SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Numbers: 333-32385-05 and 333-32385
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0329830
Delaware 51-0329829
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
585 Slawin Court, Mount Prospect, Illinois 60056-2183
(Address of principal executive offices, including zip code)
(847) 803-9200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
<PAGE>
The aggregate market value of voting stock held by non-affiliates
of the registrant as of March 30, 1999 was $6,124,747.
On March 30, 1999, there were outstanding: (i) 36,142,883 shares of
Common Stock, par value $.01 per share, of Hedstrom Holdings, Inc.,
(ii) 31,520,000 shares of Non-Voting Common Stock, par value $.01
per share, of Hedstrom Holdings, Inc. and (iii) 10 shares of Common
Stock, par value $.01 per share, of Hedstrom Corporation.
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
Item 1. Business
This Form 10-K and future filings by the Company on Form 10-Q and
Form 8-K and future oral and written statements by the Company and
its management may include, certain forward-looking statements,
including (without limitation) statements with respect to
anticipated future operating and financial performance. Year 2000
compliance and other similar forecasts and statements of
expectation. Words such as "expects", "anticipates", "intends",
"plans", " believes", "seeks", "estimates", and "should", and
variations of these words and similar expressions, are intended to
identify these forward looking statements. Forward-looking
statements by the Company and its management are based on
estimates, projections, beliefs and assumptions of management and
are not guarantees of future performance. The Company disclaims any
obligation to update or revise any forward-looking statement based
on the occurrence of future events, the receipt of new information,
or otherwise. Actual future performance, outcomes and results may
differ materially from those expressed in forward-looking
statements made by the Company and its management.
General
Hedstrom Holdings, Inc. ("Holdings") is a holding company whose
primary operating subsidiary is Hedstrom Corporation ("Hedstrom") or
the "Company"). The principal shareholders of Holdings are Hicks,
Muse, Tate & Furst Equity Fund II, L.P. ("HM Fund II"), an
affiliate of Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"),
certain affiliates of Hicks Muse and certain members of Holding's
senior management. Hicks Muse is a private investment firm based in
Dallas, New York, St. Louis and Mexico City that specializes in
acquisitions, recapitalizations and other principal investing
activities.
In October 1995, HM Fund II, together with certain other
investors (the "HM Group"), acquired an 82% common equity interest
in Holdings in a transaction that was accounted for as a
recapitalization (the "1995 Recapitalization"). The total
enterprise value of Hedstrom at the time of the 1995
Recapitalization, including the assumption and refinancing of
certain indebtedness, was approximately $75 million. The HM Group
paid approximately $27 million for its common equity interest,
which, together with Holdings senior management's 18% retained
common equity ownership, implied a total equity value of Holdings
at that time of approximately $33 million. In June of 1997,
Hedstrom acquired ERO, Inc. ("ERO") and its subsidiaries,
manufacturers and marketers of children's leisure products (the
"Acquisition"). In connection with the Acquisition, HM Fund II
purchased 31,520,000 shares of Holding's non-voting common stock
for an aggregate purchase price of $39,400,000. On July 24, 1998
the Company acquired Backyard Products Limited, a leading
manufacturer and supplier of wood gym sets and accessories.
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Hedstrom is a leading North American manufacturer and marketer of
well-established children's leisure and activity products. The
Company's diversified product lines are in such "evergreen" product
categories as outdoor gym sets, wood gym kits and slides, spring
horses, trampolines, playballs, arts and crafts kits, game tables,
and indoor sleeping bags, play tents and wall decorations. The
Company considers such product categories to be "evergreen" because
each is characterized by proven longevity, demonstrated market
demand and consistent sales over time. The Company's products are
sold primarily through national retailers, mass merchants, home
improvement centers, sporting goods stores, drug store chains and
supermarkets.
For the twelve month period ended December 31, 1998, the
Company's net sales, cash flow from operations and EBITDA were
$301.7, $7.4 and $36.7 million, respectively. The Company's
outdoor gym set product line accounted for approximately 20% of the
Company's net sales for the fiscal year ended December 31, 1998. No
other product line accounted for more than 10% of the Company's net
sales in fiscal year 1998.
Hedstrom's operations are conducted through five principal
operating divisions (or segments).
The Bedford Division in Bedford, Pennsylvania manufactures and
markets in the United States and Canada outdoor gym sets, wood
gym kits and slides, spring horses, trampolines and gym
accessories.
The Ashland Division in Ashland, Ohio manufactures and markets
in the United States a wide variety of children's playballs and
ball pit products.
The Montreal Division in Montreal, Canada is a fully integrated
manufacturer of children's products, including arts and crafts
kits, game tables and certain other children's bulk play
products such as play kitchens and battery-operated ride-on
vehicles. It also manufactures and markets a broad line of
school supplies featuring popular licensed characters,
including back packs, book bags, lunch kits and stationery
products such as portfolios, binders, study kits, pencils and
theme books marketed under the Impact brand name.
The ERO Division in Hazlehurst, Georgia produces the
Slumber Shoppe line of products, including indoor sleeping bags
and play tents featuring popular licensed characters, a water
sports line of products including flotation jackets, masks,
fins, goggles and snorkels sold to the children's market
utilizing ERO's license portfolio and to the children's and
adults' markets under the Coral brand name. It also markets
licensed room decorations for young children, consisting
principally of stick-on and peel-off wall decorations under the
Priss Prints brand name.
The International Division in Bracknell, United Kingdom and
Milton, Ontario Canada produces and distributes gym sets
and other products manufactured by all of Holdings' domestic
divisions.
<PAGE>
Hedstrom utilizes excess capacity at both the Bedford Division
and the Ashland Division to manufacture components for a variety of
OEMs of industrial and consumer products.
Customers
Four of the Company's customers (Wal-Mart, Toys R Us, K-Mart and
Target) account for over 50% of the Company's sales. As a result,
the Company's operations can be significantly impacted by these
customers. Although Hedstrom has well-established relationships
with these customers, it does not have long term contracts with any
of them. A decrease in business from any of these customers could
have a material adverse effect on the Company's results of
operations and financial condition. During 1998, well-publicized
changes in the inventory policies and purchasing practices of Toys
R Us, the Company's second largest customer in 1998, and, to a
lesser extent, those of the Company's other customers adversely
affected the 1998 sales levels of the Company and of the industry
generally. As a consequence, the Company's operating income in
fiscal 1998 was significantly less than anticipated. Although
management does not anticipate similar events in fiscal 1999, there
can be no assurance that competitive pressures in the retail sector
will not result in continued pressure on the Company's sales and
operating income.
As a result of the aforementioned competitive pressures, there
recently have been a number of consolidations and business failures
in the retail sector. As a result, there may be a further
concentration of the Company's customer base, as well as an adverse
change in the Company's credit exposure. Although management has
no reason to believe that there are any significant credit risks
associated with any of its key customers, a credit failure by a
key customer or a significant number of smaller customers would
have a material adverse effect on Hedstrom's results of operations.
Acquisitions
See Note 3 to the consolidated financial statements for a discussion
of the Company's acquisitions.
Products
Bedford Division
Outdoor Gym Sets. The Bedford Division produces a broad selection
of painted metal gym sets and composite metal and plastic gym sets.
Each of the Company's outdoor gym sets consists of a heavy-duty
metal frame which supports several hanging, swinging rides such as
contoured swing seats, glide rides and trapezes. In addition, the
Company's outdoor gym sets often incorporate a plastic slide and
climbing tower. The Company sells its outdoor gym sets as complete,
ready-to-assemble kits. The Company's outdoor gym set line consists
of 12 styles available in a variety of colors that sell at retail
prices between $99.99 and $299.99. In 1997, the Company began to
emphasize wood complete gym sets, which consist of all components
<PAGE>
necessary to construct a wood gym set. This product line was
enhanced through the acquisition of Backyard Products Ltd. in 1998.
As the leading manufacturer of ready-to-assemble wood gym sets, the
Company markets and sells this product line under the Backyard
Escapes brand. These products consist of all components necessary
to build wood gym sets including pre-cut, pre-drilled, treated
lumber, swings, plastic slides and accessories. These products
generally sell for retail prices between $299.99 and $799.99.
Wood Gyms and Slides. The Bedford Division produces wood gym kits
which it markets primarily through home improvement centers and
building supply stores. Wood gym kits consist of components
necessary to construct a wood gym set, such as nuts, bolts and
framing brackets, and are typically sold together with accessories
such as swings, climbing towers and plastic slides. The Company
does not sell the lumber, nails or the tools required to construct
the wood gym kits. The retailers that carry the Company's wood gym
kits benefit from the sale of such items, particularly the lumber.
The Company currently offers wood gym kits with designs and layouts
ranging from simple swing set designs to more elaborate designs in
the shape of pirate ships and trains. The Company's wood gym kits
generally sell for retail prices between $69.99 and $324.99, and
the Company's slides generally sell for retail prices between
$79.99 and $129.99.
Spring Horses. The Bedford Division designs and manufactures 14
different styles of spring horses for use by children ages 9 months
to six years old. The Company manufactures the body of the horse,
paints it to a specific style and packages it with a metal frame
manufactured by the Company.
Trampolines. The Bedford Division designs, manufactures and
imports three different styles of trampolines primarily for use by
children. This relatively new product line was enhanced during 1997
by the acquisition of Bollinger Industries, Inc.'s trampoline
business.
Gym Accessories, OEM and Other. The Bedford Division designs,
manufactures, sources and sells a broad line of accessories that
complement its outdoor gym sets and wood gym kits. Accessories
include swing seats, climbing ropes, ladders and nets. Many of the
Company's outdoor gym sets may be customized with various
accessories sold both in connection with the initial purchase of an
outdoor gym set and as upgrades or replacement parts for the
Company's large base of installed units. The Company is currently
offering over 65 individual accessory items. In addition, the
Company has undertaken efforts to identify new products that the
Bedford Division can manufacture during the May through November
period when its manufacturing capacity historically has been
underutilized. During the second half of 1997, the Company began
producing one such product, "Turbo Hoops," which is a home version
of the popular basketball game found in taverns and other
commercial establishments. In addition, the Company is seeking
opportunities to utilize seasonal excess capacity at the Bedford
Division to manufacture products for OEMs. Sales to OEM customers
<PAGE>
will better enable it to cost-effectively maintain a core of full-
time, highly skilled workers and a high level of plant utilization
year-round, resulting in a consistent source of revenue and
profitability for the Bedford Division.
For fiscal years 1998, 1997 and 1996, the Bedford Division
accounted for 36.1%, 33.1% and 65.7%, respectively, of the
Company's net sales.
Ashland Division
The Ashland Division produces a wide variety of children's
playballs ranging in size from 4" to 36" in diameter, including
both premium playballs and non-premium playballs.
Premium Playballs. The Company's premium playballs generally
include stylized printing on all or one-half of the ball's surface
or contain fun novelty items inside the ball. The premium playballs
that are decorated with stylized printing feature either popular
characters from the Company's extensive license portfolio or the
Company's proprietary playball patterns. The Company's proprietary
playball patterns include holograms, sparkles and other geometric
patterns. In addition to playballs with stylized printing, the
Company produces a line of "goofballs" that contain items inside
the ball such as plastic spiders, worms and beads. The Company's
premium playballs generally sell at retail prices between $1.99 and
$8.99.
Non-Premium Playballs. The Company's non-premium playballs
include decorated playballs with stripes or other simple patterns,
undecorated playballs and athletic-style playballs such as
footballs, basketballs, baseballs, volleyballs and soccer balls.
Non-premium playballs are available in a wide range of colors and
sizes. This product line experienced significant growth over the
last two years from the introduction of an 18" diameter playball, a
new size in the playball category. The Company's non-premium
playballs generally sell at retail prices between $1.99 and $24.99.
Ball Pits. In fiscal 1995, the Company developed and introduced
home and backyard versions of the popular ball pits used by
children in commercial locations such as McDonald's. The Company
sells its ball pit product as a complete, ready-to-assemble set
including an inflatable tent-like enclosure and 250 to 400 ball pit
balls. The Company sources the enclosures from several overseas
manufacturers and packages the enclosures with ball pit balls
manufactured at the Ashland Division. Management believes that one
of the Company's competitive advantages in this product category is
its ability to manufacture high-quality ball pit balls using a
patented process for which the Company has an exclusive licensing
agreement. Hedstrom currently offers four ball pit models.
<PAGE>
OEM and Other. The Ashland Division complements its core playball
and ball pit businesses and smoothes seasonal production
requirements by manufacturing a variety of custom-fabricated
plastic products for toy, sporting goods, hospital supply,
decorating and lighting companies. Sales to OEM customers enable
the Ashland Division to cost-effectively maintain a core of full-
time, highly skilled workers and result in a high level of plant
utilization year-round while providing a consistent source of
revenue and profitability.
For fiscal years 1998, 1997 and 1996, the Ashland Division
accounted for 12.9%, 14.3% and 34.3%, respectively, of the
Company's net sales.
Montreal Division
The Montreal Division manufactures and markets over 700
children's leisure and activity products, including arts and crafts
kits, game tables, battery operated ride-ons and a line of back-to-
school/stationery products marketed under the Impact brand name.
The Montreal Division's arts and crafts kits and Impact back-to-
school stationery products, over 700 products combined, are being
repostioned under one new brand, Express Ways!, to take advantage
of the synergy between the two categories within the trade and the
consumer and provide a stronger competitive advantage. The
Montreal Division's game tables and battery operated ride-ons are
being repositioned under the Hedstrom brand name to take advantage
of that brand's established identity of leadership in bulk toys.
Arts and crafts products include a broad variety of children's
activity kits, chests and boxes that include stickers, stamps,
candles, paints, clay, beads, sand art and magic sets. Back-to-
school and stationery products utilize characters popular with
children such as Star Wars characters, Pooh and Barbie.
Game tables combine a wide variety of popular table games such as
pool, table tennis, knock hockey, foosball and basketball, into a
single game table. For example, the 5-in-1 game table includes
pool, table tennis, knock hockey, shuffleboard and curling. The 10-
in-1 game table includes each of those games plus foosball, arcade
and floor basketball, English pub darts and racquetball.
Battery-operated ride-ons utilize 6-volt or 12-volt battery power
to motorize child-size versions of adult vehicles. Designed for 3
to 7 year old children, these vehicles reach speeds of 2.5 to 4.5
miles per hour.
The Montreal Division was acquired in June of 1997 in connection
with the ERO Acquisition. For fiscal years 1998 and 1997, the
Montreal Division accounted for 20.3% and 25.3% of the Company's
net sales, respectively.
ERO Division
ERO's product offerings consist of its Slumber Shoppe line of
products, its water sports line of products and its Priss Prints
line of products.
<PAGE>
The Slumber Shoppe line of products includes indoor sleeping
bags, carrying cases, play tents and selected children's furniture,
all of which feature popular licensed characters and are marketed
for children between the ages of two and ten. The core product
within this line is the slumber bag, a lightweight indoor sleeping
bag used for slumber parties, sleepovers and children's nap times.
Play tents (also called slumber tents and play houses) are designed
to be used indoors and give children a private area that can be
used as a clubhouse, fort or special play area. ERO also sells foam
and bean bag chairs featuring licensed characters.
The water sports line of products includes a full range of
personal flotation devices (such as flotation vests) and swim and
pool products (including masks, fins, snorkels and goggles). These
products are directed at the children's market using the Company's
license portfolio, and at the children's and adults' markets under
the Coral brand name.
Priss Prints sells self-adhesive wall decorations for children's
rooms that can be removed without any damage to the wall or paint.
Such wall decorations use licensed characters and proprietary
designs. For 1998, such licensed characters included Looney Tunes,
Barbie(TM), Pooh, Mickey for Kids and other popular characters. New
product offerings include licensed character borders, night-lights,
switchplates, hooks and drawer knobs.
The ERO Division was acquired in June of 1997 in connection with
the ERO acquisition. For fiscal years 1998 and 1997, the ERO
Division accounted for 24.3% and 23.6% of the Company's net sales,
respectively.
International Division
The International Division, located in the United Kingdom and
Canada, produces and distributes gym sets and other products
manufactured by all of Holdings' Domestic Divisions. For the fiscal
years 1998 and 1997, the International Division accounted for 6.4%
and 3.6% of the Company's net sales, respectively. Sales by the
International Division were insignificant prior to 1997 and were
included within the Ashland and Bedford Divisions' net sales.
Sales and Marketing
The Company's sales force for the Bedford, Ashland and ERO
Divisions is comprised of a Senior Vice President, four sales
managers of national accounts, one sales manager of home centers
and one international sales manager who deal directly with
customers and outside vendor representatives. These outside vendor
representatives include approximately 22 manufacturers
representative organizations with over 100 sales representatives
that service Hedstrom's mass merchant and home center customers.
The Company's sales force for the Montreal Division is comprised of
several in-house sales managers and three outside vendor
representatives.
<PAGE>
Hedstrom's marketing activities include customer service, product
development and advertising and promotions. The Company utilizes
six customer service representatives to serve retail customers by
tracking and confirming orders and answering general inquiries.
Hedstrom's consumer relations department is staffed with trained
professionals who, through an "800" number, assist end-users in
assembling products and purchasing spare parts. Hedstrom's product
development staff consists of engineering and design professionals.
The product development process involves extensive product
engineering, model making and sample testing.
An important element in the Company's marketing strategy is the
ability to differentiate its products from those of its competitors
and stimulate sales by using popular licensed characters and well-
known brand names on its products. Accordingly, the Company
emphasizes the acquisition and maintenance of a broad portfolio of
licensed characters. Rather than pursuing a few licensed characters
with speculative appeal, the Company maintains multiple licenses in
several categories, including both classic (e.g., Mickey's Stuff
for Kids, Barbie(TM), Pooh and 101 Dalmatians) and contemporary
characters. The Company's license agreements typically have a term
of two years and require payments by the Company of approximately
12-16% of licensed product revenues. The renewal terms of certain
license agreements are based upon the attainment of specified sales
levels, whereas others are based on informal understandings or
arrangements. License agreements typically are subject to
termination by the licensor upon failure of the licensee to meet
various performance standards. Under the terms of certain of its
license agreements, the Company is required to pay minimum
guaranteed fees to the licensors over the life of the agreement or
on a prepaid basis. The guaranteed license fees payable by the
Company have been insignificant due to the Company's having
exceeded its minimum royalty requirements. Approximately 25% of the
Company's net sales for the fiscal year ended December 31, 1998
were derived from sales of licensed products. Approximately 89% of
such net sales were attributable to licenses covering ten licensed
characters and approximately 54% of such net sales were derived
from licenses with Disney Enterprises, Inc. and its affiliates.
Approximately 29% of the Company's Pro Forma Net Sales for the
fiscal year ended December 31, 1997 were derived from sales of
licensed products. Approximately 91% of such net sales would have
been attributable to licenses covering ten licensed characters and
approximately 65% of such net sales would have been derived from
licenses with Disney Enterprises, Inc. and its affiliates.
The ERO Division derives a significant portion of its revenues
from sales of products featuring licensed characters. Although the
ERO Division intends to renew key existing licenses and obtain new
licenses, there can be no assurance that it will be able to do so.
The failure to renew key existing licenses or obtain new licenses
would have a material adverse effect on the Company's results of
operations.
International
The Company's sales to customers located outside the United
States totaled $45.7 million, $30.8 million and $12.6 million, for
the fiscal years ended December 31, 1998, December 31, 1997 and for
the fiscal year ended July 31, 1996, respectively.
<PAGE>
Competition
The Company generally operates in a highly-competitive
environment. Competition in the markets for the Company's products
is based primarily on cost, characters licensed (for licensed
character products), product design and quality, reputation,
customer service, new product innovation and creative marketing and
distribution approaches. Competitive factors
in the market for character licenses include royalty levels,
breadth of product lines, timely royalty reporting and payment,
artistic applications and compliance with licensors' guidelines.
Bedford Division. Management believes that the Company's sales of
outdoor gym sets for the fiscal year ended December 31, 1998,
represented approximately 98% of the total sales in the U.S. market
for outdoor painted metal gym sets and composite metal and plastic
gym sets. The Company's principal competitor in this product line
is RDM, Inc., formerly known as Roadmaster Corporation, which was
purchased out of bankruptcy in late 1997. Certain custom gym set
manufacturers also compete in this market. Management believes that
the Company holds the second largest share of the total U.S. wood
gym kit market behind Playcor Corporation (formerly known as Swing-
N-Slide Corporation).
Ashland Division. Based on the Company's sales of playballs for
the fiscal year ended December 31, 1998, management estimates that
the Company accounted for approximately 85% of total sales in the
U.S. market for children's playballs. The Company's largest
competitor in this product line is National Latex Corporation.
Montreal Division. In the arts and crafts and back-to-
school/stationery product categories, the Company competes with
Hallmark Corporation's Binney & Smith unit (under the Crayola
brand name), Rose Art, Lisa Frank, NSI, Creativity for Kids, Stuart
Hall and Mead Corporation. In the game table category, the Company
competes with Toy Biz, Sportscraft and Monneret. Competition in the
battery-operated ride-on category includes Fisher Price ( a
subsidiary of Mattel) and Peg Perego.
ERO Division. The Company's main competitors with respect to its
Slumber Shoppe product line are Bibb and Coleman, which produces
non-licensed slumber bags, and Fisher Price which produces non-
licensed slumber tents. Management believes that the Company has a
market share of greater than 75% with respect to licensed sleeping
bags and slumber tents. With respect to its water sports product
line, the Company's competitors include Sterns, Kent and Aqua
Leisure. The Company competes primarily against Borden, Infantino,
Dolly and 3M in the overall room decor industry. Management
believes that the Company is a market leader in this business.
International Division. Management believes that the Company is
the leading marketer for outdoor childrens toys within the United
Kingdom with its major competitors being Kettler in Germany and
AMCA in France. Additionally, management believes that the Company
is the leading provider of gym sets in Canada. The Company's main
competitors in Canada are Flexible Flyer, Jump King and Grand Toys.
Manufacturing and Supply; Raw Materials
<PAGE>
Bedford Division
Production Process. The Bedford Division's main production,
warehousing and distribution facilities are located in Bedford,
Pennsylvania. The manufacturing process for the Company's outdoor
gym sets and accessories consists of eight integrated operations:
steel tube-forming, metal stamping, secondary fabrication,
painting, plastic forming, plastic coating, assembly and packaging.
Steel tubes are used primarily for the main structural supports of
the Company's gym sets. The Bedford Division can produce up to
8,000 gym sets per day depending on the type of outdoor gym sets
then in production. Backyard Products production, warehousing and
distribution facilities are located in a 120,000 square foot
facility in Collingwood, Ontario. The manufacturing process for the
company's outdoor gym sets consists of five integrated operations;
wood milling, wood processing, wood staining, assembly and
packaging. Backyard Products can produce up to 1,000 wooden gym
sets a day depending on the type of gym set in production.
Capacity. Management believes that the Bedford Division presently
has adequate capacity to meet anticipated future production
requirements at times of peak demand. The division also has the
capability to outsource or increase capacity in all of its
processes in the future should backlog develop.
Quality Assurance. The Bedford Division maintains an extensive
quality assurance program that includes the development of plans
for effective control of manufacturing processes, supplier surveys
to assure manufacturing capability and a formal product release
system to assure that product goals are achieved. Quality assurance
personnel verify that manufacturing employees are correctly
performing quality inspections by, among other things, auditing
incoming raw materials, manufacturing processes and finished
products. All manufacturing employees are trained and provided with
the tools necessary to determine whether manufactured parts meet
specifications. Employees assemble one unit from each production
lot to verify conformance to safety standards.
Raw Materials. The primary raw materials used by the Bedford
Division include sheet and band steel, wood and plastic resin. Most
of the division's steel raw materials (which represented
approximately one-third of the Bedford Division's total raw
materials purchased in 1998) are currently sourced from a single
supplier. The Company typically enters into a one-year
supply contract with this supplier each August. These contracts
protect the Company from price increases while allowing for
downward adjustments if market prices should fall. Management
believes that alternative sources of supply are readily available
for substantially all of the raw materials used by the Bedford
Division, including steel.
Components Purchases. Management periodically evaluates the
economics of producing internally rather than purchasing certain
plastic components used in the production and assembly of its
outdoor gym sets. The Company currently is using excess capacity in
its Montreal Division plant to produce certain plastic slides and
swings for the Bedford Division.
<PAGE>
Ashland Division
Facilities. The Ashland Division's production facilities are
located in two facilities in Ashland, Ohio. The main plant houses
most of the division's production capacity. It includes a warehouse
and distribution center. A second leased facility is used primarily
to serve the division's OEM customer base and, to a lesser degree,
as a source of increased playball capacity. The second plant also
houses the division's administrative offices and showrooms. The
Ashland Division also has three satellite facilities strategically
located in Carrollton, Texas, Reno, Nevada and Dothan, Alabama.
These facilities are used primarily to manufacture undecorated
playballs for regional customers and to inflate premium and non-
premium playballs that are shipped from Ashland.
Production Process. The Ashland Division manufactures its
products utilizing two manufacturing processes: (i) rotational
molding for polyvinyl playballs and polyethylene plastic OEM
products and (ii) blow molding for plastic ball pit balls. All
playballs are inflated at Ashland during production to ensure that
they meet the Company's quality standards, then deflated for
storage or shipping. The Company believes its satellite playball
plants provide it with a competitive advantage by minimizing the
distance that inflated balls must be shipped, and thereby reducing
shipping costs.
Capacity. Management believes that the Ashland Division has
adequate capacity to meet anticipated future production
requirements at times of peak demand and has ample space within its
existing facilities to expand capacity.
Ball Pit License. The Company has entered into a year-to-year
licensing agreement with Euro-Matic, Ltd. ("Euro-Matic"), a United
Kingdom-based company that holds the patent for the ball pit balls
that the Company produces. Using machinery and molds supplied by
Euro-Matic, the Company manufactures ball pit balls for sale by
Euro-Matic to the "institutional market," including McDonald's,
Discovery Zone, hospitals, schools, and similar institutions and
businesses. The Company receives a fixed fee for each ball
manufactured. In addition, Euro-Matic provides the Company with
molds that the Company uses with its own machinery to produce ball
pit balls that the Company packages with its ball bit products for
sale to the retail market.
Quality Assurance. The Ashland Division maintains a rigorous
quality control process. The division has three quality assurance
personnel who are trained in methods of statistical process control
and continuous improvement.
Raw Materials. The Ashland Division manufactures its products
from commodity raw materials such as plastic resins, pigments and
other chemicals that generally are available from numerous sources.
The Company has not entered into any supply contracts with any of
the Ashland Division's vendors. Management believes that alternate
sources of supply are readily available for all of the raw
materials used by the Ashland Division.
<PAGE>
Montreal Division
The Montreal Division's production facilities are located in
Montreal, Quebec. The Division also owns a facility in Plattsburgh,
New York which is used to distribute products in the United States.
The Montreal Division manufactures all of its plastic components
and crayons, mixes its own paint and prints all labels, cartons,
coloring books, stickers and instruction sheets. All of the
Montreal Division's products are manufactured with non-toxic
materials to comply with industry standards for children's products
and applicable environmental laws.
ERO Division
The ERO Division produces or assembles slumber bags, personal
flotation devices, juvenile furniture and children's wall
decoration products at the ERO Division's Hazlehurst, Georgia
facility. To reduce lead times and inventory levels with respect to
these product lines, the ERO Division utilizes just-in-time
manufacturing and sourcing systems. The ERO Division purchases its
play tents, slumber mates, swim, aqua fitness, back-to-school and
wall decoration products from manufacturers located in the United
States, Taiwan, Hong Kong and the People's Republic of China. The
ERO Division's pricing and supply of imported products has not been
affected by the recent economic problems in Asia.
The ERO Division's largest suppliers for its domestic operations
provide printed fabric for the slumber bags, liners for the slumber
bags, vinyl prints for room decorations, polyester fiber to fill
the slumber bags and zippers and buckles. The ERO Division works
closely with its suppliers in order to consolidate the purchasing
function and to foster teamwork between the ERO Division and its
suppliers. For each of the aforementioned products, the ERO
Division maintains alternative sources of supply.
International Division
The Company leases and operates a production facility in
Holyhead, United Kingdom. The facility is used to manufacture
various gym set lines. The International Division produces gym sets
in a similar fashion as those at the Bedford Division with its
primary raw materials being sheet and band steel. Products other
than metal gym sets are primarily sourced from the Company's other
divisions.
Backlog
The Company monitors the inventory level of each of its key
customers, which allows the Company to anticipate customer orders
and fill such orders within days. As a result of such monitoring
and the Company's just-in-time manufacturing of several of its
principal products, the Company does not generate significant
backlog.
<PAGE>
Seasonality
Historically, the Company's sales have been highly seasonal, with
its peak selling season occurring during the first two calendar
quarters of the year. However, management believes the ERO
acquisition has helped the Company to better balance its sales
throughout the year because the ERO and Montreal Division's peak
selling season occurs during the third and fourth calendar quarters
of the year. Net sales for the Company for each calendar quarter
during the fiscal year ended December 31, 1998 were 26.0%, 27.6%,
21.3% and 25.1%, respectively, of total net sales for the twelve
month period. Pro Forma Net Sales for the Company for each calendar
quarter during the fiscal year ended December 31, 1997 were 22.7%,
25.6%, 20.9% and 30.8%, respectively, of total Pro Forma Net Sales
for such twelve-month period.
Environmental
Certain of the Company's operations, including the use of
solvents, paints and other materials that contain chemicals that
are considered hazardous under various environmental laws, are
subject to federal, state, local and foreign environmental laws and
regulations which govern, among other things, the discharge of
pollutants into the air and water, and the handling and disposal of
solid and hazardous wastes. Permits are required for certain of the
Company's operations, and these permits are subject to
modification, renewal and revocation by issuing authorities.
Governmental authorities have the power to enforce compliance with
applicable laws and regulations, and violations may result in
fines, injunctions, including the cessation of operations, or both.
Management believes that the Company's operations currently comply
in all material respects with applicable environmental laws and
regulations.
Under the Clean Air Act Amendments of 1990 (the "CAA"), the
Environmental Protection Agency has been directed, among other
things, to develop standards and permit procedures with respect to
certain air pollutants. Because many of the implementing
regulations have not yet been promulgated, the Company cannot make
a final assessment of the impact of the CAA. Based upon its
preliminary review of the CAA, however, management currently
believes that compliance with the CAA and other environmental laws
and regulations will not have a material adverse effect on the
Company.
Government Regulations
The Company is subject to the provisions of, among other laws,
the Federal Hazardous Substances Act and the Federal Consumer
Product Safety Act. These laws empower the Consumer Product Safety
Commission (the "CPSC") to protect consumers from hazardous
products and other articles. The CPSC has the authority to exclude
from the market products which are found to be unsafe or hazardous
and can require a manufacturer to recall such products under
certain circumstances. Similar laws exist in some states and cities
in the United States and in Canada and Europe. While the Company
<PAGE>
believes that it is, and will continue to be, in compliance in all
material respects with applicable laws, rules and regulations,
there can be no assurance that the Company's products will not be
found to violate such laws, rules and regulations, or that more
restrictive laws, rules or regulations will not be adopted in the
future which could make compliance more difficult or expensive or
otherwise have a material adverse effect on the Company's business,
financial condition and results of operations.
Employees
As of December 31, 1998, the Company employed 2,234 people.
Approximately 10% of the Company's employees are unionized, all of
whom are employed in the Ashland Division. These employees are
represented by the Rubber Workers Union, which is affiliated with
the United States Steel Workers Union. Members of the Rubber
Workers Union in Ashland, Ohio ceased production at the Ashland
Division Plant on October 3, 1998. The work stoppage at the
Ashland facility was resolved on October 10, 1998 when a tentative
agreement was reached. The new collective bargaining agreement was
ratified by the rank and file on October 12, 1998 and will expire
on October 2, 2001. The work stoppage did not have a material
effect on the Company's operations or its ability to service its
customers on a timely basis. The Company believes that it has a
good relationship with its employees.
Item 2. Properties
Management believes that the Company's facilities are in good
condition and that it has sufficient capacity to meet its current
and projected manufacturing and distribution needs. The Company's
principal executive offices are located at 585 Slawin Court, Mount
Prospect, Illinois 60056.
The following table summarizes certain information regarding the
Company's principal operating facilities all of which are owned by
the Company or one of its subsidiaries.
<PAGE>
Approximate
Square
Location Footage Description of Use
------------------- ------------ ---------------------
Saint Laurent, Quebec 800,000 Montreal Division sales,
administration,
manufacturing and
distribution
Bedford, Pennsylvania 472,000 Bedford Division
manufacturing, warehouse
and administration
Ashland, Ohio 273,000 Ashland Division
manufacturing, warehouse
and administration
Hazlehurst, Georgia 230,000 ERO Division manufacturing
and distribution
Plattsburgh, New York 80,000 Montreal Division
manufacturing and
distribution
Leased Facilities
The Company also leases various facilities in the U.S., Canada
and United Kingdom. Such facilities range in size from
120,000 square feet in Collingwood, Ontario to 1,400 square feet
in the United Kingdom.
Item 3. Legal Proceedings
The Company is from time to time involved in lawsuits arising in
the ordinary course of business. The Company maintains product
liability insurance and management does not believe that the
outcome of any such lawsuits, individually or in the aggregate,
will have a material adverse effect on the Company's financial
condition. Although historically the Company has not been required
to pay any material liability claims, there can be no assurance
that the Company will not incur claims which are in excess or
outside of its insurance coverage.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted during the fourth quarter of the
year ended December 31, 1998.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
There is no established public trading market for the Company's
common stock. As of March 30, 1999, there were 61 record holders of
Holdings common stock and 1 record holder of Holdings' non-voting
common stock.
<PAGE>
The terms of the Company's indebtedness impose significant
restrictions on the Company's ability to make dividend payments
(see further discussion of such in Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations", and
Note 6 to the Company's consolidated financial statements in Item
8). The Company has not paid cash dividends historically, and does
not intend to do so in the foreseeable future.
<PAGE>
Item 6. Selected Financial Data
The following information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial
statements of Holdings and the notes thereto contained elsewhere
herein. Holdings historically had a fiscal year ending July 31
but changed its fiscal year to December 31, effective in 1997.
<PAGE>
<TABLE>
Fiscal Year Fiscal Year Five Months
Ended Ended Ended
December 31, December 31, December 31, Fiscal Year Ended July 31,
(Dollars in thousands, except per 1998 1997 1996 1995 1996 1995 1994
share amounts) ------------ ---------- ---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales ......................... $301,696 $256,146 $23,994 $31,792 $133,194 $133,862 $108,655
Cost of sales ..................... 210,607 172,390 21,973 26,000 105,068 107,312 87,170
-------- -------- ------- ------- ------- ------- -------
Gross profit ...................... 91,089 83,756 2,021 5,792 28,126 26,550 21,485
Selling, general and administrative
Expenses ......................... 66,917 47,052 7,546 7,067 24,603 19,207 18,181
-------- -------- ------- ------- ------- ------- -------
Operating income (loss)............ 24,172 36,704 (5,525) (1,275) 3,523 7,343 3,304
Recapitalization expenses(a) _ _ _ 9,600 9,600 _ _
Interest expense .................. 31,335 19,131 2,115 1,773 5,896 4,573 2,982
-------- -------- ------- ------- ------- ------- -------
Income (loss) before income taxes.. (7,163) 17,573 (7,640) (12,648) (11,973) 2,770 322
Income tax expense (benefit)....... (436) 7,997 (2,869) (4,074) (3,857) 1,440 103
-------- -------- ------- ------- ------- ------- -------
Income (loss) from continuing
Operations ....................... (6,727) 9,576 (4,771) (8,574) (8,116) 1,330 219
Loss from discontinued
operations(b) .................... _ _ _ _ _ (585) (3,180)
-------- -------- ------- ------- ------- ------- -------
Net income (loss) ................. $ (6,727) $ 9,576 $(4,771) $(8,574) $(8,116) $ 745 $ (2,961)
======== ======== ======= ======= ======= ======= =======
Diluted earnings per share (c) ($0.10) $0.18
Diluted weighted average shares
Outstanding(c) .................... 67,663 52,416
Other Financial Data:
Net cash provided by (used in):
Operating activities $7,414 $(9,779) $2,978 $(19,209) $(17,744) $ 396 $1,344
Investing activities (34,713) (146,387) (1,309) (1,342) (6,490) (2,574) (2,988)
Financing activities 20,789 165,622 (9,134) 19,842 31,135 2,899 1,060
EBITDA(d) .......................... 36,717 45,772 (3,549) (393) 9,420 10,088 5,529
Depreciation and amortization(e) 12,545 9,068 1,976 882 3,347 2,745 2,225
Capital expenditures ............... 11,292 6,395 1,376 1,342 6,738 2,574 2,988
Balance Sheet Data (end of period):
Total assets ....................... $395,767 $387,539 $72,075 $70,459 $85,024 $69,809 $60,005
Total debt (including current
maturities) ...................... 313,489 289,404 60,471 57,750 69,706 32,710 29,811
Stockholders' equity (deficit) 38,599 47,164 (3,097) 2,055 1,674 15,392 14,647
</TABLE>
<PAGE>
__________
(a) In connection with the 1995 Recapitalization, Holdings incurred
approximately $9.6 million in costs, all of which were expensed.
(b) During fiscal 1995, Holdings discontinued the operations of its
Hedstrom Holdings II subsidiary. Hedstrom Holdings II was
involved in the manufacturing of traffic control devices. The
sole customer of Hedstrom Holdings II was a related party with
which Holdings no longer has an ongoing relationship.
(c) Due to the ERO acquisition, net income (loss) per share for the
five months ended December 31, 1996 and 1995 and for
the three fiscal years ended July 31, 1996 has no
significant relevance to current amounts.
(d) EBITDA represents operating income plus depreciation and
amortization and, for the twelve months ended July 31, 1996,
certain other one-time charges aggregating $2.55 million, as
follows: (i) $0.8 million related to a one-time design
adjustment to one of Hedstrom's outdoor gym set accessories to
address certain alleged defects, (ii) a non-cash inventory
write-down of $0.75 million related to the mix shift in
Hedstrom's outdoor gym set product line, and (iii) a $1.0
million non-cash write-off of advertising barter credits by
Hedstrom in connection with its decision to discontinue its
trial advertising campaign. Management believes EBITDA for the
twelve months ended July 31, 1996, as adjusted for these one-
time charges, provides a more meaningful comparison of
historical results. EBITDA as determined by Holdings may not be
comparable to the EBITDA measure as reported by other companies.
EBITDA is not intended to represent cash flow from operations as
defined by GAAP and should not be considered as an indicator of
operating performance or an alternative to cash flow or operating
income (as measured by GAAP) or as a measure of liquidity. In
addition, this measure does not represent funds available for
discretionary use. It is included herein to provide additional
information with respect to the ability of Holdings to meet
its future debt service, capital expenditures and working
capital requirements.
(e) Depreciation and amortization included herein excludes the
amortization of deferred financing costs that is included in
interest expense.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
The following discussion generally relates to the historical
consolidated results of operations and financial condition of
Holdings and Hedstrom. The comparison between years is naturally
affected by the significant impact of the Acquisition of ERO, Inc.
The following discussion and analysis should be read in conjunction
with the consolidated financial statements of Holdings, and the
notes thereto, included elsewhere herein. For purposes of this
discussion, references to "Hedstrom", where appropriate, include
Holdings and Hedstrom and its subsidiaries (including, with respect
to periods after the consummation of the ERO acquisition, ERO and
its subsidiaries).
General
Hedstrom is a leading United States manufacturer and marketer of
well-established children's leisure and activity products. Hedstrom
has five principal divisions. The Bedford Division principally
manufacturers and markets in the United States and Canada painted
metal and composite metal and plastic outdoor gym sets, wood gym
kits and sets and slides, spring horses, trampolines and gym
accessories. The Ashland Division manufactures and markets in the
United States a wide variety of children's playballs and ball pit
products. The Montreal Division manufactures children's products
including arts and craft kits, game tables, battery operated cars
and back-to-school products. The ERO Division manufactures and
distributes slumber products, water sports products and room decor
items. The International Division manufactures and distributes
painted metal gym sets and sells other products manufactured by
Hedstrom's other divisions.
Forward Looking Statements
This Form 10-K and future filings by the Company on Form 10-Q and
Form 8-K and future oral and written statements by the Company and
its management may include, certain forward-looking statements,
including (without limitation) statements with respect to
anticipated future operating and financial performance, Year 2000
compliance and other similar forecasts and statements of
expectation. Words such as "expects", "anticipates", "intends",
"plans", "believes", "seeks", "estimates", and "should", and
variations of These words and similar expressions, are intended
to identify these forward looking statements. Forward-looking
statements by the Company and its management are based on
estimates, projections, beliefs and assumptions of management and
are not guarantees of future performance. The Company disclaims any
obligation to update or revise any forward-looking statement based
on the occurrence of future events, the receipt of new information,
or otherwise. Actual future performance, outcomes and results may
differ materially from those expressed in forward-looking
statements made by the Company and its management.
<PAGE>
Fiscal Year Change
Hedstrom historically had a fiscal year ending July 31 but
changed its fiscal year-end to December 31, effective in 1997.
Management implemented this change primarily to improve the
accuracy of Hedstrom's annual budgeting process. Hedstrom's retail
customers generally do not determine outdoor gym set product
placements for the upcoming peak Spring selling season until the
preceding Fall. In the past, Hedstrom prepared its budgets without
the benefit of knowing what its outdoor gym set placements would be
for the upcoming fiscal year.
As a result of the change in Hedstrom's fiscal year, Hedstrom has
presented financial statements for the five-month period ended
December 31, 1996 and for the comparable period in 1995. Management
does not believe that a comparison of such periods is meaningful
because, given the concentration of Hedstrom's net sales in the
first and second calendar quarters, overall changes in production
levels in the comparably less active period from August to December
can have a significant impact on stated profitability for such
period due to the absorption of fixed manufacturing costs. This is
especially true when comparing the above-mentioned five-month
period in 1996 versus the same five-month period in 1995. In late
1996, management took several steps to increase the daily
production capacity of outdoor gym sets in an effort to increase
its capacity during peak production periods, thereby reducing
inventory levels and related material and warehouse expense. As a
result of these efforts, Hedstrom is now able to manufacture gym
sets on a just-in-time basis in response to specific customer
orders. The move to just-in-time manufacturing in late calendar
1996 precluded the need to begin manufacturing gym sets in 1996 for
sale in 1997 and thus, unlike in late 1995, Hedstrom expensed the
fixed overhead incurred at its idle outdoor gym set operations. As
a result of the switch to just-in-time manufacturing, Hedstrom's
operating results were significantly better in the second calendar
quarter of 1997 versus the second calendar quarter of 1996 because,
among other things, it produced outdoor gym sets in the second
calendar quarter of 1997, whereas in the same period of 1996,
Hedstrom met consumer demand for outdoor gym sets out of inventory.
Net Sales
Hedstrom computes net sales by deducting sales allowances,
including allowances for returns, volume discounts and promotions
(including cooperative advertising), from its gross sales. Where
information concerning net sales by product line is provided in
this filing, Hedstrom has estimated net sales by attributing sales
allowances to each product line in proportion to the individual
product line's percentage of gross sales.
In 1996, Hedstrom revised certain of its promotional policies,
effectively increasing the sales thresholds at which Hedstrom's
customers earn certain promotional discounts, which increased
Hedstrom's profitability in 1997.
<PAGE>
Results of Operations
The following table sets forth net sales and gross profit for
each of Hedstrom's five operating divisions for the periods
indicated:
Twelve Months
Ended December 31,
----------------------
1998 1997 1996
(In millions) ---- ---- ----
(unaudited)
Net sales:
Bedford Division ........... $109.0 $ 84.8 $ 82.4
Ashland Division ........... 38.9 36.8 43.0
Montreal Division .......... 61.2 64.8 _
ERO Division ............... 73.4 60.5 _
International Division ..... 19.2 9.2 -
------ ------ ------
Total net sales .... $301.7 $256.1 $125.4
====== ====== ======
Gross profit:
Bedford Division ........... $ 22.3 $ 21.2 $ 13.1
Ashland Division ........... 10.6 9.5 11.2
Montreal Division .......... 21.0 24.0 _
ERO Division ............... 33.5 27.1 _
International Division ..... 3.7 2.0 -
------ ------ ------
Total gross profit.. $ 91.1 $ 83.8 $ 24.3
====== ====== ======
Fiscal Year Ended December 31, 1998 Compared to Fiscal Year Ended
December 31, 1997
Net Sales. Hedstrom's total net sales increased to $301.7
million in the fiscal year ended December 31, 1998 from $256.1
million in fiscal 1997, an increase of $45.6 million. Such
increase was attributable to higher sales at the Bedford,
International, and Ashland Divisions, and also the inclusion of the
ERO and Montreal Divisions for the full year 1998 versus only the
last seven months of fiscal 1997. Net sales of the Bedford
Division increased by $24.2 million for fiscal 1998 versus fiscal
1997. The increase was attributable primarily to increased sales
of trampolines as a result of the acquisition of Bollinger
Industries Inc.'s trampoline business, higher sales of metal gym
sets as a result of increased market penetration, and increased
wood gym sales as a result of the acquisition of Backyard Products
Limited (see Note 3 of the Notes to Consolidated Financial
Statements). These increases were partially offset by lower sales
of spring horses during the year due to inventory reduction efforts
by Toys R Us. Additionally, increased sales of preschool products
were offset by lower sales of OEM products. The net sales of the
International Division for fiscal 1998 increased by $10.0 million
as compared to fiscal 1997. The increase can be attributed to the
<PAGE>
acquisition of certain assets of Bestoy, a U.K. manufacturer,
during the first quarter of 1998. The inclusion of the ERO and the
Montreal Divisions for the full fiscal year 1998 versus only seven
months of fiscal 1997 resulted in increased sales of $9.3 million.
Net sales of the Ashland Division increased by $2.1 million versus
the prior year mainly as a result of greater demand for children's
ball pits, the effects of which were partially offset by lower
sales of OEM products. On a pro-forma basis, net sales of the ERO
Division decreased approximately 15% mainly as a result of
inventory reduction efforts by Toys R Us. On a pro-forma basis,
net sales of the Montreal Division decreased approximately 21% due
to limited new product offerings related to arts and crafts and
game tables and lower sales of Impact products attributable to the
Company's elimination of non profitable products during 1998.
Gross Profit. As a result of the increase in Hedstrom's total
net sales, total gross profit increased to $91.1 million in fiscal
1998 from $83.8 million in fiscal 1997. As a percentage of net
sales, gross profit decreased to 30.2% in fiscal 1998 from 32.7% in
fiscal 1997. The decrease in total gross profit percentage in
fiscal 1998 was due to lower gross margin percentages at the
Bedford, and Montreal Divisions, which were partially offset by a
higher gross margin percentage at the ERO Division. The gross
profit percentage of the Montreal Division decreased to 34.3% for
fiscal 1998 from 37.0% for fiscal 1997. The decrease in the
Montreal Division's gross profit margin was mainly a result of
unfavorable production variances during the first five months of
the year, as a result of the seasonal nature of the business, which
were not included in the fiscal 1997 results due to the timing of
the acquisition by Hedstrom. Additionally, margins were negatively
impacted by an unfavorable product sales mix and low margin "close-
out" sales of Impact products. The Bedford Division's gross profit
percentage decreased from 25.0% in fiscal 1997 to 20.5% in fiscal
1998. The decline in the Bedford Division's gross profit
percentage for fiscal 1998 was due mainly to an unfavorable product
mix. Sales of trampolines, which carry a lower gross profit
percentage, increased as a percentage of total Bedford
Division sales, while sales of metal gym sets, which generally
carry a higher overall gross margin, decreased as a percentage
of total Bedford Division sales. Additionally, gym set
margins were negatively impacted by a shift in sales to mass
merchants which resulted in lower average selling prices. The ERO
Division's gross profit percentage increased to 45.6% for fiscal
1998 versus 44.8% for fiscal 1997. The increase in the ERO
Division was due primarily to favorable manufacturing variances, as
well as a more favorable product sales mix and more favorable
material costs. The Ashland and International Divisions gross
margins fluctuated slightly from the prior year as a result of
changes in product sales mix. On a pro-forma basis, the gross
profit percentage of the ERO Division increased in fiscal 1998 as
compared to fiscal 1997 due to more favorable product sales mix and
more favorable material costs. On a pro-forma basis, the gross
profit percentage of the Montreal Division remained relatively
unchanged as favorable material costs were offset by unfavorable
production variances related to volume.
<PAGE>
Selling, General and Administrative Expense. Total selling,
general and administrative expenses increased to $66.9 million in
fiscal 1998 from $47.1 million in fiscal 1997. Expressed as a
percentage of net sales, selling, general and administrative
expenses increased to 22.2% in fiscal 1998 from 18.4% in fiscal
1997. The increase was due principally to the inclusion of the ERO
and Montreal Divisions for the full year, which experience
relatively high selling, general and administrative expenses, and
the inclusion of amortization of acquisition-related intangible
assets and royalty expenses. In addition, provision for bad debts
was increased to cover accounts receivable risk related to Caldor
and Service Merchandise. The Company also wrote off approximately
$0.7 million of barter credits during fiscal 1998.
Interest Expense. For fiscal 1998, interest expense increased by
$12.2 million to $31.3 million. The increase in interest expense
was a result of higher average debt levels associated with the
acquisition-related debt and higher working capital requirements.
Income Tax Expense. Holdings' effective income tax rate in 1998
was 6.1% as compared with an effective income tax rate of 45.5% in
1997. The decrease was attributable to the large amount of non-
deductible goodwill generated by the ERO acquisition, unbenefitted
foreign losses and certain foreign income which will be taxed.
Fiscal Year Ended December 31, 1997 Compared to Twelve Months Ended
December 31, 1996
A comparison of Hedstrom's results of operations for the fiscal
year ended December 31, 1997 with the same period in 1996 is
necessarily affected by the impact of the consummation of the ERO
Acquisition in June 1997. Due to the inclusion of seven months of
operations of the ERO and Montreal Divisions in the fiscal year
ended December 31, 1997, management does not believe that
comparisons with the same period in 1996 is meaningful.
Net Sales. Hedstrom's total net sales increased to $256.1 million
in the fiscal year ended December 31, 1997 from $125.4 million in
1996, an increase of $130.7 million. Such increase was attributable
to the inclusion of the ERO and Montreal Divisions and an increase
in sales at the Bedford Division, offset by a decline in sales at
the Ashland Division. Net sales of the Bedford Division increased
primarily as a result of (i) the restructuring of several
promotional allowances, (ii) increased sales of trampolines due to
the business acquired from Bollinger Industries, Inc., (iii) an
increase in OEM sales, (iv) new product introductions and (v) the
acquisition of M.A. Henry Limited in August of 1997. These
increases were partially offset by a decrease resulting from a
shift in product mix to lower-priced outdoor gym sets. Net sales of
the Ashland Division decreased primarily as a result of a decrease
in sales of certain undecorated playballs which decrease was
partially offset by the increase in market share of ball pits. On a
pro-forma basis, the net sales of the ERO Division increased
approximately 12% in 1997 as compared to 1996 due to increased
account penetration in the Slumber Shoppe and Priss Prints product
lines. On a pro-forma basis, the net sales of the Montreal Division
decreased by approximately 4% in 1997 primarily due to a decline in
the overall arts and crafts market which decrease was offset by the
introduction of its battery-operated car.
<PAGE>
Gross Profit. As a result of the increase in Hedstrom's total net
sales, total gross profit increased to $83.8 million in 1997 from
$24.3 million in 1996. As a percentage of net sales, gross profit
increased to 32.7% in 1997 from 19.4% in 1996 due in part to the
inclusion of the results of the ERO and Montreal Divisions, whose
combined gross profit margin of 40.8% is higher than the other
divisions of Hedstrom. The Bedford Division's gross profit margin
in 1997 increased to 24.4% from 15.9% in 1996, primarily as a
result of the benefits of (i) a 1996 Cost Reduction Plan, and (ii)
improvements in promotional programs, which benefits were partially
offset by a decrease in net sales attributable to sales of lower-
priced and lower-margin outdoor gym sets. Gross profit margin in
the Ashland Division increased to 26.4% in 1997 from 26.0% in 1996
primarily as a result of an increase in selling prices and the
favorable effects of the 1996 Cost Reduction Plan, the effects of
which were partially offset by a reduction in production volume. On
a pro-forma basis, the gross profit percentage of the ERO Division
increased in 1997 as compared to 1996 due to increased production
volume and lower material costs. On a pro-forma basis, the gross
profit percentage of the Montreal Division decreased in 1997 due
primarily to (i) decreased production volume, (ii) the start-up
costs of producing a new product, battery-operated cars and (iii)
a shift in sales mix from higher-margin arts and crafts products to
lower-margin battery-operated cars.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses increased to $47.1 million in 1997 from
$25.1 million in 1996. As a percentage of net sales, selling,
general and administrative expenses decreased to 18.4% in 1997 from
20.0% in 1996, due principally to a reduction in warehouse and
shipping costs resulting from Hedstrom's implementation of just-in-
time manufacturing of outdoor gym sets and the discontinuation of
certain print advertising programs. This reduction was partially
offset by the inclusion of the ERO and Montreal Divisions
relatively high selling, general and administrative expenses, which
include the amortization of acquisition-related intangible assets
and royalty expense.
Interest Expense. Interest expense increased as a result of the
incurrence of acquisition-related indebtedness and higher interest
rates.
Income Tax Expense. Holdings' effective income tax rate in 1997
was 45.5% as compared with an effective income tax rate of 38.1% in
1996. The increase was attributable to the acquisition of ERO,
which generated a large amount of non-deductible goodwill and a
higher amount of income derived from foreign sources which have a
higher effective tax rate than the U.S. sources.
Liquidity and Capital Resources of the Company
<PAGE>
Working Capital and Cash Flows
Net cash provided by operating activities was $7.4 million for
the fiscal year ended December 31, 1998. The cash provided by
operations reflects the seasonal nature of the Company's sales. The
ERO and Montreal Division's 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 $34.7 million during
the fiscal year ended December 31, 1998, including $16.8 million
used for the acquisition of Backyard Products Limited (as discussed
in Note 3 of the Notes to Consolidated Financial Statements), $11.3
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 3 of the Notes to Consolidated
Financial Statements) and $3.6 million used to purchase certain
assets from Bestoy, a U.K. manufacturer.
Net cash provided by financing activities was $20.8 million,
representing net proceeds from an additional $30.0 million of
Tranche B Term Loans used to fund the acquisition of Backyard
Products Limited and paydown a portion of the Company's outstanding
balance of the Company's Revolving Credit Facility. The Company
also made $8.0 million of principal payments on the Company's other
term loans.
Liquidity
Interest payments on the Senior Subordinated Notes and interest
and principal payments under the Senior Credit Facilities represent
significant cash requirements for the Company. The Senior
Subordinated Notes require semiannual interest payments of $5.5
million. Borrowings under the Senior Credit Facilities bear
interest at floating rates and require interest payments on varying
dates depending on the interest rate option selected by the
Company.
Outstanding borrowings under the Senior Credit Facilities
consisted of $130.7 million under the Term Loan Facilities,
comprised of $66.5 million of Tranche A Term Loans maturing in 2003
and $64.2 million of Tranche B Term Loans maturing in 2005. The
Senior Credit Facilities also include a $70 million Revolving
Credit Facility. As of December 31, 1998, a balance of $34.9
million was outstanding under the Revolving Credit Facility.
The Term Loan Facilities will require principal repayments in
1999 according to the following schedule:
Date Tranche A Term Loans Tranche B Term Loans
-------------- -------------------- --------------------
March 31, 1999 $4,000,000 $125,000
June 30, 1999 1,000,000 125,000
September 30, 1999 4,000,000 125,000
December 31, 1999 1,000,000 125,000
<PAGE>
The Revolving Credit Facility terminates and all amounts
outstanding thereunder mature on the maturity date of the Tranche A
Term Loan Facility in 2003.
At present, the Discount Notes do not require cash interest
payments. Rather, principal will accrete to an aggregate principal
amount of $44,612,000 on June 1, 2002. Commencing on such date,
Holdings will be required to make semiannual interest payments of
$2,676,720.
The Company's remaining liquidity demands are for capital
expenditures and for working capital needs. The Senior Credit
Facilities impose an annual limit of $10.0 million on the Company's
capital expenditures and investments (subject in any given year to
a roll-over of up to $4.0 million of unused capital expenditure
capacity from the previous year). The Senior Credit Facilities
impose significant restrictions on the Company's ability to make
dividend payments.
The Company's primary sources of liquidity are cash flows from
operations and borrowings under the Revolving Credit Facility. As
of December 31, 1998, approximately $22.6 million was available to
the Company (subject to borrowing base limitations) for borrowings
under the Revolving Credit Facility. Management believes that cash
generated from operations, together with borrowings under the
Revolving Credit Facility, will be sufficient to meet the Company's
working capital and capital expenditures needs for the foreseeable
future.
The Company has established avaluation allowance which fully
reserves deferred tax assets associated with the Company's
operations in the United Kingdom, which are not assured of
realization. However, the Company believes it is more likely
than not to realize the remaining net deferred tax asset and
accordingly no valuation allowance has been provided. This
conclusion is based on, (i) projections (which include
the ERO and Montreal Divisions) of sufficient taxable U.S.
income to fully realize the net operating loss carryforwards by
the end of calendar year 1999, (ii) the tax loss carryforwards
included in the net deferred tax asset were generated in very
recent periods and do not begin to expire until the years
2011-2018, (iii) the significant excess of book basis over tax
basis relative to the net assets of ERO, Inc. and (iv) the
carryback of $5,545,000 in net operating loss carryforwards
which will result in a 1999 tax refund of $6,745,000. Management
continually evaluates the realizability of the net
deferred tax assets and the need for a valuation allowance on such
assets.
<PAGE>
Montreal Division
In 1997, subsequent to its acquisition by the Company, the
Montreal Division experienced a decline in sales of its arts and
crafts product line, a new product line experienced initial quality
problems and the former owners of the Montreal Division announced
they were leaving the Company. These events triggered an assessment
of recoverability of the book value of the non-current assets,
including goodwill, of the Montreal Division. Results of the
assessment indicated there was no impairment of value under
Statement of Financial Accounting Standards No. 121 ("SFAS 121") as
of December 31, 1997. Management has put in place a new management
team, instituted certain cost reduction programs and is actively
developing new versions of current products. Management believes
these factors will improve the future cash flow and profitability
of the Montreal Division.
Adoption of Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board has issued SFAS No. 133,
"Accounting for Derivative and Similar Financial Instruments For
Hedging Activities". This pronouncement revises the accounting for
derivative financial instruments. It requires entities to
recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The
adoption of this statement is required for fiscal years beginning
after June 15, 1999. The Company has entered into interest rate
swap agreements to hedge exposure to variable interest rate debt.
The Company will recognize these derivatives at fair value in its
financial statements if these agreements are outstanding as of
January 1, 2000. The adoption of this pronouncement is not expected
to have a significant impact on the Company's financial position or
results of operations.
The Financial Accounting Standards Board has issued SFAS No. 134
"Accounting For Mortgage-Backed Securities". SFAS No. 134 will
have no effect on the financial condition or results of operations
of the Company.
Year 2000 Date Conversion
The Company relies on a significant number of computer programs
and computer technologies (collectively, "IT") and non-IT Systems
for its key operations, including product design, finance and
various administrative functions. In July of 1997 the Company
began an impact assessment of the Year 2000 on its business systems
and ability to provide product, information, and services to its
business partners before, during and after the Year 2000. As a
result of this assessment the Company adopted a two phase plan to
attain Year 2000 compliance.
Phase I of the Company's Year 2000 compliance plan addresses its
mainframe business systems which need to be converted to handle
Year 2000 dates. Phase II addresses computer hardware, stand-alone
systems, and embedded systems which may need to be upgraded by the
end of 1999.
<PAGE>
Conversion of Phase I data bases and programs was completed in
July 1998. The systems testing phase is now in progress and is
anticipated to be completed in the first quarter of 1999. The
Company plans to install the converted business systems in April
1999.
Assessment of all computer hardware, stand-alone systems,
communications hardware and software which may require replacement
or upgrade by January 2000 is now in progress. The Company has
identified all systems which it believes are not Year 2000
compliant. Remediation of these systems will take place throughout
1999.
In addition, the Company is evaluating the Year 2000 readiness of
its key vendors to ensure that its ability to produce and deliver
products is not materially impacted. As this evaluation is
completed, the Company will decide what further actions, if any,
are appropriate.
The Company anticipates that its Year 2000 compliance costs will
approximate $1.0 million. The Company believes that it has funds
available through its existing credit facilities to address the
Year 2000 costs. These costs will include software, hardware and
consulting expenses which are being expensed as incurred. The
Company believes its current worse case scenario would be the
inability of suppliers to deliver key raw materials. The Company is
currently devising contingency plans which could among other things
include carrying excess stock of key raw materials such as steel at
December 31, 1999. While the Company is confident that the Year
2000 issues are manageable and will be dealt with in a timely
fashion, this conclusion is forward looking and involves
uncertainty and risks. The ultimate result may be impacted by a
variety of factors such as, but not limited to, the ability to
successfully remediate existing IT systems, the failure to identify
problems associated with non-IT systems and problems associated
with supplier or customer information systems any of which could
have a material adverse effect on the Company's ability to
successfully address Year 2000 issues.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Hedstrom Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of
Hedstrom Holdings, Inc. (a Delaware corporation) and subsidiary as
of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for the
two years ended December 31, 1998, the five months ended December
31, 1996, and the fiscal year ended July 31, 1996. These financial
statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule
based on our audits.
<PAGE>
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Hedstrom Holdings, Inc. and subsidiary as of December 31, 1998 and
1997, and the results of their operations and their cash flows for
the two years ended December 31, 1998, the five months ended
December 31, 1996, and the fiscal year ended July 31, 1996 in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule appearing
on page 52 of this Form 10-K is presented for the purpose of
complying with the Securities and Exchange Commission's rules and
is not a part of the basic financial statements. This schedule has
been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set
forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 5, 1999
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, December 31,
1998 1997
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......... $ 4,334 $ 10,844
Trade accounts receivable, net of
allowance for bad debts of
$5,280 and $2,297 ............... 69,522 82,702
Taxes receivable ................... 6,745 -
Inventories ........................ 53,722 47,464
Deferred income taxes .............. 6,016 4,379
Prepaid expenses and other current
assets .......................... 4,130 4,801
-------- --------
Total current assets ....... 144,469 150,190
-------- --------
PROPERTY, PLANT, AND EQUIPMENT, at cost,
net of accumulated depreciation ...... 48,102 42,823
GOODWILL, net of accumulated amortization
of $7,341 and $2,384 ................. 186,826 170,941
OTHER ASSETS:
Deferred financing fees, net of
accumulated amortization of $4,755 and
$1,576 ............................... 14,295 17,474
Deferred charges and other, net of
accumulated amortization of $2,372
and $1,629 ....................... 500 1,387
Deferred income taxes .............. 1,575 4,724
-------- --------
Total other assets ......... 16,370 23,585
-------- --------
Total assets ............... $395,767 $387,539
======== ========
</TABLE>
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, December 31,
1998 1997
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S>
CURRENT LIABILITIES: <C> <C>
Revolving line of credit ........... $34,920 $35,500
Current portion of long-term debt .. 11,905 9,222
Accounts payable ................... 20,709 23,381
Accrued expenses -
Compensation ..................... 2,958 4,066
Commissions and royalties ........ 5,044 5,365
Acquisition costs ................ 230 6,354
Customer allowances .............. 7,234 7,193
Other ............................ 7,504 4,612
-------- --------
Total current liabilities .. 90,504 95,693
-------- --------
LONG-TERM DEBT
Senior Subordinated Notes .......... 110,000 110,000
Senior Discount Notes .............. 26,584 23,288
Term loans ......................... 123,736 104,375
Notes payable to related parties ... 2,500 2,500
Capital leases ..................... 1,690 1,605
Other .............................. 2,154 2,914
-------- --------
Total long-term debt ....... 266,664 244,682
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
10,000,000 shares authorized, no shares
issued or outstanding ................ - -
Common stock, $.01 par value,
50,000,000 shares authorized, 36,142,883
shares issued and outstanding,
respectively ...................... 361 361
Non-voting common stock, $.01 par
value, 40,000,000 shares authorized,
31,520,000 shares issued and outstanding 315 315
Additional paid-in capital ......... 51,553 51,553
Accumulated other comprehensive loss . (2,616) (778)
Accumulated deficit ................ (11,014) (4,287)
-------- --------
Total stockholders' equity 38,599 47,164
-------- --------
Total liabilities and stockholders' equity $395,767 $387,539
======== ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share amounts)
For the For the For the Five For the
Fiscal Year Fiscal Year Months Fiscal Year
Ended Ended Ended Ended
December 31, December 31, December 31, July 31,
1998 1997 1996 1996
------- ------- ------- -------
<S> <C> <C> <C>
NET SALES ....................... $301,696 $256,146 $ 23,994 $133,194
COST OF SALES ................... 210,607 172,390 21,973 105,068
-------- -------- -------- --------
Gross profit ................ 91,089 83,756 2,021 28,126
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES 66,917 47,052 7,546 24,603
-------- -------- -------- --------
Operating income (loss) ..... 24,172 36,704 (5,525) 3,523
RECAPITALIZATION EXPENSES ....... - - - 9,600
INTEREST EXPENSE ................ 31,335 19,131 2,115 5,896
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (7,163) 17,573 (7,640) (11,973)
INCOME TAX EXPENSE (BENEFIT) .... (436) 7,997 (2,869) (3,857)
-------- -------- -------- -------
NET INCOME (LOSS) ............... $ (6,727) $ 9,576 $ (4,771) $(8,116)
======== ======== ======== =======
BASIC NET INCOME PER COMMON SHARE:
Net income .................... $ (0.10) $ 0.18
Weighted average shares outstanding 67,663 52,153
DILUTED NET INCOME PER COMMON SHARE AND
COMMON SHARE EQUIVALENTS:
Net income .................... $ (0.10) $ 0.18
Weighted average shares and common share
equivalents outstanding ....... 67,663 52,416
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the For the For the For the
Fiscal Fiscal Five Fiscal
Year Year Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, July 31,
1998 1997 1996 1996
-------- ------- ------- -------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....... $ (6,727) $ 9,576 $ (4,771) $ (8,116)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities-
Depreciation of property, plant and equipment 7,588 5,802 1,626 2,903
Amortization of goodwill and deferred charges 4,957 3,266 350 511
Amortization of deferred financing fees and
original issue discount 6,475 3,246 - -
Deferred income tax provision (benefit) (4,033) 7,027 (2,862) (3,808)
Gain on the disposition of property, plant, and
equipment ................. (1) (1) (60) (182)
Provision for losses on accounts receivable, net
of recoveries ............ 3,183 1,246 64 37
Changes in assets and liabilities
Accounts receivable . 9,966 (46,754) 9,734 (892)
Taxes receivable .... (6,745) - - -
Inventories ......... (4,243) 4,874 (2,042) (139)
Prepaid expenses .... 761 298 (119) 6
Accounts payable .... (3,630) 1,709 1,851 (7,906)
Accrued expenses .... (137) (68) (793) (158)
-------- -------- -------- --------
Net cash provided by (used for) operating
activities ................ 7,414 (9,779) 2,978 (17,744)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of ERO, Inc. (3,037) (122,600) - -
Acquisition of Backyard Products, Ltd. (16,805) - - -
Acquisition of certain assets of Bollinger
Industries, Inc. .......... - (14,928) - -
Acquisitions of property, plant, and equipment (11,292) (6,395) (1,376) (6,738)
Proceeds from the sale of property, plant, and
equipment ................. - 8 67 248
Other acquisitions ...... (3,579) (2,472) - -
-------- -------- -------- --------
Net cash used for investing activities (34,713) (146,387) (1,309) (6,490)
-------- -------- -------- --------
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of Senior
Subordinated Notes .... - 110,000 - -
Net proceeds from the issuance of new Term Loans 30,000 110,000 - -
Net proceeds from the issuance of Senior Discount
Notes .................. - 21,618 - -
Borrowings on new Revolving Credit Facility, net (580) 35,500 - -
Repayments on new term loans (7,956) (1,125) - -
Borrowings (repayments) of old term loans, net - (92,767) - 35,000
Debt financing and other transaction costs - (21,000) - -
Borrowings (repayments) on old revolving lines of
credit, net ............... - (42,400) (9,050) (2,360)
Net proceeds from issuance of voting common stock - 3,401 - 27,242
Net proceeds from issuance of non-voting common stock - 40,000 - -
Redemption of common stock from existing stockholders - - - (29,772)
Redemption of preferred stock from
existing stockholders . - - - (3,072)
Notes payable to related parties - - - 2,500
Capital lease (payments) borrowings and other (675) 2,395 (84) 1,597
-------- -------- -------- --------
Net cash provided by (used for) financing activities 20,789 165,622 (9,134) 31,135
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............. (6,510) 9,456 (7,465) 6,901
CASH AND CASH EQUIVALENTS:
Purchased cash .......... - 855 - -
Beginning of year/period 10,844 533 7,998 1,097
-------- -------- -------- --------
End of year/period ...... $ 4,334 $ 10,844 $ 533 $ 7,998
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Income taxes paid ....... $3,733 $ 4,431 $ 45 $ 503
Interest paid ........... $24,897 $ 13,922 $ 1,534 $ 5,036
SUPPLEMENTAL DISCLOSURE OF ASSETS ACQUIRED:
See Note 3
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Accumulated
Preferred Stock Common Stock Additional Other
Paid-In Comprehensive Accumulated
Shares Par Value Shares Par Value Capital Loss Deficit Total
--------- ------ ---------- ---- ------ ------------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1995 3,005,555 $ 3,006 33,231,090 $ 332 $12,964 $ - $ (910) $ 15,392
Paid-in-kind dividends on
preferred stock 66,277 66 - - - (66) -
Redemption of common stock
from existing stockholders - - (27,531,941) (275) (29,497) - - (29,772)
Redemption of preferred
stock from existing
stockholders (3,071,832) (3,072) - - - - - (3,072)
Sale of common stock to
new stockholders .. - - 27,242,350 272 26,970 - - 27,242
Net loss ........ - - - - - - (8,116) (8,116)
--------
Comprehensive Loss - - - - - - - (8,116)
--------- ------- ---------- ----- ------- ------- ------- --------
BALANCE AT JULY 31, 1996 - - 32,941,499 329 10,437 - (9,092) 1,674
Net loss ........ - - - - - - (4,771) (4,771)
--------
Comprehensive Loss - - - - - - - (4,771)
--------- ------- ---------- ----- ------- ------- ------- --------
BALANCE AT DECEMBER 31, 1996 - - 32,941,499 329 10,437 - (13,863) (3,097)
Issuance of voting common
stock - - 3,201,384 32 3,369 - - 3,401
Issuance of non-voting
common stock ........... - - 31,520,000 315 39,685 - - 40,000
Acquisition transaction costs - - - - (1,938) - - (1,938)
Foreign currency
translation adjustment - - - - - (778) - (778)
Net income ...... - - - - - - 9,576 9,576
--------
Comprehensive Income - - - - - - - 8,798
--------- ------- ---------- ----- ------- ------- ------- --------
BALANCE AT DECEMBER 31, 1997 - - 67,662,883 676 51,553 (778) (4,287) 47,164
Foreign Currency translation
Adjustment .... - - - - - (1,838) - (1,838)
Net Loss ........ - - - - - - (6,727) (6,727)
--------
Comprehensive Loss - - - - - - - (8,565)
--------- ------- ---------- ----- ------ ------- -------- --------
BALANCE AT DECEMBER 31, 1998 - $ - 67,662,883 $ 676 $ 51,553 $(2,616) $(11,014) $ 38,599
========= ======= ========== ===== ======== ======= ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
<PAGE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Hedstrom Holdings, Inc. ("Holdings") is a holding Company with no
operations, other than its 100% ownership of Hedstrom Corporation
("Hedstrom", and together with Holdings, the "Company"). The
Company is a manufacturer and marketer of well-established
children's leisure and activity products. The Company's products
fall within five principal divisions: Bedford, Ashland, Montreal,
ERO and International. Through its facility in Bedford,
Pennsylvania, the Bedford Division manufactures and distributes gym
set products consisting of metal gym sets, composite metal and
plastic gym sets, wood gym sets, wood gym kits, plastic outdoor
slides and gym set accessories. Through its facility in Ashland,
Ohio, the Ashland Division manufactures playball products, which
consist of premium playballs made of plastic or vinyl and decorated
with popular licensed characters or designs, nonpremium playballs
that generally have minimal decoration, athletic balls targeted at
young children, and ball pit products. Through its facility in
Montreal, Canada, the Montreal Division manufactures children's
products including arts and crafts kits, game tables, battery
operated ride-on vehicles and back-to-school items. Through its
facility in Hazlehurst, Georgia, the ERO Division manufactures and
distributes slumber products, water sports products and room
decorations for children. Through its facility in the United
Kingdom and Canada, the International Division produces and
distributes gym sets and other products manufactured by its
Domestic Divisions. The Company sells its products through major
national toy retailers, mass merchants, supermarkets, drug store
chains, and home centers primarily in the United States, Canada,
and the United Kingdom. The Company employed 2,234 people at
December 31, 1998, 10% of which are represented by the Rubber
Workers Union. The collective bargaining agreement with the
Rubber Workers Union expires on October 2, 2001.
Four of the Company's customers (Wal-Mart, Toys R Us, K-Mart and
Target) account for over 50% of the Company's sales. As a result,
the Company's operations can be significantly impacted by these
customers. Although Hedstrom has well-established relationships
with these customers, it does not have long term contracts with any
of them. A decrease in business from any of these customers could
have a material adverse effect on the Company's results of
operations and financial condition. During 1998, well-publicized
changes in the inventory policies and purchasing practices of Toys
R Us, the Company's second largest customer in 1998, and, to a
lesser extent, those of the Company's other customers adversely
affected the 1998 sales levels of the Company and of the industry
generally. As a consequence, the Company's operating income in
fiscal 1998 was significantly less than anticipated. Although
management does not anticipate similar events in fiscal 1999, there
can be no assurance that competitive pressures in the retail sector
will not result in continued pressure on the Company's sales and
operating income.
<PAGE>
As a result of the aforementioned competitive pressures, there
recently have been a number of consolidations and business failures
in the retail sector. As a result, there may be a further
concentration of the Company's customer base, as well as an adverse
change in the Company's credit exposure. Although management has
no reason to believe that there are any significant credit risks
associated with any of its key customers, a credit failure by a
key customer or a significant number of smaller customers would
have a material adverse effect on Hedstrom's results of operations.
The ERO Division derives a significant portion of its revenues
from sales of products featuring licensed characters. Although the
ERO Division intends to renew key existing licenses and obtain new
licenses, there can be no assurance that it will be able to do so.
The failure to renew key existing licenses or obtain new licenses
would have a material adverse effect on the Company's results of
operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Hedstrom Holdings, Inc. and its wholly owned
subsidiary, Hedstrom Corporation. Effective June 12, 1997, Hedstrom
acquired ERO, Inc. ("ERO"), which became a wholly owned subsidiary
of Hedstrom (see Note 3). The accompanying consolidated financial
statements reflect the operations of ERO since June 1, 1997.
Management does not believe that the 1997 over 1996 comparisons are
meaningful, given the 1997 acquisition of ERO. All intercompany
balances and transactions have been eliminated in consolidation.
Fiscal Year
Prior to August 1, 1996, the Company's fiscal year ended on July
31. Effective January 1, 1997, the Company changed its fiscal year
to a calendar year ending on December 31. The following
consolidated financial statements include the twelve month period
from January 1, 1996 to December 31, 1996 for comparative purposes
only.
Consolidated Income Statement
For the twelve months ended December 31, 1996
(Unaudited)
(In thousands)
NET SALES .............................. $125,396
COST OF SALES .......................... 101,041
--------
Gross profit ................. 24,355
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES ................................ 25,082
-------
Operating loss ................ (727)
-------
INTEREST EXPENSE ........................ 6,238
INCOME TAX BENEFIT ...................... (2,652)
--------
NET LOSS ................................ $ (4,313)
<PAGE> ========
Consolidated Statement of Cash Flows
For the twelve months ended December 31, 1996
(Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss ............................... $(4,313)
Adjustments to reconcile net
loss to net cash provided
by operating activities
Depreciation and amoritization ....... 4,401
Changes in assets and liabilities:
Accounts receivable ............... 3,804
Inventories ....................... 4,088
Accounts payable .................. (5)
Accrued expenses .................. 1,434
Other ............................. (4,966)
------
Net cash provided by operating
activities ............................ 4,443
------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of property,
plant and equipment .................. (6,457)
------
Net cash used for investing
activities ........................... (6,457)
------
Net cash provided by financing
activities ........................... 2,159
------
NET INCREASE IN CASH AND CASH
CASH EQUIVALENTS ....................... 145
CASH AND CASH EQUIVALENTS:
Beginning of period .................. 388
-------
End of period ........................ $ 533
=======
Cash and Cash Equivalents
Cash and cash equivalents include short-term investments with
original maturities of three months or less. These investments are
stated at cost which approximates market.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. The cost of
manufactured products includes materials, direct labor, and an
allocation of plant overheads. The cost of purchased products
includes inbound freight and duty.
<PAGE>
Property, Plant, and Equipment
Property, plant, and equipment acquired in the normal course of
business are stated at cost. Property, plant, and equipment
acquired in connection with the acquisitions of ERO and other
companies are stated at fair market value as of that date as
determined by independent appraisals, where appropriate.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Additions and improvements
are capitalized, while expenditures for maintenance and repairs are
charged to operations as incurred. The cost and accumulated
depreciation of property sold or retired are removed from the
respective accounts and the resultant gains or losses, if any, are
included in current operations.
The estimated useful lives of property, plant, and equipment are
as follows:
Buildings and improvements ....... 5-40 years
Machinery and equipment .......... 3-12 years
Computer hardware and software ... 3-5 years
Furniture and fixtures ........... 5-10 years
Depreciation is allocated to cost of sales and selling, general,
and administrative expense based upon the related asset's use.
Depreciation of approximately $6,696,000, $5,184,000, $1,576,000
and $2,797,000 is included in cost of sales for the fiscal years
ended December 31, 1998, December 31, 1997, for the five months
ended December 31, 1996, and for the fiscal year ended July 31,
1996, respectively. Depreciation of approximately $892,000, $618,000,
$50,000 and $106,000 is included in selling, general, and
administrative expense for the fiscal years ended December 31, 1998,
December 31, 1997, for the five months ended December 31, 1996,
and for the fiscal year ended July 31, 1996, respectively.
Long-lived assets and certain identifiable intangibles, including
goodwill, to be held and used by the Company are reviewed for
impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In the event
that facts and circumstances indicate that the cost of long-lived
assets may be impaired, an evaluation of recoverability is
performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset would be compared
to the asset's carrying amount to determine if a write-down to fair
value is required.
Goodwill
Goodwill, representing the excess of the cost over the net
tangible and identifiable intangible assets of acquired businesses,
is stated at cost and is amortized on a straight-line basis over
forty years. Amortization of goodwill of $4,214,000 and $2,384,000
is included in selling, and administrative expense for the fiscal
years ended December 31, 1998 and December 31, 1997, respectively.
The Company had no Goodwill during fiscal year 1996 or on December
31, 1996. Goodwill is reviewed for impairment in accordance with
the policy, as discussed above.
<PAGE>
Deferred Financing Fees
Deferred financing fees, representing costs incurred in connection
with obtaining borrowings under long-term debt agreements, are
stated at cost and are amortized over the life of the related debt.
Amortization of deferred financing fees of $3,179,000 and
$1,576,000 is included in interest expense for the fiscal years
ended December 31, 1998 and December 31, 1997, respectively.
Deferred Charges and Other, Net
Deferred charges and other on the accompanying balance sheets is
comprised of the following (in thousands):
December 31, December 31,
1998 1997
----------- -----------
Deferred expenses .................... $ 2,872 $ 2,546
Barter credits ....................... - 470
------- --------
2,872 3,016
Less-Accumulated amortization ........ (2,372) (1,629)
------- --------
$ 500 $ 1,387
======= ========
Deferred expenses primarily relate to costs the Company incurs to
obtain shelf space, and replace competitors products, at certain of
its retail customers. In connection with these transactions, the
Company obtains a commitment from the retailer that it will
exclusively stock the Company's products for a period not less than
three years. As a result, these costs are deferred and amortized
over a 36-month period on a straight-line basis. Amortization
expense is included in selling, general, and administrative expense
on the accompanying income statements and was $743,000, $882,000,
$350,000 and $358,000 for the fiscal years ended December 31, 1998,
December 31, 1997, for the five months ended December 31, 1996 and
for the fiscal year ended July 31, 1996, respectively.
Prior to the recapitalization discussed in Note 12, the Company
had capitalized certain financing costs and organizational costs.
These costs were immediately expensed in connection with the
recapitalization and are included in recapitalization expenses on
the accompanying July 31, 1996, income statement. The deferred
financing costs were being amortized over the period of the
underlying debt on a straight-line basis and organizational costs
were being amortized over a 60-month period. Prior to the
recapitalization, amortization of deferred financing costs was
$67,000 in the fiscal year ended July 31, 1996 and is included in
interest expense on the accompanying income statements.
Amortization of organizational costs prior to the recapitalization
was $85,000 in the fiscal year ended July 31, 1996 and is included
in selling, general, and administrative expense on the accompanying
income statements.
<PAGE>
During the fiscal year ended July 31, 1995, the Company exchanged
certain finished goods inventory with a cost basis of approximately
$320,000 for barter credits. Although the barter credits had a
stated value of approximately $3,200,000, they were recorded at an
amount equal to the cost basis of the inventory exchanged, such
that no profit was recognized on the transaction. The barter
credits can be used principally for the purchase of print and media
advertising; however, cash must be used in addition to the barter
credits to secure the advertising. During the fiscal year ended
December 31, 1997, the five months ended December 31, 1996 and the
fiscal year ended July 31, 1996, the Company utilized approximately
$49,000, $262,000 and $262,000, respectively, of these barter
credits. As a result of the Company's decision to reduce its
advertising expenditures during calendar 1997, management
determined that all of its barter credits may not be fully utilized
prior to their expiration in August 1998. Therefore, the Company
wrote-off an additional $1,000,000 of the barter credits during the
fiscal year ended July 31, 1996. During 1998 management assessed
the realizable value of the remaining barter credits and determined
that it was unlikely that any significant value would be realized.
As a result, the Company wrote-off the remaining barter credits
totaling $747,000.
Revenue Recognition
The Company recognizes revenue when title to the goods transfers.
For the majority of the Company's sales, this occurs at the time of
shipment.
Income Taxes
Deferred income taxes are determined under the asset and
liability method in accordance with Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes".
Deferred income taxes arise from temporary differences between the
income tax basis of assets and liabilities and their reported
amounts in the financial statements.
Net Income (Loss) Per Common Share
Basic earnings per share is computed by dividing net income
(loss) 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 (loss) by the weighted average
number of shares of common stock and other dilutive securities.
Excluded from the computation of diluted earnings per share are
options to purchase 2.4 million and 1.8 million shares of common
stock in 1998 and 1997 respectively. These options were outstanding
during these respective years, but were excluded because the option
exercise price was greater than the average market price of the
common shares. Due to the ERO acquisition, described in Note 3,
net income (loss) per share for the five months ended December 31,
1996 and for the fiscal year ended July 31, 1996 have no
significant relevance to current amounts.
<PAGE>
Fair Value of Financial Instruments
The carrying amount reported in the consolidated balance sheets
for cash and cash equivalents, accounts receivable, accounts
payable, and accrued expenses approximates fair value because of
the immediate or short-term maturity of these financial
instruments. The carrying amount reported for long-term debt
approximates fair market value because the underlying instruments
are at rates similar to current rates offered to the Company for
debt with the same remaining maturities.
Foreign Currency Translation
The financial position and results of operations of the Company's
foreign subsidiaries are measured using each subsidiary's local
currency as the functional currency. Assets and liabilities of the
foreign subsidiaries are translated to U.S. dollars using exchange
rates in effect at balance sheet dates. Income and expense items
are translated at monthly average rates of exchange. The resultant
translation gains or losses are included as a component of
accumulated other comprehensive loss in stockholders' equity and
designated as a foreign currency translation adjustment.
Transaction gains or losses were not significant in any year.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123), encourages, but does not
require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen
to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the
amount the employee must pay to acquire the stock. See Note 9.
Reclassifications
Certain 1997 and 1996 amounts have been reclassified to conform
with their current year presentation.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses for the reporting period.
Actual results could differ from those estimates.
<PAGE>
Recent Accounting Pronouncements
Holdings has adopted SFAS No. 130, "Reporting Comprehensive
Income," effective January 1, 1998. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements.
Comprehensive income is defined as the total of net income and all
other non-owner changes in equity. The accompanying Consolidated
Statement of Stockholders' Equity has been restated to disclose
comprehensive income for each year presented.
Holdings has adopted SFAS No. 131, "Disclosure about Segments of
An Enterprise and Related Information." 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. Restatement of prior year segment disclosure was
required upon adoption of SFAS No. 131. See Note 13.
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. The Company has revised its disclosures accordingly. See
Note 8.
The Financial Accounting Standards Board has issued SFAS No. 133,
"Accounting for Derivative and Similar Financial Instruments For
Hedging Activities". This pronouncement revises the accounting for
derivative financial instruments. It requires entities to
recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The
adoption of this statement is required for fiscal years beginning
after June 15, 1999. The Company has entered into interest rate
swap agreements to hedge exposure to variable interest rate debt.
The Company will recognize these derivatives at fair value in its
financial statements if these agreements are outstanding as of
January 1, 2000. The adoption of this pronouncement is not expected
to have a significant impact on the Company's financial position or
results of operations.
The Financial Accounting Standards Board has issued SFAS No. 134
"Accounting For Mortgage-Backed Securities". SFAS No. 134 will
have no effect on the disclosures, financial condition or results
of operations of the Company.
<PAGE>
3. ACQUISITIONS:
On April 10, 1997, Hedstrom and HC Acquisition Corp., a wholly
owned subsidiary of Hedstrom, entered into an Agreement and Plan of
Merger (the "Merger Agreement") with ERO to acquire ERO for a total
enterprise value of approximately $200 million. Pursuant to the
Merger Agreement, HC Acquisition Corp. commenced and, on June 12,
1997, consummated a tender offer for all of the outstanding shares
of the common stock of ERO at a purchase price of $11.25 per share
(the "Tender Offer"). Holdings also assumed a purchase price
contingency related to ERO, Inc.'s acquisition of the Montreal
Division in October of 1995. The contingency included an additional
$3.7 million of purchase price contingent upon achievement of
certain conditions. As those conditions were met as of December 31,
1997, Holdings accrued a liability for the contingency against
goodwill. This was reflected in accrued expenses-acquisition costs
in the consolidated balance sheet. 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").
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 (on July 24, 1998 the Tranche B
Term Loan was increased to $65.0 million to allow for the
acquisition of Backyard Products Limited, see further discussion
below) (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 is also used to finance certain
seasonal working capital requirements.
<PAGE>
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 $159.8 million, has been recorded
as goodwill and is being amortized on a straight-line basis over 40
years. In the event that facts and circumstances indicate that the
goodwill may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future
undiscounted 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 .............. $ 53,500
Net property,plant and
equipment................... 20,000
Other assets ................ 9,400
Goodwill .................... 159,800
Liabilities assumed ......... (120,100)
---------
Cash paid for ERO........ $ 122,600
=========
In 1997, subsequent to the acquisition of ERO, the Montreal
Division experienced a decline in sales of its arts and crafts
product line, a new product line experienced initial quality
problems and the former owners of Montreal announced they were
leaving the Company. These events triggered an assessment of
recoverability of the book value of the non-current assets,
including goodwill, of this Division. Results of the assessment
indicated there was no impairment of value under Statement of
Financial Accounting Standards No. 121 ("SFAS 121") as of December
31, 1997. Management has put in place a new management team,
instituted certain cost reduction programs, established a quality
control function and is actively developing new versions of current
products. Management believes these factors will improve the future
cash flow and profitability of this Division.
On July 24, 1998 the Company acquired 100% of the outstanding
shares of Backyard Products Limited, approximately $13.9 million,
a leading Canadian manufacturer and supplier of wood gym sets and
accessories. The purchase price of approximately $16.8 million was
financed through an amendment to the Company's existing Senior
Credit Facilities, which increased the Tranche B Term Loan by $30
million. The $30 million proceeds from the amendment were used to
fund the acquisition as well as to pay down borrowings under the
Revolving Credit Facility. The acquisition was accounted for as a
purchase; accordingly, the purchase price was 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 $3.4 million and the liabilities assumed was
$2.7 million. The excess of the purchase price over the value of
the net assets acquired of, $16.1 million was recorded as goodwill
and will be amortized over 40 years.
<PAGE>
4. INVENTORIES:
Inventories are comprised of the following (in thousands):
December 31, December 31,
1998 1997
------------ -----------
Raw materials ..................... $21,421 $16,502
Work-in-process ................... 9,013 5,690
Finished goods .................... 23,288 25,272
------- -------
$53,722 $47,464
======= =======
5. PROPERTY, PLANT, AND EQUIPMENT:
Property, plant, and equipment is comprised of the following (in
thousands):
December 31, December 31,
1998 1997
------------ -----------
Buildings and improvements....... $17,183 $16,567
Machinery and equipment .......... 47,392 40,131
Computer software and hardware ... 3,095 1,469
Furniture and fixtures ........... 2,076 1,277
------- ------
69,746 59,444
Less - Accumulated depreciation .. (25,453) (20,430)
------- -------
44,293 39,014
Land ............................. 3,809 3,809
------- -------
$48,102 $42,823
======= =======
6. DEBT
Debt consists of the following (in thousands):
December 31, December 31,
1998 1997
----------- -----------
Senior Subordinated Notes .......... $110,000 $110,000
Term Loans ......................... 134,158 112,375
Senior Discount Notes .............. 26,584 23,288
Revolving Credit Facility .......... 34,920 35,500
Other .............................. 7,827 8,241
-------- --------
$313,489 $289,404
======== ========
<PAGE>
Term Loans and Revolving Credit Facility
As discussed in Note 3, in connection with the ERO acquisition,
Hedstrom obtained the Senior Credit Facilities. The Senior Credit
Facilities consist of (a) a six-year Tranche A Senior Secured Term
Loan Facility providing for term loans to Hedstrom in a principal
amount of $75 million; (b) an eight-year Tranche B Senior Secured
Term Loan Facility providing for term loans to Hedstrom in a
principal amount of $35 million (on July 24, 1998 the Tranche B
Term Loan was increased to $65.0 million to allow for the
acquisition of Backyard Products Limited, see Note 3 for further
discussion); and (c) a Senior Secured Revolving Credit Facility
providing for revolving loans to Hedstrom and the issuance of
letters of credit for the account of Hedstrom in an aggregate
principal and stated amount at any time not to exceed $70 million.
Borrowings under the Revolving Credit Facility will be available
based upon a borrowing base not to exceed 85% of eligible accounts
receivable and 50% of eligible inventory.
The obligations of Hedstrom under the Senior Credit Facilities
are unconditionally, fully and irrevocably guaranteed (jointly and
severally) by Holdings and each of Hedstrom's direct or indirect
domestic subsidiaries (collectively, the "Senior Credit Facilities
Guarantors"). In addition, the Senior Credit Facilities will be
secured by first priority or equivalent security interests in (i)
all the capital stock of, or other equity interests in, each direct
or indirect domestic subsidiary of Hedstrom and 65% of the capital
stock of, or other equity interests in, each direct foreign
subsidiary of Hedstrom, or any of its domestic subsidiaries and
(ii) all tangible and intangible assets (including, without
limitation, intellectual property and owned real property) of
Hedstrom and the Senior Credit Facilities Guarantors.
On December 30, 1998, the Company amended the Senior Credit
Facility. The amendment allows for less restrictive financial
covenants.In addition, the amendment allows, at Hedstrom's option,
the interest rates per annum applicable to the Senior Credit
Facilities to be either (i) the Eurocurrency Rate (as defined) plus
3.0% in the case of the Tranche A Term Loan Facility and the
Revolving Credit Facility or 3.5% in the case of the Tranche B
Term Loan Facility or (ii) the Alternate Base Rate (as defined)
plus 2.0% in the case of the Tranche A Term Loan Facility and the
Revolving Credit Facility or 2.5% 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 Senior Credit Facilities contain a number of covenants that,
among other things, restrict the ability of Hedstrom to dispose
of assets, incur additional indebtedness, repay other indebtedness
or amend other debt instruments, pay dividends, create liens on
assets, make investments or acquisitions, engage in mergers or
consolidations, make capital expenditures, or engage in certain
transactions with affiliates. In addition, under the Senior
Credit Facilities, Hedstrom is required to comply with specified
minimum interest coverage and maximum leverage ratios. At December
31, 1998, the Company was in compliance with all of the amended
restrictive covenants contained in the Senior Credit Facility.
Senior Discount Notes
In connection with the ERO acquisition, Holdings received $25.0
million of gross proceeds from the issuance by Holdings of 44,612
units, consisting of the Discount Notes and 2,705,896 shares of
Holdings common stock. Of the $25.0 million in gross proceeds, $3.4
million ($1.25 per share) was allocated to the common stock, based
upon management's estimate of fair market value, and $21.6 million
was allocated to Discount Notes.
The Discount Notes are unsecured obligations of Holdings and have
an aggregate principal amount at maturity (June 1, 2009) of $44.6
million, representing a yield to maturity of 12%. No cash interest
will accrue on the Discount Notes prior to June 1, 2002.
Thereafter, cash interest will be payable on June 1 and December 1
of each year, commencing December 1, 2002. Amortization of the
original issue discount, which is included in interest expense,
totaled $3,296,000 and $1,670,000 during the fiscal years ended
December 31, 1998 and December 31, 1997, respectively.
Except as set forth below, the Discount Notes will not be
redeemable at the option of Holdings prior to June 1, 2002. On and
after such date, the Discount Notes will be redeemable, at
Holdings' option, in whole or in part, at the following redemption
prices (expressed in percentages of principal amount at maturity),
plus accrued and unpaid interest to the redemption date:
if redeemed during the 12-month period commencing on June 1 of
the years set forth below:
Redemption
Period Price(%)
------------ ----------
2002 ................................... 106.000
2003 ................................... 104.000
2004 ................................... 102.000
2005 and thereafter .................... 100.000
<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 as of, and accrued and unpaid interest, if any,
to the date of redemption.
The Discount Notes Indenture contains certain covenants that,
among other things, limit (i) the incurrence of additional
indebtedness by Holdings and its restricted subsidiaries (as
defined), (ii) the payment of dividends and other restricted
payments by Holdings and its restricted subsidiaries, (iii)
restrictions on distributions from restricted subsidiaries, (iv)
asset sales, (v) transactions with affiliates, (vi) sales or
issuances of restricted subsidiary capital stock and (vii) mergers
and consolidations.
Senior Subordinated Notes
The $110.0 million Senior Subordinated Notes bear interest at 10%
per annum, payable on June 1 and December 1 of each year,
commencing December 1, 1997. The Senior Subordinated Notes mature
on June 1, 2007. Except as set forth below, the Senior Subordinated
Notes are not redeemable at the option of Hedstrom prior to June 1,
2002. On and after such date, the Senior Subordinated Notes are
redeemable, at Hedstrom's option, in whole or in part, at the
following redemption prices (expressed in percentages of principal
amount), plus accrued and unpaid interest to the redemption date:
if redeemed during the 12-month period commencing on June 1 of
the years set forth below:
Redemption
Period Price(%)
--------- ----------
2002 ..................................105.000
2003 ..................................103.333
2004 ..................................101.667
2005 and thereafter ...................100.000
<PAGE>
In addition, at any time and from time to time prior to June 1,
2000, Hedstrom may redeem in the aggregate up to $44.0 million
principal amount of Senior Subordinated Notes with the proceeds of
one or more equity offerings so long as there is a public market at
the time of such redemption (provided that if the equity offering
is an offering by Holdings, a portion of the net cash proceeds
thereof equal to the amount required to redeem any such Senior
Subordinated Notes is contributed to the equity capital of
Hedstrom), at a redemption price (expressed as a percentage of
principal amount) of 110%, plus accrued and unpaid interest, if
any, to the redemption date; provided, however, that at least $66.0
million aggregate principal amount of the Senior Subordinated Notes
remains outstanding after each such redemption.
The Senior Subordinated Notes are unsecured senior subordinated
obligations of Hedstrom and are unconditionally and fully
guaranteed (jointly and severally) on a senior basis by Holdings
and on a senior subordinated basis by each domestic subsidiary of
Hedstrom. The Senior Subordinated Notes are subordinated to all
senior indebtedness (as defined) of Hedstrom and rank pari passu in
right of payment with all senior subordinated indebtedness (as
defined) of Hedstrom.
The Senior Subordinated Notes Indenture contains certain
covenants that, among other things, limit (i) the incurrence of
additional indebtedness by Hedstrom and its restricted subsidiaries
(as defined), (ii) the payment of dividends and other restricted
payments by Hedstrom and its restricted subsidiaries, (iii)
restrictions on distributions from restricted subsidiaries, (iv)
asset sales, (v) transactions with affiliates, (vi) sales or
issuances of restricted subsidiary capital stock and (vii) mergers
and consolidations.
Other Debt
Other debt consists of a $2.5 million Holdings note payable to
the previous owners of Holdings as well as various other mortgages,
capital leases and equipment loans. The $2.5 million note payable
bears interest at 10% per annum and is payable at the earlier of
April 30, 2002, or when the Company has met certain cash flow
levels. The mortgages and equipment loans have varying interest
rates and maturities.
Interest Rate Swaps
As of December 31, 1998, the Company had interest rate swap
agreements in place with two of its lenders under which the Company
exchanged a variable interest rate for a fixed interest rate. The
Company anticipates that the counter parties to the swap agreements
will fully perform their obligations. During the fiscal year ended
December 31, 1998, the effect of the swap agreements were
immaterial. Terms of the swap agreements are as follows at December
31, 1998:
Notional Amounts Fixed Interest Rate Expiration Date
---------------- ------------------- ---------------
$30 million 8.05% October 28, 1999
$12 million 8.555% December 29, 2000
<PAGE>
Maturities
Aggregate maturities of long-term debt over the next five years
are as follows (in thousands): 1999 - $11,905; 2000 - $14,655; 2001
- $17,156; 2002; - $22,156; and 2003 - $33,552.
7. INCOME TAXES:
The sources of pretax income (loss) for the fiscal years ended
December 31, 1998 and December 31, 1997 were as follows (in
thousands):
1998 1997
---- ----
Domestic ... $(14,174) $ 9,877
Foreign .... 7,011 7,696
-------- -------
$ (7,163) $17,573
======== =======
The Company has not provided for U.S. federal and foreign income
withholding taxes on its foreign subsidiaries' undistributed
earnings as of December 31, 1998 and December 31, 1997, because
such earnings are considered to be indefinitely reinvested.
Repatriation of these earnings would not materially increase the
Company's tax liability. If these earnings were distributed in the
form of dividends or otherwise, foreign tax credits could be used
to offset the U.S. income taxes due on income earned from foreign
sources.
Pretax income from foreign sources in periods prior to 1997 were
not significant.
The components of the provisions (benefits) for income taxes are
as follows (in thousands):
<TABLE>
For the Fiscal For the Fiscal For the Five For the Fiscal
Year Ended Year Ended Months Ended Year Ended
December 31, December 31, December 31, July 31,
1998 1997 1996 1996
--------------- -------------- ------------ -------------
<S>
Current <C> <C> <C> <C>
State ......... $ - $ 339 $ 33 $ 43
U.S. federal... - (2,745) (40) (92)
Foreign ....... 3,597 3,376 - -
------- ------- --------- ---------
3,597 970 (7) (49)
------- ------- --------- ---------
Deferred:
State ......... (773) 412 - -
U.S. federal... (3,511) 6,133 (2,862) (3,808)
Foreign ...... 251 482 - -
------- ------- --------- ---------
(4,033) 7,027 (2,862) (3,808)
------- ------- --------- ---------
$ (436) $ 7,997 $ (2,869) $ (3,857)
======= ======= ========= =========
</TABLE>
<PAGE>
The provisions (benefits) for income taxes differ from those
computed using the statutory U.S. federal income tax rate as a
result of the following (in thousands)
<TABLE>
For the Fiscal For the Fiscal For the Five For the Fiscal
Year Ended Year Ended Months Ended Year Ended
December 31, December 31, December 31, July 31,
1998 1997 1996 1996
<S> --------------- -------------- ------------- --------------
Current: Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
<C> <C> <C> <C> <C> <C> <C> <C>
Expected provision (benefit)... $(2,435) (34)% $5,975 34% $(2,598) (34)% $(4,071) (34)%
State income taxes, net
of federal benefit............ (511) (7) 495 3 (219) (3) (183) (1)
Foreign corporate tax in
excess of 34%................. 459 6 826 5 47 - 151 1
Foreign loss nottax benefited . 980 14 - - - - - -
Nondeductible Goodwill ........ 994 14 727 4 - - - -
Recapitalization costs ........ - - - - - - 479 4
Other.......................... 77 1 (26) - (99) (1) (233) (2)
------- ---- ------ ---- ------- ----- ------- -----
Actual Provision(benefit) $ (436) (6)% $7,997 46% $(2,869) (38)% $(3,857) (32)%
======= ==== ====== ==== ======= ===== ======= =====
</TABLE>
The net deferred tax assets are comprised of the following
(in thousands):
<TABLE>
December 31, December 31,
1998 1997
------------ ------------
Current deferred tax asset: <C> <C>
Allowances for accounts receivable $1,329 $ 568
Accrued Liabilities ........................ 4,153 3,656
Other ...................................... 534 155
------ -------
Current deferred tax asset............... 6,016 4,379
------ -------
Noncurrent deferred tax asset:
Tax over book depreciation ................. (4,274) (4,056)
Net operating loss carryforward............. 3,154 6,480
Accrued Interest on Senior Discount Notes... 2,094 644
Recapitalization costs ..................... 735 1,104
Other ...................................... 615 552
Valuation Allowance (749) -
------ -------
Noncurrent deferred tax asset............ 1,575 4,724
------ -------
Net deferred tax asset ....................... $7,591 $ 9,103
====== =======
</TABLE>
The Company has net operating loss carryforwards of $8,170,000 to
apply against future taxable income. Such carryforwards expire
between 2011 and 2018.
<PAGE>
The Company has recorded current taxes receivable of $6,745,000.
This receivable consists of an overpayment of Canadian and U.S.
taxes of $1,200,000 and the carryback of $5,545,000 of net
operating losses.
The valuation allowance fully reserves deferred tax assets
associated with the Company's operations in the United Kingdom,
which are not expected to be realized. However, the Company
believes it is more likely than not to realize the remaining net
deferred tax asset and accordingly no valuation allowance has been
provided. This conclusion is based on, (i) projections (which
include the ERO and Montreal Divisions) of sufficient taxable U.S.
income to fully realize the net operating loss carryforwards by
the end of calendar year 1999, (ii) the tax loss carryforwards
included in the net deferred tax asset were generated in very
recent periods and do not begin to expire until the years 2011-2018,
(iii) the significant excess of book basis over tax basis relative
to the net assets of ERO, Inc. and (iv) the carryback of $5,545,000
million in net operating loss carryforwards which will result in a
1999 tax refund of $6,745,000. Management continually evaluates the
realizability of the net deferred tax assets and the need for a
valuation allowance on such assets.
8. EMPLOYEE BENEFIT PLANS:
All employees of the Bedford and Ashland Divisions are eligible
to participate in either the Union Employees' Tax Sheltered Savings
Plan or the tax-sheltered Savings Plan (collectively the "Hedstrom
Plans"), depending upon the employment status of the employees as
union or nonunion after meeting certain requirements. The Union
Employees' Tax Sheltered Savings Plan covers all union employees 18
years of age or older who have worked for 1,000 consecutive hours
within a 12-month period. The tax-sheltered Savings Plan covers all
nonunion employees 18 years of age or older who have been employed
for 120 consecutive days within a 12-month period.
For the Hedstrom Plans, the employees may contribute from 1% to
15% of their compensation (either before tax, after tax, or a
combination thereof) to the Plans. The Company provides matching
contributions at the rate of 50% of the employee's contribution up
to 6% of gross wages as defined by the Plans agreements.
The Company may make annual discretionary contributions to the
Hedstrom Plans. Discretionary contributions during the fiscal years
ended December 31, 1998, December 31, 1997, the five months ended
December 31, 1996, and for the fiscal year ended July 31, 1996,
aggregated approximately $730,000, $607,000, $218,000 and
$634,000, respectively.
U.S. Employees of the ERO and Montreal Divisions are covered by a
contributory profit sharing plan established pursuant to the
provisions of Section 401(k) of the Internal Revenue Code which
provides retirement benefits for eligible employees of the Company
(the "ERO Plan"). Eligible employees may contribute from 1% to 15%
of their compensation. The Company may provide matching
contributions at the rate of 50% of the employee's contribution up
to 6% of the employee's gross wages. Discretionary contributions
during the fiscal years ended December 31, 1998 and December 31,
1997, were $179,000 and $171,000, respectively.
<PAGE>
9. STOCK-BASED COMPENSATION PLAN:
The company maintains two stock option plans, the 1995 Stock
Option Plan and the 1997 Stock Option Plan (the "Plans") which
authorize grants of stock options of up to 2,446,236 and 2,750,000
shares, respectively, to key employees of the Company. Options are
granted at the fair market value at the date of grant, as
determined by management.
Options issued under the Plan expire ten years from date of grant
and vest equally over periods of time ranging from two to three
years, as determined by the Company's Option Committee of the Board
of Directors.
The following is a summary of stock option transactions from July
31, 1996 through December 31, 1998:
<TABLE> Average
Shares Option Prices Exercise Price
--------- ------------- --------------
<S> <C> <C> <C>
Shares under option at July 31, 1996....... 2,174,216 $1.00 $1.00
Options granted ......................... 200,000 1.00 1.00
Options exercised ....................... _ _ _
Options terminated ...................... - - -
--------- -------------- ---------
Shares under option at December 31, 1996... 2,374,216 $1.00 $1.00
--------- -------------- ---------
Options granted ......................... 1,767,912 1.25 1.25
Options exercised ....................... - - -
Options terminated ...................... - - -
--------- ------------- ---------
Shares under option at December 31, 1997... 4,142,128 1.00 to 1.25 1.11
--------- ------------- ---------
Options granted 765,000 1.65 1.65
Options exercised _ _ _
Options terminated (135,000) 1.25 1.25
--------- -------------- --------
Shares exercisable at December 31, 1998 4,772,128 $1.00 to $1.65 $1.23
========= ============== ========
Shares under option at December 31, 1998 2,896,853 $1.00 to $1.65 $1.05
Shares exercisable at December 31, 1997 1,516,144 $1.00 $1.00
Shares exercisable at December 31, 1996 724,739 $1.00 $1.00
Shares exercisable at July 31, 1996 - - -
</TABLE>
At December 31, 1998, 22,020 and 402,088 remaining options are
available for grant under the 1995 Stock Option Plan and the 1997
Stock Option Plan, respectively. The weighted average remaining
contractual life of shares under option at December 31, 1998 was 8
years.
The Company has adopted APB Opinion 25 "Accounting for Stock
Issued to Employees" and related interpretations in accounting for
its stock option plan. Accordingly, no compensation cost has been
recognized for the stock option plans. Due to the Acquisition, net
income per share for the fiscal year ended July 31, 1996 have no
significant relevance to current amounts. Had compensation cost for
the Company's plans been determined based on the fair value at the
date of grant for awards in the fiscal years ended December 31,
1998 and December 31, 1997, the Company's total and per share net
income would have been as follows (dollars in thousands, except per
share amounts):
<PAGE>
1998 1997
Net income: ---- ----
As reported ......................... $(6,727) $9,576
Pro forma ........................... (7,004) 9,212
Basic net income per common share
As reported ......................... $(0.10) $0.18
Pro forma ........................... (0.10) 0.18
Diluted net income per common share
and common share equivalent:
As reported ......................... $(0.10) $0.18
Pro forma ........................... (0.10) 0.18
The weighted average fair value of options granted is $1.06 and
$0.71 during the fiscal years ended December 31, 1998 and December
31, 1997, respectively. The fair value of each option is estimated
on the date of the grant using the minimum value method with the
following assumptions used for the grant in December 1998; risk
free interest rates of 4.53%; expected dividend yield of 0% and
expected life of ten years.
10. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases production equipment under capital leases with
terms expiring at various times through 2004. The net capital lease
asset of $2,276,0000 and $1,825,000 as of December 31, 1998 and
December 31, 1997, respectively, is included in property, plant,
and equipment on the accompanying consolidated balance sheets.
Aggregate future minimum lease payments related to capital leases
are as follows: 1999 - $662,000; 2000 - $662,000; 2001 - $613,000;
2002 - $492,000; 2003 - $281,000; and thereafter - $89,000. The
portion related to interest over the remaining life of the capital
leases was $309,000 at December 31, 1998.
The Company leases production equipment under operating lease
agreements with terms expiring at various times through 2003. Rent
expense under operating leases for the fiscal years ended December
31, 1998, December 31, 1997, for the five months ended December 31,
1996, and for the fiscal year ended July 31, 1996, aggregated
$2,232,000, $2,309,000, $936,000 and $2,500,000, respectively.
Aggregate future minimum lease commitments for noncancelable
operating leases that have initial or remaining lease terms in
excess of one year as of December 31, 1998, are as follows: 1999 -
$2,017,000; 2000; - $1,459,000; 2001 - $946,000; 2002 - $626,000;
2003 - $195,000; and thereafter $388,000.
Legal Matters
There are various claims and pending legal actions against the
Company, primarily involving product liability, seeking damages in
varying amounts. In the opinion of management, the amount of
ultimate liability with respect to these actions will not
materially affect the financial position or results of operations
of the Company.
<PAGE>
11. RELATED-PARTY TRANSACTIONS:
On October 27, 1995, in connection with the recapitalization
discussed in Note 12, the Company entered into a ten-year agreement
with Hicks Muse, pursuant to which it pays Hicks Muse an annual fee
(initially $175,000) for management and advisory services in
connection with the organization, management, and operations of the
Company. The annual fee is adjustable each July 31st to an amount
equal to 0.1% of the consolidated net sales of the Company during
the previous twelve months, but in no event less than $175,000.
Management fees and related expenses under this agreement amounted
to $329,000, $257,000, $82,000 and $207,000 for the fiscal years
ended December 31, 1998, December 31, 1997, for the five months
ended December 31, 1996, and for the fiscal year ended July 31,
1996, respectively, and are included in selling, general, and
administrative expenses on the accompanying income statements.
On October 27, 1995, in connection with the recapitalization
discussed in Note 12, the Company entered into a ten-year agreement
with an affiliate of Hicks Muse pursuant to which it paid this
affiliate a financial advisory fee of approximately $1,175,000 as
compensation for its services as financial advisor in connection
with the recapitalization. In addition, this Hicks Muse affiliate
will be entitled to receive a fee equal to 1.5% of the transaction
value, as defined, for each add-on transaction, as defined, in
which the Company is involved.
12. RECAPITALIZATION:
Prior to October 27, 1995, the majority of Holdings common stock
was held by Arnold E. Ditri, President and Chief Executive Officer,
and Alastair H. McKelvie, Executive Vice President. The remaining
common stock was held by John H. Hurshman and the Fidelity
Investment Charitable Gift Trust.
On October 27, 1995, Holdings was purchased by Hicks, Muse, Tate
& Furst Equity Fund II, L.P. ("HM Fund II"). Concurrently, all of
the outstanding preferred stock was redeemed, the outstanding
common stock held by John H. Hurshman and the Fidelity Investment
Charitable Trust was redeemed, a majority of the outstanding common
stock of Arnold E. Ditri and Alastair H. McKelvie was redeemed, new
common shares were issued to HM Fund II, new debt facilities were
obtained and existing debt facilities were repaid as part of the
transaction. As Arnold Ditri and Alastair H. McKelvie retained a
minority investment in Holdings, the transaction was accounted for
as a recapitalization, and existing account balances were carried
forward. The Company expensed all of its costs associated with the
recapitalization, which totaled approximately $9,600,000.
In connection with the recapitalization, Holdings effected a
common stock split of 39,095.40 shares for one and increased the
authorized shares from 1,000 (par value $.01) to 50,000,000 (par
value $.01). After the recapitalization, the majority of the common
stock is held by HM Fund II. The remaining common stock was held by
Arnold E. Ditri, Alastair H. McKelvie, various other members of
management, and various other investment groups.
13. SEGMENT AND GEOGRAPHIC INFORMATION:
<PAGE>
Effective January 1, 1998, the Company adopted SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related
Information." SFAS 131 requires companies to identify their
operating segments based upon the internal financial information
reported to the company's chief operating decision maker. The
Company's operating decision maker is its Chief Executive Officer
(CEO). Financial information reported to the CEO reflects five
business segments: the Bedford Division, the Ashland Division, the
ERO Division, the Montreal Division and the International Division.
The CEO evaluates performance of each segment based upon the
operating earnings (loss) of each segment. The accounting policies
of segments are the same as those described in the summary of
accounting policies in Note 1 to the consolidated financial
statements.
The Company develops, manufactures and sells a variety of
children's leisure and activity products.
The Bedford Division principally manufactures and markets in the
United States and Canada outdoor gym sets, wood gym kits and
slides, spring horses, trampolines and gym accessories.
The Ashland Division principally manufactures and markets in the
United States a wide variety of children's playballs and ball pit
products.
The Montreal Division principally manufactures and markets
children's products including arts and crafts, game tables, certain
other children's bulk play products such as play kitchens and
battery-operated ride-on vehicles. In addition, this division
includes a broad line of school supplies featuring popular licensed
characters.
The ERO Division produces the Slumber Shoppe line of products
including products such as indoor sleeping bags and play tents
featuring popular licensed characters, a water sports line of
products including flotation jackets, masks, fins, goggles and
snorkels. Additionally the division produces licensed room
decorations for young children, consisting principally of stick-on
and peel-off wall decorations.
The International Division produces and distributes gym sets and
other products, manufactured by its domestic divisions, outside of
the United States.
<TABLE>
For the Five For the Fiscal
For the Fiscal Years Months Ended Year Ended
Ended December 31, December 31, July 31,
------------------ ------------ -------------
1998 1997 1996 1996
---- ---- ---- ----
<S>
Bedford Division <C> <C> <C> <C>
Net revenues $109,031 $84,784 $12,652 $83,891
Operating earnings (loss) 4,558 7,873 (4,959) (1,601)
Identifiable assets 56,092 61,111 43,388 55,442
Capital expenditures 4,514 1,861 681 4,919
Depreciation and amortization 4,364 3,987 1,454 2,507
<PAGE>
Ashland Division
Net revenues 38,846 36,837 11,341 49,303
Operating earnings (loss) 2,498 1,891 (566) 5,124
Identifiable assets 22,102 25,336 27,410 28,169
Capital expenditures 2,106 1,756 695 1,819
Depreciation and amortization 1,433 1,267 454 907
ERO Division
Net revenues 73,442 60,517 - -
Operating earnings (loss) 15,190 12,582 - -
Identifiable assets 40,316 35,930 - -
Capital expenditures 1,670 354 - -
Depreciation and amortization 1,574 707 - -
Montreal Division
Net revenues 61,193 64,785 - -
Operating earnings (loss) 3,896 14,320 - -
Identifiable assets 65,226 66,796 - -
Capital expenditures 2,784 2,424 - -
Depreciation and amortization 4,917 3,107 - -
International Division
Net revenues 19,184 9,225 - -
Operating earnings (loss) (1,970) 38 - -
Identifiable assets 6,063 2,076 - -
Capital expenditures 218 - - -
Depreciation and amortization 257 - - -
Corporate, other non-segments
and Intercompany Eliminations
Identifiable assets 205,968 196,290 1,277 1,413
Depreciation and amortization 6,475 3,246 68 -
Consolidated totals from
continuing operations
Net revenues 301,696 256,146 23,994 133,194
Operating earnings (loss) 24,172 36,704 (5,525) 3,523
Identifiable assets 395,767 387,539 72,075 85,024
Capital expenditures 11,292 6,395 1,376 6,738
Depreciation and amortization 19,020 12,314 1,976 3,414
</TABLE>
Significant Concentration of Customers
All trade accounts receivable are unsecured. A significant level
of the Company's net sales is generated from four retail companies
that serve national markets. Sales to the Company's top four
customers aggregated approximately $166.2 million, $137.4 million,
$61.3 million and $63.9 million for the fiscal years ended December
31, 1998, December 31, 1997, for the five months ended December 31,
1996 and for the fiscal year ended July 31, 1996, respectively.
Three of the Company's customers accounted for over 10% of the
Company's net sales during the fiscal year ended December 31, 1998.
Total revenues generated from each of these three customers were
$65.9 million, $50.1 million and $34.2 million, respectively. Two of
the Company's customers each accounted for over 10% of the
Company's net sales during the fiscal year ended December 31, 1997.
Total revenues generated from each of these two customers were
<PAGE>
$54.9 million, and $41.7 million, respectively. Three of the
Company's customers each accounted for over 10% of the Company's
net sales for the five months ended December 31, 1996. Total
revenues generated from each of these three customers were $3.6
million, $2.9 million and $2.6 million, respectively. Three of
the Company's customers each accounted for over 10% of the
Company's net sales during the fiscal year ended July 31, 1996.
Total revenues generated from each of these three customers were
$25.3 million, $16.0 million and $16.0 million, respectively.
Sales to the aforementioned major customers are made by all of
the Company's divisions.
During fiscal years ended December 31, 1998 and 1997, the
Company's outdoor gym set product line, produced by the Bedford
Division, accounted for approximately 20% of the Company's net
sales for the fiscal year. No other product line accounted for more
than 10% of the Company's net sales for the fiscal years ended
December 31, 1998 and 1997. For the five month period ended
December 31, 1996 gym sets accounted for 28% of the Company's net
sales, while wood kits, produced at the Bedford division, accounted
for 18% of the Company's net sales and Ball Pits, produced at the
Ashland Division, accounted for 13% of the Company's net sales. No
other product line accounted for more than 10% of the Company's
net sales for the five month period ended December 31, 1996. For
the fiscal year ended July 31, 1996, the Company's outdoor gym set
product line accounted for approximately 51% of the Company's net
sales and the undecorated play ball product line, produced at the
Ashland Division, accounted for 11% of the Company's net sales. No
other product line accounted for more than 10% of the Company's net
sales for the fiscal year ended July 31, 1996.
Summarized geographic information as of and for the fiscal years
ended December 31, 1998 and December 31, 1997 is as follows (in
thousands):
<TABLE> Other
-------------------------
United Foreign
States Canada Operations Elminations Total
-------- ------- ---------- ----------- --------
<S>
Fiscal Year Ended December 31, 1998
----------------------------------- <C> <C> <C> <C> <C>
Sales to unaffiliated customers...... $265,611 $19,988 $16,097 $ - $301,696
Transfers between geographic areas... 7,665 37,436 - (45,101) -
-------- ------- ------- -------- --------
Total net sales...................... $273,276 $57,424 $16,097 $(45,101) $301,696
======== ======= ======= ======== ========
Operating income.................... $ 14,537 $12,422 $(2,731) $ (56) $ 24,172
======== ======= ======= ======== ========
Identifiable assets.................. $355,475 $38,272 $(9,368) $ (7,348) $395,767
======== ======= ======= ======== ========
Fiscal Year Ended Decmeber 31, 1997
-----------------------------------
Sales to unaffiliated customers...... $229,601 $14,322 $12,223 $ - $256,146
Transfers between geographic areas... 5,344 38,306 - (43,650) -
-------- ------- ------- -------- --------
Total net sales...................... $234,945 $52,628 $12,223 $(43,650) $256,146
======== ======= ======= ======== ========
Operating income.................... $ 23,936 $13,259 $ (451) $ (40) $ 36,704
======== ======= ======= ======== ========
Indentifiable assets................. $360,968 $52,176 $ 8,440 $(34,045) $387,539
======== ======= ======= ======== ========
</TABLE>
<PAGE>
The Company generated no material foreign income for the fiscal
years ended July 31, 1996 and 1995 and owned no material foreign
assets at July 31, 1996 and 1995.
14. QUARTERLY FINANCIAL DATA (unaudited; in thousands):
<TABLE>
Fiscal Year Ended December 31, 1998
-----------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Net sales ............... $78,389 $83,272 $64,353 $75,682 $301,696
Gross profit ............ 22,064 23,081 23,544 22,400 91,089
Net income (loss)(loss)(loss) (259) (339) 150 (6,279) (6,727)
Basic net income (loss) per common share $0.00 $(0.01) $0.00 $(0.09) $(0.10)
Diluted net income (loss) per common
share and common share equivalents 0.00 (0.01) 0.00 (0.09) (0.10)
Fiscal Year Ended December 31, 1997
-----------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Net sales $47,937 $56,114 $61,462 $90,633 $256,146
Gross profit 13,396 17,076 19,740 33,544 83,756
Net income (loss)(loss)(loss) 3,216 2,769 (919) 4,510 9,576
Basic net income (loss) per common share $0.10 $0.05 $(0.01) $0.07 $0.18
Diluted net income (loss) per common
share and common share equivalents 0.10 0.05 (0.01) 0.07 0.18
</TABLE>
15. SUBSIDIARY GUARANTORS/NONGUARANTORS FINANCIAL INFORMATION
The following is financial information pertaining to Hedstrom and
its subsidiary guarantors and subsidiary nonguarantors (with
respect to the Senior Subordinated Notes and the Senior Credit
Facilities) for the periods in which they are included in Holding's
accompanying consolidated financial statements.
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(In thousands)
ASSETS
At December 31, 1998 At December 31, 1997
--------------------------------------------- --------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Adjustments/ Total
Guarantors Guarantors Eliminations Hedstrom Guarantors Guarantor Eliminations Hedstrom
---------- ---------- ------------ -------- ---------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,839 $ 2,495 $ - $ 4,334 $ 8,984 $ 1,860 $ - $ 10,844
Trade accounts receivable,
net .............. 59,193 10,329 - 69,522 73,625 9,077 - 82,702
Taxes receivable ... 6,095 650 - 6,745 - - - -
Inventories ........ 40,742 13,036 (56) 53,722 38,429 9,075 (40) 47,464
Deferred income taxes 6,016 - - 6,016 4,379 - - 4,379
Prepaid expenses and other 3,849 281 - 4,130 4,310 491 - 4,801
-------- -------- -------- -------- -------- -------- -------- --------
Total current assets 117,734 26,791 (56) 144,469 129,727 20,503 (40) 150,190
-------- -------- -------- -------- -------- -------- -------- --------
PROPERTY, PLANT, AND
EQUIPMENT, net 31,361 16,741 - 48,102 27,448 15,375 - 42,823
GOODWILL, net ........ 165,835 20,991 - 186,826 152,457 18,484 - 170,941
OTHER ASSETS:
Investment in and Advances
to Nonguarantor
Subsidiaries ...... 56,190 - (56,190) - 44,799 - (44,799) -
Deferred financing fees, net 13,357 - - 13,357 16,328 - - 16,328
Deferred charges and
other, net ........... 500 - - 500 1,387 - - 1,387
Deferred income taxes 1,092 (1,611) - (519) 4,602 (522) - 4,080
-------- -------- -------- -------- -------- -------- -------- --------
Total other assets 236,974 19,380 (56,190) 200,164 219,573 17,962 (44,799) 192,736
-------- -------- -------- -------- -------- -------- -------- --------
Total assets $386,069 $ 62,912 $(56,246) $392,735 $376,748 $ 53,840 $(44,839) $385,749
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(In thousands)
ASSETS
At December 31, 1998 At December 31, 1997
--------------------------------------------- --------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Adjustments/ Total
Guarantors Guarantors Eliminations Hedstrom Guarantors Guarantor Eliminations Hedstrom
---------- ---------- ------------ -------- ---------- --------- ------------ --------
LIABILITIES AND STOCKHOLDER'S EQUITY
<S>
CURRENT LIABILITIES: <C> <C> <C> <C> <C> <C> <C> <C>
Revolving line of credit $ 34,920 $ - $ - $ 34,920 $33,282 $ 2,218 $ - $ 35,500
Current portion of long
term debt and capital leases 11,417 488 - 11,905 8,492 730 - 9,222
Advances from
Nonguarantor Subsidiaries - 39,091 (39,091) - - 31,956 (31,956) -
Accounts payable(c) 17,170 3,539 - 20,709 20,784 2,597 - 23,381
Accrued expenses(c) 20,520 2,198 (23) 22,695 25,061 2,432 (16) 27,477
-------- -------- -------- -------- -------- -------- -------- --------
Total current liabilities 84,027 45,316 (39,114) 90,229 87,619 39,933 (31,972) 95,580
-------- -------- -------- -------- -------- -------- -------- --------
LONG-TERM DEBT(a):
Senior subordinated notes 110,000 - - 110,000 110,000 - - 110,000
Term loans ......... 123,736 - - 123,736 104,375 - - 104,375
Capital leases ..... 1,690 - - 1,690 1,605 - - 1,605
Other .............. 1,667 487 - 2,154 1,857 1,057 - 2,914
-------- -------- -------- -------- -------- -------- -------- --------
Total long-term debt 237,093 487 - 237,580 217,837 1,057 - 218,894
-------- -------- -------- -------- -------- -------- -------- --------
STOCKHOLDER'S EQUITY
Total Stockholder's
equity (deficit)(b) 64,949 17,109 (17,132) 64,926 71,292 12,850 (12,867) 71,275
-------- -------- -------- -------- -------- -------- -------- --------
Total liabilities and
Stockholder's equity $386,069 $ 62,912 $(56,246) $392,735 $376,748 $ 53,840 $(44,839) $385,749
======== ======== ======== ======== ======== ======== ======== ========
footnotes to follow
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING INCOME STATEMENTS
(In thousands)
Fiscal Year Ended December 31, 1998 Fiscal Year Ended December 31, 1997
------------------------------------------------ ----------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Ajustments/ Total Subsidiary Non- Ajustments/ Total
Guarantors Guarantors Eliminations Hedstrom Guarantors Guarantors Eliminations Hedstrom
---------- ---------- ------------ -------- ---------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
NET SALES .... $286,159 $60,638 $(45,101) $301,696 $243,344 $56,452 $ (43,650) $256,146
COST OF SALES 213,124 42,528 (45,045) 210,607 175,834 40,166 (43,610) 172,390
-------- ------- -------- -------- ------- ------- --------- --------
Gross profit 73,035 18,110 (56) 91,089 67,510 16,286 (40) 83,756
SG&A EXPENSES 57,412 9,505 - 66,917 42,655 4,397 - 47,052
-------- ------- -------- -------- -------- ------- --------- --------
Operating income
(loss) ....... 15,623 8,605 (56) 24,172 24,855 11,889 (40) 36,704
INTEREST EXPENSE(c) 25,546 2,034 - 27,580 15,614 1,492 - 17,106
-------- ------- -------- -------- -------- ------- --------- --------
INCOME (LOSS) BEFORE
TAXES ........ (9,923) 6,571 (56) (3,408) 9,241 10,397 (40) 19,598
INCOME TAX EXPENSE
(BENEFIT) .... (1,773) 2,899 (23) 1,103 4,532 4,263 (16) 8,779
-------- ------- -------- -------- -------- ------- --------- --------
NET INCOME (LOSS) $ (8,150) $ 3,672 $ (33) $ (4,511) $ 4,709 $ 6,134 $ (24) $ 10,819
======== ======= ======== ======== ======== ======= ========= ========
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING INCOME STATEMENTS
(In thousands)
For the Five Months Ended For the Fiscal Year Ended
December 31, 1996 July 31, 1996
-------------------------------- ---------------------------------
Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Total Subsidiary Non- Total
Guarantors Guarantor Hedstrom Guarantors Guarantors Hedstrom
---------- --------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $23,074 $920 $23,994 $129,074 $4,120 $133,194
COST OF SALES 21,238 735 21,973 101,482 3,586 105,068
------- ---- ------- -------- ------ --------
Gross profit 1,836 185 2,021 27,592 534 28,126
SG&A EXPENSES 7,225 321 7,546 23,659 944 24,603
------- ---- ------- -------- ------ --------
Operating income (loss) (5,389) (136) (5,525) 3,933 (410) 3,523
RECAPITALIZATION EXPENSE - - - 9,600 - 9,600
INTEREST EXPENSE(c) 2,010 1 2,011 5,674 34 5,708
------- ---- ------- -------- ------ --------
INCOME (LOSS) BEFORE TAXES (7,399) (137) (7,536) (11,341) (444) (11,785)
INCOME TAX EXPENSE (BENEFIT) (2,775) (54) (2,829) (3,786) - (3,786)
------- ---- ------- -------- ------ --------
NET INCOME (LOSS) $(4,624) $(83) $(4,707) $ (7,555) $ (444) $ (7,999)
======= ==== ======= ======== ====== ========
footnotes to follow
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Year Ended December 31, 1998 Fiscal Year Ended December 31, 1997
------------------------------------------- --------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Adjustments/ Total
Guarantors Guarantors Eliminations Hedstrom Guarantors Guarantors Eliminations Hedstrom
--------- ---------- ------------ -------- ---------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)(c) $(8,150) $ 3,672 $ (33) $ (4,511) $ 4,709 $6,134 $ (24) $ 10,819
Depreciation and amortization 12,633 2,883 - 15,516 9,212 1,328 - 10,540
Deferred income tax
provision (benefit)(c) (5,122) 1,089 - (4,033) 6,916 - - 6,916
Gain on the disposition of
property, plant and equipment (1) - - (1) (1) - - (1)
Provision for losses on
accounts Receivable 2,683 500 - 3,183 1,246 - - 1,246
Changes in assets and
liabilities:
Accounts receivable 11,718 (1,752) - 9,966 (40,150) (6,604) - (46,754)
Taxes receivable (6,095) (650) - (6,745) - - - -
Inventories ..... (984) (3,315) 56 (4,243) 461 4,373 40 4,874
Prepaid expenses and other 551 210 - 761 789 (491) - 298
Accounts payable(c) (4,572) 942 - (3,630) 2,535 (534) - 2,001
Accrued expenses(c) 1,748 (574) (23) 1,151 (1,768) 1,935 (16) 151
------- ------- ------ ------- -------- ----- ------ --------
Net cash provided by (used
for) Operating activities 4,409 3,005 - 7,414 (16,051) 6,141 - (9,910)
------- ------- ------ ------- -------- ----- ------ --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of ERO, Inc. (3,037) - - (3,037) (122,600) - - (122,600)
Acquisition of certain
assets of Bollinger
Industries, Inc. - - - - (14,928) - - (14,928)
Acquisitions of PP&E (8,317) (2,975) - (11,292) (6,395) - - (6,395)
Other acquisitions (16,884) (3,500) - (20,384) (2,322) - - (2,322)
Proceeds from the sale of PP&E - - - - 8 - - 8
------- ------- ------ ------- -------- ----- ------ --------
Net cash used for
investing Activities (28,238) (6,475) - (34,713) (146,237) - - (146,237)
------- ------- ------ ------- -------- ----- ------ --------
<PAGE>
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 ... 30,000 - - 30,000 110,000 - - 110,000
Equity contribution from
Holdings(b) ..... - - - - 63,750 - - 63,750
Borrowings on new revolving
line of credit .. 1,638 (2,218) - (580) 35,500 - - 35,500
Repayments of new Term Loans (7,956) - - (7,956) (1,125) - - (1,125)
Repayments of old term loans - - - - (87,017) (5,750) - (92,767)
Debt financing cost(b) - - - - (19,750) - - (19,750)
Repayments on old revolving
lines of credit, net - - - - (42,400) - - (42,400)
Advances to-(from)
Nonguarantor Subsidiaries (7,135) 7,135 - - (1,078) 1,078 - -
Other ............. 137 (812) - (675) 2,395 - - 2,395
------- ------- ------- -------- -------- ------ ------- --------
Net cash provided by (used
for) Financing activities 16,684 4,105 - 20,789 170,275 (4,672) - 165,603
------- ------- ------- -------- -------- ------ ------- --------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (7,145) 635 - (6,510) 7,987 1,469 - 9,456
CASH AND CASH EQUIVALENTS:
Purchased Cash - - - - 530 325 - 855
Beginning of period 8,984 1,860 - 10,844 467 66 - 533
------- ------- ------- -------- -------- ------ ------- --------
End of period ..... $ 1,839 $ 2,495 $ - $ 4,334 $8,984 $1,860 $ - $10,844
======= ======= ======= ======== ======== ====== ======= ========
footnotes to follow
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
For the Five Months Ended
December 31, 1996 For the Fiscal Year Ended July 31, 1996
------------------------------------- ----------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Total Subsidiary Non- Total
Guarantors Guarantors Hedstrom Guarantors Guarantor Hedstrom
---------- ---------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)(c) $(4,624) $ (83) $(4,707) $(7,555) $ (444) $(7,999)
Depreciation and amortization 1,973 3 1,976 3,407 7 3,414
Deferred income tax provision
(benefit)(c) ........ (2,862) - (2,862) (3,808) - (3,808)
Gain on the disposition of
property, plant and equipment (60) - (60) - - -
Provision for losses on
accounts receivable 64 - 64 - - -
Other (145) - (145)
Changes in assets and
liabilities
Accounts receivable 8,794 940 9,734 (817) (75) (892)
Inventories ..... (2,089) 47 (2,042) (64) (75) (139)
Prepaid expenses and other (132) 13 (119) (20) 26 6
Accounts payable(c) 1,793 (6) 1,787 (8,012) (11) (8,023)
Accrued expenses(c) (163) (630) (793) 26 (184) (158)
------ ----- ------ ------- ------ -------
Net cash provided by (used
for) operating activities 2,694 284 2,978 (16,988) (756) (17,744)
------ ----- ------ ------- ------ -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of ERO, Inc. - - - - - -
Acquisition of certain assets
of Bollinger Industries, Inc. - - - - - -
Acquisitions of PP&E (1,375) (1) (1,376) (6,735) (3) (6,738)
Other acquisitions - - - - - -
Proceeds from the sale of PP&E 67 - 67 248 - 248
------ ----- ------ ------- ------ -------
Net cash used for
investing activities (1,308) (1) (1,309) (6,487) (3) (6,490)
------ ----- ------ ------- ------ -------
<PAGE>
CASH FLOWS FROM FINANCING
ACTIVITIES
Redemption of common stock - - - (29,772) - (29,772)
Redemption of preferred stock - - - (3,072) - (3,072)
Proceeds from sale of common
stock - - - 29,742 - 29,742
Term loan borrowings - - - 35,000 - 35,000
Repayments of new term loans - - - - - -
Repayments of old term loans - - - - - -
Debt financing cost(b) - - - - - -
Repayments on old revolving
lines of credit, net (8,728) (322) (9,050) (3,162) 802 (2,360)
Advances to-(from) - - - - - -
Nonguarantor Subsidiaries
Other ............. (84) - (84) 1,597 - 1,597
------ ----- ------ ------- ------ -------
Net cash provided by (used
for) financing activities (8,812) (322) (9,134) 30,333 802 31,135
------ ----- ------ ------- ------ -------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (7,426) (39) (7,465) 6,858 43 6,901
CASH AND CASH EQUIVALENTS:
Purchased Cash - - - - - -
Beginning of period 7,893 105 7,998 1,035 62 1,097
------ ----- ------ ------- ------ -------
End of period ..... $ 467 $ 66 $ 533 $ 7,893 $ 105 $ 7,998
====== ====== ====== ======= ====== =======
footnotes to follow
</TABLE>
<PAGE>
HEDSTROM CORPORATION AND SUBSIDIARIES
FOOTNOTES
Each domestic subsidiary of Hedstrom (the "Subsidiary
Guarantors") has fully and unconditionally guaranteed the Senior
Subordinated Notes on a joint and several basis. The Company has
not presented separate financial statements and other disclosures
concerning the Subsidiary Guarantors because management has
determined that such information is not material to investors.
The column "Total Hedstrom" represents the consolidated financial
statements of Hedstrom Corporation and its subsidiaries. Hedstrom
Corporation is Holdings' only direct subsidiary. The primary
differences between the consolidated amounts of Hedstrom
Corporation and the consolidated amounts included in the
accompanying consolidated financial statements of Holdings are as
follows:
(a) Hedstrom Corporation's Long-Term Debt does not include a $2.5
million note payable issued by Holdings in connection with its
1995 recapitalization, and the Senior Discount Notes valued at
$26.6 million at December 31, 1998.
(b) Hedstrom Corporation's stockholder's equity included Holdings'
stockholders' equity plus, as of December 31, 1998 and 1997 only,
$21.6 million in proceeds from the issuance of Senior Discount
Notes, which proceeds were contributed as equity by Holdings to
Hedstrom Corporation and the loss incurred by Holding's
discontinued subsidiary Holdings II and as of both December 31,
1997 and December 31, 1996, the $2.5 million note payable
described in (a) above.
(c) Accounts payable, interest expense, income tax expense and
accrued expenses do not reflect the accrued interest, interest
expense and the tax benefit of accrued interest on the obligations
discussed in (a) above.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
MANAGEMENT
Directors and Executive Officers of Holdings and Hedstrom
<PAGE>
The following table sets forth the age and the position of the
directors and executive officers of each of Holdings and Hedstrom.
Name Age Position
--------------- --- ----------------------------------
Robert H. Elman...... 60 Chairman of the Board of Directors of
Holdings and Hedstrom
Alan B. Menkes....... 39 Director of Holdings and Hedstrom
Jack D. Furst......... 40 Director of Holdings and Hedstrom
Arnold E. Ditri....... 62 Director of Holdings and Hedstrom;
Chief Executive Officer and
President of Holdings and Hedstrom
David F. Crowley...... 49 Chief Financial Officer of Holdings
and Hedstrom
Alastair H. McKelvie.. 67 Executive Vice President - Operations
of Hedstrom
Michael J. Johnston... 51 Executive Vice President -
Manufacturing of Hedstrom
Alfred C. Carosi, Jr.. 51 Executive Vice President - Sales and
Marketing of Hedstrom
Robert H. Elman has been the Chairman of the Board of Holdings
and Hedstrom since July 1997 and has been a director of Holdings
and Hedstrom since October 1995. Mr. Elman is Chairman and Chief
Executive of DESA International, Inc. ("DESA International"), a
manufacturer of indoor and outdoor heating products and specialty
tools. Mr. Elman has served in that capacity since March 1985 when
DESA International was formed as part of the leveraged buy out of
AMCA International, Inc.'s Consumer Products Division. Prior to
1985, he served as Senior Group Vice President of AMCA
International with responsibilities for the Consumer, Automotive
Products, Aerospace, and Food Packaging Divisions. Mr. Elman joined
AMCA International in 1975 when it acquired DESA Industries, a
company he assisted in forming in 1969. Prior to forming DESA
Industries, Mr. Elman was employed with ITT and Singer in various
management positions in the United States and Europe.
Alan B. Menkes has been a director of Holdings and Hedstrom since
October 1995. Mr. Menkes is a Partner of Thomas Weisel Partners
LLC, a privately held merchant banking firm. From 1996 to 1998, Mr
Menkes was a Managing Director and Principal of Hicks Muse. Prior
thereto, Mr. Menkes served as a Vice President of Hicks Muse from
1992 to 1995. Before joining Hicks Muse in 1992, Mr. Menkes was
employed for five years by The Carlyle Group, a Washington D.C.-
based private investment firm, most recently as a Senior Vice
President.
Jack D. Furst has been a director of Holdings and Hedstrom since
July 1997. Mr. Furst is a Managing Director and Principal of Hicks
Muse and has held such position since 1989. Prior to joining Hicks
Muse, Mr. Furst was a Vice President and subsequently a Partner of
Hicks & Haas, Incorporated, a Dallas-based private investment firm
from 1987 to May 1989. From 1984 to 1986, Mr. Furst was a merger
and acquisition/corporate finance specialist for The First Boston
Corporation in New York. Mr. Furst serves on the board of directors
of Omni America Holdings Corporation, International Wire Holding
Company, Viasystems Group, Inc., Viasystems, Inc. and Cooperative
Computing Holding Company, Inc.
<PAGE>
Arnold E. Ditri was Chairman of the Board of Hedstrom from
December 1991 until October 1995 and has been a director of
Holdings and Hedstrom since October 1995. He has been President and
Chief Executive Officer of Hedstrom since March 1993 and of
Holdings since October 1995. Mr. Ditri served as President of Ditri
Associates, Inc. from 1981 until 1994. Ditri Associates, with a
number of financial partners, specialized in acquiring and building
under-achieving companies. From 1984 through 1988, Ditri Associates
built Eagle Industries, Inc. in partnership with Great American
Management, Inc. of Chicago. From 1961 to 1981, Mr. Ditri was a
management consultant with Booz Allen & Hamilton and Touche Ross &
Co. He was a partner in Touche Ross from 1967 to 1981.
David F. Crowley has been Chief Financial Officer of Hedstrom
since 1994 and of Holdings since October 1995. Prior to joining
Hedstrom, Mr. Crowley served as Chief Financial Officer and/or Vice
President of Finance for various companies owned and operated by
Ditri Associates. Prior to joining Ditri Associates, from 1986 to
1990, Mr. Crowley was Treasurer of the Ring Screw Works Company in
Detroit, Michigan. From 1974 to 1985, he was employed by Price
Waterhouse where he was a Retail and Banking Industry Specialist
and served in London, England for two years managing strategic
planning and technical projects for the firm.
Alastair H. McKelvie has been Executive Vice President of
Operations with Hedstrom since 1991. Mr. McKelvie has over 40 years
of experience chiefly in manufacturing and general management
positions covering a wide range of products, processes, and
geographic locations. From 1989 to 1991, Mr. McKelvie served as
Executive Vice President for various companies owned and operated
by Ditri Associates. Prior to 1989, he served as Executive Vice
President of Eagle Industries. From 1965 to 1982, Mr. McKelvie held
a number of line and staff positions in the Singer Company
including Vice President of Manufacturing in its International
Group and General Manager of its two most profitable operating
divisions.
Michael J. Johnston has been Executive Vice President of
Manufacturing of Hedstrom since November 1997. Prior to joining
Hedstrom, Mr. Johnston served as Senior Vice President and General
Manager Services Company for Philips Consumer Electronics from 1994
to 1997. From 1991 to 1994, he was Vice President of Manufacturing
for Black & Decker Household Products Group. From 1989 to 1991,
Mr. Johnston was Senior Vice President and General Manager of Danly
Die Set, a division of Connell Ltd. Partnership. From 1970 to
1989, he served in various manufacturing-related positions with
General Electric Co.
<PAGE>
Alfred A. Carosi, Jr. has been Executive Vice President of Sales
and Marketing with Hedstrom since December 1996. In this position
he is also responsible for corporate product development. Prior to
joining Hedstrom, Mr. Carosi was Senior Vice President of Marketing
and Marketing Services for the Parker Brothers Division of Hasbro,
Inc. from 1991 to 1995. From 1990 to 1991, he was Vice President of
Children's and Family Programs at NBC. Before joining NBC, Mr.
Carosi served as Senior Vice President of Marketing and Marketing
Services for Hasbro, Inc. from 1989 to 1990 and for Hasbro's
Playskool Division from 1987 to 1988. Prior to 1987, Mr. Carosi
worked in various marketing-related capacities for Procter and
Gamble, Sara Lee Corp. and Anheuser Busch, Inc.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth the compensation awarded to or
earned by the President and Chief Executive Officer of Hedstrom and
each other executive officer of Hedstrom whose total annual salary
and bonus for the year ended December 31, 1998 was in excess of
$100,000 (the "Named Executive Officers"). Fiscal years 1997 and
1998 represent the fiscal years ended December 31, 1997 and
December 31, 1998. Fiscal year 1996 represents the twelve months
ended July 31, 1996.
<TABLE>
Long Term
Compensation
Annual Compensation -------------------------------
-------------------------- Securities All Other
Fiscal Underlying Compensation
Name and Principal Postion Year Salary($)(1) Bonus($)(2) Options(#)(3) ($)(4)
-------------------------- ------ ------------ ---------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Arnold E. Ditri ................ 1998 $505,000 _ - $4,072
President and Chief Executive 1997 340,000 197,500 456,446 3,791
Officer 1996 333,938 _ 543,544 3,205
David F. Crowley(5) ............ 1998 171,900 - - 4,876
Chief Financial Officer 1997 121,900 48,760 28,233 251
1996 107,705 _ 271,777 270
Alfred A. Carosi, Jr. (6)....... 1998 239,635 _ - 25,875
Executive Vice President - 1997 220,644 90,000 200,000 39,774
Sales and Marketing 1996 17,917 _ 200,000 -
Alastair H. McKelvie(7)......... 1998 130,000 _ - -
Executive Vice President - 1997 90,000 36,000 28,233 6,408
Operations 1996 82,500 - 271,777 -
Michael J. Johnston (7)......... 1998 255,000 127,500 - 172,839
Executive Vice President - 1997 29,423 - 400,000 -
Operations 1996 - - - -
</TABLE>
__________
(1) Includes the following amounts deferred by Messrs. Ditri,
Carosi and Johnston, respectively, pursuant to the Company's
Savings Plan for the following fiscal years: 1998- $23,575,
$10,000 and $3,433; 1997- $18,837, $10,014 and $0; 1996-
$15,766, $0, $0 and $0.
<PAGE>
(2) Amount includes bonuses accrued during each fiscal year but
paid shortly thereafter.
(3) All stock option grants were made pursuant to the Company's
1995 and 1997 Stock Option Plans.
(4) Represents premiums paid by the Company under a group term life
insurance plan, and the reimbursement of Mr. Johnston's
relocation expenses in 1998 and Mr. Carosi's relocation
expenses in 1997.
(5) Mr. Crowley was named Chief Financial Officer of the Company
effective November, 1994.
(6) Mr. Carosi was named Executive Vice President of Sales and
Marketing of the Company effective December, 1996.
(7) Mr. Johnston was named Executive Vice President of Operations
effective November 10, 1997.
__________
No option grants were made during the year ended December 31, 1998
to the named executive officers.
__________
The following table summarizes the value of options to acquire
Holdings Common Stock held by the Named Executive Officers as of
December 31, 1998.
Option Exercises and Year-End Option Value Table
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Values(1)
<TABLE>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1998 December 31, 1998 (2)
---------------------------- ---------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Arnold E. Ditri.......... 695,693 304,297 $414,163 $121,719
David F. Crowley ........ 281,188 18,822 180,419 7,529
Alfred A. Carosi, Jr..... 200,000 200,000 113,333 96,667
Michael J. Johnston...... 133,333 266,667 53,333 106,667
Alastair H. McKelvie .... 281,188 18,922 180,419 7,529
</TABLE>
__________
(1) No options were exercised by a Named Executive Officer in 1998.
(2) Assumes a fair market value of $1.65 per share. Because
Holdings Common Stock is privately-held, for purposes of the
calculation of the value of unexercised options as of December
31, 1998, Hedstrom has assumed a per share fair market value for
Holdings Common Stock equal to the per share exercise price of
most recently issued options.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners
and Management
STOCK OWNERSHIP AND CERTAIN TRANSACTIONS
Stock Ownership
All of the issued and outstanding capital stock of Hedstrom is
owned by Holdings. The following table sets forth certain
information regarding the beneficial ownership of the outstanding
Holdings Common Stock by each person who is known by Holdings to
beneficially own more than 5% of the Holdings Common Stock and by
the directors of Holdings and the Named Executive Officers,
individually, and by the directors and executive officers of
Holdings as a group as of March 30, 1999.
<TABLE>
Shares of Holidings
Common Stock
Beneficially Owned
-------------------
Percent
Number of of
Shares Class
<S> ------------ ------
5% Stockholders <C> <C>
HM Parties(1) ................................. 56,030,600 82.8%
c/o Hicks, Muse, Tate & Furst Incorporated
200 Crescent Court, Suite 1600
Dallas, Texas 75201
Officers and Directors
Robert H. Elman ................................ 1,625,000 2.4%
Alan B. Menkes ................................ 36,370 *
Jack D. Furst (1)(2) ........................... 55,451,640 82.0%
Arnold E. Ditri (3) ............................ 4,601,993 6.8%
David F. Crowley (4) ........................... 312,767 *
Alastair H. McKelvie (5) ....................... 2,074,888 3.1%
Alfred C. Carosi, Jr. (6) ...................... 200,000 *
Michael J. Johnston (6) ........................ 133,333 *
All executive officers and directors as a
group (10 persons ............................. 64,435,991 95.2%
</TABLE>
__________
* Represents less than 1%
(1) Includes (i) 23,829,000 shares owned of record by HM Fund II, a
limited partnership of which the sole general partner is HM2/GP
Partners, L.P., a limited partnership of which the sole general
partner is Hicks, Muse GP Partners, L.P., a limited partnership
of which the sole general partner is Hicks, Muse, Tate & Furst
Fund II Incorporated, a corporation affiliated with Hicks Muse;
(ii) 31,520,000 shares of Non-Voting Common Stock owned of
record by HM Fund II which are convertible into shares of
Holdings Common Stock, on a one-for-one basis, at the option of
HM Fund II, (iii) 479,400 shares owned of record by Thomas O.
Hicks; and (iv) 202,200 shares owned of record by four
children's trusts of which Mr. Hicks serves as trustee. Mr.
Hicks is a controlling stockholder of Hicks Muse and serves as
Chairman of the Board, Chief Executive Officer and Secretary of
<PAGE>
Hicks Muse. Accordingly, Mr. Hicks may be deemed to be the
beneficial owner of Holdings Common Stock held by HM Fund II.
John R. Muse, Charles W. Tate, Jack D. Furst, Lawrence D.
Stuart, Jr., and Michael J. Levitt are officers, directors and
minority stockholders of Hicks Muse and as such may be deemed to
share with Mr. Hicks the power to vote or dispose of Holdings
Common Stock held by HM Fund II. Each of Messrs. Hicks, Muse,
Tate, Furst, Stuart and Levitt disclaims the existence of a
group and disclaims beneficial ownership of Holdings Common
Stock not respectively owned of record by him.
(2) Includes 102,640 shares owned of record by Mr. Furst. Mr. Furst
disclaims beneficial ownership of shares not owned of record by
him.
(3) Includes (i) 3,106,300 shares owned of record by Mr. Ditri,
(ii) 800,000 shares owned of record by certain members of Mr.
Ditri's family, and (iii) 695,693 shares subject to options that
are exercisable within 60 days. Mr. Ditri disclaims beneficial
ownership of shares not owned of record by him.
(4) Includes (i) 31,579 shares owned of record by Mr. Crowley and
(ii) 281,188 shares subject to options that are exercisable
within 60 days.
(5) Includes (i) 1,793,700 shares owned of record by Mr. McKelvie
and (ii) 281,188 shares subject to options that are exercisable
within 60 days.
(6) Consists of shares subject to options that are exercisable
within 60 days.
Item 13. Certain Relationships and Related Transactions
Certain Transactions
Monitoring and Oversight Agreement
On October 27, 1995, Holdings and Hedstrom entered into a ten-
year agreement (the "Monitoring and Oversight Agreement") with
Hicks, Muse & Co. Partners, L.P. ("Hicks Muse Partners"), pursuant
to which they pay Hicks Muse Partners an annual fee (initially
$175,000) for oversight and monitoring services to Holdings and
Hedstrom. The annual fee is adjustable each July 31st to an amount
equal to 0.1% of the consolidated net sales of Hedstrom during the
previous twelve months, but in no event less than $175,000. Mr.
Furst, director of Holdings and Hedstrom, is a principal of Hicks
Muse Partners. In addition, Holdings and Hedstrom have agreed to
indemnify Hicks Muse Partners, its affiliates and their respective
directors, officers and controlling persons, if any, and, agents
and employees of Hicks Muse Partners or any of its affiliates from
and against all claims, liabilities, losses, damages, and expenses,
including legal fees, arising out of or in connection with the
services rendered by Hicks Muse Partners in connection with the
Monitoring and Oversight Agreement.
<PAGE>
The Monitoring and Oversight Agreement makes available the
resources of Hicks Muse Partners concerning a variety of financial
and operational matters. The services that have been and will
continue to be provided by Hicks Muse Partners could not otherwise
be obtained by Holdings and Hedstrom without the addition of
personnel or the engagement of outside professional advisors. In
management's opinion, the fees provided for under this agreement
reasonably reflect the benefits received and to be received by
Holdings and Hedstrom.
Financial Advisory Agreement
On October 27, 1995, Holdings and Hedstrom entered into a ten-
year agreement (the "Financial Advisory Agreement") with
HM2/Management Partners, L.P. ("HM2"), pursuant to which they paid
HM2 a cash financial advisory fee of approximately $1.175 million
as compensation for its services as financial advisor in connection
with the acquisition of Holdings and Hedstrom by Hicks Muse. HM2
also will be entitled to receive a fee equal to 1.5% of the
transaction value (as defined) for each add-on transaction (as
defined) in which Hedstrom is involved. The term "transaction
value" means the total value of any add-on transaction (excluding
any fees payable pursuant to the Financial Advisory Agreement in
connection with such add-on transaction) including the amount of
any indebtedness, preferred stock or similar items assumed (or
remaining outstanding). The term "add-on transaction" means any
future proposal for a tender offer, acquisition, sale, merger,
exchange offer, recapitalization, restructuring, or other similar
transaction directly or indirectly involving Holdings, Hedstrom, or
any of their respective subsidiaries, and any other person or
entity.
Mr. Furst, a director of Holdings and Hedstrom, is a principal of
HM2. In addition, Holdings and Hedstrom have agreed to indemnify
HM2, its affiliates and their respective directors, officers and
controlling persons, if any, and agents and employees of HM2 from
and against all claims, liabilities, losses, damages, and expenses,
including legal fees, arising out of or in connection with the
services rendered by HM2 in connection with the Financial Advisory
Agreement. The Financial Advisory Agreement makes available the
resources of HM2 concerning a variety of financial matters. The
services that have been and will continue to be provided by HM2
could not otherwise be obtained by Holdings and Hedstrom without
the addition of personnel or the engagement of outside professional
advisors. In management's opinion, the fees provided for under this
agreement reasonably reflect the benefits received and to be
received by Holdings and Hedstrom.
<PAGE>
Stockholders Agreement
The investors who purchased or received Holdings Common Stock in
connection with or subsequent to the acquisition of Holdings and
Hedstrom by Hicks Muse and its affiliates (other than persons who
acquired shares of Holdings Common Stock in connection with
Holdings Discount Notes offering and their transfers) have entered
into a stockholders agreement (the "Stockholders Agreement"). The
Stockholders Agreement grants preemptive rights and certain piggy-
back registration rights to the parties thereto and contains
provisions requiring the parties thereto to sell their shares of
Holdings Common Stock in connection with certain sales of Holdings
Common Stock by HM Fund II ("drag-along rights") and grants the
parties thereto other than HM Fund II the right to include a
portion of their shares of Holdings Common Stock in certain sales
in which HM Fund II does not exercise its drag-along rights ("tag-
along rights"). The Stockholders Agreement terminates on its tenth
anniversary date, although the preemptive rights, drag-along rights
and tag-along rights contained therein will terminate earlier upon
the consummation of a registered underwritten public offering of
Holdings Common Stock by Holdings.
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
(a) (1) Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Income Statements for the Fiscal Years
Ended December 31, 1998 and December 31, 1997, for the Five
Months Ended December 31, 1996 and for the Fiscal Year
Ended July 31, 1996.
Consolidated Statements of Cash Flows for the Fiscal Years
Ended December 31, 1998 and December 31, 1997, for the
Five Months Ended December 31, 1996 and for the Fiscal Year
Ended July 31, 1996.
Consolidated Statements of Stockholders' Equity for the
Fiscal Years Ended December 31, 1998 and December 31, 1997,
for the Five Months Ended December 31, 1996 and for the
Fiscal Year Ended July 31, 1996.
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
Schedule IX - Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted because they are not
applicable or are not required, or because the required
information has been included in the Consolidated Financial
Statements or Notes thereto.
<PAGE>
(3) Exhibits
Description of Exhibits
-----------------------
(1) 2.1 - Agreement and Plan of Merger, dated as of
April 10, 1997, among Hedstrom Corporation
HC Acquisition Corp. and ERO, Inc.
(1) 3.1 - Restated Certificate of Incorporation of
Hedstrom Holdings, Inc., as filed with the
Secretary of State of the State of Delaware
on October 27, 1995.
(1) 3.2 - Certificate of Amendment of Restated
Certificate of Incorporation of Hedstrom
Holdings,
Inc., as filed with the Secretary of State of
the State of Delaware on June 6, 1997.
(1) 3.3 - Restated Bylaws of Hedstrom Holdings, Inc.
(1) 3.4 - Certificate of Incorporation of New Hedstrom
Corp., as filed with the Secretary of
State of the State of Delaware on November 20,
1990.
(1) 3.5 - Certificate of Amendment of the Certificate
of Incorporation of New Hedstrom Corp., as
filed with the Secretary of State of the State
of Delaware on January 14, 1991.
(1) 3.6 - By-Laws of Hedstrom Corporation.
(1) 3.7 - Amended and Restated Certificate of
Incorporation of ERO, Inc., as filed as Annex
A to that certain Certificate of Ownership and
& Merger filed with the Secretary of State of
the State of Delaware on June 12, 1997 merging
HC Acquisition Corp. with and into
ERO, Inc.
(1) 3.8 - Amended and Restated Bylaws of ERO, Inc.
(1) 3.9 - Certificate of Incorporation of ERO
Industries, Inc., as filed as Annex A to that
certain Certificate of Merger filed with the
Secretary of State of the State of Delaware on
July 15, 1988 merging GTC Leisure, Inc. with
and into ERO Industries, Inc.
(1) 3.10 - By-Laws of ERO Industries, Inc.
(1) 3.11 - Articles of Incorporation of ERO Marketing,
Inc., as filed with the Secretary of State
of the State of Illinois on January 21, 1992.
(1) 3.12 - Bylaws of ERO Marketing, Inc.
<PAGE>
(1) 3.13 - Certificate of Incorporation of Priss Prints
Acquisition Corp., as filed with the Secretary
of State of the State of Delaware on September
19, 1986.
(1) 3.14 - Certificate of Amendment of Certificate of
Incorporation of Priss Prints Acquisition
Corp., as filed with the Secretary of State of
the State of Delaware on November 5, 1986.
(1) 3.15 - By-Laws of Priss Prints, Inc.
(1) 3.16 - Certificate of Incorporation of Impact, Inc.,
as filed with the Secretary of State of the
State of Delaware on November 3, 1993.
(1) 3.17 - By-Laws of Impact, Inc.
(1) 3.18 - Certificate of Incorporation of ERO Canada,
Inc., as filed with the Secretary of State of
the State of Delaware on August 3, 1994.
(1) 3.19 - By-Laws of ERO Canada, Inc.
(1) 3.20 - Certificate of Incorporation of ERO NY
Acquisition, Inc., as filed with the Secretary
of State of the State of Delaware on October
12,1995.
(1) 3.21 - Certificate of Amendment of Certificate of
Incorporation of ERO NY Acquisition,
Inc., as filed with the Secretary of State of
the State of Delaware on January 23, 1996.
(1) 3.22 - By-Laws of Montreal Industries, Inc.
(1) 4.1 - Indenture, dated as of June 1, 1997, among
Hedstrom Corporation, Hedstrom
Holdings, Inc., the Subsidiary Guarantors
identified on the signature pages thereto and
IBJ Schroder Bank & Trust Company, as Trustee.
(1) 4.2 - Form of Senior Subordinated Note.
(1) 4.3 - Indenture, dated as of June 1, 1997, among
Hedstrom Holdings, Inc. and United States
Trust Company of New York, as Trustee.
(1) 4.4 - Form of Discount Note.
(1) 4.5 - [Intentionally Omitted]
(1) 4.6 - Registration Rights Agreement, dated as of
June 9, 1997, among Hedstrom Corporation and
Hedstrom Holdings, Inc., as Issuers, and Credit
Suisse First Boston Corporation, Societe
Generale Securities Corporation and UBS
Securities LLC, as Initial Purchasers.
<PAGE>
(1) 4.7 - Common Stock Registration Rights Agreement,
dated as of June 9, 1997, among Hedstrom
Holdings, Inc. and Credit Suisse First
Boston Corporation, Societe Generale
Securities Corporation and UBS Securities LLC,
as Initial Purchasers.
(1) 10.1 - Credit Agreement, dated as of June 12, 1997,
among Hedstrom Corporation Hedstrom Holdings,
Inc., the Lenders from time to time parties
thereto, Societe Generale, as Documentation
Agent, UBS Securities LLC, as Syndication
Agent, and Credit Suisse First Boston
Corporation, as Administrative Agent.
(1) 10.2 - Form of Tranche A Note.
(1) 10.3 - Form of Tranche B Note.
(1) 10.4 - Form of Revolving Credit Note.
(1) 10.5 - Form of Swing Line Note.
(1) 10.6 - Master Guarantee and Collateral Agreement,
dated as of June 12, 1997, made by
(1) 10.7 - Open End Mortgage, dated as of June
12, 1997, from Hedstrom Corporation,
as Mortgagor, to Credit Suisse First Boston
Corporation, as Mortgagee.
(1) 10.8 - Open End Mortgage and Security Agreement,
dated as of June 12, 1997, from Hedstrom
Corporation, as Mortgagor, to Credit Suisse
Corporation, as Mortgagee.
(1) 10.9 - Deed and Security Agreement, dated as of June
12, 1997, from ERO Industries, Inc., as
Grantor, to Credit Suisse First Boston
Corporation, as Grantee.
(1) 10.10 - Mortgage of Shares, dated as of June 12,
1997, between Hedstrom Corporation, as
Chargor, and Credit Suisse First Boston, as
Administrative Agent.
(1) 10.11 - Mortgage of Shares, dated as of June 12,
1997, between Montreal Industries, Inc., as
Chargor, and Credit Suisse First Boston, as
Administrative Agent.
(1) 10.12 - Stockholders Agreement, dated as of October
27, 1995, among Hedstrom Holdings and
the holders listed on the signature pages
thereof.
<PAGE>
(1) 10.13 - First Amendment to Stockholders Agreement,
dated as of June 1, 1997, between
Hedstrom Holdings, Inc. and Hicks, Muse,
Tate & Furst Equity Fund II, L.P.
(1) 10.14 - Form of Subordinated Note issued by Hedstrom
Holdings, Inc.
(1) 10.15 - Amendment and Waiver, dated as of June 12,
1997, between Hedstrom Holdings, Inc.
and Alan Plotkin, as Holder Representative,
regarding the Subordinated Notes of
Hedstrom Holdings, Inc.
(1) 10.16 - Form of Promissory Note (Series A) issued by
Hedstrom Holdings, Inc.
(1) 10.17 - Amendment and Waiver, dated as of June
12, 1997, between Hedstrom Holdings,
Inc. and Alan Plotkin, as Holder
Representative, regarding the Promissory
Notes (Series A) of Hedstrom Holdings, Inc.
(1) 10.18 - Form of Promissory Note (Series B) issued by
Hedstrom Holdings, Inc.
(1) 10.19 - Amendment and Waiver, dated as of June 12,
1997, between Hedstrom Holdings, Inc.
and Alan Plotkin, as Holder Representative,
regarding the Promissory Notes (Series B)
of Hedstrom Holdings, Inc.
(1) 10.20 - Executive Employment Agreement, dated as of
October 27, 1995, among Hedstrom
Holdings, Inc., Hedstrom Corporation and
Arnold E. Ditri
(1) 10.21 - Executive Employment Agreement, dated as of
October 27, 1995, between Hedstrom
Corporation and Alastair McKelvie.
(1) 10.22 - Monitoring and Oversight Agreement, dated as
of October 27, 1995, among Hedstrom
Holdings, Inc., Hedstrom Corporation and Hicks,
Muse & Co. Partners, L.P.
(1) 10.23 - Financial Advisory Agreement, dated as of
October 27, 1995, among Hedstrom
Holdings, Inc., Hedstrom Corporation and
HM2/Management Partners, L.P.
(1) 10.24 - Hedstrom Holdings, Inc. 1995 Stock Option
Plan.
(2) 10.25 - The Third Restatement of ERO Industries,
Inc. Retirement Income Plan (401(k)).
<PAGE>
(4) 10.26 - The Hedstrom Corporation Tax Sheltered
Savings Plan (401(k)).
(4) 10.27 - 1997 Hedstrom Holdings, Inc. Stock Option
Plan.
(4) 10.28 - Amendment Number One, dated November 11,
1997, and Amendment Number Two, dated
December 19, 1997, to the Credit Agreement,
dated as of June 12, 1997, among Hedstrom
Corporation, Hedstrom Holdings, Inc., the
financial institutions party thereto
and Credit Suisse First Boston, as agent.
(4) 10.29 - Specimen and listing of all license
agreements between Disney Enterprises, Inc. and
Hedstrom Corporation and its Subsidiaries.
(3) 10.30 - Second Amendment to the Third Restatement of
ERO Industries, Inc. Retirement Income Plan
(401(k)).
(5) 10.31 - Stock Purchase Agreement, dated July 24,
1998 by and between Hedstrom Corporation
and Richard Boyer.
(5) 10.32 - 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.
(5) 10.33 - Collective Bargaining Agreement, dated
October 3, 1998 by and between Hedstrom
Corporation and The United Steel Workers of
America, AFL-CIO-CLC, on behalf of
its affiliated Local Union No. 524L
10.34 - Amendment Number Four dated December 30, 1998
to the Credit Agreement, dated as of June 12,
1997, among Hedstrom Corporation, Hedstrom
Holdings, Inc., the financial institutions
party thereto and Credit Suisse First Boston,
as agent.
11.1 - Computation of Earnings Per Share.
(1) 21.1 - Subsidiaries of the Company.
23.1 - Consent of Arthur Andersen LLP, independent
auditors.
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).
<PAGE>
(2) Incorporated by reference to ERO, Inc.'s Report on
Form 10-K (File No. 0-19942) for the fiscal
year ended December 31, 1993.
(3) Incorporated by reference to ERO, Inc.'s Report on
Form 10-K (File No. 0-19942) for the fiscal
year December 31, 1996.
(4) Incorporated by reference to Holdings' and
Hedstrom's Report on Form 10-K (File Nos. 333-32385-05
and 333-32385) for the fiscal year December 31, 1997.
(5) Incorporated by reference to Holdings' and
Hedstrom's Report on Form 10-Q (File Nos. 333-32385-05
and 333-32385) for the quarterly period ended June 30,
1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
fourth quarter of 1998.
<PAGE>>
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, each of the Co-Registrants has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Mount
Prospect, State of Illinois, on the 30th day of March, 1999.
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
/s/ ARNOLD E. DITRI
By -------------------
Arnold E. Ditri
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1934, as
amended, this report has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
- ------------------- --------------------------------- --------------
/s/ ROBERT H. ELMAN Chairman of the Board of Directors March 30, 1999
- --------------------- Direcotr of the Co-Registrants
Robert H. Elman listed above
/s/ ARNOLD E. DITRI President, Chief Executive Officer March 30, 1999
- --------------------- and Director of the Co-Registrants
Arnold E. Ditri listed above
(Principal Executive Officer)
/s/ DAVID F. CROWLEY Chief Financial Officer of the March 30, 1999
- --------------------- Co-Registrants listed above
David F. Crowley (Principal Financial and
Accounting Officer)
/s/ ALAN B. MENKES Director of the Co-Registrants March 30, 1999
- --------------------- listed above
Alan B. Menkes
/s/ JACK D. FURST Director of the Co-Registrants March 30, 1999
- --------------------- listed above
Jack D. Furst
<PAGE>
<TABLE>
Hedstrom Holdings, Inc.
Schedule IX
Valuation and Qualifying Accounts and Reserves
As of and for the Fiscal Years Ended December 31, 1998, December 31, 1997
and as of and
for the Fiscal Year Ended July 31, 1996
Additions Deletions
-------------------- -----------------------
Foreign
Balance at Charged to Charged Currency Balance at
Beginning Costs and to Other Translation End
of Year Expenses Accounts Write-offs Adjustment of Year
---------- ---------- ---------- ---------- ---------- ----------
<S>
1998
<C> <C> <C> <C> <C> <C>
Allowance for doubtful accounts ........ $2,297,000 $3,183,000 $151,000(3) $ (344,000) $(7,000) $5,280,000
Accumulated amortization of goodwill ... 2,384,000 4,957,000 - - - 7,341,000
Amortization ofdeferred financing fees.. 3,246,000 6,475,000 - - - 9,721,000
Accumulated amortization of deferred
charges .............................. 1,629,000 743,000 - - - 2,372,000
1997
Allowance for doubtful accounts.......... 505,000 1,258,000 751,000(1) (196,000) (21,000) 2,297,000
Accumulated amortization of goodwill..... - 2,384,000 - - - -
Amortization of deferred financing fees.. - - - - - -
Accumulated amortization of deferred
charges ............................... 747,000 882,000 - - - 1,629,000
1996
Allowance for doubtful accounts........... 405,000 76,000 - (39,000) (1,000) 441,000
Accumulated amortization of deferred
charges................................ 2,907,000 520,000 - (3,030,000)(2) - 397,000
(1) Represents reserve established on the opening balance sheet
pursuant to the ERO, Inc. acquisition.
(2) Represents a write-off in connection with the Company's 1995
Recapitalization.
(3) Represents reserve established on the opening balance sheet
pursuant to the Backyard Products, Ltd. acquisition.
</TABLE>
FOURTH AMENDMENT, dated as of December 30, 1998 (this
"Fourth 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:
Definitions. Unless otherwise defined herein, terms defined
in the Credit Agreement shall be used as so defined.
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 "Applicable Margin" and by adding the
following definition in lieu thereof:
"Applicable Margin': with respect to (a) Tranche B Loans,
(i) 3.50% per annum, in the case of Eurodollar Loans and (ii) 2.50%
per annum, in the case of ABR Loans and (b) with respect to Tranche
A Loans and Revolving Credit Loans, the rate per annum set forth
under the relevant column heading below opposite the Leverage Ratio
then in effect:
<PAGE>
Applicable Margin
Leverage Ratio ABR Loans Eurodollar Loans
-------------- --------- ----------------
Greater than or equal to 5.0 to 1.00 2.00% 3.00%
Less than 5.0 to 1.0, but greater than
or equal to 4.5 to 1.0 1.75% 2.75%
Less than 4.5 to 1.0, but greater than
or equal to 4.0 to 1.0 1.50% 2.50%
Less than 4.0 to 1.0, but greater than
or equal to 3.5 to 1.0 1.25% 2.25%
Less than 3.5 to 1.0, but greater than
or equal to 3.0 to 1. 1.00% 2.00%
Less than 3.0 to 1. 0.75% 1.75%
; provided that any change in the interest rate on a Loan
resulting from a change in the Leverage Ratio of the Borrower
and its Subsidiaries shall become effective as of the opening
of business on the date which is the earlier of (A) the date
upon which the Administrative Agent receives the financial
statements required to be delivered pursuant to subsection
10.1 which evidence such change in the Leverage Ratio and (B)
the date upon which such financial statements are required to
be delivered pursuant to subsection 10.1; provided, further,
that, in the event that the financial statements required to
be delivered pursuant to subsection 10.1(a) or (b), as
applicable, are not delivered when due (after giving effect to
the applicable cure period), then during the period from the
date upon which such financial statements were required to be
delivered until the date upon which they actually are
delivered, the Leverage Ratio shall be deemed for purposes of
this definition to be greater than or equal to 5.0 to 1.0;
and provided, further, however, that the "Applicable Margin"
from time to time for Swing Line Loans shall be the same as
the "Applicable Margin" then in effect for ABR Loans.
Amendment to Subsection 11.
A. Subsection 11.1 is hereby amended by deleting such
subsection in its entirety and substituting the following in
lieu thereof:
11.1. Financial Condition Covenants.
(a) Minimum Interest Coverage Ratio. Permit the ratio
(the "Consolidated Interest Coverage Ratio") of (i) Borrower's
Consolidated EBITDA for any period of four consecutive fiscal
quarters ending as of the end of any of the fiscal periods set
forth below to (ii) Borrower's Consolidated Interest Expense for
such period, to be less than the ratio set forth opposite such
period below:
<PAGE>
Period Ratio
Fourth Fiscal Quarter 1998 1.30 to 1.00
First Fiscal Quarter 1999 1.30 to 1.00
Second Fiscal Quarter 1999 1.50 to 1.00
Third Fiscal Quarter 1999 1.50 to 1.00
Fourth Fiscal Quarter 1999 1.85 to 1.00
First Fiscal Quarter 2000 1.85 to 1.00
Second Fiscal Quarter 2000 2.00 to 1.00
Third Fiscal Quarter 2000 2.25 to 1.00
Fourth Fiscal Quarter 2000 2.40 to 1.00
First Fiscal Quarter 2001 2.40 to 1.00
Second Fiscal Quarter 2001 2.60 to 1.00
hird Fiscal Quarter 2001 2.75 to 1.00
Fourth Fiscal Quarter 2001 3.00 to 1.00
First Fiscal Quarter 2002 3.00 to 1.00
Second Fiscal Quarter 2002 3.25 to 1.00
Third Fiscal Quarter 2002 3.25 to 1.00
Fourth Fiscal Quarter 2002 - thereafter 3.50 to 1.00
(b) Maximum Leverage Ratio. Permit the Leverage Ratio as
of the end of any of the fiscal periods set forth below to be
more than the ratio set forth below opposite such period:
Period Ratio
Fourth Fiscal Quarter 1998 7.25 to 1.00
First Fiscal Quarter 1999 7.00 to 1.00
Second Fiscal Quarter 1999 6.40 to 1.00
Third Fiscal Quarter 1999 6.00 to 1.00
Fourth Fiscal Quarter 1999 5.00 to 1.00
First Fiscal Quarter 2000 5.00 to 1.00
Second Fiscal Quarter 2000 4.75 to 1.00
Third Fiscal Quarter 2000 4.50 to 1.00
Fourth Fiscal Quarter 2000 4.00 to 1.00
First Fiscal Quarter 2001 4.00 to 1.00
Second Fiscal Quarter 2001 3.75 to 1.00
Third Fiscal Quarter 2001 3.75 to 1.00
Fourth Fiscal Quarter 2001 3.00 to 1.00
First Fiscal Quarter 2002 3.00 to 1.00
Second Fiscal Quarter 2002 2.75 to 1.00
Third Fiscal Quarter 2002 2.75 to 1.00
Fourth Fiscal Quarter 2002 - thereafter 2.50 to 1.00
Notwithstanding anything to the contrary herein, for the
purposes of determining the Leverage Ratio and the
Consolidated Interest Coverage Ratio for the periods ending
on or about December 31, 1998 and March 31, 1999, Consolidated
EBITDA for the relevant period shall be deemed to equal actual
Consolidated EBITDA for such period plus $2,600,000 and
$1,200,000, respectively."
B. Subsection 11.10(o) is hereby amended by deleting the
reference therein to "$17,200,000" and substituting in lieu
thereof a reference to "$17,400,000."
C. Subsection 11.10(k) is hereby amended by adding after the
reference to "continuing" on the second line thereof the
following:
<PAGE>
"and the Leverage Ratio as of the most recently completed
fiscal quarter of the Borrower and on a pro forma basis after
giving effect to the Investment contemplated hereby shall not
exceed 5.00 to 1.00."
Effective Date. This Fourth Amendment will become effective as
of the date (the "Fourth 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
and (ii) payment to each of the Lenders that executes and
delivers this Fourth Amendment to the Administrative Agent
prior to December 30, 1998 of an amendment fee equal to .25%
of such Lender's Commitments and Loans on the Fourth Amendment
Effective Date. The Borrower shall deliver to the
Administrative Agent resolutions of the Borrower authorizing
the execution and delivery of this Fourth Amendment prior to
January 30, 1999.
Representations and Warranties. The Parent and the Borrower
represent and warrant to each Lender that (a) this Fourth
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.
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 Fourth Amendment shall constitute a Credit Document.
Governing Law. This Fourth Amendment shall be governed by, and
construed and interpreted in accordance with, the laws of the
State of New York.
Counterparts. This Fourth 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.
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 Fourth
Amendment, including, without limitation, the reasonable fees
and disbursements of counsel to the Administrative Agent.
<PAGE>
Acknowledgment with Respect to Various Credit Documents.
Each Credit Party, by its execution and delivery of a copy of
this Fourth 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
Fourth 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 Fourth 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.
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:
SOCIETE GENERALE, as a Lender
By:
Title:
UBS AG, Stamford Branch, as a Lender
By:
Title:
<PAGE>
BANK POLSKA KASA OPIEKI S.A. -
PEKAO S.A. GROUP
By:
Title:
BHF-BANK AKTIENGESELLSCHAFT
By:
Title:
CITICORP USA, INC.
By:
Title:
DEEPROCK & COMPANY
By: Eaton Vance Management,
as Investment Advisor
By:
Title:
THE FIRST NATIONAL BANK OF CHICAGO
By:
Title:
FIRST SOURCE FINANCIAL, LLP
By: First Source Financial, Inc.,
as Agent/Manager
By:
Title:
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By:
Title:
MERRILL LYNCH DEBT STRATEGIES FUND,
INC.
<PAGE>
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 SENIOR INCOME TRUST
By:
Title:
ORIX USA CORPORATION
By:
Title:
SANWA BUSINESS CREDIT CORPORATION
By:
Title:
SENIOR DEBT PORTFOLIO
BOSTON MANAGEMENT AND RESEARCH,
as Investment Advisor
By:
Title:
PamCo Cayman Ltd.
By: Highland Capital Management,
L.P. as Collateral Manager
<PAGE>
By:
Title:
PAM CAPITAL FUNDING, L.P.
By: Highland Capital Management,
L.P. as Collateral Manager
By:
Title:
THE CHASE MANHATTAN BANK
By:
Title:
IMPERIAL BANK
By:
Title:
ACKNOWLEDGED AND AGREED:
ERO, INC.
By:
Name:
Title:
ERO INDUSTRIES, INC.
By:
Name:
Title:
ERO MARKETING, INC.
By:
Name:
Title:
PRISS PRINTS, INC.
<PAGE>
By:
Name:
Title:
IMPACT, INC.
By:
Name:
Title:
ERO CANADA, INC.
By:
Name:
Title:
AMAV INDUSTRIES INC.
By:
Name:
Title:
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
EARNINGS PER SHARE DISCLOSURE
For the year ended December 31, 1998
(Dollars in thousands)
Income Shares Share
(Numerator) (Denominator) Amount
----------- ----------- ------
Basic Earnings Per Share:
Net loss $ (6,727) 67,663 $(0.10)
Effect of Dilutive Securities:
Stock options in the money -- -- --
Buyback of shares at
average price of $1.13 -- -- --
-------- ------ ------
Net effect of stock options -- -- --
-------- ------ ------
Diluted Earnings Per Share:
Net income $ (6,727) 67,663 $(0.10)
========= ====== ======
Options to purchase 4,772,128 shares of common stock at a range of $1.00-$1.65
per share were outstanding at December 31, 1998 but were not included in the
computation of diluted EPS as inclusion of stock options would have been
antidilutive.
ARTHUR ANDERSEN, LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously
filed Registration Statement File No. 333-33377.
/s/Arthur Andersen
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 5, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,334
<SECURITIES> 0
<RECEIVABLES> 74,802
<ALLOWANCES> (5,280)
<INVENTORY> 53,722
<CURRENT-ASSETS> 144,469
<PP&E> 73,555
<DEPRECIATION> (25,453)
<TOTAL-ASSETS> 395,767
<CURRENT-LIABILITIES> 90,504
<BONDS> 0
0
0
<COMMON> 676
<OTHER-SE> 37,887
<TOTAL-LIABILITY-AND-EQUITY> 395,767
<SALES> 301,696
<TOTAL-REVENUES> 301,696
<CGS> 210,607
<TOTAL-COSTS> 66,917
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,335
<INCOME-PRETAX> (7,163)
<INCOME-TAX> (436)
<INCOME-CONTINUING> (6,727)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,727)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
