<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 1997.
REGISTRATION NO. 333-32385
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
<TABLE>
<S> <C> <C> <C>
HEDSTROM CORPORATION HEDSTROM HOLDINGS, INC.
(and certain Subsidiaries Identified in Footnote 1 (Exact Name of Co-Registrant as Specified in its
Below) Charter)
(Exact Name of Co-Registrant as Specified in its
Charter)
DELAWARE 51-0329829 DELAWARE 51-0329830
(State or other (I.R.S. Employer (State or other (I.R.S. Employer
jurisdiction jurisdiction
of incorporation or Identification No.) of incorporation or Identification No.)
organization) organization)
3944
(Primary Standard Industrial
Classification Code Number)
DAVID F. CROWLEY
585 SLAWIN COURT 585 SLAWIN COURT
MOUNT PROSPECT, ILLINOIS 60056 MOUNT PROSPECT, ILLINOIS 60056
(847) 803-9200 (847) 803-9200
(Address, Including Zip Code, and Telephone Number, (Name, Address, Including Zip Code, and Telephone
Number,
Including Area Code of Co-Registrants' Including Area Code, of Agent for Service)
Principal Executive Offices)
</TABLE>
Copies to:
GLENN D. WEST
WEIL, GOTSHAL & MANGES LLP
100 CRESCENT COURT
SUITE 1300
DALLAS, TEXAS 75201
(214) 746-7700
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of the Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================================
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10% Senior Subordinated Notes due 2007 of
Hedstrom Corporation(2)...................... $110,000,000 $1,000.00 $110,000,000 $33,333.33
- --------------------------------------------------------------------------------------------------------------------------------
Senior Guarantee(2)............................
- --------------------------------------------------------------------------------------------------------------------------------
Senior Subordinated Guarantees(2)..............
- --------------------------------------------------------------------------------------------------------------------------------
12% Senior Discount Notes due 2009 of Hedstrom
Holdings, Inc.(3)............................ $ 44,612,000 $ 568.45 $ 25,359,691 $ 7,684.75
================================================================================================================================
</TABLE>
(1) The following direct and indirect subsidiaries of Hedstrom Corporation are
Co-Registrants (the "Subsidiary Guarantors"), each of which is incorporated
in the state and has the I.R.S. Employer Identification Number indicated:
ERO, Inc., a Delaware corporation (36-3573286); ERO Industries, Inc., a
Delaware corporation (36-1047920); ERO Marketing, Inc., an Illinois
corporation (36-3807010); Priss Prints, Inc., a Delaware corporation
(54-1389361); Impact, Inc., a Delaware corporation (36-3918720); ERO Canada,
Inc., a Delaware corporation (36-3969563); and Amav Industries, Inc., a
Delaware corporation (36-4051894).
(2) The 10% Senior Subordinated Notes due 2007 are unconditionally (as well as
jointly and severally) guaranteed by Hedstrom Holdings, Inc., the sole
stockholder of Hedstrom Corporation, on an unsecured, senior basis and by
the Subsidiary Guarantors on an unsecured, senior subordinated basis.
Pursuant to Rule 457(n) under the Securities Act of 1933, no separate
consideration will be paid in respect to these guarantees.
(3) The "Amount to be Registered" with respect to the 12% Senior Discount Notes
due 2009 represents the aggregate principal amount at maturity of such
notes. The 12% Senior Discount Notes due 2009 were sold at a substantial
discount from their principal amount at maturity. The registration fee with
respect to the 12% Senior Discount Notes due 2009 was calculated based on
the approximate accreted value thereof as of July 25, 1997 determined
pursuant to the provisions of the indenture governing such notes.
THE CO-REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE CO-REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
HEDSTROM CORPORATION
HEDSTROM HOLDINGS, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION IN
THE PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF FORM S-1
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
-------------------------------- ----------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Cover Page of Registration Statement;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Prospectus Summary; Risk Factors;
Business; Selected Consolidated Historical
Financial Data of Holdings; Selected
Consolidated Historical Financial Data of
ERO; Unaudited Pro Forma Consolidated
Financial Information
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Not Applicable
6. Dilution............................................. Not Applicable
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Front Cover Page of Prospectus; The
Exchange Offers; Plan of Distribution
9. Description of Securities to be Registered........... Description of New Senior Subordinated
Notes; Description of New Discount Notes
10. Interests of Named Experts and Counsel............... Not Applicable
11. Information with Respect to the Registrant........... Cover Page of Registration Statement;
Prospectus Summary; Risk Factors; Selected
Consolidated Historical Financial Data of
Holdings; Selected Consolidated Financial
Data of ERO; Unaudited Pro Forma
Consolidated Financial Information;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of Hedstrom and Holdings;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of ERO; Business; Management;
Stock Ownership and Certain Transactions;
Description of the Senior Credit
Facilities; Legal Matters
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Not Applicable
</TABLE>
<PAGE> 3
PROSPECTUS
<TABLE>
<C> <C>
OFFER FOR ALL OUTSTANDING OFFER FOR ALL OUTSTANDING
10% SENIOR SUBORDINATED NOTES DUE 2007 12% SENIOR DISCOUNT NOTES DUE 2009
IN EXCHANGE FOR IN EXCHANGE FOR
10% SENIOR SUBORDINATED NOTES DUE 2007 12% SENIOR DISCOUNT NOTES DUE 2009
OF OF
HEDSTROM CORPORATION HEDSTROM HOLDINGS, INC.
</TABLE>
Pursuant to the terms and subject to the conditions set forth in this
Prospectus and the accompanying letters of transmittal, (i) Hedstrom
Corporation, a Delaware Corporation ("Hedstrom"), Hedstrom Holdings, Inc., a
Delaware corporation and the sole stockholder of Hedstrom ("Holdings"), and the
Subsidiary Guarantors (as defined) hereby offer (the "Senior Subordinated Notes
Exchange Offer") to exchange $1,000 principal amount of registered 10% Senior
Subordinated Notes Due 2007 (the "New Senior Subordinated Notes") issued by
Hedstrom, for each $1,000 principal amount of unregistered 10% Senior
Subordinated Notes Due 2007 (the "Old Senior Subordinated Notes", and together
with the New Senior Subordinated Notes, the "Senior Subordinated Notes") issued
by Hedstrom, of which an aggregate principal amount of $110,000,000 is
outstanding and (ii) Holdings hereby offers (the "Discount Notes Exchange
Offer," and together with the Senior Subordinated Notes Exchange Offer, the
"Exchange Offers") to exchange $1,000 principal amount at maturity of registered
12% Senior Discount Notes Due 2009 (the "New Discount Notes") issued by
Holdings, for each $1,000 principal amount at maturity of unregistered 12%
Senior Discount Notes Due 2009 (the "Old Discount Notes," and together with the
New Discount Notes, the "Discount Notes") issued by Holdings, of which an
aggregate principal amount at maturity of $44,612,000 is outstanding. The Old
Senior Subordinated Notes and the Old Discount Notes are sometimes collectively
referred to herein as the "Old Notes" and the New Senior Subordinated Notes and
the New Discount Notes are sometimes collectively referred to herein as the "New
Notes." Hedstrom and Holdings are sometimes collectively referred to herein as
the "Issuers."
The form and terms of the New Notes are identical to the form and terms of
the Old Notes except that (i) interest on the New Senior Subordinated Notes
shall accrue from the date of issuance of the Old Senior Subordinated Notes,
(ii) the Accreted Value (as defined) of the New Discount Notes will be
calculated from the date of issuance of the Old Discount Notes, and (iii) the
New Notes are being registered under the Securities Act of 1933, as amended (the
"Securities Act"), and will not bear any legends restricting their transfer. The
New Senior Subordinated Notes will evidence the same debt as the Old Senior
Subordinated Notes and will be issued pursuant to, and entitled to the benefits
of, the indenture governing the Old Senior Subordinated Notes. The New Discount
Notes will evidence the same debt as the Old Discount Notes and will be issued
pursuant to, and entitled to the benefits of, the indenture governing the Old
Discount Notes. The Exchange Offers are being made in order to satisfy certain
contractual obligations of Hedstrom and Holdings. See "The Exchange Offers",
"Description of New Senior Subordinated Notes" and "Description of New Discount
Notes."
The net proceeds from the sale of the Old Notes were used to effect the
acquisition by Hedstrom of ERO, Inc. ("ERO") and its subsidiaries. Such
acquisition was effected pursuant to a tender offer by HC Acquisition Corp., a
wholly owned subsidiary of Hedstrom ("Acquisition Co."), for all of the
outstanding common stock of ERO and the subsequent merger of Acquisition Co.
with and into ERO with ERO surviving as a wholly owned subsidiary of Hedstrom.
See "Prospectus Summary -- The Transactions."
(continued on next page)
------------------------------------------------------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 26 FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
NEW NOTES.
------------------------------------------------------------------------------
Hedstrom and Holdings will accept for exchange any and all Old Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on December
4, 1997, unless extended (as so extended, the "Expiration Date"). Tenders of Old
Notes may be withdrawn at any time prior to the Expiration Date. The Exchange
Offers are subject to certain customary conditions. See "The Exchange Offers."
In order for a holder of Old Notes to participate in an Exchange Offer, such
holder must represent to Hedstrom or Holdings, as appropriate, that, among other
things, (i) the New Notes acquired pursuant to such Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the holder of the Old Notes, (ii) neither
the holder nor any such other person has an arrangement or understanding with
any person to participate in the distribution of such New Notes within the
meaning of the Securities Act, (iii) neither the holder nor any such other
person is an "affiliate," as defined under Rule 405 promulgated under the
Securities Act, of Hedstrom, Holdings or any Subsidiary Guarantor (as defined),
or if it is an affiliate, such holder or such other person will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable, (iv) if such holder or other person is not a broker-dealer,
neither the holder nor any such other person is engaged in or intends to engage
in the distribution of such New Notes, and (v) if such holder or other person is
a broker-dealer, that it will receive New Notes for its own account in exchange
for Old Notes that were acquired as a result of market-making activities or
other trading activities. See "The Exchange Offers -- Purpose and Effect."
Each broker-dealer that receives New Notes for its own account pursuant to
either of the Exchange Offers must acknowledge that it will deliver a prospectus
in connection with any resale of those New Notes. The letters of transmittal
accompanying this Prospectus state that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. Hedstrom and Holdings have agreed that,
for a period of 180 days after the Expiration Date, they will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
No public market has existed for the Old Notes before the Exchange Offers.
Hedstrom and Holdings currently do not intend to list the New Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system, and no active public market for the New Notes is currently
anticipated. Hedstrom and Holdings will pay all the expenses incident to the
Exchange Offers.
The Exchange Offers are not conditioned upon any minimum principal amount of
Old Senior Subordinated Notes or Old Discount Notes being tendered for exchange
pursuant to the Exchange Offers.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is November 4, 1997.
<PAGE> 4
(continued from front cover)
The New Senior Subordinated Notes will bear interest at a rate of 10% per
annum, payable on June 1 and December 1 of each year, commencing December 1,
1997. The New Senior Subordinated Notes will mature on June 1, 2007. Hedstrom
will not be required to make any sinking fund payment with respect to the New
Senior Subordinated Notes. The New Senior Subordinated Notes will not be
redeemable at the option of Hedstrom prior to June 1, 2002, except (i) that
until June 1, 2000, Hedstrom may redeem, at its option, in the aggregate up to
$44,000,000 principal amount of the Senior Subordinated Notes at the redemption
price set forth herein with the net proceeds of one or more Equity Offerings (as
defined) if at least $66,000,000 principal amount of the Senior Subordinated
Notes remains outstanding after any such redemption and (ii) upon a Change of
Control (as defined), as described below. On or after June 1, 2002, the New
Senior Subordinated Notes may be redeemed at the option of Hedstrom, in whole or
in part, at the redemption prices set forth herein.
The Old Discount Notes were issued at a substantial discount from the
principal amount at maturity of such notes. Principal on each New Discount Note
will accrete from the date of issuance of the Old Discount Notes to a principal
amount of $1,000 on June 1, 2002, representing a yield to maturity of 12% (based
upon the issue price of a Unit and computed on a semi-annual bond equivalent
basis). Except as described herein, no cash interest will accrue on the New
Discount Notes prior to June 1, 2002. Thereafter, the New Discount Notes will
accrue cash interest at a rate of 12% per annum, and cash interest will be
payable on June 1 and December 1 of each year, commencing December 1, 2002. The
New Discount Notes will mature on June 1, 2009. Holdings will not be required to
make any sinking fund payment with respect to the New Discount Notes. The New
Discount Notes will not be redeemable at the option of Holdings prior to June 1,
2002, except (i) that until June 1, 2000, Holdings may redeem, at its option, in
the aggregate up to 40% of the Accreted Value of the Discount Notes at the
redemption price set forth herein with the net proceeds of one or more Equity
Offerings if at least $26,767,200 principal amount at maturity of the Discount
Notes remains outstanding after any such redemption and (ii) upon a Change of
Control (as described below). On or after June 1, 2002, the New Discount Notes
may be redeemed at the option of Holdings, in whole or in part, at the
redemption prices set forth herein. The New Discount Notes will bear original
issue discount ("OID"), and the holders of the New Discount Notes will be
required to include such OID in gross income for U.S. federal income tax
purposes, on a constant yield to maturity basis, in advance of the receipt of
the cash payments to which such income is attributable. See "Certain United
States Federal Income Tax Considerations with Respect to the New Notes."
The New Senior Subordinated Notes will be unsecured senior subordinated
obligations of Hedstrom and will be unconditionally and fully guaranteed
(jointly and severally) on a senior basis (the "Holdings Guaranty") by Holdings
and on a senior subordinated basis (the "Subsidiary Guaranties" and, together
with the Holdings Guaranty, the "Guaranties") by each domestic subsidiary of
Hedstrom (the "Subsidiary Guarantors"). The New Senior Subordinated Notes will
be subordinated to all Senior Indebtedness (as defined) of Hedstrom and will
rank pari passu in right of payment with all Senior Subordinated Indebtedness
(as defined) of Hedstrom. As of June 30, 1997, Holdings Senior Indebtedness (as
defined) and Senior Indebtedness (as defined) of Hedstrom were approximately
$244.3 million and $117.7 million, respectively, and Senior Subordinated
Indebtedness of Hedstrom was $110.0 million. The New Discount Notes will be
senior unsecured obligations of Holdings and will rank pari passu in right of
payment with all Senior Indebtedness of Holdings. The New Discount Notes will be
effectively subordinated to all Indebtedness (as defined) and obligations of
Hedstrom and its subsidiaries. As of June 30, 1997, the New Discount Notes were
effectively subordinated to approximately $282.4 million of aggregate
liabilities (including trade payables) of Hedstrom and its subsidiaries.
Upon a Change of Control, (i) each Issuer will have the option, at any time
on or prior to June 1, 2002, to redeem such Issuer's New Notes, in whole but not
in part, at a redemption price equal to 100% of (A) in the case of the New
Senior Subordinated Notes, the principal amount thereof, and (B) in the case of
the New Discount Notes, the Accreted Value thereof, in each case plus the
Applicable Premium (as defined) and accrued and unpaid interest, if any, to the
date of redemption, and (ii) if an Issuer does not so redeem its New Notes
pursuant to clause (i) above or if such Change of Control occurs after June 1,
2002, each holder of such New Notes may require the Issuer thereof to repurchase
such New Notes at a purchase price equal to 101% of (A) in the case of the New
Senior Subordinated Notes, the principal amount thereof, and (B) in the case of
the New Discount Notes, the Accreted Value thereof, in each case plus accrued
and unpaid interest, if any, to the date of repurchase.
2
<PAGE> 5
AVAILABLE INFORMATION
Hedstrom, Holdings and the Subsidiary Guarantors have filed with the
Securities and Exchange Commission (the "Commission") a Registration Statement
(which term shall encompass any amendments thereto) on Form S-1 under the
Securities Act with respect to the securities offered hereby. This Prospectus
does not contain all information set forth in the Registration Statement and the
exhibits thereto, to which reference is hereby made. Although the Issuers
believe that statements made in this Prospectus as to the contents of any
contract, agreement, or other document describe all material elements of such
documents, such statements are not necessarily complete. With respect to each
such contract, agreement, or other document filed as an exhibit to the
Registration Statement, reference is hereby made to such exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
As a result of the filing of the Registration Statement with the
Commission, Holdings, Hedstrom and the Subsidiary Guarantors each will become
subject to the informational reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, will
be required to file reports and other information with the Commission. Such
reports and other information can be inspected and copied at the principal
office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and the following Regional Offices of the Commission: Chicago
Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60611 and New York Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material may also
be obtained at prescribed rates from the Public Reference Section of the
Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission also maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission at http://www.sec.gov.
The Issuers will furnish holders of the securities offered hereby with
annual reports containing, among other information, audited financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited financial information for the first three quarters of each
fiscal year. The Issuers will also furnish such other reports as it may
determine or as may be required by law or by the indentures governing the New
Notes. In reliance upon certain Staff Accounting Bulletins of the Commission,
interpretations of the staff of the Commission and no-action relief granted by
the staff of the Commission to unrelated third parties, the Issuers intend to
seek no-action relief permitting Hedstrom and the Subsidiary Guarantors to not
file periodic reports with the Commission under the Exchange Act separately from
Holdings, and in lieu thereof, to set forth in Holding's periodic reports
selected financial information and certain other information with respect to
Holdings, Hedstrom, the Subsidiary Guarantors and the subsidiaries of Hedstrom
which are not guarantors of the Senior Subordinated Notes.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in this
Prospectus, including, without limitation, such statements under "Prospectus
Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations Hedstrom and Holdings," "Management's Discussion and
Analysis of Financial Condition and Results of Operations of ERO," and
"Business" and located elsewhere herein are forward-looking statements. Although
the Issuers believe that the expectations reflected in such forward-looking
statements are reasonable, they can give no assurance that such expectations
will prove to have been correct. Important factors that could cause actual
results to differ materially from expectations ("Cautionary Statements") are
disclosed in this Prospectus, including, without limitation, in conjunction with
the forward-looking statements included in this Prospectus and/or under "Risk
Factors." All subsequent written or oral forward-looking statements attributable
to an Issuer or persons acting on behalf of an Issuer are expressly qualified in
their entirety by the Cautionary Statements.
3
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, included elsewhere in this Prospectus. As used in
this Prospectus, unless otherwise indicated or unless the context otherwise
requires, references herein to (i) the "Transactions" refer collectively to the
Acquisition (as defined) and the Financings (as defined), (ii) "Holdings" refer
to Hedstrom Holdings, Inc. and, where appropriate, its subsidiaries, (iii)
"Hedstrom" refer to Hedstrom Corporation and, where appropriate, its
subsidiaries, (iv) "ERO" refer to ERO, Inc. and, where appropriate, its
subsidiaries, and (v) the "Company" refer to Hedstrom and its subsidiaries and
ERO and its subsidiaries on a combined basis after completion of the
Transactions, including the businesses conducted by Hedstrom and ERO prior to
the Transactions. Unless otherwise specified, all financial, statistical and
other data regarding the Company contained herein is presented on a pro forma
basis after giving effect to the Transactions. Market and market share data used
throughout this Prospectus are estimates provided by the management of the
Company. Such estimates are based on management's internal research and
experience in the Company's markets. Such estimates, while believed by
management to be accurate, have not been verified by any independent source.
THE COMPANY
The Company (consisting of the businesses of Hedstrom and ERO) is a leading
North American manufacturer and marketer of well-established children's leisure
and activity products. The Company's diversified product lines are in such
"evergreen" product categories as outdoor gym sets, wood gym kits and slides,
spring horses, playballs, arts and crafts kits, game tables, and licensed indoor
sleeping bags, play tents and wall decorations. The Company considers such
product categories to be "evergreen" in nature because each is characterized by
proven longevity, demonstrated market demand and consistent sales over time. For
example, the Company believes products such as outdoor gym sets and playballs
have been marketed and sold in the United States for over 30 years.
The Company believes that in the U.S. markets for nine of its ten principal
product categories, it enjoys the competitive advantage of being the market
share leader, the low-cost producer or both. For the twelve-month period ended
December 31, 1996, approximately half of the Company's pro forma net sales were
derived from product categories for which the Company believes it has a market
share of approximately 75% or greater. As a result of the Company's leading
market shares, the Company enjoys favorable relationships with its customers and
suppliers and with licensors of popular characters that decorate certain of the
Company's products. The Company believes its focus on evergreen product
categories in which it has competitive advantages provides consistent sales and
cash flows. The Company's products are sold primarily through national
retailers, mass merchants, home improvement centers, sporting goods stores, drug
store chains and supermarkets.
COMPETITIVE STRENGTHS
The Company believes that the following characteristics contribute to the
Company's position as a leading manufacturer and marketer of children's leisure
and activity products:
- Leading Share in Selected Niche Markets. The Company believes its outdoor
gym sets, spring horses, playballs, ball pits and licensed sleeping bags
and play tents each command market shares of approximately 75% or
greater. Sales from these product categories accounted for approximately
half of the Company's pro forma net sales for the twelve-month period
ended December 31, 1996. In addition, the Company believes it is one of
the leading suppliers in the U.S. markets for wood gym kits and slides,
children's arts and crafts kits, game tables and wall decorations. The
Company believes its position as a market share leader in selected niche
markets (i) provides the Company with certain advantages over existing
competitors and prospective entrants in such markets, (ii) creates the
strong relationships with retailers that are critical to securing and
maintaining valuable retail shelf space for existing and new products and
(iii) provides a platform for introducing new products.
4
<PAGE> 7
- Stable and Established Product Categories. Substantially all of the
Company's products are in evergreen categories within the children's
leisure and activity products industry. For example, the Company believes
products such as outdoor gym sets and playballs have been marketed and
sold in the United States for over 30 years. The Company believes its
diverse portfolio of evergreen products will contribute to stable
revenues and cash flows, providing resources for the Company to implement
its business strategies. See "-- Business Strategy."
- Low-Cost Manufacturing Capabilities. The Company believes that it is the
low-cost manufacturer in the markets for each major product category
which the Company manufactures internally. The Company believes its
leading market share in such niche markets as outdoor gym sets, spring
horses, playballs and ball pits provides it with a significant cost
advantage relative to smaller competitors in such markets due to the
Company's greater sales volume and resultant operating leverage and
efficiencies. With respect to the Company's children's arts and crafts
kits and game tables, the Company is able to realize cost advantages from
the low labor rates, low overhead and extensive vertical integration of
its Canadian manufacturing facility. The Company believes its position as
a low-cost manufacturer will enable it to (i) maintain operating profit
margins, (ii) respond to competitive pressures through flexibility in
pricing strategies, (iii) realize sales growth by offering superior
quality products at competitive prices and (iv) expand its existing
product lines and enter new product categories.
BUSINESS STRATEGY
The Company's strategy is to enhance its operating margins and strengthen
its position as a leading manufacturer and marketer of children's leisure and
activity products. The Company plans to improve its profitability by
rationalizing its cost structure and utilizing the Company's excess capacity at
certain of its facilities through, among other things, pursuing counter-seasonal
sales opportunities. Furthermore, the Company has identified several
opportunities for revenue growth, including enhancing existing products,
introducing complementary products, focusing its licensed products on
traditional characters and pursuing international sales opportunities.
- Achieve Cost Savings. Management believes it will realize annual cost
savings in excess of $6 million as a result of cost saving initiatives
implemented or being implemented as a result of the Acquisition, such as
rationalizing sales, marketing and general administrative functions,
consolidating purchases of raw materials and eliminating less profitable
product lines. Independent of the Acquisition, the Company expects to
realize in excess of $9 million of permanent cost savings in 1997 and
thereafter as a result of cost reduction programs implemented at Hedstrom
in the second half of 1996. See "-- Hedstrom 1996 Cost Reduction Plan,"
"Unaudited Pro Forma Consolidated Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations of Hedstrom and Holdings."
- Utilize Excess Capacity. The Company produces its outdoor gym sets, wood
gym kits and slides at its facility in Bedford, Pennsylvania, primarily
in the period from December through April. During the balance of the
year, the Bedford facility remains relatively inactive. The Company
believes it can enhance sales and profitability by identifying products
that it can manufacture during the May through November period, either
for itself or for original equipment manufacturers ("OEMs"). The Company
has already identified several products that it will begin producing in
the second half of 1997. In addition, management is pursuing
opportunities to increase the utilization of its low-cost plastic molding
operations at its Ashland, Ohio facility, which already supplies a
variety of components to OEMs of industrial and consumer products.
- Enhance Existing Products and Develop Complementary Products. The Company
has maintained sales growth and its leading market shares by continuously
enhancing its principal products and designing and developing
complementary products and accessories. Management believes that by
pursuing this strategy it can continue growth within its core product
lines with minimal economic risk. In addition, the Company will evaluate
opportunities to expand its product lines, increase its market shares and
acquire complementary products through strategic acquisitions.
5
<PAGE> 8
- Focus Licensed Products on Traditional Characters. The Company believes
that it can differentiate certain of its products and stimulate sales
more effectively and inexpensively through the licensing of recognized
traditional characters rather than the development and promotion of its
own brand names. For the Company's products lines that feature licensed
characters, such as sleeping bags, play tents and wall decorations, the
Company intends to emphasize traditionally popular characters such as the
classic Disney and Looney Tunes(TM) characters, although the Company will
also complement such characters by obtaining licenses for event-driven
characters. The Company estimates that products featuring licensed
traditional characters (including products featuring the 101 Dalmatians
characters, which experienced increased sales in 1996 as a result of the
release of a new version of the 101 Dalmatians movie) accounted for
approximately 14% of the Company's pro forma net sales for the
twelve-month period ended December 31, 1996, while products based on
licensed event-driven characters also accounted for approximately 14% of
the Company's pro forma net sales for such period.
- Pursue International Sales Opportunities. To date, the Company has not
focused a significant amount of resources toward the development of an
international customer base. For the twelve-month period ended December
31, 1996, the Company's pro forma net sales outside the United States and
Canada totaled less than 4% of the Company's total pro forma net sales.
The Company believes there are significant sales opportunities for the
Company's products in Europe and Latin America, particularly its
children's arts and crafts kits, outdoor gym sets, playballs and ball
pits.
ACQUISITION RATIONALE
Hedstrom and ERO are leading manufacturers and marketers of children's
leisure and activity products. Hedstrom's principal products include outdoor gym
sets, wood gym kits and slides, spring horses, playballs and ball pits. ERO's
principal products include children's arts and crafts kits, game tables and
licensed indoor sleeping bags, play tents and wall decorations. The acquisition
of ERO by Hedstrom created one of the largest North American manufacturers and
marketers of children's evergreen leisure and activity products and provides
Hedstrom with (i) a more diverse portfolio of products, (ii) significant growth
potential through ERO's Amav division ("Amav"), (iii) decreased seasonality as a
result of more balanced sales throughout the year, (iv) significant cost savings
and operating efficiencies and (v) additional advantages resulting from
increased scale.
- Product Diversity in Well-Established Markets. The combination of
Hedstrom and ERO significantly reduces the Company's dependence on any
particular product line while expanding the Company's overall presence in
children's evergreen leisure and activity product categories. With the
combination of Hedstrom and ERO, the Company has ten principal product
categories, with its largest product line (outdoor gym sets) accounting
for approximately 20% of the Company's pro forma net sales for the
twelve-month period ending December 31, 1996.
- Growth Potential at Amav. In October 1995, ERO established its Amav
division through the acquisition of Amav Industries, Ltd., a
Canadian-based manufacturer of children's arts and crafts kits and game
tables. Amav has grown rapidly over the four-year period ended December
31, 1996, with sales increasing at a compound annual rate in excess of
40% over such period. Management attributes Amav's success to its
strategy of targeting large, established product lines in which it can
apply its design, engineering and manufacturing expertise to produce a
high-quality product at a lower cost than its competitors. Management
believes Amav's low-cost manufacturing, design and engineering
capabilities will enable the Company to continue to increase sales of its
existing products lines as well as to add complementary product lines.
- Reduced Seasonality. The combination of Hedstrom and ERO significantly
reduces the effect of seasonality on the Company's business. The peak
selling season for Hedstrom's products is the first half of the calendar
year whereas the peak selling season for ERO's products is the second
half of the calendar year. As a result of the Acquisition, the Company's
sales throughout the year will be relatively balanced. Pro forma net
sales for the Company for each calendar quarter during the twelve months
ended December 31, 1996 were 24.6%, 26.5%, 22.8% and 26.1%, respectively,
of total pro forma net sales for
6
<PAGE> 9
such twelve-month period. Balanced sales throughout the year will reduce
seasonal fluctuations in working capital and will enable the Company to
generate more consistent cash flow.
- Cost Savings. As discussed under "-- Business Strategy," management
believes that the cost saving initiatives which have been or which are
being implemented as a result of the combination of Hedstrom and ERO will
allow the Company to realize cost savings in excess of $6 million per
year.
- Additional Advantages Resulting from Increased Scale. With over $280
million in pro forma net sales for the twelve-month period ending
December 31, 1996, management believes the Company will have
significantly more clout with retailers, suppliers and licensors than
either Hedstrom or ERO individually. In addition, management anticipates
that the Company's size also will enable it to pursue international sales
opportunities more effectively.
HEDSTROM 1996 COST REDUCTION PLAN
From fiscal 1992 through fiscal 1995, Hedstrom's operating income increased
at a compound annual rate of approximately 33.5%. In fiscal 1996, Hedstrom's
operating income declined 52% relative to fiscal 1995. In addition, from fiscal
1992 through fiscal 1995, Hedstrom's EBITDA increased at a compound annual rate
of approximately 25%. In fiscal 1996, Hedstrom's EBITDA declined modestly. In
order to improve Hedstrom's profitability in 1997 and thereafter, management
implemented a plan in the second half of 1996 (the "1996 Cost Reduction Plan")
to reduce costs by over $9 million in 1997 and thereafter as compared with
fiscal 1996 levels. Important elements of the plan include:
- Implementing Just-in-Time Manufacturing. In late 1996, Hedstrom
restructured certain of its manufacturing operations to increase its
daily production capacity of outdoor gym sets. This restructuring has
enabled Hedstrom to manufacture outdoor gym sets to specific customer
orders rather than producing outdoor gym sets in anticipation of customer
orders, which Hedstrom had done in the past because of capacity
constraints. In fiscal 1996, prior to implementing this restructuring,
Hedstrom experienced a significant and unexpected change in its sales mix
of outdoor gym sets, requiring Hedstrom to use third party warehouses to
store many of the outdoor gym sets it had produced in anticipation of
customer demand. As a result, Hedstrom incurred approximately $2.1
million of higher warehouse and material handling costs. Through the
first six months of 1997, Hedstrom has successfully manufactured outdoor
gym sets on a just-in-time basis, resulting in significantly lower
warehouse and material handling expense as compared to the same period in
1996. The implementation of just-in-time manufacturing of outdoor gym
sets has enabled Hedstrom to carry a lower level of outdoor gym set
inventory and, as a result, to eliminate the need for utilizing third
party warehouses for outdoor gym sets. Management believes the Company
will save approximately $2.1 million of warehouse and material handling
expense in 1997 and thereafter as a result of implementing just-in-time
manufacturing of outdoor gym sets.
- Improved Manufacturing Procedures. In an effort to streamline outdoor gym
set production and improve manufacturing efficiencies, in 1996 Hedstrom
(i) reduced its number of outdoor gym set product offerings, (ii)
redesigned certain outdoor gym set components to reduce the cost of such
components and (iii) further standardized many of the components among
its various outdoor gym set product offerings. Management believes these
actions will improve profitability by approximately $2.0 million in 1997
and thereafter over fiscal 1996 levels.
- In-sourcing Certain Plastic Components. Hedstrom periodically evaluates
the economics of producing internally certain plastic components used in
the production and assembly of its outdoor gym sets versus purchasing
such components externally. In 1996, Hedstrom invested approximately $3.0
million in new plastic blow-molding equipment to manufacture many of the
plastic slides that it had previously purchased from third-party vendors.
Management estimates that producing these slides internally is currently
providing annual cost savings of approximately $1.5 million as compared
to fiscal 1996 levels.
- Discontinuation of Trial Advertising Campaign. Hedstrom historically has
advertised its products in cooperation with its retail customers,
principally through print media such as newspaper circulars and
free-standing inserts sponsored by its customers. In fiscal 1996,
Hedstrom initiated, on a trial basis, its
7
<PAGE> 10
own multi-media advertising program designed to increase consumer
awareness of the Hedstrom brand over time. The total cost for this
advertising program was approximately $1.5 million. After careful review,
management determined that this trial advertising campaign would not
provide an acceptable return on investment and elected to discontinue it.
Therefore, such costs will not be incurred in 1997 and thereafter.
- Restructure Promotional Programs. Consistent with industry practice,
Hedstrom provides retailers with certain promotional allowances, a
portion of which typically is fixed in nature and a portion of which is
based on the volume of customer purchases of Hedstrom products. In late
1996, Hedstrom reduced the fixed component of certain of its promotional
allowances and restructured its promotional programs with several
customers by raising the required volumes necessary to achieve certain
promotional discounts. Management believes these initiatives will improve
profitability in 1997 and thereafter by approximately $1.4 million over
fiscal 1996 levels.
- Personnel Reductions. Hedstrom reduced its number of full-time employees
by approximately 30 people in a variety of departments in the second half
of 1996. Management believes that such personnel reductions will result
in savings of approximately $0.7 million in 1997 and thereafter over
fiscal 1996 levels.
The implementation of the 1996 Cost Reduction Plan has resulted in marked
improvement in Hedstrom's profitability in 1997 and management expects that such
initiatives will continue to contribute to enhanced profitability during the
remainder of 1997. For the six months ended June 30, 1997, which includes the
results of ERO for the month of June 1997, Hedstrom recorded net sales and
operating income of $104.1 million and $14.2 million, respectively, as compared
with net sales and operating income for the comparable period in 1996 of $96.1
million and $8.1 million, respectively. Operating income as a percentage of net
sales increased to 14% for the six-month period ended June 30, 1997 from 8% for
the comparable period in 1996. The enhanced profitability of Hedstrom has
resulted in EBITDA of $17.0 million for the six months ended June 30, 1997, as
compared with EBITDA for the comparable period in 1996 of $10.4 million. EBITDA
as a percentage of net sales increased to 16% for the six months ended June 30,
1997 from 11% for the comparable period in 1996. Management believes the results
of operations of ERO for the period from June 1, 1997 through June 11, 1997,
prior to the Merger (as defined), are not significant to Holdings results of
operations for the six-months ended June 30, 1997.
After giving pro forma effect to the Transactions, the Company's pro forma
net sales and operating income for the twelve-month period ended December 31,
1996 would have been $283.3 million and $24.2 million, respectively. Also, after
giving pro forma effect to the Transactions, pro forma EBITDA for the
twelve-month period ended December 31, 1996 would have been $38.7 million.
Assuming the Transactions occurred and assuming implementation of the 1996 Cost
Reduction Plan at the beginning of the twelve-month period ended December 31,
1996, pro forma net sales and operating income would have been $283.3 million
and $30.0 million, respectively. Also, assuming the Transactions occurred and
assuming implementation of the 1996 Cost Reduction Plan at the beginning of the
twelve-month period ended December 31, 1996, pro forma EBITDA, would have been
$44.5 million.
THE TRANSACTIONS
On April 10, 1997, Hedstrom and HC Acquisition Corp., a wholly owned
subsidiary of Hedstrom ("Acquisition Co."), entered into an Agreement and Plan
of Merger with ERO (the "Merger Agreement") to acquire ERO for a total
enterprise value of approximately $200 million. Pursuant to the Merger
Agreement, Acquisition Co. commenced a tender offer for all of the outstanding
shares of the common stock of ERO at a purchase price of $11.25 per share (the
"Tender Offer"). The Tender Offer was consummated on June 12, 1997. On that
date, subsequent to the consummation of the Tender Offer, (i) Acquisition Co.
was merged with and into ERO (the "Merger") with ERO surviving the Merger as a
wholly owned subsidiary of Hedstrom, (ii) certain of ERO's outstanding
indebtedness was refinanced by Hedstrom (the "ERO Refinancing") and (iii)
Hedstrom refinanced (the "Hedstrom Refinancing") its then existing revolving
credit facility (the "Old Revolving Credit
8
<PAGE> 11
Facility") and term loan facility (the "Old Term Loan Facility"). The Tender
Offer, the Merger, the ERO Refinancing and the Hedstrom Refinancing are
collectively referred to herein as the "Acquisition".
Holdings and Hedstrom required approximately $301.1 million in cash to
consummate the Acquisition, including approximately (i) $122.6 million paid in
connection with the Tender Offer and the Merger, (ii) $82.6 million paid in
connection with the ERO Refinancing, (iii) $74.9 million paid in connection with
the Hedstrom Refinancing and (iv) $21.0 million incurred in respect of fees and
expenses. The funds required to consummate the Acquisition were provided by (i)
$75.0 million of term loans (the "Tranche A Term Loans") under a new six-year
senior secured term loan facility (the "Tranche A Term Loan Facility"), (ii)
$35.0 million of term loans (the "Tranche B Term Loans" and, together with the
Tranche A Term Loans, the "Term Loans") under a new eight-year senior secured
term loan facility (the "Tranche B Term Loan Facility" and, together with the
Tranche A Term Loan Facility, the "Term Loan Facilities"), (iii) $16.1 million
of borrowings under a new $70.0 million senior secured revolving credit facility
(the "Revolving Credit Facility" and, together with the Term Loan Facilities,
the "Senior Credit Facilities"), (iv) $110.0 million of gross proceeds from the
offering (the "Original Senior Subordinated Notes Offering") by Hedstrom of the
Old Senior Subordinated Notes, (v) $25.0 million of gross proceeds from the
offering (the "Units Offering" and, together with the Original Senior
Subordinated Notes Offering, the "Original Offerings") by Holdings of 44,612
units (the "Units") consisting of the Old Discount Notes and 2,705,896 shares
(the "Shares") of Common Stock, $.01 par value per share, of Holdings ("Holdings
Common Stock") and (vi) $40.0 million of gross proceeds from the private
placement (the "Equity Private Placement" and, together with the Original
Offerings and the borrowings under the Senior Credit Facilities, the
"Financings") of 31,520,000 shares of Non-Voting Common Stock, $.01 par value
per share, of Holdings ("Holdings Non-Voting Common Stock") and 480,000 shares
of Holdings Common Stock.
The following table sets forth the sources and uses of funds in connection
with the Transactions.
<TABLE>
<CAPTION>
SOURCES OF FUNDS AMOUNT
---------------- ------
(IN MILLIONS)
<S> <C>
Revolving Credit Facility........ $ 16.1
Tranche A Term Loans............. 75.0
Tranche B Term Loans............. 35.0
Original Senior Subordinated
Notes Offering................. 110.0
Units Offering................... 25.0
Equity Private Placement......... 40.0
------
Total Sources............... $301.1
======
</TABLE>
<TABLE>
<CAPTION>
SOURCES OF FUNDS AMOUNT
---------------- ------
(IN MILLIONS)
<S> <C>
Tender Offer/Merger.............. $122.6
ERO Refinancing(a)............... 82.6
Hedstrom Refinancing(a).......... 74.9
Fees and expenses(b)............. 21.0
------
Total Uses.................. $301.1
======
</TABLE>
- ---------------
(a) Includes accrued interest expense.
(b) Fees and expenses include Initial Purchasers' discount, bank fees, financial
advisory fees, legal and accounting fees, printing costs and other expenses
related to the Transactions.
9
<PAGE> 12
ORGANIZATIONAL CHART
The following chart depicts (i) the summary organizational structure of
Holdings and the Company and its material subsidiaries after consummation of the
Transactions and (ii) the sources of financing for the Transactions.
[Flow-Chart]
DESCRIPTION OF ORGANIZATIONAL CHART
(FOR EDGAR PURPOSES ONLY)
The chart provided in the prospectus is a vertical flow-chart. The first (i.e.,
the top box of the flow chart) represents Holdings. It indicates that Holdings
received $25 million pursuant to the Units Offering and $40 million pursuant to
the Equity Private Placement. The second box in the flow chart represents
Hedstrom, and show that Hedstrom is a direct, wholly owned subsidiary of
Holdings. It also indicates that Hedstrom received (i) $16.1 million pursuant to
borrowings under the Revolving Credit Facility(1), (ii) $75.0 million pursuant
to the Tranche A Term Loans, (iii) $35.0 million pursuant to the Tranche B Term
Loans and (iv) $110.0 million pursuant to the Original Senior Subordinated Notes
Offering. The third box of the flow chart represents ERO and shows that ERO is a
direct, wholly owned subsidiary of Hedstrom. The fourth and final box of the
flow chart represents all of the operating subsidiaries of ERO and shows that
such operating subsidiaries are direct or indirect wholly owned subsidiaries of
ERO.
- ---------------
(1) The Revolving Credit Facility provides for borrowings of up to $70 million
(subject to certain borrowing base requirements). See "Description of the
Senior Credit Facilities."
10
<PAGE> 13
MANAGEMENT AND OWNERSHIP
The principal shareholders of Holdings are Hicks, Muse, Tate & Furst Equity
Fund II, L.P. ("HM Fund II"), an affiliate of Hicks, Muse, Tate & Furst
Incorporated ("Hicks Muse"), and certain members of Hedstrom's senior
management. Hicks Muse is a private investment firm based in Dallas, New York,
St. Louis and Mexico City that specializes in acquisitions, recapitalizations
and other principal investing activities. Since Hicks Muse's inception in 1989,
the firm has completed or has pending over 70 transactions having a combined
transaction value of approximately $19 billion. Hedstrom's senior management
team, led by Arnold E. Ditri, its President and Chief Executive Officer, has
extensive and diverse experience in managing consumer and industrial products
companies, especially within the confines of a leveraged capital structure.
In October 1995, HM Fund II, together with certain other investors (the "HM
Group"), acquired an 82% common equity interest in Holdings in a transaction
that was accounted for as a recapitalization (the "1995 Recapitalization"). The
total enterprise value of Hedstrom at the time of the 1995 Recapitalization,
including the assumption and refinancing of certain indebtedness, was
approximately $75 million. The HM Group paid approximately $27 million for its
common equity interest, which, together with Hedstrom senior management's 18%
retained common equity ownership, implied a total equity value of Holdings at
that time of approximately $33 million. Pursuant to the Equity Private
Placement, HM Fund II and certain affiliates thereof purchased an additional $40
million of Holdings' common equity.
RECENT DEVELOPMENTS
On October 29, 1997, Hedstrom entered into an Asset Purchase Agreement with
RDM Sports Group, Inc. and Sports Group, Inc. (neither of which is affiliated
with Hedstrom), pursuant to which Hedstrom has agreed to purchase certain
inventory, equipment and intellectual property of Sports Group, Inc. for
$10,000,000 in cash on the terms and subject to the conditions set forth in such
agreement. RDM Sports Group, Inc., Sports Group, Inc. and certain of their
affiliates are debtors and debtors-in-possession in cases pending in the United
States Bankruptcy Court for the Northern District of Georgia under Chapter 11 of
Title 11 of the United States Code Sections 101 et seq., Case Nos. 97-12788
through 97-12796. Subject to required bankruptcy court approval, Hedstrom
anticipates that the purchase will be consummated early in December 1997.
Hedstrom also is presently in discussions with another unaffiliated party
with respect to the proposed purchase by Hedstrom of certain portions of that
party's inventory, equipment and intellectual property for approximately
$14,250,000 in cash subject to the terms and conditions of a definitive asset
purchase agreement. There can be no assurance, however, that an agreement will
be reached.
In connection with these proposed asset acquisitions (the "Proposed Asset
Acquisitions"), Hedstrom contemplates that the Credit Agreement (as defined)
will be amended to permit the acquisitions and to provide for an additional
$10,000,000 of Tranche B Term Loans, in which case the amortization payments
with respect to the existing Tranche B Term Loans will be increased pro rata. It
is contemplated that the balance of the funds required to consummate the
Proposed Asset Acquisitions will be obtained through a draw under the Revolving
Credit Facility.
11
<PAGE> 14
THE EXCHANGE OFFERS
THE SENIOR SUBORDINATED NOTES EXCHANGE OFFER:
The Senior Subordinated Notes Exchange Offer applies to $110.0 million
aggregate principal amount of the Old Senior Subordinated Notes. The form and
terms of the New Senior Subordinated Notes will be the same as the form and
terms of the Old Senior Subordinated Notes except that (i) interest on the New
Senior Subordinated Notes will accrue from the date of issuance of the Old
Senior Subordinated Notes, and (ii) the New Senior Subordinated Notes are being
registered under the Securities Act and, therefore, will not bear legends
restricting their transfer. The New Senior Subordinated Notes will evidence the
same debt as the Old Senior Subordinated Notes and will be entitled to the
benefits of the Senior Subordinated Notes Indenture (as defined) pursuant to
which the Old Senior Subordinated Notes were issued. The Old Senior Subordinated
Notes and the New Senior Subordinated Notes are sometimes referred to
collectively herein as the "Senior Subordinated Notes." See "Description of New
Senior Subordinated Notes."
The Senior Subordinated
Notes Exchange Offer....... $1,000 principal amount of New Senior Subordinated
Notes in exchange for each $1,000 principal amount
of Old Senior Subordinated Notes. As of the date
hereof, Old Senior Subordinated Notes representing
$110.0 million aggregate principal amount are
outstanding. The terms of the New Senior
Subordinated Notes and the Old Senior Subordinated
Notes are substantially identical.
Based on an interpretation by the Commission's
staff set forth in no-action letters issued to
third parties unrelated to Hedstrom, Holdings and
the Subsidiary Guarantors, Hedstrom, Holdings and
the Subsidiary Guarantors believe that New Senior
Subordinated Notes issued pursuant to the Senior
Subordinated Notes Exchange Offer in exchange for
Old Senior Subordinated Notes may be offered for
resale, resold and otherwise transferred by any
person receiving the New Senior Subordinated Notes,
whether or not that person is the holder (other
than any such holder or such other person that is
an "affiliate" of Hedstrom, Holdings or any
Subsidiary Guarantors within the meaning of Rule
405 under the Securities Act), without compliance
with the registration and prospectus delivery
provisions of the Securities Act, provided that (i)
the New Senior Subordinated Notes are acquired in
the ordinary course of business of that holder or
such other person, (ii) neither the holder nor such
other person is engaging in or intends to engage in
a distribution of the New Senior Subordinated
Notes, and (iii) neither the holder nor such other
person has an arrangement or understanding with any
person to participate in the distribution of the
New Senior Subordinated Notes. See "The Exchange
Offers -- Purpose and Effect." Each broker-dealer
that receives New Senior Subordinated Notes for its
own account in exchange for Old Senior Subordinated
Notes, where those Old Senior Subordinated Notes
were acquired by the broker-dealer as a result of
its market-making activities or other trading
activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such
New Senior Subordinated Notes. See "Plan of
Distribution."
Registration Rights
Agreement.................. The Old Senior Subordinated Notes were sold by
Hedstrom on June 12, 1997, in a private placement.
In connection with the sale, Hedstrom and Holdings
entered into a Registration Rights Agreement with
the initial purchasers (the "Initial Purchasers")
of the Old Notes (the "Registration Rights
Agreement") providing for, among other things, the
Senior Subordinated Notes Exchange Offer. See "The
Exchange Offers -- Purpose and Effect."
12
<PAGE> 15
Expiration Date............ The Senior Subordinated Notes Exchange Offer will
expire at 5:00 p.m., New York City time, on
December 4, 1997, or such later date and time to
which it is extended.
Withdrawal................. The tender of Old Senior Subordinated Notes
pursuant to the Senior Subordinated Notes Exchange
Offer may be withdrawn at any time prior to the
Expiration Date. Any Old Senior Subordinated Notes
not accepted for exchange for any reason will be
returned without expense to the tendering holder
thereof as promptly as practicable after the
expiration or termination of the Senior
Subordinated Notes Exchange Offer.
Interest on the New Senior
Subordinated Notes and
Old
Senior Subordinated
Notes.................... Interest on each New Senior Subordinated Note will
accrue from the date of issuance of the Old Senior
Subordinated Note for which such New Senior
Subordinated Note is exchanged.
Conditions to the Senior
Subordinated Notes
Exchange Offer........... The Senior Subordinated Notes Exchange Offer is
subject to certain customary conditions, certain of
which may be waived by Hedstrom. See "The Exchange
Offers -- Certain Conditions to the Exchange
Offers."
Procedures for Tendering
Old
Senior Subordinated
Notes.................... Each holder of Old Senior Subordinated Notes
wishing to accept the Senior Subordinated Notes
Exchange Offer must complete, sign and date the
accompanying letter of transmittal relating to the
Senior Subordinated Notes Exchange Offer (the
"Senior Subordinated Notes Letter of Transmittal"),
or a copy thereof, in accordance with the
instructions contained herein and therein, and mail
or otherwise deliver the Senior Subordinated Notes
Letter of Transmittal, or the copy, together with
the Old Senior Subordinated Notes and any other
required documentation, to the Senior Subordinated
Notes Exchange Agent (as defined) at the address
set forth in the Senior Subordinated Notes Letter
of Transmittal. Persons holding Old Senior
Subordinated Notes through the Depository Trust
Company ("DTC") and wishing to accept the Senior
Subordinated Notes Exchange Offer must do so
pursuant to the DTC's Automated Tender Offer
Program, by which each tendering Participant will
agree to be bound by the Senior Subordinated Notes
Letter of Transmittal. By executing or agreeing to
be bound by the Senior Subordinated Notes Letter of
Transmittal, each holder will represent to Hedstrom
that, among other things, (i) the New Senior
Subordinated Notes acquired pursuant to the Senior
Subordinated Notes Exchange Offer are being
obtained in the ordinary course of business of the
person receiving such New Senior Subordinated
Notes, whether or not such person is the holder of
the Old Senior Subordinated Notes, (ii) neither the
holder nor any such other person has an arrangement
or understanding with any person to participate in
the distribution of such New Senior Subordinated
Notes within the meaning of the Securities Act,
(iii) neither the holder nor any such other person
is an "affiliate," as defined under Rule 405
promulgated under the Securities Act, of Hedstrom,
Holdings or any Subsidiary Guarantor, or if it is
an affiliate, such holder or such other person will
comply with the registration and prospectus
delivery requirements of the Securities Act to the
extent applicable, (iv) if such holder or other
person is not a broker-dealer, neither the holder
nor any such other person is engaged in or intends
to engage in the distribution of such New
13
<PAGE> 16
Senior Subordinated Notes, and (v) if such holder
or other person is a broker-dealer, that it will
receive New Senior Subordinated Notes for its own
account in exchange for Old Senior Subordinated
Notes that were acquired as a result of
market-making activities or other trading
activities and that it will be required to
acknowledge that it will deliver a prospectus in
connection with any resale of such New Senior
Subordinated Notes. See "The Exchange
Offers -- Procedures for Tendering."
Shelf Registration
Requirement................ Pursuant to the Registration Rights Agreement,
Hedstrom and Holdings are required to file a
"shelf" registration statement for a continuous
offering pursuant to Rule 415 under the Securities
Act in respect of the Old Senior Subordinated Notes
(and use their reasonable best efforts to cause
such shelf registration statement to be declared
effective by the Commission and keep it
continuously effective, supplemented and amended
for prescribed periods) if (i) Hedstrom is not
permitted to effect the Senior Subordinated Notes
Exchange Offer because of any change in law or in
applicable interpretations thereof by the staff of
the Commission, (ii) the Senior Subordinated Notes
Exchange Offer is not consummated within 180 days
of the date of issuance of the Old Senior
Subordinated Notes, (iii) any Initial Purchaser so
requests with respect to Old Senior Subordinated
Notes not eligible to be exchanged for New Senior
Subordinated Notes in the Senior Subordinated Notes
Exchange Offer and held by it following
consummation of the Senior Subordinated Notes
Exchange Offer, or (iv) any holder of Old Senior
Subordinated Notes (other than a broker-dealer
electing to exchange Old Notes, acquired for its
own account as a result of market-making activities
or other trading activities, for New Notes (an
"Exchanging Dealer")) is not eligible to
participate in the Senior Subordinated Notes
Exchange Offer or, in the case of any holder of Old
Senior Subordinated Notes (other than an Exchanging
Dealer) that participates in the Senior
Subordinated Notes Exchange Offer, such holder does
not receive freely tradeable New Senior
Subordinated Notes upon consummation of the Senior
Subordinated Notes Exchange Offer.
Acceptance of Old Senior
Subordinated Notes and
Delivery of New Senior
Subordinated Notes....... Hedstrom will accept for exchange any and all Old
Senior Subordinated Notes which are properly
tendered in the Senior Subordinated Notes Exchange
Offer prior to the Expiration Date. The New Senior
Subordinated Notes issued pursuant to the Senior
Subordinated Notes Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offers -- Terms of the Exchange Offers."
Senior Subordinated Notes
Exchange Agent........... IBJ Schroder Bank & Trust Company is serving as
Exchange Agent (the "Senior Subordinated Notes
Exchange Agent") in connection with the Senior
Subordinated Notes Exchange Offer.
Federal Income Tax
Considerations........... The exchange pursuant to the Senior Subordinated
Notes Exchange Offer should not be a taxable event
for federal income tax purposes. See "Certain
Federal Income Tax Considerations of the Exchange
Offers."
Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered
or that are tendered but not accepted will,
following the completion of the Senior Subordinated
14
<PAGE> 17
Notes Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof.
THE DISCOUNT NOTES EXCHANGE OFFER:
The Discount Notes Exchange Offer applies to $44,612,000 aggregate
principal amount at maturity of the Old Discount Notes. The form and terms of
the New Discount Notes will be the same as the form and terms of the Old
Discount Notes except that (i) the Accreted Value (as defined) of the New
Discount Notes will be calculated from the date of issuance of the Old Discount
Notes, and (ii) the New Discount Notes are being registered under the Securities
Act and, therefore, will not bear legends restricting their transfer. The New
Discount Notes will evidence the same debt as the Old Discount Notes and will be
entitled to the benefits of the Discount Notes Indenture (as defined) pursuant
to which the Old Discount Notes were issued. The Old Discount Notes and the New
Discount Notes are sometimes referred to collectively herein as the "Discount
Notes." See "Description of New Discount Notes."
The Discount Notes Exchange
Offer.................... $1,000 principal amount at maturity of New Discount
Notes in exchange for each $1,000 principal amount
at maturity of Old Discount Notes. As of the date
hereof, Old Discount Notes representing $44,612,000
aggregate principal amount at maturity are
outstanding. The terms of the New Discount Notes
and the Old Discount Notes are substantially
identical.
Based on an interpretation by the Commission's
staff set forth in no-action letters issued to
third parties unrelated to Holdings, Holdings
believes that New Discount Notes issued pursuant to
the Discount Notes Exchange Offer in exchange for
Old Discount Notes may be offered for resale,
resold and otherwise transferred by any person
receiving the New Discount Notes, whether or not
that person is the holder (other than any such
holder or such other person that is an "affiliate"
of Holdings within the meaning of Rule 405 under
the Securities Act), without compliance with the
registration and prospectus delivery provisions of
the Securities Act, provided that (i) the New
Discount Notes are acquired in the ordinary course
of business of that holder or such other person,
(ii) neither the holder nor such other person is
engaging in or intends to engage in a distribution
of the New Discount Notes, and (iii) neither the
holder nor such other person has an arrangement or
understanding with any person to participate in the
distribution of the New Discount Notes. See "The
Exchange Offers -- Purpose and Effect." Each
broker-dealer that receives New Discount Notes for
its own account in exchange for Old Discount Notes,
where those Old Discount Notes were acquired by the
broker-dealer as a result of its market-making
activities or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such New Discount
Notes. See "Plan of Distribution."
Registration Rights
Agreement.................. The Old Discount Notes were sold by Holdings on
June 12, 1997, in a private placement. In
connection with the sale, Hedstrom and Holdings
entered into the Registration Rights Agreement
providing for, among other things, the Discount
Notes Exchange Offer. See "The Exchange Offers --
Purpose and Effect."
Expiration Date............ The Discount Notes Exchange Offer will expire at
5:00 p.m., New York City time, on December 4, 1997,
or such later date and time to which it is
extended.
Withdrawal................. The tender of Old Discount Notes pursuant to the
Discount Notes Exchange Offer may be withdrawn at
any time prior to the Expiration
15
<PAGE> 18
Date. Any Old Discount Notes not accepted for
exchange for any reason will be returned without
expense to the tendering holder thereof as promptly
as practicable after the expiration or termination
of the Discount Notes Exchange Offer.
Accreted Value of the New
Discount Notes and Old
Discount Notes........... The Accreted Value of each New Discount Note will
be calculated from the date of issuance of the Old
Discount Note for which such New Discount Note is
exchanged.
Conditions to the Discount
Notes Exchange Offer....... The Discount Notes Exchange Offer is subject to
certain customary conditions, certain of which may
be waived by Hedstrom. See "The Exchange
Offers -- Certain Conditions to the Exchange
Offers."
Procedures for Tendering
Old Discount Notes......... Each holder of Old Discount Notes wishing to accept
the Discount Notes Exchange Offer must complete,
sign and date the accompanying letter of
transmittal relating to the Discount Notes Exchange
Offer (the "Discount Notes Letter of Transmittal";
the Discount Notes Letter of Transmittal and the
Senior Subordinated Notes Letter of Transmittal are
sometimes referred to herein individually as a
"Letter of Transmittal" and collectively as the
"Letters of Transmittal"), or a copy thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver the
Discount Notes Letter of Transmittal, or the copy,
together with the Old Discount Notes and any other
required documentation, to the Discount Notes
Exchange Agent (as defined) at the address set
forth in the Discount Notes Letter of Transmittal.
Persons holding Old Discount Notes through the
Depository Trust Company ("DTC") and wishing to
accept the Discount Notes Exchange Offer must do so
pursuant to the DTC's Automated Tender Offer
Program, by which each tendering Participant will
agree to be bound by the Discount Notes Letter of
Transmittal. By executing or agreeing to be bound
by the Discount Notes Letter of Transmittal, each
holder will represent to Holdings that, among other
things, (i) the New Discount Notes acquired
pursuant to the Discount Notes Exchange Offer are
being obtained in the ordinary course of business
of the person receiving such New Discount Notes,
whether or not such person is the holder of the Old
Discount Notes, (ii) neither the holder nor any
such other person has an arrangement or
understanding with any person to participate in the
distribution of such New Discount Notes within the
meaning of the Securities Act, (iii) neither the
holder nor any such other person is an "affiliate,"
as defined under Rule 405 promulgated under the
Securities Act, of Holdings, or if it is an
affiliate, such holder or such other person will
comply with the registration and prospectus
delivery requirements of the Securities Act to the
extent applicable, (iv) if such holder or other
person is not a broker-dealer, neither the holder
nor any such other person is engaged in or intends
to engage in the distribution of such New Discount
Notes, and (v) if such holder or other person is a
broker-dealer, that it will receive New Discount
Notes for its own account in exchange for Old
Discount Notes that were acquired as a result of
market-making activities or other trading
activities and that it will be required to
acknowledge that it will deliver a prospectus in
connection with any resale of such new Discount
Notes.
16
<PAGE> 19
Shelf Registration
Requirement................ Pursuant to the Registration Rights Agreement,
Holdings is required to file a "shelf" registration
statement for a continuous offering pursuant to
Rule 415 under the Securities Act in respect of the
Old Discount Notes (and use its best efforts to
cause such shelf registration statement to be
declared effective by the Commission and keep it
continuously effective, supplemented and amended
for prescribed periods) if (i) Holdings is not
permitted to effect the Discount Notes Exchange
Offer because of any change in law or in applicable
interpretations thereof by the staff of the
Commission, (ii) the Discount Notes Exchange Offer
is not consummated within 180 days of the date of
issuance of the Old Discount Notes, (iii) any
Initial Purchaser so requests with respect to Old
Discount Notes not eligible to be exchanged for new
Discount Notes in the Discount Notes Exchange Offer
and held by it following consummation of the
Discount Notes Exchange Offer, or (iv) any holder
of Old Discount Notes (other than an Exchanging
Dealer) is not eligible to participate in the
Discount Notes Exchange Offer or, in the case of
any holder of Old Discount Notes (other than an
Exchanging Dealer) that participates in the
Discount Notes Exchange Offer, such holder does not
receive freely tradeable New Discount Notes upon
consummation of the Discount Notes Exchange Offer.
Acceptance of Old Discount
Notes and Delivery of New
Discount Notes........... Holdings will accept for exchange any and all Old
Discount Notes which are properly tendered in the
Discount Notes Exchange Offer prior to the
Expiration Date. The New Discount Notes issued
pursuant to the Discount Notes Exchange Offer will
be delivered promptly following the Expiration
Date. See "The Exchange Offers -- Terms of the
Exchange Offer."
Discount Notes Exchange
Agent...................... United States Trust Company of New York is serving
as Exchange Agent (the "Discount Notes Exchange
Agent"; the Senior Subordinated Notes Exchange
Agent and the Discount Notes Exchange Agent are
sometimes referred to herein individually as an
"Exchange Agent" and collectively as the "Exchange
Agents") in connection with the Discount Notes
Exchange Offer.
Federal Income Tax
Considerations........... The exchange pursuant to the Discount Notes
Exchange Offer should not be a taxable event for
federal income tax purposes. See "Certain Federal
Income Tax Considerations of the Exchange Offers."
Effect of Not Tendering.... Old Discount Notes that are not tendered or that
are tendered but not accepted will, following the
completion of the Discount Notes Exchange Offer,
continue to be subject to the existing restrictions
upon transfer thereof.
17
<PAGE> 20
TERMS OF THE NEW NOTES
NEW SENIOR SUBORDINATED NOTES:
Issuer..................... Hedstrom Corporation.
Securities Offered......... $110.0 million aggregate principal amount of 10%
Senior Subordinated Notes Due 2007.
Maturity................... June 1, 2007.
Interest Payment Dates..... June 1 and December 1 of each year, commencing
December 1, 1997.
Optional Redemption........ The New Senior Subordinated Notes will not be
redeemable at the option of Hedstrom prior to June
1, 2002, except (i) that until June 1, 2000,
Hedstrom may redeem, at its option, in the
aggregate up to $44,000,000 principal amount of the
Senior Subordinated Notes at the redemption price
set forth herein with the net proceeds of one or
more Equity Offerings (as defined) if at least
$66,000,000 principal amount of the Senior
Subordinated Notes remains outstanding after any
such redemption and (ii) upon a Change of Control
(as defined), as described below. On or after June
1, 2002, the New Senior Subordinated Notes may be
redeemed at the option of Hedstrom, in whole or in
part, at any time at the redemption prices set
forth herein, together with accrued and unpaid
interest, if any, to the date of redemption. See
"Description of the New Senior Subordinated
Notes -- Optional Redemption."
Change of Control.......... Upon a Change of Control, (i) Hedstrom will have
the option, at any time on or prior to June 1,
2002, to redeem the New Senior Subordinated Notes,
in whole but not in part, at a redemption price
equal to 100% of the principal amount thereof plus
the Applicable Premium (as defined) and accrued and
unpaid interest, if any, to the date of redemption,
and (ii) if Hedstrom does not redeem the New Senior
Subordinated Notes pursuant to clause (i) above or
if such Change of Control occurs after June 1,
2002, each holder of New Senior Subordinated Notes
may require Hedstrom to repurchase all or any
portion of such holder's New Senior Subordinated
Notes at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid
interest, if any, to the date of repurchase. There
can be no assurance that Hedstrom will be able to
raise sufficient funds to meet this repurchase
obligation should it arise. See "Description of the
New Senior Subordinated Notes -- Optional
Redemption" and "-- Change of Control."
Ranking and Guaranties..... The New Senior Subordinated Notes will be unsecured
senior subordinated obligations of Hedstrom and
will be unconditionally guaranteed (jointly and
severally) on a senior basis by Holdings (the
"Holdings Guaranty") and on a senior subordinated
basis (the "Subsidiary Guaranties" and, together
with the Holdings Guaranty, the "Guaranties") by
each domestic subsidiary of Hedstrom (the
"Subsidiary Guarantors"). The New Senior
Subordinated Notes will be subordinated in right of
payment to all Senior Indebtedness (as defined) of
Hedstrom and will rank pari passu in right of
payment with all Senior Subordinated Indebtedness
(as defined) of Hedstrom. The Holdings Guaranty
will be an unsecured senior obligation of Holdings
and will rank pari passu in right of payment with
all Holdings Senior Indebtedness (as defined). Each
Subsidiary Guaranty will be subordinated in right
of payment to all Subsidiary Guarantor Senior
18
<PAGE> 21
Indebtedness (as defined) of the relevant
Subsidiary Guarantor and will rank pari passu in
right of payment with all Subsidiary Guarantor
Senior Subordinated Indebtedness (as defined) of
the relevant Subsidiary Guarantor. As of June 30,
1997, Senior Indebtedness of Hedstrom, Holdings
Senior Indebtedness and Subsidiary Guarantor Senior
Indebtedness were approximately $117.7 million,
$244.3 million and $112.7 million, respectively,
and Senior Subordinated Indebtedness of Hedstrom
and Subsidiary Guarantor Senior Subordinated
Indebtedness were approximately $110.0 million and
$110.0 million, respectively. See "Description of
New Senior Subordinated Notes -- Guaranties" and
"-- Ranking and Subordination."
Restrictive Covenants...... 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. All of these
limitations and prohibitions, however, are subject
to a number of important qualifications and
exceptions. See "Description of New Senior
Subordinated Notes -- Certain Covenants."
Use of Proceeds............ There will be no cash proceeds to Hedstrom from the
exchange of New Senior Subordinated Notes for Old
Senior Subordinated Notes pursuant to the Senior
Subordinated Notes Exchange Offer. The net proceeds
from the Original Senior Subordinated Notes
Offering were used, together with proceeds from the
other Financings, to effect the Acquisition.
NEW DISCOUNT NOTES:
Issuer..................... Hedstrom Holdings, Inc.
Securities Offered......... $44,612,000 aggregate principal amount at maturity
of 12% Senior Discount Notes Due 2009.
Maturity................... June 1, 2009.
Yield and Interest......... The Old Discount Notes were issued at a substantial
discount from the principal amount at maturity of
such notes. Principal on each New Discount Note
will accrete from the date of issuance of the Old
Discount Notes to a principal amount of $1,000 on
June 1, 2002, representing a yield to maturity of
12% (based on the issue price of a Unit and
computed on a semi-annual bond equivalent basis).
Except as described herein, no cash interest will
accrue on the New Discount Notes prior to June 1,
2002. Thereafter, cash interest will accrue at a
rate of 12% per annum, and cash interest will be
payable on June 1 and December 1 of each year,
commencing December 1, 2002. There can be no
assurance that Holdings will have adequate cash
available at the time of any scheduled cash
interest payments.
Original Issue Discount.... For U.S. federal income tax purposes, the New
Discount Notes will bear original issue discount
("OID") and each holder of a New Discount Note will
be required to include such OID in gross income for
U.S. federal income tax purposes, on a constant
yield to maturity basis, in advance of the receipt
of the cash payments to which such income is
attributable. See
19
<PAGE> 22
"Certain United States Federal Income Tax
Considerations with Respect to the New Notes."
Optional Redemption........ The New Discount Notes will not be redeemable at
the option of Holdings prior to June 1, 2002,
except (i) that until June 1, 2000, Holdings may
redeem, at its option, in the aggregate up to 40%
of the Accreted Value of the Discount Notes at the
redemption price set forth herein with the net
proceeds of one or more Equity Offerings if at
least $26,767,200 principal amount at maturity of
the Discount Notes remains outstanding after any
such redemption and (ii) upon a Change of Control,
as described below. On or after June 1, 2002, the
New Discount Notes may be redeemed at the option of
Holdings, in whole or in part, at the redemption
prices set forth herein, together with accrued and
unpaid interest, if any, to the date of redemption.
See "Description of the New Discount
Notes -- Optional Redemption."
Change of Control.......... Upon a Change of Control, (i) Holdings will have
the option, at any time on or prior to June 1,
2002, to redeem the New Discount Notes, in whole
but not in part, at a redemption price equal to
100% of the Accreted Value thereof plus the
Applicable Premium and accrued and unpaid interest,
if any, to the date of redemption, and (ii) if
Holdings does not redeem the New Discount Notes
pursuant to clause (i) above or if such Change of
Control occurs after June 1, 2002, each holder of
New Discount Notes may require Holdings to
repurchase all or any portion of such holder's New
Discount Notes at a purchase price equal to 101% of
the Accreted Value thereof plus accrued and unpaid
interest, if any, to the date of repurchase. There
can be no assurance that Holdings will be able to
raise sufficient funds to meet this repurchase
obligation should it arise. See "Description of the
New Discount Notes -- Optional Redemption" and
"-- Change of Control."
Ranking.................... The New Discount Notes will be unsecured senior
obligations of Holdings and will rank pari passu in
right of payment with all Senior Indebtedness of
Holdings, including the Holdings Guaranty and
Holdings' guarantee of the Senior Credit
Facilities. Except for the 1995 Recapitalization
Notes (as defined) in an aggregate principal amount
of $2.5 million, Holdings has not issued, and does
not have any arrangement to issue, any indebtedness
that would be subordinated to the New Discount
Notes. Holdings is a holding company with no
operations of its own and whose primary asset is
the capital stock of Hedstrom, all of which is
pledged to secure Holdings' guarantee of the Senior
Credit Facilities. As a result of the holding
company structure, the holders of the New Discount
Notes will effectively rank junior in right of
payment to all creditors of Hedstrom and its
subsidiaries, including the lenders under the
Senior Credit Facilities, holders of the Senior
Subordinated Notes and trade creditors. As of June
30, 1997, the New Discount Notes were effectively
subordinated to approximately $282.4 million of
aggregate liabilities (including trade payables) of
Hedstrom and its subsidiaries.
Restrictive Covenants...... The Discount Notes Indenture (as defined) contains
certain covenants that, among other things, limit
(i) the incurrence of additional Indebtedness by
Holdings and its Restricted Subsidiaries, (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
20
<PAGE> 23
Subsidiary capital stock and (vii) mergers and
consolidations. All of these limitations and
prohibitions, however, are subject to a number of
important qualifications and exceptions. See
"Description of the New Discount Notes -- Certain
Covenants."
Use of Proceeds............ There will be no cash proceeds to Holdings from the
exchange of New Discount Notes for Old Discount
Notes pursuant to the Discount Notes Exchange
Offer. The net proceeds from the Units Offering
were used, together with the proceeds from the
other Financings, to effect the Acquisition.
RISK FACTORS
Prospective investors should carefully consider all of the information set
forth in this Prospectus and, in particular, should evaluate the specific risk
factors set forth under "Risk Factors" for risks involved with an investment in
the New Notes.
21
<PAGE> 24
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth summary unaudited pro forma consolidated
financial data for Holdings and the Company. The pro forma information is
derived from the "Unaudited Pro Forma Consolidated Financial Information"
contained elsewhere herein that gives pro forma effect to the Transactions. The
pro forma income statement and other financial data give effect to the
Transactions as if they were consummated on January 1, 1996. The pro forma
financial data do not purport to represent what the results of operations of the
Company and Holdings and its subsidiaries would actually have been had the
Transactions in fact been consummated on the assumed date or to project the
results of operations of Holdings and its subsidiaries for any future period.
The pro forma information presented below is based on assumptions which
management believes are reasonable and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Hedstrom and Holdings," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of ERO" and the consolidated
financial statements and the notes thereto for each of Holdings and ERO included
elsewhere herein.
<TABLE>
<CAPTION>
COMPANY HOLDINGS
------------------------------- -------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
1997 1996 1997 1996
---------------- ------------ ---------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................... $142,355 $283,307 $142,355 $283,307
Cost of sales..................... 102,315 198,846 102,315 198,846
-------- -------- -------- --------
Gross profit...................... 40,040 84,461 40,040 84,461
Selling, general and
administrative expenses........ 25,233 60,284 25,233 60,284
-------- -------- -------- --------
Operating income.................. 14,807 24,177 14,807 24,177
======== ======== ======== ========
Net income (loss)................... $ 1,102 $ (1,298) $ (26) $ (3,552)
======== ======== ======== ========
Net income (loss per share(a)....... $ .00 $ (.05)
======== ========
OTHER FINANCIAL DATA:
EBITDA(b)......................... $ 20,721 $ 38,694 $ 20,721 $ 38,694
EBITDA, as adjusted(c)............
Depreciation and
amortization(d)................ 5,914 11,967 5,914 11,967
Capital expenditures.............. 5,258 10,397 5,258 10,397
Cash interest expense(e).......... 11,498 22,969 11,623 23,219
Ratio (deficiency) of earnings to
fixed charges(f)............... 1.2x (680) 1.0x (4,316)
Ratio of EBITDA to cash interest
expense(g)..................... -- 1.7x -- 1.7x
Ratio of EBITDA to interest
expense(g)..................... -- 1.6x -- 1.4x
Ratio of debt to EBITDA(g)(h)..... -- 6.0x -- 6.6x
</TABLE>
footnotes on following page
22
<PAGE> 25
- ---------------
(a) Net income (loss) per share is based on the number of common shares
outstanding immediately after the Transactions, including the common shares
associated with the Units Offering and the Equity Private Placement.
Average common equivalent shares (stock options) have not been included in
the calculation of weighted average shares outstanding since their
inclusion would not be significant during these periods.
(b) EBITDA represents operating income plus depreciation, amortization, and,
for the twelve months ended December 31, 1996, certain other one-time
charges aggregating approximately $2.55 million, as follows: (i) $0.8
million related to a one-time design adjustment to one of Hedstrom's
outdoor gym set accessories to address certain alleged defects, (ii) a
non-cash inventory write-down of $0.75 million related to the mix shift in
Hedstrom's outdoor gym set product line, and (iii) a $1.0 million non-cash
write-off of advertising barter credits by Hedstrom in connection with its
decision to discontinue its trial advertising campaign. Management believes
EBITDA for the twelve months ended December 31, 1996, as adjusted for these
one-time charges, provides a more meaningful comparison of historical
results. EBITDA as determined by Holdings may not be comparable to the
EBITDA measure as reported by other companies. EBITDA is not intended to
represent cash flow from operations as defined by GAAP and should not be
considered as an indicator of operating performance or an alternative to
cash flow or operating income (as measured by GAAP) or as a measure of
liquidity. In addition, this measure does not represent funds available for
discretionary use. It is included herein to provide additional information
with respect to the ability of Holdings to meet its future debt service,
capital expenditures and working capital requirements. Cash flows provided
by operating activities, as measured by GAAP, plus interest expense, does
not materially differ from EBITDA as reported.
(c) EBITDA, as adjusted represents the following for the year ended December
31, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
COMPANY HOLDINGS
------- --------
<S> <C> <C>
EBITDA as defined in (b) above........................... $38,694 $38,694
1996 Cost Reduction Plan................................. 5,800 5,800
------- -------
EBITDA, as adjusted...................................... $44,494 $44,494
======= =======
</TABLE>
Management of Hedstrom implemented the 1996 Cost Reduction Plan in the fall
of 1996 to reduce costs of Hedstrom in 1997 and thereafter as compared with
1996 levels. Important elements of the plan include reductions in
manufacturing costs, elimination of certain full-time employees, the
discontinuation of certain advertising programs and the reduction of
warehouse and shipping costs. Refer to Note (i) of the "Unaudited Pro Forma
Consolidated Financial Information" contained elsewhere herein for a
detailed description of the 1996 Cost Reduction Plan.
(d) Depreciation and amortization expense included herein excludes the
amortization of deferred debt financing costs which is included in interest
expense.
(e) Excludes non-cash interest expense on the Discount Notes and non-cash
amortization of debt issuance costs.
(f) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income (loss) before income taxes and fixed charges.
Fixed charges consist of (i) interest, whether expensed or capitalized;
(ii) amortization of debt expense and discount or premium relating to any
indebtedness, whether expensed or capitalized; and (iii) that portion of
rental expense considered to represent interest cost (assumed to be one-
third). Due to the seasonal nature of Hedstrom's business, the ratio of
earnings to fixed charges for the six months ended June 30, 1996 and June
30, 1997 are not accurate representations of full-year results. If the
ratio is less than 1.0x, the deficiency is shown.
(g) A significant portion of the Company's EBITDA is generated by its Amav
division in the second half of the Company's fiscal year. As a result, the
ratios of EBITDA to cash interest expense, EBITDA to interest expense, and
total debt to EBITDA for the six months ended June 30, 1997 are not
accurate representations of full-year results.
(h) Calculated using pro forma debt as of December 31, 1996 and pro forma
EBITDA for the year ended December 31, 1996 for Hedstrom and Holdings.
23
<PAGE> 26
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF HOLDINGS
The summary information below represents financial information of Holdings
and its subsidiaries for each of the fiscal years indicated in the three-year
period ended July 31, 1996, for the five-month periods ended December 31, 1995
and December 31, 1996, and for the six-month periods ended June 30, 1996 and
June 30, 1997, which information was derived from the audited consolidated
financial statements of Holdings for each of the fiscal years in the three-year
period ended July 31, 1996, from the audited consolidated financial statements
of Holdings for the five-month period ended December 31, 1996, and from the
unaudited consolidated financial statements of Holdings for the five-month
period ended December 31, 1995 and the six-month periods ended June 30, 1996 and
June 30, 1997. Income statement and other financial data for the six months
ended June 30, 1997 reflects the operations of ERO for the month of June 1997
and the balance sheet data as of June 30, 1997 includes the Transactions.
Holdings historically had a fiscal year ending July 31 but switched its fiscal
year to December 31, effective in 1997.
<TABLE>
<CAPTION>
FIVE MONTHS
SIX MONTHS ENDED ENDED
JUNE 30, DECEMBER 31, FISCAL YEAR ENDED JULY 31,
------------------- ------------------ ------------------------------
1997 1996 1996 1995 1996 1995 1994
-------- -------- ------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $104,051 $ 96,059 $23,994 $ 31,792 $133,194 $133,862 $108,655
Cost of sales......................... 73,579 72,897 21,973 26,000 105,068 107,312 87,170
-------- -------- ------- -------- -------- -------- --------
Gross profit.......................... 30,472 23,162 2,021 5,792 28,126 26,550 21,485
Selling, general and administrative
expenses............................ 16,242 15,107 7,546 7,067 24,603 19,207 18,181
-------- -------- ------- -------- -------- -------- --------
Operating income (loss)............... 14,230 8,055 (5,525) (1,275) 3,523 7,343 3,304
OTHER FINANCIAL DATA:
Net cash provided by (used for):
Operating activities................ $ (6,968) $(12,725) $ 2,978 $(19,209) $(17,744) $ 396 $ 1,344
Investing activities................ (126,046) (4,792) (1,309) (1,342) (6,490) (2,574) (2,988)
Financing activities................ 135,646 17,706 (9,134) 19,842 31,135 2,899 1,060
EBITDA(a)............................. 16,997 10,377 (3,549) (393) 9,420 10,088 5,529
Depreciation and amortization(b)...... 2,767 2,322 1,976 882 3,347 2,745 2,225
Capital expenditures.................. 3,446 4,792 1,376 1,342 6,738 2,574 2,988
Ratio (deficiency) of earnings to
fixed charges(c).................... 3.0x 2.2x (7,640) (12,648) (11,973) 1.6x 1.1x
BALANCE SHEET DATA (END OF PERIOD):
Total assets.......................... $349,962 $100,206 $72,075 $ 70,459 $ 85,024 $ 69,809 $ 60,005
Total debt (including current
maturities)......................... 255,389 77,956 60,171 57,750 69,306 32,710 29,811
Stockholders' equity (deficit)........ 44,332 4,556 (3,097) 2,055 1,674 15,392 14,647
</TABLE>
- ---------------
(a) EBITDA represents operating income plus depreciation and amortization and,
for the twelve months ended July 31, 1996, certain other one-time charges
aggregating $2.55 million (see "Unaudited Pro Forma Consolidated Financial
Information"). Management believes EBITDA for the twelve months ended
December 31, 1996, as adjusted for these one-time charges, provides a more
meaningful comparison of historical results. EBITDA as determined by the
Company may not be comparable to the EBITDA measure as reported by other
companies. EBITDA is not intended to represent cash flow from operations as
defined by GAAP and should not be considered as an indicator of operating
performance or an alternative to cash flow or operating income (as measured
by GAAP) or as a measure of liquidity. In addition, this measure does not
represent funds available for discretionary use. It is included herein to
provide additional information with respect to the ability of Holdings to
meet its future debt service, capital expenditures and working capital
requirements.
(b) Depreciation and amortization expense included herein excludes the
amortization of deferred financing costs that is included in interest
expense.
(c) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income (loss) before income taxes and fixed charges.
Fixed charges consist of (i) interest, whether expensed or capitalized;
(ii) amortization of debt expense and discount or premium relating to any
indebtedness, whether expensed or capitalized; and (iii) that portion of
rental expense considered to represent interest cost (assumed to be one-
third). Due to the seasonal nature of Hedstrom's business, the ratio of
earnings to fixed charges for the six months ended June 30, 1996 and June
30, 1997 are not accurate representations of full-year results. If the
ratio is less than 1.0x, the deficiency is shown.
24
<PAGE> 27
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF ERO
The summary information below represents financial information of ERO and
its subsidiaries for each of the fiscal years indicated in the three-year period
ended December 31, 1996, and for the three-month periods ended March 31, 1996
and March 31, 1997, which information was derived from the audited consolidated
financial statements of ERO for each of the fiscal years in the three-year
period ended December 31, 1996, and from the unaudited consolidated financial
statements of ERO for the three-month periods ended March 31, 1996 and March 31,
1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $ 19,939 $ 18,883 $157,913 $128,722 $126,734
Cost of sales......................... 13,814 13,264 97,802 80,693 79,776
-------- -------- -------- -------- --------
Gross profit.......................... 6,125 5,619 60,111 48,029 46,958
Selling, general and administrative
expenses........................... 7,763 7,553 38,896 33,183 34,078
-------- -------- -------- -------- --------
Operating income (loss)............... (1,638) (1,934) 21,215 14,846 12,880
OTHER FINANCIAL DATA:
Net cash provided by (used for):
Operating activities............... $ 12,708 $ 4,793 $ (1,277) $ 5,582 $ 8,832
Investing activities............... (289) (448) (3,619) (56,867) (6,442)
Financing activities............... (16,149) (3,628) 9,836 51,239 (2,515)
EBITDA(a)............................. (315) (590) 26,504 18,411 15,949
Depreciation and amortization(b)...... 1,323 1,344 5,289 3,565 3,069
Capital expenditures.................. 289 448 3,625 1,772 1,287
Ratio (deficiency) of earnings to
fixed charges(c)................... (3,648) (3,780) 2.2x 5.9x 5.5x
BALANCE SHEET DATA (END OF PERIOD):
Total assets.......................... $136,381 $131,353 $159,994 $144,138 $ 56,792
Total debt (including current
maturities)........................ 79,431 82,041 95,640 84,998 11,875
Stockholders' equity.................. 40,649 32,789 43,014 36,064 27,997
</TABLE>
- ---------------
(a) EBITDA represents operating income plus depreciation, and amortization.
EBITDA as determined by ERO may not be comparable to the EBITDA measure as
reported by other companies. EBITDA is not intended to represent cash flow
from operations as defined by GAAP and should not be considered as an
indicator of operating performance or an alternative to cash flow or
operating income (as measured by GAAP) or as a measure of liquidity. In
addition, this measure does not represent funds available for discretionary
use. It is included herein to provide additional information with respect
to the ability of ERO to meet its future debt service, capital expenditures
and working capital requirements.
(b) Depreciation and amortization expense included herein excludes the
amortization of deferred financing costs that is included in interest
expense.
(c) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income (loss) before income taxes and fixed charges.
Fixed charges consist of the total of (i) interest, whether expensed or
capitalized; (ii) amortization of debt expense and discount or premium
relating to any indebtedness, whether expensed or capitalized; and (iii)
that portion of rental expense considered to represent interest cost
(assumed to be one-third). Due to the seasonal nature of ERO's business,
the ratio of earnings to fixed charges for the three months ended March 31,
1996 and March 31, 1997 are not accurate representations of full year
results. If the ratio is less than 1.0x, the deficiency is shown.
25
<PAGE> 28
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating an investment in
the New Notes offered hereby. This Prospectus contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, the risk factors set forth below.
RECENT NET LOSSES
For the fiscal years ended July 31, 1994 and July 31, 1996, and for the
five-month period ended December 31, 1996, Holdings had net losses of
approximately $3.0 million, $8.1 million and $4.8 million, respectively. For the
fiscal year ended July 31, 1995, Holdings had net income of $745,000. After
giving pro forma effect to the Transactions, Holdings would have had a net loss
of approximately $3.6 million, or $0.05 per share, for the twelve months ended
December 31, 1996 and a net loss of $26,000 for the six months ended June 30,
1997.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE
Holdings and Hedstrom incurred a substantial amount of indebtedness in
connection with the Transactions. As of June 30, 1997, Holdings had $255.4
million of consolidated indebtedness and $44.3 million of consolidated
shareholders' equity, and Hedstrom had $231.3 million of consolidated
indebtedness and $67.5 million of consolidated shareholder's equity. For the
twelve months ended December 31, 1996, Holdings and Hedstrom had deficiencies of
earnings to fixed charges of $7.0 million and $6.7 million, respectively. After
giving pro forma effect to the Transactions, Holdings' deficiency of earnings to
fixed charges would have been $4.3 million for the twelve months ended December
31, 1996, and Hedstrom's deficiency of earnings to fixed charges would have been
$0.7 million for the twelve months ended December 31, 1996. See
"Capitalization", "Summary Historical Consolidated 'Financial Data of Holdings"
and "Unaudited Pro Forma Consolidated Financial Information." Holdings and
Hedstrom may incur additional indebtedness in the future, subject to certain
limitations contained in the instruments and documents governing their
respective indebtedness. See "Description of Senior Credit Facilities,"
"Description of the New Senior Subordinated Notes" and "Description of the New
Discount Notes." Accordingly, Holdings and Hedstrom will have significant debt
service obligations.
Holdings' and Hedstrom's high degree of leverage could have important
consequences to holders of the New Notes, including the following: (i) a
substantial portion of Hedstrom's cash flow from operations will be dedicated to
the payment of principal of, premium (if any) and interest on its indebtedness,
thereby reducing the funds available for operations, distributions to Holdings
for payments with respect to the Discount Notes, future business opportunities
and other purposes and increasing the vulnerability of Hedstrom to adverse
general economic and industry conditions; (ii) the ability of Holdings and
Hedstrom to obtain additional financing in the future may be limited; (iii)
certain of Hedstrom's borrowings (including, without limitation, amounts
borrowed under the Senior Credit Facilities) will be at variable rates of
interest, which will expose Hedstrom to increases in interest rates; and (iv)
all the indebtedness incurred in connection with the Senior Credit Facilities
will be secured and will become due prior to the time the principal payments on
the New Notes will become due.
Holdings' and Hedstrom's ability to make scheduled payments of the
principal of, or to pay interest on, or to refinance their respective
indebtedness (including the New Notes) will depend on Hedstrom's future
performance, which to a certain extent will be subject to economic, financial,
competitive and other factors beyond its control. Notwithstanding Holdings' and
Hedstrom's deficiencies of earnings to fixed charges for the twelve months ended
December 31, 1996, management believes that based upon Hedstrom's current
operations and anticipated growth, future cash flow from operations, together
with Hedstrom's available borrowings under the Revolving Credit Facility, will
be adequate to meet Holdings' and Hedstrom's respective anticipated requirements
for capital expenditures, interest payments and scheduled principal payments.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations of Hedstrom and Holdings -- Results of Operations" and "-- Liquidity
and Capital Resources." There can be no assurance, however, that Hedstrom's
business will continue to generate sufficient cash flow from operations in the
future to service its and Holdings' respective
26
<PAGE> 29
indebtedness and make necessary capital expenditures. If unable to do so,
Holdings and Hedstrom may be required to refinance all or a portion of their
respective indebtedness, including the New Notes, to sell assets or to obtain
additional financing. There can be no assurance that any such refinancing would
be possible, that any assets could be sold (or, if sold, of the timing of such
sales and the amount of proceeds realized therefrom) or that additional
financing could be obtained.
SUBSTANTIAL RESTRICTIONS AND COVENANTS
The Credit Agreement (as defined), the Senior Subordinated Notes Indenture
and the Discount Notes Indenture contain numerous restrictive covenants,
including, but not limited to, covenants that restrict Holdings' and Hedstrom's
ability to incur indebtedness, pay dividends, create liens, sell assets, engage
in certain mergers and acquisitions and refinance indebtedness. In addition, the
Credit Agreement will also require Hedstrom to maintain certain financial
ratios. The ability of Holdings and Hedstrom to comply with the covenants and
other terms of the Credit Agreement, the Senior Subordinated Notes Indenture and
the Discount Notes Indenture, to make cash payments with respect to the New
Notes and to satisfy their other respective debt obligations (including, without
limitation, borrowings and other obligations under the Credit Agreement) will
depend on the future operating performance of Hedstrom. In the event Holdings or
Hedstrom fails to comply with the various covenants contained in the Credit
Agreement, the Senior Subordinated Notes Indenture or the Discount Notes
Indenture, as applicable, it would be in default thereunder, and in any such
case, the maturity of substantially all of its long-term indebtedness could be
accelerated. A default under either the Senior Subordinated Notes Indenture or
the Discount Notes Indenture would also constitute an event of default under the
Credit Agreement. The Credit Agreement will prohibit the repayment, purchase,
redemption, defeasance or other payment of any of the principal of the New Notes
at any time prior to their stated maturity. See "Description of the Senior
Credit Facilities," "Description of the New Senior Subordinated Notes" and
"Description of the New Discount Notes." Holdings and Hedstrom currently are in
compliance with all covenants contained in the Credit Agreement, the Senior
Subordinated Notes Indenture and the Discount Notes Indenture.
RANKING OF THE NEW NOTES AND GUARANTIES
The indebtedness evidenced by the New Senior Subordinated Notes will be
unsecured senior subordinated obligations of Hedstrom and the indebtedness
evidenced by each Subsidiary Guaranty will be senior subordinated indebtedness
of the relevant Subsidiary Guarantor. The payment of principal of, premium (if
any), and interest on the New Senior Subordinated Notes and the payment of any
Subsidiary Guaranty will be subordinated in right of payment to all Senior
Indebtedness of Hedstrom or all Subsidiary Guarantor Senior Indebtedness of the
relevant Subsidiary Guarantor, as the case may be, including all indebtedness
and obligations of Hedstrom under the Senior Credit Facilities, and such
Subsidiary Guarantor's guaranty of such obligations. The indebtedness evidenced
by the Holdings Guaranty will be an unsecured senior obligation of Holdings and
will rank pari passu in right of payment with all unsecured Senior Indebtedness
of Holdings. Holdings currently conducts no business and has no significant
assets other than the capital stock of Hedstrom, all of which is pledged to
secure the Senior Credit Facilities. See "-- Structural Subordination of
Holdings." As of June 30, 1997, Senior Indebtedness of Hedstrom, Holdings Senior
Indebtedness and Subsidiary Guarantor Senior Indebtedness were approximately
$117.7 million, $244.3 million and $112.7 million, respectively, and Senior
Subordinated Indebtedness of Hedstrom and Subsidiary Guarantor Senior
Subordinated Indebtedness were approximately $110.0 million and $110.0 million,
respectively. The Senior Subordinated Notes Indenture permits Hedstrom to incur
additional Senior Indebtedness, provided that certain conditions are met, and
Hedstrom expects from time to time to incur additional Senior Indebtedness. In
addition, the Senior Subordinated Notes Indenture permits Senior Indebtedness to
be secured. By reason of the subordination provisions of the Senior Subordinated
Notes Indenture, in the event of insolvency, liquidation, reorganization,
dissolution or other winding-up of Hedstrom or a Subsidiary Guarantor, holders
of Senior Indebtedness of Hedstrom or Subsidiary Guarantor Senior Indebtedness,
as the case may be, will have to be paid in full before Hedstrom makes payments
in respect of the New Senior Subordinated Notes or such Subsidiary Guarantor
makes payments in respect of its Subsidiary Guaranty. In addition, no payment
will be able to be made in respect of the New Senior Subordinated Notes during
the continuance of a payment default under any Designated Senior Indebtedness
(as defined). Accordingly, there may be insufficient assets remaining after such
payments to pay amounts due on the New Senior Subordinated Notes. Furthermore,
if
27
<PAGE> 30
certain non-payment defaults exist with respect to Designated Senior
Indebtedness, the holders of such Designated Senior Indebtedness will be able to
prevent payments on the New Senior Subordinated Notes for certain periods of
time. See "Description of New Senior Subordinated Notes -- Ranking and
Subordination."
The New Discount Notes will be unsecured senior obligations of Holdings and
will rank pari passu in right of payment with all unsecured Senior Indebtedness
of Holdings, including the Holdings Guaranty and Holdings' guarantee of the
Senior Credit Facilities. As a result of the holding company structure, the
holders of the New Discount Notes will effectively rank junior in right of
payment to all creditors of Hedstrom and its subsidiaries, including, without
limitation, the lenders under the Senior Credit Facilities, holders of the New
Senior Subordinated Notes and trade creditors. See "-- Structural Subordination
of Holdings." In the event of the dissolution, bankruptcy, liquidation or
reorganization of Holdings or Hedstrom, the holders of the New Discount Notes
may not receive any amounts in respect of the New Discount Notes until after the
payment in full of all claims of the creditors of Hedstrom and its subsidiaries.
As of June 30, 1997, the New Discount Notes were effectively subordinated to
approximately $282.4 million of aggregate liabilities (consisting of
Indebtedness and trade payables) of Hedstrom and its subsidiaries. See
"Capitalization" and "Description of the New Discount Notes -- Ranking."
STRUCTURAL SUBORDINATION OF HOLDINGS
Holdings is a holding company whose only material asset is the capital
stock of Hedstrom. Holdings currently conducts no business (other than in
connection with its ownership of the capital stock of Hedstrom and the
performance of its obligations with respect to the New Discount Notes, the
Holdings Guaranty and the Senior Credit Facilities) and will depend on
distributions from Hedstrom to meet its debt service obligations. Because of the
substantial leverage of both Holdings and Hedstrom and the dependence of
Holdings upon the operating performance of Hedstrom to generate distributions to
Holdings, there can be no assurance that any such distributions will be adequate
to fund Holdings' obligations when due. In addition, the Credit Agreement, the
Senior Subordinated Notes Indenture and applicable federal and state law will
impose restrictions on the payment of dividends and the making of loans by
Hedstrom to Holdings. As a result of the foregoing restrictions, Holdings may be
unable to gain access to the cash flow or assets of Hedstrom in amounts
sufficient to pay cash interest on the New Discount Notes on and after December
1, 2002, the date on which cash interest thereon first becomes payable, and
principal of the New Discount Notes when due or upon a Change of Control or the
occurrence of any other event requiring the repayment of principal. In such
event, Holdings may be required to (i) refinance the New Discount Notes, (ii)
seek additional debt or equity financing, (iii) cause Hedstrom to refinance all
or a portion of Hedstrom's indebtedness with indebtedness containing covenants
allowing Holdings to gain access to Hedstrom's cash flow or assets, (iv) cause
Hedstrom to obtain modifications of the covenants restricting Holdings' access
to cash flow or assets of Hedstrom contained in Hedstrom's financing documents
(including, without limitation, the Credit Agreement and the Senior Subordinated
Notes Indenture), (v) merge Hedstrom with Holdings, which merger would be
subject to compliance with applicable debt covenants and the consents of certain
lenders or (vi) pursue a combination of the foregoing actions. The measures
Holdings may undertake to gain access to sufficient cash flow to meet its future
debt service requirements will depend on general economic and financial market
conditions, as well as the financial condition of Holdings and Hedstrom and
other relevant factors existing at the time. No assurance can be given that any
of the foregoing measures can be accomplished.
ENCUMBRANCES ON ASSETS TO SECURE SENIOR CREDIT FACILITIES
Hedstrom's obligations under the Senior Credit Facilities are secured by a
first priority pledge of, or a first priority security interest in, as the case
may be, substantially all of the assets (including 100% of the common stock) of
Hedstrom and its domestic subsidiaries, as well as a first priority pledge of
65% of the capital stock of each foreign subsidiary of Hedstrom or any
subsidiary thereof. If Hedstrom becomes insolvent or is liquidated, or if
payment under any of the Senior Credit Facilities or in respect of any other
secured Senior Indebtedness is accelerated, the lenders under the Senior Credit
Facilities or holders of such other secured Senior Indebtedness will be entitled
to exercise the remedies available to a secured lender under applicable law (in
addition to any remedies that may be available under documents pertaining to the
Senior Credit Facilities or such other Senior Indebtedness). The New Notes will
not be secured. Accordingly, holders of such secured Senior Indebtedness
28
<PAGE> 31
will have a prior claim with respect to the assets securing such indebtedness.
See "Description of Senior Credit Facilities", "Description of the New Senior
Subordinated Notes" and "Description of the New Discount Notes."
CERTAIN SUBSIDIARIES NOT INCLUDED AS SUBSIDIARY GUARANTORS
The Subsidiary Guarantors include only Hedstrom's domestic subsidiaries.
However, the historical consolidated financial information (including the
consolidated financial statements of Holdings and ERO included elsewhere in this
Prospectus) and the pro forma consolidated financial information included in
this Prospectus are presented on a consolidated basis, including both domestic
and foreign subsidiaries of Hedstrom and ERO. After giving pro forma effect to
the Transactions, the aggregate annual net sales for the year ended December 31,
1996 of the subsidiaries of Hedstrom which are Subsidiary Guarantors and those
which are not Subsidiary Guarantors would have been approximately $211.6 million
and $71.7 million, respectively. The aggregate total assets as of June 30, 1997
of the subsidiaries of Hedstrom which are Subsidiary Guarantors and those which
are not Subsidiary Guarantors were $324.4 million and $24.5 million,
respectively. In reliance upon certain Staff Accounting Bulletins of the
Commission, interpretations of the staff of the Commission and no-action relief
granted by the staff of the Commission to unrelated third parties, the Issuers
intend to seek no-action relief permitting Hedstrom and the Subsidiary
Guarantors to not file periodic reports under the Exchange Act separately from
Holdings, and in lieu thereof, to set forth in Holding's periodic reports
selected financial information and certain other information with respect to
Holdings, Hedstrom, the Subsidiary Guarantors and the subsidiaries of Hedstrom
which are not guarantors of the Senior Subordinated Notes. See footnote 16 to
the audited consolidated financial statements of Holdings and footnote 13 to the
audited consolidated financial of ERO contained elsewhere herein.
ORIGINAL ISSUE DISCOUNT; APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS
The Old Discount Notes were issued at a substantial discount from their
stated principal amount at maturity. Consequently, although cash interest on the
New Discount Notes generally will not accrue or be payable prior to June 1,
2002, OID will be includable in the gross income of a holder of the New Discount
Notes for U.S. federal income tax purposes in advance of the receipt of such
cash payments on the New Discount Notes. Because $3.4 million of the issue price
of the Units was allocated for U.S. federal income tax purposes to the Shares
(although no assurance can be given that the value allocated to the Shares is
indicative of the price at which the Shares may actually trade), the amount of
OID was $3.4 million greater than the difference between the principal amount at
maturity of the Old Discount Notes and the purchase price of the Units. See
"Certain United States Federal Income Tax Considerations with Respect to the New
Notes" for a more detailed discussion of the U.S. federal income tax
consequences of the purchase, ownership and disposition of the New Discount
Notes.
If a bankruptcy case is commenced by or against Holdings under the U.S.
Bankruptcy Code after the issuance of the New Discount Notes, the claim of a
holder of New Discount Notes with respect to the principal amount thereof may be
limited to an amount equal to the sum of (i) the initial offering price and (ii)
that portion of the OID that is not deemed to constitute "unmatured interest"
for purposes of the U.S. Bankruptcy Code. Any OID that was not accrued as of any
such bankruptcy filing would constitute "unmatured interest."
Because the New Discount Notes appear to provide initial holders with a
yield to maturity (for federal income tax purposes) which exceeds 11.99% (a
federally mandated interest rate for June 1997 plus five percentage points), OID
with respect to the New Discount Notes will not be deductible by Holdings until
paid. To the extent that such yield to maturity equals or exceeds 12.99% (a
federally mandated interest rate plus six percentage points), a portion of such
OID will not be deductible by Holdings. See "Certain United States Federal
Income Tax Considerations -- U.S. Holders -- Applicable High Yield Discount
Obligations."
LIMITATION ON CHANGE OF CONTROL
Upon a Change of Control (which excludes acquisitions of stock or assets by
Hicks Muse, Arnold E. Ditri and their respective affiliates), (i) each Issuer
will have the option, at any time on or prior to June 1, 2002, to redeem such
Issuer's New Notes, in whole but not in part, at a redemption price equal to
100% of (A) in the case of the New Senior Subordinated Notes, the principal
amount thereof, and (B) in the case of the New Discount
29
<PAGE> 32
Notes, the Accreted Value thereof, plus, in each case, the Applicable Premium
and accrued and unpaid interest, if any, to the date of redemption, and (ii) if
an Issuer does not redeem its New Notes pursuant to clause (i) above, each
holder of a New Note may require the Issuer thereof to repurchase such New Note
at a purchase price equal to 101% of (A) in the case of the New Senior
Subordinated Notes, the principal amount thereof and (B) in the case of the New
Discount Notes, the Accreted Value thereof, plus, in each case, accrued and
unpaid interest, if any, to the date of repurchase. There can be no assurance
that Holdings and Hedstrom will be able to raise sufficient funds to meet their
repurchase obligations upon a Change of Control or that in any event, Holdings
and Hedstrom would be permitted under the terms of the Credit Agreement and/or
the Indentures to fulfill such obligations. The failure to fulfill such
obligations would constitute an event of default under the Indentures See
"Description of the New Senior Subordinated Notes -- Change of Control" and
"Description of the New Discount Notes -- Change of Control."
RELIANCE ON KEY CUSTOMERS
After giving pro forma effect to the Transactions, the Company's pro forma
net sales to Toys "R" Us, Wal-Mart, Kmart and Target (its four largest
customers) during the twelve-month period ended December 31, 1996 would have
accounted for 16%, 17%, 10% and 7%, respectively, of the Company's pro forma net
sales during such period. Although the Company has well-established
relationships with its key customers, the Company does not have long-term
contracts with any of them. A decrease in business from any of its key customers
could have a material adverse effect on the Company's results of operations and
financial condition. See "Business -- Customers."
DEPENDENCE ON KEY LICENSES AND ON OBTAINING NEW LICENSES
After giving pro forma effect to the Transactions, approximately 28% of the
Company's pro forma net sales for the twelve months ended December 31, 1996
would have been derived from sales of licensed products. Approximately 67% of
such net sales would have been attributable to licenses covering ten licensed
characters and approximately 44% of such net sales would have been derived from
licenses with Disney Enterprises, Inc. and its affiliates. Although the Company
intends to renew key existing licenses and to obtain new licenses, there can be
no assurance that the Company will be able to do so. The failure to renew key
existing licenses or obtain new licenses could inhibit the Company's ability to
effectively compete in the licensed product market, which could in turn have a
material adverse effect on the Company. A significant segment of the Company's
business is dependent on obtaining new licenses for its products. The Company
believes that the introduction of products with new licenses and the
introduction of new licenses for existing products are material to its continued
growth and profitability. In addition, the success of the Company's products
bearing a particular licensed character is based on the popularity of the
character, the level of which changes from year to year. Consequently, the
success of the Company's licensed products business is dependent upon obtaining
new licenses for popular characters. No assurance can be given that the Company
will be able to acquire new licenses for popular characters. See
"Business -- Technology and Licensing."
RAW MATERIALS PRICES
The principal raw materials in most of the Company's products are plastic
resins, plastic components, steel and corrugated cardboard. The prices for such
raw materials are influenced by numerous factors beyond the control of the
Company, including general economic conditions, competition, labor costs, import
duties and other trade restrictions and currency exchange rates. Changing prices
for such raw materials may cause the Company's results of operations to
fluctuate significantly. Although the Company has not experienced material
adverse effects from price changes in the past, a large, rapid increase in the
price of raw materials could have a material adverse effect on the Company's
operating margins unless and until the increased cost can be passed along to
customers.
INTEGRATION OF ERO AND IMPLEMENTATION OF BUSINESS STRATEGY
Hedstrom has no previous experience acquiring and integrating a business as
large as ERO. Successful integration of ERO's operations will depend primarily
on Hedstrom's ability to manage ERO's manufacturing
30
<PAGE> 33
facilities and to eliminate redundancies and excess costs. There can be no
assurance that Hedstrom can successfully integrate ERO's operations and any
failure or inability to do so may have a material adverse effect on the
Company's results of operations.
In addition, the Company intends to continue the implementation of its
business strategy, an element of which is to achieve significant annual cost
savings. The Company's ability to successfully implement its business strategy,
and to achieve the estimated cost savings, is subject to a number of factors,
many of which are beyond the control of the Company. There can be no assurance
that the Company will be able to continue to successfully implement its business
strategy or that the Company will be able to achieve the estimated cost savings.
A failure to successfully implement its business strategy or to achieve the
estimated cost savings may have a material adverse effect on the Company's
results of operations. See "Prospectus Summary -- Business Strategy."
COMPETITION AND IMPORTANCE OF NEW PRODUCT INTRODUCTIONS AND ENHANCEMENTS
The children's leisure and activity product market is highly competitive.
Notwithstanding the competitive nature of the market, the Company has been able
to establish itself as the market share leader in certain niche markets within
the overall children's leisure and activity product market by introducing
innovative new products and regularly enhancing existing products. The Company
believes that new product introductions and enhancements of existing products
are material to its continued growth and profitability. No assurance can be
given that the Company will continue to be successful in introducing new
products or further enhancing existing products. See "Business -- Competition."
INVENTORY MANAGEMENT; DISTRIBUTION
The Company's key customers use inventory management systems to track sales
of particular products and rely on reorders being rapidly filled by suppliers,
rather than maintaining large on-hand inventories to meet consumer demand. While
these systems reduce a retailer's investment in inventory, they increase
pressure on suppliers like the Company to fill orders promptly and shift a
portion of the retailer's inventory risk onto the supplier. Production of excess
products by the Company to meet anticipated demand could result in increased
inventory carrying costs for the Company. In addition, if the Company fails to
anticipate the demand for its products, it may be unable to provide adequate
supplies of popular products to retailers in a timely fashion and may
consequently lose potential sales. Moreover, disruptions in shipments from the
Company's vendors or from the Company's warehouse facilities could have a
material adverse effect on the business, financial condition and results of
operations of the Company.
GOVERNMENT REGULATIONS
The Company is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Product Safety Act. Those laws
empower the Consumer Product Safety Commission (the "CPSC") to protect consumers
from hazardous products and other articles. The CPSC has the authority to
exclude from the market products which are found to be unsafe or hazardous and
can require a manufacturer to recall such products under certain circumstances.
Similar laws exist in some states and cities in the United States and in Canada
and Europe. While the Company believes that it is, and will continue to be, in
compliance in all material respects with applicable laws, rules and regulations,
there can be no assurance that the Company's products will not be found to
violate such laws, rules and regulations, or that more restrictive laws, rules
or regulations will not be adopted in the future which could make compliance
more difficult or expensive or otherwise have a material adverse effect on the
Company's business, financial condition and results of operations.
PRODUCT LIABILITY RISKS
The Company's products are used for and by small children. The Company
carries product liability insurance in amounts which management deems adequate
to cover risks associated with such use; however, there can be no assurance that
existing or future insurance coverage will be sufficient to cover all product
liability risks. See "Business -- Legal Proceedings."
31
<PAGE> 34
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend largely on the efforts and abilities of,
among others, Arnold E. Ditri, David F. Crowley, Alastair H. McKelvie, John D.
Dellos and Alfred C. Carosi, its executive officers. There can be no assurance
that the Company will be able to retain all of such executive officers. The
failure of such executive officers to remain active in the Company's management
could have a material adverse effect on the Company's operations. See
"Management."
SEASONALITY
Historically, Hedstrom and ERO each experienced a significant seasonal
pattern in sales and cash flow. During each of the twelve-month periods ended
July 31, 1994, July 31, 1995 and July 31, 1996, approximately 67%, 74% and 76%,
respectively, of Hedstrom's net sales were realized during the first and second
calendar fiscal quarters. During each of the twelve month periods ended December
31, 1994, December 31, 1995, and December 31, 1996, approximately 59%, 59% and
69%, respectively, of ERO's net sales were realized during the third and fourth
calendar quarters. Although one of the Company's business strategies is to
pursue opportunities for counter-seasonal sales (including new product and OEM
sales) and the Company expects decreased exposure to seasonality as a result of
the Acquisition, the Company expects that its business will continue to
experience a seasonal pattern for the foreseeable future. Because of such
seasonality, the sales of a substantial portion of each of the Company's product
categories are concentrated in relatively short periods of time during the year.
As a result, a failure by the Company to ship any such product to the
marketplace within the limited selling period would have a material adverse
effect on sales of such product and could in turn have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Hedstrom and Holdings -- Seasonality" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations of ERO --
Seasonality."
FOREIGN OPERATIONS, COUNTRY RISKS AND EXCHANGE RATE FLUCTUATIONS
As part of the Company's business strategy, it is seeking to expand its
international sales base. International operations and exports to foreign
markets are subject to a number of special risks, including currency exchange
rate fluctuations, trade barriers, exchange controls, national and regional
labor strikes, political risks and risks of increases in duties, taxes and
governmental royalties, as well as changes in laws and policies governing
operations of foreign-based companies. In addition, earnings of foreign
subsidiaries and intercompany payments are subject to foreign income tax rules
that may reduce cash flow available to meet required debt service and other
obligations of the Company.
In 1996, ERO's sales to customers outside the United States were
approximately $21.3 million, or approximately 13% of ERO's total sales. However,
$25.8 million, or 26.5%, of ERO's cost of sales were denominated in Canadian
dollars. Foreign denominated selling, general, and administrative expense and
interest expense were $5.8 million and $0.5 million, respectively. Accordingly,
the Company's revenues, cash flows and earnings may be affected by fluctuations
in certain foreign exchange rates, principally between the United States dollar
and the Canadian dollar, which may also have adverse tax effects. In addition,
because a portion of the Company's sales, costs of goods sold and other expenses
are denominated in Canadian dollars, the Company has a translation exposure to
fluctuations in the Canadian dollar against the U.S. dollar. Although the
Company has not experienced material adverse consequences from currency
fluctuations in the past, there can be no assurance that currency fluctuations
would not have a material impact on the Company in the future as increases in
the value of the Canadian dollar have the effect of increasing the U.S. dollar
equivalent of cost of goods sold and other expenses with respect to the
Company's Canadian production facilities. The company does not have any hedging
programs in place that would reduce its exposure to currency fluctuations.
FRAUDULENT CONVEYANCE
The incurrence of indebtedness (such as the Old Notes) in connection with
the Transactions and payments to consummate the Transactions with the proceeds
thereof are subject to review under relevant federal and state
32
<PAGE> 35
fraudulent conveyance statutes in a bankruptcy or reorganization case or a
lawsuit by or on behalf of creditors of Hedstrom or Holdings. Under these
statutes, if a court were to find that obligations (such as the Old Notes) were
incurred with the intent of hindering, delaying or defrauding present or future
creditors or that Hedstrom or Holdings received less than a reasonably
equivalent value or fair consideration for those obligations and, at the time of
the occurrence of the obligations, the obligor either (i) was insolvent or
rendered insolvent by reason thereof, (ii) was engaged or was about to engage in
a business or transaction for which its remaining unencumbered assets
constituted unreasonably small capital or (iii) intended to or believed that it
would incur debts beyond its ability to pay such debts as they matured or became
due, such court could void Hedstrom's or Holdings' obligations under the Old
Notes or the New Notes, subordinate the Old Notes or the New Notes to other
indebtedness of Hedstrom or Holdings, or take other action detrimental to the
holders of the Old Notes or the New Notes.
The measure of insolvency for purposes of a fraudulent conveyance claim
will vary depending upon the law of the applicable jurisdiction. Generally,
however, a company will be considered insolvent at a particular time if the sum
of its debts at that time is greater than the then fair value of its assets or
if the fair saleable value of its assets at that time is less than the amount
that would be required to pay its probable liability on its existing debts as
they become absolute and mature. Hedstrom and Holdings believe that (i) neither
Hedstrom nor Holdings will be insolvent or rendered insolvent by the incurrence
of indebtedness in connection with the Transactions, (ii) each of Hedstrom and
Holdings will be in possession of sufficient capital to run its business
effectively and (iii) each of Hedstrom and Holdings will have incurred debts
within its ability to pay as the same mature or become due.
There can be no assurance, however, as to what standard a court would apply
to evaluate the parties' intent or to determine whether Hedstrom or Holdings was
insolvent at the time of, or rendered insolvent upon consummation of, the
Transactions or that, regardless of the standard, a court would not determine
that Hedstrom or Holdings was insolvent at the time of, or rendered insolvent
upon consummation of, the Transactions.
In addition, the Guaranties may be subject to review under relevant federal
and state fraudulent conveyance and similar statutes in a bankruptcy or
reorganization case or a lawsuit by or on behalf of creditors of any of the
Guarantors. In such a case, the analysis set forth above generally would apply.
A court could avoid a Guarantor's obligation under its Guaranty, subordinate the
Guaranty to other indebtedness of such Guarantor or take other action
detrimental to the holders of the Senior Subordinated Notes.
CONTROL BY EXISTING STOCKHOLDERS
Hicks Muse and certain of its affiliates control approximately 68% of the
outstanding shares of Holdings Common Stock (approximately 80% on a
fully-diluted basis) and thereby directly control the election of the Board of
Directors and the direction of the affairs of Holdings, and indirectly control
the election of the Board of Directors and the direction of the affairs of
Hedstrom. Pursuant to the Stockholder's Agreement (as defined), Hicks Muse and
its affiliates have preemptive rights with respect to certain offerings by
Holdings of Holdings Common Stock (or equivalents thereof), as well as tag-along
and drag-along rights with respect to sales of Holdings Common Stock by the
other parties to the Stockholders Agreement. As a result, Hicks Muse and its
affiliates will be entitled to maintain, and possibly increase, their ownership
percentage of Holdings Common Stock. See "Stock Ownership and Certain
Transactions."
ABSENCE OF PUBLIC TRADING MARKET
The New Notes are being offered to the holders of Old Notes, and the
Issuers do not intend to apply to have the New Notes listed on any securities
exchange. The initial purchasers of the Old Notes (the "Initial Purchasers")
have advised the Issuers that they currently intend to make markets in the New
Notes after the consummation of the Exchange Offers, as permitted by applicable
laws and regulations; however, the Initial Purchasers are not obligated to do
so, and may discontinue any such market-making activity at any time without
notice. Therefore, there can be no assurance that active markets for the New
Notes will develop. If trading markets for the New Notes do develop, the New
Notes may trade at a discount from their face value or, with respect to the new
Discount Notes, their Accreted Value depending upon prevailing interest rates,
the market for similar securities, the performance of the Company and other
factors.
33
<PAGE> 36
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the markets for the New Notes will
not be subject to similar disruptions. Any such disruptions may have an adverse
effect on holders of the New Notes.
USE OF PROCEEDS
The Issuers will not receive any proceeds for the exchange of New Notes for
Old Notes pursuant to the Exchange Offers.
The net proceeds from the sale of the Old Notes, together with the proceeds
from the other transactions including in the Financings, were used to consummate
the Acquisition and meet ongoing working capital needs. See "Prospectus
Summary -- The Transactions."
The following table sets forth the sources and uses of funds in connection
with the Transactions.
<TABLE>
<CAPTION>
SOURCES OF FUNDS AMOUNT USES OF FUNDS AMOUNT
---------------- ------ ------------- ------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C>
Revolving Credit Facility......... $ 16.1 Tender Offer/Merger............... $122.6
Tranche A Term Loans.............. 75.0 ERO Refinancing(a)................ 82.6
Tranche B Term Loans.............. 35.0 Hedstrom Refinancing(a)........... 74.9
Old Senior Subordinated Notes
Offering........................ 110.0 Fees and expenses(b).............. 21.0
------
Units Offering.................... 25.0
Equity Private Placement.......... 40.0
------
Total Sources................ $301.1 Total Uses........................ $301.1
====== ======
</TABLE>
- ---------------
(a) Includes accrued interest expense.
(b) Fees and expenses include Initial Purchasers' discount, bank fees, financial
advisory fees, legal and accounting fees, printing costs and other expenses
related to the Transactions.
34
<PAGE> 37
CAPITALIZATION
The following table sets forth, as of June 30, 1997, (i) the capitalization
of Hedstrom and (ii) the capitalization of Holdings. The information set forth
below should be read in conjunction with "Unaudited Pro Forma Consolidated
Financial Information" and the consolidated financial statements and the notes
thereto of each of Holdings and ERO included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
--------------------
HEDSTROM HOLDINGS
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Total debt:
Revolving Credit Facility................................. $ 2,700 $ 2,700
Tranche A Term Loans...................................... 75,000 75,000
Tranche B Term Loans...................................... 35,000 35,000
Senior Subordinated Notes................................. 110,000 110,000
Senior Discount Notes..................................... -- 21,618
Other debt(a)............................................. 8,571 11,071
-------- --------
Total debt........................................ 231,271 255,389
-------- --------
Stockholders' equity(b)..................................... 67,471 44,332
-------- --------
Total capitalization......................... $298,742 $299,721
======== ========
</TABLE>
- ---------------
(a) Other debt of Holdings consists of a $3.5 million Industrial Revenue Bond,
$2.5 million of notes issued in connection with the 1995 Recapitalization
(the "1995 Recapitalization Notes"), a $1.6 million mortgage loan on an ERO
facility, $3.5 million of ERO equipment loans and capital leases and
miscellaneous other debt. Other debt of Hedstrom consists of the other debt
of Holdings other than the 1995 Recapitalization Notes.
(b) Holdings stockholders' equity includes the $27 million investment by the HM
Group as part of the 1995 Recapitalization less certain accounting
adjustments related to the 1995 Recapitalization (see "Prospectus
Summary -- Management and Ownership"), plus $40 million from the Equity
Private Placement, less certain transaction expenses. Holdings'
stockholders equity also reflects the $3.4 million ascribed to the Shares
issued in connection with the Units Offering (although no assurance can be
given that the value allocated to the Shares is indicative of the price at
which the Shares may actually trade). Hedstrom stockholders' equity
includes Holdings stockholders' equity plus $21.6 million in proceeds from
the Units Offering ascribed to the Old Discount Notes, as adjusted to
account for certain transaction expenses, and $2.5 million related to a
note payable issued by Holdings related to the 1995 Recapitalization.
35
<PAGE> 38
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial statements (the
"Pro Forma Financial Statements") include the unaudited pro forma consolidated
income statements for the six months ended June 30, 1997 and for the year ended
December 31, 1996 (the "Pro Forma Consolidated Income Statements").
The Pro Forma Consolidated Income Statements give effect to the
Transactions and the cost reduction items described in the following paragraph
as if they occurred on January 1, 1996.
Management is implementing a plan that is expected to result in annual cost
savings of approximately $6 million as a result of the Acquisition, which plan
includes rationalizing sales, marketing and general administrative functions,
closing of duplicate facilities and reductions in external administrative
expenditures as a result of operating as a consolidated group (i.e., legal,
insurance, tax, audit and public relations expenditures). The Pro Forma
Consolidated Income Statements include the cost savings Hedstrom expects to
realize as a result of personnel terminations that have occurred or that have
been formally communicated to the employees, closings of duplicative facilities
that have occurred and reductions in external administrative expenses that have
been negotiated.
The Acquisition was accounted for using the purchase method of accounting.
The aggregate purchase price for the Acquisition was allocated to the tangible
and intangible assets and liabilities acquired based upon their respective fair
values.
The Pro Forma Financial Statements are based on the historical financial
statements of Holdings, Hedstrom and ERO and the assumptions and adjustments
described in the accompanying notes. The Pro Forma Financial Statements do not
purport to represent what the Company's results of operations actually would
have been had the Transactions and the cost reduction items described herein in
fact occurred on the dates indicated or to project the results of operations for
any future period or date. The Pro Forma Financial Statements are based upon
assumptions that management believes are reasonable and should be read in
conjunction with the consolidated financial statements and the notes thereto of
each of Holdings and ERO included elsewhere herein.
Management implemented the 1996 Cost Reduction Plan in the second half of
1996 to reduce costs by over $9 million in 1997 and thereafter as compared with
fiscal 1996 levels. See "Prospectus Summary -- Hedstrom 1996 Cost Reduction
Plan." EBITDA, as adjusted for the year ended December 31, 1996 includes a
portion of the cost savings Hedstrom expects to realize from the 1996 Cost
Reduction Plan in 1997 and thereafter. EBITDA, as adjusted does not reflect
certain other cost savings and operating efficiencies or the cost of achieving
such other cost savings and operating efficiencies that management also expects
to achieve in 1997 and thereafter. See "Prospectus Summary -- Hedstrom 1996 Cost
Reduction Plan."
36
<PAGE> 39
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA/
HEDSTROM ERO PRO FORMA HEDSTROM CONSOLIDATION HOLDINGS
HISTORICAL(a) HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
------------- ---------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales....................... $125,394 $157,913 $ -- $283,307 $ -- $283,307
Cost of sales................... 101,044 97,802 -- 198,846 -- 198,846
-------- -------- ------- -------- ------- --------
Gross profit.................... 24,350 60,111 -- 84,461 -- 84,461
Selling, general and
administrative expenses....... 25,083 38,896 2,305(b) 60,284 -- 60,284
(6,000)(c)
-------- -------- ------- -------- ------- --------
Operating income (loss)......... (733) 21,215 3,695 24,177 -- 24,177
Interest expense................ 5,986 9,062 9,809(d) 24,857 3,386(d) 28,493
250(e)
-------- -------- ------- -------- ------- --------
Income (loss) before income
taxes......................... (6,719) 12,153 (6,114) (680) (3,636) (4,316)
Income tax benefit (expense).... 2,158 (4,395) 1,619(f) (618) 1,382(f) 764
-------- -------- ------- -------- ------- --------
Net income (loss)............... $ (4,561) $ 7,758 $(4,495) $ (1,298) $(2,254) $ (3,552)
Net income (loss) per
share(g)...................... $ (.05)
Weighted average shares
outstanding(g)................ -- -- -- -- -- 67,647
======== ======== ======= ======== ======= ========
OTHER FINANCIAL DATA:
EBITDA:
Operating income (loss)..... $ (733) $ 21,215 $ 3,695 $ 24,177 $ -- $ 24,177
Depreciation and
amortization.............. 4,373 5,289 2,305 11,967 -- 11,967
Product and inventory
charge.................... 1,550 -- -- 1,550 -- 1,550
Barter credit writedown..... 1,000 -- -- 1,000 -- 1,000
-------- -------- ------- -------- ------- --------
EBITDA(h)................... $ 6,190 $ 26,504 $ 6,000 $ 38,694 $ -- $ 38,694
======== ======== ======= ======== ======= ========
EBITDA, as adjusted(i)..........
Pro forma deficiency of earnings
to fixed charges(j)........... -- -- -- $ (680) -- $ (4,316)
======== ======== ======= ======== ======= ========
</TABLE>
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA/
HEDSTROM ERO PRO FORMA HEDSTROM CONSOLIDATION HOLDINGS
HISTORICAL(k) HISTORICAL(k) ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
------------- ------------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales..................... $104,051 $ 38,304 $ -- $142,355 $ -- $142,355
Cost of sales................. 73,579 28,736 -- 102,315 -- 102,315
-------- -------- ------- -------- ------- --------
Gross profit.................. 30,472 9,568 -- 40,040 -- 40,040
Selling, general and
administrative expenses..... 16,242 11,031 960(b) 25,233 -- 25,233
(3,000)(c)
-------- -------- ------- -------- ------- --------
Operating income (loss)....... 14,230 (1,463) 2,040 14,807 -- 14,807
Interest expense.............. 4,584 3,267 4,591(d) 12,442 1,693(d) 14,260
125(e)
-------- -------- ------- -------- ------- --------
Income (loss) before income
taxes....................... 9,646 (4,730) (2,551) 2,365 (1,818) 547
Income tax benefit
(expense)................... (3,584) 1,940 381(f) (1,263) 690(f) (573)
-------- -------- ------- -------- ------- --------
Net income (loss)............. $ 6,062 $ (2,790) $(2,170) $ 1,102 $(1,128) $ (26)
Net income (loss) per
share(g).................... $ .00
Weighted average shares
outstanding(g).............. -- -- -- -- -- 67,647
======== ======== ======= ======== ======= ========
OTHER FINANCIAL DATA:
EBITDA:
Operating income (loss)... $ 14,230 $ (1,463) $ 2,040 $ 14,807 $ -- $ 14,807
Depreciation and
amortization............ 2,767 2,187 960 5,914 -- 5,914
-------- -------- ------- -------- ------- --------
EBITDA(h)................. $ 16,997 $ 724 $ 3,000 $ 20,721 $ -- $ 20,721
Pro forma ratio of earnings to
fixed charges(j)............ -- -- -- 1.2x -- 1.0x
======== ======== ======= ======== ======= ========
</TABLE>
37
<PAGE> 40
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS
(DOLLARS IN THOUSANDS)
(a) The historical balances for Hedstrom are derived from the unaudited
accounting records of Hedstrom for the twelve-month period ended December
31, 1996. Hedstrom historically had a fiscal year ending July 31 but
switched its fiscal year end to December 31, effective in 1997.
Accordingly, Hedstrom's last complete fiscal year was the twelve months
ended July 31, 1996, and Hedstrom's next complete fiscal year will be the
twelve months ended December 31, 1997.
(b) Reflects the incremental change in amortization expense due to purchase
accounting and adjustments to intangible assets in connection with the
Acquisition consistent with the amortization policies utilized by the
Company.
(c) Reflects estimated cost savings as a result of the Acquisition from the
elimination of overlapping and duplicative selling, general and
administrative functions, the closing of certain duplicate facilities and
reductions in external administrative expenses such as insurance, legal,
tax, audit and public relations expenses. The estimated cost savings below
reflect personnel terminations that have occurred or that have been
formally communicated to the employees, closings of duplicate facilities
that have occurred and reductions in external administrative expenses that
have been negotiated.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
Selling, general and administrative expense
adjustment:
Acquisition related:
Salaries and benefits from personnel
terminations.............................. $3,700 $1,850
Duplicative facilities that have been
closed.................................... 900 450
External administrative expenses that have
been reduced.............................. 1,400 700
------ ------
$6,000 $3,000
====== ======
</TABLE>
(d) Reflects interest expense (at assumed rates as indicated below) associated
with the borrowings under the Senior Credit Facilities, the Senior
Subordinated Notes and the Discount Notes, the amortization of deferred
financing costs and the elimination of historical interest expense relating
to debt of Hedstrom and ERO refinanced in connection with the Acquisition:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
HEDSTROM:
Revolving Credit Facility at 8.5%................ $ 1,369 $ 684
Tranche A Term Loans at 8.5%..................... 6,375 3,188
Tranche B Term Loans at 9.0%..................... 3,150 1,575
Senior Subordinated Notes at 10.0%............... 11,000 5,500
Amortization of deferred financing costs......... 1,888 944
Other fees....................................... 396 197
Elimination of historical interest expense for
related debt................................... (14,369) (7,497)
-------- -------
Total Hedstrom......................... $ 9,809 $ 4,591
======== =======
HOLDINGS:
Discount Notes at 12.0%.......................... $ 3,000 $ 1,500
Amortization of deferred financing costs and debt
discount....................................... 386 193
-------- -------
Total Holdings......................... $ 3,386 $ 1,693
======== =======
</TABLE>
38
<PAGE> 41
A 0.125% change in the interest rate payable on the outstanding
balance would change annual interest expense as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
Revolving Credit Facility........................ $ 20 $10
Tranche A Term Loans............................. 94 47
Tranche B Term Loans............................. 44 22
---- ---
Total.................................. $158 $79
==== ===
</TABLE>
(e) Represents a consolidation adjustment to reflect interest expense on a $2.5
million note payable at Holdings.
(f) Reflects the adjustment to federal and state income taxes resulting from
the pro forma adjustments, and to recognize federal and state income taxes
at an assumed effective tax rate of approximately 38%, plus the impact of
amortizing the goodwill for book purposes but not tax purposes.
(g) Net income (loss) per share is based on the number of common shares
outstanding immediately after the Transaction, including the common shares
associated with the Units Offering and the Equity Private Placement.
Average common equivalent shares (stock options) have not been included in
the calculation of weighted average shares outstanding since their
inclusion would not be significant during these periods.
(h) EBITDA represents operating income plus depreciation, amortization, and,
for the twelve months ended December 31, 1996, certain other one-time
charges aggregating approximately $2.55 million, as follows: (i) $0.8
million related to a design adjustment to one of Hedstrom's outdoor gym set
accessories to address certain alleged defects, (ii) a non-cash inventory
write-down of $0.75 million related to the mix shift in Hedstrom's outdoor
gym set product line, and (iii) a $1.0 million non-cash write-off of
advertising barter credits by Hedstrom in connection with its decision to
discontinue its trial advertising campaign. EBITDA as determined by the
Company 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 (as measured by GAAP) as a
measure of liquidity. In addition, this measure does not represent funds
available for discretionary use, it is included herein to provide
additional information with respect to the ability of the Company to meet
its future debt service, capital expenditures and working capital
requirements.
(i) EBITDA, as adjusted represents the following for the year ended December
31, 1996:
<TABLE>
<CAPTION>
HEDSTROM HOLDINGS
PRO FORMA PRO FORMA
--------- ---------
<S> <C> <C>
EBITDA as defined in (h) above......................... $38,694 $38,694
1996 Cost Reduction Plan............................... 5,800 5,800
------- -------
EBITDA, as adjusted.................................... $44,494 $44,494
======= =======
</TABLE>
EBITDA, as adjusted reflects a portion of the cost savings from the 1996
Cost Reduction Plan implemented by Hedstrom in the second half of 1996
relating to reductions in manufacturing costs, elimination of certain
full-time employees, the discontinuation of certain advertising programs
and the reduction of warehouse and shipping costs, as more fully described
below.
Hedstrom periodically evaluates the economics of producing internally
certain plastic components used in the production and assembly of its
outdoor gym sets versus purchasing such components externally. In 1996,
Hedstrom invested approximately $3.0 million in new plastic blow-molding
equipment to manufacture many of the plastic slides that it had previously
purchased from third-party vendors. Management believes that producing
these slides internally is currently providing annual cost savings of
approximately $1.5 million.
Hedstrom reduced its number of full-time employees by approximately 30
persons in a variety of departments in the second half of 1996. Management
believes that such personnel reductions will result in savings of
approximately $0.7 million in 1997 and thereafter.
39
<PAGE> 42
In late 1996, Hedstrom restructured certain of its manufacturing operations
to increase its daily production capacity of outdoor gym sets. This
restructuring has enabled Hedstrom to manufacture outdoor gym sets to
specific customer orders rather than producing outdoor gym sets in
anticipation of customer orders, which Hedstrom had done in the past
because of capacity constraints. In fiscal 1996, prior to implementing this
restructuring, Hedstrom experienced a significant and unexpected change in
its sales mix of outdoor gym sets, requiring Hedstrom to use third-party
warehouses to store many of the outdoor gym sets it had produced in
anticipation of customer demand. As a result, Hedstrom incurred
approximately $2.1 million of higher warehouse and material handling costs.
The implementation of just-in-time manufacturing of outdoor gym sets has
enabled Hedstrom to carry a lower level of outdoor gym set inventory and,
as a result, eliminate the need for third-party warehouses for outdoor gym
sets. Management believes it will save over $2.1 million of warehouse and
material handling expense in 1997 and thereafter as a result of
implementing just-in-time manufacturing of outdoor gym sets.
Hedstrom historically has advertised its products in cooperation with its
retail customers, principally through print media sponsored by its
customers such as newspaper circulars and free-standing inserts. In fiscal
1996, Hedstrom initiated, on a trial basis, its own multi-media advertising
program designed to increase consumer awareness of the Hedstrom brand over
time. The total cost for this advertising program was approximately $1.5
million. After careful review, management determined that this trial
advertising campaign would not provide an acceptable return on investment
and elected to discontinue it. Therefore, such cost will not be incurred in
1997 and thereafter.
(j) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent pro forma income (loss) before income taxes and fixed
charges. Fixed charges consist of the total of (i) interest, whether
expensed or capitalized; (ii) amortization of debt expense and discount or
premium relating to any indebtedness, whether expensed or capitalized; and
(iii) that portion of rental expense considered to represent interest cost
(assumed to be one-third). Due to the seasonal nature of Hedstrom's
business, the ratio of earnings to fixed charges for the six months ended
June 30, 1997 is not an accurate representation of full-year results. If
the ratio is less than 1.0x, the deficiency is shown.
(k) Hedstrom's historical results of operations for the six months ended June
30, 1997 include ERO's results of operations for the month of June 1997.
ERO's historical results of operations for the six months ended June 30,
1997 include the period from January 1, 1997 through May 31, 1997.
40
<PAGE> 43
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF HOLDINGS
The selected consolidated historical financial data presented below (i) as
of and for the years in the three-year period ended July 31, 1996 and the
five-month period ended December 31, 1996, were derived from the consolidated
financial statements of Holdings, which have been audited by Arthur Andersen
LLP, independent auditors, and (ii) as of and for the two years ended July 31,
1993, were derived from audited financial statements of Hedstrom. The selected
historical consolidated financial data presented below as of and for the
five-month period ended December 31, 1995 and the six-month periods ended June
30, 1996 and 1997 have not been audited, but, in the opinion of management,
include all the adjustments (consisting only of normal, recurring adjustments)
necessary to present fairly, in all material respects, such information in
accordance with GAAP applied on a consistent basis. Income Statement and other
financial data for the six months ended June 30, 1997 reflects the operations of
ERO for the month of June 1997 and the balance sheet data as of June 30, 1997
includes the Transactions. Interim results are not necessarily indicative of
Holdings' results for the full fiscal year, principally because of the seasonal
nature of Hedstrom's business. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Hedstrom and Holdings" and the consolidated
financial statements of Holdings and the notes thereto contained elsewhere
herein. Holdings historically had a fiscal year ending July 31 but switched its
fiscal year to December 31, effective in 1997.
<TABLE>
<CAPTION>
SIX MONTHS FIVE MONTHS
ENDED ENDED
JUNE 30, DECEMBER 31, FISCAL YEAR ENDED JULY 31,
------------------- ------------------ --------------------------------------------------
1997 1996 1996 1995 1996 1995 1994 1993 1992
-------- -------- ------- -------- -------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................... $104,051 $ 96,059 $23,994 $ 31,792 $133,194 $133,862 $108,655 $93,891 $87,529
Cost of sales................... 73,579 72,897 21,973 26,000 105,068 107,312 87,170 75,592 68,632
-------- -------- ------- -------- -------- -------- -------- ------- -------
Gross profit.................... 30,472 23,162 2,021 5,792 28,126 26,550 21,485 18,299 18,897
Selling, general and
administrative expenses....... 16,242 15,107 7,546 7,067 24,603 19,207 18,181 16,890 15,816
-------- -------- ------- -------- -------- -------- -------- ------- -------
Operating income (loss)......... 14,230 8,055 (5,525) (1,275) 3,523 7,343 3,304 1,409 3,081
Recapitalization expenses(a).... -- -- -- 9,600 9,600 -- -- -- --
Restructuring expense(b)........ -- -- -- -- -- -- -- 1,476 --
Interest expense................ 4,709 3,545 2,115 1,773 5,896 4,573 2,982 2,512 2,728
-------- -------- ------- -------- -------- -------- -------- ------- -------
Income (loss) before income
taxes......................... 9,521 4,510 (7,640) (12,648) (11,973) 2,770 322 (2,579) 353
Income tax benefit (expense).... (3,536) (1,812) 2,869 4,074 3,857 (1,440) (103) 663 (257)
-------- -------- ------- -------- -------- -------- -------- ------- -------
Income (loss) from continuing
operations.................... 5,985 2,698 (4,771) (8,574) (8,116) 1,330 219 (1,916) 96
Loss from discontinued
operations(c)................. -- -- -- -- -- (585) (3,180) -- --
-------- -------- ------- -------- -------- -------- -------- ------- -------
Net income (loss)............... $ 5,985 $ 2,698 $(4,771) $ (8,574) $ (8,116) $ 745 $ (2,961) $(1,916) $ 96
======== ======== ======= ======== ======== ======== ======== ======= =======
OTHER FINANCIAL DATA:
Net cash provided by (used in):
Operating activities.......... $ (6,968) $(12,725) $ 2,978 $(19,209) $(17,744) $ 396 $ 1,344 $(3,540) $ 2,481
Investing activities.......... (126,046) (4,792) (1,309) (1,342) (6,490) (2,574) (2,988) (4,594) (3,358)
Financing activities.......... 135,646 17,706 (9,134) 19,842 31,135 2,899 1,060 8,539 740
EBITDA(d)....................... 16,997 10,377 (3,549) (393) 9,420 10,088 5,529 3,651 5,111
Depreciation and
amortization(e)............... 2,767 2,322 1,976 882 3,347 2,745 2,225 2,242 2,030
Capital expenditures............ 3,446 4,792 1,376 1,342 6,738 2,574 2,988 3,010 1,858
Ratio (deficiency) of earnings
to fixed charges(f)........... 3.0x 2.2x (7,640) (12,648) (11,973) 1.6x 1.1x (2,579) 1.1x
BALANCE SHEET DATA (END OF
PERIOD):
Total assets.................... $349,962 $100,206 $72,075 $ 70,459 $ 85,024 $ 69,809 $ 60,005 $55,607 $48,116
Total debt (including current
maturities)................... 255,389 77,956 60,171 57,750 69,306 32,710 29,811 28,351 19,812
Stockholders' equity
(deficit)..................... 44,332 4,556 (3,097) 2,055 1,674 15,392 14,647 15,228 17,144
</TABLE>
- ---------------------
(a) In connection with the 1995 Recapitalization, Holdings incurred
approximately $9.6 million in costs, all of which were expensed.
(b) During fiscal 1993, Holdings restructured its manufacturing processes at its
Bedford division, incurring costs associated with consultants, equipment
reorganization, training and temporarily idle facilities.
(c) During fiscal 1995, Holdings discontinued the operations of its Hedstrom
Holdings II subsidiary. Hedstrom Holdings II was involved in the
manufacturing of traffic control devices. The sole customer of Hedstrom
Holdings II was a related party with which Holdings no longer has an ongoing
relationship.
(d) EBITDA represents operating income plus depreciation, and amortization and,
for the twelve months ended July 31, 1996, certain other one-time charges
aggregating $2.55 million (see "Unaudited Pro Forma Consolidated Financial
Information"). EBITDA as determined by Holdings may not be comparable to the
EBITDA measure as reported by other companies. EBITDA is not intended to
represent cash flow from operations as defined by GAAP and should not be
considered as an indicator of operating performance or an alternative to
cash flow or operating income (as measured by GAAP) or as a measure of
liquidity. In addition, this measure does not represent funds available for
discretionary use. It is included herein to provide additional information
with respect to the ability of Holdings to meet its future debt service,
capital expenditures and working capital requirements.
(e) Depreciation and amortization included herein excludes the amortization of
deferred financing costs that is included in interest expense.
(f) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income (loss) before income taxes and fixed charges.
Fixed charges consist of the total of (i) interest, whether expensed or
capitalized; (ii) amortization of debt expense and discount or premium
relating to any indebtedness, whether expensed or capitalized; and (iii)
that portion of rental expense considered to represent interest cost
(assumed to be one-third). Due to the seasonal nature of Holdings'
business, the ratio of earnings to fixed charges for the six months ended
June 30, 1996 and 1997 and for the five months ended December 31, 1996 and
1995 are not accurate representations of full-year results. If the ratio is
less than 1.0x, the deficiency is shown.
41
<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF HEDSTROM AND HOLDINGS
The following discussion generally relates to the historical consolidated
results of operations and financial condition of Holdings and Hedstrom and,
accordingly, does not reflect the significant impact of the Transactions. The
following discussion and analysis should be read in conjunction with the
consolidated financial statements of Holdings, and the notes thereto, included
elsewhere herein. For purposes of this discussion, references to "Hedstrom",
where appropriate, include Holdings and Hedstrom and its subsidiaries
(including, with respect to periods after the consummation of the Acquisition,
ERO and its subsidiaries).
For information regarding the pro forma results of operations of the
Company, see the "Unaudited Pro Forma Consolidated Financial Information".
GENERAL
Hedstrom is a leading United States manufacturer and marketer of children's
leisure and activity products. Hedstrom has two principal divisions -- the
Bedford Division in Bedford, Pennsylvania (the "Bedford Division"), which
principally manufacturers and markets in the United States painted metal and
composite metal and plastic outdoor gym sets, wood gym kits and slides, spring
horses and gym accessories, and the Ashland Division in Ashland, Ohio (the
"Ashland Division"), which manufactures and markets in the United States a wide
variety of children's playballs and ball pit products. Through its International
Division, Hedstrom sells products manufactured by both the Bedford Division and
the Ashland Division outside of the United States.
FISCAL YEAR CHANGE
Hedstrom historically had a fiscal year ending July 31 but switched its
fiscal year-end to December 31, effective in 1997. Accordingly, Hedstrom's last
historical fiscal year was the twelve months ending July 31, 1996, and
Hedstrom's next complete fiscal year will be the twelve months ending December
31, 1997. Management implemented this change primarily to improve the accuracy
of Hedstrom's annual budgeting process. Hedstrom's retail customers generally do
not determine outdoor gym set product placements for the upcoming peak Spring
selling season until the preceding Fall. In the past, Hedstrom prepared its
budgets without the benefit of knowing what its outdoor gym set placements would
be for the upcoming fiscal year. Management believes that the adoption of a
December 31 fiscal year will improve the accuracy of its budgeting process.
As a result of the change in Hedstrom's fiscal year, Hedstrom has presented
financial statements for the five-month period ended December 31, 1996 and for
the comparable period in 1995. Management does not believe that the year over
year comparison for such period is meaningful because, given the concentration
of Hedstrom's net sales in the first and second calendar quarters, overall
changes in production levels in the comparably less active period from August to
December can have a significant impact on stated profitability for such period
due to the absorption of fixed manufacturing costs. This is especially true when
comparing the above-mentioned five-month period in 1996 versus the same
five-month period in 1995. In the last few months of calendar 1995, due to
capacity constraints, Hedstrom manufactured a significant number of outdoor gym
sets in anticipation of the Spring 1996 selling season. This production activity
resulted in absorption of overhead expenses of approximately $1.4 million (these
costs were capitalized into inventory) that otherwise would have been expensed
during the period had there been no production of gym sets. In late 1996,
management took several steps to increase the daily production capacity of
outdoor gym sets in an effort to increase its capacity during peak production
periods, thereby reducing inventory levels and related material and warehouse
expense. As a result of these efforts, Hedstrom is now able to manufacture gym
sets on a just-in-time basis in response to specific customer orders. The move
to just-in-time manufacturing in late calendar 1996 precluded the need to begin
manufacturing gym sets in 1996 for sale in 1997 and thus, unlike in late 1995,
Hedstrom expensed the fixed overhead incurred at its idle outdoor gym set
operations. As a result of the switch to just-in-time manufacturing, Hedstrom's
operating results were significantly better in the second calendar quarter of
1997 versus the second calendar quarter of 1996 because, among other things, it
produced outdoor gym sets in the second calendar quarter of 1997, whereas in the
same period of 1996, Hedstrom met consumer demand for outdoor gym sets out of
inventory. Hedstrom's
42
<PAGE> 45
discontinuation in 1996 of sales of certain low-margin juvenile products (such
as tricycles) that had been sold in 1995 also makes the year over year
comparison less meaningful.
NET SALES
Hedstrom computes net sales by deducting sales allowances, including
allowances for returns, volume discounts and co-operative advertising
("promotions"), from its gross sales. Where information concerning net sales by
product line is provided in this Prospectus, Hedstrom has estimated net sales by
attributing sales allowances to each product line in proportion to the
individual product line's percentage of gross sales.
In 1996, Hedstrom revised certain of its promotional policies, effectively
increasing the sales thresholds at which Hedstrom's customers earn certain
promotional discounts, which management believes will contribute to increasing
Hedstrom's profitability in 1997.
RESULTS OF OPERATIONS
The following table sets forth net sales and gross profit for each of
Hedstrom's three operating divisions and Hedstrom's total selling, general and
administrative expenses and total operating income (loss) for the periods
indicated:
<TABLE>
<CAPTION>
FIVE MONTHS
SIX MONTHS ENDED
ENDED JUNE 30, DECEMBER 31, YEAR ENDED JULY 31,
--------------- ------------- ------------------------
1997 1996 1996 1995 1996 1995 1994
------ ------ ----- ----- ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Bedford Division.......................... $58.7 $63.0 $12.0 $13.5 $ 79.3 $ 80.9 $ 71.4
Ashland Division.......................... 24.8 27.2 10.4 16.7 46.0 44.8 30.4
International Division.................... 6.6 5.9 1.6 1.6 7.9 8.2 6.9
ERO....................................... 14.0 -- -- -- -- -- --
----- ----- ----- ----- ------ ------ ------
Total net sales................... 104.1 96.1 24.0 31.8 133.2 133.9 108.7
----- ----- ----- ----- ------ ------ ------
Gross profit:
Bedford Division.......................... 16.1 14.3 (.2) 0.8 13.7 11.7 12.2
Ashland Division.......................... 7.7 8.0 1.9 4.6 13.1 13.4 8.3
International Division.................... 1.6 .9 .3 .4 1.3 1.5 1.0
ERO....................................... 5.1 -- -- -- -- -- --
----- ----- ----- ----- ------ ------ ------
Total gross profit................ 30.5 23.2 2.0 5.8 28.1 26.6 21.5
----- ----- ----- ----- ------ ------ ------
Total selling, general and administrative
expenses.................................. 16.3 15.1 7.5 7.1 24.6 19.3 18.2
----- ----- ----- ----- ------ ------ ------
Total operating income (loss)............... $14.2 $ 8.1 $(5.5) $(1.3) $ 3.5 $ 7.3 $ 3.3
===== ===== ===== ===== ====== ====== ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
A comparison of Hedstrom's results of operations for the six months ended
June 30, 1997 with the same period in 1996 is necessarily affected by the impact
of the consummation of the Transactions on June 12, 1997. Due to the inclusion
of 30 days of combined operations of Hedstrom and ERO in the six months ended
June 30, 1997, management does not believe the comparison of total net sales and
total gross profit with the same period in 1996 is meaningful.
Net Sales. Hedstrom's total net sales increased to $104.1 million in the
first six months of 1997 from $96.1 million in the first six months of 1996, an
increase of $8.0 million, or 8.3%. Such increase was attributable to the
inclusion of ERO, certain selling price increases and the restructuring of
several promotional allowances, offset by a decline in sales at the Bedford and
Ashland Divisions. June net sales of ERO, included in the first six months of
Hedstrom's results, were $14.0 million. Net sales of the Bedford Division
decreased by $4.3 million, or 6.8%, in the first six months of 1997 from the
first six months in 1996, primarily as a result of (i) a shift in product mix to
lower-priced outdoor gym sets and (ii) a decline in sales of Hedstrom's wood
kits to home centers,
43
<PAGE> 46
which accounted for decreases of $5.7 million and $1.8 million, respectively.
This decline in sales was partially offset by a $1.9 million increase
attributable to selling price increases and $1.1 million attributable to the
restructuring of certain promotional allowances. Selling prices of products sold
by the Bedford Division increased approximately 3.2% in the first six months of
1997 over the first six months in 1996. Net sales of the Ashland Division
decreased by $2.4 million, or 8.8%, in the first six months of 1997 from the
first six months of 1996, primarily as a result of a $3.8 million decrease in
sales of certain undecorated playballs and a $0.2 million decrease in sales of
O.E.M. products. These decreases were partially offset by the successful
introduction of "goofballs" and the increase in market share of ball pits, which
accounted for $0.9 million and $0.2 million of sales, respectively. Selling
prices of the Ashland Division increased approximately $0.6 million, or 2.5%, in
the first six months of 1997 over the first six months in 1996. Net sales of the
International Division increased by $.7 million, or 11.9%, in the first six
months of 1997 over the first six months of 1996, due primarily to an increase
in playball sales in Canada.
Gross Profit. As a result of the increase in Hedstrom's total net sales,
total gross profit increased to $30.5 million in the first six months of 1997
from $23.2 million in the first six months of 1996. As a percentage of net
sales, gross profit increased to 29.3% in the first six months of 1997 from
24.1% in the first six months of 1996 due primarily to (i) the inclusion of the
June 1997 results of ERO, which had a higher gross profit margin than the other
divisions of Hedstrom, (ii) the implementation of the 1996 Cost Reduction Plan
and (iii) a shift in mix to higher-margin playballs, the effects of which were
partially offset by a reduction in production volume resulting from the
implementation of just-in-time manufacturing and reduced sales. ERO's June 1997
gross profit was $5.0 million, or 35.7% of ERO's net sales, and is included in
the first six months of Hedstrom's results. The Bedford Division's gross profit
margin in the first six months of 1997 increased to 27.4% from 22.7% in the
first six months of 1996, primarily as a result of the benefits of the 1996 Cost
Reduction Plan, selling price increases and improvements in promotional
programs, which accounted for increases of 3.0%, 3.2% and 1.8%, respectively,
which benefits were partially offset by a 3.1% decrease in net sales
attributable to sales of lower-priced and lower-margin outdoor gym sets. Gross
profit margin in the Ashland Division increased to 31.0% in the first six months
of 1997 from 29.4% in the first six months of 1996 primarily as a result of (i)
an increase in selling prices, and (ii) the favorable effects of the 1996 Cost
Reduction Plan, which accounted for increases of 2.5% and 2.5%, respectively.
These increases were partially offset by (i) a reduction in production volume
and (ii) a change in product mix, which accounted for decreases of 2.0% and
1.4%, respectively. Gross profit margin in the International Division increased
to 24.2% in the first six months of 1997 from 15.3% in the first six months of
1996 primarily as a result of sales price increases and a shift to higher-margin
products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $16.3 million in the first six months of
1997 from $15.1 million in the first six months of 1996, an increase of 7.9%. As
a percentage of net sales, selling, general and administrative expenses
decreased to 15.6% in the first six months of 1997 from 15.7% in the first six
months of 1996, due principally to a reduction in warehouse and shipping costs
resulting from Hedstrom's implementation of just-in-time manufacturing of
outdoor gym sets and the discontinuation of certain print advertising program's,
which reduced expenses by 1.4% as a percentage of sales. This reduction was
partially offset by the inclusion of ERO's relatively high selling, general and
administrative expenses in June 1997, which increased expenses by 1.3% as a
percentage of net sales.
Interest Expense. Interest expense increased by 32.8% as a result of the
incurrence of Acquisition-related indebtedness and higher interest rates.
Income Tax Expense. Holdings' effective income tax rate for the six months
ended June 30, 1997 was 37.1% as compared with an effective income tax rate of
40.1% in the first six months of 1996. The decrease was attributable to the
inclusion of ERO's operating results, a large portion of which is derived from
Amav Canada and has a lower combined federal and provincial tax rate than
Holdings.
FIVE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
Net Sales. Hedstrom's total net sales decreased to $24.0 million in the
five months ended December 31, 1996 from $31.8 million in the comparable period
in 1995, a decrease of 24.5%. Net sales of the Bedford Division decreased by
$1.5 million, or 11.1%, in the 1996 period from the 1995 period, primarily as a
result of
44
<PAGE> 47
eliminating sales of low-margin juvenile products such as tricycles and ride-on
products. Net sales of the Ashland Division decreased by $6.3 million, or 37.7%,
in the 1996 period from the 1995 period. In the 1995 period, the Ashland
Division introduced its new ball pit line of products and obtained the benefit
of the initial "sell-in" of that product during the 1995 Christmas season. In
the 1996 period, ball pit products lacked the benefit of the initial "sell-in"
and were more vulnerable to competitive pressures that management believes have
since dissipated, resulting in a decline in sales of $5.0 million in the 1996
period from the 1995 period. The decline in the Ashland Division's sales is also
attributable to a decline in OEM sales. Net sales in the International Division
for the 1996 period approximated net sales for the 1995 period.
Gross Profit. Hedstrom's total gross profit decreased to $2.0 million in
the five months ended December 1996 from $5.8 million in the same period of
1995. As a percentage of net sales, gross profit decreased to 8.3% in the 1996
period from 18.2% in the 1995 period. Due to the lower production volume of
outdoor gym sets resulting from the implementation of just-in-time manufacturing
for the 1997 selling season, an additional $1.4 million of fixed manufacturing
costs were unabsorbed in the 1996 period as compared to the 1995 period. In
addition, in December 1996, Hedstrom changed the method of allocating
depreciation for interim reporting periods, resulting in a one-time adjustment
to depreciation of $0.6 million in the 1996 period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $7.5 million in the five months ended
December 31, 1996 from $7.1 million in the same period in 1995. Expressed as a
percentage of net sales, selling, general and administrative expenses increased
to 31.4% in the last five months of 1996 from 22.2% in the same period of 1995,
due principally to the decrease in sales and the inability to reduce such
expenses (which are largely fixed) proportionally. Selling, general and
administrative expenses in the 1996 period included a $0.2 million lawsuit
settlement.
Recapitalization Expense. In October of 1995, Holdings effected a
Recapitalization in which Holdings was purchased by an investment group, the
majority of the preferred stock and common stock of Holdings was redeemed, new
shares were issued to the purchaser, new debt facilities were obtained and
existing debt facilities were repaid. In addition, Holdings effected a common
stock split of 39,095 shares for one and increased the authorized shares from
1,000 to 50,000,000. After the Recapitalization, the majority of the common
stock was held by Hicks, Muse, Tate, and First Equity Fund II, L.P. However, two
of the existing shareholders retained a minority investment in Holdings.
Holdings expensed all of its costs associated with the Recapitalization. These
expenses include the following (in millions of dollars).
<TABLE>
<CAPTION>
Description Amount
----------- ------
<S> <C>
Commitment fees for the new revolver and term loan
facilities................................................ $2.9
Buyer's financing and transaction fees...................... 2.0
Seller's transaction fees................................... 1.7
Equity appreciation payments to employees................... 2.2
Other....................................................... .8
----
Total Recapitalization Expense.................... $9.6
----
</TABLE>
Interest Expense. Interest expense increased by 19.3%, due primarily to
increased borrowings associated with capital additions and higher working
capital requirements.
Income Tax Expense. Holdings' effective income tax rate for the five months
ended December 31, 1996 was 37.6% as compared with an effective income tax rate
of 35.5% in the same period of 1995. The increase was attributable to a decrease
in foreign losses, which provide no U.S. tax benefit, in 1996 relative to 1995.
In addition, the 1995 tax benefit was reduced by non-deductible transaction
costs, incurred in connection with the Recapitalization, and alternative minimum
tax incurred by Holdings.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Hedstrom's total net sales decreased to $133.2 million in fiscal
1996 from $133.9 million in fiscal 1995, a decrease of 0.5%. Net sales in the
Bedford Division decreased by $1.6 million, or 2.0%, in fiscal 1996 as compared
to fiscal 1995. Despite unit volume increases in outdoor gym sets, net sales
declined in fiscal 1996
45
<PAGE> 48
from fiscal 1995 principally as a result of an unfavorable product mix shift to
lower-priced, lower-margin outdoor gym sets due, in part, to pricing and
promotional policies implemented by certain of Hedstrom's retail customers. Net
sales of the Ashland Division increased $1.2 million, or 2.7%, in fiscal 1996 as
compared to fiscal 1995. This increase reflected the initial Christmas season
"sell-in" effect on ball pit sales.
Gross Profit. Total gross profit increased to $28.1 million in fiscal 1996
from $26.6 million in fiscal 1995, an increase of 5.6%. As a percentage of net
sales, gross profit increased to 21.1% in fiscal 1996 from 19.9% in fiscal 1995.
In the Bedford Division, gross profit margin increased to 17.3% in fiscal 1996
from 14.5% in fiscal 1995 primarily as a result of (i) a reduction in raw
materials prices and (ii) higher unit volume, which increased gross profits by
$3.0 million and $2.4 million, respectively, the effects of which were partially
offset by a shift in product mix to lower priced outdoor gym sets, which reduced
gross profits by $3.6 million. The gross profit margin of the Ashland Division
decreased to 28.5% in fiscal 1996 from 29.9% in fiscal 1995. The decrease was
attributable to increased promotional activity, an unfavorable shift in the mix
of playballs and a reduction in sales prices, which reduced gross profits by
$1.0 million, $0.9 million and $1.8 million, respectively, the effects of which
were partially offset by a $2.7 million decrease attributable to reductions in
material prices. The gross profit margin of the International Division decreased
to 16.5% in fiscal 1996 from 18.3% in fiscal 1995, principally as a result of an
unfavorable shift in product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $24.6 million in fiscal 1996 from $19.3
million in fiscal 1995 (or stated as a percentage of net sales, to 18.5% in
fiscal 1996 from 14.3% in fiscal 1995). This increase was due primarily to (i)
an increase in material handling and warehousing costs of $2.0 million,(ii) an
increase in advertising expenses of $2.0 million and (iii) a non-cash charge of
$1.0 million related to the write-off of certain advertising barter credits. The
increase in material handling and warehousing costs was due primarily to higher
levels of outdoor gym set inventories arising from the unexpected shift in
product mix and the resultant expense of outside warehouse space and related
material handling. The increased advertising expenditures related primarily to
an unsuccessful trial advertising campaign that has since been discontinued. As
a result of Hedstrom's decision to reduce its advertising expenditures during
fiscal 1997, management determined that $1.0 million of barter credits available
to pay for a portion of future advertising programs could not be utilized before
their expiration and, accordingly, were written off.
Recapitalization Expense. In October of 1995, Holdings effected a
Recapitalization in which Holdings was purchased by an investment group, the
majority of the preferred stock and common stock of Holdings was redeemed, new
shares were issued to the purchaser, new debt facilities were obtained and
existing debt facilities were repaid. In addition, Holdings effected a common
stock split of 39,095 shares for one and increased the authorized shares from
1,000 to 50,000,000. After the Recapitalization, the majority of the common
stock was held by Hicks, Muse, Tate, and First Equity Fund II, L.P. However, two
of the existing shareholders retained a minority investment in Holdings.
Holdings expensed all of its costs associated with the Recapitalization. These
expenses include the following (in millions of dollars).
<TABLE>
<CAPTION>
Description Amount
----------- ------
<S> <C>
Commitment fees for the new revolver and term loan
facilities................................................ $2.9
Buyer's financing and transaction fees...................... 2.0
Seller's transaction fees................................... 1.7
Equity appreciation payments to employees................... 2.2
Other....................................................... .8
----
Total Recapitalization Expense.................... $9.6
----
</TABLE>
Interest Expense. Interest expense increased by 28.9%, due primarily to
higher working capital requirements, acquisitions of equipment and increased
borrowings associated with the 1995 Recapitalization.
Income Tax Expense. Holdings' effective income tax rate for fiscal 1996 was
32.2% as compared with an effective income tax rate of 52.0% in fiscal 1995. The
decrease was attributable to non-deductible transaction
46
<PAGE> 49
costs incurred in fiscal 1995 in connection with the 1995 Recapitalization. In
addition, Holdings incurred alternative minimum tax in 1995 that was not
incurred in 1996.
FISCAL 1995 COMPARED TO FISCAL 1994
Net Sales. Hedstrom's total net sales were $133.9 million in fiscal 1995,
as compared to $108.7 million in fiscal 1994, an increase of 23.2%. This
increase was attributable primarily to increases in volume and selling prices at
both the Bedford Division and the Ashland Division. The Bedford Division's net
sales increased $9.5 million, or 13.3%, in fiscal 1995 over fiscal 1994,
primarily as a result of market share gains across the outdoor gym set and wood
gym kit product lines. The Ashland Division's net sales increased $14.4 million,
or 47.4% in fiscal 1995 over fiscal 1994, primarily as a result of (i) the
introduction of ball pit products, (ii) increases in the sales volume of premium
licensed playballs, (iii) a product mix shift toward higher-priced undecorated
playballs and (iv) increased sales of other products, which accounted for
increases of $7.2 million, $1.2 million, $4.0 million and $2.0 million,
respectively.
Gross Profit. Hedstrom's total gross profit was $26.6 million in fiscal
1995, as compared to $21.5 million in fiscal 1994, an increase of 23.7%.
Hedstrom's fiscal 1995 gross profit margin approximated fiscal 1994's gross
profit margin of 19.8%. The Bedford Division's gross profit margin decreased to
14.5% in fiscal 1995 from 17.1% in fiscal 1994 due to higher costs of raw
materials, particularly plastic resins. The Ashland Division's gross profit
margin increased to 29.9% in fiscal 1995 from 27.3% in fiscal 1994 primarily as
a result of (i) increases in selling prices and (ii) a product mix shift toward
higher-margin playballs, which increased gross profits by $0.9 million and $1.3
million, respectively, but the effects of which were partially offset by a $1.0
million increase in materials costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $19.3 million in fiscal 1995, as compared to $18.2
million in fiscal 1994, an increase of 6.0%. Expressed as a percentage of sales,
selling, general and administrative expenses decreased to 14.4% in fiscal 1995
from 16.7% in fiscal 1994 primarily as a result of higher sales volume.
Interest Expense. Interest expense increased by 53.3%, due primarily to
higher working capital requirements and higher interest rates.
Income Tax Expense. Holdings' effective income tax rate for fiscal 1995 was
52.0% as compared with an effective income tax rate of 32.0% in fiscal 1994. The
increase was attributable to larger losses from foreign operations, which
provide no U.S. tax benefit, in 1995 compared to 1994. In addition, Holdings
incurred alternative minimum tax in 1995 that was not incurred in 1994.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
Working Capital and Cash Flows
Net cash used for operating activities was $7.0 million for the six months
ended June 30, 1997 (net of a $13.9 million increase in accrued expenses
primarily related to the Transactions), as compared to $12.7 million for the six
month period ended June 30, 1996. The net use of cash in both periods reflects
the seasonal nature of Hedstrom's business. Hedstrom accumulates accounts
receivable during the first half of the year and subsequently liquidates them in
the second half of the year.
Net cash used for investing activities was $126.0 million for the first six
months of 1997, including the $122.6 million used for the acquisition of ERO,
Inc. and $3.4 million used for other capital expenditures. Net cash used for
investing activities was $4.8 million for the first six months of 1996, which
amount was used for capital expenditures.
Net cash provided by financing activities was $135.6 million for the six
months ended June 30, 1997, including (i) $110.0 million of proceeds from the
issuance of the Senior Subordinated Notes, (ii) $110.0 million of proceeds from
the Term Loans, (iii) $21.6 million from the issuance of the Discount Notes,
(iv) $2.7 million of net borrowings under the Revolving Credit Facility, (v) the
repayment of old term loans in the aggregate amount of $91.4 million, (vi) the
repayment of old revolving loans in the aggregate amount of $38.9 million, (vii)
debt
47
<PAGE> 50
financing costs of $17.8 million, (viii) $4.0 million of proceeds from the
issuance of Holdings Common Stock and (ix) $37.5 million of proceeds from the
issuance of Holdings Non-Voting Common Stock. The net cash provided by financing
activities was used primarily to consummate the acquisition of ERO, Inc. and to
fund operating cash requirements.
For the five months ended December 31, 1996, Hedstrom's operations provided
net cash of $3.0 million, largely the result of a $9.7 million decrease in
accounts receivable attributable to the seasonality of Hedstrom's business.
During this period, Hedstrom spent $1.3 million on capital expenditures and made
net payments of $9.1 million under its revolving credit facility.
For the fiscal year ended July 31, 1996, Hedstrom used $17.7 million of
cash in its operating activities. This net use of cash was attributable
primarily to (i) Hedstrom's $8.1 million net loss (which included $9.6 million
in costs that were expensed in connection with the 1995 Recapitalization) and
(ii) a $7.9 million reduction in accounts payable due to an acceleration of
certain obligations that previously had been extended. During fiscal 1996,
Hedstrom spent $6.7 million on equipment, including $3.3 million related to the
vertical integration of the Bedford Divisions plastics operations. Holdings and
Hedstrom's financing activities during this period generated $31.1 million in
cash. The 1995 Recapitalization involved, among other things, (i) the redemption
of $29.8 million of common stock and $3.1 million of preferred stock, (ii) the
issuance of notes to related parties in the amount of $2.5 million, (iii)
proceeds of $27.2 million from the sale of common stock to the HM Group and (iv)
term loan borrowings of $35.0 million.
For the fiscal year ended July 31, 1995, Hedstrom's operations provided
cash of $0.4 million. Net income of $0.8 million included (i) non-cash charges
of $1.2 million related to the discontinuation of its traffic controls business
and (ii) non-cash credits of $2.0 million related to certain barter sales. In
connection with higher sales activity, Hedstrom increased its accounts
receivable by $2.1 million, spent $6.9 million to build up its inventories and
had an increase of $2.4 million in prepaid expenses related to certain barter
credits. The effects of these actions were partially offset by the extension of
credit terms with certain vendors, which generated $5.8 million of cash. During
fiscal 1995, Hedstrom spent $2.6 million on capital expenditures and incurred
net borrowings of $2.9 million under its revolving credit facility.
For the fiscal year ended July 1994, Hedstrom's operations generated $1.3
million of cash. A net loss of $3.0 million included non-cash charges of $4.7
million related to the discontinuation of its traffic controls business. In
connection with higher sales activity, Hedstrom increased its accounts
receivable by $4.0 million and spent $1.7 million to build up its inventories.
The effects of these actions were offset by the extension of credit terms with
certain vendors, which generated $5.0 million of cash. During fiscal 1994,
Hedstrom spent $3.0 million on capital expenditures and generated $1.1 million
of cash in its financing activities.
48
<PAGE> 51
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 commencing in December 1997. Borrowings under
the Senior Credit Facilities will bear interest at floating rates and will
require interest payments on varying dates depending on the interest rate option
selected by the Company. Borrowings under the Senior Credit Facilities will
consist of $110 million under the Term Loan Facilities, comprised of a $75
million Tranche A Term Loan maturing in 2003 and a $35 million Tranche B Term
Loan maturing in 2005. In addition, the Senior Credit Facilities include a $70
million Revolving Credit Facility.
The Term Loan Facilities will require principal repayments according to the
following schedule:
<TABLE>
<CAPTION>
DATE TRANCHE A TERM LOAN TRANCHE B TERM LOAN
---- ------------------- -------------------
<S> <C> <C>
December 31, 1997............................... $1,000,000 $ 125,000
March 31, 1998.................................. 3,000,000 125,000
June 30, 1998................................... 750,000 125,000
September 30, 1998.............................. 3,000,000 125,000
December 31, 1998............................... 750,000 125,000
March 31, 1999.................................. 4,000,000 125,000
June 30, 1999................................... 1,000,000 125,000
September 30, 1999.............................. 4,000,000 125,000
December 31, 1999............................... 1,000,000 125,000
March 31, 2000.................................. 5,000,000 125,000
June 30, 2000................................... 1,250,000 125,000
September 30, 2000.............................. 5,000,000 125,000
December 31, 2000............................... 1,250,000 125,000
March 31, 2001.................................. 6,000,000 125,000
June 30, 2001................................... 1,500,000 125,000
September 30, 2001.............................. 6,000,000 125,000
December 31, 2001............................... 1,500,000 125,000
March 31, 2002.................................. 8,000,000 125,000
June 30, 2002................................... 2,000,000 125,000
September 30, 2002.............................. 8,000,000 125,000
December 31, 2002............................... 2,000,000 125,000
March 31, 2003.................................. 7,200,000 5,000,000
June 30, 2003................................... 1,800,000 1,250,000
September 30, 2003.............................. 5,000,000
December 31, 2003............................... 1,250,000
March 31, 2004.................................. 5,400,000
June 30, 2004................................... 1,350,000
September 30, 2004.............................. 5,400,000
December 31, 2004............................... 1,350,000
March 31, 2005.................................. 5,100,000
June 30, 2005................................... 1,275,000
</TABLE>
In connection with the Proposed Asset Acquisition, Hedstrom contemplates
that the Credit Agreement will be amended to permit the Proposed Asset
Acquisitions and to provide for an additional $10,000,000 of Tranche B Term
Loans, in which case the amortization payments with respect to the existing
Tranche B Term Loans will be increased pro rata. It is contemplated that the
balance of the funds required to consummate the Proposed Asset Acquisitions will
be obtained through a draw under the Revolving Credit Facility.
The Revolving Credit Facility terminates and all amounts outstanding
thereunder mature on the maturity date of the Tranche A Term Loan Facility. See
"Description of Senior Credit Facilities."
49
<PAGE> 52
At present, the Discount Notes do not require cash interest payments.
Rather, principal will accrete to an aggregate principal amount of $44,612,000
on June 1, 2002. Commencing on such date, Holdings will be required to make
semiannual interest payments of $2,676,720. See "Description of the New Discount
Notes."
The Company's remaining liquidity demands will be for capital expenditures
and for working capital needs. In each of 1997 and 1998 the Company is expected
to make capital expenditures of approximately $9 million. For the foreseeable
future, the Company expects that its capital expenditures will be limited
primarily to maintaining existing facilities and equipment and completing its
insourcing of manufacturing certain components. The Credit Agreement imposes an
annual limit of $10,000,000 on the Company's capital expenditures and
investments (subject in any given year to a roll-over of up to $4,000,000 of
unused capital expenditure capacity from the previous year). In addition, to
achieve the estimated net cost savings of over $9.0 million described herein
(see "Prospectus Summary -- Business Strategy -- Achieve Cost Savings" and
"Unaudited Pro Forma Consolidated Financial Information"), the Company may incur
expenditures related to the restructuring of its operations.
The Company's primary sources of liquidity are cash flows from operations
and borrowings under the Revolving Credit Facility. As of June 30, 1997,
approximately $67.3 million was available to the Company (subject to borrowing
base limitations) for borrowings under the Revolving Credit Facility. See
"Description of Senior Credit Facilities." Management believes that cash
generated from operations, together with borrowings under the Revolving Credit
Facility, will be sufficient to meet the Company's working capital and capital
expenditures needs for the foreseeable future.
The Company believes it is more likely than not to realize the net deferred
tax asset and accordingly no valuation allowance has been provided. This
conclusion is based on, (i) changes in operations that have recently occurred,
including the 1996 Cost Reduction Plan and the acquisition of ERO, Inc., which
has a lengthy and consistent history of profitable operations, (ii) projections
(which include ERO, Inc.) of sufficient taxable U.S. income to fully realize the
net deferred tax asset by the end of calendar year 1999, (iii) the tax loss
carryforwards included in the net deferred tax asset were generated in very
recent periods and do not begin to expire until the years 2008-2011, and (iv)
the significant excess of book basis over tax basis relative to the net assets
of ERO, Inc. Management continually evaluates the realizability of the net
deferred tax assets and the need for a valuation allowance on such assets.
SEASONALITY OF THE COMPANY
Hedstrom's peak selling season is the first half of the calendar year
whereas ERO's peak selling season is the second half of the calendar year.
Management believes that the Acquisition will smooth the historical seasonality
of Hedstrom's and ERO's businesses, thereby balancing working capital
requirements and enabling the Company to generate more consistent cash flows
throughout the year. Pro forma net sales for the Company for each calendar
quarter during the twelve months ended December 31, 1996 were 24.6%, 26.5%,
22.8% and 26.1%, respectively, of total pro forma net sales for such
twelve-month period.
ADOPTION OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Holdings will adopt SFAS No. 128, "Earnings Per Share", effective December
15, 1997. SFAS No. 128 requires the calculation of basic and diluted earnings
per share. Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share is computed by dividing the net income by the
weighted average number of shares of common stock and common stock equivalents.
As required, Holdings will restate the reported earnings per share upon adoption
of SFAS No. 128. Assuming adoption of SFAS No. 128, basic and diluted earnings
per share for the six months ended June 30, 1997 and 1996, respectively would
have been the same as reported earnings per share.
Holdings will adopt SFAS No. 129, "Disclosure of Information about Capital
Structure", effective December 15, 1997. SFAS No. 129 requires companies to
disclose the pertinent rights and privileges of all securities other than
ordinary common stock. Those disclosures include such things as dividend and
liquidation preferences, participation rights, call prices and dates, conversion
prices, unusual voting rights and others. As required, Holdings will make such
disclosures, if applicable, upon adoption. Management does not believe that SFAS
No. 129 will have a significant impact on Holdings' financial statements.
50
<PAGE> 53
Holdings will adopt SFAS No. 130, "Reporting Comprehensive Income",
effective January 1, 1998. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined as the
total of net income and all other non-owner changes in equity. Management does
not believe that SFAS No. 130 will have a significant impact on Holdings'
financial statements.
Holdings will adopt SFAS No. 131, "Disclosure about Segments of An
Enterprise and Related Information", effective January 1, 1998. This
pronouncement changes the requirements under which public businesses must report
segment information. The objective of the pronouncement is to provide
information about a company's different types of business activities and
different economic environments. SFAS No. 131 will require companies to select
segments based on their internal reporting system. Restatement of prior year
segment disclosure will be required upon adoption of SFAS No. 131. Adoption of
this pronouncement will have no significant impact on Holdings results of
operations or financial position. Management is evaluating what impact, if any,
adoption will have on Holdings' financial statement disclosures.
51
<PAGE> 54
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF ERO
The selected consolidated historical financial data presented below as of
and for the years in the five-year period ended December 31, 1996 were derived
from the consolidated financial statements of ERO, which have been audited by
Price Waterhouse LLP. The selected consolidated financial data presented below
as of and for the three-month periods ended March 31, 1996 and 1997 have not
been audited, but, in the opinion of management, include all the adjustments
(consisting only of normal, recurring adjustments) necessary to present fairly,
in all material respects, such information in accordance with GAAP applied on a
consistent basis. Interim results are not necessarily indicative of ERO's
results for the full year, principally because of the seasonal nature of ERO's
business. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of ERO" and the consolidated financial statements of ERO and the
notes thereto.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ---------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................................... $ 19,939 $ 18,883 $157,913 $128,722 $126,734 $95,459 $101,777
Cost of sales................................... 13,814 13,264 97,802 80,693 79,776 63,028 64,984
-------- -------- -------- -------- -------- ------- --------
Gross profit.................................... 6,125 5,619 60,111 48,029 46,958 32,431 36,793
Selling, general and administrative expenses.... 7,763 7,553 38,896 33,183 34,078 26,245 26,919
Restructuring charge............................ -- -- -- -- -- 1,700 --
-------- -------- -------- -------- -------- ------- --------
Operating income (loss)......................... (1,638) (1,934) 21,215 14,846 12,880 4,486 9,874
Interest expense................................ 2,010 1,846 9,062 1,997 1,939 1,261 2,292
-------- -------- -------- -------- -------- ------- --------
Income before income taxes...................... (3,648) (3,780) 12,153 12,849 10,941 3,225 7,582
Income tax benefit (expense).................... 1,495 1,552 (4,395) (5,167) (4,482) (1,040) (2,630)
-------- -------- -------- -------- -------- ------- --------
Income from continuing operations............... (2,153) (2,228) 7,758 7,682 6,459 2,185 4,952
Extraordinary expense -- early extinguishment of
debt, net of applicable income taxes.......... -- -- -- -- -- -- (1,558)
-------- -------- -------- -------- -------- ------- --------
Income before cumulative effect of the change in
accounting for income taxes................... (2,153) (2,228) 7,758 7,682 6,459 2,185 3,394
-------- -------- -------- -------- -------- ------- --------
Cumulative effect of the change in accounting
for income taxes.............................. -- -- -- -- -- -- (1,911)
-------- -------- -------- -------- -------- ------- --------
Net income...................................... $ (2,153) $ (2,228) $ 7,758 $ 7,682 $ 6,459 $ 2,185 $ 1,483
======== ======== ======== ======== ======== ======= ========
OTHER FINANCIAL DATA:
Net Cash provided by (used in):
Operating activities.......................... $ 12,708 $ 4,793 $ (1,277) $ 5,582 $ 8,832 $ 9,468 $ 9,369
Investing activities.......................... (289) (448) (3,619) (56,867) (6,442) (6,289) (13,443)
Financing activities.......................... (16,149) (3,628) 9,836 51,239 (2,515) (3,118) (920)
EBITDA(a)....................................... (315) (590) 26,504 18,411 15,949 7,320 12,944
Depreciation and amortization(b)................ 1,323 1,344 5,289 3,565 3,069 2,834 3,120
Capital expenditures............................ 289 448 3,625 1,772 1,287 989 1,881
Ratio (deficiency) of earnings to fixed
charges(c).................................... (3,648) (3,780) 2.2x 5.9x 5.5x 2.9x 3.8x
BALANCE SHEET DATA (END OF PERIOD):
Total assets.................................... $136,381 $131,353 $159,994 $144,138 $ 56,792 $48,935 $ 51,112
Total debt (including current maturities)....... 79,431 82,041 95,640 84,998 11,875 14,650 17,800
Stockholders' equity............................ 40,649 32,789 43,014 36,064 27,997 21,177 18,781
</TABLE>
- ---------------
(a) EBITDA represents operating income plus depreciation, and amortization.
EBITDA as determined by ERO may not be comparable to the EBITDA measure as
reported by other companies. EBITDA is not intended to represent cash flow
from operations as defined by GAAP and should not be considered as an
indicator of operating performance or an alternative to cash flow or
operating income (as measured by GAAP) or as a measure of liquidity. In
addition, this measure does not represent funds available for discretionary
use. It is included herein to provide additional information with respect to
the ability of ERO to meet its future debt service, capital expenditures and
working capital requirements.
(b) Depreciation and amortization included herein excludes the amortization of
deferred financing costs that is included in interest expense.
(c) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent income (loss) before income taxes and fixed charges. Fixed charges
consist of the total of (i) interest, whether expensed or capitalized; (ii)
amortization of debt expense and discount or premium relating to any
indebtedness, whether expensed or capitalized; and (iii) that portion of
rental expense considered to represent interest cost (assumed to be
one-third). Due to the seasonal nature of ERO's business, the ratio of
earnings to fixed charges for the three months ended March 31, 1996 and
March 31, 1997 are not accurate representations of full-year results. If the
ratio is less than 1.0x, the deficiency is shown.
52
<PAGE> 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ERO
GENERAL
ERO is a leading designer, manufacturer, importer and marketer of licensed
and branded children's leisure products through four principal business units:
- Amav, which ERO acquired in October 1995, is a fully integrated
manufacturer of children's products, including arts and crafts kits, game
tables such as table tennis, table-top hockey and soccer, pool and
shuffleboard, and certain other children's bulk play products such as
play kitchens and battery-operated ride-on vehicles.
- ERO Industries produces the Slumber Shoppe line of products, which
includes slumber products such as indoor sleeping bags and play tents
featuring popular licensed characters such as Mickey's Stuff for Kids,
Barbie(TM), Pooh, and Batman and Robin(TM), and a water sports line of
products including flotation jackets, masks, fins, goggles and snorkels
directed at the children's market through ERO's license portfolio and at
the children's and adults' markets under the Coral brand name.
- Priss Prints produces licensed room decorations for young children,
consisting principally of stick-on and peel-off wall decorations.
- Impact sells a broad line of school supplies featuring popular licensed
characters, including back packs, book bags, lunch kits and stationery
products such as portfolios, binders, study kits, pencils and theme
books.
RESULTS OF OPERATIONS
The following discussion generally relates to the historical consolidated
results of operations and financial condition of ERO and should be read in
conjunction with the Consolidated Financial Statements of ERO included elsewhere
herein.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
SUMMARY OF CONSOLIDATED FINANCIAL RESULTS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
INCREASE
1997 1996 (DECREASE)
------ ------ -----------
<S> <C> <C> <C>
Net sales............................... $19.9 $18.9 5.3%
Gross profit margin..................... 30.7% 29.8% 0.9%
Selling, general and administrative
expense (as a percentage of sales).... 38.9% 40.0% (1.1)%
Interest expense........................ $ 2.0 $ 1.8 11.1%
</TABLE>
ERO's first quarter results reflect the seasonal nature of its business.
The majority of the ERO's sales occur in the third and fourth quarters, while a
substantial portion of its expenses remain relatively consistent throughout the
year.
Net sales for the first quarter of 1997 increased 5.3% to $19.9 million as
compared to the first quarter of last year. The first quarter sales growth can
be attributed to ERO's Slumber Shoppe and Priss Prints businesses whose emphasis
on classic licenses resulted in gaining year-round placement at certain
retailers.
The gross profit margin for the quarter ended March 31, 1997 increased by
0.9% compared to the prior year due to improved pricing on its licensed products
when compared to a relatively weak performance in licensed products in the first
quarter of 1996.
53
<PAGE> 56
Selling, general and administrative expense as a percentage of sales
decreased by 1.1% as ERO was able to control fixed cost spending in a period of
increased revenues.
Interest expense increased by 11.1% compared to the same period in the
prior year due to higher interest rates and an increase in working capital
requirements.
1996 COMPARED TO 1995
Sales increased to $157.9 million, or 22.7%, in 1996 due primarily to
Amav's first full year of operations. Amav, which was acquired October 1, 1995,
contributed $66.1 million in 1996 compared to $24.6 million in 1995, a $41.5
million increase. Partially offsetting Amav's contribution, sales in ERO's
Impact business fell far short of 1995 levels due to the timing of 1996's major
licensing events. The success of Impact's back-to-school products relies heavily
on major summer licensing events. In 1996, the major licensing events occurred
in the fourth quarter, which is after the back-to-school selling season.
Amav's sales of $66.1 million represent a $16.1 million, or 32.2%, increase
over 1995 full year sales of $50.0 million. Amav's sales growth is attributable
to several factors including increased production capacity, working capital
availability, growth of the arts and crafts market, the introduction of new
products and increased account penetration.
Gross profit margins for 1996 increased by 0.8% compared to 1995 due
primarily to a shift in the sales mix to ERO's businesses with higher margins,
Amav and Priss Prints.
Selling, general and administrative expenses as a percentage of sales
decreased by 1.2% primarily due to a decrease in royalty expense as a percentage
of sales resulting from a shift in the sales mix to non-licensed products. This
decrease was partially offset by the increase in amortization expense resulting
from the Amav acquisition.
Interest expense increased significantly from the prior year due to the
acquisition debt and higher working capital requirements.
ERO's income before taxes in 1996 was generated primarily from its foreign
operations on account of the success of Amav, which has its operations based in
Canada. Because Amav manufactures its products in Canada, approximately 27% of
ERO's cost of sales in 1996 were denominated in Canadian dollars. However,
approximately 80% of Amav's sales were made to its U.S.-based corporate parent
for resale in the United States. These sales were denominated in U.S. dollars.
As a result, only 13% of ERO's 1996 sales were made to foreign customers.
ERO's effective tax rate for 1996 was 36% compared to 40% in 1995 due to an
increase in the percentage of income derived from ERO's foreign subsidiaries,
which carry lower statutory tax rates than its U.S. subsidiaries.
1995 COMPARED TO 1994
Sales increased to $128.7 million, or 1.6%, in 1995 due primarily to the
acquisition of Amav. Amav, which was acquired October 1, 1995, contributed $24.6
million to sales in 1995. Offsetting Amav's positive impact on sales, ERO's
sales of licensed products were significantly below the record levels achieved
during 1994 due to the lack of a strong license. During 1994, ERO's strongest
license, Mighty Morphin Power Rangers(TM), generated approximately 29% of total
sales. There was no such license in 1995.
Amav's full year sales in 1995 were $50.0 million as compared to $24.8
million in 1994, a 102% increase. Amav's sales improvement from the prior year
resulted from a number of factors including increased capacity due to its new
facility in Montreal, Quebec, increased account penetration and the introduction
of several new products.
During 1995, ERO discontinued the majority of products within the sports
bags and coolers product group. The products within this group, which did not
carry an exclusive license, offered ERO no competitive advantages and did not
fit into ERO's strategy of providing children's leisure products.
54
<PAGE> 57
Gross profit margins were relatively consistent with the prior year. The
shift in sales mix to ERO's businesses with higher margins, Amav and Priss
Prints, was slightly offset by the discontinuation of products in the sports
bags and coolers product group, as discussed above, and the liquidation of
certain slow-moving inventory.
Selling, general and administrative expenses as a percentage of sales
decreased by 1.1% primarily due to a decrease in royalty expense as a percentage
of sales resulting from a shift in the sales mix to Amav's non-licensed
products. This decrease was partially offset by the effect on ERO's fixed cost
structures of the decrease in licensed product sales.
Interest expense was relatively consistent with the prior year as ERO's new
$110.0 million credit facility, used to finance the Amav acquisition, was not in
effect until December 1995.
A majority of ERO's income before taxes in 1995 was generated by Amav's
Canadian operations. As mentioned above, approximately 27% of Amav's cost of
sales are denominated in Canadian dollars, whereas approximately 80% of its
sales are made to its U.S.-based corporate parent for resale in the United
States. Such resales are denominated in U.S. dollars. As a result, only 9% of
ERO's 1995 sales were made to foreign customers.
LIQUIDITY AND CAPITAL RESOURCES
Net cash generated from operating activities during the three months ended
March 31, 1997 totaled approximately $12.7 million. These cash flows, together
with cash on hand, were used principally to repay $16.2 million under ERO's then
existing loan facilities and fund capital expenditures of $0.3 million.
ERO's liquidity and capital resources are derived primarily through its
operations. Management anticipates that cash generated by operating activities
will be sufficient to conduct its operations as planned. Any additional capital
resources, if needed, will be available through capital contributions and loans
by Hedstrom (subject to restrictions imposed by certain of Hedstrom's debt
covenants).
As mentioned above, a significant portion of ERO's cost of sales is
denominated in Canadian dollars. Consequently, ERO's cash flows and earnings
(and to a lesser extent, its revenues) are affected by fluctuation in foreign
currency exchange rates, primarily, the Canadian dollar-U.S. dollar exchange
rate. ERO does not have any hedging program in place to mitigate the risks of
exchange rate fluctuation. Although ERO has not experienced material adverse
consequences from exchange rate fluctuations in the past, there can be no
assurance that future exchange rate fluctuations would not have material adverse
effects on its liquidity or capital resources.
55
<PAGE> 58
BUSINESS
GENERAL
The Company (consisting of the combined businesses of Hedstrom and ERO) is
a leading North American manufacturer and marketer of well-established
children's leisure and activity products. The Company's diversified product
lines are in such "evergreen" product categories as outdoor gym sets, wood gym
kits and slides, spring horses, playballs, arts and crafts kits, game tables,
and licensed indoor sleeping bags, play tents and wall decorations. The Company
considers such product categories to be "evergreen" in nature because each is
characterized by proven longevity, demonstrated market demand and consistent
sales over time. For example, the Company believes products such as outdoor gym
sets and playballs have been marketed and sold in the United States for over 30
years.
The Company believes that in the U.S. markets for nine of its ten principal
product categories, it enjoys the competitive advantage of being the market
share leader, the low-cost producer or both. For the twelve-month period ended
December 31, 1996, approximately half of the Company's pro forma net sales were
derived from product categories for which the Company believes it has a market
share of approximately 75% or greater. The Company's products are sold primarily
through national retailers, mass merchants, home improvement centers, sporting
goods stores, drug store chains and supermarkets. The Company's outdoor gym set
product line accounted for approximately 20% of the Company's pro forma net
sales for the twelve-month period ended December 31, 1996. No other product line
accounted for more than 10% of the Company's pro forma net sales for the
twelve-month period ended December 31, 1996.
Hedstrom's operations historically have been conducted through two
principal divisions. The Bedford Division principally manufactures and markets
in the United States outdoor gym sets, wood gym kits and slides, spring horses
and gym accessories. The Ashland Division principally manufactures and markets
in the United States a wide variety of children's playballs and ball pit
products. In addition, Hedstrom sells products manufactured by both the Bedford
Division and the Ashland Division outside of the United States through its
International Division. Hedstrom utilizes excess capacity at both the Bedford
Division and the Ashland Division to supply components to a variety of OEMs of
industrial and consumer products.
ERO's operations historically have been conducted through four principal
business units:
- Amav, which ERO acquired in October 1995, is a fully integrated
manufacturer of children's products, including arts and crafts kits, game
tables such as table tennis, table-top hockey and soccer, pool and
shuffleboard, and certain other children's bulk play products such as
play kitchens and battery-operated ride-on vehicles.
- ERO Industries produces the Slumber Shoppe line of products, which
includes slumber products such as indoor sleeping bags and play tents
featuring popular licensed characters such as Mickey's Stuff for Kids,
Barbie(TM), Pooh, and Batman and Robin(TM), and a water sports line of
products including flotation jackets, masks, fins, goggles and snorkels
directed at the children's market through ERO's license portfolio and at
the children's and adults' markets under the Coral brand name.
- Priss Prints produces licensed room decorations for young children,
consisting principally of stick-on and peel-off wall decorations.
- Impact sells a broad line of school supplies featuring popular licensed
characters, including back packs, book bags, lunch kits and stationery
products such as portfolios, binders, study kits, pencils and theme
books.
PRODUCTS
BEDFORD DIVISION
Outdoor Gym Sets. The Bedford Division produces a broad selection of
painted metal gym sets and composite metal and plastic gym sets. Each of the
Company's outdoor gym sets consists of a heavy-duty metal frame which supports
several hanging, swinging rides such as contoured swing seats, glide rides and
trapezes. In
56
<PAGE> 59
addition, the Company's outdoor gym sets often incorporate a plastic slide and
climbing tower. The Company sells its outdoor gym sets as complete,
ready-to-assemble kits. The Company's outdoor gym set line consists of 19 styles
available in a variety of colors that sell at retail prices between $80 and
$600. The Company estimates that its share of the total U.S. market for painted
metal gym set units and composite metal and plastic gym set units is
approximately 75%.
Wood Gym Kits and Slides. The Bedford Division produces wood gym kits sold
through home improvement centers and building supply stores. Wood gym kits
consist of certain components necessary to construct a wood gym set, such as
nuts, bolts and framing brackets, and are typically sold together with accessory
products including swings, climbing towers and plastic slides. The Company does
not sell the lumber, nails or the tools required to construct the wood gym kits.
The retailers that carry the Company's wood gym kits, primarily home improvement
centers, benefit from the sale of such items, particularly the lumber. The
Company currently offers wood gym kits with differing designs and layouts,
ranging from simple swing set designs to more elaborate designs in the shape of
pirate ships and trains. The Company's wood gym kits generally sell for retail
prices between $69.99 and $339.99, and the Company's slides generally sell for
retail prices between $79.99 and $269.99. The Company estimates that its share
of the total U.S. market for wood gym kits is approximately 25%, second only to
Swing-N-Slide Corporation.
Spring Horses. The Bedford Division designs and manufactures 11 different
styles of spring horses for use by children ages two to six. The Company
manufactures the body of the horse, paints it to a specific style and packages
it with a metal frame manufactured by the Company. The Bedford Division has
manufactured spring horses for over ten years, and management estimates that the
Company has approximately a 75% share of the U.S. market for this product
category.
Gym Accessories, OEM and Other. The Bedford Division designs, manufactures,
sources and sells a broad line of accessories that complement its outdoor gym
sets and wood gym kits. Accessories include swing seats, climbing ropes, ladders
and nets. Many of the Company's outdoor gym sets offer the customer the ability
to customize the gym set with various accessories sold both in connection with
the initial purchase of an outdoor gym set and as upgrades or replacement parts
for the Company's large base of installed units. The Company currently offers
over 65 individual accessory items. In addition, the Company has undertaken
efforts to identify new products that the Bedford Division can manufacture
during the May through November period when its manufacturing capacity
historically has been underutilized. One such product is "Turbo Hoops," a home
version of the popular basketball game found in taverns and other commercial
establishments. The Company intends to begin producing Turbo Hoops during the
second half of 1997. In addition, the Company is seeking opportunities to
utilize seasonal excess capacity at the Bedford Division to manufacture products
for OEMs. The Company's sales to OEM customers will better enable it to
cost-effectively maintain a core of full-time, highly skilled workers and a high
level of plant utilization year-round, resulting in a consistent source of
revenue and profitability for the Bedford Division.
ASHLAND DIVISION
The Ashland Division produces a wide variety of children's playballs
ranging in size from 4" to 36" in diameter, including both premium playballs and
non-premium playballs. Management estimates the Company's share of the total
U.S. playball market is approximately 85%.
Premium Playballs. The Company's premium playballs generally include
stylized printing on 360 degrees or 180 degrees of the ball or contain fun
novelty items inside the ball. The premium playballs that are decorated with
stylized printing feature either popular characters from the Company's extensive
license portfolio or the Company's proprietary playball patterns. The Company's
proprietary playball patterns include holograms, sparkles and other geometric
patterns. In addition to playballs with stylized printing, the Company recently
introduced a line of "goofballs" that contain items inside the ball such as
plastic spiders, worms and beads. The Company's premium playballs generally sell
at retail prices between $1.99 and $8.99.
Non-Premium Playballs. The Company's non-premium playballs include (i)
decorated playballs with stripes or other simple patterns, (ii) undecorated
playballs and (iii) athletic-style playballs such as footballs, basketballs,
baseballs, volleyballs and soccer balls. Non-premium playballs are available in
a wide range of colors and sizes.
57
<PAGE> 60
This product line experienced significant growth over the last two years from
the introduction of an 18" diameter playball, a new size in the playball
category. The Company's non-premium playballs generally sell at retail prices
between $1.99 and $24.99.
Ball Pits. In fiscal 1995, the Company developed and introduced home and
backyard versions of the popular ball pits used by children in commercial
locations such as McDonald's. The Company sells its ball pit product as a
complete, ready-to-assemble set including an inflatable tent-like enclosure and
250 to 400 ball pit balls. Management estimates that the Company's share of the
U.S. ball pit market exceeds 75%. The Company sources the enclosures from
several overseas manufacturers and packages the enclosures with ball pit balls
manufactured at the Ashland Division. Management believes that one of the
Company's competitive advantages in this product category is its ability to
manufacture high-quality ball pit balls using a patented process for which the
Company has an exclusive licensing agreement. Hedstrom currently offers four
ball pit models.
OEM and Other. The Ashland Division complements its core playball and ball
pit businesses and smooths seasonal production requirements by manufacturing a
variety of custom-fabricated plastic products for toy, sporting goods, hospital
supply, decorating and lighting companies. Sales to OEM customers enable the
Ashland Division to cost-effectively maintain a core of full-time, highly
skilled workers and result in a high level of plant utilization year-round while
providing a consistent source of revenue and profitability.
AMAV
Amav manufactures and markets children's leisure and activity products
including arts and crafts kits, game tables, and certain other children's bulk
play products. Amav's entire product line consists of approximately 400 items,
approximately 70% of which are in the arts and crafts kits category.
Arts and crafts products include a broad variety of children's activity
kits, chests and boxes that include stickers, doll outfits, mazes, paints,
balloons, stamps, stationery, sun catchers, woodworking kits, magic sets,
puzzles, sand art, egg art and art materials. These products generally are
targeted at children between three and eight years of age.
Game tables include a wide variety of popular table games such as table
tennis, table-top hockey and soccer, pool and shuffleboard that are often
integrated into a single game table. For example, Amav's 3-in-1 game table
includes table tennis, hockey and pool whereas Amav's 6-in-1 game table includes
those games plus foosball and both arcade and floor basketball. The largest game
table Amav manufactures is an 18-in-1 game table. In addition, Amav also
manufactures certain other children's bulk play products such as play kitchens
and battery-operated ride-on vehicles, which Amav recently introduced.
ERO INDUSTRIES
ERO Industries' product offerings consist of its Slumber Shoppe line of
products and its water sports line of products.
The Slumber Shoppe line of products includes indoor sleeping bags, carrying
cases, play tents and selected children's furniture, all of which feature
popular licensed characters and are targeted at children between the ages of two
and ten. The core product within this line is the slumber bag, a lightweight
indoor sleeping bag used for slumber parties, sleepovers and children's nap
times. Carrying cases (called slumber mates) are large enough to fit a slumber
bag and pajamas, toothbrushes and other items a child may need to spend the
night at a friend's house. Play tents (called slumber tents) are designed to be
used indoors, and give children a private area that can be used as a clubhouse,
fort or special play area. ERO Industries also sells foam and bean bag chairs
featuring licensed characters.
The water sports line of products includes a full range of personal
flotation devices (such as flotation vests) and swim and pool products
(including masks, fins, snorkels and goggles). These products are directed at
the children's market using the Company's license portfolio, and at the
children's and adults' markets under the Coral brand name.
58
<PAGE> 61
PRISS PRINTS
Through the 1993 acquisition of Priss Prints, ERO entered the children's
room decor industry with its licensed character wall decorations. Priss Prints
sells self-adhesive wall decorations for children's rooms that can be removed
without any damage to the wall or paint. Such wall decorations consist of
licensed characters and other decorations. For 1997, the Company's room
decoration licenses include Batman and Robin(TM), Looney Tunes(TM), and 101
Dalmatians, Pooh and other of Disney's classic characters. Potential new product
offerings include licensed character borders, introduced by Priss Prints for
1997, door decorations, night-lights and switchplates.
IMPACT
ERO established its Back-to-School product line in 1994 through the
combination of ERO's then-existing Back-to-School product line and the acquired
product lines of Impact International, Inc. and Impact Designs, Ltd.
(collectively, "Impact"). Impact now offers a broad line of licensed school
supplies, including carry bags (such as backpacks, school bags, lunch kits,
luggage, fanny packs and locker bags) and stationery products (such as theme
books, portfolios, binders, pencils and study kits). This product line
capitalizes on the Company's licensing and graphics strengths and offers
opportunities for innovative products featuring unique designs and other special
effects.
CUSTOMERS
The Company maintains an extensive customer base that includes the nation's
leading mass merchants, toy retailers, home improvement centers, department
stores, catalog showrooms, sporting goods stores and warehouse clubs. The
Company's products are sold in every state in the United States as well as
Canada, the United Kingdom and several other foreign countries.
The Company's pro forma net sales to Toys "R" Us, Wal-Mart, Kmart and
Target (its four largest customers) during the twelve-month period ended
December 31, 1996 would have accounted for 16%, 17%, 10%, and 7%, respectively,
of the Company's pro forma net sales for such period. Although the Company has
well-established relationships with its key customers, the Company does not have
long-term contracts with any of them.
SALES AND MARKETING
HEDSTROM
Hedstrom's sales force is comprised of one Sales Manager of Major Accounts
who deals directly with its top four customers -- Toys "R" Us, Wal-Mart, Kmart
and Service Merchandise -- and two National Sales Managers who work with outside
vendor representatives to cover Hedstrom's other customers. These outside vendor
representatives include approximately 22 manufacturers representative
organizations with over 100 sales representatives to service Hedstrom's mass
merchant and home center customers.
Hedstrom's marketing activities include customer service, product
development and advertising and promotions. Hedstrom has six customer service
representatives in the Bedford Division and four in the Ashland Division who
serve retail customers by tracking and confirming orders and answering general
inquiries. Hedstrom's consumer relations department is staffed with trained
professionals who, through an "800" number, assist end-users in assembling
products and purchasing spare parts. Hedstrom's product development staff
consists of twenty engineering and design professionals. The product development
process involves extensive product engineering, model making and sample testing.
Hedstrom historically has advertised its products in cooperation with its
retail customers, principally through print media such as newspaper circulars
and free-standing inserts sponsored by its customers. In fiscal 1996, Hedstrom
initiated, on a trial basis, its own multi-media advertising program designed to
increase consumer awareness of the Hedstrom brand over time. The total cost for
this advertising program was approximately $1.5 million. After careful review,
management determined that this trial advertising campaign would not provide an
acceptable return on investment and elected to discontinue it. Therefore, such
costs will not be incurred in 1997.
59
<PAGE> 62
ERO
ERO's sales and marketing organization includes a small group of direct
salespeople and independent sales representatives. ERO markets its products
primarily through numerous trade shows and limited co-operative advertising. ERO
does not currently conduct direct advertising.
ERO has in-house creative services providing marketing support for each of
its business units. While ERO uses several outside, free-lance creative
resources, its in-house facilities have display design and packaging
capabilities. The creative services departments work closely with the marketing
groups of the licensors as well as retailers to enhance consumer appeal through
the display and packaging of products.
COMPETITION
The Company generally operates in a highly-competitive environment.
Competition in the markets for the Company's products is based primarily on
cost, characters licensed (for licensed character products), product design and
quality, reputation, customer service, new product innovation and creative
marketing and distribution approaches. Competitive factors in the market for
character licenses include royalty levels, breadth of product lines, timely
royalty reporting and payment, artistic applications and compliance with
licensors' guidelines.
Bedford Division. The Company believes that its sales of outdoor gym sets
for the twelve months ended July 31, 1996, represented approximately 75% of the
total U.S. market for outdoor painted metal gym sets and composite metal and
plastic gym sets. The Company's principal competitor in this product line is
RDM, Inc., formerly known as Roadmaster Corporation (which recently filed for
bankruptcy protection). Certain custom gym set manufacturers also compete in
this market. The Company believes that it holds the second largest share of the
total U.S. wood gym kit market behind Swing-N-Slide Corporation.
Ashland Division. Based on the Company's sales of playballs for the twelve
months ended July 31, 1996, management estimates that the Company accounts for
approximately 85% of sales in the total U.S. market for children's playballs.
The Company's largest competitor in this product line is National Latex
Corporation.
Amav. In the arts and activities product market, the Company competes with
Hallmark Corporation's Binney & Smith unit (under the Crayola(TM) brand name),
and a number of smaller arts and crafts suppliers such as Rose Art, Craft House,
Ohio Art and Quincrafts Corporation. In the game table and children's bulk
activity products market, the Company competes with Fisher Price (a subsidiary
of Mattel), Little Tikes (a subsidiary of Rubbermaid), Monneret and Step 2. In
this category, start-up costs are a barrier to entry with substantial tooling
costs and equipment requirements. The Company believes that it is a market
leader in Amav's lines of business.
ERO Industries. The Company's main competitors with respect to its Slumber
Shoppe product line are Bibb and Coleman, which produces non-licensed slumber
bags, and Fisher Price which produces non-licensed slumber tents. The Company
believes that it has a market share of greater than 75% with respect to licensed
sleeping bags and slumber tents. With respect to its water sports product line,
its competitors include Sterns, Kent and Aqua Leisure.
Priss Prints. The Company competes primarily against Borden, Infantino,
Dolly and 3M in the overall room decor industry. Management believes that it is
a market leader in this business.
Impact. The Company competes against companies such as Mead, Imaginings 3
and Plymouth in the stationery products market. With respect to its carry bag
product line, the Company competes against companies such as Pyramid Hand Bags
and Imaginings 3.
MANUFACTURING AND SUPPLY; RAW MATERIALS
BEDFORD DIVISION
Production Process. The Bedford Division's production, warehousing and
distribution facilities are located in a 472,000 square foot facility in
Bedford, Pennsylvania. The manufacturing process for the Company's outdoor gym
sets and accessories consists of eight integrated operations: steel
tube-forming, metal stamping, secondary fabrication, painting, plastic forming,
plastic coating, assembly and packaging. The steel tube-forming operations
60
<PAGE> 63
consist of three high-speed tube mills which form metal strips into tubing of
various wall thickness (0.07 inches to 1.03 inches), diameters (0.50 to 2.50
inches) and lengths (19 inches to 20 feet). These steel tubes are used primarily
for the main structural supports of the Company's gym sets. The metal stamping
operations consist of mechanical presses that utilize multi-station dies to
stamp, form or draw materials from coil metal stock. The materials from the
steel tube-forming and metal stamping operations are sent to the secondary
fabrication operations, which consist of mechanical presses, bending machines,
welding stations and custom fabrication equipment. After the secondary
fabrication operation, the products are painted in one of four electrostatic
spray paint systems. The three plastic forming machines (22 pound dual-head blow
molders) produce plastic slides and other large plastic parts from HDPE resin
(high density polyethylene). The plastic coating (extruding) process covers the
swing chain and cable for the gym sets with a soft coating of PVC (polyvinyl
chloride) in various colors. Next, the products are sent to one of three final
pack lines which consist of conveyor belts manned by employees at pre-arranged
stations placing parts in packing cartons. The three pack lines can produce up
to 8,000 gym sets per day depending on the type of outdoor gym sets in
production. A hardware bag containing components assembled on the automatic
bagging line, is also placed in the packing carton. The packing cartons are then
placed on large pallets, six to twelve per pallet, depending on size, and
wrapped in thin stretchable plastic and loaded onto trucks or stored in the
warehouse to await the arrival of the trucks.
Capacity. Management believes that the Bedford Division has adequate
capacity to supply anticipated future production requirements at times of peak
demand. The division has the capability to outsource or increase capacity in all
of its processes should backlog develop in the future.
Quality Assurance. The Bedford Division maintains an extensive quality
assurance program beginning with the development of plans for effective control
of manufacturing processes, supplier surveys to assure manufacturing capability
and a formal product release system to assure that product goals are achieved.
Quality assurance personnel verify that manufacturing employees are correctly
performing quality inspections including auditing incoming raw materials,
manufacturing processes and finished products. All manufacturing employees are
trained and provided with the tools necessary to determine whether manufactured
parts meet specifications. Employees systematically assemble one unit from each
production lot to verify that form and fit conform to safety standards.
Raw Materials. The primary raw materials used by the Bedford Division
include sheet and band steel and plastic resin. Most of the division's steel raw
materials (representing approximately 31% of the Bedford Division's total raw
materials purchased) are currently sourced from a single supplier. The 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 prices should fall. The Company is presently negotiating
a new supply contract with this supplier and anticipates that it will be similar
to previous contracts. Management believes that alternative sources of supply
are readily available for substantially all of the raw materials used by the
Bedford Division, including steel.
Components Purchases. The Company periodically evaluates the economics of
producing internally certain plastic components used in the production and
assembly of its outdoor gym sets versus purchasing such components externally.
In 1996, the Company invested approximately $3.0 million in new plastic
blow-molding equipment to manufacture many of the plastic slides that it had
previously purchased from third-party vendors. Management believes that
producing these slides internally is currently providing annual cost savings of
approximately $1.5 million as compared to fiscal 1996 levels.
ASHLAND DIVISION
Facilities. The Ashland Division's production facilities are located in two
facilities in Ashland, Ohio. The main plant is 273,000 square feet and houses
most of the division's production capacity including a 115,200 square foot
warehouse and distribution center. A second 95,400 square foot leased facility
is used primarily to serve the division's OEM customer base and, to a lesser
degree, as a source of increased playball capacity. The second plant also houses
the division's administrative offices and showrooms. The Ashland Division also
has two satellite facilities strategically located in Carrollton, Texas and
Dothan, Alabama. These facilities are used primarily to manufacture undecorated
playballs for the local regions surrounding the plants and to inflate premium
and non-premium playballs that are shipped from Ashland.
61
<PAGE> 64
Production Process. The Ashland Division manufactures its products
utilizing two basic manufacturing processes: (i) rotational molding for
polyvinyl playballs and polyethylene plastic OEM products and (ii) blow molding
for plastic ball pit balls. After the initial manufacturing process, the Ashland
Division employs a variety of value-added operations such as innovative
printing, decorating and packaging, utilizing, among other things, the Company's
state-of-the-art 360 degrees playball printing systems. The Company believes it
is the only manufacturer in the United States utilizing such systems. All
playballs are inflated at Ashland during production to ensure that they meet the
Company's quality standards, then deflated for storage or shipping. The Company
ships deflated playballs to customers with inflation capabilities. Playballs
being delivered to customers without inflation capabilities are re-inflated and
boxed at one of the Ashland Division's satellite playball plants at the time
orders are shipped to such customers. The Company believes its satellite
playball plants provide it with a competitive advantage by minimizing the
distance that inflated balls must be shipped, thereby reducing shipping costs.
Capacity. Management believes that the Ashland Division has adequate
in-house capacity to supply future increased production requirements at times of
peak demand and has ample space within its existing facilities to further expand
capacity.
Ball Pit License. The Company has entered into a year-to-year licensing
agreement with Euro-Matic, Ltd. ("Euro-Matic"), a United Kingdom-based company
that holds the patent for the ball pit balls that the Company produces. Using
machinery and molds supplied by Euro-Matic, the Company manufactures ball pit
balls for sale by Euro-Matic to the "institutional market," including
McDonald's, Discovery Zone, hospitals, schools, and similar institutions and
businesses for which the Company receives a fee per ball. In addition,
Euro-Matic provides the Company with molds that the Company uses with its own
machinery to produce ball pit balls that the Company packages with its ball bit
products for sale to the retail market.
Quality Assurance. The Ashland Division maintains a rigorous quality
control process. The division has three quality assurance personnel who are
trained in the methods of statistical process control and continuous
improvement. The quality assurance team selectively audits work-in-process and
finished goods and works closely with customers to define achievable product
standards.
Raw Materials. The Ashland Division manufactures its products from
commodity raw materials such as plastic resins, pigments and other chemicals
that generally are available from numerous sources. The Company has not entered
into any supply contracts with any of the Ashland Division's vendors. Management
believes that alternate sources of supply are readily available for all of the
raw materials used by the Ashland Division.
ERO
The Company manufactures all of its arts and crafts kits and children's
bulk activity products in its Montreal, Quebec manufacturing facility. The
Company owns or leases numerous injection molding machines. The Company also
owns two large printing presses and four smaller label/sticker printers. The
Company manufactures all of its plastic components, mixes its own paint, prints
all labels, cartons, coloring books, stickers and instruction sheets and
manufactures crayons. All of the Company's products are manufactured with
non-toxic materials to comply with industry standards for children's products
and applicable environmental laws.
The Company produces or assembles slumber bags, personal flotation devices,
juvenile furniture and children's wall decoration products at the Company's
Hazlehurst, Georgia facility. To reduce lead times and inventory levels with
respect to these product lines, the Company utilizes just-in-time manufacturing
and sourcing systems. The Company purchases its play tents, slumber mates, swim,
aqua fitness, back-to-school and wall decoration products from manufacturers
located in the United States, Taiwan, Hong Kong and the People's Republic of
China.
The Company's largest suppliers for its domestic operations provide printed
fabric for the slumber bags, liners for the slumber bags, vinyl prints for room
decorations, polyester fiber to fill the slumber bags and zippers and buckles.
The Company works closely with its suppliers in order to consolidate the
purchasing function and to foster teamwork between the Company and its
suppliers. For the aforementioned products, the Company maintains alternative
sources of supply.
62
<PAGE> 65
TECHNOLOGY AND LICENSING
The Company holds a variety of patents, patent applications, trademarks and
licenses. While the Company considers such patents, trademarks and licenses to
be valuable assets, it does not believe that its competitive position is
dependent on patent or trademark protection or that its operations are dependent
on any individual patent trademark or license or group of related patents,
trademarks and licenses.
An important element in the Company's marketing strategy is the ability to
differentiate its products from those of its competitors and stimulate sales by
using popular licensed characters and well-known brand names on its products.
Accordingly, the Company emphasizes the acquisition and maintenance of a broad
portfolio of character licenses. Rather than pursuing a few licenses with
speculative appeal, the Company maintains multiple licenses in several
categories, including both classic (e.g., Mickey's Stuff for Kids, Barbie(TM),
Pooh and 101 Dalmatians) and contemporary characters (e.g., Disney's Hercules,
Jurassic Park: The Lost World(TM) and Batman and Robin(TM)). The Company's
license agreements typically run for two years and require payments of
approximately 10-12% of licensed product revenues. The renewal terms of certain
license agreements are based upon the attainment of specified sales levels,
whereas others are based on informal understandings or arrangements. License
agreements typically are subject to termination by the licensor upon failure of
the licensee to meet various performance standards. Under the terms of certain
of its license agreements, the Company is required to pay minimum guaranteed
fees to the licensor over the life of the agreement. The guaranteed license fees
payable by the Company have been insignificant due to the Company's having
exceeded its minimum royalty requirements. After giving pro forma effect to the
Transactions, approximately 28% of the Company's pro forma net sales for the
twelve months ended December 31, 1996 would have been derived from sales of
licensed products. Approximately 67% of such net sales would have been
attributable to licenses covering ten licensed characters and approximately 44%
of such net sales would have been derived from licenses with Disney Enterprises,
Inc. and its affiliates.
BACKLOG
The Company monitors the inventory level of each of its key customers,
which allows the Company to anticipate customer orders and fill such orders
within a matter of days. As a result of such monitoring and the Company's
just-in-time manufacturing of several of its principal products, the Company
does not generate significant backlog.
PLANTS AND PRINCIPAL PROPERTIES
Management believes that the Company's facilities are in good condition and
that it has sufficient capacity to meet its current and projected manufacturing
and distribution needs. The Company's principal executive offices are located at
585 Slawin Court, Mount Prospect, Illinois 60056.
63
<PAGE> 66
The following table summarizes certain information regarding the Company's
principal operating facilities.
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE LEASE
LOCATION FOOTAGE DESCRIPTION OF USE EXPIRATION(A)
-------- ----------- ------------------ -------------
<S> <C> <C> <C>
OWNED FACILITIES
Saint Laurent, Quebec................. 800,000 Amav Sales, Administration, N/A
Manufacturing and
Distribution
Bedford, Pennsylvania................. 472,000 Bedford Division N/A
Manufacturing, Warehouse
and Administrative
Ashland, Ohio......................... 273,000 Ashland Division N/A
Manufacturing, Warehouse
and Administrative
Reno, Nevada.......................... 40,000 Bedford Division 2008
Manufacturing and
Warehouse
Hazlehurst, Georgia................... 230,000 ERO Industries and Impact N/A
Manufacturing and
Distribution
Plattsburgh, New York................. 80,000 Amav Manufacturing and N/A
Distribution
LEASED FACILITIES
Ashland, Ohio......................... 95,400 Ashland Division 2011
Manufacturing
Reno, Nevada.......................... 40,000 Bedford Division 2008
Manufacturing and
Warehouse
Mount Prospect, Illinois.............. 38,000 Executive Corporate Offices 1999
Carrollton, Texas..................... 34,000 Ashland Division Warehouse 2006
and Manufacturing
Hazlehurst, Georgia................... 27,000 Priss Prints Distribution 1998
Dothan, Alabama....................... 25,100 Ashland Division Warehouse 2003
and Manufacturing
Alma, Georgia......................... 25,000 Bedford Division 2002
Manufacturing and
Warehouse
Kitchener, Ontario, Canada............ 19,300 Ashland Division Warehouse 2011
and Manufacturing
Coraopolis, Pennsylvania.............. 6,400 Corporate Offices 2000
Dallas, Texas......................... 4,000 Priss Prints Sales and 2000
Marketing
New York, New York.................... 3,900 New York Showroom 2004
Boca Raton, Florida................... 3,500 Impact Sales and Marketing 1998
Northampton, United Kingdom........... 400 Administrative Monthly
</TABLE>
- ---------------
(a) Assumes exercise of all options to renew.
64
<PAGE> 67
LEGAL PROCEEDINGS
The Company is from time to time involved in lawsuits arising in the
ordinary course of business. The Company maintains product liability insurance
and management does not believe that the outcome of any such lawsuits will have
a material adverse effect on the Company's financial condition. Although
historically the Company has not been required to pay any material liability
claims, there can be no assurance that the Company will not incur claims which
are in excess of its insurance.
SEASONALITY
Historically, the Company's sales have been highly seasonal, with
Hedstrom's peak selling season occurring during the first two calendar quarters
of the year and ERO's peak selling season occurring during the third and fourth
calendar quarters of the year. However, management believes the Acquisition will
result in the Company's sales being relatively balanced throughout the year. Pro
forma net sales for the Company for each calendar quarter during the twelve
months ended December 31, 1996 were 24.6%, 26.5%, 22.8% and 26.1%, respectively,
of total pro forma net sales for such twelve-month period.
ENVIRONMENTAL
Certain of the Company's operations, including the use of solvents, paints
and other materials that contain chemicals that are considered hazardous under
various environmental laws, are subject to federal, state, local and foreign
environmental laws and regulations, which govern, among other things, the
discharge of pollutants into the air and water, as well as the handling and
disposal of solid and hazardous wastes. Permits are required for certain of the
Company's operations, and these permits are subject to modification, renewal and
revocation by issuing authorities. Governmental authorities have the power to
enforce compliance with applicable laws and regulations, and violations may
result in fines, injunctions, including the cessation of operations, or both.
Management believes that the Company's operations currently comply in all
material respects with applicable environmental laws and regulations.
Under the Clean Air Act Amendments of 1990 (the "CAA"), the Environmental
Protection Agency has been directed, among other things, to develop standards
and permit procedures with respect to certain air pollutants. Because many of
the implementing regulations have not yet been promulgated, the Company cannot
make a final assessment of the impact of the CAA. Based upon its preliminary
review of the CAA, management currently believes that compliance with the CAA
and other environmental laws and regulations will not have a material adverse
effect on the Company.
GOVERNMENT REGULATIONS
The Company is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Product Safety Act. These laws
empower the Consumer Product Safety Commission (the "CPSC") to protect consumers
from hazardous products and other articles. The CPSC has the authority to
exclude from the market products which are found to be unsafe or hazardous and
can require a manufacturer to recall such products under certain circumstances.
Similar laws exist in some states and cities in the United States and in Canada
and Europe. While the Company believes that it is, and will continue to be, in
compliance in all material respects with applicable laws, rules and regulations,
there can be no assurance that the Company's products will not be found to
violate such laws, rules and regulations, or that more restrictive laws, rules
or regulations will not be adopted in the future which could make compliance
more difficult or expensive or otherwise have a material adverse effect on the
Company's business, financial condition and results of operations.
65
<PAGE> 68
EMPLOYEES
As of June 30, 1997, the Company employed approximately 2,125 people.
Approximately 9.5% of the Company's employees are unionized, all of whom are
employed in the Ashland Division. These employees are represented by the Rubber
Workers Union, which is affiliated with the United States Steel Workers Union.
In the past five years, the Company has experienced only one work stoppage,
which occurred in October 1995 and lasted only two days. The Company's
collective bargaining agreement with the Rubber Workers Union expires on October
10, 1998. The Company believes that it has a good relationship with its
employees.
66
<PAGE> 69
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF HOLDINGS AND HEDSTROM
The following table sets forth the age and the position of the directors
and executive officers of each of Holdings and Hedstrom.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert H. Elman............ 58 Chairman of the Board of Directors of Holdings and Hedstrom
Alan B. Menkes............. 38 Director of Holdings and Hedstrom
Jack D. Furst.............. 38 Director of Holdings and Hedstrom
Arnold E. Ditri............ 60 Director of Holdings and Hedstrom; Chief Executive Officer and
President of Holdings and Hedstrom
David F. Crowley........... 47 Chief Financial Officer of Holdings and Hedstrom
Alastair H. McKelvie....... 65 Executive Vice President -- Operations of Hedstrom
John D. Dellos............. 58 Executive Vice President -- Manufacturing of Hedstrom
Alfred C. Carosi, Jr....... 49 Executive Vice President -- Sales and Marketing of Hedstrom
</TABLE>
Robert H. Elman has been the Chairman of the Board of Holdings and Hedstrom
since July 1997 and has been a director of Holdings and Hedstrom since October
1995. Mr. Elman is Chairman and Chief Executive of DESA International, Inc.
("DESA International"), a manufacturer of indoor and outdoor heating products
and specialty tools. Mr. Elman has served in that capacity since March 1985 when
DESA International was formed as part of the leveraged buy out of AMCA
International, Inc.'s Consumer Products Division. Prior to 1985, he served as
Senior Group Vice President of AMCA International with responsibilities for the
Consumer, Automotive Products, Aerospace, and Food Packaging Divisions. Mr.
Elman joined AMCA International in 1975 when it acquired DESA Industries, a
company he assisted in forming in 1969. Prior to forming DESA Industries, Mr.
Elman was employed with ITT and Singer in various management positions in the
United States and Europe.
Alan B. Menkes has been a director of Holdings and Hedstrom since October
1995. Mr. Menkes is a Managing Director and Principal of Hicks Muse, having
served as such since April 1996. Prior thereto, Mr. Menkes served as a Vice
President of Hicks Muse. Before joining Hicks Muse in 1992, Mr. Menkes was
employed by The Carlyle Group, a Washington D.C.-based private investment firm,
most recently as a Senior Vice President. Mr. Menkes also serves as a director
of International Home Foods, Inc.
Jack D. Furst has been a director of Holdings and Hedstrom since July 1997.
Mr. Furst is a Managing Director and Principal of Hicks Muse and has held such
position since 1989. Prior to joining Hicks Muse, Mr. Furst was a Vice President
and subsequently a Partner of Hicks & Haas, Incorporated, a Dallas-based private
investment firm from 1987 to May 1989. From 1984 to 1986, Mr. Furst was a merger
and acquisition/corporate finance specialist for The First Boston Corporation in
New York. Mr. Furst serves on the board of directors of Neodata Corporation,
Desa Holdings Corporation, International Wire Holding Company, Viasystems Group,
Inc., Viasystems, Inc. and Cooperative Computing, Inc.
Arnold E. Ditri was Chairman of the Board of Hedstrom from December 1991
until October 1995 and has been a director of Holdings and Hedstrom since
October 1995. He has been President and Chief Executive Officer of Hedstrom
since March 1993 and of Holdings since October 1995. Mr. Ditri served as
President of Ditri Associates, Inc. from 1981 until 1994. Ditri Associates, with
a number of financial partners, specialized in acquiring and building
under-achieving companies. From 1984 through 1988, Ditri Associates built Eagle
Industries, Inc. in partnership with Great American Management, Inc. of Chicago.
From 1961 to 1981, Mr. Ditri was a management consultant with Booz Allen &
Hamilton and Touche Ross & Co. He was a partner in Touche Ross from 1967 to
1981.
David F. Crowley has been Chief Financial Officer of Hedstrom since 1994
and of Holdings since October 1995. Prior to joining Hedstrom, Mr. Crowley
served as Chief Financial Officer and/or Vice President of Finance for various
companies owned and operated by Ditri Associates. Prior to joining Ditri
Associates, from 1986 to 1990, Mr. Crowley was Treasurer of the Ring Screw Works
Company in Detroit, Michigan. From 1974 to
67
<PAGE> 70
1985, he was employed by Price Waterhouse where he was a Retail and Banking
Industry Specialist and served in London, England for two years managing
strategic planning and technical projects for the firm.
Alastair H. McKelvie has been Executive Vice President of Operations with
Hedstrom since 1991. Mr. McKelvie has over 40 years of experience chiefly in
manufacturing and general management positions covering a wide range of
products, processes, and geographic locations. From 1989 to 1991, Mr. McKelvie
served as Executive Vice President for various companies owned and operated by
Ditri Associates. Prior to 1989, he served as Executive Vice President of Eagle
Industries. From 1965 to 1982, Mr. McKelvie held a number of line and staff
positions in the Singer Company including Vice President of Manufacturing in its
International Group and General Manager of its two most profitable operating
divisions.
John D. Dellos has been Executive Vice President of Operations with
Hedstrom since 1994 and has over 36 years of operations experience. Previous to
joining Hedstrom, Mr. Dellos was Senior Vice President of Manufacturing of
P.P.M. Cranes, Inc. in Conway, South Carolina from 1990 to 1993. Prior to that,
Mr. Dellos was employed as General Manager of Manufacturing from 1986 to 1989 by
Komatsu America Manufacturing Company located in Chattanooga, Tennessee. Before
joining Komatsu, Mr. Dellos served in several capacities for a division of
Dresser Industries in Galion, Ohio from 1974 to 1985. From 1959 to 1973, Mr.
Dellos worked for Deere and Company in various positions.
Alfred A. Carosi, Jr. has been Executive Vice President of Sales and
Marketing with Hedstrom since December 1996. In this position he is also
responsible for corporate product development. Prior to joining Hedstrom, Mr.
Carosi was Senior Vice President of Marketing and Marketing Services for the
Parker Brothers Division of Hasbro, Inc. from 1991 to 1995. From 1990 to 1991,
he was Vice President of Children's and Family Programs at NBC. Before joining
NBC, Mr. Carosi served as Senior Vice President of Marketing and Marketing
Services for Hasbro, Inc. from 1989 to 1990 and for Hasbro's Playskool Division
from 1987 to 1988. Prior to 1987, Mr. Carosi worked in various marketing-related
capacities for Hasbro, Sara Lee Corp. and Anheuser Busch, Inc.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth for the fiscal year ended July 31, 1996 (the
last full fiscal year of Hedstrom), the compensation awarded to or earned by the
President and Chief Executive Officer of Hedstrom and each other executive
officer of Hedstrom whose total annual salary and bonus for the fiscal year
ended July 31, 1996 was in excess of $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
---------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS(#) ($)(1)
--------------------------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Arnold E. Ditri................................... 333,938 -- 543,544 15,422
President and Chief Executive Officer
David F. Crowley.................................. 120,941 4,463 271,777 1,515
Chief Financial Officer
John D. Dellos.................................... 124,435 7,456 271,777 6,014
Executive Vice President -- Manufacturing
</TABLE>
- ---------------
(1) All Other Compensation for the fiscal year ended July 31, 1996 includes the
following: (i) contributions made by Hedstrom on behalf of the following
individuals to Hedstrom's 401(K) Savings Plan: Mr. Ditri -- $11,435; Mr.
Crowley -- $1,254; and Mr. Dellos -- $5,276; and (ii) premiums paid by
Hedstrom for term life insurance policies in the following amounts: Mr.
Ditri -- $3,987; Mr. Crowley -- $261; and Mr. Dellos -- $738.
68
<PAGE> 71
The following table summarizes option grants made during the fiscal year
ended July 31, 1996 to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES
SECURITIES PERCENT OF OF STOCK PRICE
UNDERLYING TOTAL OPTIONS APPRECIATION FOR OPTION
OPTIONS GRANTED TO EXERCISE OR TERM(2)
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION --------------------------
NAME (#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- -------------- ------------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Arnold E. Ditri............. 543,544 25.0% $1.00 10/27/05 341,832 866,269
David F. Crowley............ 271,777 12.5% $1.00 10/27/05 170,919 433,143
John D. Dellos.............. 271,777 12.5% $1.00 10/27/05 170,919 433,143
</TABLE>
- ---------------
(1) The options to purchase Holdings Common Stock were granted under the
Hedstrom Holdings, Inc. 1995 Stock Option Plan (the "1995 Option Plan") and
become exercisable in three equal annual installments commencing on the
first anniversary of the date of grant.
(2) The potential realizable value portion of the foregoing table illustrates
the value that might be realized upon exercise of the options immediately
prior to the expiration of their term, assuming the specified compound rates
of appreciation of Holdings Common Stock over the term of the options. These
amounts represent certain assumed rates of appreciation only, assuming a
fair market value on the date of grant of $1.00 per share. Because Holdings
Common Stock is privately-held, Hedstrom assumed a per share fair market
value on the date of grant of the foregoing options equal to $1.00 per share
based on the per share amount paid by Hicks Muse in connection with the
acquisition of Holdings and Hedstrom in October 1995. Actual gains on the
exercise of options are dependent on the future performance of Holdings
Common Stock. There can be no assurance that the potential values reflected
in this table will be achieved. All amounts have been rounded to the nearest
whole dollar amount.
The following table summarizes the value of options to acquire Holdings
Common Stock held by the Named Executive Officers as of July 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
JULY 31, 1996 (#) FISCAL YEAR END ($)(2)
------------------------- -------------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------- -------------------------
<S> <C> <C>
Arnold E. Ditri..................................... 0/543,544 0/0
David F. Crowley.................................... 0/271,777 0/0
John D. Dellos...................................... 0/271,777 0/0
</TABLE>
- ---------------
(1) No options were exercised by a Named Executive Officer in fiscal 1996.
(2) Assumes a fair market value of $1.00 per share. Because Holdings Common
Stock is privately-held, for purposes of the calculation of the value of
unexercised options as of July 31, 1996, Hedstrom has assumed a per share
fair market value for Holdings Common Stock equal to the per share value
paid by Hicks Muse in connection with the acquisition of Holdings and
Hedstrom in October 1995.
69
<PAGE> 72
EMPLOYMENT AGREEMENTS
Arnold E. Ditri Employment Agreement. Mr. Ditri entered into an employment
agreement with Holdings and Hedstrom on October 27, 1995. Pursuant to such
employment agreement, Mr. Ditri will serve as the President and Chief Executive
Officer of Holdings and Hedstrom through October 31, 1998, which term shall be
extended for successive terms of one year each unless terminated by either party
at least 90 days prior to the end of the initial term or any annual extension.
Mr. Ditri is required to devote substantially all of his business efforts to
Holdings, Hedstrom and their subsidiaries.
The compensation provided to Mr. Ditri under his employment agreement
includes an annual base salary of $340,000 and such benefits as are customarily
accorded to senior executive employees of Holdings and Hedstrom who are
similarly situated. In addition, Mr. Ditri is entitled to an annual cash bonus
equal to not less than 50% of his base salary if Holdings and Hedstrom achieve
the sales, operating income, and departmental performance targets set forth in
the Hedstrom Corporation Incentive Plan.
Mr. Ditri's employment agreement also provides that if Holdings and
Hedstrom terminate Mr. Ditri's employment without Cause (as defined) or if Mr.
Ditri terminates his employment for Good Reason (as defined), Mr. Ditri shall be
entitled to receive his base salary for one year after such termination or for
the remaining term of the employment agreement, whichever is greater; provided,
however, that if Mr. Ditri is employed by (A) an entity other than a Competitive
Business (as defined), then all compensation earned by Mr. Ditri will reduce the
amounts required to be paid by the Holdings and Hedstrom as described in this
sentence, or (B) any Competitive Business, then Holdings and Hedstrom shall have
no obligation to pay the amounts described in this sentence. In the event Mr.
Ditri's employment is terminated due to Mr. Ditri's death, his base salary shall
continue for six months and any bonus payment shall be prorated to reflect the
portion of the then current year for which Mr. Ditri performed services. In the
event of Mr. Ditri's disability, Mr. Ditri shall be entitled to receive his base
salary (less disability insurance proceeds pursuant to any benefit plan of the
Holdings or Hedstrom) for the Disability Period (as defined).
"Cause" exists if and when (i) Holdings' board of directors has notified
Mr. Ditri in writing of its reasonable determination that he is not
substantially performing the primary duties of his office; (ii) Mr. Ditri has
been convicted of a felony under state or federal criminal law involving theft,
fraud or moral turpitude; (iii) Mr. Ditri has engaged in gross negligence or
willful misconduct injurious to Holdings or Hedstrom; or (iv) Mr. Ditri has
materially breached any of his covenants under his employment agreement or any
other agreement with Holdings or Hedstrom.
"Good Reason" means any of the following (without Mr. Ditri's consent): (i)
the taking of any action by Holdings' board of directors or its designees
(unless it has determined that Mr. Ditri is not substantially performing the
primary duties of his then current office, after 30 days' notice and failure to
correct by Mr. Ditri) in a manner that has the effect of significantly divesting
Mr. Ditri's authority with respect to his subordinates or materially interferes
with the exercise of Mr. Ditri's authority to manage and supervise the business
and operations of Holdings and Hedstrom; (ii) any relocation of Holdings' and
Hedstrom's executive offices to a location outside of the Cleveland, Ohio,
Pittsburgh, Pennsylvania or New York, New York metropolitan areas, except for
required travel in connection with Holdings' and Hedstrom's business; and (iii)
any failure to pay Mr. Ditri his compensation when due pursuant to the terms of
his employment agreement.
"Competitive Business" means any business entity which is engaged in the
businesses in which Holdings or Hedstrom engages during the Restricted Period
(as defined), sells or markets its products in the United States, and derives or
plans to derive a material portion of its revenues from such products. For
purposes of the preceding sentence, sales of 50% of its total revenues or in
excess of $5,000,000 in dollar volume shall be deemed to be material.
"Restricted Period" means the period during which Mr. Ditri is employed by
Holdings and Hedstrom and for a period of one year thereafter; provided, that if
Mr. Ditri's employment is terminated without Cause or if Mr. Ditri terminates
his employment for Good Reason, the "Restricted Period" shall extend only so
long as Holdings and Hedstrom are required to pay Mr. Ditri pursuant to his
employment agreement.
70
<PAGE> 73
A "Disability" occurs if and when Mr. Ditri becomes unable to substantially
perform his services as a result of his permanent or temporary, total or partial
physical or mental disability.
"Disability Period" means the period commencing on the first day of the
calendar month following the month during which a Disability occurs and ending
on the first to occur of the following: (i) the expiration of Mr. Ditri's
employment agreement; (ii) if the Disability is continuous throughout the six
consecutive months following the month during which the Disability occurs, then
the last day of such sixth consecutive calendar month; and (iii) if the
Disability is intermittent and shall exist throughout any 12 calendar months
following the month during which the Disability occurs, then the last day of
such 12th calendar month.
David F. Crowley Severance Arrangement. While Mr. Crowley does not have a
formal employment agreement, Holdings and Hedstrom have agreed that Mr. Crowley
will be entitled to receive his base salary for a period of 12 months following
any termination of his employment, other than for cause, on or prior to November
15, 1997.
COMPENSATION OF DIRECTORS
With the exception of Robert H. Elman, the directors of Holdings and
Hedstrom did not receive compensation from either Holdings or Hedstrom for
services rendered in that capacity during the fiscal year ended July 31, 1996.
Mr. Elman receives $500 for each telephonic meeting and $1,000 for each meeting
attended in person. During the fiscal year ended July 31, 1996, Mr. Elman
received a total of $3,000 pursuant to such arrangements. Directors of Holdings
and Hedstrom are entitled to reimbursement of their reasonable out-of-pocket
expenses in connection with their travel to and attendance at meetings of the
board of directors or committees thereof.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended July 31, 1996, all matters concerning
executive officer compensation were addressed by the Board of Directors of
Holdings and Hedstrom. During this period Mr. Ditri served as both a director
and an officer of Holdings and Hedstrom. No executive officer of Holdings or
Hedstrom served as a member of the board of directors or compensation committee
of any entity which has one or more executive officers who serve on Holdings' or
Hedstrom's Board of Directors.
71
<PAGE> 74
STOCK OWNERSHIP AND CERTAIN TRANSACTIONS
STOCK OWNERSHIP
All of the issued and outstanding capital stock of Hedstrom is owned by
Holdings. The following table sets forth certain information regarding the
beneficial ownership of the outstanding Holdings Common Stock by each person who
is known by Holdings to beneficially own more than 5% of the Holdings Common
Stock and by the directors of Holdings and the Named Executive Officers,
individually, and by the directors and executive officers of Holdings as a
group.
<TABLE>
<CAPTION>
SHARES OF HOLDINGS
COMMON STOCK
BENEFICIALLY OWNED
---------------------
PERCENT
NUMBER OF OF
SHARES CLASS
---------- -------
<S> <C> <C>
5% STOCKHOLDERS
HM Parties(1)............................................. 56,030,600 82.8%
c/o Hicks, Muse, Tate & Furst Incorporated
200 Crescent Court, Suite 1600
Dallas, Texas 75201
OFFICERS AND DIRECTORS
Robert H. Elman........................................... 1,625,000 4.5%
Alan B. Menkes (1)(2)..................................... 55,385,370 81.9%
Jack D. Furst (1)(3)...................................... 55,451,640 82.0%
Arnold E. Ditri (4)....................................... 4,087,481 11.3%
David E. Crowley (5)...................................... 122,171 *
John N. Dellos (6)........................................ 169,539 *
Alastair H. McKelvie (7).................................. 1,884,292 5.2%
All executive officers and directors as a group (8
persons)............................................... 61,766,552 92.3%
</TABLE>
- ---------------
* Represents less than 1%
(1) Includes (i) 23,829,000 shares owned of record by HM Fund II, a limited
partnership of which the sole general partner is HM2/GP Partners, L.P., a
limited partnership of which the sole general partner is Hicks, Muse GP
Partners, L.P., a limited partnership of which the sole general partner is
Hicks, Muse, Tate & Furst Fund II Incorporated, a corporation affiliated
with Hicks Muse; (ii) 31,520,000 shares of Non-Voting Common Stock owned of
record by HM Fund II which are convertible into shares of Holdings Common
Stock, on a one-for-one basis, at the option of HM Fund II, (iii) 479,400
shares owned of record by Thomas O. Hicks; and (iv) 202,200 shares owned of
record by four children's trusts of which Mr. Hicks serves as trustee. Mr.
Hicks is a controlling stockholder of Hicks Muse and serves as Chairman of
the Board, President, Chief Executive Officer, Chief Operating Officer and
Secretary of Hicks Muse. Accordingly, Mr. Hicks may be deemed to be the
beneficial owner of Holdings Common Stock held by HM Fund II. John R. Muse,
Charles W. Tate, Jack D. Furst, Lawrence D. Stuart, Jr., Alan B. Menkes, and
Michael J. Levitt are officers, directors and minority stockholders of Hicks
Muse and as such may be deemed to share with Mr. Hicks the power to vote or
dispose of Holdings Common Stock held by HM Fund II. Each of Messrs. Hicks,
Muse, Tate, Furst, Stuart, Menkes and Levitt disclaims the existence of a
group and disclaims beneficial ownership of Holdings Common Stock not
respectively owned of record by him.
(2) Includes 36,370 shares owned of record by Mr. Menkes.
(3) Includes (i) 36,078 shares owned of record by Mr. Furst and (ii) 66,562
shares owned of record by a family trust of which Mr. Furst serves as
trustee. Mr. Furst disclaims beneficial ownership of shares not owned of
record by him.
(4) Includes (i) 3,106,300 shares owned of record by Mr. Ditri, (ii) 800,000
shares owned of record by certain members of Mr. Ditri's family, and (iii)
181,181 shares subject to options that are exercisable within 60 days. Mr.
Ditri disclaims beneficial ownership of shares not owned of record by him.
72
<PAGE> 75
(5) Includes (i) 31,579 shares owned of record by Mr. Crowley and (ii) 90,592
shares subject to options that are exercisable within 60 days.
(6) Includes (i) 78,947 shares owned of record by Mr. Dellos and (ii) 90,592
shares subject to options that are exercisable within 60 days.
(7) Includes (i) 1,793,700 shares owned of record by Mr. McKelvie and (ii)
90,592 shares subject to options that are exercisable within 60 days.
CERTAIN TRANSACTIONS
Monitoring and Oversight Agreement
On October 27, 1995, Holdings and Hedstrom entered into a ten-year
agreement (the "Monitoring and Oversight Agreement") with Hicks, Muse & Co.
Partners, L.P. ("Hicks Muse Partners"), pursuant to which they pay Hicks Muse
Partners an annual fee of $175,000 for oversight and monitoring services to
Holdings and Hedstrom. The annual fee is adjustable at the end of each fiscal
year to an amount equal to 0.1% of the consolidated net sales of Hedstrom during
such fiscal year, but in no event less than $175,000. Messrs. Muse and Menkes,
directors of Holdings and Hedstrom, are each principals of Hicks Muse Partners.
In addition, Holdings and Hedstrom have agreed to indemnify Hicks Muse Partners,
its affiliates and their respective directors, officers and controlling persons,
if any, and, agents and employees of Hicks Muse Partners or any of its
affiliates from and against all claims, liabilities, losses, damages, and
expenses, including legal fees, arising out of or in connection with the
services rendered by Hicks Muse Partners in connection with the Monitoring and
Oversight Agreement.
The Monitoring and Oversight Agreement makes available the resources of
Hicks Muse Partners concerning a variety of financial and operational matters.
The services that have been and will continue to be provided by Hicks Muse
Partners could not otherwise be obtained by Holdings and Hedstrom without the
addition of personnel or the engagement of outside professional advisors. In
management's opinion, the fees provided for under this agreement reasonably
reflect the benefits received and to be received by Holdings and Hedstrom.
Financial Advisory Agreement
On October 27, 1995, Holdings and Hedstrom entered into a ten-year
agreement (the "Financial Advisory Agreement") with HM2/Management Partners,
L.P. ("HM2"), pursuant to which they paid HM2 a cash financial advisory fee of
approximately $1.175 million as compensation for its services as financial
advisor in connection with the acquisition of Holdings and Hedstrom by Hicks
Muse. HM2 also will be entitled to receive a fee equal to 1.5% of the
transaction value (as defined) for each add-on transaction (as defined) in which
Hedstrom is involved. The term "transaction value" means the total value of any
add-on transaction (excluding any fees payable pursuant to the Financial
Advisory Agreement in connection with such add-on transaction) including the
amount of any indebtedness, preferred stock or similar items assumed (or
remaining outstanding). The term "add-on transaction" means any future proposal
for a tender offer, acquisition, sale, merger, exchange offer, recapitalization,
restructuring, or other similar transaction directly or indirectly involving
Holdings, Hedstrom, or any of their respective subsidiaries, and any other
person or entity. In connection with the Acquisition, Holdings and Hedstrom paid
HM2 a cash financial advisory fee under the Financial Advisory Agreement of
approximately $3 million as compensation for its services as financial advisor
in connection with the Acquisition.
Messrs. Muse and Menkes, directors of Holdings and Hedstrom, are each
principals of HM2. In addition, Holdings and Hedstrom have agreed to indemnify
HM2, its affiliates and their respective directors, officers and controlling
persons, if any, and agents and employees of HM2 from and against all claims,
liabilities, losses, damages, and expenses, including legal fees, arising out of
or in connection with the services rendered by HM2 in connection with the
Financial Advisory Agreement. The Financial Advisory Agreement makes available
the resources of HM2 concerning a variety of financial matters. The services
that have been and will continue to be provided by HM2 could not otherwise be
obtained by Holdings and Hedstrom without the addition of personnel or the
engagement of outside professional advisors. In management's opinion, the fees
provided for under this agreement reasonably reflect the benefits received and
to be received by Holdings and Hedstrom.
73
<PAGE> 76
Stockholders Agreement
The investors who purchased or received Holdings Common Stock in connection
with or subsequent to the acquisition of Holdings and Hedstrom by Hicks Muse and
its affiliates have entered into a stockholders agreement (the "Stockholders
Agreement"). The Stockholders Agreement grants preemptive rights and certain
piggy-back registration rights to the parties thereto and contains provisions
requiring the parties thereto to sell their shares of Holdings Common Stock in
connection with certain sales of Holdings Common Stock by HM Fund II
("drag-along rights") and grants the parties thereto other than HM Fund II the
right to include a portion of their shares of Holdings Common Stock in certain
sales in which HM Fund II does not exercise its drag-along rights ("tag-along
rights"). The Stockholders Agreement terminates on its tenth anniversary date,
although the preemptive rights, drag-along rights and tag-along rights contained
therein will terminate earlier upon the consummation of a registered
underwritten public offering of Holdings Common Stock by Holdings.
74
<PAGE> 77
DESCRIPTION OF THE SENIOR CREDIT FACILITIES
In connection with the Financings, Holdings and Hedstrom entered into a
Credit Agreement (the "Credit Agreement") with Credit Suisse First Boston
Corporation ("CSFB") and the other lenders party thereto to provide the Senior
Credit Facilities. The description of the Senior Credit Facilities set forth
below does not purport to be complete and is qualified in its entirety by
reference to the provisions of the Credit Agreement, including the definitions
therein of certain terms, and the other underlying agreements of the Senior
Credit Facilities.
The Senior Credit Facilities consist of (a) the six-year Tranche A Term
Loan in the principal amount of $75 million; (b) the eight-year Tranche B Term
Loan in the principal amount of $35 million; and (c) the Revolving Credit
Facility providing for revolving loans to Hedstrom and the issuance of letters
of credit for the account of Hedstrom in an aggregate principal and stated
amount at any time not to exceed $70 million. Borrowings under the Revolving
Credit Facility are available based upon a borrowing base not to exceed 85% of
eligible accounts receivable and 50% of eligible inventory.
The full amount of each Term Loan was drawn on the date on which the
Tenders Offer was consummated (the "Closing Date"). Amounts repaid or prepaid in
respect of the Term Loans may not be reborrowed. Loans under the Revolving
Credit Facility were available on the Closing Date and will continue to be
available until the date that is six years after such Closing Date (the
"Revolving Credit Termination Date"). Letters of credit under the Revolving
Credit Facility are available at any time subject to the limitations contained
in the following sentence. No letter of credit will be permitted to have an
expiration date after the earlier of (a) one year from the date of its issuance
and (b) five business days before the Revolving Credit Termination Date. Letters
of credit will be renewable for one-year periods, provided that no letter of
credit shall extend beyond the time specified in clause (b) of the previous
sentence.
The Term Loans will amortize according to the following schedule:
<TABLE>
<CAPTION>
DATE TRANCHE A TERM LOAN TRANCHE B TERM LOAN
---- ------------------- -------------------
<S> <C> <C>
December 31, 1997............................... $1,000,000 $ 125,000
March 31, 1998.................................. 3,000,000 125,000
June 30, 1998................................... 750,000 125,000
September 30, 1998.............................. 3,000,000 125,000
December 31, 1998............................... 750,000 125,000
March 31, 1999.................................. 4,000,000 125,000
June 30, 1999................................... 1,000,000 125,000
September 30, 1999.............................. 4,000,000 125,000
December 31, 1999............................... 1,000,000 125,000
March 31, 2000.................................. 5,000,000 125,000
June 30, 2000................................... 1,250,000 125,000
September 30, 2000.............................. 5,000,000 125,000
December 31, 2000............................... 1,250,000 125,000
March 31, 2001.................................. 6,000,000 125,000
June 30, 2001................................... 1,500,000 125,000
September 30, 2001.............................. 6,000,000 125,000
December 31, 2001............................... 1,500,000 125,000
March 31, 2002.................................. 8,000,000 125,000
June 30, 2002................................... 2,000,000 125,000
September 30, 2002.............................. 8,000,000 125,000
December 31, 2002............................... 2,000,000 125,000
March 31, 2003.................................. 7,200,000 5,000,000
June 30, 2003................................... 1,800,000 1,250,000
September 30, 2003.............................. 5,000,000
December 31, 2003............................... 1,250,000
March 31, 2004.................................. 5,400,000
June 30, 2004................................... 1,350,000
September 30, 2004.............................. 5,400,000
December 31, 2004............................... 1,350,000
March 31, 2005.................................. 5,100,000
June 30, 2005................................... 1,275,000
</TABLE>
75
<PAGE> 78
Hedstrom is required to make mandatory prepayments of loans, and revolving
credit commitments will be mandatorily reduced, in amounts, at times and subject
to certain exceptions, (a) in respect of 75% of consolidated excess cash flow of
Hedstrom starting with fiscal year 1998 and (b) in respect of 100% of the net
proceeds of certain dispositions of material assets or the stock of subsidiaries
or the issuance of capital stock or the incurrence of certain indebtedness by
Hedstrom or any of its subsidiaries. Hedstrom is entitled, at its option, to
prepay loans, and permanently reduce revolving credit commitments, in whole or
in part, at any time in certain minimum amounts. All such prepayments shall be
applied first to the Tranche A Term Loans and the Tranche B Term Loans ratably
(and to the installments thereof ratably in accordance with the then remaining
number of installments) and second, to reduce the commitments under the
Revolving Credit Facility.
The obligations of Hedstrom under the Senior Credit Facilities are
unconditionally and irrevocably guaranteed by Holdings and each of Hedstrom's
direct or indirect domestic subsidiaries (collectively, the "Senior Credit
Facilities Guarantors"). In addition, the Senior Credit Facilities are secured
by first priority or equivalent security interests in (i) all the capital stock
of, or other equity interests in, Hedstrom and each direct or indirect domestic
subsidiary of Hedstrom and 65% of the capital stock of, or other equity
interests in, each direct foreign subsidiary of Hedstrom, or any of its domestic
subsidiaries and (ii) all tangible and intangible assets (including, without
limitation, intellectual property and owned real property) of Hedstrom and the
Senior Credit Facilities Guarantors and the proceeds thereof (subject to certain
excepts and qualifications).
At Hedstrom's option, the interest rates per annum applicable to the Senior
Credit Facilities may be either (i) the Eurocurrency Rate (as defined in the
Credit Agreement) plus (x) 2.5% in the case of the Tranche A Term Loan and the
Revolving Credit Facility or (y) 3.0% in the case of the Tranche B Term Loan or
(ii) the Alternate Base Rate (as defined in the Credit Agreement) plus (x) 1.5%
in the case of the Tranche A Term Loan and the Revolving Credit Facility or (y)
2.0% in the case of the Tranche B Term Loan. The Alternate Base Rate is the
highest of (a) CSFB's Prime Rate (as defined in the Credit Agreement) and (b)
the federal funds effective rate from time to time plus 0.5%. The applicable
margin in respect of the Tranche A Term Loan and the Revolving Credit Facility
will be adjusted from time to time by amounts to be agreed upon based on the
achievement of certain performance targets to be determined.
Hedstrom must pay a commission on the face amount of all outstanding
letters of credit at a per annum rate equal to the Applicable Margin then in
effect with respect to Eurocurrency Loans (as defined in the Credit Agreement)
under the Revolving Credit Facility. Hedstrom will also pay a per annum
commitment fee equal to 0.50% on the undrawn portion of the commitments in
respect of the Revolving Credit Facility.
The Credit Agreement contains covenants that require Hedstrom to maintain
its properties and those of its subsidiaries, together with insurance thereon;
to provide certain information to the administrative agent, including financial
statements, notices and reports and permit inspections of the books and records
of Hedstrom and its subsidiaries; to comply with applicable laws, including
environmental laws and ERISA; and to pay taxes and contractual obligations. The
Credit Agreement also contains a number of significant covenants that, among
other things, restrict the ability of Hedstrom to dispose of assets, incur
additional indebtedness, repay other indebtedness or amend other debt
instruments, pay dividends, create liens on assets, make investments or
acquisitions, engage in mergers or consolidations, make capital expenditures, or
engage in certain transactions with affiliates, amend the Indentures, refinance
the New Notes and otherwise restrict corporate activities. In addition, under
the Credit Agreement, Hedstrom is required to comply with specified minimum
interest coverage and maximum leverage ratios. Hedstrom presently is in
compliance with all covenants under the Credit Agreement.
The Credit Agreement contains customary events of default, including
failure to pay principal on either of the Term Loans when due or any interest or
other amount that becomes due within 5 days after the due date thereof, any
representation or warranty made or deemed made is incorrect in any material
respect on or as of the date made or deemed made, the default in the performance
of negative covenants or a default in the performance of certain other covenants
or agreements for a period of thirty days, default in other indebtedness or
guarantee obligations, certain insolvency events, certain ERISA events, actual
or asserted invalidity of any loan documents and a change in control of
Hedstrom.
76
<PAGE> 79
In connection with the Proposed Asset Acquisitions, Hedstrom contemplates
that the Credit Agreement will be amended to permit the Proposed Asset
Acquisitions and to provide for an additional $10,000,000 of Tranche B Term
Loans, in which case the amortization payments with respect to the existing
Tranche B Term Loans will be increased pro rata. It is contemplated that the
balance of the funds required to consummate the Proposed Asset Acquisitions will
be obtained through a draw under the the Revolving Credit Facility.
THE EXCHANGE OFFERS
PURPOSE AND EFFECT
The Old Notes were sold by the Issuers on June 12, 1997, in a private
placement. In connection with that placement, the Issuers entered into the
Registration Rights Agreement, which requires that the Issuers file a
registration statement under the Securities Act with respect to the New Notes
and, upon the effectiveness of that registration statement, offer to the holders
of the Old Notes the opportunity to exchange their Old Notes for a like
principal amount (or principal amount at maturity) of New Notes, which will be
issued without a restrictive legend and may be reoffered and resold by the
holder without registration under the Securities Act. The Registration Rights
Agreement further provides that the Issuers must use their best efforts to cause
the registration statement with respect to the Exchange Offers to be declared
effective on or before November 10, 1997. Except as provided below, upon the
completion of the Exchange Offers, the Issuers' obligations with respect to the
registration of the Old Notes and the New Notes will terminate. A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part and although the Issuers believe
that the summary herein of certain provisions thereof describes all material
elements of the Registration Rights Agreement, such summary does not purport to
be complete and is subject to, and is qualified in its entirety by reference
thereto.
The Registration Rights Agreement provides for the assessment of additional
interest ("Additional Interest") in the event (such event being a "Registration
Default") that (i) the Registration Statement of which this Prospectus is a part
has not been filed by July 28, 1997, (ii) the Exchange Offers have not been
consummated by December 9, 1997, or (iii) after December 9, 1997, and after the
Registration Statement of which this Prospectus is a part has been declared
effective, such Registration Statement ceases to be effective or such
Registration Statement or this Prospectus cease to be usable in connection with
resales of the New Notes. Notwithstanding the foregoing, a Registration Default
shall be deemed not to have occurred and be continuing if (i) such purported
Registration Default has occurred solely as a result of the occurrence of
material events with respect to the Issuers that would need to be described in
the Registration Statement or this Prospectus and the Issuers are proceeding
promptly and in good faith to amend or supplement the Registration Statement and
this Prospectus to describe such events; provided, however, that in any case if
such purported Registration Default occurs for a continuous period in excess of
45 days, Additional Interest will be payable from the 46th day after the
occurrence of such Registration Default until such Registration Default is cured
or until the relevant Issuer is no longer required to keep such Registration
Statement effective or such Registration Statement or this Prospectus usable.
Additional Interest will accrue at a rate of 0.50% per annum (over and above the
interest rate set forth in the title of the Notes) and will be payable in cash
on each scheduled interest payment date (or interest accrual date in the case of
the Discount Notes, if applicable) following the applicable Registration
Default.
The Registration Statement of which this Prospectus is a part was initially
filed on July 30, 1997, two days after the required filing date of July 28,
1997. As a consequence, Hedstrom and Holdings required to pay two days of
Additional Interest on the Notes. In the case of the Senior Subordinated Notes,
approximately $3,000 of Additional Interest will be payable on December 1, 1997,
the first scheduled interest payment date. In the case of the Discount Notes,
approximately $700 of Additional Interest will be payable on December 1, 1997,
the first semi-annual accrual date. The Issuers do not anticipate that any
further Additional Interest will become payable as the result of a Registration
Default.
Following the completion of the Exchange Offers (except as set forth in the
paragraph immediately below), holders of Old Notes not tendered will not have
any further registration rights and those Old Notes will continue
77
<PAGE> 80
to be subject to certain restrictions on transfer. Accordingly, the liquidity of
the market for the Old Notes could be adversely affected upon completion of the
Exchange Offer.
In order to participate in an Exchange Offer, a holder must represent to
the applicable Issuer, among other things, that (i) the New Notes acquired
pursuant to such Exchange Offer are being obtained in the ordinary course of
business of the person receiving such New Notes, whether or not such person is
the holder of the Old Notes, (ii) neither the holder nor any such other person
has an arrangement or understanding with any person to participate in the
distribution of such New Notes within the meaning of the Securities Act, (iii)
neither the holder nor any such other person is an "affiliate," as defined under
Rule 405 promulgated under the Securities Act, of Hedstrom, Holdings or any
Subsidiary Guarantor, or if it is an affiliate, such holder or such other person
will comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable, (iv) if such holder or other person is
not a broker-dealer, neither the holder nor any such other person is engaged in
or intends to engage in the distribution of such New Notes, and (v) if such
holder or other person is a broker-dealer, that it will receive New Notes for
its own account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities and that it will be
required to acknowledge that it will deliver a prospectus in connection with any
resale of such New Notes.
Pursuant to the Registration Rights Agreement, each Issuer is required to
file a "shelf" registration statement for a continuous offering pursuant to Rule
415 under the Securities Act in respect of its Old Notes (and use its reasonable
best efforts to cause such shelf registration statement to be declared effective
by the Commission and keep it continuously effective, supplemented and amended
for prescribed periods) if (i) such Issuer is not permitted to effect its
Exchange Offer because of any change in law or in applicable interpretations
thereof by the staff of the Commission, (ii) such Exchange Offer is not
consummated within 180 days of the date of issuance of the Old Notes, (iii) any
Initial Purchaser so requests with respect to Old Notes not eligible to be
exchanged for New Notes in such Exchange Offer and held by it following
consummation of such Exchange Offer, or (iv) any holder of Old Notes (other than
an Exchanging Dealer) is not eligible to participate in such Exchange Offer or,
in the case of any holder of Old Notes (other than an Exchanging Dealer) that
participates in such Exchange Offer, such holder does not receive freely
tradeable New Notes upon consummation of such Exchange Offer. In the event that
either Issuer is obligated to file a "shelf" registration statement, it may be
required to keep such "shelf" registration statement effective for at least two
years. Other than as set forth in this paragraph, no holder will have the right
to participate in the "shelf" registration statement nor otherwise to require
that an Issuer register such holder's Old Notes under the Securities Act. See
"-- Procedures for Tendering."
Based on an interpretation by the Commission's staff set forth in no-action
letters issued to third-parties unrelated to Hedstrom, Holdings or any of the
Subsidiary Guarantors, the Issuers believe that, with the exceptions set forth
below, New Notes issued pursuant to the Exchange Offers in exchange for Old
Notes may be offered for resale, sold and otherwise transferred by any person
receiving such New Notes, whether or not such person is the holder (other than
any such holder or such other person which is an "affiliate" of Hedstrom,
Holdings or any of the Subsidiary Guarantors within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that (i) the New
Notes are acquired in the ordinary course of business of that holder or such
other person, (ii) neither the holder nor such other person is engaging in or
intends to engage in a distribution of the New Notes, and (iii) neither the
holder nor such other person has an arrangement or understanding with any person
to participate in the distribution of the New Notes. Any holder who tenders in
an Exchange Offer for the purpose of participating in a distribution of New
Notes cannot rely on this interpretation by the Commission's staff and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes, where the Old Notes were acquired by that broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
Following the completion of the Exchange Offers (except as set forth in the
third paragraph under "-- Purpose and Effect" above), holders of Old Notes not
tendered will not have any further registration rights
78
<PAGE> 81
and those Old Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for a holder's Old Notes
could be adversely affected upon completion of the Exchange Offers if the holder
does not participate in the Exchange Offers.
TERMS OF THE SENIOR SUBORDINATED NOTES EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Senior Subordinated Notes Letter of Transmittal, Hedstrom will accept
any and all Old Senior Subordinated Notes validly tendered and not withdrawn
prior to the Expiration Date. Hedstrom will issue $1,000 principal amount of New
Senior Subordinated Notes in exchange for each $1,000 principal amount of
outstanding Old Senior Subordinated Notes accepted in the Senior Subordinated
Notes Exchange Offer. Holders may tender some or all of their Old Senior
Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer.
However, Old Senior Subordinated Notes may be tendered only in integral
multiples of $1,000 in principal amount.
The form and terms of the New Senior Subordinated Notes will be
substantially the same as the form, and terms of the Old Senior Subordinated
Notes except that (i) interest on the New Senior Subordinated Notes will accrue
from the date of issuance of the Old Senior Subordinated Notes and (ii) the New
Senior Subordinated Notes have been registered under the Securities Act and will
not bear legends restricting their transfer. The New Senior Subordinated Notes
will evidence the same debt as the Old Senior Subordinated Notes and will be
issued pursuant to, and entitled to the benefits of, the Senior Subordinated
Notes Indenture.
As of June 30, 1997, Old Senior Subordinated Notes representing
$110,000,000 aggregate principal amount were outstanding. This Prospectus,
together with the Senior Subordinated Notes Letter of Transmittal, is being sent
to such registered Holder and to others believed to have beneficial interests in
the Old Senior Subordinated Notes. Holders of Old Senior Subordinated Notes do
not have any appraisal or dissenters' rights under the General Corporation Law
of the State of Delaware or the Senior Subordinated Notes Indenture in
connection with the Senior Subordinated Notes Exchange Offer. Hedstrom intends
to conduct the Senior Subordinated Notes Exchange Offer in accordance with the
applicable requirements of the Exchange Act and the rules and regulations of the
Commission promulgated thereunder.
Hedstrom shall be deemed to have accepted validly tendered Old Senior
Subordinated Notes when, as, and if Hedstrom has given oral or written notice
thereof to the Senior Subordinated Notes Exchange Agent. The Senior Subordinated
Notes Exchange Agent will act as agent for the tendering holders for the purpose
of receiving the New Senior Subordinated Notes from Hedstrom. If any tendered
Old Senior Subordinated Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Senior Subordinated Notes
will be returned, without expense, to the tendering holder thereof as promptly
as practicable after the Expiration Date.
Holders who tender Old Senior Subordinated Notes in the Senior Subordinated
Notes Exchange Offer will not be required to pay brokerage commissions or fees
or, subject to the instructions in the Senior Subordinated Notes Letter of
Transmittal, transfer taxes with respect to the exchange of Old Senior
Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer.
Hedstrom will pay all charges and expenses, other than certain applicable taxes,
in connection with the Senior Subordinated Notes Exchange Offer. See "The
Exchange Offers -- Fees and Expenses."
TERMS OF THE DISCOUNT NOTES EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Discount Notes Letter of Transmittal, Holdings will accept any and
all Old Discount Notes validly tendered and not withdrawn prior to the
Expiration Date. Holdings will issue $1,000 principal amount at maturity of New
Discount Notes in exchange for each $1,000 principal amount at maturity of
outstanding Old Discount Notes accepted in the Discount Notes Exchange Offer.
Holders may tender some or all of their Old Discount Notes pursuant to the
Discount Notes Exchange Offer. However, Old Discount Notes may be tendered only
in integral multiples of $1,000 in principal amount at maturity.
79
<PAGE> 82
The form and terms of the New Discount Notes will be substantially the same
as the form and terms of the Old Discount Notes except that (i) the Accreted
Value of the New Discount Notes will be calculated from the date of issuance of
the Old Discount Notes and (ii) the New Discount Notes have been registered
under the Securities Act and will not bear legends restricting their transfer.
The New Discount Notes will evidence the same debt as the Old Discount Notes and
will be issued pursuant to, and entitled to the benefits of, the Discount Notes
Indenture.
As of June 30, 1997, Old Discount Notes representing $44,612,000 aggregate
principal amount at maturity were outstanding. This Prospectus, together with
the Discount Notes Letter of Transmittal, is being sent to such registered
Holder and to others believed to have beneficial interests in the Old Discount
Notes. Holders of Old Discount Notes do not have any appraisal or dissenters'
rights under the General Corporation Law of the State of Delaware or the
Discount Notes Indenture in connection with the Discount Notes Exchange Offer.
Holdings intends to conduct the Discount Notes Exchange Offer in accordance with
the applicable requirements of the Exchange Act and the rules and regulations of
the Commission promulgated thereunder.
Holdings shall be deemed to have accepted validly tendered Old Discount
Notes when, as, and if Holdings has given oral or written notice thereof to the
Discount Notes Exchange Agent. The Discount Notes Exchange Agent will act as
agent for the tendering holders for the purpose of receiving the New Discount
Notes from Holdings. If any tendered Old Discount Notes are not accepted for
exchange because of an invalid tender, the occurrence of certain other events
set forth herein or otherwise, certificates for any such unaccepted Old Discount
Notes will be returned, without expense, to the tendering holder thereof as
promptly as practicable after the Expiration Date.
Holders who tender Old Discount Notes in the Discount Notes Exchange Offer
will not be required to pay brokerage commissions or fees or, subject to the
instructions in the Discount Notes Letter of Transmittal, transfer taxes with
respect to the exchange of Old Discount Notes pursuant to the Discount Notes
Exchange Offer. Holdings will pay all charges and expenses, other than certain
applicable taxes, in connection with the Discount Notes Exchange Offer. See "The
Exchange Offers -- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean, with respect to either Exchange
Offer, 5:00 p.m., New York City time, on December 4, 1997, unless an Issuer, in
its sole discretion, extends the Exchange Offer applicable to its Old Notes, in
which case the term "Expiration Date" shall mean the latest date and time to
which such Exchange Offer is extended. In any event, each Exchange Offer will be
held open for at least twenty business days. In order to extend its Exchange
Offer, the applicable Issuer will notify the Exchange Agent for such Exchange
Offer and each registered holder of such Issuer's Old Notes of any extension by
oral or written notice prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Each Issuer
reserves the right, in its sole discretion, (i) to delay accepting any Old
Notes, to extend its Exchange Offer or, if any of the conditions set forth under
"The Exchange Offers -- Certain Conditions to Exchange Offers" shall not have
been satisfied, to terminate such Exchange Offer, by giving oral or written
notice of such delay, extension or termination to the Senior Subordinated Notes
Exchange Agent or the Discount Notes Exchange Agent, as the case may be, or (ii)
to amend the terms of its Exchange Offer in any manner.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender the Old Notes in an Exchange Offer.
Except as set forth under "The Exchange Offers -- Book Entry Transfer," to
tender in an Exchange Offer a holder must complete, sign and date the Letter of
Transmittal applicable to such Exchange Offer, or a copy thereof, have the
signatures thereon guaranteed if required by such Letter of Transmittal, and
mail or otherwise deliver such Letter of Transmittal or copy to the Exchange
Agent for such Exchange Offer prior to the Expiration Date for such Exchange
Offer. In addition, either (i) certificates for such Old Notes must be received
by the Exchange Agent for such Exchange Offer along with the Letter of
Transmittal applicable to such Exchange Offer, or (ii) a timely confirmation of
a book-entry transfer (a "Book-Entry Confirmation") of such Old Notes, if that
procedure is available, into the account of the Exchange Agent for such Exchange
Offer at the DTC (the "Book-Entry Transfer Facility")
80
<PAGE> 83
pursuant to the procedure for book-entry transfer described below, must be
received by such Exchange Agent prior to the Expiration Date, or (iii) the
Holder must comply with the guaranteed delivery procedures described below. To
be tendered effectively, a Letter of Transmittal and other required documents
must be received by the appropriate Exchange Agent at its address set forth
under "The Exchange Offers -- Exchange Agents" prior to the Expiration Date.
The tender by a holder that is not withdrawn before the Expiration Date
will constitute an agreement between that holder and the applicable Issuer in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal applicable to such Issuer's Exchange Offer.
THE METHOD OF DELIVERY OF OLD NOTES, A LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO AN EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO AN EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE ISSUERS. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES, OR
NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company, or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. If the beneficial
owner wishes to tender on the owner's own behalf, the owner must, prior to
completing and executing a Letter of Transmittal and delivering the owner's Old
Notes, either make appropriate arrangements to register ownership of the Old
Notes in the beneficial owner's name or obtain a properly completed bond power
from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case maybe, must be guaranteed by an Eligible Institution (as defined below)
unless Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on such Letter of Transmittal
or (ii) for the account of an Eligible Institution. If signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, the guarantee must be by any eligible guarantor institution that is
a member of or participant in the Securities Transfer Agents Medallion Program,
the New York Stock Exchange Medallion Signature Program, the Stock Exchange
Medallion Program, or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Exchange Act (an "Eligible Institution").
If a Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, the Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by the registered holder
as that registered holder's name appears on the Old Notes.
If a Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
relevant Issuer of their authority to so act must be submitted with such Letter
of Transmittal unless waived by the relevant Issuer.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of tendered Old Notes will be determined by
the Issuers in their sole discretion, which determination will be final and
binding. Each Issuer reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the acceptance of which would, in the
opinion of counsel for such Issuer, be unlawful. Each Issuer also reserves the
right to waive any defects, irregularities, or conditions of tender as to
particular Old Notes. An Issuer's interpretation of the terms and conditions of
its Exchange Offer (including the instructions in a Letter of Transmittal) will
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be cured within such
time as the Issuer of such Old Notes shall determine. Although each Issuer
intends to notify holders of defects or irregularities with respect to tenders
of Old Notes,
81
<PAGE> 84
neither the Issuers, the Exchange Agents, nor any other person shall incur any
liability for failure to give such notification. Tenders of Old Notes will not
be deemed to have been made until such defects or irregularities have been cured
or waived. Any Old Notes received by an Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by such Exchange Agent to the tendering holders, unless
otherwise provided in the Letter of Transmittal accompanying such Old Notes, as
soon as practicable following the Expiration Date.
In addition, each Issuer reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding after the
Expiration Date or, as set forth under "The Exchange Offers -- Conditions to the
Exchange Offer," to terminate its Exchange Offer and, to the extent permitted by
applicable law, purchase Old Notes in the open market, in privately negotiated
transactions, or otherwise. The terms of any such purchases or offers could
differ from the terms of such Issuer's Exchange Offer.
By tendering, each holder will represent that, among other things, (i) the
New Notes acquired pursuant to such Exchange Offer are being obtained in the
ordinary course of business of the person receiving such New Notes, whether or
not such person is the holder of the Old Notes, (ii) neither the holder nor any
such other person has an arrangement or understanding with any person to
participate in the distribution of such New Notes within the meaning of the
Securities Act, (iii) neither the holder nor any such other person is an
"affiliate," as defined under Rule 405 promulgated under the Securities Act, of
Hedstrom, Holdings or any Subsidiary Guarantor, or if it is an affiliate, such
holder or such other person will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable, (iv) if
such holder or other person is not a broker-dealer, neither the holder nor any
such other person is engaged in or intends to engage in the distribution of such
New Notes, and (v) if such holder or other person is a broker-dealer, that it
will receive New Notes for its own account in exchange for Old Notes that were
acquired as a result of market-making activities or other trading activities and
that it will be required to acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to an Exchange Offer will be made only after timely receipt by
the Exchange Agent for such Exchange Offer of certificates for such Old Notes or
a timely Book-Entry Confirmation of such Old Notes into such Exchange Agent's
account at the Book-Entry Transfer Facility, a properly completed and duly
executed Letter of Transmittal (or, with respect to the DTC and its
participants, electronic instructions in which the tendering holder acknowledges
its receipt of and agreement to be bound by the Letter of Transmittal for such
Exchange Offer) and all other required documents. If any tendered Old Notes are
not accepted for any reason set forth in the terms and conditions of the
Exchange Offer for such Old Notes or if Old Notes are submitted for a greater
principal amount than the holder desires to exchange, such unaccepted or
non-exchanged Old Notes will be returned without expense to the tendering Holder
thereof (or, in the case of Old Notes tendered by book-entry transfer into an
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry transfer procedures described below, such non-exchanged Old Notes
will be credited to an account maintained with such Book-Entry Transfer
Facility) as promptly as practicable after the expiration or termination of the
Exchange Offer for such Old Notes.
BOOK-ENTRY TRANSFER
The Exchange Agents will make requests to establish accounts with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offers within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes being tendered by
causing the Book-Entry Transfer Facility to transfer such Old Notes into the
appropriate Exchange Agent's account at the Book-Entry Transfer Facility in
accordance with such Book-Entry Transfer Facility's procedures for transfer.
However, although delivery of Old Notes may be effected through book-entry
transfer at the Book-Entry Transfer Facility, a Letter of Transmittal or copy
thereof, with any required signature guarantees and any other required
documents, must, in any case other than as set forth in the following paragraph,
be transmitted to and received by the appropriate Exchange Agent at its address
set forth under "The Exchange Offers -- Exchange Agents" on or prior to the
Expiration Date or the guaranteed delivery procedures described below must be
complied with.
82
<PAGE> 85
DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through DTC. To accept an Exchange Offer through
ATOP, participants in DTC must send electronic instructions to DTC through DTC's
communication system in place of sending a signed, hard copy Letter of
Transmittal. DTC is obligated to communicate those electronic instructions to
the Exchange Agents. To tender Old Notes through ATOP, the electronic
instructions sent to DTC and transmitted by DTC to an Exchange Agent must
contain the participant acknowledgement of its receipt of and agreement to be
bound by the Letter of Transmittal for such Old Notes.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the appropriate Exchange
Agent before the Expiration Date, or the procedure for book-entry transfer
cannot be completed on a timely basis, a tender may be effected if (i) the
tender is made through an Eligible Institution, (ii) prior to the Expiration
Date, such Exchange Agent received from such Eligible Institution a properly
completed and duly executed Letter of Transmittal (or a facsimile thereof) and
Notice of Guaranteed Delivery, substantially in the form provided by the Issuer
of the Old Notes tendered (by telegram, telex, facsimile transmission, mail or
hand delivery), setting forth the name and address of the holder of such Old
Notes and the amount of Old Notes tendered, stating that the tender is being
made thereby and guaranteeing that within three New York Stock Exchange ("NYSE")
trading days after the date of execution of the Notice of Guaranteed Delivery,
the certificates for all physically tendered Old Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and any other
documents required by the applicable Letter of Transmittal will be deposited by
the Eligible Institution with the appropriate Exchange Agent, and (iii) the
certificates for all physically tendered Old Notes, in proper form for transfer,
or a Book-Entry Confirmation, as the case may be, and all other documents
required by the applicable Letter of Transmittal, are received by such Exchange
Agent within three NYSE trading days after the date of execution of the Notice
of Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date.
For a withdrawal of a tender of Old Notes to be effective, a written or
(for DTC participants) electronic ATOP transmission notice of withdrawal must be
received by the appropriate Exchange Agent at its address set forth in this
Prospectus prior to 5:00 p.m., New York City time, on the Expiration Date. Any
such notice of withdrawal must (i) specify the name of the person having
deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old
Notes to be withdrawn (including the certificate number or numbers and principal
amount of such Old Notes), (iii) be signed by the holder in the same manner as
the original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee of such Old Notes register
the transfer of such Old Notes into the name of the person withdrawing the
tender, and (iv) specify the name in which any such Old Notes are to be
registered, if different from that of the holder who tendered such Old Notes.
All questions as to the validity, form, and eligibility (including time of
receipt) of such notices will be determined by the Issuer of the Old Notes
subject to such notice, whose determination shall be final and binding on all
parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer relating to such Old
Notes. Any Old Notes which have been tendered for exchange but which are not
exchanged for any reason will be returned to the holder thereof without cost to
such holder as soon as practicable after withdrawal, rejection of tender, or
termination of the Exchange Offer relating to such Old Notes. Properly withdrawn
Old Notes may be retendered by following one of the procedures under "The
Exchange Offers -- Procedures for Tendering" at any time on or prior to the
Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offers, an Issuer shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend such Issuer's
83
<PAGE> 86
Exchange Offer if at any time before the acceptance of such Old Notes for
exchange or the exchange of the New Notes for such Old Notes, such Issuer
determines that its Exchange Offer violates applicable law, any applicable
interpretation of the staff of the Commission or any order of any governmental
agency or court of competent jurisdiction.
The foregoing conditions are for the sole benefit of the Issuers and may be
asserted by the Issuers regardless of the circumstances giving rise to any such
condition or may be waived by the Issuers in whole or in part at any time and
from time to time in their sole discretion. The failure by an Issuer at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, an Issuer will not accept for exchange any Old Notes tendered,
and no New Notes will be issued in exchange for any such Old Notes, if at such
time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the indenture relating to such Issuer's Old Notes under the
Trust Indenture Act of 1939, as amended (the "TIA"). In any such event each
Issuer is required to use every reasonable effort to obtain the withdrawal of
any stop order at the earliest possible time.
EXCHANGE AGENTS
SENIOR SUBORDINATED NOTES EXCHANGE AGENT
All executed Senior Subordinated Notes Letters of Transmittal should be
directed to the Senior Subordinated Notes Exchange Agent. IBJ Schroder Bank &
Trust Company has been appointed the Senior Subordinated Notes Exchange Agent.
Questions, requests for assistance and requests for additional copies of this
Prospectus or of the Senior Subordinated Notes Letter of Transmittal should be
directed to the Senior Subordinated Notes Exchange Agent addressed as follows:
To: IBJ SCHRODER BANK & TRUST COMPANY,
<TABLE>
<C> <C> <C>
By Mail: By Facsimile Transmission: By Hand/Overnight Delivery:
IBJ Schroder Bank & Trust (212) 858-2611 IBJ Schroder Bank & Trust
Company Company
P.O. Box 84 To Confirm, One State Street
Bowling Green Station Facsimile Transmissions Call: New York, New York 10004
New York, New York 10274-0084 (212) 858-2103 Attn: Securities Processing
Attn: Reorganization Operations Window, Subcellar One,
Department (SC-1)
</TABLE>
DISCOUNT NOTES EXCHANGE AGENT
All executed Discount Notes Letters of Transmittal should be directed to
the Discount Notes Exchange Agent. The United States Trust Company of New York
has been appointed as the Discount Notes Exchange Agent. Questions, requests for
assistance and requests for additional copies of the Prospectus or the Discount
Notes Letter of Transmittal should be directed to the Discount Notes Exchange
Agent addressed as follows:
84
<PAGE> 87
To: THE UNITED STATES TRUST COMPANY OF NEW YORK,
<TABLE>
<C> <C> <C>
By Overnight Courier: By Hand: By Registered Or Certified
United States Trust Company United States Trust Company Mail:
of New York of New York United States Trust Company
770 Broadway, 13th Floor 111 Broadway of New York
New York, New York 10003 Lower Level P.O. Box 844
Attn: Corporate Trust Services Attn: Corporate Trust Services Attn: Corporate Trust Services
Telephone: (800) 548-6565 New York, New York 10006 Cooper Station
Facsimile: (212) 420-6152 New York, New York 10276-0844
Telephone: (800) 548-6565
Facsimile: (212) 420-6152
</TABLE>
FEES AND EXPENSES
The Issuers will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offers. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Issuers.
The estimated cash expenses to be incurred in connection with the Exchange
Offers will be paid by the Issuers and are estimated in the aggregate to be
$256,018.08, which includes fees and expenses of the Trustees for the Old Notes,
accounting, legal, printing, and related fees and expenses.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection except that holders who instruct an Issuer
to register New Notes in the name of, or request that Old Notes not tendered or
not accepted in an Exchange Offer be returned to, a person other than the
registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
85
<PAGE> 88
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
RELATING TO THE EXCHANGE OFFERS
The following discussion is a summary of certain U.S. federal income tax
considerations relevant to the exchange of Old Notes for New Notes, but does not
purport to be a complete analysis of all potential tax effects. The discussion
is based upon the Internal Revenue Code of 1986, as amended, Treasury
regulations, Internal Revenue Service rulings and pronouncements, and judicial
decisions now in effect, all of which are subject to change at any time by
legislative, judicial or administrative action. Any such changes may be applied
retroactively in a manner that could adversely affect a holder of New Notes. The
description does not consider the effect of any applicable foreign, state, local
or other tax laws or estate or gift tax considerations.
EACH HOLDER SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO IT OF EXCHANGING OLD NOTES FOR NEW NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN LAWS.
EXCHANGE OF OLD NOTES FOR NEW NOTES
The exchange of Old Notes for New Notes pursuant to an Exchange Offer
should not constitute a significant modification of the terms of the Old Notes.
Therefore, such exchange should not constitute an exchange for U.S. federal
income tax purposes. Accordingly, such exchange should have no federal income
tax consequences to holders of Old Notes, and holders should have the same tax
basis, holding period and adjusted issue price with respect to the New Notes as
such holders had with respect to the Old Notes.
86
<PAGE> 89
DESCRIPTION OF THE NEW SENIOR SUBORDINATED NOTES
GENERAL
The New Senior Subordinated Notes will be issued under the Indenture, dated
as of June 1, 1997 (the "Senior Subordinated Notes Indenture"), among Hedstrom,
Holdings, the Subsidiary Guarantors and IBJ Schroder Bank & Trust Company, as
Trustee (the "Senior Subordinated Notes Trustee"), pursuant to which the Old
Senior Subordinated Notes were issued. Upon the issuance of the New Senior
Subordinated Notes, the Senior Subordinated Notes Indenture will be subject to
and governed by the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The following summary of certain provisions of the Senior
Subordinated Notes Indenture and the New Senior Subordinated Notes does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Senior Subordinated Notes Indenture
(including the definitions of certain terms therein and those terms made a part
thereof by the Trust Indenture Act) and the Senior Subordinated Notes, copies of
which are available as set forth under "Available Information."
The New Senior Subordinated Notes will be issued only in fully registered
form, without coupons, in denominations of $1,000 and any integral multiple of
$1,000. No service charge will be made for any registration of transfer or
exchange of New Senior Subordinated Notes, but Hedstrom may require payment of a
sum sufficient to cover any transfer tax or other similar governmental charge
payable in connection therewith.
TERMS OF NEW SENIOR SUBORDINATED NOTES
The New Senior Subordinated Notes will be unsecured, senior subordinated
obligations of Hedstrom, limited to $110 million aggregate principal amount, and
will mature on June 1, 2007. Each New Senior Subordinated Note will bear
interest at the rate of 10% per annum from June 12, 1997, or from the most
recent date to which interest has been paid or provided for, payable
semiannually on June 1 and December 1 of each year, commencing December 1, 1997
to holders of record at the close of business on the May 15 or November 15
immediately preceding the interest payment date.
The interest rate on the Old Senior Subordinated Notes is subject to
increase in certain circumstances if Hedstrom does not file a registration
statement relating to the Senior Subordinated Notes Exchange Offer or if the
Senior Subordinated Notes Exchange Offer is not consummated on a timely basis or
if certain other conditions are not satisfied.
OPTIONAL REDEMPTION
Except as set forth below, the New Senior Subordinated Notes will not be
redeemable at the option of Hedstrom prior to June 1, 2002. On and after such
date, the New Senior Subordinated Notes will be redeemable, at Hedstrom's
option, in whole or in part, at any time upon not less than 30 nor more than 60
days prior notice mailed by first-class mail to each holder's registered
address, at the following redemption prices (expressed in percentages of
principal amount), plus accrued and unpaid interest to the redemption date
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date):
if redeemed during the 12-month period commencing on June 1 of the years
set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2002........................................................ 105.000
2003........................................................ 103.333
2004........................................................ 101.667
2005 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to June 1, 2000,
Hedstrom may redeem in the aggregate up to $44,000,000 principal amount of
Senior Subordinated Notes with the proceeds of one or more Equity Offerings so
long as there is a Public Market at the time of such redemption (provided that
if the Equity Offering is an offering by Holdings, a portion of the net cash
proceeds thereof equal to the amount required to redeem any such Senior
Subordinated Notes is contributed to the equity capital of Hedstrom), at a
redemption price
87
<PAGE> 90
(expressed as a percentage of principal amount) of 110%, plus accrued and unpaid
interest, if any, to the redemption date (subject to the right of holders of
record on the relevant record date to receive accrued and unpaid interest due on
the relevant interest payment date in respect of the Senior Subordinated Notes);
provided, however, that at least $66,000,000 aggregate principal amount of the
Senior Subordinated Notes remains outstanding after each such redemption.
At any time on or prior to June 1, 2002, the New Senior Subordinated Notes
may also be redeemed as a whole at the option of Hedstrom upon the occurrence of
a Change of Control, upon not less than 30 nor more than 60 days prior notice
(but in no event more than 90 days after the occurrence of such Change of
Control) mailed by first-class mail to each holder's registered address, at a
redemption price equal to 100% of the principal amount thereof plus the
Applicable Premium as of, and accrued and unpaid interest, if any, to, the date
of redemption (the "Redemption Date") (subject to the right of holders of record
on the relevant record date to receive interest due on the relevant interest
payment date).
"Applicable Premium" means, with respect to a New Senior Subordinated Note
at any Redemption Date, the greater of (i) 1.0% of the principal amount of such
New Senior Subordinated Note and (ii) the excess of (A) the present value at
such time of (1) the redemption price of such New Senior Subordinated Note at
June 1, 2002 (such redemption price being described under "-- Optional
Redemption") plus (2) all required interest payments due on such New Senior
Subordinated Note through June 1, 2002, computed using a discount rate equal to
the Treasury Rate plus 100 basis points, over (B) the principal amount of such
New Senior Subordinated Note.
"Change of Control" means:
(i) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets
of Hedstrom and its Subsidiaries to any Person or group of related Persons
for purposes of Section 13(d) of the Exchange Act (a "Group") (whether or
not otherwise in compliance with the provisions of the Senior Subordinated
Notes Indenture), other than to Hicks Muse, Arnold E. Ditri or any of their
respective Affiliates, officers and directors (the "Permitted Holders"); or
(ii) a majority of the Board of Directors of Holdings or Hedstrom
shall consist of Persons who are not Continuing Directors; or
(iii) the acquisition by any Person or Group (other than the Permitted
Holders) of the power, directly or indirectly, to vote or direct the voting
of securities having more than 50% of the ordinary voting power for the
election of directors of Hedstrom.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the
Redemption Date (or, if such Statistical Release is no longer published, any
publicly available source or similar market data)) most nearly equal to the
period from the Redemption Date to June 1, 2002; provided, however, that if the
period from the Redemption Date to June 1, 2002 is not equal to the constant
maturity of a United States Treasury security for which a weekly average yield
is given, the Treasury Rate shall be obtained by linear interpolation
(calculated to the nearest one-twelfth of a year) from the weekly average yields
of United States Treasury securities for which such yields are given, except
that if the period from the Redemption Date to June 1, 2002 is less than one
year, the weekly average yield on actually traded United States Treasury
securities adjusted to a constant maturity of one year shall be used.
In the case of any partial redemption, selection of the Senior Subordinated
Notes for redemption will be made by the Senior Subordinated Notes Trustee on a
pro rata basis, by lot or by such other method as the Senior Subordinated Notes
Trustee in its sole discretion shall deem to be fair and appropriate, although
no Senior Subordinated Note of $1,000 in original principal amount or less will
be redeemed in part. If any Senior Subordinated Note is to be redeemed in part
only, the notice of redemption relating to such Senior Subordinated Note shall
state the portion of the principal amount thereof to be redeemed. A new Senior
Subordinated Note in principal amount equal to the unredeemed portion thereof
will be issued in the name of the holder thereof upon cancellation of the
original Senior Subordinated Note.
88
<PAGE> 91
GUARANTIES
The obligations of Hedstrom pursuant to the New Senior Subordinated Notes,
including the repurchase obligation resulting from a Change of Control, will be
unconditionally guaranteed, jointly and severally, on (i) a senior unsecured
basis by Holdings and (ii) a senior subordinated basis by each of the Subsidiary
Guarantors (collectively, the "Guarantors"). Holdings is a holding company that
will derive all its operating income and cash flow from its subsidiaries,
including primarily Hedstrom, the common stock of which will be pledged to
secure Holdings' guarantee of all indebtedness of Hedstrom outstanding under the
Credit Agreement. The obligations of each Subsidiary Guarantor are limited to
the maximum amount as will, after giving effect to all other contingent and
fixed liabilities of such Subsidiary Guarantor (including, without limitation,
any guarantees under the Credit Agreement) and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
its Subsidiary Guaranty or pursuant to its contribution obligations under the
Senior Subordinated Notes Indenture, result in the obligations of such
Subsidiary Guarantor under the Subsidiary Guaranty not constituting a fraudulent
conveyance or fraudulent transfer under federal or state law.
Each Guarantor may consolidate with or merge into or sell its assets to
Hedstrom or another Subsidiary Guarantor without limitation. Each Guarantor may
consolidate with or merge into or sell all or substantially all its assets to a
Person other than Hedstrom or another Subsidiary Guarantor (whether or not
affiliated with such Guarantor). Upon the sale or disposition (by merger or
otherwise) of a Subsidiary Guarantor (or all or substantially all of its assets)
to a Person (whether or not an Affiliate of such Subsidiary Guarantor) which is
not a Subsidiary of Hedstrom, which sale or disposition is otherwise in
compliance with the Senior Subordinated Notes Indenture (including the covenant
described under "Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock"), such Subsidiary Guarantor shall be deemed released from all
its obligations under the Senior Subordinated Notes Indenture and its Subsidiary
Guaranty and such Subsidiary Guaranty shall terminate; provided, however, that
any such termination shall occur only to the extent that all obligations of such
Subsidiary Guarantor under the Credit Agreement and all of its Guarantees of,
and under all of its pledges of assets or other security interests which secure,
any other Indebtedness of Hedstrom shall also terminate upon such release, sale
or transfer.
The provisions under the Senior Subordinated Notes Indenture relating to
the Guaranties may be waived or modified with the written consent of the holders
of a majority in principal amount of the Senior Subordinated Notes then
outstanding.
RANKING AND SUBORDINATION
New Senior Subordinated Notes and Subsidiary Guaranties
The payment of the principal of, premium (if any), and interest on the New
Senior Subordinated Notes and the payment of any Subsidiary Guaranty is
subordinated in right of payment, as set forth in the Senior Subordinated Notes
Indenture, to the payment when due of all Senior Indebtedness of Hedstrom or all
Subsidiary Guarantor Senior Indebtedness of the relevant Subsidiary Guarantor,
as the case may be. However, payment from the money or the proceeds of U.S.
Government Obligations held in any defeasance trust described under "Defeasance"
below is not subordinate to any Senior Indebtedness or subject to the
restrictions described herein. As of June 30, 1997, (i) the outstanding Senior
Indebtedness of Hedstrom was $117.7 million (exclusive of unused commitments)
and (ii) the outstanding Subsidiary Guarantor Senior Indebtedness of the
Subsidiary Guarantors was approximately $112.7 million, virtually all of it
represented by guarantees of Senior Indebtedness of Hedstrom under the Credit
Agreement. Although the Senior Subordinated Notes Indenture contains limitations
on the amount of additional Indebtedness that Hedstrom may Incur, under certain
circumstances the amount of such Indebtedness could be substantial and, in any
case, such Indebtedness may be Senior Indebtedness. See "Certain
Covenants -- Limitation on Indebtedness" below.
As used herein, "Senior Indebtedness" of Hedstrom is defined, whether
outstanding on the Issue Date or thereafter Incurred, as the Bank Indebtedness
and all other Indebtedness of Hedstrom, including interest and fees thereon,
unless, in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is provided that the obligations in respect of such
Indebtedness are not superior in right of payment to the Senior
89
<PAGE> 92
Subordinated Notes; provided, however, that Senior Indebtedness will not include
(1) any obligation of Hedstrom to any Subsidiary, (2) any liability for Federal,
state, foreign, local or other taxes owed or owing by Hedstrom, (3) any accounts
payable or other liability to trade creditors arising in the ordinary course of
business (including Guarantees thereof or instruments evidencing such
liabilities) or (4) any Indebtedness, Guarantee or obligation of Hedstrom that
is expressly subordinate or junior in right of payment to any other
Indebtedness, Guarantee or obligation of Hedstrom, including any Senior
Subordinated Indebtedness and any Subordinated Obligations.
A portion of the operations of Hedstrom are conducted through its
subsidiaries. Claims of creditors of such subsidiaries, including trade
creditors, secured creditors and creditors holding indebtedness and guarantees
issued by such subsidiaries, and claims of preferred stockholders (if any) of
such subsidiaries generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of Hedstrom,
including holders of the New Senior Subordinated Notes, even if such obligations
do not constitute Senior Indebtedness. The New Senior Subordinated Notes and
each Subsidiary Guaranty, therefore, will be effectively subordinated to
creditors (including trade creditors) and preferred stockholders (if any) of the
subsidiaries of Hedstrom (other than the Subsidiary Guarantors). At June 30,
1997, the total liabilities of Hedstrom's subsidiaries (other than the
Subsidiary Guarantors) were approximately $16.9 million, including trade
payables. Although the Senior Subordinated Notes Indenture limits the Incurrence
of Indebtedness of certain of Hedstrom's subsidiaries, such limitation is
subject to a number of significant qualifications. Moreover, the Senior
Subordinated Notes Indenture does not impose any limitation on the Incurrence by
such subsidiaries of liabilities that are not considered Indebtedness under the
Senior Subordinated Notes Indenture. See "-- Certain Covenants -- Limitation on
Indebtedness."
Only Indebtedness of Hedstrom or a Subsidiary Guarantor that is Senior
Indebtedness or Subsidiary Guarantor Senior Indebtedness, as the case may be,
will rank senior to the New Senior Subordinated Notes and the relevant
Subsidiary Guaranty in accordance with the provisions of the Senior Subordinated
Notes Indenture. The New Senior Subordinated Notes and each Subsidiary Guaranty
will in all respects rank pari passu with all other Senior Subordinated
Indebtedness of Hedstrom and Subsidiary Guarantor Senior Subordinated
Indebtedness of the relevant Subsidiary Guarantor, as the case may be. Hedstrom
has agreed in the Senior Subordinated Notes Indenture that it will not Incur,
directly or indirectly, any Indebtedness that is subordinate or junior in
ranking in any respect to Senior Indebtedness unless such Indebtedness is Senior
Subordinated Indebtedness or is contractually subordinated in right of payment
to Senior Subordinated Indebtedness. In addition, no Subsidiary Guarantor may
Incur any Indebtedness if such Indebtedness is subordinate or junior in ranking
in any respect to any Subsidiary Guarantor Senior Indebtedness of such
Subsidiary Guarantor unless such Indebtedness is Subsidiary Guarantor Senior
Subordinated Indebtedness of such Subsidiary Guarantor or is contractually
subordinated in right of payment to Subsidiary Guarantor Senior Subordinated
Indebtedness of such Subsidiary Guarantor. Unsecured Indebtedness is not deemed
to be subordinate or junior to Secured Indebtedness merely because it is
unsecured.
Hedstrom may not pay principal of, premium (if any), or interest on, the
New Senior Subordinated Notes or make any deposit pursuant to the provisions
described under "Defeasance" below and may not otherwise purchase or retire any
New Senior Subordinated Notes (collectively, "pay the New Senior Subordinated
Notes") if (i) any Senior Indebtedness is not paid when due or (ii) any other
default on Senior Indebtedness occurs and the maturity of such Senior
Indebtedness is accelerated in accordance with its terms unless, in either case,
the default has been cured or waived and any such acceleration has been
rescinded or such Senior Indebtedness has been paid in full. However, Hedstrom
may pay the New Senior Subordinated Notes without regard to the foregoing if
Hedstrom and the Trustee receive written notice approving such payment from the
Representative of the Senior Indebtedness with respect to which either of the
events set forth in clause (i) or (ii) of the immediately preceding sentence has
occurred and is continuing. During the continuance of any default (other than a
default described in clause (i) or (ii) of the second preceding sentence) with
respect to any Designated Senior Indebtedness pursuant to which the maturity
thereof may be accelerated immediately without further notice (except such
notice as may be required to effect such acceleration) or the expiration of any
applicable grace periods, Hedstrom may not pay the New Senior Subordinated Notes
(except in (i) Capital Stock (other than Disqualified Stock) issued by Hedstrom
to pay interest on the New Senior Subordinated Notes or issued in exchange for
the New Senior Subordinated Notes, (ii) in securities substantially identical to
the New Senior Subordinated Notes issued by
90
<PAGE> 93
Hedstrom in payment of interest thereon or (iii) in securities issued by
Hedstrom which are subordinated to Senior Indebtedness at least to the same
extent as the New Senior Subordinated Notes and having an Average Life at least
equal to the remaining Average Life of the New Senior Subordinated Notes) for a
period (a "Payment Blockage Period") commencing upon the receipt by the Senior
Subordinated Notes Trustee (with a copy to Hedstrom) of written notice (a
"Blockage Notice") of such default from the Representative of the holders of
such Designated Senior Indebtedness specifying an election to effect a Payment
Blockage Period and ending 179 days thereafter (or earlier if such Payment
Blockage Period is terminated (i) by written notice to the Senior Subordinated
Notes Trustee and Hedstrom from the Person or Persons who gave such Blockage
Notice, (ii) because the default giving rise to such Blockage Notice is no
longer continuing or (iii) because such Designated Senior Indebtedness has been
repaid in full). Notwithstanding the provisions described in the immediately
preceding sentence, unless the holders of such Designated Senior Indebtedness or
the Representative of such holders have accelerated the maturity of such
Designated Senior Indebtedness, Hedstrom may resume payments on the New Senior
Subordinated Notes after the end of such Payment Blockage Period. Not more than
one Blockage Notice may be given in any consecutive 360-day period, irrespective
of the number of defaults with respect to Designated Senior Indebtedness during
such period.
Upon any payment or distribution of the assets of Hedstrom upon a total or
partial liquidation or dissolution or reorganization or bankruptcy of or similar
proceeding relating to Hedstrom or its property, the holders of Senior
Indebtedness will be entitled to receive payment in full of the Senior
Indebtedness before the holders of the New Senior Subordinated Notes are
entitled to receive any payment, and until the Senior Indebtedness is paid in
full, any payment or distribution to which holders of the New Senior
Subordinated Notes would be entitled but for the subordination provisions of the
Senior Subordinated Notes Indenture will be made to holders of the Senior
Indebtedness as their interests may appear. If a distribution is made to holders
of the New Senior Subordinated Notes that, due to the subordination provisions,
should not have been made to them, such holders are required to hold it in trust
for the holders of Senior Indebtedness and pay it over to them as their
interests may appear.
If payment of the New Senior Subordinated Notes is accelerated because of
an Event of Default, Hedstrom or the Senior Subordinated Notes Trustee shall
promptly notify the holders of the Designated Senior Indebtedness or the
Representative of such holders of the acceleration. Hedstrom may not pay the New
Senior Subordinated Notes until five Business Days after such holders or the
Representative of the Designated Senior Indebtedness receive notice of such
acceleration and, thereafter, may pay the New Senior Subordinated Notes only if
the subordination provisions of the Senior Subordinated Notes Indenture
otherwise permit payment at that time.
The obligations of a Subsidiary Guarantor under its Subsidiary Guaranty are
senior subordinated obligations. As such, the rights of holders of the New
Senior Subordinated Notes to receive payment by a Subsidiary Guarantor pursuant
to its Subsidiary Guaranty will be subordinated in right of payment to the
rights of holders of Subsidiary Guarantor Senior Indebtedness of such Subsidiary
Guarantor. The terms of the subordination provisions described above with
respect to Hedstrom's obligations under the New Senior Subordinated Notes apply
equally to a Subsidiary Guarantor and the obligations of such Subsidiary
Guarantor under its Subsidiary Guaranty.
By reason of such subordination provisions contained in the Senior
Subordinated Notes Indenture, in the event of insolvency, creditors of Hedstrom
or a Subsidiary Guarantor who are holders of Senior Indebtedness of Hedstrom or
of Subsidiary Guarantor Senior Indebtedness of a Subsidiary Guarantor, as the
case may be, may recover more, ratably, than the holders of the New Senior
Subordinated Notes, and creditors of Hedstrom who are not holders of Senior
Indebtedness or of Senior Subordinated Indebtedness (including the New Senior
Subordinated Notes) may recover less, ratably, than holders of Senior
Indebtedness and may recover more, ratably, than the holders of Senior
Subordinated Indebtedness.
The provisions under the Senior Subordinated Notes Indenture relating to
the subordination of the New Senior Subordinated Notes may be waived or modified
with the written consent of the holders of a majority in principal amount of the
Senior Subordinated Notes then outstanding.
91
<PAGE> 94
Holdings Guaranty
The Indebtedness evidenced by the Holdings Guaranty will be senior
obligations of Holdings, will rank pari passu in right of payment with all
Holdings Senior Indebtedness, including the Discount Notes and Holdings'
guarantee under the Credit Agreement, and will be senior in right of payment to
all Holdings Subordinated Obligations. As of June 30, 1997, there was
approximately $244.3 million of Holdings Senior Indebtedness (all of which was
represented by the Old Discount Notes, the Holdings Guaranty and Holdings'
Guarantee of the Credit Agreement), and $2.5 million of Holdings Subordinated
Obligations.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder will have the right
to require Hedstrom to repurchase all or any part of such holder's New Senior
Subordinated Notes at a purchase price in cash equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of
repurchase (subject to the right of holders of record on the relevant record
date to receive accrued and unpaid interest due on the relevant interest payment
date in respect of outstanding New Senior Subordinated Notes).
Within 30 days following any Change of Control, unless Hedstrom has mailed
a redemption notice with respect to all the outstanding New Senior Subordinated
Notes in connection with such Change of Control, Hedstrom shall mail a notice to
each holder with a copy to the Trustee stating: (1) that a Change of Control has
occurred and that such holder has the right to require Hedstrom to purchase such
holder's New Senior Subordinated Notes at a purchase price in cash equal to 101%
of the principal amount thereof plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of holders of record on a record date to
receive accrued and unpaid interest on the relevant interest payment date in
respect of outstanding New Senior Subordinated Notes); (2) the repurchase date
(which shall be no earlier than 30 days nor later than 60 days from the date
such notice is mailed); and (3) the procedures determined by Hedstrom,
consistent with the Senior Subordinated Notes Indenture, that a holder must
follow in order to have its New Senior Subordinated Notes purchased.
Hedstrom will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of New Senior Subordinated Notes pursuant to
this covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of the Senior Subordinated Notes Indenture,
Hedstrom will comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations described in the Senior
Subordinated Notes Indenture by virtue thereof.
The definition of "Change of Control" includes, among other transactions, a
disposition of all or substantially all of the property and assets of Hedstrom
and its Subsidiaries. With respect to the disposition of property or assets, the
phrase "all or substantially all" as used in the Senior Subordinated Notes
Indenture varies according to the facts and circumstances of the subject
transaction, has no clearly established meaning under New York law (which is the
choice of law under the Senior Subordinated Notes Indenture) and is subject to
judicial interpretation. Accordingly, in certain circumstances there may be a
degree of uncertainty in ascertaining whether a particular transaction would
involve a disposition of "all or substantially all" of the property or assets of
a Person and, therefore, it may be unclear as to whether a Change of Control has
occurred and whether Hedstrom is required to make an offer to repurchase the New
Senior Subordinated Notes as described above.
The Change of Control purchase feature is a result of negotiations between
Hedstrom and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that Hedstrom would decide to do so in the future. Subject to the limitations
discussed below, Hedstrom could, in the future, enter into certain transactions,
including acquisitions, refinancings or other recapitalizations, that would not
constitute a Change of Control under the Senior Subordinated Notes Indenture,
but that could increase the amount of indebtedness outstanding at such time or
otherwise affect Hedstrom's capital structure or credit ratings. Restrictions on
the ability of Hedstrom to Incur additional Indebtedness are contained in the
covenants described under "-- Certain Covenants -- Limitation on Indebtedness."
Such restrictions can only be waived with the consent of the holders of a
majority in principal amount of the Senior Subordinated Notes then outstanding.
Except for the limitations contained in such covenants, however, the Senior
92
<PAGE> 95
Subordinated Notes Indenture will not contain any covenants or provisions that
may afford holders of the New Senior Subordinated Notes protection in the event
of a highly leveraged transaction.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the Credit Agreement. Future Senior
Indebtedness of Hedstrom and its Subsidiaries may also contain prohibitions of
certain events that would constitute a Change of Control or require such Senior
Indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the holders of their right to require Hedstrom to repurchase the Senior
Subordinated Notes could cause a default under such Senior Indebtedness, even if
the Change of Control itself does not, due to the financial effect of such
repurchase on Hedstrom. Finally, Hedstrom's ability to pay cash to the holders
upon a repurchase may be limited by Hedstrom's then existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any required repurchases. Even if sufficient funds were
otherwise available, the terms of the Bank Indebtedness will prohibit Hedstrom's
prepayment of New Senior Subordinated Notes prior to their scheduled maturity.
Consequently, if Hedstrom is not able to prepay the Bank Indebtedness and any
other Senior Indebtedness containing similar restrictions or obtain requisite
consents, as described above, Hedstrom will be unable to fulfill its repurchase
obligations if holders of New Senior Subordinated Notes exercise their
repurchase rights following a Change of Control, thereby resulting in a default
under the Senior Subordinated Notes Indenture.
The provisions under the Senior Subordinated Notes Indenture relating to
Hedstrom's obligation to make an offer to repurchase the New Senior Subordinated
Notes as a result of a Change of Control may be waived or modified with the
written consent of the holders of a majority in principal amount of the Senior
Subordinated Notes then outstanding.
CERTAIN COVENANTS
The Senior Subordinated Notes Indenture contains certain covenants
including, among others, the following:
Limitation on Indebtedness.
(a) Hedstrom shall not and shall not permit any of its Restricted
Subsidiaries to, Incur, directly or indirectly, any Indebtedness; provided,
however, that Hedstrom and any of its Restricted Subsidiaries may Incur
Indebtedness if on the date thereof the Consolidated Coverage Ratio would be
greater than 2.00 to 1.00, if such Indebtedness is Incurred on or prior to
December 31, 1999 or 2.25 to 1.00, if such Indebtedness is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), Hedstrom and its
Restricted Subsidiaries may Incur the following Indebtedness: (i) Indebtedness
Incurred pursuant to (A) the Credit Agreement (including, without limitation,
any renewal, extension, refunding, restructuring, replacement or refinancing
thereof referred to in clause (ii) of the definition thereof) or (B) any other
agreements or indentures governing Senior Indebtedness; provided, however, that
the aggregate principal amount of all Indebtedness Incurred pursuant to this
clause (i) does not exceed $180 million at any time outstanding, less the
aggregate principal amount thereof repaid with the net proceeds of Asset
Dispositions (to the extent, in the case of a repayment of revolving credit
Indebtedness, the commitment to advance the loans repaid has been terminated);
(ii) Indebtedness represented by Capitalized Lease Obligations, mortgage
financings or purchase money obligations, in each case Incurred for the purpose
of financing all or any part of the purchase price or cost of construction or
improvement of property used in a Related Business or Incurred to Refinance any
such purchase price or cost of construction or improvement, in each case
Incurred no later than 365 days after the date of such acquisition or the date
of completion of such construction or improvement; provided, however, that the
principal amount of any Indebtedness Incurred pursuant to this clause (ii) shall
not exceed $15 million at any time outstanding; (iii) Permitted Indebtedness;
and (iv) Indebtedness (other than Indebtedness described in clauses (i) - (iii))
in a principal amount which, when taken together with the principal amount of
all other Indebtedness Incurred pursuant to this clause (iv) and then
outstanding, will not exceed $15 million (it being understood that any
Indebtedness Incurred under this clause (iv) shall cease to be deemed Incurred
or outstanding for purposes of this clause (iv) (but shall be deemed to be
Incurred for purposes of paragraph (a)) from and after the first date on which
Hedstrom or its Restricted
93
<PAGE> 96
Subsidiaries could have Incurred such Indebtedness under the foregoing paragraph
(a) without reliance upon this clause (iv)).
(c) Notwithstanding the foregoing, neither Hedstrom nor any Restricted
Subsidiary shall Incur any Indebtedness under paragraph (b) above if the
proceeds thereof are used, directly or indirectly, to Refinance any Subordinated
Obligations of Hedstrom unless such Indebtedness shall be subordinated to the
New Senior Subordinated Notes to at least the same extent as such Subordinated
Obligations. No Subsidiary Guarantor shall Incur any Indebtedness under
paragraph (b) above if the proceeds thereof are used, directly or indirectly, to
Refinance any Subsidiary Guarantor Subordinated Obligation of such Subsidiary
Guarantor unless such Indebtedness shall be subordinated to the obligations of
such Subsidiary Guarantor under the Subsidiary Guaranty to at least the same
extent as such Subsidiary Guarantor Subordinated Obligation.
(d) In addition, Hedstrom shall not Incur any Secured Indebtedness which is
not Senior Indebtedness unless contemporaneously therewith effective provision
is made to secure the New Senior Subordinated Notes equally and ratably with
such Secured Indebtedness for so long as such Secured Indebtedness is secured by
a Lien. No Subsidiary Guarantor shall Incur any Secured Indebtedness which is
not Subsidiary Guarantor Senior Indebtedness unless contemporaneously therewith
effective provision is made to secure such Subsidiary Guarantor's obligations
under the Subsidiary Guaranty equally and ratably with such Secured Indebtedness
for so long as such Secured Indebtedness is secured by a Lien.
(e) Hedstrom will not permit any Unrestricted Subsidiary to incur any
Indebtedness other than Non-Recourse Debt; provided, however, that if any such
Indebtedness ceases to be Non-Recourse Debt, such event shall be deemed to
constitute an Incurrence of Indebtedness by Hedstrom or a Restricted Subsidiary.
(f) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, Hedstrom, in its sole discretion,
will classify such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.
Limitation on Layering. Hedstrom shall not Incur any Indebtedness if such
Indebtedness is subordinate or junior in ranking in any respect to any Senior
Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or is
contractually subordinated in right of payment to Senior Subordinated
Indebtedness. No Subsidiary Guarantor shall Incur any Indebtedness if such
Indebtedness is contractually subordinate or junior in ranking in any respect to
any Guarantor Senior Indebtedness of such Subsidiary Guarantor unless such
Indebtedness is Subsidiary Guarantor Senior Subordinated Indebtedness of such
Subsidiary Guarantor or is contractually subordinated in right of payment to
Subsidiary Guarantor Senior Subordinated Indebtedness of such Subsidiary
Guarantor.
Limitation on Restricted Payments. (a) Hedstrom shall not, and shall not
permit any of its Restricted Subsidiaries, directly or indirectly, to (i)
declare or pay any dividend or make any distribution on or in respect of its
Capital Stock (including any payment in connection with any merger or
consolidation involving Hedstrom or any of its Restricted Subsidiaries) except
(A) dividends or distributions payable solely in its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to purchase such
Capital Stock, and (B) dividends or distributions payable solely to Hedstrom or
a Restricted Subsidiary (and if such Restricted Subsidiary is not a Wholly-Owned
Subsidiary, to its other holders of Capital Stock on a pro rata basis), (ii)
purchase, redeem, retire or otherwise acquire for value any Capital Stock of
Hedstrom held by any Person other than a Restricted Subsidiary of Hedstrom or
any Capital Stock of a Restricted Subsidiary held by any Affiliate of Hedstrom,
other than another Restricted Subsidiary (in either case, other than in exchange
for its Capital Stock (other than Disqualified Stock)), (iii) purchase,
repurchase, redeem, defease or otherwise acquire or retire for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment, any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of purchase, repurchase or acquisition) or (iv)
make any Investment (other than a Permitted Investment) in any Person (any such
dividend, distribution, purchase, redemption, repurchase, defeasance, other
acquisition, retirement or Investment being herein referred to in clauses (i)
through (iv) as a "Restricted Payment"), if at the
94
<PAGE> 97
time Hedstrom or such Restricted Subsidiary makes such Restricted Payment: (1) a
Default shall have occurred and be continuing (or would result therefrom); or
(2) Hedstrom is not able to Incur an additional $1.00 of Indebtedness pursuant
to paragraph (a) under "-- Limitation on Indebtedness"; or (3) the aggregate
amount of such Restricted Payment and all other Restricted Payments declared or
made subsequent to the Issue Date would exceed the sum of: (A) 50% of the
Consolidated Net Income accrued during the period (treated as one accounting
period) from the Issue Date to the end of the most recent fiscal quarter ending
prior to the date of such Restricted Payment as to which financial results are
available (or, in case such Consolidated Net Income shall be a deficit, minus
100% of such deficit); (B) the aggregate net proceeds received by Hedstrom from
the issue or sale of its Capital Stock (other than Disqualified Stock) or other
capital contributions subsequent to the Issue Date (other than net proceeds
received from an issuance or sale of such Capital Stock to a Subsidiary of
Hedstrom or an employee stock ownership plan or similar trust); provided,
however, that the value of any non-cash net proceeds shall be as determined by
the Board of Directors in good faith, except that in the event the value of any
non-cash net proceeds shall be $10 million or more, the value shall be as
determined in writing by an independent investment banking firm of nationally
recognized standing; (C) the aggregate Net Cash Proceeds received by Hedstrom
from the issue or sale of its Capital Stock (other than Disqualified Stock) to
an employee stock ownership plan or similar trust subsequent to the Issue Date;
provided, however, that if such plan or trust Incurs any Indebtedness to or
Guaranteed by Hedstrom or any of its Restricted Subsidiaries to finance the
acquisition of such Capital Stock, such aggregate amount shall be limited to
such Net Cash Proceeds less such Indebtedness Incurred to or Guaranteed by
Hedstrom or any of its Restricted Subsidiaries and any increase in the
Consolidated Net Worth of Hedstrom resulting from principal repayments made by
such plan or trust with respect to Indebtedness Incurred by it to finance the
purchase of such Capital Stock; (D) the amount by which Indebtedness of Hedstrom
is reduced on Hedstrom's balance sheet upon the conversion or exchange (other
than by a Restricted Subsidiary of Hedstrom) subsequent to the Issue Date of any
Indebtedness of Hedstrom for Capital Stock of Hedstrom (less the amount of any
cash, or other property, distributed by Hedstrom upon such conversion or
exchange); (E) the amount equal to the net reduction in Investments (other than
Permitted Investments) made by Hedstrom or any of its Restricted Subsidiaries in
any Person resulting from (i) repurchases or redemptions of such Investments by
such Person, proceeds realized upon the sale of such Investment to an
unaffiliated purchaser, and repayments of loans or advances or other transfers
of assets by such Person to Hedstrom or any Restricted Subsidiary of Hedstrom or
(ii) the redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries
(valued in each case as provided in the definition of "Investment") not to
exceed, in the case of any Unrestricted Subsidiary, the amount of Investments
previously made by Hedstrom or any Restricted Subsidiary in such Unrestricted
Subsidiary, which amount was included in the calculation of the amount of
Restricted Payments; provided, however, that no amount shall be included under
this clause (E) to the extent it is already included in Consolidated Net Income;
(F) the aggregate Net Cash Proceeds received by a Person in consideration for
the issuance of such Person's Capital Stock (other than Disqualified Stock)
which are held by such Person at the time such Person is merged with and into
Hedstrom in accordance with the "Merger and Consolidation" covenant subsequent
to the Issue Date; provided, however, that concurrently with or immediately
following such merger Hedstrom uses an amount equal to such Net Cash Proceeds to
redeem or repurchase Hedstrom's Capital Stock; and (G) $5 million.
(b) The provisions of paragraph (a) shall not prohibit: (i) any purchase or
redemption of Capital Stock or Subordinated Obligations of Hedstrom made by
exchange for, or out of the proceeds of the substantially concurrent sale of,
Capital Stock of Hedstrom (other than Disqualified Stock and other than Capital
Stock issued or sold to a Subsidiary or an employee stock ownership plan or
similar trust); provided, however, that (A) such purchase or redemption shall be
excluded in the calculation of the amount of Restricted Payments and (B) the Net
Cash Proceeds from such sale shall be excluded from clause (3)(B) of paragraph
(a); (ii) any purchase or redemption of Subordinated Obligations of Hedstrom
made by exchange for, or out of the proceeds of the substantially concurrent
sale of, Subordinated Obligations of Hedstrom; provided, however, that such
purchase or redemption shall be excluded in the calculation of the amount of
Restricted Payments; (iii) any purchase or redemption of Subordinated
Obligations from Net Available Cash to the extent permitted under "Limitation on
Sales of Assets and Subsidiary Stock" below; provided, however, that such
purchase or redemption shall be excluded in the calculation of the amount of
Restricted Payments; (iv) dividends paid within 60 days after the date of
declaration if at such date of declaration such dividend would have complied
with this provision;
95
<PAGE> 98
provided, however, that such dividend shall be included in the calculation of
the amount of Restricted Payments; (v) payments of dividends on Hedstrom's
common stock after an initial public offering of common stock of Hedstrom in an
annual amount not to exceed 6% of the gross proceeds (before deducting
underwriting discounts and commissions and other fees and expenses of the
offering) received by Hedstrom from shares of common stock sold for the account
of Hedstrom (and not for the account of any stockholder) in such initial public
offering or 6% of the amount contributed to Hedstrom by Holdings from the
proceeds of an initial public offering of common stock of Holdings; (vi)
payments by Hedstrom to repurchase Capital Stock or other securities of Holdings
or Hedstrom from members of management of Holdings or Hedstrom in an aggregate
amount not to exceed $5 million; (vii) payments to enable Holdings or Hedstrom
to redeem or repurchase stock purchase or similar rights granted by Holdings or
Hedstrom with respect to its Capital Stock in an aggregate amount not to exceed
$1 million; (viii) payments, not to exceed $200,000 in the aggregate, to enable
Holdings or Hedstrom to make cash payments to holders of its Capital Stock in
lieu of the issuance of fractional shares of its Capital Stock; (ix) payments
made pursuant to any merger, consolidation or sale of assets effected in
accordance with the "Merger and Consolidation" covenant; provided, however, that
no such payment may be made pursuant to this clause (ix) unless, after giving
effect to such transaction (and the incurrence of any Indebtedness in connection
therewith and the use of the proceeds thereof), Hedstrom would be able to Incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with the "Limitation on Indebtedness" covenant such that, after
Incurring that $1.00 of additional Indebtedness, the Consolidated Coverage Ratio
would be greater than 3.50: 1.00; (x) purchase or redemption by Hedstrom or a
Restricted Subsidiary of Capital Stock of ERO, Inc. contemplated by the Merger
Agreement; (xi) payments by Hedstrom to fund (A) out of pocket expenses of
Holdings for administrative, legal and accounting services provided by third
parties, or to pay franchise fees and similar costs in an amount not to exceed
$1 million per annum and (B) taxes of Holdings attributable to Hedstrom and its
Subsidiaries; provided however, that such payments shall be excluded in the
calculation of the amount of Restricted Payments; and (xii) the declaration or
payment of any dividend on shares of Hedstrom's common stock so long as (A)
Hedstrom would be permitted immediately after giving pro forma effect to such
declaration or payment to incur an additional $1.00 of Indebtedness pursuant to
clause (a) under "Limitations on Indebtedness," (B) such declaration or payment
is made immediately prior to a date on which cash interest is required to be
paid on the Discount Notes and (C) the full amount of such payment is applied by
Holdings on such date as payment of such cash interest on the Discount Notes;
provided, however, that such dividend shall be included in the calculation of
the amount of Restricted Payments; provided, however, that in the case of
clauses (v), (vi), (vii), (viii) and (ix) no Default or Event of Default shall
have occurred or be continuing at the time of such payment or as a result
thereof.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
Hedstrom shall not, and shall not permit any of its Restricted Subsidiaries to,
create or permit to exist or become effective any consensual encumbrance or
restriction on the ability of any such Restricted Subsidiary to (i) pay
dividends or make any other distributions on its Capital Stock or pay any
Indebtedness or other obligation owed to Hedstrom, (ii) make any loans or
advances to Hedstrom or (iii) transfer any of its property or assets to
Hedstrom; except: (a) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date, including the Credit Agreement; (b)
any encumbrance or restriction with respect to such a Restricted Subsidiary
pursuant to an agreement relating to any Indebtedness Incurred or Preferred
Stock issued and outstanding by such Restricted Subsidiary on or prior to the
date on which such Restricted Subsidiary was acquired by Hedstrom and
outstanding on such date (other than Indebtedness Incurred or Preferred Stock
issued as consideration in, or to provide all or any portion of the funds or
credit support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary of Hedstrom or was acquired by Hedstrom); (c) any encumbrance or
restriction with respect to such a Restricted Subsidiary pursuant to an
agreement evidencing Indebtedness Incurred without violation of the Senior
Subordinated Notes Indenture or effecting a refinancing of Indebtedness issued
pursuant to an agreement referred to in clauses (a) or (b) or this clause (c) or
contained in any amendment to an agreement referred to in clauses (a) or (b) or
this clause (c); provided, however, that the encumbrances and restrictions with
respect to such Restricted Subsidiary contained in any such refinancing
agreement or amendment, taken as a whole, are no less favorable to the holders
of the New Senior Subordinated Notes in any material respect, as determined in
good faith by the senior management of Hedstrom or Board of Directors of
Hedstrom, than encumbrances and restrictions with respect to
96
<PAGE> 99
such Restricted Subsidiary contained in agreements in effect at, or entered into
on, the Issue Date; (d) in the case of clause (iii), any encumbrance or
restriction (A) that restricts in a customary manner the subletting, assignment
or transfer of any property or asset that is a lease, license, conveyance or
contract or similar property or asset, (B) by virtue of any transfer of,
agreement to transfer, option or right with respect to, or Lien on, any property
or assets of Hedstrom or any Restricted Subsidiary not otherwise prohibited by
the Senior Subordinated Notes Indenture, (C) that is included in a licensing
agreement to the extent such restrictions limit the transfer of the property
subject to such licensing agreement or (D) arising or agreed to in the ordinary
course of business and that does not, individually or in the aggregate, detract
from the value of property or assets of Hedstrom or any of its Subsidiaries in
any manner material to Hedstrom or any such Restricted Subsidiary as determined
in good faith by the senior management of Hedstrom; (e) in the case of clause
(iii) above, restrictions contained in security agreements, mortgages or similar
documents securing Indebtedness of a Restricted Subsidiary to the extent such
restrictions restrict the transfer of the property subject to such security
agreements; (f) any restriction with respect to such a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition; (g) any encumbrance or
restriction imposed solely upon a Foreign Subsidiary; provided, however, that,
immediately after giving effect to such encumbrance or restriction, Hedstrom
would be able to Incur at least $1.00 of Indebtedness pursuant to clause (a) of
the covenant described under "-- Limitation on Indebtedness;" and (h)
encumbrances or restrictions arising or existing by reason of applicable law.
Limitation on Sales of Assets and Subsidiary Stock. (a) Hedstrom shall not,
and shall not permit any of its Restricted Subsidiaries to, directly or
indirectly, make any Asset Disposition unless (i) Hedstrom or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value, as determined in good faith by Hedstrom's senior
management or the Board of Directors (including as to the value of all noncash
consideration), of the shares and assets subject to such Asset Disposition, (ii)
at least 75% of the consideration thereof received by Hedstrom or such
Restricted Subsidiary is in the form of cash or cash equivalents and (iii) an
amount equal to 100% of the Net Available Cash from such Asset Disposition is
applied by Hedstrom (or such Restricted Subsidiary, as the case may be) (A)
first, to the extent Hedstrom or any Restricted Subsidiary elects (or is
required by the terms of any Senior Indebtedness), to prepay, repay or purchase
(x) Senior Indebtedness or (y) Indebtedness (other than any Disqualified Stock)
of a Wholly-Owned Subsidiary (in each case other than Indebtedness owed to
Hedstrom) within 180 days from the later of the date of such Asset Disposition
or the receipt of such Net Available Cash; (B) second, within one year from the
receipt of such Net Available Cash, to the extent of the balance of such Net
Available Cash after application in accordance with clause (A), at Hedstrom's
election either (x) to the investment in or acquisition of Additional Assets or
(y) to prepay, repay or purchase (1) Senior Indebtedness or (2) Indebtedness
(other than any Disqualified Stock) of a Wholly-Owned Subsidiary (in each case
other than Indebtedness owed to Hedstrom); and (C) third, within 45 days after
the later of the application of Net Available Cash in accordance with clauses
(A) and (B) and the date that is one year from the receipt of such Net Available
Cash, to the extent of the balance of such Net Available Cash after application
in accordance with clauses (A) and (B), to make an offer to purchase Senior
Subordinated Notes (and other Senior Subordinated Indebtedness designated by
Hedstrom), pro rata tendered at 100% of the principal amount thereof (or 100% of
the accreted value of such other Senior Subordinated Indebtedness, if such
Senior Subordinated Indebtedness was issued at a discount) plus accrued and
unpaid interest, if any, thereon to the date of purchase. The balance of such
Net Available Cash after application in accordance with clauses (A), (B) and (C)
may be used by Hedstrom in any manner not otherwise prohibited under the Senior
Subordinated Notes Indenture. Notwithstanding anything contained herein to the
contrary, in connection with any prepayment, repayment or purchase of
Indebtedness pursuant to clause (A), (B) or (C) above, Hedstrom or such
Restricted Subsidiary shall retire such Indebtedness and shall cause the related
loan commitment (if any) to be permanently reduced in an amount equal to the
principal amount so prepaid, repaid or purchased. Notwithstanding the foregoing
provisions, Hedstrom and its Restricted Subsidiaries shall not be required to
apply any Net Available Cash in accordance herewith except to the extent that
the aggregate Net Available Cash from all Asset Dispositions which are not
applied in accordance with this covenant at any time exceeds $5 million.
Hedstrom shall not be required to make an offer for Senior Subordinated Notes
pursuant to this covenant if the Net Available Cash available therefor (after
application of the proceeds as provided in clauses (A) and (B)) is less than $10
million for any particular Asset Disposition (which lesser amounts shall be
carried
97
<PAGE> 100
forward for purposes of determining whether an offer is required with respect to
the Net Available Cash from any subsequent Asset Disposition).
For the purposes of this covenant, the following will be deemed to be cash
or cash equivalents: (x) the assumption by the transferee of Senior Indebtedness
of Hedstrom or Indebtedness of any Restricted Subsidiary of Hedstrom and the
release of Hedstrom or such Restricted Subsidiary from all liability on such
Senior Indebtedness or Indebtedness in connection with such Asset Disposition
(in which case Hedstrom shall, without further action, be deemed to have applied
such assumed Indebtedness in accordance with clause (A) of the preceding
paragraph) and (y) securities received by Hedstrom or any Restricted Subsidiary
of Hedstrom from the transferee that are promptly converted by Hedstrom or such
Restricted Subsidiary into cash.
Notwithstanding the foregoing, Hedstrom and its Restricted Subsidiaries
will be permitted to consummate an Asset Swap if (i) immediately after giving
effect to such Asset Swap, no Default or Event of Default shall have occurred or
be continuing, (ii) in the event such Asset Swap involves an aggregate amount in
excess of $5 million, the terms of such Asset Swap have been approved by a
majority of the members of the Board of Directors of Hedstrom, and (iii) in the
event such Asset Swap involves an aggregate amount in excess of $20 million,
Hedstrom has received a written opinion from an independent investment banking
firm of nationally recognized standing that such Asset Swap is fair to Hedstrom
or such Restricted Subsidiary, as the case may be, from a financial point of
view.
(b) In the event of an Asset Disposition that requires the purchase of
Senior Subordinated Notes pursuant to clause (a)(iii)(C), Hedstrom will be
required to purchase Senior Subordinated Notes (and any other Senior
Subordinated Indebtedness tendered for by Hedstrom) tendered pursuant to an
offer by Hedstrom for the Senior Subordinated Notes (and any other Senior
Subordinated Indebtedness) at a purchase price of 100% of their principal amount
plus accrued and unpaid interest, if any, to the purchase date in accordance
with the procedures (including prorating in the event of oversubscription) set
forth in the Senior Subordinated Notes Indenture. If the aggregate purchase
price of the Senior Subordinated Notes (and any other Senior Subordinated
Indebtedness) tendered pursuant to the offer is less than the Net Available Cash
allotted to the purchase thereof, Hedstrom may use the remaining Net Available
Cash for any purpose not prohibited by the Senior Subordinated Notes Indenture
and any remaining Net Available Cash will not be subject to any future offer.
(c) Hedstrom will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Senior Subordinated Notes
pursuant to the Senior Subordinated Notes Indenture. To the extent that the
provisions of any securities laws or regulations conflict with provisions of
this covenant, Hedstrom will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under the
Senior Subordinated Notes Indenture by virtue thereof.
Limitation on Affiliate Transactions. (a) Hedstrom will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, enter into
or conduct any transaction or series of related transactions (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of Hedstrom other than a Wholly-Owned Subsidiary (an
"Affiliate Transaction") unless: (i) the terms of such Affiliate Transaction are
no less favorable to Hedstrom or such Restricted Subsidiary, as the case may be,
than those that could be obtained at the time of such transaction or series of
related transactions, in arm's-length dealings with a Person who is not such an
Affiliate; (ii) in the event such Affiliate Transaction involves an aggregate
amount in excess of $5 million, the terms of such transaction or series of
related transactions, have been approved by a majority of the members of the
Board of Directors of Hedstrom and by a majority of the disinterested members of
such Board, if any (and such majority or majorities as the case may be,
determines that such Affiliate Transaction satisfies the criteria in (i) above);
and (iii) in the event such Affiliate Transaction involves an aggregate amount
in excess of $15 million, Hedstrom has received a written opinion from an
independent investment banking firm of nationally recognized standing that such
Affiliate Transaction is fair to Hedstrom or such Restricted Subsidiary, as the
case may be, from a financial point of view.
(b) The foregoing paragraph (a) shall not apply to (i) any Restricted
Payment permitted to be made pursuant to the covenant described under
"Limitation on Restricted Payments," (ii) any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise pursuant to, or the
funding of, employment
98
<PAGE> 101
arrangements, stock options and stock ownership plans approved by the Board of
Directors of Hedstrom, (iii) loans or advances to employees in the ordinary
course of business of Hedstrom or any of its Restricted Subsidiaries, (iv) any
transaction between Wholly-Owned Subsidiaries, (v) indemnification agreements
with, and the payment of fees and indemnities to, directors, officers and
employees of Hedstrom and its Restricted Subsidiaries, in each case in the
ordinary course of business, (vi) transactions pursuant to agreements as in
existence on the Issue Date, (vii) any employment, noncompetition or
confidentiality agreements entered into by Hedstrom or any of its Restricted
Subsidiaries with its employees in the ordinary course of business, (viii)
payments made in connection with the Transactions, including fees to Hicks Muse,
(ix) the issuance of Capital Stock of Hedstrom (other than Disqualified Stock)
and (x) any obligations of Hedstrom pursuant to the Monitoring and Oversight
Agreement and the Financial Advisory Agreement.
Limitation on Capital Stock of Restricted Subsidiaries. Hedstrom will not,
nor will it permit any Restricted Subsidiary to, sell or otherwise dispose of
any Capital Stock (other than Preferred Stock) of a Restricted Subsidiary to any
Person (other than to Hedstrom or a Wholly-Owned Subsidiary of Hedstrom) or
permit any Person (other than Hedstrom or a Wholly-Owned Subsidiary of Hedstrom)
to own any Capital Stock (other than Preferred Stock) of a Restricted Subsidiary
of Hedstrom, if in either case as a result thereof such Restricted Subsidiary
would no longer be a Restricted Subsidiary of Hedstrom; provided, however, that
this provision shall not prohibit (x) Hedstrom or any of its Restricted
Subsidiaries from selling, leasing or otherwise disposing of all of the Capital
Stock of any Restricted Subsidiary or (y) the designation of a Restricted
Subsidiary as an Unrestricted Subsidiary in compliance with the Senior
Subordinated Notes Indenture.
SEC Reports. Hedstrom will file with the Senior Subordinated Notes Trustee
and provide to the holders of the New Senior Subordinated Notes, within 15 days
after it files them with the Commission, copies of the annual reports and of the
information, documents and other reports (or copies of such portions of any of
the foregoing as the Commission may by rules and regulations prescribe) which
Hedstrom or Holdings files with the Commission pursuant to Section 13 or 15(d)
of the Exchange Act. Pursuant to the Senior Subordinated Notes Indenture,
Hedstrom and Holdings have agreed that they shall file with the Commission all
annual reports and such other documents, information and reports required by
Section 13 or 15(d) of the Exchange Act notwithstanding that Hedstrom and
Holdings may not be subject to the reporting requirements of the Exchange Act.
Merger and Consolidation. Hedstrom shall not consolidate with or merge with
or into, or convey, transfer or lease, in one transaction or a series of related
transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (the "Successor Company") shall be
a corporation, partnership, trust or limited liability company organized and
existing under the laws of the United States of America, any State thereof or
the District of Columbia and the Successor Company (if not Hedstrom) shall
expressly assume, by supplemental indenture, executed and delivered to the
Senior Subordinated Notes Trustee, in form satisfactory to the Senior
Subordinated Notes Trustee, all the obligations of Hedstrom under the Senior
Subordinated Notes and the Senior Subordinated Notes Indenture; (ii) immediately
after giving effect to such transaction (and treating any Indebtedness that
becomes an obligation of the Successor Company or any Subsidiary of the
Successor Company as a result of such transaction as having been Incurred by the
Successor Company or such Subsidiary at the time of such transaction), no
Default or Event of Default shall have occurred and be continuing; (iii)
immediately after giving effect to such transaction, the Successor Company would
be able to Incur at least an additional $1.00 of Indebtedness pursuant to
paragraph (a) of "-- Limitation on Indebtedness"; and (iv) Hedstrom shall have
delivered to the Senior Subordinated Notes Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger or transfer
and such supplemental indenture (if any) comply with the Senior Subordinated
Notes Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, Hedstrom under the Senior Subordinated Notes
Indenture, but, in the case of a lease of all or substantially all its assets,
Hedstrom will not be released from the obligation to pay the principal of and
interest on the Senior Subordinated Notes.
Notwithstanding the foregoing clauses (ii) and (iii), (1) any Restricted
Subsidiary of Hedstrom may consolidate with, merge into or transfer all or part
of its properties and assets to Hedstrom and (2) Hedstrom may
99
<PAGE> 102
merge with an Affiliate incorporated solely for the purpose of reincorporating
Hedstrom in another jurisdiction to realize tax or other benefits.
Future Guarantors. Hedstrom shall cause each domestic Restricted Subsidiary
(including each domestic Restricted Subsidiary created or acquired following the
Issue Date) to Guarantee the New Senior Subordinated Notes pursuant to a
Subsidiary Guaranty on the terms and conditions set forth in the Senior
Subordinated Notes Indenture.
EVENTS OF DEFAULT
Each of the following constitutes an Event of Default under the Senior
Subordinated Notes Indenture: (i) a default in any payment of interest on any
Senior Subordinated Note when due, continued for 30 days, whether or not such
payment is prohibited by the provisions described under "Ranking and
Subordination" above, (ii) a default in the payment of principal of any Senior
Subordinated Note when due at its Stated Maturity, upon optional redemption,
upon required repurchase, upon declaration or otherwise, whether or not such
payment is prohibited by the provisions described under "Ranking and
Subordination" above, (iii) the failure by Hedstrom to comply with its
obligations under "Certain Covenants -- Merger and Consolidation" above, (iv)
the failure by Hedstrom to comply for 30 days after notice with any of its
obligations under the covenant described under "Change of Control" above or
under the covenants described under "Certain Covenants" above (in each case,
other than a failure to purchase Senior Subordinated Notes which shall
constitute an Event of Default under clause (ii) above), other than "Merger and
Consolidation", (v) the failure by Hedstrom to comply for 60 days after notice
with its other agreements contained in the Senior Subordinated Notes Indenture,
(vi) Indebtedness of Hedstrom or any Restricted Subsidiary is not paid within
any applicable grace period after final maturity or is accelerated by the
holders thereof because of a default and the total amount of such Indebtedness
unpaid or accelerated exceeds $10 million and such default shall not have been
cured or such acceleration rescinded after a 10 day period (the "cross
acceleration provision"), (vii) certain events of bankruptcy, insolvency or
reorganization of Hedstrom, Holdings or a Significant Subsidiary (the
"bankruptcy provisions"), (viii) any judgment or decree for the payment of money
in excess of $10 million (to the extent not covered by insurance) is rendered
against Hedstrom or a Significant Subsidiary and such judgment or decree shall
remain undischarged or unstayed for a period of 60 days after such judgment
becomes final and non-appealable (the "judgment default provision") or (ix) the
Holdings Guaranty or any Subsidiary Guaranty by a Significant Subsidiary ceases
to be in full force and effect (except as contemplated by the terms of the
Senior Subordinated Notes Indenture) or Holdings or any Subsidiary Guarantor
that is a Significant Subsidiary denies or disaffirms its obligations under the
Senior Subordinated Notes Indenture or the Holdings Guaranty or its Subsidiary
Guaranty, respectively, and such Default continues for 10 days. However, a
default under clauses (iv) and (v) will not constitute an Event of Default until
the Senior Subordinated Notes Trustee or the holders of 25% in principal amount
of the outstanding Senior Subordinated Notes notify Hedstrom of the default and
Hedstrom does not cure such default within the time specified in clauses (iv)
and (v) hereof after receipt of such notice.
If an Event of Default occurs and is continuing, the Senior Subordinated
Notes Trustee or the holders of at least 25% in principal amount of the
outstanding Senior Subordinated Notes by notice to Hedstrom may declare the
principal of and accrued and unpaid interest, if any, on all the Senior
Subordinated Notes to be due and payable. Upon such a declaration, such
principal and accrued and unpaid interest shall be due and payable immediately.
If an Event of Default relating to certain events of bankruptcy, insolvency or
reorganization of Hedstrom, Holdings or any Significant Subsidiary occurs and is
continuing, the principal of and accrued and unpaid interest on all the Senior
Subordinated Notes will become and be immediately due and payable without any
declaration or other act on the part of the Senior Subordinated Notes Trustee or
any holders. Under certain circumstances, the holders of a majority in principal
amount of the outstanding Senior Subordinated Notes may rescind any such
acceleration with respect to the Senior Subordinated Notes and its consequences.
Subject to the provisions of the Senior Subordinated Notes Indenture
relating to the duties of the Senior Subordinated Notes Trustee, if an Event of
Default occurs and is continuing, the Senior Subordinated Notes Trustee will be
under no obligation to exercise any of the rights or powers under the Senior
Subordinated Notes Indenture at the request or direction of any of the holders
unless such holders have offered to the Senior Subordinated Notes Trustee
reasonable indemnity or security against any loss, liability or expense. Except
to
100
<PAGE> 103
enforce the right to receive payment of principal, premium (if any) or interest
when due, no holder may pursue any remedy with respect to the Senior
Subordinated Notes Indenture or the Senior Subordinated Notes unless (i) such
holder has previously given the Senior Subordinated Notes Trustee notice that an
Event of Default is continuing, (ii) holders of at least 25% in principal amount
of the outstanding Senior Subordinated Notes have requested the Senior
Subordinated Notes Trustee to pursue the remedy, (iii) such holders have offered
the Senior Subordinated Notes Trustee reasonable security or indemnity against
any loss, liability or expense, (iv) the Senior Subordinated Notes Trustee has
not complied with such request within 60 days after the receipt of the request
and the offer of security or indemnity and (v) the holders of a majority in
principal amount of the outstanding Senior Subordinated Notes have not given the
Senior Subordinated Notes Trustee a direction that, in the opinion of the Senior
Subordinated Notes Trustee, is inconsistent with such request within such 60-day
period. Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding Senior Subordinated Notes are given the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Senior Subordinated Notes Trustee or of exercising any trust or
power conferred on the Senior Subordinated Notes Trustee. The Senior
Subordinated Notes Trustee, however, may refuse to follow any direction that
conflicts with law or the Senior Subordinated Notes Indenture or that the Senior
Subordinated Notes Trustee determines is unduly prejudicial to the rights of any
other holder or that would involve the Senior Subordinated Notes Trustee in
personal liability. Prior to taking any action under the Senior Subordinated
Notes Indenture, the Senior Subordinated Notes Trustee shall be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
The Senior Subordinated Notes Indenture provides that if a Default occurs
and is continuing and is known to the Senior Subordinated Notes Trustee, the
Senior Subordinated Notes Trustee must mail to each holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of, premium (if any) or interest on any Senior Subordinated Note,
the Senior Subordinated Notes Trustee may withhold notice if and so long as its
board of directors, a committee of its board of directors or a committee of its
Trust officers in good faith determines that withholding notice is in the
interests of the holders of Senior Subordinated Notes. In addition, Hedstrom is
required to deliver to the Senior Subordinated Notes Trustee, within 120 days
after the end of each fiscal year, a certificate indicating whether the signers
thereof know of any Default that occurred during the previous year. Hedstrom
also is required to deliver to the Senior Subordinated Notes Trustee, within 30
days after the occurrence thereof, written notice of any events which would
constitute certain Defaults.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Senior Subordinated Notes Indenture may
be amended with the consent of the holders of a majority in principal amount of
the Senior Subordinated Notes then outstanding (including consents obtained in
connection with a tender offer or exchange for the Senior Subordinated Notes)
and any past default or compliance with any provisions may be waived with the
consent of the holders of a majority in principal amount of the Senior
Subordinated Notes then outstanding. However, without the consent of each holder
of an outstanding Senior Subordinated Note affected, no amendment may, among
other things, (i) reduce the amount of Senior Subordinated Notes whose holders
must consent to an amendment, (ii) reduce the stated rate of or extend the
stated time for payment of interest on any Senior Subordinated Note, (iii)
reduce the principal of or extend the Stated Maturity of any Senior Subordinated
Note, (iv) reduce the premium payable upon the redemption or repurchase of any
Senior Subordinated Note or change the time at which any Senior Subordinated
Note may be redeemed as described under "Optional Redemption" above, (v) make
any Senior Subordinated Note payable in money other than that stated in the
Senior Subordinated Note, (vi) impair the right of any holder to receive payment
of principal of and interest on such holder's Senior Subordinated Notes on or
after the due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such holder's Senior Subordinated Notes or (vii)
make any change in the amendment provisions which require each holder's consent
or in the waiver provisions.
Without the consent of any holder, Hedstrom and the Trustee may amend the
Senior Subordinated Notes Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation,
partnership, trust or limited liability company of the obligations of Hedstrom
under the Senior Subordinated Notes Indenture, to provide for uncertificated
Senior Subordinated Notes in addition to or in place
101
<PAGE> 104
of certificated Senior Subordinated Notes (provided that the uncertificated
Senior Subordinated Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Senior
Subordinated Notes are described in Section 163(f) (2) (B) of the Code), to add
further Guarantees with respect to the Senior Subordinated Notes, to secure the
Senior Subordinated Notes, to add to the covenants of Hedstrom for the benefit
of the holders or to surrender any right or power conferred upon Hedstrom, to
make any change that does not adversely affect the rights of any holder or to
comply with any requirement of the Commission in connection with the
qualification of the Senior Subordinated Notes Indenture under the Trust
Indenture Act. However, no amendment may be made to the subordination provisions
of the Senior Subordinated Notes Indenture that adversely affects the rights of
any holder of Senior Indebtedness then outstanding unless the holders of such
Senior Indebtedness (or any group or representative thereof authorized to give a
consent) consent to such change.
The consent of the holders is not necessary under the Senior Subordinated
Notes Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Senior Subordinated Notes Indenture becomes
effective, Hedstrom is required to mail to the holders a notice briefly
describing such amendment. However, the failure to give such notice to all the
holders, or any defect therein, will not impair or affect the validity of the
amendment.
DEFEASANCE
Hedstrom at any time may terminate all its obligations under the Senior
Subordinated Notes and the Senior Subordinated Notes Indenture ("legal
defeasance"), except for certain obligations, including those respecting the
defeasance trust and obligations to register the transfer or exchange of the
Senior Subordinated Notes, to replace mutilated, destroyed, lost or stolen
Senior Subordinated Notes and to maintain a registrar and paying agent in
respect of the Senior Subordinated Notes. Hedstrom at any time may terminate its
obligations under "-- Change of Control," and under substantially all of its
covenants in the Senior Subordinated Notes Indenture, including the covenants
described under "-- Certain Covenants" (other than "-- Merger and
Consolidation"), the operation of the cross acceleration provision, the
bankruptcy provisions with respect to Significant Subsidiaries and the judgment
default provision described under "-- Events of Default" above and the
limitations contained in clauses (iii) and (iv) under "-- Certain
Covenants -- Merger and Consolidation" above ("covenant defeasance").
Hedstrom may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If Hedstrom exercises its legal
defeasance option, payment of the Senior Subordinated Notes may not be
accelerated because of an Event of Default with respect thereto. If Hedstrom
exercises its covenant defeasance option, payment of the Senior Subordinated
Notes may not be accelerated because of an Event of Default specified in clause
(iv), (vi), (vii) (with respect only to Significant Subsidiaries), (viii) or
(ix) under "Events of Default" above or because of the failure of Hedstrom to
comply with clause (iii) or (iv) under "-- Certain Covenants -- Merger and
Consolidation" above. If Hedstrom exercises its legal defeasance option or its
covenant defeasance option, each Guarantor will be released from all its
obligations with respect to its Guaranty.
In order to exercise either defeasance option, Hedstrom must irrevocably
deposit in trust (the "defeasance trust") with the Senior Subordinated Notes
Trustee money or U.S. Government Obligations for the payment of principal,
premium (if any) and interest on the Senior Subordinated Notes to maturity or
any redemption date specified by Hedstrom, as the case may be, and must comply
with certain other conditions, including delivery to the Senior Subordinated
Notes Trustee of an Opinion of Counsel to the effect that holders of the Senior
Subordinated Notes will not recognize income, gain or loss for U.S. Federal
income tax purposes as a result of such deposit and defeasance and will be
subject to U.S. Federal income tax on the same amounts and in the same manner
and at the same times as would have been the case if such deposit and defeasance
had not occurred (and, in the case of legal defeasance only, such Opinion of
Counsel must be based on a ruling of the Internal Revenue Service (the
"Service") or other change in applicable U.S. Federal income tax law).
102
<PAGE> 105
CONCERNING THE TRUSTEE
IBJ Schroder Bank & Trust Company is the Senior Subordinated Notes Trustee
under the Senior Subordinated Notes Indenture and has been appointed by Hedstrom
as Registrar and Paying Agent with regard to the Senior Subordinated Notes.
The Holders of a majority in principal amount of the outstanding Senior
Subordinated Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Senior
Subordinated Notes Trustee, subject to certain exceptions. The Senior
Subordinated Notes Indenture provides that if an Event of Default occurs (and is
not cured), the Senior Subordinated Notes Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Senior Subordinated Notes
Trustee will be under no obligation to exercise any of its rights or powers
under the Senior Subordinated Notes Indenture at the request of any holder of
Senior Subordinated Notes, unless such holder shall have offered to the Senior
Subordinated Notes Trustee security and indemnity satisfactory to it against any
loss, liability or expense and then only to the extent required by the terms of
the Senior Subordinated Notes Indenture.
GOVERNING LAW
The Senior Subordinated Notes Indenture provides that it and the Senior
Subordinated Notes will be governed by, and construed in accordance with, the
laws of the State of New York without giving effect to applicable principles of
conflicts of law to the extent that the application of the law of another
jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by Hedstrom or a Restricted Subsidiary of Hedstrom; (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary of Hedstrom; or (iv) Permitted Investments of the
type and in the amounts described in clause (viii) of the definition thereof;
provided, however, that, in the case of clauses (ii) and (iii), such Restricted
Subsidiary is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares), property or
other assets (each referred to for the purposes of this definition as a
"disposition") by Hedstrom or any of its Restricted Subsidiaries (including any
disposition by means of a merger, consolidation or similar transaction) other
than (i) a disposition by a Restricted Subsidiary to Hedstrom or by Hedstrom or
a Restricted Subsidiary to a Wholly-Owned Subsidiary, (ii) a disposition of
inventory in the ordinary course of business, (iii) a disposition of obsolete or
worn out equipment or equipment that is no longer useful in the conduct of the
business of Hedstrom and its Restricted Subsidiaries and that is disposed of in
each case in the ordinary course of business, (iv) dispositions of property for
net proceeds which, when taken collectively with the net proceeds of any other
such dispositions under this clause (iv) that were consummated since the
beginning of the calendar year in which such disposition is consummated, do not
exceed 1.5% of the consolidated book value of Hedstrom's assets as of the most
recent date prior to such disposition for which a consolidated balance sheet of
Hedstrom has been regularly prepared, and (v) transactions permitted under
"Certain Covenants -- Merger and Consolidation" above.
103
<PAGE> 106
"Asset Swap" means the execution of a definitive agreement, subject only to
customary closing conditions that Hedstrom in good faith believes will be
satisfied, for a substantially concurrent purchase and sale, or exchange, of
Productive Assets between Hedstrom or any of its Restricted Subsidiaries and
another Person or group of affiliated Persons; provided, however, that any
amendment to or waiver of any closing condition that individually or in the
aggregate is material to the Asset Swap shall be deemed to be a new Asset Swap.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Senior Subordinated Notes, compounded annually) of
the total obligations of the lessee for rental payments during the remaining
term of the lease included in such Sale/Leaseback Transaction (including any
period for which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any and all amounts, whether outstanding on the
Issue Date or thereafter Incurred, payable by Hedstrom under or in respect of
the Credit Agreement and any related notes, collateral documents, letters of
credit and guarantees, including principal, premium (if any), interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to Hedstrom whether or not a claim for
post filing interest is allowed in such proceedings), fees, charges, expenses,
reimbursement obligations, guarantees and all other amounts payable thereunder
or in respect thereof.
"Board of Directors" means, as the context requires, the Board of Directors
of Holdings or Hedstrom or any committee thereof duly authorized to act on
behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted as a capitalized lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated without penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Cash Flow" for any period means the Consolidated Net Income
for such period, plus, without duplication, the following to the extent deducted
in calculating such Consolidated Net Income: (i) income tax expense, (ii)
Consolidated Interest Expense, (iii) depreciation expense, (iv) amortization
expense, (v) exchange or translation losses on foreign currencies, and (vi) all
other non-cash items reducing Consolidated Net Income (excluding any non-cash
item to the extent it represents an accrual of or reserve for cash disbursements
for any subsequent period prior to the Stated Maturity of the Senior
Subordinated Notes) and less, to the extent added in calculating Consolidated
Net Income, (x) exchange or translation gains on foreign currencies and (y)
non-cash items (excluding such non-cash items to the extent they represent an
accrual for cash receipts reasonably expected to be received prior to the Stated
Maturity of the Senior Subordinated Notes), in each case for such period.
Notwithstanding the foregoing, the income tax expense, the depreciation expense
and amortization expense of a Subsidiary of Hedstrom shall be included in
Consolidated Cash Flow only to the extent (and in the same proportion) that the
net income of such Subsidiary was included in calculating Consolidated Net
Income.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated Cash Flow for the period of
the most recent four consecutive fiscal quarters ending prior to the
104
<PAGE> 107
date of such determination and as to which financial statements are available to
(ii) Consolidated Interest Expense for such four fiscal quarters; provided,
however, that (1) if Hedstrom or any of its Restricted Subsidiaries has Incurred
any Indebtedness since the beginning of such period that remains outstanding or
if the transaction giving rise to the need to calculate Consolidated Coverage
Ratio is an Incurrence of Indebtedness, or both, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to (A) such Indebtedness as if such Indebtedness had
been Incurred on the first day of such period (provided that if such
Indebtedness is Incurred under a revolving credit facility (or similar
arrangement or under any predecessor revolving credit or similar arrangement)
only that portion of such Indebtedness that constitutes the one year projected
average balance of such Indebtedness (as determined in good faith by senior
management of Hedstrom and assuming a constant level of sales) shall be deemed
outstanding for purposes of this calculation) and (B) the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise discharged with the
proceeds of such new Indebtedness as if such discharge had occurred on the first
day of such period, (2) if since the beginning of such period any Indebtedness
of Hedstrom or any of its Restricted Subsidiaries has been repaid, repurchased,
defeased or otherwise discharged (other than Indebtedness under a revolving
credit or similar arrangement unless such revolving credit Indebtedness has been
permanently repaid and has not been replaced), Consolidated Interest Expense for
such period shall be calculated after giving pro forma effect thereto as if such
Indebtedness had been repaid, repurchased, defeased or otherwise discharged on
the first day of such period and as if Hedstrom or such Restricted Subsidiary
had not earned the interest income actually earned during such period in respect
of cash or Temporary Cash Investments used to repay, repurchase, defease or
otherwise discharge such Indebtedness, (3) if since the beginning of such period
Hedstrom or any of its Restricted Subsidiaries shall have made any Asset
Disposition or if the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio is an Asset Disposition, Consolidated Cash Flow for
such period shall be reduced by an amount equal to the Consolidated Cash Flow
(if positive) attributable to the assets which are the subject of such Asset
Disposition for such period, or increased by an amount equal to the Consolidated
Cash Flow (if negative) attributable thereto for such period, and Consolidated
Interest Expense for such period shall be (i) reduced by an amount equal to the
Consolidated Interest Expense attributable to any Indebtedness of Hedstrom or
any of its Restricted Subsidiaries repaid, repurchased, defeased or otherwise
discharged with respect to Hedstrom and its continuing Restricted Subsidiaries
in connection with such Asset Disposition for such period (or, if the Capital
Stock of any Restricted Subsidiary of Hedstrom is sold, the Consolidated
Interest Expense for such period directly attributable to the Indebtedness of
such Restricted Subsidiary to the extent Hedstrom and its continuing Restricted
Subsidiaries are no longer liable for such Indebtedness after such sale) and
(ii) increased by interest income attributable to the assets which are the
subject of such Asset Disposition for such period, (4) if since the beginning of
such period Hedstrom or any of its Restricted Subsidiaries (by merger or
otherwise) shall have made an Investment in any Restricted Subsidiary of
Hedstrom (or any Person which becomes a Restricted Subsidiary of Hedstrom) or an
acquisition of assets, including any Investment in a Restricted Subsidiary of
Hedstrom or any acquisition of assets occurring in connection with a transaction
causing a calculation to be made hereunder, which constitutes all or
substantially all of a product line or operating unit of a business.
Consolidated Cash Flow and Consolidated Interest Expense for such period shall
be calculated after giving pro forma effect thereto (including the Incurrence of
any Indebtedness and the use of the proceeds therefrom) as if such Investment or
acquisition occurred on the first day of such period and (5) if since the
beginning of such period any Person (that subsequently became a Restricted
Subsidiary of Hedstrom or was merged with or into Hedstrom or any Restricted
Subsidiary of Hedstrom since the beginning of such period) shall have made any
Asset Disposition, Investment or acquisition of assets that would have required
an adjustment pursuant to clause (3) or (4) above if made by Hedstrom or a
Restricted Subsidiary of Hedstrom during such period, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto as if such Asset Disposition, Investment or acquisition
occurred on the first day of such period. For purposes of this definition,
whenever pro forma effect is to be given to an acquisition of assets, the amount
of income or earnings relating thereto and the amount of Consolidated Interest
Expense associated with any Indebtedness Incurred in connection therewith, the
pro forma calculations shall be determined in good faith by a responsible
financial or accounting officer of Hedstrom. If any Indebtedness bears a
floating rate of interest and is being given pro forma effect, the interest
expense on such Indebtedness shall be calculated as if the rate in effect on the
date of determination had been the applicable rate for the entire period (taking
into account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of 12
105
<PAGE> 108
months). Notwithstanding anything herein to the contrary, if at the time the
calculation of the Consolidated Coverage Ratio is to be made, Hedstrom does not
have available consolidated financial statements reflecting the ownership by
Hedstrom of ERO for a period of at least four full fiscal quarters, all
calculations required by the Consolidated Coverage Ratio shall be prepared on a
pro forma basis, as though such acquisition and the related transactions (to the
extent not otherwise reflected in the consolidated financial statements of
Hedstrom) had occurred on the first day of the four-fiscal-quarter period for
which such calculation is being made.
"Consolidated Interest Expense" means, for any period, the total interest
expense of Hedstrom and its Restricted Subsidiaries, plus, to the extent not
included in such interest expense, (i) interest expense attributable to capital
leases, (ii) amortization of debt discount, (iii) capitalized interest, (iv)
non-cash interest expense, (v) commissions, discounts and other fees and charges
owed with respect to letters of credit and bankers' acceptance financing, (vi)
interest actually paid by Hedstrom or any such Restricted Subsidiary under any
Guarantee of Indebtedness or other obligation of any other Person, (vii) net
payments (whether positive or negative) pursuant to Interest Rate Agreements,
(viii) the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust to pay
interest or fees to any Person (other than Hedstrom) in connection with
Indebtedness Incurred by such plan or trust and (ix) cash and Disqualified Stock
dividends in respect of all Preferred Stock of Restricted Subsidiaries and
Disqualified Stock of Hedstrom held by Persons other than Hedstrom or a
Wholly-Owned Subsidiary and less (a) to the extent included in such interest
expense, the amortization of capitalized debt issuance costs and debt discount
solely to the extent relating to the issuance and sale of Indebtedness together
with any other security as part of an investment unit and (b) interest income.
Notwithstanding the foregoing, the Consolidated Interest Expense with respect to
any Restricted Subsidiary of Hedstrom, that was not a Wholly-Owned Subsidiary,
shall be included only to the extent (and in the same proportion) that the net
income of such Restricted Subsidiary was included in calculating Consolidated
Net Income.
"Consolidated Net Income" means, for any period, the net income (loss) of
Hedstrom and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income (loss) of
any Person acquired by Hedstrom or any of its Restricted Subsidiaries in a
pooling of interests transaction for any period prior to the date of such
acquisition, (ii) any net income of any Restricted Subsidiary of Hedstrom if
such Restricted Subsidiary is subject to restrictions, directly or indirectly,
on the payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to Hedstrom (other than restrictions in
effect on the Issue Date with respect to a Restricted Subsidiary of Hedstrom and
other than restrictions that are created or exist in compliance with the
"-- Limitation on Restrictions on Distributions from Restricted Subsidiaries"
covenant), (iii) any gain or loss realized upon the sale or other disposition of
any assets of Hedstrom or its consolidated Restricted Subsidiaries (including
pursuant to any Sale/Leaseback Transaction) which are not sold or otherwise
disposed of in the ordinary course of business and any gain or loss realized
upon the sale or other disposition of any Capital Stock of any Person, (iv) any
extraordinary gain or loss, (v) the cumulative effect of a change in accounting
principles, (vi) restructuring charges or writeoffs recorded within the one year
period following the Issue Date in an aggregate amount not to exceed $5 million
including any reversals of any such charges, (vii) the net income of any Person,
other than a Restricted Subsidiary, except to the extent of the lesser of (A)
dividends or distributions paid to Hedstrom or any of its Restricted
Subsidiaries by such Person and (B) the net income of such Person (but in no
event less than zero), and the net loss of such Person (other than an
Unrestricted Subsidiary) shall be included only to the extent of the aggregate
Investment of Hedstrom or any of its Restricted Subsidiaries in such Person and
(viii) any non-cash expenses attributable to grants or exercises of employee
stock options. Notwithstanding the foregoing, for the purpose of the covenant
described under "Certain Covenants -- Limitation on Restricted Payments" only,
there shall be excluded from Consolidated Net Income any dividends, repayments
of loans or advances or other transfers of assets from Unrestricted Subsidiaries
to Hedstrom or a Restricted Subsidiary to the extent such dividends, repayments
or transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a)(3)(E) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of Hedstrom and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of Hedstrom ending prior to the taking of any action for the
purpose of which the determination is being made and for which financial
statements are available (but in no event ending more than
106
<PAGE> 109
135 days prior to the taking of such action), as (i) the par or stated value of
all outstanding Capital Stock of Hedstrom plus (ii) paid-in capital or capital
surplus relating to such Capital Stock plus (iii) any retained earnings or
earned surplus less (A) any accumulated deficit and (B) any amounts attributable
to Disqualified Stock.
"Continuing Director" means, as of the date of determination, any Person
who (i) was a member of the Board of Directors on the date of the Senior
Subordinated Notes Indenture, (ii) was nominated for election or elected to the
Board of Directors with the affirmative vote of a majority of the Continuing
Directors who were members of such Board of Directors at the time of such
nomination or election, or (iii) is a representative of a Permitted Holder.
"Credit Agreement" means (i) the Credit Agreement as well as all exhibits,
schedules and appendices thereto to be entered into among Hedstrom, Credit
Suisse First Boston, as Administrative Agent, and the lenders parties thereto
from time to time, as the same may be amended, supplemented or otherwise
modified from time to time and (ii) any renewal, extension, refunding,
restructuring, replacement or refinancing thereof (whether with the original
Administrative Agent and lenders or another administrative agent or agents or
other lenders and whether provided under the original Credit Agreement or any
other agreement).
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values as to which such Person is a
party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness in the
case of Hedstrom, (ii) any Guarantee by a Subsidiary Guarantor of the Bank
Indebtedness in the case of such Subsidiary Guarantor and (iii) any other Senior
Indebtedness in the case of Hedstrom or Subsidiary Guarantor Senior Indebtedness
in the case of such Subsidiary Guarantor which, at the date of determination,
has an aggregate principal amount outstanding of, or under which, at the date of
determination, the holders thereof are committed to lend up to, at least $10
million and is specifically designated by Hedstrom or such Subsidiary Guarantor
in the instrument evidencing or governing such Senior Indebtedness or Subsidiary
Guarantor Senior Indebtedness as "Designated Senior Indebtedness" for purposes
of the Senior Subordinated Notes Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
of such Person which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock (excluding capital stock which is convertible or exchangeable
solely at the option of Hedstrom or a Restricted Subsidiary) or (iii) is
redeemable at the option of the holder thereof, in whole or in part, in each
case on or prior to the Stated Maturity of the Senior Subordinated Notes;
provided, however, that only the portion of Capital Stock which so matures or is
mandatorily redeemable, is so convertible or exchangeable or is so redeemable at
the option of the holder thereof prior to such Stated Maturity shall be deemed
to be Disqualified Stock; provided further, however, that any Capital Stock that
would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Senior Subordinated Notes shall
not constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are not more favorable to the
holders of such Capital Stock than the provisions described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and "Change of
Control".
"Equity Offering" means an offering for cash by Holdings or Hedstrom of its
common stock, or options, warrants or rights with respect to its common stock.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Financial Advisory Agreement" means the Financial Advisory Agreement
between Hicks Muse Partners and Holdings and Hedstrom as in effect on the Issue
Date.
107
<PAGE> 110
"Foreign Subsidiary" means a Restricted Subsidiary that is incorporated in
a jurisdiction other than the United States or a State thereof or the District
of Columbia and with respect to which more than 80% of its assets (determined on
a consolidated basis in accordance with GAAP) are located in territories outside
of the United States of America and jurisdictions outside the United States of
America.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Senior Subordinated Notes
Indenture, including those set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or the SEC or in such other statements by such other entity as
approved by a significant segment of the accounting profession. All ratios and
computations based on GAAP contained in the Senior Subordinated Notes Indenture
shall be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Holdings Guaranty" means the Guarantee of the Senior Subordinated Notes by
Holdings.
"Holdings Senior Indebtedness" means, with respect to Holdings, whether
outstanding on the Issue Date or thereafter issued, any Guarantee of the Bank
Indebtedness by Holdings, all other Guarantees by Holdings of Senior
Indebtedness of Hedstrom and all Indebtedness of Holdings, including interest
and fees thereon, unless, in the instrument creating or evidencing the same or
pursuant to which the same is outstanding, it is provided that the obligations
of Holdings in respect of such Indebtedness are not superior in right of payment
to the obligations of Holdings under the Holdings Guaranty; provided, however,
that Holdings Senior Indebtedness shall not include (1) any obligations of
Holdings to Hedstrom or any Subsidiary of Hedstrom, (2) any liability for
Federal, state, local or other taxes owed or owing by Holdings, (3) any accounts
payable or other liability to trade creditors arising in the ordinary course of
business (including Guarantees thereof or instruments evidencing such
liabilities) or (4) any Indebtedness, Guarantee or obligation of Holdings that
is expressly subordinate or junior in right of payment to any other
Indebtedness, Guarantee or obligation of Holdings, including any Holdings Senior
Subordinated Indebtedness and Holdings Subordinated Obligations.
"Holdings Subordinated Obligation" means, with respect to Holdings, any
indebtedness of Holdings (whether outstanding on the Issue Date or thereafter
Incurred) which is subordinate or junior in right of payment to the obligations
of Holdings under the Holdings Guaranty pursuant to a written agreement.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be incurred
by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary.
The term "Incurrence" when used as a noun shall have a correlative meaning.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money, (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto) (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in clauses (i), (ii) and (v)) entered into in the ordinary
course of business of such Person to the extent that such letters of credit are
not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed
no later than the third Business Day following receipt by such
108
<PAGE> 111
Person of a demand for reimbursement following payment on the letter of credit),
(iv) all obligations of such Person to pay the deferred and unpaid purchase
price of property or services (except trade payables and accrued expenses
incurred in the ordinary course of business), which purchase price is due more
than six months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services, (v) all
Capitalized Lease Obligations and all Attributable Indebtedness of such Person,
(vi) all Indebtedness of other Persons secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person, (vii) all
Indebtedness of other Persons to the extent Guaranteed by such Person, (viii)
the amount of all obligations of such Person with respect to the redemption,
repayment or other repurchase of any Disqualified Stock or, with respect to any
Restricted Subsidiary of Hedstrom, any Preferred Stock of such Restricted
Subsidiary to the extent such obligation arises on or before the Stated Maturity
of the Senior Subordinated Notes (but excluding, in each case, any accrued
dividends) and (ix) to the extent not otherwise included in this definition,
obligations under Currency Agreements and Interest Rate Agreements. The amount
of Indebtedness of any Person at any date shall be the outstanding principal
amount of all unconditional obligations as described above, as such amount would
be reflected on a balance sheet prepared in accordance with GAAP, and the
maximum liability of such Person, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations described above at such
date.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement designed to protect such Person against fluctuations in interest
rates as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts payable on the balance sheet of such Person) or other
extension of credit (including by way of Guarantee or similar arrangement, but
excluding any debt or extension of credit represented by a bank deposit other
than a time deposit) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
Indebtedness or other similar instruments issued by such Person. For purposes of
the "Limitation on Restricted Payments" covenant, (i) "Investment" shall include
the portion (proportionate to Hedstrom's equity interest in a Restricted
Subsidiary to be designated as an Unrestricted Subsidiary) of the fair market
value of the net assets of such Restricted Subsidiary of Hedstrom at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, Hedstrom shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) Hedstrom's "Investment" in such Subsidiary at the time of such redesignation
less (y) the portion (proportionate to Hedstrom's equity interest in such
Subsidiary) of the fair market value of the net assets of such Subsidiary at the
time that such Subsidiary is so redesignated a Restricted Subsidiary; and (ii)
any property transferred to or from an Unrestricted Subsidiary shall be valued
at its fair market value at the time of such transfer, in each case as
determined in good faith by the Board of Directors and evidenced by a resolution
of such Board of Directors certified in an Officers' Certificate to the Trustee.
"Issue Date" means the date on which the Old Senior Subordinated Notes were
originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Merger Agreement" means the Agreement and Plan of Merger dated April 10,
1997, between Hedstrom, HC Acquisition Corp. and ERO, Inc.
"Monitoring and Oversight Agreement" means the Monitoring and Oversight
Agreement between Hicks Muse Partners and Holdings and Hedstrom as in effect on
the Issue Date.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to the properties or assets
109
<PAGE> 112
subject to such Asset Disposition), in each case net of (i) all legal, title and
recording tax expenses, commissions and other fees and expenses incurred, and
all Federal, state, foreign and local taxes required to be paid or accrued as a
liability under GAAP, as a consequence of such Asset Disposition, (ii) all
payments made on any Indebtedness which is secured by any assets subject to such
Asset Disposition, in accordance with the terms of any Lien upon such assets, or
which must by its terms, or in order to obtain a necessary consent to such Asset
Disposition, or by applicable law, be repaid out of the proceeds from such Asset
Disposition, (iii) all distributions and other payments required to be made to
any Person owning a beneficial interest in assets subject to sale or minority
interest holders in Subsidiaries or joint ventures as a result of such Asset
Disposition, (iv) the deduction of appropriate amounts to be provided by the
seller as a reserve, in accordance with GAAP, against any liabilities associated
with the assets disposed of in such Asset Disposition and retained by Hedstrom
or any Restricted Subsidiary of Hedstrom after such Asset Disposition and (v)
any portion of the purchase price from an Asset Disposition placed in escrow
(whether as a reserve for adjustment of the purchase price, for satisfaction of
indemnities in respect of such Asset Disposition or otherwise in connection with
such Asset Disposition); provided, however, that upon the termination of such
escrow, Net Available Cash shall be increased by any portion of funds therein
released to Hedstrom or any Restricted Subsidiary.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result of such issuance or sale.
"Non-Recourse Debt" means Indebtedness (i) as to which neither Hedstrom nor
any Restricted Subsidiary (a) provides any guarantee or credit support of any
kind (including any undertaking, guarantee, indemnity, agreement or instrument
that would constitute Indebtedness) or (b) is directly or indirectly liable (as
a guarantor or otherwise) and (ii) no default with respect to which (including
any rights that the holders thereof may have to take enforcement action against
an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both)
any holder of any other Indebtedness of Hedstrom or any Restricted Subsidiary to
declare a default under such other Indebtedness or cause the payment thereof to
be accelerated or payable prior to its stated maturity.
"Permitted Indebtedness" means (i) Indebtedness of Hedstrom owing to and
held by any Wholly-Owned Subsidiary or Indebtedness of a Restricted Subsidiary
owing to and held by Hedstrom or any Wholly-Owned Subsidiary; provided, however,
that any subsequent issuance or transfer of any Capital Stock or any other event
which results in any such Wholly-Owned Subsidiary ceasing to be a Wholly-Owned
Subsidiary or any subsequent transfer of any such Indebtedness (except to
Hedstrom or a Wholly-Owned Subsidiary) shall be deemed, in each case, to
constitute the Incurrence of such Indebtedness by the issuer thereof; (ii)
Indebtedness represented by (x) the Senior Subordinated Notes, (y) any
Indebtedness (other than the Indebtedness described in clauses (i), (ii) and
(iv) of paragraph (b) of the covenant described under "Limitation on
Indebtedness" and other than Indebtedness Incurred pursuant to clause (i) above
or clauses (iv), (v) or (vi) below) outstanding on the Issue Date and (z) any
Refinancing Indebtedness Incurred in respect of any Indebtedness described in
this clause (ii) or Incurred pursuant to paragraph (a) of the covenant described
under "Limitation on Indebtedness;" (iii) (A) Indebtedness of a Restricted
Subsidiary Incurred and outstanding on the date on which such Restricted
Subsidiary was acquired by Hedstrom or a Restricted Subsidiary (other than
Indebtedness Incurred as consideration in, or to provide all or any portion of
the funds or credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary became a
Subsidiary or was otherwise acquired by Hedstrom or a Restricted Subsidiary);
provided, however, that at the time such Restricted Subsidiary is acquired by
Hedstrom or a Restricted Subsidiary, Hedstrom would have been able to Incur
$1.00 of additional Indebtedness pursuant to paragraph (a) of the covenant
described under "Limitation on Indebtedness" above after giving effect to the
Incurrence of such Indebtedness pursuant to this clause (iii) and (B)
Refinancing Indebtedness Incurred by Hedstrom or a Restricted Subsidiary in
respect of Indebtedness Incurred by such Restricted Subsidiary pursuant to this
clause (iii); (iv) Indebtedness (A) in respect of performance bonds, bankers'
acceptances and surety or appeal bonds provided by Hedstrom or any of its
Restricted Subsidiaries to their customers in the ordinary course of their
business, (B) in respect of performance bonds or similar obligations of Hedstrom
or any of its Restricted Subsidiaries for or in connection with pledges,
deposits or payments made or given in the ordinary course of business in
connection with or to secure statutory,
110
<PAGE> 113
regulatory or similar obligations, including obligations under health, safety or
environmental obligations, (C) arising from Guarantees to suppliers, lessors,
licensees, contractors, franchisees or customers of obligations (other than
Indebtedness) incurred in the ordinary course of business and (D) under Currency
Agreements and Interest Rate Agreements; provided, however, that in the case of
Currency Agreements and Interest Rate Agreements, such Currency Agreements and
Interest Rate Agreements are entered into for bona fide hedging purposes of
Hedstrom or its Restricted Subsidiaries (as determined in good faith by the
Board of Directors or senior management of Hedstrom) and correspond in terms of
notional amount, duration, currencies and interest rates, as applicable, to
Indebtedness of Hedstrom or its Restricted Subsidiaries Incurred without
violation of the Senior Subordinated Notes Indenture or to business transactions
of Hedstrom or its Restricted Subsidiaries on customary terms entered into in
the ordinary course of business; (v) Indebtedness arising from agreements
providing for indemnification, adjustment of purchase price or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of Hedstrom or any of its Restricted
Subsidiaries pursuant to such agreements, in each case Incurred in connection
with the disposition of any business assets or Restricted Subsidiary of Hedstrom
(other than Guarantees of Indebtedness or other obligations Incurred by any
Person acquiring all or any portion of such business assets or Restricted
Subsidiary of Hedstrom for the purpose of financing such acquisition) in a
principal amount not to exceed the gross proceeds actually received by Hedstrom
or any of its Restricted Subsidiaries in connection with such disposition;
provided, however, that the principal amount of any Indebtedness Incurred
pursuant to this clause (v), when taken together with all Indebtedness Incurred
pursuant to this clause (v) and then outstanding, shall not exceed $10 million;
(vi) Indebtedness consisting of (A) Guarantees by Hedstrom or a Restricted
Subsidiary of Indebtedness Incurred by a Wholly-Owned Subsidiary without
violation of the Senior Subordinated Notes Indenture and (B) Guarantees by a
Restricted Subsidiary of Senior Indebtedness Incurred by Hedstrom without
violation of the Senior Subordinated Notes Indenture (so long as such Restricted
Subsidiary could have Incurred such Indebtedness directly without violation of
the Senior Subordinated Notes Indenture); and (vii) Indebtedness arising from
the honoring by a bank or other financial institution of a check, draft or
similar instrument drawn against insufficient funds in the ordinary course of
business, provided that such Indebtedness is extinguished within ten Business
Days of its incurrence.
"Permitted Investment" means an Investment by Hedstrom or any of its
Restricted Subsidiaries in (i) Hedstrom or a Wholly-Owned Subsidiary of
Hedstrom; provided, however, that the primary business of such Wholly-Owned
Subsidiary is a Related Business; (ii) another Person if as a result of such
Investment such other Person becomes a Wholly-Owned Subsidiary of Hedstrom or is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, Hedstrom or a Wholly-Owned Subsidiary of
Hedstrom; provided, however, that in each case such Person's primary business is
a Related Business; (iii) Temporary Cash Investments; (iv) receivables owing to
Hedstrom or any of its Restricted Subsidiaries, if created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms; (v) payroll, travel and similar advances to cover matters
that are expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary course of
business; (vi) loans or advances to employees for purposes of purchasing
Hedstrom's common stock in an aggregate amount outstanding at any one time not
to exceed $5 million and other loans and advances to employees made in the
ordinary course of business consistent with past practices of Hedstrom or such
Restricted Subsidiary; (vii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to
Hedstrom or any of its Restricted Subsidiaries or in satisfaction of judgments
or claims; (viii) a Person engaged in a Related Business or a loan or advance to
Hedstrom the proceeds of which are used solely to make an Investment in a Person
engaged in a Related Business or a Guarantee by Hedstrom of Indebtedness of any
Person in which such Investment has been made; provided, however, that no
Permitted Investments may be made pursuant to this clause (viii) to the extent
the amount thereof would, when taken together with all other Permitted
Investments made pursuant to this clause (viii), exceed $10 million in the
aggregate (plus, to the extent not previously reinvested, any return of capital
realized on Permitted Investments made pursuant to this clause (viii), or any
release or other cancellation of any Guarantee constituting such Permitted
Investment); (ix) Persons to the extent such Investment is received by Hedstrom
or any Restricted Subsidiary as non-cash consideration for asset dispositions
effected in compliance with the covenant described under "-- Limitations on
Sales of Assets and Subsidiary Stock;" (x) prepayments and other credits to
suppliers made in the ordinary course of business consistent with the past
111
<PAGE> 114
practices of Hedstrom and its Restricted Subsidiaries; and (xi) Investments in
connection with pledges, deposits, payments or performance bonds made or given
in the ordinary course of business in connection with or to secure statutory,
regulatory or similar obligations, including obligations under health, safety or
environmental obligations.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Productive Assets" means assets of a kind used or usable by Hedstrom and
its Restricted Subsidiaries in Hedstrom's business or any Related Business.
A "Public Market" exists at any time with respect to the common stock of
Hedstrom or Holdings if (a) the common stock of Hedstrom or Holdings is then
registered with the Securities and Exchange Commission pursuant to Section 12(b)
or 12(g) of the Exchange Act and traded either on a national securities exchange
or in the National Association of Securities Dealers Automated Quotation System
and (b) at least 15% of the total issued and outstanding common stock of
Hedstrom or Holdings has been distributed prior to such time by means of an
effective registration statement under the Securities Act, or pursuant to sales
pursuant to Rule 144 under the Securities Act.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have a
correlative meaning) any Indebtedness of Hedstrom or any Restricted Subsidiary
existing on the date of the Senior Subordinated Notes Indenture or Incurred in
compliance with the Senior Subordinated Notes Indenture (including Indebtedness
of Hedstrom that refinances Indebtedness of any Restricted Subsidiary and
Indebtedness of any Restricted Subsidiary that refinances Indebtedness of
another Restricted Subsidiary) including Indebtedness that refinances
Refinancing Indebtedness; provided, however, that (i) the Refinancing
Indebtedness has a Stated Maturity no earlier than the earlier of (A) the first
anniversary of the Stated Maturity of the Senior Subordinated Notes and (B) the
Stated Maturity of the Indebtedness being refinanced, (ii) the Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the lesser of (A) the Average Life of
the Senior Subordinated Notes and (B) the Average Life of the Indebtedness being
refinanced, and (iii) such Refinancing Indebtedness is Incurred in an aggregate
principal amount (or if issued with original issue discount, an aggregate issue
price) that is equal to (or 101% of, in the case of a refinancing of the Senior
Subordinated Notes in connection with a Change of Control) or less than the sum
of the aggregate principal amount (or if issued with original issue discount,
the aggregate accreted value) then outstanding of the Indebtedness being
refinanced, plus applicable premium and defeasance costs and reasonable fees and
expenses paid in connection with such refinancing.
"Related Business" means any business which is the same as or related,
ancillary or complementary to any of the businesses of Hedstrom and its
Restricted Subsidiaries on the date of the Senior Subordinated Notes Indenture,
as reasonably determined by Hedstrom's Board of Directors.
"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Indebtedness.
"Restricted Subsidiary" means any Subsidiary of Hedstrom other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby Hedstrom or a Restricted Subsidiary
transfers such property to a Person and Hedstrom or a Subsidiary leases it from
such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of Hedstrom or a Subsidiary
Guarantor secured by a Lien.
112
<PAGE> 115
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Subordinated Indebtedness" means the Senior Subordinated Notes and
any other Indebtedness of Hedstrom that specifically provides that such
Indebtedness is to rank pari passu with the Senior Subordinated Notes in right
of payment and is not subordinated by its terms in right of payment to any
Indebtedness or other obligation of Hedstrom which is not Senior Indebtedness.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of Hedstrom within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision.
"Subordinated Obligation" means any Indebtedness of Hedstrom (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Senior Subordinated Notes pursuant to a
written agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person. Unless otherwise specified herein, each reference to a Subsidiary shall
refer to a Subsidiary of Hedstrom.
"Subsidiary Guarantor" means each Subsidiary (other than foreign
subsidiaries) of Hedstrom in existence on the Issue Date and each Subsidiary
(other than foreign subsidiaries and Unrestricted Subsidiaries) created or
acquired by Hedstrom after the Issue Date.
"Subsidiary Guarantor Senior Indebtedness" means, with respect to any
Subsidiary Guarantor, whether outstanding on the Issue Date or thereafter
issued, any Guarantee of the Bank Indebtedness by such Subsidiary Guarantor, all
other Guarantees by such Subsidiary Guarantor of Senior Indebtedness of Hedstrom
and all Indebtedness of such Subsidiary Guarantor, including interest and fees
thereon, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that the obligations of such
Subsidiary Guarantor in respect of such Indebtedness are not superior in right
of payment to the obligations of such Subsidiary Guarantor under the Subsidiary
Guaranty; provided, however, that Subsidiary Guarantor Senior Indebtedness shall
not include (1) any obligations of such Subsidiary Guarantor to Hedstrom or any
other Subsidiary of Hedstrom, (2) any liability for Federal, state, local or
other taxes owed or owing by such Subsidiary Guarantor, (3) any accounts payable
or other liability to trade creditors arising in the ordinary course of business
(including Guarantees thereof or instruments evidencing such liabilities) or (4)
any Indebtedness, Guarantee or obligation of such Subsidiary Guarantor that is
expressly subordinate or junior in right of payment to any other Indebtedness,
Guarantee or obligation of such Subsidiary Guarantor, including any Subsidiary
Guarantor Senior Subordinated Indebtedness and Subsidiary Guarantor Subordinated
Obligations of such Subsidiary Guarantor.
"Subsidiary Guarantor Senior Subordinated Indebtedness" means, with respect
to a Subsidiary Guarantor, the obligations of such Subsidiary Guarantor under
the Subsidiary Guaranty and any other Indebtedness of such Subsidiary Guarantor
that specifically provides that such Indebtedness is to rank pari passu in right
of payment with the obligations of such Subsidiary Guarantor under the
Subsidiary Guaranty and is not subordinated by its terms in right of payment to
any Indebtedness or other obligation of such Subsidiary Guarantor which is not
Subsidiary Guarantor Senior Indebtedness of such Subsidiary Guarantor.
"Subsidiary Guarantor Subordinated Obligation" means, with respect to a
Subsidiary Guarantor, any Indebtedness of such Subsidiary Guarantor (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the obligations of such Subsidiary Guarantor under
the Subsidiary Guaranty pursuant to a written agreement.
"Subsidiary Guaranty" means the Guarantee of the Senior Subordinated Notes
by a Subsidiary Guarantor.
113
<PAGE> 116
"Temporary Cash Investments" means any of the following: (i) any Investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) Investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America having capital, surplus and undivided profits
aggregating in excess of $250 million (or the foreign currency equivalent
thereof) and whose long-term debt, or whose parent holding company's long-term
debt, is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act), (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) Investments in commercial paper, maturing not more than 180
days after the date of acquisition, issued by a corporation (other than an
Affiliate of Hedstrom) organized and in existence under the laws of the United
States of America or any foreign country recognized by the United States of
America with a rating at the time as of which any investment therein is made of
"P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or
higher) according to Standard and Poor's Ratings Group, (v) Investments in
securities with maturities of six months or less from the date of acquisition
issued or fully guaranteed by any state, commonwealth or territory of the United
States of America, or by any political subdivision or taxing authority thereof,
and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's
Investors Service, Inc. and (vi) Investments in mutual funds whose investment
guidelines restrict such funds' investments to those satisfying the provisions
of clauses (i) through (v) above.
"Unrestricted Subsidiary" means (i) any Subsidiary of Hedstrom that at the
time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
Hedstrom (including any newly acquired or newly formed Subsidiary of Hedstrom)
to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, Hedstrom or any Subsidiary of Hedstrom that is not a
Subsidiary of the Subsidiary to be so designated; provided, however, that either
(A) the Subsidiary to be so designated has total consolidated assets of $10,000
or less or (B) if such Subsidiary has consolidated assets greater than $10,000,
then such designation would be permitted under "Limitation on Restricted
Payments." The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided, however, that immediately after giving
effect to such designation (x) Hedstrom could Incur $1.00 of additional
Indebtedness under clause (a) of "-- Limitation on Indebtedness" and (y) no
Default shall have occurred and be continuing. Any such designation by the Board
of Directors shall be evidenced to the Trustee by promptly filing with the
Trustee a copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors thereof.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of Hedstrom, at
least 99% of the Capital Stock of which (other than directors' qualifying
shares) is owned by Hedstrom or another Wholly-Owned Subsidiary; provided,
however, that until the date that is 180 days following the Issue Date, ERO,
Inc. shall be deemed to be a Wholly-Owned Subsidiary of Hedstrom so long as
Hedstrom or a Wholly-Owned Subsidiary owns at least a percentage of the Capital
Stock of ERO, Inc. equal to the percentage of such Capital Stock acquired by HC
Acquisition Corp. in connection with its tender offer for the Capital Stock of
ERO, Inc.
114
<PAGE> 117
DESCRIPTION OF THE NEW DISCOUNT NOTES
GENERAL
The New Discount Notes will be issued under the Indenture, dated as of June
1, 1997 (the "Discount Notes Indenture"), among Holdings and United States Trust
Company of New York, as Trustee (the "Discount Notes Trustee"), pursuant to
which the Old Discount Notes were issued. Upon the issuance of the New Discount
Notes, the Discount Notes Indenture will be subject to and governed by the Trust
Indenture Act. The following summary of certain provisions of the Discount Notes
Indenture and the New Discount Notes does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the provisions
of the Discount Notes Indenture (including the definitions of certain terms
therein and those terms made a part thereof by the Trust Indenture Act) and the
Discount Notes, copies of which are available as set forth under "Available
Information."
TERMS OF NEW DISCOUNT NOTES
The New Discount Notes will be unsecured senior obligations of Holdings,
limited to $44,612,000 aggregate principal amount at maturity, and will mature
on June 1, 2009. No cash interest will accrue on the New Discount Notes prior to
June 1, 2002, although for U.S. Federal income tax purposes a significant amount
of original issue discount will be recognized by a Holder as such discount
accrues. Cash interest will accrue on the New Discount Notes at the rate of 12%
per annum from June 12, 2002, or from the most recent date to which interest has
been paid or provided for, payable semiannually on June 1 and December 1 of each
year, commencing December 1, 2002 to holders of record at the close of business
on the May 15 or November 15 immediately preceding the interest payment date.
The interest rate on the Old Discount Notes is subject to increase in
certain circumstances if Holdings does not file a registration statement
relating to the Discount Notes Exchange Offer or if the Discount Notes Exchange
Offer is not consummated on a timely basis or if certain other conditions are
not satisfied.
OPTIONAL REDEMPTION
Except as set forth below, the New Discount Notes will not be redeemable at
the option of Holdings prior to June 1, 2002. On and after such date, the New
Discount Notes will be redeemable, at Holdings' option, in whole or in part, at
any time upon not less than 30 nor more than 60 days prior notice mailed by
first-class mail to each holder's registered address, at the following
redemption prices (expressed in percentages of principal amount at maturity),
plus accrued and unpaid interest to the redemption date (subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date):
if redeemed during the 12-month period commencing on June 1 of the years
set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2002........................................................ 106.000
2003........................................................ 104.000
2004........................................................ 102.000
2005 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to June 1, 2000,
Holdings may redeem in the aggregate up to 40% of the Accreted Value of the
Discount Notes with the proceeds of one or more Equity Offerings by Holdings so
long as there is a Public Market at the time of such redemption, at a redemption
price (expressed as a percentage of Accreted Value on the redemption date) of
112%, plus accrued and unpaid interest, if any, to the redemption date (subject
to the right of holders of record on the relevant record date to receive accrued
and unpaid interest due on the relevant interest payment date in respect of the
Discount Notes); provided, however, that at least $26,767,200 aggregate
principal amount at maturity of the Discount Notes remains outstanding after
each such redemption.
115
<PAGE> 118
At any time on or prior to June 1, 2002, the New Discount Notes may also be
redeemed as a whole at the option of Holdings upon the occurrence of a Change of
Control, upon not less than 30 nor more than 60 days prior notice (but in no
event more than 90 days after the occurrence of such Change of Control) mailed
by first-class mail to each holder's registered address, at a redemption price
equal to 100% of the Accreted Value thereof plus the Applicable Premium as of,
and accrued and unpaid interest, if any, to, the date of redemption (the
"Redemption Date") (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date).
"Applicable Premium" means, with respect to a New Discount Note at any
Redemption Date, the greater of (i) 1.0% of the Accreted Value of such New
Discount Note on such Redemption Date and (ii) the excess of (A) the present
value at such time of (1) the redemption price of such New Discount Note at June
1, 2002 (such redemption price being described under "Optional Redemption") plus
(2) all required interest payments, if any, due on such New Discount Note
through June 1, 2002, computed using a discount rate equal to the Treasury Rate
plus 100 basis points, over (B) the Accreted Value of such New Discount Note on
the Redemption Date.
"Change of Control" means:
(i) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets
of Holdings and its Subsidiaries to any Person or group of related Persons
for purposes of Section 13(d) of the Exchange Act (a "Group") (whether or
not otherwise in compliance with the provisions of the Discount Notes
Indenture), other than to Hicks Muse, Arnold E. Ditri or any of their
Affiliates, officers and directors (the "Permitted Holders"); or
(ii) a majority of the Board of Directors of Holdings shall consist of
Persons who are not Continuing Directors; or
(iii) the acquisition by any Person or Group (other than the Permitted
Holders) of the power, directly or indirectly, to vote or direct the voting
of securities having more than 50% of the ordinary voting power for the
election of directors of Holdings.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the
Redemption Date (or, if such Statistical Release is no longer published, any
publicly available source or similar market data)) most nearly equal to the
period from the Redemption Date to June 1, 2002; provided, however, that if the
period from the Redemption Date to June 1, 2002 is not equal to the constant
maturity of a United States Treasury security for which a weekly average yield
is given, the Treasury Rate shall be obtained by linear interpolation
(calculated to the nearest one-twelfth of a year) from the weekly average yields
of United States Treasury securities for which such yields are given, except
that if the period from the Redemption Date to June 1, 2002 is less than one
year, the weekly average yield on actually traded United States Treasury
securities adjusted to a constant maturity of one year shall be used.
In the case of any partial redemption, selection of the Discount Notes for
redemption will be made by the Discount Notes Trustee on a pro rata basis, by
lot or by such other method as the Discount Notes Trustee in its sole discretion
shall deem to be fair and appropriate, although no Discount Note of $1,000 in
principal amount at maturity or less will be redeemed in part. If any Discount
Note is to be redeemed in part only, the notice of redemption relating to such
Discount Note shall state the portion of the principal amount at maturity
thereof to be redeemed. A new Discount Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof upon
cancellation of the original Discount Note.
RANKING
The indebtedness evidenced by the New Discount Notes will constitute
senior, unsecured obligations of Holdings, will rank pari passu in right of
payment with all existing and future unsecured Senior Indebtedness of Holdings
and will rank senior in right of payment to any future subordinated indebtedness
of Holdings. At June 30, 1997, Holdings had no Indebtedness other than the Old
Senior Subordinated Discount Notes, its
116
<PAGE> 119
Guarantees with respect to the Old Senior Subordinated Notes and the Senior
Credit Facilities and the 1995 Recapitalization Notes. See "Capitalization."
All of the operations of Holdings are conducted through its subsidiaries.
Claims of creditors of such subsidiaries, including trade creditors, secured
creditors and creditors holding indebtedness and guarantees issued by such
subsidiaries, and claims of preferred stockholders (if any) of such subsidiaries
generally will have priority with respect to the assets and earnings of such
subsidiaries over the claims of creditors of Holdings, including holders of the
Discount Notes. The Discount Notes, therefore, will be effectively subordinated
to creditors (including trade creditors) and preferred stockholders (if any) of
subsidiaries of Holdings. At June 30, 1997, the aggregate liabilities
(consisting of Indebtedness and trade payables) of Holdings' subsidiaries would
have been approximately $282.4 million, including the Old Senior Subordinated
Notes and the Senior Credit Facilities. Although the Discount Notes Indenture
limits the incurrence of Indebtedness and preferred stock of Holdings'
Restricted Subsidiaries, such limitation is subject to a number of significant
qualifications. Moreover, the Discount Notes Indenture does not impose any
limitation on the incurrence by such Restricted Subsidiaries of liabilities that
are not considered Indebtedness under the Discount Notes Indenture. See
"-- Certain Covenants -- Limitation on Indebtedness" and "-- Limitation and
Restrictions on Distributions from Restricted Subsidiaries."
As used herein, "Senior Indebtedness" of Holdings is defined, whether
outstanding on the Issue Date or thereafter Incurred, as Indebtedness of
Holdings, including interest and fees thereon, unless, in the instrument
creating or evidencing the same or pursuant to which the same is outstanding, it
is provided that the obligations in respect of such Indebtedness are subordinate
in right of payment to the Discount Notes; provided, however, that Senior
Indebtedness will not include (1) any obligation of Holdings to any Subsidiary,
(2) any liability for Federal, state, foreign, local or other taxes owed or
owing by Holdings, (3) any accounts payable or other liability to trade
creditors arising in the ordinary course of business (including Guarantees
thereof or instruments evidencing such liabilities) or (4) any Indebtedness (and
any accrued and unpaid interest in respect thereof), Guarantee or obligation of
Holdings that is expressly subordinate or junior in right of payment to any
other Indebtedness, Guarantee or obligation of Holdings including any
Subordinated Obligations.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder will have the right
to require Holdings to repurchase all or any part of such holder's New Discount
Notes at a purchase price in cash equal to 101% of the Accreted Value thereof
plus accrued and unpaid interest, if any, to the date of repurchase (subject to
the right of holders of record on the relevant record date to receive accrued
and unpaid interest due on the relevant interest payment date in respect of
outstanding New Discount Notes).
Within 30 days following any Change of Control, unless Holdings has mailed
a redemption notice with respect to all the outstanding New Discount Notes in
connection with such Change of Control, Holdings shall mail a notice to each
holder with a copy to the Discount Notes Trustee stating: (1) that a Change of
Control has occurred and that such holder has the right to require Holdings to
purchase such holder's New Discount Notes at a purchase price in cash equal to
101% of the Accreted Value thereof plus accrued and unpaid interest, if any, to
the date of purchase (subject to the right of holders of record on a record date
to receive accrued and unpaid interest on the relevant interest payment date in
respect of outstanding New Discount Notes); (2) the repurchase date (which shall
be no earlier than 30 days nor later than 60 days from the date such notice is
mailed); and (3) the procedures determined by Holdings, consistent with the
Discount Notes Indenture, that a holder must follow in order to have its New
Discount Notes purchased.
Holdings will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of New Discount Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of the Discount Notes Indenture, Holdings
will comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations described in the Discount Notes
Indenture by virtue thereof.
The definition of "Change of Control" includes, among other transactions, a
disposition of all or substantially all of the property and assets of Holdings
and its Subsidiaries. With respect to the disposition of
117
<PAGE> 120
property or assets, the phrase "all or substantially all" as used in the
Discount Notes Indenture varies according to the facts and circumstances of the
subject transaction, has no clearly established meaning under New York law
(which is the choice of law under the Discount Notes Indenture) and is subject
to judicial interpretation. Accordingly, in certain circumstances there may be a
degree of uncertainty in ascertaining whether a particular transaction would
involve a disposition of "all or substantially all" of the property or assets of
a Person, and therefore it may be unclear as to whether a Change of Control has
occurred and whether Holdings is required to make an offer to repurchase the New
Discount Notes as described above.
The Change of Control purchase feature is a result of negotiations between
Holdings and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that Holdings would decide to do so in the future. Subject to the limitations
discussed below, Holdings could, in the future, enter into certain transactions,
including acquisitions, refinancings or other recapitalizations, that would not
constitute a Change of Control under the Discount Notes Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect Holdings' capital structure or credit ratings. Restrictions on the
ability of Holdings to Incur additional Indebtedness are contained in the
covenants described under "-- Certain Covenants -- Limitation on Indebtedness."
Such restrictions can only be waived with the consent of the holders of a
majority in principal amount at maturity of the Discount Notes then outstanding.
Except for the limitations contained in such covenants, however, the Discount
Notes Indenture will not contain any covenants or provisions that may afford
holders of the New Discount Notes protection in the event of a highly leveraged
transaction.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the Credit Agreement. Future
indebtedness of Holdings and its Subsidiaries may also contain prohibitions of
certain events that would constitute a Change of Control or require such
indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the holders of their right to require Holdings to repurchase the New Discount
Notes could cause a default under such indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on
Holdings. Finally, Holdings' ability to pay cash to the holders upon a
repurchase may be limited by Holdings' then existing financial resources. There
can be no assurance that sufficient funds will be available when necessary to
make any required repurchases. Even if sufficient funds were otherwise
available, the terms of the certain Indebtedness could prohibit Holdings'
prepayment of New Discount Notes prior to their scheduled maturity.
Consequently, if Holdings is not able to prepay such Indebtedness, Holdings will
be unable to fulfill its repurchase obligations if holders of New Discount Notes
exercise their repurchase rights following a Change of Control, thereby
resulting in a default under the Discount Notes Indenture.
The provisions under the Discount Notes Indenture relating to Holdings'
obligation to make an offer to repurchase the New Discount Notes as a result of
a Change of Control may be waived or modified with the written consent of the
holders of a majority in principal amount at maturity of the Discount Notes then
outstanding.
CERTAIN COVENANTS
The Discount Notes Indenture contains certain covenants including, among
others, the following:
Limitation on Indebtedness.
(a) Holdings shall not and shall not permit any of its Restricted
Subsidiaries to, Incur, directly or indirectly, any Indebtedness; provided,
however, that Holdings and any of its Restricted Subsidiaries may Incur
Indebtedness if on the date thereof the Consolidated Coverage Ratio would
be greater than 1.75 to 1.00, if such Indebtedness is Incurred on or prior
to December 31, 1999 or 2.00 to 1.00, if such Indebtedness is Incurred
thereafter.
(b) Notwithstanding the foregoing paragraph (a), Holdings and its
Restricted Subsidiaries may Incur the following Indebtedness: (i)
Indebtedness Incurred pursuant to (A) the Credit Agreement (including,
without limitation, any renewal, extension, refunding, restructuring,
replacement or refinancing thereof referred to in clause (ii) of the
definition thereof) or (B) any other agreements or indentures governing
Senior
118
<PAGE> 121
Indebtedness; provided, however, that the aggregate principal amount of all
Indebtedness Incurred pursuant to this clause (i) does not exceed $180
million at any time outstanding, less the aggregate principal amount
thereof repaid with the net proceeds of Asset Dispositions (to the extent,
in the case of a repayment of revolving credit Indebtedness, the commitment
to advance the loans repaid has been terminated); (ii) Indebtedness
represented by Capitalized Lease Obligations, mortgage financings or
purchase money obligations, in each case Incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property used in a Related Business or Incurred to Refinance
any such purchase price or cost of construction or improvement, in each
case Incurred no later than 365 days after the date of such acquisition or
the date of completion of such construction or improvement; provided,
however, that the principal amount of any Indebtedness Incurred pursuant to
this clause (ii) shall not exceed $15 million at any time outstanding;
(iii) Permitted Indebtedness; and (iv) Indebtedness (other than
Indebtedness described in clauses (i) - (iii)) in a principal amount which,
when taken together with the principal amount of all other Indebtedness
Incurred pursuant to this clause (iv) and then outstanding, will not exceed
$15 million (it being understood that any Indebtedness Incurred under this
clause (iv) shall cease to be deemed Incurred or outstanding for purposes
of this clause (iv) (but shall be deemed to be Incurred for purposes of
paragraph (a)) from and after the first date on which Holdings or its
Restricted Subsidiaries could have Incurred such Indebtedness under the
foregoing paragraph (a) without reliance upon this clause (iv)).
(c) Notwithstanding the foregoing, neither Holdings nor any Restricted
Subsidiary shall Incur any Indebtedness under paragraph (b) above if the
proceeds thereof are used, directly or indirectly, to Refinance any
Subordinated Obligations of Holdings unless such Indebtedness shall be
subordinated to the New Discount Notes to at least the same extent as such
Subordinated Obligations.
(d) Holdings will not permit any Unrestricted Subsidiary to incur any
Indebtedness other than Non-Recourse Debt; provided, however, that if any
such Indebtedness ceases to be Non-Recourse Debt, such event shall be
deemed to constitute an Incurrence of Indebtedness by Holdings or a
Restricted Subsidiary.
(e) For purposes of determining compliance with the foregoing
covenant, (i) in the event that an item of Indebtedness meets the criteria
of more than one of the types of Indebtedness described above, Holdings, in
its sole discretion, will classify such item of Indebtedness and only be
required to include the amount and type of such Indebtedness in one of the
above clauses and (ii) an item of Indebtedness may be divided and
classified in more than one of the types of Indebtedness described above.
Limitation on Restricted Payments. (a) Holdings shall not, and shall not
permit any of its Restricted Subsidiaries, directly or indirectly, to (i)
declare or pay any dividend or make any distribution on or in respect of its
Capital Stock (including any payment in connection with any merger or
consolidation involving Holdings or any of its Restricted Subsidiaries) except
(A) dividends or distributions payable solely in its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to purchase such
Capital Stock, and (B) dividends or distributions payable solely to Holdings or
a Restricted Subsidiary (and if such Restricted Subsidiary is not a Wholly-Owned
Subsidiary, to its other holders of Capital Stock on a pro rata basis), (ii)
purchase, redeem, retire or otherwise acquire for value any Capital Stock of
Holdings held by any Person other than a Restricted Subsidiary of Holdings or
any Capital Stock of a Restricted Subsidiary held by any Affiliate of Holdings,
other than another Restricted Subsidiary (in either case, other than in exchange
for its Capital Stock (other than Disqualified Stock)), (iii) purchase,
repurchase, redeem, defease or otherwise acquire or retire for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment, any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of purchase, repurchase or acquisition) or (iv)
make any Investment (other than a Permitted Investment) in any Person (any such
dividend, distribution, purchase, redemption, repurchase, defeasance, other
acquisition, retirement or Investment being herein referred to in clauses (i)
through (iv) as a "Restricted Payment"), if at the time Holdings or such
Restricted Subsidiary makes such Restricted Payment: (1) a Default shall have
occurred and be continuing (or would result therefrom); or (2) Holdings is not
able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a)
under "-- Limitation on Indebtedness"; or (3) the aggregate amount of such
Restricted Payment and all other Restricted Payments declared or made subsequent
to the Issue Date would
119
<PAGE> 122
exceed the sum of: (A) 50% of the Consolidated Net Income accrued during the
period (treated as one accounting period) from the Issue Date to the end of the
most recent fiscal quarter ending prior to the date of such Restricted Payment
as to which financial results are available (or, in case such Consolidated Net
Income shall be a deficit, minus 100% of such deficit); (B) the aggregate net
proceeds received by Holdings from the issue or sale of its Capital Stock (other
than Disqualified Stock) or other capital contributions subsequent to the Issue
Date (other than net proceeds received from an issuance or sale of such Capital
Stock to a Subsidiary of Holdings or an employee stock ownership plan or similar
trust); provided, however, that the value of any non-cash net proceeds shall be
as determined by the Board of Directors in good faith, except that in the event
the value of any non-cash net proceeds shall be $10 million or more, the value
shall be as determined in writing by an independent investment banking firm of
nationally recognized standing; (C) the aggregate Net Cash Proceeds received by
Holdings from the issue or sale of its Capital Stock (other than Disqualified
Stock) to an employee stock ownership plan or similar trust subsequent to the
Issue Date; provided, however, that if such plan or trust Incurs any
Indebtedness to or Guaranteed by Holdings or any of its Restricted Subsidiaries
to finance the acquisition of such Capital Stock, such aggregate amount shall be
limited to such Net Cash Proceeds less such Indebtedness Incurred to or
Guaranteed by Holdings or any of its Restricted Subsidiaries and any increase in
the Consolidated Net Worth of Holdings resulting from principal repayments made
by such plan or trust with respect to Indebtedness Incurred by it to finance the
purchase of such Capital Stock; (D) the amount by which Indebtedness of Holdings
is reduced on Holdings' balance sheet upon the conversion or exchange (other
than by a Restricted Subsidiary of Holdings) subsequent to the Issue Date of any
Indebtedness of Holdings for Capital Stock of Holdings (less the amount of any
cash, or other property, distributed by Holdings upon such conversion or
exchange); (E) the amount equal to the net reduction in Investments (other than
Permitted Investments) made by Holdings or any of its Restricted Subsidiaries in
any Person resulting from (i) repurchases or redemptions of such Investments by
such Person, proceeds realized upon the sale of such Investment to an
unaffiliated purchaser, and repayments of loans or advances or other transfers
of assets by such Person to Holdings or any Restricted Subsidiary of Holdings or
(ii) the redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries
(valued in each case as provided in the definition of "Investment") not to
exceed, in the case of any Unrestricted Subsidiary, the amount of Investments
previously made by Holdings or any Restricted Subsidiary in such Unrestricted
Subsidiary, which amount was included in the calculation of the amount of
Restricted Payments; provided, however, that no amount shall be included under
this clause (E) to the extent it is already included in Consolidated Net Income;
(F) the aggregate Net Cash Proceeds received by a Person in consideration for
the issuance of such Person's Capital Stock (other than Disqualified Stock)
which are held by such Person at the time such Person is merged with and into
Holdings in accordance with the "Merger and Consolidation" covenant subsequent
to the Issue Date; provided, however, that concurrently with or immediately
following such merger Holdings uses an amount equal to such Net Cash Proceeds to
redeem or repurchase Holdings' Capital Stock; and (G) $5 million.
(b) The provisions of paragraph (a) shall not prohibit: (i) any purchase or
redemption of Capital Stock or Subordinated Obligations of Holdings made by
exchange for, or out of the proceeds of the substantially concurrent sale of,
Capital Stock of Holdings (other than Disqualified Stock and other than Capital
Stock issued or sold to a Subsidiary of Holdings or an employee stock ownership
plan or similar trust); provided, however, that (A) such purchase or redemption
shall be excluded in the calculation of the amount of Restricted Payments and
(B) the Net Cash Proceeds from such sale shall be excluded from clause (3)(B) of
paragraph (a); (ii) any purchase or redemption of Subordinated Obligations of
Holdings made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Subordinated Obligations of Holdings; provided, however,
that such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments; (iii) any purchase or redemption of Subordinated
Obligations from Net Available Cash to the extent permitted under "-- Limitation
on Sales of Assets and Subsidiary Stock" below; provided, however, that such
purchase or redemption shall be excluded in the calculation of the amount of
Restricted Payments; (iv) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would have
complied with this provision; provided, however, that such dividend shall be
included in the calculation of the amount of Restricted Payments; (v) payments
of dividends on Holdings' common stock after an initial public offering of
common stock of Holdings in an annual amount not to exceed 6% of the gross
proceeds (before deducting underwriting discounts and commissions and other fees
and expenses of the offering) received by Holdings from shares of common stock
120
<PAGE> 123
sold for the account of Holdings (and not for the account of any stockholder) in
such initial public offering; (vi) payments by Holdings to repurchase Capital
Stock or other securities of Holdings from members of management of Holdings in
an aggregate amount not to exceed $5 million; (vii) payments to enable Holdings
to redeem or repurchase stock purchase or similar rights granted by Holdings
with respect to its Capital Stock in an aggregate amount not to exceed $1
million; (viii) payments, not to exceed $200,000 in the aggregate, to enable
Holdings to make cash payments to holders of its Capital Stock in lieu of the
issuance of fractional shares of its Capital Stock; (ix) payments made pursuant
to any merger, consolidation or sale of assets effected in accordance with the
"Merger and Consolidation" covenant; provided, however, that no such payment may
be made pursuant to this clause (ix) unless, after giving effect to such
transaction (and the incurrence of any Indebtedness in connection therewith and
the use of the proceeds thereof), Holdings would be able to Incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) in compliance with
the "Limitation on Indebtedness" covenant such that, after Incurring that $1.00
of additional Indebtedness, the Consolidated Coverage Ratio would be greater
than 3.50:1.00; and (x) purchase or redemption by Holdings or a Restricted
Subsidiary of Capital Stock of ERO, Inc. contemplated by the Merger Agreement;
provided, however, that in the case of clauses (v), (vi), (vii), (viii) and (ix)
no Default or Event of Default shall have occurred or be continuing at the time
of such payment or as a result thereof.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
Holdings shall not, and shall not permit any of its Restricted Subsidiaries to,
create or permit to exist or become effective any consensual encumbrance or
restriction on the ability of any such Restricted Subsidiary to (i) pay
dividends or make any other distributions on its Capital Stock or pay any
Indebtedness or other obligation owed to Holdings, (ii) make any loans or
advances to Holdings or (iii) transfer any of its property or assets to
Holdings; except: (a) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date, including the Senior Subordinated
Notes Indenture and the Credit Agreement; (b) any encumbrance or restriction
with respect to such a Restricted Subsidiary pursuant to an agreement relating
to any Indebtedness Incurred or Preferred Stock issued and outstanding by such
Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by Holdings and outstanding on such date (other than
Indebtedness Incurred or Preferred Stock issued as consideration in, or to
provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant to which
such Restricted Subsidiary became a Restricted Subsidiary of Holdings or was
acquired by Holdings); (c) any encumbrance or restriction with respect to such a
Restricted Subsidiary pursuant to an agreement evidencing Indebtedness Incurred
without violation of the Discount Notes Indenture or effecting a refinancing of
Indebtedness issued pursuant to an agreement referred to in clause (a) or (b) or
this clause (c) or contained in any amendment to an agreement referred to in
clauses (a) or (b) or this clause (c); provided, however, that the encumbrances
and restrictions with respect to such Restricted Subsidiary contained in any
such refinancing agreement or amendment, taken as a whole, are no less favorable
to the holders of the New Discount Notes in any material respect, as determined
in good faith by the senior management or the Board of Directors, than
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in agreements in effect at, or entered into on, the Issue Date; (d) in
the case of clause (iii), any encumbrance or restriction (A) that restricts in a
customary manner the subletting, assignment or transfer of any property or asset
that is a lease, license, conveyance or contract or similar property or asset,
(B) by virtue of any transfer of, agreement to transfer, option or right with
respect to, or Lien on, any property or assets of Holdings or any Restricted
Subsidiary not otherwise prohibited by the Discount Notes Indenture, (C) that is
included in a licensing agreement to the extent such restrictions limit the
transfer of the property subject to such licensing agreement or (D) arising or
agreed to in the ordinary course of business and that does not, individually or
in the aggregate, detract from the value of property or assets of Holdings or
any of its Subsidiaries in any manner material to Holdings or any such
Restricted Subsidiary; (e) in the case of clause (iii) above, restrictions
contained in security agreements, mortgages or similar documents securing
Indebtedness of a Restricted Subsidiary to the extent such restrictions restrict
the transfer of the property subject to such security agreements; (f) any
restriction with respect to such a Restricted Subsidiary imposed pursuant to an
agreement entered into for the sale or disposition of all or substantially all
the Capital Stock or assets of such Restricted Subsidiary pending the closing of
such sale or disposition; (g) any encumbrance or restriction imposed solely upon
a Foreign Subsidiary; provided, however, that, immediately after giving effect
to such encumbrance or restriction, Holdings would be able to Incur at least
$1.00 of Indebtedness pursuant to clause (a) of the covenant described under
121
<PAGE> 124
"-- Limitation on Indebtedness;" and (h) encumbrances or restrictions arising or
existing by reason of applicable law.
Limitation on Sales of Assets and Subsidiary Stock. (a) Holdings shall not,
and shall not permit any of its Restricted Subsidiaries to, directly or
indirectly, make any Asset Disposition unless (i) Holdings or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value, as determined in good faith by Holdings' senior
management or the Board of Directors (including as to the value of all non-cash
consideration), of the shares and assets subject to such Asset Disposition, (ii)
at least 75% of the consideration thereof received by Holdings or such
Restricted Subsidiary is in the form of cash or cash equivalents and (iii) an
amount equal to 100% of the Net Available Cash from such Asset Disposition is
applied by Holdings (or such Restricted Subsidiary, as the case may be) (A)
first, to the extent Holdings or any Restricted Subsidiary elects (or is
required by the terms of any Senior Indebtedness), to prepay, repay or purchase
(x) Senior Indebtedness or (y) Indebtedness (other than any Disqualified Stock)
of a Wholly-Owned Subsidiary (in each case other than Indebtedness owed to
Holdings) within 180 days from the later of the date of such Asset Disposition
or the receipt of such Net Available Cash; (B) second, within one year from the
receipt of such Net Available Cash, to the extent of the balance of such Net
Available Cash after application in accordance with clause (A), at Holdings'
election either (x) to the investment in or acquisition of Additional Assets or
(y) to prepay, repay or purchase (1) Senior Indebtedness or (2) Indebtedness
(other than any Disqualified Stock) of a Wholly-Owned Subsidiary (in each case
other than Indebtedness owed to Holdings); and (C) third, within 45 days after
the later of the application of Net Available Cash in accordance with clauses
(A) and (B) and the date that is one year from the receipt of such Net Available
Cash, to the extent of the balance of such Net Available Cash after application
in accordance with clauses (A) and (B), to make an offer to purchase Discount
Notes (and other Senior Indebtedness designated by Holdings), pro rata tendered
at 100% of the Accreted Value thereof (or 100% of the principal amount of such
other Senior Indebtedness, if such Senior Indebtedness was not issued at a
discount) plus accrued and unpaid interest, if any, thereon to the date of
purchase. The balance of such Net Available Cash after application in accordance
with clauses (A), (B) and (C) may be used by Holdings in any manner not
otherwise prohibited under the Discount Notes Indenture. Notwithstanding
anything contained herein to the contrary, in connection with any prepayment,
repayment or purchase of Indebtedness pursuant to clause (A), (B) or (C) above,
Holdings or such Restricted Subsidiary shall retire such Indebtedness and shall
cause the related loan commitment (if any) to be permanently reduced in an
amount equal to the principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions, Holdings and its Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
herewith except to the extent that the aggregate Net Available Cash from all
Asset Dispositions which are not applied in accordance with this covenant at any
time exceeds $5 million. Holdings shall not be required to make an offer for
Discount Notes pursuant to this covenant if the Net Available Cash available
therefor (after application of the proceeds as provided in clauses (A) and (B))
is less than $10 million for any particular Asset Disposition (which lesser
amounts shall be carried forward for purposes of determining whether an offer is
required with respect to the Net Available Cash from any subsequent Asset
Disposition).
For the purposes of this covenant, the following will be deemed to be cash
or cash equivalents: (x) the assumption by the transferee of Indebtedness of
Holdings or any Restricted Subsidiary of Holdings and the release of Holdings or
such Restricted Subsidiary from all liability on such Indebtedness in connection
with such Asset Disposition (in which case Holdings shall, without further
action, be deemed to have applied such assumed Indebtedness in accordance with
clause (A) of the preceding paragraph) and (y) securities received by Holdings
or any Restricted Subsidiary of Holdings from the transferee that are promptly
converted by Holdings or such Restricted Subsidiary into cash.
Notwithstanding the foregoing, Holdings and its Restricted Subsidiaries
will be permitted to consummate an Asset Swap if (i) immediately after giving
effect to such Asset Swap, no Default or Event of Default shall have occurred or
be continuing, (ii) in the event such Asset Swap involves an aggregate amount in
excess of $5 million, the terms of such Asset Swap have been approved by a
majority of the members of the Board of Directors of Holdings, and (iii) in the
event such Asset Swap involves an aggregate amount in excess of $20 million,
Holdings has received a written opinion from an independent investment banking
firm of nationally
122
<PAGE> 125
recognized standing that such Asset Swap is fair to Holdings or such Restricted
Subsidiary, as the case may be, from a financial point of view.
(b) In the event of an Asset Disposition that requires the purchase of
Discount Notes pursuant to clause (a) (iii) (C), Holdings will be required to
purchase Discount Notes (and any other Senior Indebtedness tendered for by
Holdings) tendered pursuant to an offer by Holdings for the Discount Notes (and
any other Senior Indebtedness) at a purchase price of 100% of their Accreted
Value on the date of purchase plus accrued and unpaid interest, if any, to the
purchase date in accordance with the procedures (including prorating in the
event of oversubscription) set forth in the Discount Notes Indenture. If the
aggregate purchase price of the Discount Notes and any other Senior Indebtedness
tendered pursuant to the offer is less than the Net Available Cash allotted to
the purchase thereof, Holdings may use the remaining Net Available Cash for any
purpose not prohibited by the Discount Notes Indenture and any remaining Net
Available Cash will not be subject to any future offer to purchase.
(c) Holdings will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Discount Notes pursuant to the
Discount Notes Indenture. To the extent that the provisions of any securities
laws or regulations conflict with provisions of this covenant, Holdings will
comply with the applicable securities laws and regulations and will not be
deemed to have breached its obligations under the Discount Notes Indenture by
virtue thereof.
Limitation on Affiliate Transactions. (a) Holdings will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, enter into
or conduct any transaction or series of related transactions (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of Holdings other than a Wholly-Owned Subsidiary (an
"Affiliate Transaction") unless: (i) the terms of such Affiliate Transaction are
no less favorable to Holdings or such Restricted Subsidiary, as the case may be,
than those that could be obtained at the time of such transaction or series of
related transactions in arm's-length dealings with a Person who is not such an
Affiliate; (ii) in the event such Affiliate Transaction involves an aggregate
amount in excess of $5 million, the terms of such transaction or series of
related transactions have been approved by a majority of the members of the
Board of Directors of Holdings and by a majority of the disinterested members of
such Board, if any (and such majority or majorities, as the case may be,
determines that such Affiliate Transaction satisfies the criteria in (i) above);
and (iii) in the event such Affiliate Transaction involves an aggregate amount
in excess of $15 million, Holdings has received a written opinion from an
independent investment banking firm of nationally recognized standing that such
Affiliate Transaction is fair to Holdings or such Restricted Subsidiary, as the
case may be, from a financial point of view.
(b) The foregoing paragraph (a) shall not apply to (i) any Restricted
Payment permitted to be made pursuant to the covenant described under
"Limitation on Restricted Payments," (ii) any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise pursuant to, or the
funding of, employment arrangements, stock options and stock ownership plans
approved by the Board of Directors of Holdings, (iii) loans or advances to
employees in the ordinary course of business of Holdings or any of its
Restricted Subsidiaries, (iv) any transaction between Wholly-Owned Subsidiaries,
(v) indemnification agreements with, and the payment of fees and indemnities to,
directors, officers and employees of Holdings and its Restricted Subsidiaries,
in each case in the ordinary course of business, (vi) transactions pursuant to
agreements as in existence on the Issue Date, (vii) any employment,
noncompetition or confidentiality agreements entered into by Holdings or any of
its Restricted Subsidiaries with its employees in the ordinary course of
business, (viii) payments made in connection with the Transactions, including
fees to Hicks Muse, (ix) the issuance of Capital Stock of Holdings (other than
Disqualified Stock) and (x) any obligations of Holdings pursuant to the
Monitoring and Oversight Agreement and the Financial Advisory Agreement.
Limitation on Liens. Holdings will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any of its properties (including Capital Stock
of a Restricted Subsidiary), whether owned at the Issue Date or thereafter
acquired, other than Permitted Liens, without effectively providing that the New
Discount Notes will be secured equally and ratably with (or prior to) the
obligations so secured for so long as such obligations are so secured.
123
<PAGE> 126
Limitation on Sale/Leaseback Transactions. Holdings will not, and will not
permit any of its Restricted Subsidiaries to, enter into any Sale/Leaseback
Transaction with respect to any property unless (i) Holdings or such Restricted
Subsidiary would be entitled to (A) Incur Indebtedness in an amount equal to the
Attributable Debt with respect to such Sale/Leaseback Transaction pursuant to
the covenant described under "-- Limitation on Indebtedness" and (B) create a
Lien on such property securing such Attributable Debt without equally and
ratably securing the New Discount Notes pursuant to the covenant described under
"-- Limitation on Liens," (ii) the net proceeds received by Holdings or any
Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at
least equal to the fair value (as determined by the Board of Directors) of such
property and (iii) Holdings applies the proceeds of such transaction in
compliance with the covenant described under "-- Limitation on Sales of Assets
and Subsidiary Stock."
Limitation on Capital Stock of Restricted Subsidiaries. Holdings will not,
nor will it permit any Restricted Subsidiary to, sell or otherwise dispose of
any Capital Stock (other than Preferred Stock) of a Restricted Subsidiary to any
Person (other than to Holdings or a Wholly-Owned Subsidiary of Holdings) or
permit any Person (other than Holdings or a Wholly-Owned Subsidiary of Holdings)
to own any Capital Stock (other than Preferred Stock) of a Restricted Subsidiary
of Holdings, if in either case as a result thereof such Restricted Subsidiary
would no longer be a Restricted Subsidiary of Holdings; provided, however, that
this provision shall not prohibit (x) Holdings or any of its Restricted
Subsidiaries from selling, leasing or otherwise disposing of all of the Capital
Stock of any Restricted Subsidiary or (y) the designation of a Restricted
Subsidiary as an Unrestricted Subsidiary in compliance with the Discount Notes
Indenture.
SEC Reports. Holdings will file with the Discount Notes Trustee and provide
to the holders of the New Discount Notes, within 15 days after it files them
with the Commission, copies of the annual reports and of the information,
documents and other reports (or copies of such portions of any of the foregoing
as the Commission may by rules and regulations prescribe) which Holdings files
with the Commission pursuant to Section 13 or 15(d) of the Exchange Act.
Pursuant to the Discount Notes Indenture, Holdings has agreed that it shall file
with the Commission all annual reports and such other documents, information and
reports required by Section 13 or 15(d) of the Exchange Act notwithstanding that
Holdings may not be subject to the reporting requirements of the Exchange Act.
Merger and Consolidation. Holdings shall not consolidate with or merge with
or into, or convey, transfer or lease, in one transaction or a series of related
transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (the "Successor Company") shall be
a corporation, partnership, trust or limited liability company organized and
existing under the laws of the United States of America, any State thereof or
the District of Columbia and the Successor Company (if not Holdings) shall
expressly assume, by supplemental indenture, executed and delivered to the
Discount Notes Trustee, in form satisfactory to the Discount Notes Trustee, all
the obligations of Holdings under the Discount Notes and the Discount Notes
Indenture; (ii) immediately after giving effect to such transaction (and
treating any Indebtedness that becomes an obligation of the Successor Company or
any Subsidiary of the Successor Company as a result of such transaction as
having been Incurred by the Successor Company or such Subsidiary at the time of
such transaction), no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction, the
Successor Company would be able to Incur at least an additional $1.00 of
Indebtedness pursuant to paragraph (a) of "-- Limitation on Indebtedness"; and
(iv) Holdings shall have delivered to the Discount Notes Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with the
Discount Notes Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, Holdings under the Discount Notes Indenture,
but, in the case of a lease of all or substantially all its assets, Holdings
will not be released from the obligation to pay the principal of and interest on
the Discount Notes.
Notwithstanding the foregoing clauses (ii) and (iii), (1) any Restricted
Subsidiary of Holdings may consolidate with, merge into or transfer all or part
of its properties and assets to Holdings and (2) Holdings may merge with an
Affiliate incorporated solely for the purpose of reincorporating Holdings in
another jurisdiction to realize tax or other benefits.
124
<PAGE> 127
EVENTS OF DEFAULT
Each of the following constitutes an Event of Default under the Discount
Notes Indenture: (i) a default in any payment of interest on any Discount Note
when due, continued for 30 days, (ii) a default in the payment of principal of
any Discount Note when due at its Stated Maturity, upon optional redemption,
upon required repurchase, upon declaration or otherwise, (iii) the failure by
Holdings to comply with its obligations under "Certain Covenants -- Merger and
Consolidation" above, (iv) the failure by Holdings to comply for 30 days after
notice with any of its obligations under the covenant described under "Change of
Control" above or under the covenants described under "Certain Covenants" above
(in each case, other than a failure to purchase Discount Notes which shall
constitute an Event of Default under clause (ii) above), other than "Merger and
Consolidation", (v) the failure by Holdings to comply for 60 days after notice
with its other agreements contained in the Discount Notes Indenture, (vi)
Indebtedness of Holdings or any Restricted Subsidiary is not paid within any
applicable grace period after final maturity or is accelerated by the holders
thereof because of a default and the total amount of such Indebtedness unpaid or
accelerated exceeds $10 million and such default shall not have been cured or
such acceleration rescinded after a 10-day period (the "cross acceleration
provision"), (vii) certain events of bankruptcy, insolvency or reorganization of
Holdings or a Significant Subsidiary (the "bankruptcy provisions") or (viii) any
judgment or decree for the payment of money in excess of $10 million (to the
extent not covered by insurance) is rendered against Holdings or a Significant
Subsidiary and such judgment or decree shall remain undischarged or unstayed for
a period of 60 days after such judgment becomes final and non-appealable (the
"judgment default provision"). However, a default under clauses (iv) and (v)
will not constitute an Event of Default until the Discount Notes Trustee or the
holders of 25% in principal amount at maturity of the outstanding Discount Notes
notify Holdings of the default and Holdings does not cure such default within
the time specified in clauses (iv) and (v) hereof after receipt of such notice.
If an Event of Default occurs and is continuing, the Discount Notes Trustee
or the holders of at least 25% in principal amount of the outstanding Discount
Notes by notice to Holdings may declare the Accreted Value of and accrued and
unpaid interest, if any, on all the Discount Notes to be due and payable. Upon
such a declaration, such Accreted Value and accrued and unpaid interest shall be
due and payable immediately. If an Event of Default relating to certain events
of bankruptcy, insolvency or reorganization of Holdings occurs and is
continuing, the Accreted Value of and accrued and unpaid interest on all the
Discount Notes will become and be immediately due and payable without any
declaration or other act on the part of the Discount Notes Trustee or any
holders. Under certain circumstances, the holders of a majority in principal
amount at maturity of the outstanding Discount Notes may rescind any such
acceleration with respect to the Discount Notes and its consequences.
Subject to the provisions of the Discount Notes Indenture relating to the
duties of the Discount Notes Trustee, if an Event of Default occurs and is
continuing, the Discount Notes Trustee will be under no obligation to exercise
any of the rights or powers under the Discount Notes Indenture at the request or
direction of any of the holders unless such holders have offered to the Discount
Notes Trustee reasonable indemnity or security against any loss, liability or
expense. Except to enforce the right to receive payment of principal, premium
(if any) or interest when due, no holder may pursue any remedy with respect to
the Discount Notes Indenture or the Discount Notes unless (i) such holder has
previously given the Discount Notes Trustee notice that an Event of Default is
continuing, (ii) holders of at least 25% in principal amount at maturity of the
outstanding Discount Notes have requested the Discount Notes Trustee to pursue
the remedy, (iii) such holders have offered the Discount Notes Trustee
reasonable security or indemnity against any loss, liability or expense, (iv)
the Discount Notes Trustee has not complied with such request within 60 days
after the receipt of the request and the offer of security or indemnity and (v)
the holders of a majority in principal amount at maturity of the outstanding
Discount Notes have not given the Discount Notes Trustee a direction that, in
the opinion of the Discount Notes Trustee, is inconsistent with such request
within such 60-day period. Subject to certain restrictions, the holders of a
majority in principal amount at maturity of the outstanding Discount Notes are
given the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Discount Notes Trustee or of
exercising any trust or power conferred on the Discount Notes Trustee. The
Discount Notes Trustee, however, may refuse to follow any direction that
conflicts with law or the Discount Notes Indenture or that the Discount Notes
Trustee determines is unduly prejudicial to the rights of any other holder or
that would involve the
125
<PAGE> 128
Discount Notes Trustee in personal liability. Prior to taking any action under
the Discount Notes Indenture, the Discount Notes Trustee shall be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
The Discount Notes Indenture provides that if a Default occurs and is
continuing and is known to the Discount Notes Trustee, the Discount Notes
Trustee must mail to each holder notice of the Default within 90 days after it
occurs. Except in the case of a Default in the payment of principal of, premium
(if any) or interest on any Discount Note, the Discount Notes Trustee may
withhold notice if and so long as its board of directors, a committee of its
board of directors or a committee of its Trust officers in good faith determines
that withholding notice is in the interests of the holders of Discount Notes. In
addition, Holdings is required to deliver to the Discount Notes Trustee, within
120 days after the end of each fiscal year, a certificate indicating whether the
signers thereof know of any Default that occurred during the previous year.
Holdings also is required to deliver to the Discount Notes Trustee, within 30
days after the occurrence thereof, written notice of any events which would
constitute certain Defaults.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Discount Notes Indenture may be amended
with the consent of the holders of a majority in principal amount at maturity of
the Discount Notes then outstanding (including consents obtained in connection
with a tender offer or exchange for the Discount Notes) and any past default or
compliance with any provisions may be waived with the consent of the holders of
a majority in principal amount at maturity of the Discount Notes then
outstanding. However, without the consent of each holder of an outstanding Note
affected, no amendment may, among other things, (i) reduce the amount of
Discount Notes whose holders must consent to an amendment, (ii) reduce the
stated rate of or extend the stated time for payment of interest on any Discount
Note, (iii) reduce the principal of or extend the Stated Maturity of any
Discount Note, (iv) reduce the premium payable upon the redemption or repurchase
of any Discount Note or change the time at which any Note may be redeemed as
described under "Optional Redemption" above, (v) make any Discount Note payable
in money other than that stated in the Discount Note, (vi) impair the right of
any holder to receive payment of principal of and interest on such holder's
Discount Notes on or after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such holder's Discount Notes or
(vii) make any change in the amendment provisions which require each holder's
consent or in the waiver provisions.
Without the consent of any holder, Holdings and the Discount Notes Trustee
may amend the Discount Notes Indenture to cure any ambiguity, omission, defect
or inconsistency, to provide for the assumption by a successor corporation,
partnership, trust or limited liability company of the obligations of Holdings
under the Discount Notes Indenture, to provide for uncertificated Discount Notes
in addition to or in place of certificated Discount Notes (provided that the
uncertificated Discount Notes are issued in registered form for purposes of
Section 163(f) of the Code, or in a manner such that the uncertificated Discount
Notes are described in Section 163(f) (2) (B) of the Code), to add Guarantees
with respect to the Discount Notes, to secure the Discount Notes, to add to the
covenants of Holdings for the benefit of the holders or to surrender any right
or power conferred upon Holdings, to make any change that does not adversely
affect the rights of any holder or to comply with any requirement of the
Commission in connection with the qualification of the Discount Notes Indenture
under the Trust Indenture Act.
The consent of the holders is not necessary under the Discount Notes
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Discount Notes Indenture becomes effective,
Holdings is required to mail to the holders a notice briefly describing such
amendment. However, the failure to give such notice to all the holders, or any
defect therein, will not impair or affect the validity of the amendment.
DEFEASANCE
Holdings at any time may terminate all its obligations under the Discount
Notes and the Discount Notes Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and
126
<PAGE> 129
obligations to register the transfer or exchange of the Discount Notes, to
replace mutilated, destroyed, lost or stolen Discount Notes and to maintain a
registrar and paying agent in respect of the Discount Notes. Holdings at any
time may terminate its obligations under "-- Change of Control" and under
substantially all of its covenants in the Discount Notes Indenture, including
the covenants described under "-- Certain Covenants" (other than "-- Merger and
Consolidation"), the operation of the cross acceleration provision, the
bankruptcy provisions with respect to Significant Subsidiaries, the judgment
default provision described under "Events of Default" above and the limitations
contained in clauses (iii) and (iv) under "-- Certain Covenants -- Merger and
Consolidation" above ("covenant defeasance").
Holdings may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If Holdings exercises its legal
defeasance option, payment of the Discount Notes may not be accelerated because
of an Event of Default with respect thereto. If Holdings exercises its covenant
defeasance option, payment of the Discount Notes may not be accelerated because
of an Event of Default specified in clause (iv), (vi), (vii) (with respect only
to Significant Subsidiaries) or (viii) under "Events of Default" above or
because of the failure of Holdings to comply with clause (iii) or (iv) under
"-- Certain Covenants -- Merger and Consolidation" above.
In order to exercise either defeasance option, Holdings must irrevocably
deposit in trust (the "defeasance trust") with the Discount Notes Trustee money
or U.S. Government Obligations for the payment of principal, premium (if any)
and interest on the Discount Notes to maturity or any redemption date specified
by Holdings, as the case may be, and must comply with certain other conditions,
including delivery to the Discount Notes Trustee of an Opinion of Counsel to the
effect that holders of the Discount Notes will not recognize income, gain or
loss for Federal income tax purposes as a result of such deposit and defeasance
and will be subject to Federal income tax on the same amounts and in the same
manner and at the same times as would have been the case if such deposit and
defeasance had not occurred (and, in the case of legal defeasance only, such
Opinion of Counsel must be based on a ruling of the Internal Revenue Service or
other change in applicable Federal income tax law).
CONCERNING THE TRUSTEE
United States Trust Company of New York is the Discount Notes Trustee under
the Discount Notes Indenture and has been appointed by Holdings as Registrar and
Paying Agent with regard to the Discount Notes.
The Holders of a majority in principal amount of the outstanding Discount
Notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Discount Notes Trustee,
subject to certain exceptions. The Discount Notes Indenture provides that if an
Event of Default occurs (and is not cured), the Discount Notes Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Discount
Notes Trustee will be under no obligation to exercise any of its rights or
powers under the Discount Notes Indenture at the request of any holder of
Discount Notes, unless such holder shall have offered to the Discount Notes
Trustee security and indemnity satisfactory to it against any loss, liability or
expense and then only to the extent required by the terms of the Discount Notes
Indenture.
GOVERNING LAW
The Discount Notes Indenture provides that it and the Discount Notes will
be governed by, and construed in accordance with, the laws of the State of New
York without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
127
<PAGE> 130
CERTAIN DEFINITIONS
"Accreted Value" means, as of any date (the "Specified Date"), the amount
provided below for each $1,000 principal amount at maturity of Discount Notes:
(i) if the Specified Date occurs on one of the following dates (each,
a "Semi-Annual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
SEMI-ANNUAL
ACCRUAL DATE ACCRETED VALUE
------------ --------------
<S> <C>
December 1, 1997....................................... $ 591.90
June 1, 1998........................................... 627.41
December 1, 1998....................................... 665.06
June 1, 1999........................................... 704.96
December 1, 1999....................................... 747.26
June 1, 2000........................................... 792.10
December 1, 2000....................................... 839.62
June 1, 2001........................................... 890.00
December 1, 2001....................................... 943.40
June 1, 2002........................................... 1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) the original issue price
($560.387 per Unit) of a Unit and (b) an amount equal to the product of (1)
the Accreted Value for the first Semi-Annual Accrual Date less such
original issue price multiplied by (2) a fraction, the numerator of which
is the number of days elapsed from the Issue Date to the Specified Date,
using a 360-day year of 12 30-day months, and the denominator of which is
the number of days from the Issue Date to the first Semi-Annual Accrual
Date, using a 360-day year of 12 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for
the Semi-Annual Accrual Date immediately preceding such Specified Date and
(b) an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (2) a
fraction, the numerator of which is the number of days elapsed from the
immediately preceding Semi-Annual Accrual Date to the Specified Date, using
a 360-day year of 12 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by Holdings or a Restricted Subsidiary of Holdings; (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary of Holdings; or (iv) Permitted Investments of the
type and in the amounts described in clause (viii) of the definition thereof;
provided, however, that, in the case of clauses (ii) and (iii), such Restricted
Subsidiary is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares), property or
other assets (each referred to for the purposes of this definition as a
"disposition") by Holdings or any of its Restricted Subsidiaries (including any
128
<PAGE> 131
disposition by means of a merger, consolidation or similar transaction) other
than (i) a disposition by a Restricted Subsidiary to Holdings or by Holdings or
a Restricted Subsidiary to a Wholly-Owned Subsidiary, (ii) a disposition of
inventory in the ordinary course of business, (iii) a disposition of obsolete or
worn out equipment or equipment that is no longer useful in the conduct of the
business of Holdings and its Restricted Subsidiaries and that is disposed of in
each case in the ordinary course of business, (iv) dispositions of property for
net proceeds which, when taken collectively with the net proceeds of any other
such dispositions under this clause (iv) that were consummated since the
beginning of the calendar year in which such disposition is consummated, do not
exceed 1.5% of the consolidated book value of Holdings' assets as of the most
recent date prior to such disposition for which a consolidated balance sheet of
Holdings has been regularly prepared, and (v) transactions permitted under
"Certain Covenants -- Merger and Consolidation" above.
"Asset Swap" means the execution of a definitive agreement, subject only to
customary closing conditions that Holdings in good faith believes will be
satisfied, for a substantially concurrent purchase and sale, or exchange, of
Productive Assets between Holdings or any of its Restricted Subsidiaries and
another Person or group of affiliated Persons; provided, however, that any
amendment to or waiver of any closing condition that individually or in the
aggregate is material to the Asset Swap shall be deemed to be a new Asset Swap.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Discount Notes, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of Holdings or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted as a capitalized lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated without penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Cash Flow" for any period means the Consolidated Net Income
for such period, plus, without duplication, the following to the extent deducted
in calculating such Consolidated Net Income: (i) income tax expense, (ii)
Consolidated Interest Expense, (iii) depreciation expense, (iv) amortization
expense, (v) exchange or translation losses on foreign currencies, and (vi) all
other non-cash items reducing Consolidated Net Income (excluding any non-cash
item to the extent it represents an accrual of or reserve for cash disbursements
for any subsequent period prior to the Stated Maturity of the Discount Notes)
and less, to the extent added in calculating Consolidated Net Income, (x)
exchange or translation gains on foreign currencies and (y) non-cash items
(excluding such non-cash items to the extent they represent an accrual for cash
receipts reasonably expected to be received prior to the Stated Maturity of the
Discount Notes), in each case for such period. Notwithstanding the foregoing,
the income tax expense, the depreciation expense and amortization expense of a
Subsidiary of Holdings shall be included in Consolidated Cash Flow only to the
extent (and in the same proportion) that the net income of such Subsidiary was
included in calculating Consolidated Net Income.
129
<PAGE> 132
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated Cash Flow for the period of
the most recent four consecutive fiscal quarters ending prior to the date of
such determination and as to which financial statements are available to (ii)
Consolidated Interest Expense for such four fiscal quarters; provided, however,
that (1) if Holdings or any of its Restricted Subsidiaries has Incurred any
Indebtedness since the beginning of such period that remains outstanding or if
the transaction giving rise to the need to calculate Consolidated Coverage Ratio
is an Incurrence of Indebtedness, or both, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to (A) such Indebtedness as if such Indebtedness had
been Incurred on the first day of such period (provided that if such
Indebtedness is Incurred under a revolving credit facility (or similar
arrangement or under any predecessor revolving credit or similar arrangement)
only that portion of such Indebtedness that constitutes the one year projected
average balance of such Indebtedness (as determined in good faith by senior
management of Holdings and assuming a constant level of sales) shall be deemed
outstanding for purposes of this calculation) and (B) the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise discharged with the
proceeds of such new Indebtedness as if such discharge had occurred on the first
day of such period, (2) if since the beginning of such period any Indebtedness
of Holdings or any of its Restricted Subsidiaries has been repaid, repurchased,
defeased or otherwise discharged (other than Indebtedness under a revolving
credit or similar arrangement unless such revolving credit Indebtedness has been
permanently repaid and has not been replaced), Consolidated Interest Expense for
such period shall be calculated after giving pro forma effect thereto as if such
Indebtedness had been repaid, repurchased, defeased or otherwise discharged on
the first day of such period and as if Holdings or such Restricted Subsidiary
had not earned the interest income actually earned during such period in respect
of cash or Temporary Cash Investments used to repay, repurchase, defease or
otherwise discharge such Indebtedness, (3) if since the beginning of such period
Holdings or any of its Restricted Subsidiaries shall have made any Asset
Disposition or if the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio is an Asset Disposition, Consolidated Cash Flow for
such period shall be reduced by an amount equal to the Consolidated Cash Flow
(if positive) attributable to the assets which are the subject of such Asset
Disposition for such period, or increased by an amount equal to the Consolidated
Cash Flow (if negative) attributable thereto for such period, and Consolidated
Interest Expense for such period shall be (i) reduced by an amount equal to the
Consolidated Interest Expense attributable to any Indebtedness of Holdings or
any of its Restricted Subsidiaries repaid, repurchased, defeased or otherwise
discharged with respect to Holdings and its continuing Restricted Subsidiaries
in connection with such Asset Disposition for such period (or, if the Capital
Stock of any Restricted Subsidiary of Holdings is sold, the Consolidated
Interest Expense for such period directly attributable to the Indebtedness of
such Restricted Subsidiary to the extent Holdings and its continuing Restricted
Subsidiaries are no longer liable for such Indebtedness after such sale) and
(ii) increased by interest income attributable to the assets which are the
subject of such Asset Disposition for such period, (4) if since the beginning of
such period Holdings or any of its Restricted Subsidiaries (by merger or
otherwise) shall have made an Investment in any Restricted Subsidiary of
Holdings (or any Person which becomes a Restricted Subsidiary of Holdings) or an
acquisition of assets, including any Investment in a Restricted Subsidiary of
Holdings or any acquisition of assets occurring in connection with a transaction
causing a calculation to be made hereunder, which constitutes all or
substantially all of a product line or operating unit of a business.
Consolidated Cash Flow and Consolidated Interest Expense for such period shall
be calculated after giving pro forma effect thereto (including the Incurrence of
any Indebtedness and the use of the proceeds therefrom) as if such Investment or
acquisition occurred on the first day of such period and (5) if since the
beginning of such period any Person (that subsequently became a Restricted
Subsidiary of Holdings or was merged with or into Holdings or any Restricted
Subsidiary of Holdings since the beginning of such period) shall have made any
Asset Disposition, Investment or acquisition of assets that would have required
an adjustment pursuant to clause (3) or (4) above if made by Holdings or a
Restricted Subsidiary of Holdings during such period, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto as if such Asset Disposition, Investment or acquisition
occurred on the first day of such period. For purposes of this definition,
whenever pro forma effect is to be given to an acquisition of assets, the amount
of income or earnings relating thereto and the amount of Consolidated Interest
Expense associated with any Indebtedness Incurred in connection therewith, the
pro forma calculations shall be determined in good faith by a responsible
financial or accounting officer of Holdings. If any Indebtedness bears a
floating rate of interest and is being given pro forma effect, the interest
expense on such Indebtedness shall be calculated as if the rate in effect on the
date
130
<PAGE> 133
of determination had been the applicable rate for the entire period (taking into
account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of 12 months).
Notwithstanding anything herein to the contrary, if at the time the calculation
of the Consolidated Coverage Ratio is to be made, Holdings does not have
available consolidated financial statements reflecting the ownership by Holdings
of ERO for a period of at least four full fiscal quarters, all calculations
required by the Consolidated Coverage Ratio shall be prepared on a pro forma
basis, as though such acquisition and the related transactions (to the extent
not otherwise reflected in the consolidated financial statements of Holdings)
had occurred on the first day of the four-fiscal-quarter period for which such
calculation is being made.
"Consolidated Interest Expense" means, for any period, the total interest
expense of Holdings and its Restricted Subsidiaries, plus, to the extent not
included in such interest expense, (i) interest expense attributable to capital
leases, (ii) amortization of debt discount, (iii) capitalized interest, (iv)
non-cash interest expense, (v) commissions, discounts and other fees and charges
owed with respect to letters of credit and bankers' acceptance financing, (vi)
interest actually paid by Holdings or any such Restricted Subsidiary under any
Guarantee of Indebtedness or other obligation of any other Person, (vii) net
payments (whether positive or negative) pursuant to Interest Rate Agreements,
(viii) the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust to pay
interest or fees to any Person (other than Holdings) in connection with
Indebtedness Incurred by such plan or trust and (ix) cash and Disqualified Stock
dividends in respect of all Preferred Stock of Restricted Subsidiaries and
Disqualified Stock of Holdings held by Persons other than Holdings or a
Wholly-Owned Subsidiary and less (a) to the extent included in such interest
expense, the amortization of capitalized debt issuance costs and debt discount
solely to the extent relating to the issuance and sale of Indebtedness together
with any other security as part of an investment unit and (b) interest income.
Notwithstanding the foregoing, the Consolidated Interest Expense with respect to
any Restricted Subsidiary of Holdings, that was not a Wholly-Owned Subsidiary,
shall be included only to the extent (and in the same proportion) that the net
income of such Restricted Subsidiary was included in calculating Consolidated
Net Income.
"Consolidated Net Income" means, for any period, the net income (loss) of
Holdings and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income (loss) of
any Person acquired by Holdings or any of its Restricted Subsidiaries in a
pooling of interests transaction for any period prior to the date of such
acquisition, (ii) any net income of any Restricted Subsidiary of Holdings if
such Restricted Subsidiary is subject to restrictions, directly or indirectly,
on the payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to Holdings (other than restrictions in
effect on the Issue Date with respect to a Restricted Subsidiary of Holdings and
other than restrictions that are created or exist in compliance with the
"-- Limitation on Restrictions on Distributions from Restricted Subsidiaries"
covenant), (iii) any gain or loss realized upon the sale or other disposition of
any assets of Holdings or its consolidated Restricted Subsidiaries (including
pursuant to any Sale/Leaseback Transaction) which are not sold or otherwise
disposed of in the ordinary course of business and any gain or loss realized
upon the sale or other disposition of any Capital Stock of any Person, (iv) any
extraordinary gain or loss, (v) the cumulative effect of a change in accounting
principles, (vi) restructuring charges or writeoffs recorded within the one year
period following the Issue Date in an aggregate amount not to exceed $5 million
including any reversals of any such charges, (vii) the net income of any Person,
other than a Restricted Subsidiary, except to the extent of the lesser of (A)
dividends or distributions paid to Holdings or any of its Restricted
Subsidiaries by such Person and (B) the net income of such Person (but in no
event less than zero), and the net loss of such Person (other than an
Unrestricted Subsidiary) shall be included only to the extent of the aggregate
Investment of Holdings or any of its Restricted Subsidiaries in such Person and
(viii) any non-cash expenses attributable to grants or exercises of employee
stock options. Notwithstanding the foregoing, for the purpose of the covenant
described under "Certain Covenants -- Limitation on Restricted Payments" only,
there shall be excluded from Consolidated Net Income any dividends, repayments
of loans or advances or other transfers of assets from Unrestricted Subsidiaries
to Holdings or a Restricted Subsidiary to the extent such dividends, repayments
or transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a) (3)(E) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of Holdings and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the
131
<PAGE> 134
most recent fiscal quarter of Holdings ending prior to the taking of any action
for the purpose of which the determination is being made and for which financial
statements are available (but in no event ending more than 135 days prior to the
taking of such action), as (i) the par or stated value of all outstanding
Capital Stock of Holdings plus (ii) paid in capital or capital surplus relating
to such Capital Stock plus (iii) any retained earnings or earned surplus less
(A) any accumulated deficit and (B) any amounts attributable to Disqualified
Stock.
"Continuing Director" means, as of the date of determination, any Person
who (i) was a member of the Board of Directors on the date of the Discount Notes
Indenture, (ii) was nominated for election or elected to the Board of Directors
with the affirmative vote of a majority of the Continuing Directors who were
members of such Board of Directors at the time of such nomination or election,
or (iii) is a representative of a Permitted Holder.
"Credit Agreement" means (i) the Credit Agreement as well as all exhibits,
schedules and appendices thereto to be entered into among Hedstrom, Credit
Suisse First Boston, as Administrative Agent, and the lenders parties thereto
from time to time, as the same may be amended, supplemented or otherwise
modified from time to time and (ii) any renewal, extension, refunding,
restructuring, replacement or refinancing thereof (whether with the original
Administrative Agent and lenders or another administrative agent or agents or
other lenders and whether provided under the original Credit Agreement or any
other agreement).
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values as to which such Person is a
party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
of such Person which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock (excluding capital stock which is convertible or exchangeable
solely at the option of Holdings or a Restricted Subsidiary) or (iii) is
redeemable at the option of the holder thereof, in whole or in part, in each
case on or prior to the Stated Maturity of the Discount Notes; provided,
however, that only the portion of Capital Stock which so matures or is
mandatorily redeemable, is so convertible or exchangeable or is so redeemable at
the option of the holder thereof prior to such Stated Maturity shall be deemed
to be Disqualified Stock; provided further, however, that any Capital Stock that
would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Discount Notes shall not
constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are not more favorable to the
holders of such Capital Stock than the provisions described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and "Change of
Control".
"Equity Offering" means an offering for cash by Holdings of its common
stock, or options, warrants or rights with respect to its common stock.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Financial Advisory Agreement" means the Financial Advisory Agreement
between Hicks Muse Partners and Holdings and Hedstrom as in effect on the Issue
Date.
"Foreign Subsidiary" means a Restricted Subsidiary that is incorporated in
a jurisdiction other than the United States or a State thereof or the District
of Columbia and with respect to which more than 80% of its assets (determined on
a consolidated basis in accordance with GAAP) are located in territories outside
of the United States of America and jurisdictions outside the United States of
America.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Discount Notes Indenture,
including those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or the
SEC or in such other statements by such
132
<PAGE> 135
other entity as approved by a significant segment of the accounting profession.
All ratios and computations based on GAAP contained in the Discount Notes
Indenture shall be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be incurred
by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary.
The term "Incurrence" when used as a noun shall have a correlative meaning.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money, (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto) (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in clauses (i), (ii) and (v)) entered into in the ordinary
course of business of such Person to the extent that such letters of credit are
not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed
no later than the third Business Day following receipt by such person of a
demand for reimbursement following payment on the letter of credit), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services (except trade payables and accrued expenses incurred in the
ordinary course of business), which purchase price is due more than six months
after the date of placing such property in service or taking delivery and title
thereto or the completion of such services, (v) all Capitalized Lease
Obligations and all Attributable Indebtedness of such Person, (vi) all
Indebtedness of other Persons secured by a Lien on any asset of such Person,
whether or not such Indebtedness is assumed by such Person, (vii) all
Indebtedness of other Persons to the extent Guaranteed by such Person, (viii)
the amount of all obligations of such Person with respect to the redemption,
repayment or other repurchase of any Disqualified Stock or, with respect to any
Restricted Subsidiary of Holdings, any Preferred Stock of such Restricted
Subsidiary to the extent such obligation arises on or before the Stated Maturity
of the Discount Notes (but excluding, in each case, any accrued dividends) and
(ix) to the extent not otherwise included in this definition, obligations under
Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of
any Person at any date shall be the outstanding principal amount of all
unconditional obligations as described above, as such amount would be reflected
on a balance sheet prepared in accordance with GAAP, and the maximum liability
of such Person, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations described above at such date.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement designed to protect such Person against fluctuations in interest
rates as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts payable on the balance sheet of such Person) or other
extension of credit (including by way of Guarantee or similar arrangement, but
excluding any debt or extension of credit represented by a bank deposit other
than a time deposit) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
Indebtedness or other similar instruments issued by
133
<PAGE> 136
such Person. For purposes of the "-- Limitation on Restricted Payments"
covenant, (i) "Investment" shall include the portion (proportionate to Holdings'
equity interest in a Restricted Subsidiary to be designated as an Unrestricted
Subsidiary) of the fair market value of the net assets of such Restricted
Subsidiary of Holdings at the time that such Restricted Subsidiary is designated
an Unrestricted Subsidiary; provided, however, that upon a redesignation of such
Subsidiary as a Restricted Subsidiary, Holdings shall be deemed to continue to
have a permanent "Investment" in an Unrestricted Subsidiary in an amount (if
positive) equal to (x) Holdings' "Investment" in such Subsidiary at the time of
such redesignation less (y) the portion (proportionate to Holdings' equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time that such Subsidiary is so redesignated a Restricted
Subsidiary; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors and
evidenced by a resolution of such Board of Directors certified in an Officers'
Certificate to the Trustee.
"Issue Date" means the date on which the Old Discount Notes were originally
issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Merger Agreement" means the Agreement and Plan of Merger dated April 10,
1997, between Hedstrom, HC Acquisition Corp. and ERO, Inc.
"Monitoring and Oversight Agreement" means the Monitoring and Oversight
Agreement between Hicks Muse Partners and Holdings and Hedstrom as in effect on
the Issue Date.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to the properties or assets subject to such Asset Disposition), in each case net
of (i) all legal, title and recording tax expenses, commissions and other fees
and expenses incurred, and all Federal, state, foreign and local taxes required
to be paid or accrued as a liability under GAAP, as a consequence of such Asset
Disposition, (ii) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of any
Lien upon such assets, or which must by its terms, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable law, be repaid out
of the proceeds from such Asset Disposition, (iii) all distributions and other
payments required to be made to any Person owning a beneficial interest in
assets subject to sale or minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition, (iv) the deduction of
appropriate amounts to be provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the assets disposed of in
such Asset Disposition and retained by Holdings or any Restricted Subsidiary of
Holdings after such Asset Disposition and (v) any portion of the purchase price
from an Asset Disposition placed in escrow (whether as a reserve for adjustment
of the purchase price, for satisfaction of indemnities in respect of such Asset
Disposition or otherwise in connection with such Asset Disposition); provided,
however, that upon the termination of such escrow, Net Available Cash shall be
increased by any portion of funds therein released to Holdings or any Restricted
Subsidiary.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result of such issuance or sale.
"Non-Recourse Debt" means Indebtedness (i) as to which neither Holdings nor
any Restricted Subsidiary (a) provides any guarantee or credit support of any
kind (including any undertaking, guarantee, indemnity, agreement or instrument
that would constitute Indebtedness) or (b) is directly or indirectly liable (as
a guarantor or otherwise) and (ii) no default with respect to which (including
any rights that the holders thereof may have to take enforcement action against
an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both)
any holder of any other Indebtedness of Holdings or any Restricted Subsidiary to
declare a default under such other Indebtedness or cause the payment thereof to
be accelerated or payable prior to its stated maturity.
134
<PAGE> 137
"Permitted Indebtedness" means (i) Indebtedness of Holdings owing to and
held by any Wholly-Owned Subsidiary or Indebtedness of a Restricted Subsidiary
owing to and held by Hedstrom or any Wholly-Owned Subsidiary; provided, however,
that any subsequent issuance or transfer of any Capital Stock or any other event
which results in any such Wholly-Owned Subsidiary ceasing to be a Wholly-Owned
Subsidiary or any subsequent transfer of any such Indebtedness (except to
Holdings or a Wholly-Owned Subsidiary) shall be deemed, in each case, to
constitute the Incurrence of such Indebtedness by the issuer thereof; (ii)
Indebtedness represented by (x) the Discount Notes and the Senior Subordinated
Notes, (y) any Indebtedness (other than the Indebtedness described in clauses
(i), (ii) and (iv) of paragraph (b) of the covenant described under "Limitation
on Indebtedness" and other than Indebtedness Incurred pursuant to clause (i)
above or clauses (iv), (v) or (vi) below) outstanding on the Issue Date and (z)
any Refinancing Indebtedness Incurred in respect of any Indebtedness described
in this clause (ii) or Incurred pursuant to paragraph (a) of the covenant
described under "Limitation on Indebtedness;" (iii) (A) Indebtedness of a
Restricted Subsidiary Incurred and outstanding on the date on which such
Restricted Subsidiary was acquired by Holdings or a Restricted Subsidiary (other
than Indebtedness Incurred as consideration in, or to provide all or any portion
of the funds or credit support utilized to consummate, the transaction or series
of related transactions pursuant to which such Restricted Subsidiary became a
Subsidiary or was otherwise acquired by Holdings or a Restricted Subsidiary);
provided, however, that at the time such Restricted Subsidiary is acquired by
Holdings or a Restricted Subsidiary, Holdings would have been able to Incur
$1.00 of additional Indebtedness pursuant to paragraph (a) of the covenant
described under "Limitation on Indebtedness" above after giving effect to the
Incurrence of such Indebtedness pursuant to this clause (iii) and (B)
Refinancing Indebtedness Incurred by Holdings or a Restricted Subsidiary in
respect of Indebtedness Incurred by such Restricted Subsidiary pursuant to this
clause (iii); (iv) Indebtedness (A) in respect of performance bonds, bankers'
acceptances and surety or appeal bonds provided by Holdings or any of its
Restricted Subsidiaries to their customers in the ordinary course of their
business, (B) in respect of performance bonds or similar obligations of Holdings
or any of its Restricted Subsidiaries for or in connection with pledges,
deposits or payments made or given in the ordinary course of business in
connection with or to secure statutory, regulatory or similar obligations,
including obligations under health, safety or environmental obligations, (C)
arising from Guarantees to suppliers, lessors, licensees, contractors,
franchisees or customers of obligations (other than Indebtedness) incurred in
the ordinary course of business and (D) under Currency Agreements and Interest
Rate Agreements; provided, however, that in the case of Currency Agreements and
Interest Rate Agreements, such Currency Agreements and Interest Rate Agreements
are entered into for bona fide hedging purposes of Holdings or its Restricted
Subsidiaries (as determined in good faith by the Board of Directors or senior
management of Holdings) and correspond in terms of notional amount, duration,
currencies and interest rates, as applicable, to Indebtedness of Holdings or its
Restricted Subsidiaries Incurred without violation of the Discount Notes
Indenture or to business transactions of Holdings or its Restricted Subsidiaries
on customary terms entered into in the ordinary course of business; (v)
Indebtedness arising from agreements providing for indemnification, adjustment
of purchase price or similar obligations, or from Guarantees or letters of
credit, surety bonds or performance bonds securing any obligations of Holdings
or any of its Restricted Subsidiaries pursuant to such agreements, in each case
Incurred in connection with the disposition of any business assets or Restricted
Subsidiary of Holdings (other than Guarantees of Indebtedness or other
obligations Incurred by any Person acquiring all or any portion of such business
assets or Restricted Subsidiary of Holdings for the purpose of financing such
acquisition) in a principal amount not to exceed the gross proceeds actually
received by Holdings or any of its Restricted Subsidiaries in connection with
such disposition; provided, however, that the principal amount of any
Indebtedness Incurred pursuant to this clause (v), when taken together with all
Indebtedness Incurred pursuant to this clause (v) and then outstanding, shall
not exceed $10 million; (vi) Indebtedness consisting of (A) Guarantees by
Holdings or a Restricted Subsidiary of Indebtedness Incurred by a Wholly-Owned
Subsidiary without violation of the Discount Notes Indenture and (B) Guarantees
by a Restricted Subsidiary of Senior Indebtedness Incurred by Holdings without
violation of the Discount Notes Indenture (so long as such Restricted Subsidiary
could have Incurred such Indebtedness directly without violation of the Discount
Notes Indenture); and (vii) Indebtedness arising from the honoring by a bank or
other financial institution of a check, draft or similar instrument drawn
against insufficient funds in the ordinary course of business, provided that
such Indebtedness is extinguished within ten Business Days of its incurrence.
135
<PAGE> 138
"Permitted Investment" means an Investment by Holdings or any of its
Restricted Subsidiaries in (i) Holdings or a Wholly-Owned Subsidiary of
Holdings; provided, however, that the primary business of such Wholly-Owned
Subsidiary is a Related Business; (ii) another Person if as a result of such
Investment such other Person becomes a Wholly-Owned Subsidiary of Holdings or is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, Holdings or a Wholly-Owned Subsidiary of
Holdings; provided, however, that in each case such Person's primary business is
a Related Business; (iii) Temporary Cash Investments; (iv) receivables owing to
Holdings or any of its Restricted Subsidiaries, if created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms; (v) payroll, travel and similar advances to cover matters
that are expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary course of
business; (vi) loans or advances to employees for purposes of purchasing
Holdings' common stock in an aggregate amount outstanding at any one time not to
exceed $5 million and other loans and advances to employees made in the ordinary
course of business consistent with past practices of Holdings or such Restricted
Subsidiary; (vii) stock, obligations or securities received in settlement of
debts created in the ordinary course of business and owing to Holdings or any of
its Restricted Subsidiaries or in satisfaction of judgments or claims; (viii) a
Person engaged in a Related Business or a loan or advance to Holdings the
proceeds of which are used solely to make an Investment in a Person engaged in a
Related Business or a Guarantee by Holdings of Indebtedness of any Person in
which such Investment has been made; provided, however, that no Permitted
Investments may be made pursuant to this clause (viii) to the extent the amount
thereof would, when taken together with all other Permitted Investments made
pursuant to this clause (viii), exceed $10 million in the aggregate (plus, to
the extent not previously reinvested, any return of capital realized on
Permitted Investments made pursuant to this clause (viii), or any release or
other cancellation of any Guarantee constituting such Permitted Investment);
(ix) Persons to the extent such Investment is received by Holdings or any
Restricted Subsidiary as non-cash consideration for asset dispositions effected
in compliance with the covenant described under "-- Limitations on Sales of
Assets and Subsidiary Stock;" (x) prepayments and other credits to suppliers
made in the ordinary course of business consistent with the past practices of
Holdings and its Restricted Subsidiaries; and (xi) Investments in connection
with pledges, deposits, payments or performance bonds made or given in the
ordinary course of business in connection with or to secure statutory,
regulatory or similar obligations, including obligations under health, safety or
environmental obligations.
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under worker's compensation laws, unemployment insurance
laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United States government bonds
to secure surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import duties or for the payment of rent, in
each case Incurred in the ordinary course of business; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due or being contested in good faith by appropriate proceedings or other
Liens arising out of judgments or awards against such Person with respect to
which such Person shall then be proceeding with an appeal or other proceedings
for review; (c) Liens for property taxes not yet subject to penalties for
non-payment or which are being contested in good faith and by appropriate
proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters of credit
do not constitute Indebtedness; (e) minor survey exceptions, minor encumbrances,
easements or reservations of, or rights of others for, licenses, rights-of-way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real property or
Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of the
business of such Person; (f) Liens securing Indebtedness Incurred to finance the
construction, purchase or lease of, or repairs, improvements or additions to,
property of such Person; provided, however, that the Lien may not extend to any
other property owned by such Person or any of its Subsidiaries at the time the
Lien is Incurred, and the Indebtedness (other than any interest thereon) secured
by the Lien may not be Incurred more than 180 days after the later of the
acquisition, completion of construction, repair, improvement, addition or
commencement of full operation of the property subject to the Lien; (g) Liens to
secure Indebtedness permitted
136
<PAGE> 139
under the provisions described in clause (b)(i) under "-- Certain
Covenants -- Limitation on Indebtedness"; (h) Liens existing on the Issue Date;
(i) Liens on property or shares of Capital Stock of another Person at the time
such other Person becomes a Subsidiary of such Person; provided, however, that
such Liens are not created, incurred or assumed in connection with, or in
contemplation of, such other Person becoming such a Subsidiary; provided
further, however, that such Lien may not extend to any other property owned by
such Person or any of its Subsidiaries; (j) Liens on property at the time such
Person or any of its Subsidiaries acquires the property, including any
acquisition by means of a merger or consolidation with or into such Person or a
Subsidiary of such Person; provided, however, that such Liens are not created,
incurred or assumed in connection with, or in contemplation of, such
acquisition; provided further, however, that the Liens may not extend to any
other property owned by such Person or any of its Subsidiaries; (k) Liens
securing Indebtedness or other obligations of a Subsidiary of such Person owing
to such Person or a Wholly-Owned Subsidiary of such Person; (1) Liens securing
Interest Rate Agreements and Currency Agreements so long as such Interest Rate
Agreements and Currency Agreements relate to Indebtedness that is, and is
permitted to be under the Discount Notes Indenture, secured by a Lien on the
same property securing such Interest Rate Agreements and Currency Agreements;
and (m) Liens to secure any Refinancing (or successive Refinancings) as a whole,
or in part, of any Indebtedness secured by any Lien referred to in the foregoing
clauses (f), (h), (i) and (j); provided, however, that (x) such new Lien shall
be limited to all or part of the same property that secured the original Lien
(plus improvements to or on such property) and (y) the Indebtedness secured by
such Lien at such time is not increased to any amount greater than the sum of
(A) the outstanding principal amount or, if greater, committed amount of the
Indebtedness described under clauses (f), (h), (i) or (j) at the time the
original Lien became a Permitted Lien and (B) an amount necessary to pay any
fees and expenses, including premiums, related to such refinancing, refunding,
extension, renewal or replacement. Notwithstanding the foregoing, "Permitted
Liens" will not include any Lien described in clauses (f), (i) or (j) above to
the extent such Lien applies to any Additional Assets acquired directly or
indirectly from Net Available Cash pursuant to the covenant described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock."
For purposes of this definition, the term "Indebtedness" shall be deemed to
include interest on such Indebtedness.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Productive Assets" means assets of a kind used or usable by Holdings and
its Restricted Subsidiaries in Holdings' business or any Related Business.
A "Public Market" exists at any time with respect to the common stock of
Holdings if (a) the common stock of Holdings is then registered with the
Securities and Exchange Commission pursuant to Section 12(b) or 12(g) of
Exchange Act and traded either on a national securities exchange or in the
National Association of Securities Dealers Automated Quotation System and (b) at
least 15% of the total issued and outstanding common stock of Holdings has been
distributed prior to such time by means of an effective registration statement
under the Securities Act, or pursuant to sales pursuant to Rule 144 under the
Securities Act.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have a
correlative meaning) any Indebtedness of Holdings or any Restricted Subsidiary
existing on the date of the Discount Notes Indenture or Incurred in compliance
with the Discount Notes Indenture (including Indebtedness of Holdings that
refinances Indebtedness of any Restricted Subsidiary and Indebtedness of any
Restricted Subsidiary that refinances Indebtedness of another Restricted
Subsidiary) including Indebtedness that refinances Refinancing Indebtedness;
provided, however, that (i) the Refinancing Indebtedness has a Stated Maturity
no earlier than the earlier of (A) the first anniversary of the Stated Maturity
of the Discount Notes and (B) the Stated Maturity of the Indebtedness being
refinanced, (ii) the Refinancing Indebtedness has an
137
<PAGE> 140
Average Life at the time such Refinancing Indebtedness is Incurred that is equal
to or greater than the lesser of (A) the Average Life of the Discount Notes and
(B) the Average Life of the Indebtedness being refinanced, and (iii) such
Refinancing Indebtedness is Incurred in an aggregate principal amount (or if
issued with original issue discount, an aggregate issue price) that is equal to
(or 101% of, in the case of a refinancing of the Discount Notes in connection
with a Change of Control) or less than the sum of the aggregate principal amount
(or if issued with original issue discount, the aggregate accreted value) then
outstanding of the indebtedness being refinanced, plus applicable premium and
defeasance costs and reasonable fees and expenses paid in connection with
refinancing.
"Related Business" means any business which is the same as or related,
ancillary or complementary to any of the businesses of Holdings and its
Restricted Subsidiaries on the date of the Discount Notes Indenture, as
reasonably determined by Holdings's Board of Directors.
"Restricted Subsidiary" means any Subsidiary of Holdings other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby Holdings or a Restricted Subsidiary
transfers such property to a Person and Holdings or a Subsidiary leases it from
such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of Holdings or a Subsidiary
Guarantor secured by a Lien.
"Securities Act" means the Securities Act of 1933, as amended.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of Holdings within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision.
"Subordinated Obligation" means any Indebtedness of Holdings (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Discount Notes pursuant to a written
agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person. Unless otherwise specified herein, each reference to a Subsidiary shall
refer to a Subsidiary of Holdings.
"Temporary Cash Investments" means any of the following: (i) any Investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) Investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America having capital, surplus and undivided profits
aggregating in excess of $250 million (or the foreign currency equivalent
thereof) and whose long-term debt, or whose parent holding company's long-term
debt, is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act), (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) Investments in commercial paper, maturing not more than 180
days after the date of acquisition, issued by a corporation (other than an
Affiliate of Holdings) organized and in existence under the laws of the United
States of America or any foreign country recognized by the United States of
America with a rating at the time as of which any investment therein is made of
"P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or
higher) according to Standard and Poor's Ratings Group, (v) Investments in
securities with maturities of six months or less from the date of acquisition
138
<PAGE> 141
issued or fully guaranteed by any state, commonwealth or territory of the United
States of America, or by any political subdivision or taxing authority thereof,
and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's
Investors Service, Inc. and (vi) Investments in mutual funds whose investment
guidelines restrict such funds' investments to those satisfying the provisions
of clauses (i) through (v) above.
"Unrestricted Subsidiary" means (i) any Subsidiary of Holdings that at the
time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
Holdings (including any newly acquired or newly formed Subsidiary of Holdings)
to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, Holdings or any Subsidiary of Holdings that is not a
Subsidiary of the Subsidiary to be so designated; provided, however, that either
(A) the Subsidiary to be so designated has total consolidated assets of $10,000
or less or (B) if such Subsidiary has consolidated assets greater than $10,000,
then such designation would be permitted under "Limitation on Restricted
Payments." The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided, however, that immediately after giving
effect to such designation (x) Holdings could Incur $1.00 of additional
Indebtedness under clause (a) of "-- Limitation on Indebtedness" and (y) no
Default shall have occurred and be continuing. Any such designation by the Board
of Directors shall be evidenced to the Trustee by promptly filing with the
Trustee a copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors thereof.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of Holdings, at
least 99% of the Capital Stock of which (other than directors' qualifying
shares) is owned by Holdings or another Wholly-Owned Subsidiary; provided,
however, that until the date that is 180 days following the Issue Date, ERO,
Inc. shall be deemed to be a Wholly-Owned Subsidiary of Holdings so long as
Holdings or a Wholly-Owned Subsidiary owns at least a percentage of the Capital
Stock of ERO, Inc. equal to the percentage of such Capital Stock acquired by HC
Acquisition Corp. in connection with its tender offer for the Capital Stock of
ERO, Inc.
139
<PAGE> 142
CERTAIN MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
WITH RESPECT TO THE NEW NOTES
The following discussion summarizes the material United States federal
income tax considerations generally applicable to holders acquiring New Senior
Subordinated Notes or New Discount Notes in the Exchange Offers, but does not
purport to be a complete analysis of all potential consequences. The discussion
is based upon the provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), the applicable Treasury Regulations promulgated and proposed
thereunder, judicial authority and current administrative rulings and practice,
all of which are subject to change, possibly with retroactive effect. Except as
specifically provided below, the following discussion is limited to the U.S.
federal income tax consequences relevant to a holder of a New Senior
Subordinated Note or a New Discount Note who or which is (i) an individual who
is a citizen or resident of the United States, (ii) a corporation or partnership
created or organized under the laws of the United States, or any political
subdivision thereof, or (iii) an estate or trust otherwise subject to U.S.
federal income taxation of its worldwide income (each a "U.S. Holder"). For
taxable years beginning after December 31, 1996, a trust is a U.S. Holder if a
court within the United States is able to exercise primary supervision of the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. This discussion
does not purport to deal with all aspects of U.S. federal income taxation that
might be relevant to particular holders in light of their personal investment
circumstances or status, nor does it discuss the U.S. federal income tax
consequences to certain types of holders subject to special treatment under the
U.S. federal income tax laws (for example, financial institutions, insurance
companies, dealers in securities, tax-exempt organizations, or taxpayers holding
the New Senior Subordinated Notes or the New Discount Notes as part of a
"straddle", "hedge" or "conversion transaction"). Moreover, the effect of any
applicable state, local or foreign tax laws is not discussed.
Except as otherwise indicated below, this discussion assumes that the New
Senior Subordinated Notes or the New Discount Notes are held as capital assets
(as defined in Section 1221 of the Code) by the holders thereof. The Issuers
will treat the New Senior Subordinated Notes or the New Discount as indebtedness
for U.S. federal income tax purposes, and the balance of the discussion is based
on the assumption that such treatment will be respected.
Prospective holders are urged to consult their own tax advisors regarding
the federal, state, local and other tax considerations of the acquisition,
ownership and disposition of the New Senior Subordinated Notes or the New
Discount Notes.
U.S. HOLDERS
Stated Interest on the New Senior Subordinated Notes. The stated interest
on the New Senior Subordinated Notes will be included in income by a U.S. Holder
in accordance with such U.S. Holder's usual method of accounting.
Stated Interest on the New Discount Notes. The stated interest on the New
Discount Notes will be included in the amount of OID with respect to such New
Discount Notes. A U.S. Holder will not be required to report separately as
taxable income actual payments of stated interest with respect to the New
Discount Notes.
Original Issue Discount Applicable to the New Discount Notes. For the
reasons discussed below, the Old Discount Notes were issued with OID.
Accordingly, each U.S. Holder of a New Discount Note will be required to include
in income (regardless of whether such U.S. Holder is a cash or accrual basis
taxpayer) in each taxable year, in advance of the receipt of cash payments on
such New Discount Notes, that portion of the OID, computed on a constant yield
basis, attributable to each day during such year on which the holder held the
New Discount Notes and the Old Discount Notes exchanged for such New Discount
Notes. See " -- Taxation of Original Issue Discount" below.
For U.S. federal income tax purposes, the New Discount Notes are regarded
as the same indebtedness as the Old Discount Notes. Hence, any reference herein
to the New Discount Notes includes a reference to the Old Discount Notes, and
any reference to the Old Discount Notes includes a reference to the New Discount
Notes.
The amount of OID with respect to each New Discount Note is equal to the
excess of (i) its "stated redemption price at maturity" over (ii) the "issue
price" of the Old Discount Note.
140
<PAGE> 143
Because the original purchasers of the Old Discount Notes also acquired
Shares, each Old Discount Note was treated for U.S. federal income tax purposes
as having been issued as part of an "investment unit" (i.e., the Units)
consisting of such Old Discount Note and the associated Shares. The "issue
price" of an Old Discount Note will be equal to the portion of the "issue price"
of the Unit allocable to such Old Discount Note based upon the relative fair
market values of such Old Discount Note and the associated Shares comprising the
Unit. Because the Units were issued for money, the "issue price" of each Unit
was the first price at which a substantial amount of the Units were sold. For
purposes of determining the issue price of the Units, sales to bond houses,
brokers, or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers (which includes the Initial
Purchasers) are ignored. Furthermore, the Treasury Regulations provide that the
issuer's allocation of the issue price of the investment unit is binding on all
holders of the investment unit, unless the holder explicitly discloses (on a
form prescribed by the Internal Revenue Service (the "Service") and attached to
the U.S. Holder's timely filed U.S. federal income tax return for the tax year
that includes the acquisition date of the investment unit) that its allocation
of the issue price of the investment unit is different from the issuer's
allocation. The allocation by Holdings is not, however, binding on the Service.
Under the Regulations, the "stated redemption price at maturity" of a New
Discount Note will equal the sum of all cash payments (including principal and
stated interest) required to be made on such New Discount Note (including
payments on the Old Discount Note exchanged for such New Discount Note) and the
excess of the aggregate of such amounts over the issue price of the Old Discount
Note exchanged for such New Discount Note would be included in the holder's
income as OID.
Taxation of Original Issue Discount. A U.S. Holder of a debt instrument
issued with OID is required to include in gross income for U.S. federal income
tax purposes an amount equal to the sum of the "daily portions" of such OID for
all days during the taxable year on which such holder holds the debt instrument.
The daily portions of OID required to be included in a U.S. Holder's gross
income in a taxable year will be determined under a constant yield method by
allocating to each day during the taxable year on which the U.S. Holder holds
the debt instrument a pro rata portion of the OID on such debt instrument which
is attributable to the "accrual period" in which such day is included. The
amount of the OID attributable to each accrual period will be the product of the
"adjusted issue price" of the New Discount Note at the beginning of such accrual
period multiplied by the "yield to maturity" of the New Discount Note (properly
adjusted for the length of the accrual period). The New Discount Note's "yield
to maturity" is that discount rate which, when used in computing the present
value of all principal and stated interest payments to be made under a New
Discount Note (including payments on the Old Discount Note exchanged for such
New Discount Note), produces an amount equal to the issue price of the Old
Discount Note exchanged for such New Discount Note. The "adjusted issue price"
of the New Discount Note at the beginning of an accrual period will generally be
the issue price of the Old Discount Note exchanged for such New Discount Note
plus the aggregate amount of OID that accrued in all prior accrual periods
(determined without regard to the rules described below concerning acquisition
premium) less any cash payments on the New Discount Note (including payments on
the Old Discount Note exchanged for such New Discount Note). An "accrual period"
may be of any length and may vary in length over the term of the debt
instrument, provided that each accrual period is not longer than one year and
each scheduled payment of principal or interest occurs either on the final day
or the first day of an accrual period.
Acquisition Premium on New Discount Notes. A U.S. Holder of a New Discount
Note who purchases such New Discount Note for an amount that is greater than its
then adjusted issue price but equal to or less than the sum of all amounts
payable on the New Discount Note after the purchase date will be considered to
have purchased such New Discount Note at an "acquisition premium." Under the
acquisition premium rules, the amount of OID which such U.S. Holder must include
in income with respect to such New Discount Note for any taxable year will be
reduced by the portion of such acquisition premium properly allocable to such
year.
Amortizable Bond Premium on New Senior Subordinated Notes. If the holder's
basis in the New Senior Subordinated Notes exceeds the amount payable at the
maturity date (or earlier call date, under certain circumstances), such excess
will be deductible by the holder of the New Senior Subordinated Notes as
amortizable bond premium over the term of the New Senior Subordinated Notes
(taking into account earlier call dates, under certain circumstances), under a
yield-to-maturity formula, if an election by the holder under Section 171 of the
Code is made or is already in effect. An election under Section 171 of the Code
is available
141
<PAGE> 144
only if the New Senior Subordinated Notes are held as capital assets. This
election is revocable only with the consent of the Service and applies to all
obligations owned or acquired by the holder on or after the first day of the
taxable year to which the election applies. To the extent the excess is deducted
as amortizable bond premium, the holder's adjusted tax basis in the New Senior
Subordinated Notes will be reduced. Except as may otherwise be provided in
future Treasury Regulations, the amortizable bond premium will be treated as an
offset to interest income on the New Senior Subordinated Notes rather than as a
separate deduction item. Recently proposed Treasury Regulations, which are not
yet effective, would modify the described rules under Section 171 in order to
coordinate such rules with the rules relating to original issue discount.
Market Discount on New Notes. Generally, the market discount rules
discussed below will not apply to a U.S. Holder of a New Note received in one of
the Exchange Offers for an Old Note acquired when it was originally issued.
These rules would apply, however, to an original holder whose tax basis in the
New Note is less than such New Note's "issue price" (as defined above).
Gain recognized on the disposition (including a redemption) by a U.S.
Holder of a New Note that has accrued market discount will be treated as
ordinary income, and not capital gain, to the extent of the accrued market
discount, provided that the amount of market discount exceeds a statutorily
defined de minimis amount. "Market discount" is defined as the excess, if any,
of the "revised issue price" (as defined below) in the case of the New Discount
Notes or the "stated redemption price at maturity" in the case of the New Senior
Subordinated Notes over the tax basis of the debt obligation in the hands of the
holder immediately after its acquisition. The "revised issue price" of a debt
obligation generally equals the sum of its issue price and the total amount of
OID includible in the gross income of all holders for periods before the
acquisition of the debt obligation by the current holder (without regard to any
reduction in such income resulting from any prior purchase at an acquisition
premium) and less any cash payments in respect of such debt obligation. The
"stated redemption price at maturity" of the New Senior Subordinated Notes will
equal the stated principal amount thereof.
Unless the U.S. Holder elects otherwise, the accrued market discount would
be the amount calculated by multiplying the market discount by a fraction, the
numerator of which is the number of days the obligation has been held by the
U.S. Holder and the denominator of which is the number of days after the U.S.
Holder's acquisition of the obligation up to and including its maturity date.
A U.S. Holder of a New Note acquired at a market discount also may be
required to defer the deduction of all or a portion of the interest on any
indebtedness incurred or maintained to carry the New Note until it is disposed
of in a taxable transaction. Moreover, to the extent of any accrued market
discount on such New Notes, any partial principal payment with respect to New
Notes (possibly including stated interest payments on the New Discount Notes)
will be includible as ordinary income upon receipt as will the New Note's fair
market value on certain otherwise non-taxable transfers (such as gifts).
A U.S. Holder of a New Note acquired at market discount may elect to
include the market discount in income as it accrues (on either a ratable or
constant yield to maturity basis). This election would apply to all market
discount obligations acquired by the electing U.S. Holder on or after the first
day of the first taxable year to which the election applies. The election may be
revoked only with the consent of the Service. If a holder of a New Note so
elects to include market discount in income currently, the above-discussed rules
with respect to ordinary income recognition resulting from sales and certain
other disposition transactions and to deferral of interest deductions would not
apply.
Election to Apply OID Principles. A U.S. Holder may generally, upon
election, include in income all interest (including stated interest, acquisition
discount, OID, de minimis OID, market discount, de minimis market discount, and
unstated interest, as adjusted by any amortizable bond premium or acquisition
premium) that accrues on a New Note by using the constant yield method
applicable to OID obligations, subject to certain limitations and exceptions.
The election is to be made for the taxable year in which the U.S. Holder
acquired the obligation, and may not be revoked without the consent of the
Service.
Tax Basis. A U.S. Holder's initial tax basis in a New Note will be equal to
the purchase price paid by such holder for the Old Note exchanged for such New
Note or for a New Note (as the case may be). In the case of a
142
<PAGE> 145
New Discount Note exchanged for an Old Discount Note, a U.S. Holder's initial
tax basis would be the portion of the purchase price of the Unit allocable to
the Old Discount Note exchanged for such new Discount Note.
A U.S. Holder's tax basis in a New Discount Note will be increased by the
amount of OID that is included in such U.S. Holder's income pursuant to the
foregoing rules (taking into account acquisition premium) through the day
preceding the day of disposition (and the accruals of market discount, if any,
which the U.S. Holder elected to include in gross income on an annual basis) and
will be decreased by the amount of any cash payments received. A U.S. Holder's
tax basis in a New Senior Subordinated Note will be increased by the amount of
accrued market discount, if any, which the U.S. Holder elected to include in
gross income on an annual basis and decreased by the amortizable bond premium,
if any, which the U.S. Holder has elected to offset against interest income.
Sale or Redemption. Unless a nonrecognition provision applies, the sale,
exchange, redemption or other disposition of New Notes will be a taxable event
for U.S. federal income tax purposes. In such event, a U.S. Holder will
recognize gain or loss equal to the difference between (i) the amount of cash
plus the fair market value of any property received upon such sale, exchange,
redemption or other taxable disposition (except to the extent that amounts
received are attributable, in the case of the New Senior Subordinated Notes, to
accrued interest, which portion of the consideration would be taxed as ordinary
income if the interest was previously untaxed) and (ii) the holder's adjusted
tax basis therein. Subject to the discussion above under the caption "Market
Discount" with respect to the New Notes, such gain or loss should be capital
gain or loss and will be long-term capital gain or loss if the New Notes will
have been held by the holder for more than one year at the time of such sale,
exchange, redemption or other disposition.
Applicable High-Yield Discount Obligations. Pursuant to section 163 of the
Code and because it appears that the New Discount Notes are "applicable high
yield discount obligations" ("AHYDOs"), a portion of the OID accruing on the New
Discount Notes may be treated as a dividend generally eligible for the
dividends-received deduction in the case of corporate holders (and subject to
the limitations described above), and Holdings (A) would not be entitled to
deduct the "disqualified portion" of the OID accruing on the New Discount Notes
and (B) would be allowed to deduct the remainder of the OID only when paid in
cash. The New Discount Notes appear to be AHYDOs because their yield to maturity
equals or exceeds 11.99% (the sum of five percentage points and the applicable
federal rate (the "AFR") in effect for the calendar month in which the Old
Discount Notes were issued (which applicable federal rate was 6.99% for June
1997)).
Because the New Discount Notes appear to be AHYDOs, for purposes of the
dividends-received deduction a corporate holder would be treated as receiving
dividend income to the extent of the lesser of (i) Holdings' current and
accumulated earnings and profits, and (ii) the "disqualified portion" of the OID
of such New Discount Note. The "disqualified portion" of the OID is equal to the
lesser of (i) the amount of OID or (ii) the portion of the "total return" (i.e.,
the excess of all payments to be made with respect to a New Discount Notes over
its issue price) in excess of the AFR plus six percentage points (or 12.99%).
Backup Withholding and Information Reporting. Under the Code, U.S. Holders
of New Senior Subordinated Notes and New Discount Notes may be subject, under
certain circumstances, to information reporting and "backup withholding" at a
31% rate with respect to cash payments in respect of principal (and premium, if
any), OID, interest, dividends and the gross proceeds from dispositions thereof.
Backup withholding applies only if the U.S. Holder (i) fails to furnish its
social security or other taxpayer identification number ("TIN") within a
reasonable time after a request therefor, (ii) furnishes an incorrect TIN, (iii)
fails to report properly interest or dividends, or (iv) fails, under certain
circumstances, to provide a certified statement, signed under penalty of
perjury, that the TIN provided is its correct number and that it is not subject
to backup withholding. Any amount withheld from a payment to a U.S. Holder under
the backup withholding rules is allowable as a credit (and may entitle such
holder to a refund) against such U.S. Holder's U.S. federal income tax
liability, provided that the required information is furnished to the Service.
Certain persons are exempt from backup withholding, including corporations and
financial institutions. U.S. Holders of New Senior Subordinated Notes and New
Discount Notes should consult their tax advisors as to their qualification for
exemption from backup withholding and the procedure for obtaining such
exemption.
143
<PAGE> 146
The Issuers will furnish annually to the Service and to record holders of
the New Notes (to whom it is required to furnish such information) information
relating to the amount of OID, interest and dividends, as applicable. Because
this information will be based upon the adjusted issue price of the New Discount
Notes as if the holder were an original holder, purchasers who purchase New
Discount Notes for an amount other than the adjusted issue price at the time of
purchase will be required to determine for themselves the amount of OID, if any,
that they are required to report. See also "-- Acquisition Premium on Discount
Notes" and "-- Market Discount on Notes."
THE FOREGOING DISCUSSION IS BASED ON THE PROVISIONS OF THE CODE,
REGULATIONS, RULINGS AND JUDICIAL DECISIONS NOW IN EFFECT, ALL OF WHICH ARE
SUBJECT TO CHANGE. ANY SUCH CHANGES MAY BE APPLIED RETROACTIVELY IN A MANNER
THAT COULD ADVERSELY AFFECT U.S. HOLDERS OF NEW NOTES. EACH HOLDER OF ANY OF THE
NEW NOTES SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES TO IT, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN
AND OTHER TAX LAWS, OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NEW NOTES.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a Holder of a New Note that is not a U.S. Holder (a
"Non-U.S. Holder").
For purposes of the following discussion, interest and gain on the sale,
exchange or other disposition of a New Note will be considered to be "U.S. trade
or business income" if such income or gain is (i) effectively connected with the
conduct of a U.S. trade or business or (ii) in the case of a treaty resident,
attributable to a permanent establishment (or, in the case of an individual, a
fixed base) in the United States.
Stated Interest and OID on New Notes. Generally any interest or OID paid to
a Non-U.S. Holder of a New Note that is not U.S. trade or business income will
not be subject to U.S. federal income tax if the interest or OID qualifies as
"portfolio interest." Generally interest and OID on the New Notes will qualify
as portfolio interest if (i) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total voting power of all voting stock of
Hedstrom (in the case of the New Senior Subordinated Notes) or Holdings (in the
case of the New Discount Notes) and (ii) such holder is not a "controlled
foreign corporation" with respect to which Hedstrom or Holdings (as the case may
be) is a "related person" within the meaning of the Code, and (iii) the
beneficial owner, under penalty of perjury, certifies that the beneficial owner
is not a United States person and such certificate provides the beneficial
owner's name and address, and (iv) the Non-U.S. Holder is not a bank receiving
interest on the extension of credit made pursuant to a loan agreement made in
the ordinary course of its trade or business.
The gross amount of payments to a Non-U.S. Holder of interest or OID that
do not qualify for the portfolio interest exception and that are not effectively
connected with the conduct of a U.S. trade or business will be subject to U.S.
federal income tax at the rate of 30%, unless a U.S. income tax treaty applies
to reduce or eliminate withholding. U.S. trade or business income will be taxed
on a net basis at regular U.S. rates rather than the 30% gross rate. In the case
of a Non-U.S. Holder that is a corporation, such United States trade or business
income may also be subject to the branch profits tax (which is generally imposed
on a foreign corporation on the actual or deemed repatriation from the United
States of earnings and profits attributable to United States trade or business
income) at a 30% rate. The branch profits tax may not apply (or may apply at a
reduced rate) if a recipient is a qualified resident of certain countries with
which the United States has an income tax treaty. To claim the benefit of a tax
treaty or to claim exemption from withholding because the income is U.S. trade
or business income, the Non-U.S. Holder must provide a properly executed Form
1001 or 4224 (or such successor forms as the Service designate), as applicable,
prior to the payment of interest. These forms must be periodically updated.
Under proposed U.S. Treasury regulations, not currently in effect, however, a
Non-U.S. Holder of Notes who wishes to claim the benefit of an applicable treaty
rate would be required to satisfy applicable certification and other
requirements, which would include the requirement that the Non-U.S. Holder file
a form containing the holder's name and address or provide certain documentary
evidence issued by foreign governmental authorities as proof of residence in the
foreign country. Certain special procedures are provided in the proposed
regulations
144
<PAGE> 147
for payment through qualified intermediaries. Because the New Discount Notes
appear to be AHYDOs, the recharacterization of a portion of OID as dividends as
described above will not apply for purposes of U.S. withholding tax.
Sale, Exchange or Redemption of New Notes. Except as described below and
subject to the discussion concerning backup withholding, any gain realized by a
Non-U.S. Holder on the sale, exchange, redemption or other disposition of a New
Note generally will not be subject to U.S. federal income tax, unless (i) such
gain is U.S. trade or business income, (ii) subject to certain exceptions, the
Non-U.S. Holder is an individual who holds the New Note as a capital asset, is
present in the United States for 183 days or more in the taxable year of the
disposition, and either has a "tax home" (as defined for U.S. federal income tax
purposes) in the United States or an office or other fixed place of business in
the United States to which such disposition is attributable and (iii) the
Non-U.S. Holder is subject to tax pursuant to the provisions of U.S. tax law
applicable to certain U.S. expatriates (including certain former citizens or
residents of the United States).
Federal Estate Tax. New Notes held (or treated as held) by an individual
who is not a citizen or resident of the United States (for U.S. federal estate
tax purposes) at the time of his or her death will not be included in such
individual's gross estate for U.S. federal estate tax purposes provided that (i)
the individual does not actually or constructively own 10% or more of the total
voting power of all voting stock of Hedstrom or Holdings (as the case may be)
and (ii) income on the New Notes was not effectively connected with the conduct
of a U.S. trade or business.
Information Reporting and Backup Withholding. Hedstrom and Holdings must
report annually to the Service and to each Non-U.S. Holder any interest or OID
that is subject to withholding, or that is exempt from U.S. withholding tax
pursuant to a tax treaty, or interest or OID that is exempt from U.S. tax under
the portfolio interest exception. Copies of these information returns may also
be made available under the provisions of a specific treaty or agreement to the
tax authorities of the country in which the Non-U.S. Holder resides. In the case
of payments of interest (including OID) to Non-U.S. Holders, temporary Treasury
Regulations provide that information reporting and backup withholding at a rate
of 31% will not apply to such payments with respect to which either the
requisite certification has been received or an exemption has otherwise been
established (provided that neither the payor nor its paying agent has actual
knowledge that the holder is a U.S. person or the conditions of any other
exemption are not, in fact, satisfied).
The Treasury regulations provide that backup withholding and information
reporting will not apply to payments of principal on the New Notes by Hedstrom
or Holdings to a Non-U.S. Holder, if the Holder certifies as to its non-U.S.
status under penalties of perjury or otherwise establishes an exemption
(provided that neither Hedstrom nor Holdings nor their paying agents has actual
knowledge that the holder is a United States person or that the conditions of
any other exemption are not, in fact, satisfied.)
The payment of the proceeds from the disposition of New Notes to or through
the United States office of any broker, U.S. or foreign, will be subject to
information reporting and possibly backup withholding unless the owner certifies
as its non-U.S. status under penalty of perjury or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
holder is a U.S. person or that the conditions of any other exemption are not,
in fact, satisfied. The payment of the proceeds from the disposition of a New
Note to or through a non-U.S. office of a non-U.S. broker that is not a U.S.
related person will not be subject to information reporting or backup
withholding. For this purpose, a "U.S. related person" is (i) a "controlled
foreign corporation" for U.S. federal income tax purposes or (ii) a foreign
person 50% or more of whose gross income from all sources for the three-year
period ending with the close of its taxable year preceding the payment (or for
such part of the period that the broker has been in existence) is derived from
activities that are effectively connected with the conduct of a United States
trade or business.
In the case of the payment of proceeds from the disposition of New Notes to
or through a non-U.S. office of a broker that is either a U.S. person or a U.S.
related person, the regulations require information reporting on the payment
unless the broker has documentary evidence in its files that the owner is a
Non-U.S. Holder and the broker has no knowledge to the contrary. Backup
withholding will not apply to payments made through foreign offices of a broker
that is not a U.S. person or a U.S. related person (absent actual knowledge that
the payee is a U.S. person).
145
<PAGE> 148
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY,
EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISER AS TO PARTICULAR TAX
CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF THE NEW NOTES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS,
AND OF ANY PROPOSED CHANGES IN APPLICABLE LAWS.
146
<PAGE> 149
DESCRIPTION OF CAPITAL STOCK
The following summarizes certain provisions of Holdings' Restated
Certificate of Incorporation, as amended (the "Certificate of Incorporation").
Such summary does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all of the provisions of the Certificate of
Incorporation, copies of which are available as set forth under "Available
Information."
GENERAL
The Certificate of Incorporation provides for, among other things, the
authorization of 100,000,000 shares of Holdings Common Stock, 40,000,000 shares
of Holdings Non-Voting Common Stock and 10,000,000 shares of undesignated
preferred stock (the "Preferred Stock"). As of June 30, 1997, there were
36,127,395 shares of Holdings Common Stock, 31,520,000 shares of Holdings
Non-Voting Common Stock and no shares of Preferred Stock outstanding. In
addition, Holdings had 2,174,216 shares of Holdings Common Stock reserved for
issuance upon exercise of outstanding options granted under the 1995 Option Plan
and 31,520,000 shares of Holdings Common Stock reserved for issuance upon
conversion of Holdings Non-Voting Common Stock.
COMMON STOCK
All of the issued and outstanding shares of Holdings Common Stock and
Holdings Non-Voting Common Stock are fully paid and non-assessable. The Holdings
Common Stock and Holdings Non-Voting Common Stock are substantially identical
except with respect to voting and conversion rights. Holders of Holdings Common
Stock are entitled to one vote per share on all matters to be voted on by
stockholders whereas holders of Holdings Non-Voting Common Stock generally have
no right to vote except as may be specified in the Certificate of Incorporation
or as required by applicable law. Subject to the rights of holders of any class
or series of Preferred Stock and the restrictions, if any, imposed by
indebtedness outstanding from time to time, the holders of Holdings Common Stock
and Holdings Non-Voting Common Stock are entitled to receive dividends and other
distributions on a pro rata basis as and when declared by the Board of Directors
of Holdings out of any funds of Holdings legally available therefor. Holders of
Holdings Common Stock and Holdings Non-Voting Common Stock have no preemptive,
subscription, redemption or sinking fund rights under the terms of the
Certificate of Incorporation, but each holder of Holdings Common Stock and
Holdings Non-Voting Common Stock who is a party to the Stockholders Agreement is
entitled to the preemptive rights granted therein. See "Stock Ownership and
Certain Transactions -- Certain Transactions -- Stockholders Agreement." Shares
of Holdings Non-Voting Common Stock are convertible into shares of Holdings
Common Stock at any time and from time to time at the option of the holders
thereof.
In connection with the Units Offering, 2,705,896 shares of Holdings Common
Stock were issued. Such shares will not trade separately from the Old Discount
Notes until the commencement of the Discount Notes Exchange Offer or the
effectiveness of a shelf registration statement with respect to the Old Discount
Notes or such earlier date after July 12, 1997, as the Initial Purchasers may
determine. Pursuant to a Common Stock Registration Rights Agreement, dated as of
June 9, 1997, among Holdings and the Initial Purchasers, Holdings is required to
file a shelf registration statement with respect to such shares of Holdings
Common Stock.
PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors of
Holdings to create and issue one or more classes or series of Preferred Stock
and to determine the rights and preferences of each class or series, to the
extent permitted by the Certificate of Incorporation and applicable law. The
Board of Directors of Holdings may determine, without the further vote or action
by Holding's stockholders: (i) whether or not the class or series is to have
voting rights, full, special, or limited, or is to be without voting rights, and
whether or not such class or series is to be entitled to vote as a separate
class either alone or together with the holders of one or more other classes or
series of stock; (ii) the number of shares to constitute the class or series and
the designations thereof; (iii) the preferences, and relative, participating,
optional, or other special rights, if any, and the qualifications, limitations,
or restrictions thereof, if any, with respect to any class or series; (iv)
whether or not the shares of any class or series shall be redeemable at the
option of Holdings or the holders thereof or upon the happening of any
147
<PAGE> 150
specified event and, if redeemable, the redemption price or prices (which may be
payable in the form of cash, notes, securities, or other property), and the time
or times at which, and the terms and conditions upon which, such shares shall be
redeemable and the manner of redemption; (v) whether or not the shares of a
class or series shall be subject to the operation of retirement or sinking funds
to be applied to the purchase or redemption of such shares for retirement, and,
if such retirement or sinking fund or funds are to be established, the annual
amount thereof, and the terms and provisions relative to the operation thereof;
(vi) the dividend rate, whether dividends are payable in cash, stock of
Holdings, or other property, the conditions upon which and the times when such
dividends are payable, the preference to or the relation to the payment of
dividends payable on any other class or classes or series of stock, whether or
not such dividends shall be cumulative or noncumulative, and if cumulative, the
date or dates from which such dividends shall accumulate; (vii) the preferences,
if any, and the amounts thereof which the holders of any class or series thereof
shall be entitled to receive upon the voluntary or involuntary dissolution of,
or upon any distribution of the assets of, Holdings; (viii) whether or not the
shares of any class or series, at the option of Holdings or the holder thereof
or upon the happening of any specified event, shall be convertible into or
exchangeable for, the shares of any other class or classes or of any other
series of the same or any other class or classes of stock, securities, or other
property of Holdings and the conversion price or prices or ratio or ratios or
the rate or rates at which such exchange may be made, with such adjustments, if
any, as shall be stated and expressed or provided for in such resolution or
resolutions; and (ix) such other special rights and protective provisions with
respect to any class or series as may to the Board of Directors of Holdings seem
advisable.
148
<PAGE> 151
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
an Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Issuers have agreed that, for a period of 180 days after
the applicable Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale. In addition, until March 5, 1998 all dealers effecting transactions in
the New Notes may be required to deliver a Prospectus.
The Issuers will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to an Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to an
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the applicable Expiration Date, Hedstrom
will promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Issuers have agreed to pay all expenses
incident to the Exchange Offers (including the expenses of one counsel for the
holders of the Old Notes) other than commissions or concessions of any brokers
or dealers and will indemnify holders of the Old Notes (including any
broker-dealers) against certain liabilities, including certain liabilities under
the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the Securities offered hereby will be
passed upon for Holdings and Hedstrom by Weil, Gotshal & Manges LLP, Dallas,
Texas.
INDEPENDENT AUDITORS
The audited consolidated financial statements of Holdings included in this
Registration Statement have been audited by Arthur Andersen LLP, independent
certified public accountants, to the extent and for the periods indicated in
their report thereon, and are included herein in reliance upon the authority of
said firm as experts in giving said reports. The audited financial statements of
ERO, Inc. included in this Registration Statement have been audited by Price
Waterhouse LLP, independent certified public accountants, to the extent and for
the periods indicated in their report thereon, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
149
<PAGE> 152
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY:
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of December 31, 1996 and
July 31, 1996.......................................... F-3
Consolidated Income Statements for the five months ended
December 31, 1996, and for each of the fiscal years
ended July 31, 1996, 1995, and 1994.................... F-4
Consolidated Statements of Stockholders' Equity for the
five months ended December 31, 1996, and for each of
the fiscal years ended July 31, 1996, 1995 and 1994.... F-5
Consolidated Statements of Cash Flows for the five months
ended December 31, 1996 and for each of the fiscal
years ended July 31, 1996, 1995 and 1994............... F-6
Notes to Consolidated Financial Statements................ F-7
Consolidated Balance Sheets as of June 30, 1997
(unaudited) and December 31, 1996...................... F-23
Consolidated Income Statements for the six months ended
June 30, 1997 and 1996
(unaudited)............................................ F-24
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 1997 (unaudited)................. F-25
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 (unaudited)............... F-26
Notes to Consolidated Financial Statements (unaudited).... F-27
ERO, INC.:
Report of Independent Public Accountants.................. F-37
Consolidated Balance Sheets as of December 31, 1996, and
1995................................................... F-38
Consolidated Income Statements for the years ended
December 31, 1996, 1995, and 1994...................... F-39
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994....................... F-40
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994........... F-41
Notes to Consolidated Financial Statements................ F-42
Consolidated Balance Sheets as of March 31, 1997
(unaudited) and December 31, 1996...................... F-55
Consolidated Income Statements for the three months ended
March 31, 1997 and 1996
(unaudited)............................................ F-56
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996 (unaudited).............. F-57
Notes to Consolidated Financial Statements (unaudited).... F-58
</TABLE>
F-1
<PAGE> 153
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Hedstrom Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Hedstrom
Holdings, Inc. (a Delaware corporation) and subsidiary as of December 31, 1996,
and July 31, 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for the five months ended December 31,
1996, and for each of the fiscal years ended July 31, 1996, 1995, and 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hedstrom Holdings, Inc. and
subsidiary as of December 31, 1996, and July 31, 1996, and the results of their
operations and their cash flows for the five months ended December 31, 1996, and
for each of the fiscal years ended July 31, 1996, 1995, and 1994, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
April 11, 1997 (except with respect
to the matter discussed in Note 16,
as to which the date is June 12, 1997)
F-2
<PAGE> 154
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1996, AND JULY 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1996 1996
------------ --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............. $ 533 $ 7,998
Trade accounts receivable, net of
allowance for doubtful accounts of
$505 and $441, respectively........ 13,586 23,384
Inventories........................... 23,816 21,774
Deferred income taxes................. 5,027 3,121
Prepaid expenses and other current
assets............................. 690 826
-------- -------
Total current assets.......... 43,652 57,103
-------- -------
PROPERTY, PLANT, AND EQUIPMENT, at cost,
net of accumulated depreciation....... 21,743 22,000
OTHER ASSETS:
Deferred charges and other, net of
accumulated amortization........... 2,318 2,515
Deferred income taxes................. 4,362 3,406
-------- -------
Total other assets............ 6,680 5,921
-------- -------
Total assets.................. $ 72,075 $85,024
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit.............. $ 17,400 $26,450
Current portion of term loans......... 1,750 --
Current portion of capital leases..... 215 208
Accounts payable...................... 11,698 9,847
Accrued expenses --
Compensation....................... 1,061 1,882
Commissions and royalties.......... 206 196
Customer allowances and other...... 1,736 1,719
-------- -------
Total current liabilities..... 34,066 40,302
-------- -------
LONG-TERM DEBT:
Term loans............................ 36,750 38,500
Notes payable to related parties...... 2,500 2,500
Capital leases........................ 1,556 1,648
Other................................. 300 400
-------- -------
Total long-term debt.......... 41,106 43,048
-------- -------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
10,000,000 shares authorized, no
shares issued or outstanding....... -- --
Common stock, $.01 par value,
50,000,000 shares authorized,
32,941,499 shares issued, and
outstanding........................ 329 329
Additional paid-in capital............ 10,437 10,437
Accumulated deficit................... (13,863) (9,092)
-------- -------
Total stockholders' (deficit)
equity...................... (3,097) 1,674
-------- -------
Total liabilities and
stockholders' equity........ $ 72,075 $85,024
======== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE> 155
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
FOR THE FIVE MONTHS ENDED DECEMBER 31, 1996, AND
FOR EACH OF THE FISCAL YEARS ENDED JULY 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FIVE
MONTHS ENDED FOR THE FISCAL YEARS ENDED JULY 31,
DECEMBER 31, ------------------------------------
1996 1996 1995 1994
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES........................................ $23,994 $133,194 $133,862 $108,655
COST OF SALES.................................... 21,973 105,068 107,312 87,170
------- -------- -------- --------
Gross profit........................... 2,021 28,126 26,550 21,485
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.... 7,546 24,603 19,207 18,181
------- -------- -------- --------
Operating income (loss)................ (5,525) 3,523 7,343 3,304
RECAPITALIZATION EXPENSES........................ -- 9,600 -- --
INTEREST EXPENSE................................. 2,115 5,896 4,573 2,982
------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES................................... (7,640) (11,973) 2,770 322
INCOME TAX BENEFIT (EXPENSE)..................... 2,869 3,857 (1,440) (103)
------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS......... (4,771) (8,116) 1,330 219
LOSS FROM DISCONTINUED OPERATIONS (net of tax
benefit of $619 and $1,503, respectively)...... -- -- (585) (3,180)
------- -------- -------- --------
NET INCOME (LOSS)................................ $(4,771) $ (8,116) $ 745 $ (2,961)
======= ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE> 156
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FIVE MONTHS ENDED DECEMBER 31, 1996, AND FOR EACH
OF THE FISCAL YEARS ENDED JULY 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ----------------------- PAID-IN ACCUMULATED
SHARES PAR VALUE SHARES PAR VALUE CAPITAL DEFICIT TOTAL
---------- --------- ----------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1993............ 2,500,000 $ 2,500 33,231,090 $ 332 $ 12,964 $ 1,812 $ 17,608
Paid-in-kind dividends on
preferred stock................. 249,403 250 -- -- -- (250) --
Net loss.......................... -- -- -- -- -- (2,961) (2,961)
---------- ------- ----------- ----- -------- -------- --------
BALANCE AT JULY 31, 1994............ 2,749,403 2,750 33,231,090 332 12,964 (1,399) 14,647
Paid-in-kind dividends on
preferred stock................. 256,152 256 -- -- -- (256) --
Net income........................ -- -- -- -- -- 745 745
---------- ------- ----------- ----- -------- -------- --------
BALANCE AT JULY 31, 1995............ 3,005,555 3,006 33,231,090 332 12,964 (910) 15,392
Paid-in-kind dividends on
preferred stock................. 66,277 66 -- -- -- (66) --
Redemption of common stock from
existing stockholders........... -- -- (27,531,941) (275) (29,497) -- (29,772)
Redemption of preferred stock from
existing stockholders........... (3,071,832) (3,072) -- -- -- -- (3,072)
Sale of common stock to new
stockholders.................... -- -- 27,242,350 272 26,970 -- 27,242
Net loss.......................... -- -- -- -- -- (8,116) (8,116)
---------- ------- ----------- ----- -------- -------- --------
BALANCE AT JULY 31, 1996............ -- -- 32,941,499 329 10,437 (9,092) 1,674
Net loss.......................... -- -- -- -- -- (4,771) (4,771)
---------- ------- ----------- ----- -------- -------- --------
BALANCE AT DECEMBER 31, 1996........ -- $ -- 32,941,499 $ 329 $ 10,437 $(13,863) $ (3,097)
========== ======= =========== ===== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE> 157
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FIVE MONTHS ENDED DECEMBER 31, 1996, AND
FOR EACH OF THE FISCAL YEARS ENDED JULY 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FIVE
MONTHS FOR THE FISCAL YEARS ENDED
ENDED JULY 31,
DECEMBER 31, ------------------------------
1996 1996 1995 1994
------------- -------- ------- -------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income..................... $ (4,771) $ (8,116) $ 745 $(2,961)
Adjustments to reconcile net (loss)
income to net cash provided by (used
for) operating activities-
Depreciation of property, plant and
equipment......................... 1,626 2,903 2,365 1,883
Amortization of deferred assets..... 350 511 582 521
Discontinued operations............. -- -- 1,204 4,683
Deferred income tax (benefit)
provision......................... (2,862) (3,808) 755 (1,428)
Gain on the disposition of property,
plant, and equipment.............. (60) (182) -- --
Provision for losses on accounts
receivable........................ 64 37 100 119
Changes in assets and liabilities
Accounts receivable............... 9,734 (892) (2,139) (4,041)
Inventories....................... (2,042) (139) (6,941) (1,703)
Prepaid expenses.................. (119) 6 (2,428) 1
Accounts payable.................. 1,851 (7,906) 5,757 5,054
Accrued expenses.................. (793) (158) 396 (784)
-------- -------- ------- -------
Net cash provided by (used for)
operating activities......... 2,978 (17,744) 396 1,344
-------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant, and
equipment........................... (1,376) (6,738) (2,574) (2,988)
Proceeds from the sale of property,
plant, and equipment................ 67 248 -- --
-------- -------- ------- -------
Net cash used for investing
activities................... (1,309) (6,490) (2,574) (2,988)
-------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of common stock from
existing stockholders............... -- (29,772) -- --
Redemption of preferred stock from
existing stockholders............... -- (3,072) -- --
Notes payable to related parties...... -- 2,500 -- --
Proceeds from sale of common stock to
new stockholders.................... -- 27,242 -- --
Term loan borrowings.................. -- 35,000 -- --
Borrowings on old line of credit...... -- -- 4,667 --
Payments on old line of credit........ -- (23,837) (1,768) (840)
Borrowings on new revolving line of
credit.............................. 12,050 26,450 -- --
Payments on new revolving line of
credit.............................. (21,100) (4,973) -- --
Capital lease (payments) borrowings
and other........................... (84) 1,597 -- 1,900
-------- -------- ------- -------
Net cash (used for) provided by
financing activities......... (9,134) 31,135 2,899 1,060
-------- -------- ------- -------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS........................... (7,465) 6,901 721 (584)
CASH AND CASH EQUIVALENTS:
Beginning of year/period.............. 7,998 1,097 376 960
-------- -------- ------- -------
End of year/period.................... $ 533 $ 7,998 $ 1,097 $ 376
======== ======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Income taxes paid..................... $ 45 $ 503 $ 46 41
Interest paid......................... $ 1,534 $ 5,036 $ 4,405 $ 2,972
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE> 158
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Hedstrom Holdings, Inc. ("Holdings") is a holding Company with no
operations or assets, other than its 100% ownership of Hedstrom Corporation
("Hedstrom", and together with Holdings, the "Company"). The Company is a
manufacturer and marketer of children's activity-oriented play products. The
Company's principal products fall within two main categories: outdoor gym sets
and playballs. Through its facility in Bedford, Pennsylvania, the Company
manufactures and distributes gym set products consisting of painted metal gym
sets, composite metal and plastic gym sets, wood gym kits, plastic outdoor
slides and gym set accessories. Through its facility in Ashland, Ohio, the
Company manufactures playball products, which consist of premium playballs made
of plastic or vinyl and decorated with popular licensed characters or designs,
nonpremium playballs that generally have minimal decoration, athletic balls
targeted at young children, and ball pit products. The Company sells its
products through major national toy retailers, mass merchants, supermarkets,
drug store chains, and home centers in the United States, Canada, and the United
Kingdom.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Holdings and its wholly owned subsidiary, Hedstrom. All intercompany balances
and transactions have been eliminated in consolidation.
During fiscal 1995, Holdings discontinued the operations of its Hedstrom
Holdings II subsidiary. Hedstrom Holdings II was involved in the manufacturing
of traffic control devices. The sole customer of Hedstrom Holdings II was a
related party which the Company no longer has an ongoing relationship with.
During the fiscal years ended July 31, 1995 and 1994, Hedstrom Holdings II
incurred net losses of $0.6 million and $3.2 million, respectively.
Fiscal Year
Prior to August 1, 1996, the Company's fiscal year ended on July 31.
Effective January 1, 1997, the Company changed its fiscal year to a calendar
year ending on December 31. The accompanying consolidated financial statements
include the 5-month period from August 1, 1996 to December 31, 1996. The
following unaudited consolidated financial statements for the five-month period
ended December 31, 1995 are provided for comparative purposes.
CONSOLIDATED INCOME STATEMENT
FOR THE FIVE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
NET SALES................................................... $ 31,792
COST OF SALES............................................... 26,000
--------
Gross profit...................................... 5,792
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES............... 7,067
--------
Operating loss.................................... (1,275)
RECAPITALIZATION EXPENSES................................... 9,600
INTEREST EXPENSE............................................ 1,773
--------
LOSS BEFORE INCOME TAXES.................................... (12,648)
INCOME TAX BENEFIT.......................................... 4,074
--------
NET LOSS.................................................... $ (8,574)
========
</TABLE>
F-7
<PAGE> 159
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE FIVE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (8,574)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization............................. 882
Changes in assets and liabilities:
Accounts receivable.................................... 5,045
Inventories............................................ (6,272)
Accounts payable....................................... (11,559)
Accrued expenses....................................... 106
Other.................................................. 270
--------
Net cash used for operating activities.................... (20,102)
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant and equipment............. (1,342)
--------
Net cash used for investing activities.................... (1,342)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of common stock................................ (29,772)
Redemption of preferred stock............................. (3,072)
Proceeds from sale of common stock........................ 27,242
Payments on line of credit, net........................... (8,855)
Notes payable to related party............................ 2,500
Borrowings on term loans.................................. 35,000
Capital lease payments and other.......................... (2,308)
--------
Net cash provided by financing activities................. 20,735
--------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (709)
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 1,097
--------
End of period............................................. $ 388
========
</TABLE>
Cash and Cash Equivalents
Cash and cash equivalents include short-term investments with original
maturities of three months or less. These investments are stated at cost which
approximates market.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. The cost of manufactured products
includes materials, direct labor, and an allocation of plant overheads. The cost
of purchased products includes inbound freight and duty.
Property, Plant, and Equipment
Property, plant, and equipment acquired subsequent to January 10, 1991, are
stated at cost. Property, plant, and equipment acquired in connection with a
prior acquisition of the Company on January 10, 1991, were stated at fair market
value as of that date as determined by independent appraisals. Depreciation is
computed using the
F-8
<PAGE> 160
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
straight-line method over the estimated useful lives of the assets. Additions
and improvements are capitalized, while expenditures for maintenance and repairs
are charged to operations as incurred. The cost and accumulated depreciation of
property sold or retired are removed from the respective accounts and the
resultant gains or losses, if any, are included in current operations.
The estimated useful lives of property, plant, and equipment are as
follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 10-40 years
Machinery and equipment..................................... 3-12 years
Furniture and fixtures...................................... 5 years
</TABLE>
Depreciation is allocated to cost of sales and selling, general, and
administrative expense based upon the related asset's use. Depreciation of
approximately $1,576,000, $2,797,000, $2,248,000, and $1,749,000 is included in
cost of sales for the five months ended December 31, 1996, and for each of the
fiscal years ended July 31, 1996, 1995, and 1994, respectively. Depreciation of
approximately $50,000, $106,000, $117,000, and $134,000 is included in selling,
general, and administrative expense for the five months ended December 31, 1996,
and for each of the fiscal years ended July 31, 1996, 1995, and 1994,
respectively.
Effective August 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). SFAS 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of SFAS 121 had no effect on the Company's financial
position or results of operations as of and for the five months ended December
31, 1996.
Deferred Charges and Other, Net
Deferred charges and other on the accompanying balance sheets is comprised
of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1996 1996
------------ ----------
<S> <C> <C>
Deferred expenses.......................................... $2,546,000 $2,388,000
Barter credits............................................. 519,000 524,000
---------- ----------
3,065,000 2,912,000
Less-Accumulated amortization.............................. (747,000) (397,000)
---------- ----------
$2,318,000 $2,515,000
========== ==========
</TABLE>
Deferred expenses primarily relate to costs the Company incurs to obtain
shelf space, and replace competitors products, at certain of its retail
customers. In connection with these transactions, the Company obtains a
commitment from the retailer that it will exclusively stock the Company's
products for a period not less than three years. As a result, these costs are
deferred and amortized over a 36-month period on a straight-line basis.
Amortization expense is included in selling, general, and administrative expense
on the accompanying income statements and was $350,000, $358,000, $37,000, and
$0 for the five months ended December 31, 1996 and for each of the fiscal years
ended July 31, 1996, 1995, and 1994, respectively.
Prior to the recapitalization discussed in Note 3, the Company had
capitalized certain financing costs and organizational costs. These costs were
immediately expensed in connection with the recapitalization and are included in
recapitalization expenses on the accompanying July 31, 1996, income statement.
The deferred financing costs were being amortized over the period of the
underlying debt on a straight-line basis and organizational costs were being
amortized over a 60-month period. Prior to the recapitalization, amortization of
deferred financing costs were $67,000, $202,000, and $179,000 in the fiscal
years ended July 31, 1996, 1995, and
F-9
<PAGE> 161
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1994, respectively, and are included in interest expense on the accompanying
income statements. Amortization of organizational costs prior to the
recapitalization were $85,000, $341,000, and $341,000 in the fiscal years ended
July 31, 1996, 1995, and 1994, respectively, and are included in selling,
general, and administrative expense on the accompanying income statements.
During the fiscal year ended July 31, 1995, the Company exchanged certain
finished goods inventory with a cost basis of approximately $2,000,000 for
barter credits. Although the barter credits had a stated value of approximately
$3,200,000, they were recorded at an amount equal to the cost basis of the
inventory exchanged, such that no profit was recognized on the transaction. The
barter credits can be used principally for the purchase of print and media
advertising; however, cash must be used in addition to the barter credits to
secure the advertising. During the fiscal year ended July 31, 1996, and for the
five months ended December 31, 1996, the Company utilized approximately $262,000
of these barter credits. As a result of the Company's decision to reduce its
advertising expenditures during calendar 1997, management determined that all of
its barter credits may not be fully utilized prior to their expiration in August
1998. Therefore, the Company wrote-off an additional $1,000,000 of the barter
credits during the fiscal year ended July 31, 1996. Management believes that the
remaining recorded credits will be utilized prior to their expiration.
Revenue Recognition
The Company recognizes revenue when title to the goods transfers. For the
majority of the Company's sales, this occurs at the time of shipment.
Income Taxes
Deferred income taxes are determined under the asset and liability method
in accordance with Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" (SFAS 109). Deferred income taxes arise from
temporary differences between the income tax basis of assets and liabilities and
their reported amounts in the financial statements.
Fair Value of Financial Instruments
The carrying amount reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, accounts payable, and accrued
expenses approximates fair value because of the immediate or short-term maturity
of these financial instruments. The carrying amount reported for long-term debt
approximates fair market value because the underlying instruments are at rates
similar to current rates offered to the Company for debt with the same remaining
maturities.
Significant Concentration of Customers
All trade accounts receivable are unsecured. A significant level of the
Company's net sales is generated from approximately four retail companies that
serve national markets. Net sales, as a percentage of total net sales, to the
Company's top four customers for the five months ended December 31, 1996, and
for each of the fiscal years ended July 31, 1996, 1995, and 1994, were:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JULY 31,
FIVE MONTHS ENDED ---------------------------
CUSTOMER DECEMBER 31, 1996 1996 1995 1994
-------- ----------------- ----- ----- -----
<S> <C> <C> <C> <C>
Toys "R" Us............................ 15% 12% 17% 19%
Wal-Mart............................... 12% 19% 12% 10%
K-Mart................................. 11% 12% 9% 9%
Service Merchandise.................... 8% 5% 5% 7%
</TABLE>
F-10
<PAGE> 162
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the reporting
period. Actual results could differ from those estimates.
3. RECAPITALIZATION:
Prior to October 27, 1995, the majority of Holdings common stock was held
by Arnold E. Ditri, President and Chief Executive Officer, and Alastair H.
McKelvie, Executive Vice President. The remaining common stock was held by John
H. Hurshman and the Fidelity Investment Charitable Gift Trust.
On October 27, 1995, Holdings was purchased by another investment group.
Concurrently, all of the outstanding preferred stock was redeemed, the
outstanding common stock held by John H. Hurshman and the Fidelity Investment
Charitable Trust was redeemed, a majority of the outstanding common stock of
Arnold E. Ditri and Alastair H. McKelvie was redeemed, new common shares were
issued to the purchaser, new debt facilities were obtained and existing debt
facilities were repaid as part of the transaction. As Arnold Ditri and Alastair
H. McKelvie retained a minority investment in Holdings, the transaction was
accounted for as a recapitalization, and existing account balances were carried
forward. The Company expensed all of its costs associated with the
recapitalization, which totaled approximately $9,600,000.
In connection with the recapitalization, Holdings effected a common stock
split of 39,095.40 shares for one and increased the authorized shares from 1,000
(par value $.01) to 50,000,000 (par value $.01). After the recapitalization, the
majority of the common stock is held by Hicks, Muse, Tate & Furst Equity Fund
II, L.P. (Hicks Muse). The remaining common stock is held by Arnold E. Ditri,
Alastair H. McKelvie, various other members of management, and various other
investment groups.
4. INVENTORIES:
Inventories are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1996 1996
------------ -----------
<S> <C> <C>
Raw materials.............................................. $ 7,534,000 $ 8,456,000
Work-in-process............................................ 2,298,000 1,262,000
Finished goods............................................. 13,984,000 12,056,000
----------- -----------
$23,816,000 $21,774,000
=========== ===========
</TABLE>
F-11
<PAGE> 163
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT, AND EQUIPMENT:
Property, plant, and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1996 1996
------------ -----------
<S> <C> <C>
Buildings and improvements................................. $ 7,695,000 $ 7,598,000
Machinery and equipment.................................... 25,218,000 24,235,000
Furniture and fixtures..................................... 758,000 540,000
----------- -----------
33,671,000 32,373,000
Less - Accumulated depreciation............................ (12,074,000) (10,519,000)
----------- -----------
21,597,000 21,854,000
Land....................................................... 146,000 146,000
----------- -----------
$21,743,000 $22,000,000
=========== ===========
</TABLE>
6. REVOLVING LINE OF CREDIT:
In connection with the recapitalization discussed in Note 3, the Company
entered into a new revolving line of credit agreement, which allows the Company
to borrow up to $65,000,000. The Company pays interest on the borrowings equal
to either the highest of 1/2 of 1% in excess of the Base Rate, as defined in the
agreement, or the Eurodollar Rate, as defined in the agreement, plus the
Applicable Margin on Base Rate Loans of 1.50% and Eurodollar Loans of 2.75%. The
Company has the ability to convert their borrowings from Base Rate Loans to
Eurodollar Loans and vice versa pursuant to certain restrictions in the
agreement. At December 31, 1996, and July 31, 1996, the Company has borrowings
outstanding under this revolving line of credit of $17,400,000 and $26,450,000,
respectively, of which $14,000,000 and $16,000,000, respectively, are at the
Eurodollar Rate (8.25% and 8.19%, respectively) and $3,400,000 and $10,450,000,
respectively, are at the Base Rate (9.75%).
The revolving line of credit agreement contains restrictive covenants,
which were revised effective July 31, 1996, the most significant of which
requires the Company to comply with certain consolidated financial ratios,
including a leverage ratio and an interest coverage ratio, earnings before
interest, income taxes, depreciation and amortization, and annual capital
expenditure requirements. Additionally the revolving line of credit is
collateralized by the Company's inventories and accounts receivable. The Company
was in compliance with the revised restrictive covenants as of December 31,
1996, and July 31, 1996.
7. TERM LOANS:
In connection with the recapitalization discussed in Note 3, a term loan
agreement was entered into for $35,000,000. The Company pays interest on these
borrowings consistent with the revolving line of credit (see Note 6). At
December 31, 1996, and July 31, 1996, the term loan has an interest rate equal
to the Eurodollar rate (8.25% and 8.19%, respectively). Principal payments,
which range from $525,000 to $7,875,000 over the life of the term loan
agreement, begin on October 15, 1997, and continue until the term loan matures
on April 27, 2001. The term loan is also subject to the revised restrictive
covenants described in Note 6 for the revolving line of credit.
The Company also has a $3,500,000 Industrial Revenue Bond from Bedford
County which bears interest at 7.13%. Annual principal payments begin in 2004 in
amounts ranging from $500,000 to $600,000 and will retire the bond in 2009.
Aggregate maturities of the Company's term loans over the next five years
are as follows: 1997 -- $1,750,000; 1998 -- $3,500,000; 1999 -- $6,000,000;
2000 -- $8,000,000; 2001 -- $15,750,000; thereafter, $3,500,000.
F-12
<PAGE> 164
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. NOTES PAYABLE TO RELATED PARTIES:
In connection with the recapitalization discussed in Note 3, $2,500,000 of
the common stock redemption payment was held back from the previous owners. This
$2,500,000 is payable to the previous owners at the earlier of April 30, 2002,
or when the Company has met certain cash flow levels. Holdings makes quarterly
interest payments to the previous owners based on a rate of 10.00% per annum.
9. INCOME TAXES:
Provisions (benefits) for income taxes are as follows:
<TABLE>
<CAPTION>
FOR THE FIVE
MONTHS ENDED FOR THE FISCAL YEARS ENDED JULY 31,
DECEMBER 31, --------------------------------------
1996 1996 1995 1994
------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Continuing operations....................... $(2,869,000) $(3,857,000) $1,440,000 $ 103,000
Discontinued operations..................... -- -- (619,000) (1,503,000)
----------- ----------- ---------- -----------
$(2,869,000) $(3,857,000) $ 821,000 $(1,400,000)
=========== =========== ========== ===========
</TABLE>
The components of the provisions (benefits) for income taxes are as
follows:
<TABLE>
<CAPTION>
FOR THE FIVE
MONTHS ENDED FOR THE FISCAL YEARS ENDED JULY 31,
DECEMBER 31, -------------------------------------
1996 1996 1995 1994
------------ ----------- --------- -----------
<S> <C> <C> <C> <C>
Current:
State....................................... $ 33,000 $ 43,000 $ 179,000 $ 28,000
U.S. federal................................ (40,000) (92,000) (113,000) --
----------- ----------- --------- -----------
(7,000) (49,000) 66,000 28,000
Deferred:
U.S. federal................................ (2,862,000) (3,808,000) 755,000 (1,428,000)
----------- ----------- --------- -----------
$(2,869,000) $(3,857,000) $ 821,000 $(1,400,000)
=========== =========== ========= ===========
</TABLE>
The provisions (benefits) for income taxes differ from those computed using
the statutory U.S. federal income tax rate as a result of the following:
<TABLE>
<CAPTION>
FOR THE FIVE
MONTHS ENDED FOR THE FISCAL YEARS ENDED JULY 31,
DECEMBER 31, -------------------------------------
1996 1996 1995 1994
------------ ----------- --------- -----------
<S> <C> <C> <C> <C>
Expected provision (benefit).................. $(2,598,000) $(4,071,000) $ 532,000 $(1,483,000)
State income taxes, net of federal benefit.... (219,000) (183,000) 82,000 (200,000)
Foreign corporate earnings.................... 47,000 151,000 169,000 116,000
Recapitalization costs........................ -- 479,000 -- --
Other......................................... (99,000) (233,000) 38,000 167,000
----------- ----------- --------- -----------
Actual provision (benefit).................... $(2,869,000) $(3,857,000) $ 821,000 $(1,400,000)
=========== =========== ========= ===========
</TABLE>
F-13
<PAGE> 165
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1996 1996
------------ -----------
<S> <C> <C>
Current deferred tax asset:
Net operating loss carryforward......................... $ 2,246,000 $ --
Inventory reserves...................................... 248,000 454,000
Costs capitalized to inventory for tax purposes......... 304,000 247,000
Allowances for accounts receivable...................... 938,000 1,187,000
Nondeductible accruals.................................. 1,243,000 1,184,000
Other................................................... 48,000 49,000
----------- -----------
Current deferred tax asset...................... $ 5,027,000 $ 3,121,000
=========== ===========
Noncurrent deferred tax asset (liability):
Net operating loss carryforward......................... $ 4,408,000 $ 3,238,000
Tax over book depreciation.............................. (1,898,000) (1,844,000)
Recapitalization costs.................................. 1,592,000 1,753,000
Other................................................... 260,000 259,000
----------- -----------
Noncurrent deferred tax asset................... $ 4,362,000 $ 3,406,000
=========== ===========
</TABLE>
The Company has net operating loss carryforwards of $17,511,000 to apply
against future taxable income. Such carryforwards expire as follows: $911,000 in
2008, $3,500,000 in 2009, $4,200,000 in 2010, and $8,900,000 in 2011.
The Company believes it is more likely than not to realize the net deferred
tax asset and accordingly no valuation allowance has been provided. This
conclusion is based on, (i) changes in operations that have recently occurred,
including the 1996 Cost Reduction Plan (see Note 14) and the acquisition of ERO,
Inc. (see Note 16), which has a lengthy and consistent history of profitable
operations, (ii) projections (which include ERO, Inc.) of sufficient taxable
U.S. income to fully realize the net deferred tax asset by the end of calendar
year 1999, (iii) the tax loss carryforwards included in the net deferred tax
asset were generated in very recent periods and do not begin to expire until the
years 2008-2011, and (iv) the significant excess of book basis over tax basis
relative to the net assets of ERO, Inc. Management continually evaluates the
realizability of the net deferred tax assets and the need for a valuation
allowance on such assets.
10. EMPLOYEE BENEFIT PLANS:
All Company employees are eligible to participate in either the Union
Employees' Tax Sheltered Savings Plan or the tax-sheltered Savings Plan
(collectively the "Plans"), depending upon the employment status of the
employees as union or nonunion after meeting certain requirements. The Union
Employees' Tax Sheltered Savings Plan covers all union employees 18 years of age
or older who have worked for 1,000 consecutive hours within a 12-month period.
The tax-sheltered Savings Plan covers all nonunion employees 18 years of age or
older who have been employed for 120 consecutive days within a 12-month period.
For both Plans the employees may contribute from 1% to 15% of their
compensation (either before tax, after tax, or a combination thereof) to the
Plans. The Company provides matching contributions at the rate of 50% of the
employee's contribution up to 6% of gross wages as defined by the Plans
agreements.
The Company may make annual discretionary contributions to the Plans.
Discretionary contributions during the five months ended December 31, 1996, and
for each of the fiscal years ended July 31, 1996, 1995, and 1994, aggregated
approximately $218,000, $634,000, $642,000, and $591,000, respectively.
F-14
<PAGE> 166
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCK-BASED COMPENSATION PLAN:
In October 1995, Holdings adopted the Hedstrom Holdings, Inc. 1995 Stock
Option Plan (the "Plan") which authorizes grants of stock options to all regular
salaried full-time officers and key employees of the Company. There are
2,446,236 shares of common stock authorized for issuance under the Plan. In
October 1995 and December 1996, stock options were granted for 2,174,216 and
200,000 shares, respectively, at 100% of the fair market value at the date of
grant. Fair market value of Holdings common stock on the October 1995 and
December 1996 grant dates was assumed to be $1 per share, which is equal to the
per share value paid by Hicks Muse in connection with their acquisition of
Holdings in October 1995.
Options issued under the Plan expire ten years from date of grant and vest
equally over a three year period from the date of grant. There were
approximately 725,000 options exercisable as of December 31, 1996. No options
were exercised or forfeited during the fiscal year ended July 31, 1996 or for
the five months ended December 31, 1996.
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for stock option awards. Had compensation cost for the stock options
issued in October 1995 and December 1996 been determined under the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the Company's pro forma net losses for the fiscal year ended July
31, 1996 and the five months ended December 31,1996 would not have been
materially different from the reported net losses for those respective periods.
Pro forma compensation cost may not be representative of that to be expected in
future years.
The fair value of each option is estimated on the date of grant using the
minimum value method with the following assumptions used for the two grants in
October 1995 and December 1996; risk free interest rates of 6.16% - 6.21%;
expected dividend yield of 0% and expected life of ten years.
12. COMMITMENTS AND CONTINGENCIES:
Leases
In July 1996, the Company entered into a capital lease agreement for
certain production equipment. The net capital lease asset of $1,767,000 and
$1,880,000 as of December 31, 1996, and July 31, 1996, respectively, is included
in property, plant, and equipment on the accompanying consolidated balance
sheets. Aggregate future minimum lease payments related to this capital lease
are as follows: 1997 -- $362,000; 1998 -- $362,000; 1999 -- $362,000;
2000 -- $362,000; 2001 -- $362,000; thereafter -- $511,000. The portion related
to interest over the remaining life of the lease was $550,000 at December 31,
1996.
The Company leases production equipment under operating lease agreements
with terms expiring at various times through 2004. Rent expense under operating
leases for the five months ended December 31, 1996, and for the fiscal years
ended July 31, 1996, 1995, and 1994, aggregated $936,000, $2,500,000,
$1,167,800, and $742,000, respectively. Aggregate future minimum lease
commitments for noncancelable operating leases that have initial or remaining
lease terms in excess of one year as of December 31, 1996, are as follows:
1997 -- $943,000; 1998 -- $746,000; 1999 -- $661,000; 2000 -- $548,000;
2001 -- $481,000; thereafter $807,000.
Legal Matters
There are various claims and pending legal actions against the Company,
primarily involving product liability, seeking damages in varying amounts. In
the opinion of management, the amount of ultimate liability with respect to
these actions will not materially affect the financial position or results of
operations of the Company.
F-15
<PAGE> 167
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. RELATED-PARTY TRANSACTIONS:
On October 27, 1995, in connection with the recapitalization discussed in
Note 3, the Company entered into a ten-year agreement with Hicks Muse, pursuant
to which they pay Hicks Muse an annual fee of $175,000 for management and
advisory services in connection with the organization, management, and
operations of the Company. The annual fee is adjustable at the end of each
fiscal year to an amount equal to 0.1% of the consolidated net sales of the
Company during such fiscal year, but in no event less than $175,000. Management
fees and related expenses under this agreement amounted to $82,000 and $207,000
for the five months ended December 31, 1996, and for the fiscal year ended July
31, 1996, respectively, and are included in selling, general, and administrative
expenses on the accompanying income statements.
On October 27, 1995, in connection with the recapitalization discussed in
Note 3, the Company entered into a ten-year agreement with an affiliate of Hicks
Muse pursuant to which they paid this affiliate a financial advisory fee of
approximately $1,175,000 as compensation for its services as financial advisor
in connection with the recapitalization. In addition, this Hicks Muse affiliate
will be entitled to receive a fee equal to 1.5% of the transaction value, as
defined, for each add-on transaction, as defined, in which the Company is
involved.
14. 1996 COST REDUCTION PLAN:
During fiscal 1996, the Company incurred a loss before income taxes and
recapitalization expenses of $2.4 million. In order to improve Hedstrom's
profitability in 1997 and thereafter, management implemented a plan in the fall
of 1996 (the "1996 Cost Reduction Plan") to reduce costs by over $9 million in
1997 and thereafter as compared with fiscal 1996 levels. Important elements of
the plan include:
- Implementing Just-in-Time Manufacturing. In late 1996, Hedstrom
restructured certain of its manufacturing operations to increase its
daily production capacity of outdoor gym sets. This restructuring has
enabled Hedstrom to manufacture outdoor gym sets to specific customer
orders rather than producing outdoor gym sets in anticipation of customer
orders, which Hedstrom had done in the past because of capacity
constraints. In fiscal 1996, prior to implementing this restructuring,
Hedstrom experienced a significant and unexpected change in its sales mix
of outdoor gym sets, requiring Hedstrom to use third party warehouses to
store many of the outdoor gym sets it had produced in anticipation of
customer demand. As a result, Hedstrom incurred approximately $2.1
million of higher warehouse and material handling costs. The
implementation of just-in-time manufacturing of outdoor gym sets will
enable Hedstrom to carry a lower level of outdoor gym set inventory and,
as a result, to eliminate the need for utilizing third party warehouses
for outdoor gym sets. Management believes the Company will save
approximately $2.1 million of warehouse and material handling expense in
1997 and thereafter as a result of implementing just-in-time
manufacturing of outdoor gym sets.
- Improved Manufacturing Procedures. In an effort to streamline outdoor gym
set production and improve manufacturing efficiencies, in 1996 Hedstrom
(i) reduced its number of outdoor gym set product offerings, (ii)
redesigned certain outdoor gym set components to reduce the cost of such
components and (iii) further standardized many of the components among
its various outdoor gym set product offerings. Management believes these
actions will improve profitability by approximately $2.0 million in 1997
and thereafter over fiscal 1996 levels.
- In-sourcing Certain Plastic Components. Hedstrom periodically evaluates
the economics of producing internally certain plastic components used in
the production and assembly of its outdoor gym sets versus purchasing
such components externally. In 1996, Hedstrom invested approximately $3.0
million in new plastic blow-molding equipment to manufacture many of the
plastic slides that it had previously purchased from third-party vendors.
Management estimates that producing these slides internally will provide
annual cost savings of approximately $1.5 million as compared to fiscal
1996 levels.
- Discontinuation of Trial Advertising Campaign. Hedstrom historically has
advertised its products in cooperation with its retail customers,
principally through print media such as newspaper circulars and
free-standing inserts sponsored by its customers. In fiscal 1996,
Hedstrom initiated, on a trial basis, its
F-16
<PAGE> 168
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
own multi-media advertising program designed to increase consumer
awareness of the Hedstrom brand over time. The total cost for this
advertising program was approximately $1.5 million. After careful review,
management determined that this trial advertising campaign would not
provide an acceptable return on investment and elected to discontinue it.
Therefore, such costs will not be incurred in 1997 and thereafter.
- Restructure Promotional Programs. Consistent with industry practice,
Hedstrom provides retailers with certain promotional allowances, a
portion of which typically is fixed in nature and a portion of which is
based on the volume of customer purchases of Hedstrom products. In late
1996, Hedstrom reduced the fixed component of certain of its promotional
allowances and restructured its promotional programs with several
customers by raising the required volumes necessary to achieve certain
promotional discounts. Management believes these initiatives will improve
profitability in 1997 and thereafter by approximately $1.4 million over
fiscal 1996 levels.
- Personnel Reductions. Hedstrom reduced its number of full-time employees
by approximately 30 people in a variety of departments in the second half
of 1996. Management believes that such personnel reductions will result
in savings of approximately $0.7 million in 1997 and thereafter over
fiscal 1996 levels.
15. QUARTERLY FINANCIAL DATA (UNAUDITED; IN THOUSANDS):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31, 1996 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales...................................... $19,115 $24,217 $60,430 $29,432
Gross profit................................... 3,160 5,713 16,125 3,128
Net (loss) income.............................. (7,782) (387) 4,415 (4,362)
Pro forma income (loss) per share.............. (0.12) (0.01) 0.07 (0.06)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31, 1995 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales...................................... $17,120 $27,009 $61,827 $27,906
Gross profit................................... 2,743 6,193 13,721 3,893
Net (loss) income.............................. (584) 525 2,254 (1,450)
</TABLE>
16. SUBSEQUENT EVENT:
On April 10, 1997, Hedstrom and HC Acquisition Corp., a wholly owned
subsidiary of Hedstrom, entered into an Agreement and Plan of Merger (the
"Merger Agreement") with ERO, Inc. to acquire ERO for a total enterprise value
of approximately $200 million. Pursuant to the Merger Agreement, HC Acquisition
Corp. commenced and, on June 12, 1997, consummated a tender offer for all of the
outstanding shares of the common stock of ERO at a purchase price of $11.25 per
share (the "Tender Offer"). Upon consummation of the Tender Offer, (i) HC
Acquisition Corp. was merged with and into ERO (the "Merger") with ERO surviving
the Merger as a wholly owned subsidiary of Hedstrom, (ii) certain of ERO's
outstanding indebtedness was refinanced by Hedstrom (the "ERO Refinancing") and
(iii) Hedstrom refinanced (the "Hedstrom Refinancing") its existing revolving
credit facility and term loan facility (the Merger, the Tender Offer, the ERO
Refinancing and the Hedstrom Refinancing, are collectively referred to herein as
the "Acquisition").
Holdings and Hedstrom required approximately $301.1 million in cash to
consummate the Acquisition, including approximately (i) $122.6 million paid in
connection with the Tender Offer and the Merger, (ii) $82.6 million paid in
connection with the ERO Refinancing, (iii) $74.9 million paid in connection with
the Hedstrom Refinancing, and (iv) $21.0 million incurred in respect of fees and
expenses. The funds required to consummate the Acquisition were provided by (i)
$75.0 million of term loans under a new six-year senior secured term loan
facility (the "Tranche A Term Loan Facility"), (ii) $35.0 million of term loans
under a new eight-year senior secured term loan facility (the "Tranche B Term
Loan Facility" and, together with the Tranche A Term Loan Facility, the "Term
Loan Facilities"), (iii) $16.1 million of borrowings under a new $70.0 million
senior secured revolving credit facility (the "Revolving Credit Facility" and,
together with the
F-17
<PAGE> 169
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Term Loan Facilities, the "Senior Credit Facilities", (iv) $110.0 million of
gross proceeds from the offering by Hedstrom of 10% Senior Subordinated Notes
Due 2007 (the "Senior Subordinated Notes"), (v) $25.0 million of gross proceeds
from the offering by Holdings of 44,612 units consisting of 12% Senior Discount
Notes Due 2009 (the "Discount Notes") and 2,705,896 shares of Common Stock, $.01
par value per share, of Holdings ("Holdings Common Stock") and (vi) $40.0
million of gross proceeds from the private placement of 31,520,000 shares of
Non-Voting Common Stock, $.01 par value per share, of Holdings ("Holdings
Non-Voting Common Stock") and 480,000 shares of Holdings Common Stock.
The acquisition of ERO will be accounted for under the purchase method of
accounting, and accordingly, the purchase price will be allocated to the assets
acquired and the liabilities assumed based upon fair value at the date of the
acquisition of ERO. The excess of the purchase price over the fair values of the
tangible net assets acquired is $146.8 million, will be recorded as goodwill and
will be amortized on a straight-line basis over 40 years.
The net purchase price will be allocated as follows (in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 59,400
Net property, plant and equipment........................... 20,000
Goodwill.................................................... 146,800
Liabilities assumed......................................... (103,600)
---------
Cash paid for ERO................................. $ 122,600
=========
</TABLE>
In connection with the acquisition of ERO, management implemented a plan
(the "Rationalization Plan") that will result in annual cost savings of $6
million as a result of rationalizing sales, marketing and general and
administrative functions, closings of duplicate facilities and reductions in
external administrative expenditures including legal, insurance, tax, audit and
public relations expenditures. The cost savings outlined below reflect personnel
terminations that have already occurred or that have been formally communicated
to the employees, closings of duplicate facilities that have occurred and
reductions in external administrative expenses that have been negotiated.
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Salaries and benefits from personnel terminations........... $3,700
Duplicative facilities that have been closed................ 900
External administrative expenses that have been reduced..... 1,400
------
Total annual cost savings......................... $6,000
======
</TABLE>
The unaudited pro forma results below assume the Acquisition occurred at
the beginning of the periods presented and that the Rationalization Plan
discussed in the preceding paragraph were implemented at the beginning of the
periods presented (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FIVE MONTHS TWELVE MONTHS FISCAL YEAR
ENDED ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1996 JULY 31, 1996
----------------- ----------------- -------------
<S> <C> <C> <C>
Net sales............................. $119,745 $283,307 $260,008
Net income (loss)..................... $ 1,049 $ (3,552) $(12,792)
Net income (loss) per share........... $ 0.02 $ (0.05) $ (0.19)
</TABLE>
The above pro forma results include adjustments to give effect to
amortization of goodwill, interest expense related to the Senior Subordinated
Notes, the Discount Notes and the Senior Credit Facilities and implementation of
the Rationalization Plan, together with the related tax effects. The pro forma
results are not necessarily indicative of the operating results that would have
occurred had the Acquisition been consummated and had the Rationalization Plan
been implemented as of the beginning of the periods presented, nor are they
necessarily indicative of future operating results.
F-18
<PAGE> 170
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The obligations of Hedstrom relating to the Senior Subordinated Notes and
the Senior Credit Facilities are unconditionally, fully and irrevocably
guaranteed (jointly and severally) by Holdings and each of Hedstrom's direct and
indirect domestic subsidiaries. The Senior Subordinated Notes are unsecured
senior subordinated obligations of Hedstrom. The Senior Credit Facilities are
secured by 100% of the stock of Hedstrom Corporation and its domestic
subsidiaries and 65% of the capital stock of each foreign subsidiary of
Hedstrom. The Discount Notes are unsecured senior obligations of Holdings.
Following is financial information pertaining to Hedstrom and its
subsidiary guarantors and its subsidiary nonguarantor (with respect to the
Senior Subordinated Notes and the Senior Credit Facilities) for the periods in
which they are included in Holding's consolidated financial statements.
HEDSTROM CORPORATION
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1996 AND JULY 31, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT JULY 31, 1996
------------------------------------- -------------------------------------
HEDSTROM HEDSTROM HEDSTROM HEDSTROM
SUBSIDIARY SUBSIDIARY TOTAL SUBSIDIARY SUBSIDIARY TOTAL
GUARANTORS NON-GUARANTOR HEDSTROM GUARANTORS NON-GUARANTOR HEDSTROM
---------- ------------- -------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............ $ 467 $ 66 $ 533 $ 7,893 $ 105 $ 7,998
Trade accounts receivable, net....... 13,126 460 13,586 21,984 1,400 23,384
Inventories.......................... 23,368 448 23,816 21,279 495 21,774
Deferred income taxes................ 5,027 0 5,027 3,121 -- 3,121
Prepaid expenses and other........... 674 16 690 797 29 826
-------- ------- -------- ------- ------- -------
Total current assets........... 42,662 990 43,652 55,074 2,029 57,103
PROPERTY, PLANT, AND EQUIPMENT, net.... 21,735 8 21,743 21,990 10 22,000
DEFERRED CHARGES AND OTHER,
net.................................. 2,318 -- 2,318 2,515 -- 2,515
DEFERRED INCOME TAXES(d)............... 4,251 -- 4,251 3,335 -- 3,335
-------- ------- -------- ------- ------- -------
Total assets................... $ 70,966 $ 998 $71,964 $82,914 $ 2,039 $84,953
======== ======= ======== ======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Revolving line of credit............. $ 15,430 $ 1,970 $17,400 $24,158 $ 2,292 $26,450
Current portion of term loans........ 1,750 -- 1,750 -- -- --
Current portion of capital leases.... 215 -- 215 208 -- 208
Accounts payable(c).................. 11,275 131 11,406 9,522 137 9,659
Accrued expenses..................... 3,006 (3) 3,003 3,170 627 3,797
-------- ------- -------- ------- ------- -------
Total current liabilities...... 31,676 2,098 33,774 37,058 3,056 40,114
LONG-TERM DEBT(a):
Term loans........................... 36,750 -- 36,750 38,500 -- 38,500
Capital leases....................... 1,556 -- 1,556 1,648 -- 1,648
Other................................ 300 -- 300 400 -- 400
-------- ------- -------- ------- ------- -------
Total long-term debt........... 38,606 -- 38,606 40,548 -- 40,548
STOCKHOLDER'S EQUITY(b):
Common stock......................... -- -- -- -- -- --
Additional paid-in capital........... 8,929 -- 8,929 8,929 -- 8,929
Accumulated deficit.................. (8,245) (1,100) (9,345) (3,621) (1,017) (4,638)
-------- ------- -------- ------- ------- -------
Total stockholder's equity
(deficit).................... 684 (1,100) (416) 5,308 (1,017) 4,291
-------- ------- -------- ------- ------- -------
Total liabilities and
stockholder's equity......... $ 70,966 $ 998 $71,964 $82,914 $ 2,039 $84,953
======== ======= ======== ======= ======= =======
</TABLE>
footnotes to follow
F-19
<PAGE> 171
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HEDSTROM CORPORATION
CONSOLIDATING INCOME STATEMENTS
FOR THE FIVE MONTHS ENDED DECEMBER 31, 1996 AND
THE FISCAL YEAR ENDED JULY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS ENDED
DECEMBER 31, 1996 FOR THE FISCAL YEAR ENDED JULY 31, 1996
------------------------------------- -----------------------------------------
HEDSTROM HEDSTROM HEDSTROM HEDSTROM
SUBSIDIARY SUBSIDIARY TOTAL SUBSIDIARY SUBSIDIARY TOTAL
GUARANTORS NON-GUARANTOR HEDSTROM GUARANTORS NON-GUARANTOR HEDSTROM
---------- ------------- -------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET SALES............................... $ 23,074 $ 920 $23,994 $ 129,074 $ 4,120 $ 133,194
COST OF SALES........................... 21,238 735 21,973 101,482 3,586 105,068
-------- ------- -------- --------- ------- ---------
Gross Profit.................... 1,836 185 2,021 27,592 534 28,126
SG&A EXPENSES........................... 7,225 321 7,546 23,659 944 24,603
-------- ------- -------- --------- ------- ---------
Operating income (loss)......... (5,389) (136) (5,525) 3,933 (410) 3,523
RECAPITALIZATION EXPENSES............... -- -- -- 9,600 -- 9,600
INTEREST EXPENSE(c)..................... 2,010 1 2,011 5,674 34 5,708
-------- ------- -------- --------- ------- ---------
LOSS BEFORE TAXES....................... (7,399) (137) (7,536) (11,341) (444) (11,785)
INCOME TAX BENEFIT(d)................... 2,775 54 2,829 3,786 -- 3,786
-------- ------- -------- --------- ------- ---------
NET LOSS $ (4,624) $ (83) $(4,707) $ (7,555) $ (444) $ (7,999)
======== ======= ======== ========= ======= =========
</TABLE>
HEDSTROM CORPORATION
CONSOLIDATING INCOME STATEMENTS
FOR THE FISCAL YEARS ENDED JULY 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED FOR THE FISCAL YEAR ENDED
JULY 31, 1995 JULY 31, 1994
-------------------------------------- -------------------------------------
HEDSTROM HEDSTROM HEDSTROM HEDSTROM
SUBSIDIARY SUBSIDIARY TOTAL SUBSIDIARY SUBSIDIARY TOTAL
GUARANTORS NON-GUARANTOR HEDSTROM GUARANTORS NON-GUARANTOR HEDSTROM
---------- ------------- --------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
NET SALES................................ $ 131,551 $ 2,311 $133,862 $107,211 $ 1,444 $108,655
COST OF SALES............................ 105,223 2,089 107,312 85,747 1,423 87,170
--------- ------- --------- -------- ------- --------
Gross profit..................... 26,328 222 26,550 21,464 21 21,485
SG&A EXPENSES............................ 18,508 699 19,207 17,820 361 18,181
--------- ------- --------- -------- ------- --------
Operating income (loss).......... 7,820 (477) 7,343 3,644 (340) 3,304
INTEREST EXPENSE......................... 4,555 18 4,573 2,973 9 2,982
--------- ------- --------- -------- ------- --------
INCOME (LOSS) BEFORE TAXES............... 3,265 (495) 2,770 671 (349) 322
INCOME TAX (EXPENSE) BENEFIT............. (1,577) 137 (1,440) (237) 134 (103)
--------- ------- --------- -------- ------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS............................. 1,688 (358) 1,330 434 (215) 219
LOSS FROM DISCONTINUED OPERATIONS (NET OF
TAX BENEFIT)........................... (585) -- (585) (3,180) -- (3,180)
--------- ------- --------- -------- ------- --------
NET INCOME (LOSS)........................ $ 1,103 $ (358) $ 745 $ (2,746) $ (215) $ (2,961)
========= ======= ========= ======== ======= ========
</TABLE>
footnotes to follow
F-20
<PAGE> 172
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HEDSTROM CORPORATION
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE FIVE MONTHS ENDED DECEMBER 31, 1996 AND
THE FISCAL YEAR ENDED JULY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS ENDED
DECEMBER 31, 1996 FOR THE FISCAL YEAR ENDED JULY 31, 1996
-------------------------------------- -----------------------------------------
HEDSTROM HEDSTROM HEDSTROM HEDSTROM
SUBSIDIARY SUBSIDIARY TOTAL SUBSIDIARY SUBSIDIARY TOTAL
GUARANTORS NON-GUARANTOR HEDSTROM GUARANTORS NON-GUARANTOR HEDSTROM
---------- -------------- -------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss(c)(d)..................... $ (4,624) $ (83) $(4,707) $ (7,555) $ (444) $ (7,999)
Depreciation and amortization...... 1,973 3 1,976 3,407 7 3,414
Deferred income tax benefit(d)..... (2,862) -- (2,862) (3,808) -- (3,808)
Other.............................. 4 -- 4 (145) -- (145)
Changes in assets and liabilities:
Accounts receivable.............. 8,794 940 9,734 (817) (75) (892)
Inventories...................... (2,089) 47 (2,042) (64) (75) (139)
Prepaid expenses and other....... (132) 13 (119) (20) 26 6
Accounts payable(c).............. 1,793 (6) 1,787 (8,012) (11) (8,023)
Accrued expenses................. (163) (630) (793) 26 (184) (158)
-------- ----- -------- -------- ------- --------
Net cash provided by (used
for) operating
activities................. 2,694 284 2,978 (16,988) (756) (17,744)
-------- ----- -------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of PP&E............... (1,375) (1) (1,376) (6,735) (3) (6,738)
Proceeds from the sale of PP&E..... 67 -- 67 248 -- 248
-------- ----- -------- -------- ------- --------
Net cash used for investing
activities................. (1,308) (1) (1,309) (6,487) (3) (6,490)
-------- ----- -------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of common stock......... -- -- -- (29,772) -- (29,772)
Redemption of preferred stock...... -- -- -- (3,072) -- (3,072)
Proceeds from sale of common
stock............................ -- -- -- 29,742 -- 29,742
Term loan borrowings............... -- -- -- 35,000 -- 35,000
Borrowings on revolving line of
credit........................... 12,050 -- 12,050 24,528 1,922 26,450
Payments on revolving line of
credit........................... (20,778) (322) (21,100) (27,690) (1,120) (28,810)
Capital lease (payments) borrowings
and other........................ (84) -- (84) 1,597 -- 1,597
-------- ----- -------- -------- ------- --------
Net cash (used for) provided
by financing activities.... (8,812) (322) (9,134) 30,333 802 31,135
-------- ----- -------- -------- ------- --------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS................... (7,426) (39) (7,465) 6,858 43 6,901
CASH AND CASH EQUIVALENTS:
Beginning of year/period........... 7,893 105 7,998 1,035 62 1,097
-------- ----- -------- -------- ------- --------
End of year/period................. $ 467 $ 66 $ 533 $ 7,893 $ 105 $ 7,998
======== ===== ======== ======== ======= ========
</TABLE>
footnotes to follow
F-21
<PAGE> 173
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HEDSTROM CORPORATION
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JULY 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED JULY 31, 1995 FOR THE FISCAL YEAR ENDED JULY 31, 1994
---------------------------------------- ----------------------------------------
HEDSTROM HEDSTROM HEDSTROM HEDSTROM
SUBSIDIARY SUBSIDIARY TOTAL SUBSIDIARY SUBSIDIARY TOTAL
GUARANTORS NON-GUARANTOR HEDSTROM GUARANTORS NON-GUARANTOR HEDSTROM
----------- -------------- --------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................... $ 1,103 $ (358) $ 745 $(2,746) $ (215) $(2,961)
Depreciation and amortization........ 2,942 5 2,947 2,402 2 2,404
Discontinued operations.............. 1,204 -- 1,204 4,683 -- 4,683
Deferred income tax provision........ 755 -- 755 (1,428) -- (1,428)
Other................................ 100 -- 100 119 -- 119
Changes in assets and liabilities:
Accounts receivable................ (1,741) (398) (2,139) (3,114) (927) (4,041)
Inventories........................ (6,876) (65) (6,941) (1,348) (355) (1,703)
Prepaid expenses and other......... (2,434) 6 (2,428) (22) 23 1
Accounts payable................... 5,662 95 5,757 5,086 (32) 5,054
Accrued expenses................... (455) 851 396 (744) (40) (784)
------- ------- ------- ------- ------- -------
Net cash provided by (used for)
operating activities......... 260 136 396 2,888 (1,544) 1,344
------- ------- ------- ------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisitions of PP&E................. (2,565) (9) (2,574) (2,977) (11) (2,988)
------- ------- ------- ------- ------- -------
Net cash used for investing
activities................... (2,565) (9) (2,574) (2,977) (11) (2,988)
------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving line of
credit............................. 3,366 1,301 4,667 -- -- --
Payments on revolving line of
credit............................. (383) (1,385) (1,768) (406) (434) (840)
Capital lease (payments) borrowings
and other.......................... -- -- -- (108) 2,008 1,900
------- ------- ------- ------- ------- -------
Net cash provided by (used for)
financing activities......... 2,983 (84) 2,899 (514) 1,574 1,060
------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS..................... 678 43 721 (603) 19 (584)
CASH AND CASH EQUIVALENTS:
Beginning of year.................... 357 19 376 960 -- 960
------- ------- ------- ------- ------- -------
End of year.......................... $ 1,035 $ 62 $ 1,097 $ 357 $ 19 $ 376
======= ======= ======= ======= ======= =======
</TABLE>
The column "Total Hedstrom" represents the consolidated financial statements of
Hedstrom Corporation and its subsidiaries. Hedstrom Corporation is Holdings'
only direct subsidiary. The primary differences between the consolidated amounts
of Hedstrom Corporation and the consolidated amounts included in the
accompanying consolidated financial statements of Holdings are as follows:
(a) Hedstrom Corporation's Long-Term Debt does not include a $2.5 million
note payable issued by Holdings in connection with the 1995
Recapitalization.
(b) Hedstrom Corporation's stockholder's equity is $2.5 million higher than
Holdings' stockholders' equity as a result of the note payable
discussed in (a) above.
(c) Accounts Payable and Interest Expense do not reflect the accrued
interest and interest expense, respectively, on the note payable
discussed in (a) above.
(d) Deferred income taxes does not reflect the deferred tax benefit of
accrued interest on the note payable discussed in (a) above.
F-22
<PAGE> 174
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,165 $ 533
Trade accounts receivable................................. 70,231 13,586
Inventories............................................... 47,120 23,816
Deferred income taxes..................................... 3,611 5,027
Prepaid expenses and other current assets................. 4,116 690
-------- --------
Total current assets.............................. 128,243 43,652
-------- --------
PROPERTY, PLANT, AND EQUIPMENT, at cost, net of accumulated
depreciation.............................................. 42,442 21,743
GOODWILL, net of accumulated amortization................... 146,800 --
OTHER ASSETS:
Deferred financing charges, net of accumulated
amortization........................................... 17,800 --
Deferred charges and other, net of accumulated
amortization........................................... 7,691 2,318
Deferred income taxes..................................... 6,986 4,362
-------- --------
Total other assets................................ 32,477 6,680
-------- --------
Total assets...................................... $349,962 $ 72,075
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit.................................. 2,700 17,400
Current portion of long-term debt......................... 6,371 1,965
Accounts payable.......................................... 22,621 11,698
Accrued expenses.......................................... 27,320 3,003
-------- --------
Total current liabilities......................... 59,012 34,066
-------- --------
LONG-TERM DEBT
Senior Subordinated Notes................................. 110,000 --
Senior Discount Notes..................................... 21,618 --
Term loans................................................ 108,375 36,750
Notes payable to related parties.......................... 2,500 2,500
Capital leases............................................ 1,745 1,556
Other..................................................... 2,380 300
-------- --------
Total long-term debt.............................. 246,618 41,106
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued or outstanding............ -- --
Common stock, $.01 par value, 100,000,000 shares
authorized, 36,127,395 and 32,941,499 shares issued and
outstanding, respectively.............................. 361 329
Non-voting common stock, $.01 par value, 40,000,000 shares
authorized, 31,520,000 shares issued and outstanding... 315 --
Additional paid-in capital................................ 51,534 10,437
Accumulated deficit....................................... (7,878) (13,863)
-------- --------
Total stockholders' equity (deficit).............. 44,332 (3,097)
-------- --------
Total liabilities and stockholders' equity........ $349,962 $ 72,075
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-23
<PAGE> 175
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
NET SALES................................................... $104,051 $ 96,059
COST OF SALES............................................... 73,579 72,897
-------- --------
Gross profit...................................... 30,472 23,162
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES............... 16,242 15,107
-------- --------
Operating income.................................. 14,230 8,055
INTEREST EXPENSE............................................ 4,709 3,545
-------- --------
INCOME BEFORE INCOME TAXES.................................. 9,521 4,510
INCOME TAX EXPENSE.......................................... 3,536 1,812
-------- --------
NET INCOME.................................................. $ 5,985 $ 2,698
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-24
<PAGE> 176
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL
PAR PAID-IN ACCUMULATED
SHARES VALUE CAPITAL DEFICIT TOTAL
----------- ----- ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996......... 32,941,499 $329 $10,437 $(13,863) $(3,097)
Issuance of voting common stock.... 3,185,896 32 3,950 -- 3,982
Issuance of non-voting common
stock........................... 31,520,000 315 37,147 -- 37,462
Net income......................... -- -- -- 5,985 5,985
----------- ---- ------- -------- -------
BALANCE AT JUNE 30, 1997............. 67,647,395 $676 $51,534 $ (7,878) $44,332
=========== ==== ======= ======== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-25
<PAGE> 177
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 5,985 $ 2,698
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization............................. 2,767 2,322
Deferred income tax provision (benefit)................... (2,676) --
Changes in assets and liabilities:
Accounts receivable.................................... (32,260) (27,569)
Inventories............................................ 6,239 3,607
Prepaid expenses and other current assets.............. 983 (343)
Accounts payable....................................... 949 2,821
Accrued expenses....................................... 13,890 3,739
Other.................................................. (2,845) --
--------- --------
Net cash used for operating activities.................... (6,968) (12,725)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of ERO, Inc................................... (122,600) --
Acquisitions of property, plant and equipment............. (3,446) (4,792)
--------- --------
Net cash used for investing activities.................... (126,046) (4,792)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Senior Subordinated Notes... 110,000 --
Net proceeds from issuance of new term loans.............. 110,000 --
Net proceeds from issuance of Senior Discount Notes....... 21,618 --
Borrowings on new revolving line of credit, net........... 2,700 --
Repayments of old term loans.............................. (91,393) --
Repayments of old revolving lines of credit, net.......... (38,925) 16,058
Debt financing costs...................................... (17,800) --
Net proceeds from issuance of voting common stock......... 3,982 --
Net proceeds from issuance of non-voting common stock..... 37,462 --
Capital lease payments and other.......................... (1,998) 1,648
--------- --------
Net cash provided by financing activities................. 135,646 17,706
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 2,632 189
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 533 388
--------- --------
End of period............................................. $ 3,165 $ 577
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non-Cash investing and financing activities:
Fair value of ERO Assets Acquired...................... $ 226,200 --
ERO Liabilities Assumed................................ $(103,600) --
--------- --------
Cash Paid......................................... $ 122,600 $ --
========= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-26
<PAGE> 178
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PRINCIPLES OF CONSOLIDATION
The accompanying interim consolidated financial statements include the
accounts of Hedstrom Holdings, Inc. ("Holdings") and its wholly owned
subsidiary, Hedstrom Corporation ("Hedstrom," and together with Holdings, the
"Company"). Effective June 12, 1997, Hedstrom acquired ERO, Inc. ("ERO"), which
became a wholly owned subsidiary of Hedstrom (see Note 2). The accompanying
consolidated financial statements reflect the operations of ERO for the month of
June 1997. These financial statements are unaudited but, in the opinion of
management, contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial condition, results of
operations and cash flows of the Company. All intercompany balances and
transactions have been eliminated in consolidation.
The results of operations for the six months ended June 30, 1997, are not
necessarily indicative of the results to be expected for the entire fiscal year.
2. ACQUISITION OF ERO, INC.
On April 10, 1997, Hedstrom and HC Acquisition Corp., a wholly owned
subsidiary of Hedstrom, entered into an Agreement and Plan of Merger (the
"Merger Agreement") with ERO to acquire ERO for a total enterprise value of
approximately $200 million. Pursuant to the Merger Agreement, HC Acquisition
Corp. commenced and, on June 12, 1997, consummated a tender offer for all of the
outstanding shares of the common stock of ERO at a purchase price of $11.25 per
share (the "Tender Offer"). Upon consummation of the Tender Offer, (i) HC
Acquisition Corp. was merged with and into ERO (the "Merger") with ERO surviving
the Merger as a wholly owned subsidiary of Hedstrom, (ii) certain of ERO's
outstanding indebtedness was refinanced by Hedstrom (the "ERO Refinancing") and
(ii) Hedstrom refinanced (the "Hedstrom Refinancing") its existing revolving
credit facility and term loan facility (the Merger, the Tender Offer, the ERO
Refinancing and the Hedstrom Refinancing, are collectively referred to herein as
the "Acquisition").
Holdings and Hedstrom required approximately $301.1 million in cash to
consummate the Acquisition, including approximately (i) $122.6 million paid in
connection with the Tender Offer and the Merger, (ii) $82.6 million paid in
connection with the ERO Refinancing, (iii) $74.9 million paid in connection with
the Hedstrom Refinancing and (iv) $21.0 million incurred in respect of fees and
expenses. The funds required to consummate the Acquisition were provided by (i)
$75.0 million of term loans under a new six-year senior secured term loan
facility (the "Tranche A Term Loan Facility"), (ii) $35.0 million of term loans
under a new eight-year senior secured term loan facility (the "Tranche B Term
Loan Facility" and, together with the Tranche A Term Loan Facility, the "Term
Loan Facilities"), (iii) $16.1 million of borrowings under a new $70.0 million
senior secured revolving credit facility (the "Revolving Credit Facility" and,
together with the Term Loan Facilities, the "Senior Credit Facilities", (iv)
$110.0 million of gross proceeds from the offering by Hedstrom of 10% Senior
Subordinated Notes Due 2007 (the "Senior Subordinated Notes"), (v) $25.0 million
of gross proceeds from the offering by Holdings of 44,612 units consisting of
12% Senior Discount Notes Due 2009 (the "Discount Notes") and 2,705,896 shares
of Common Stock, $.01 par value per share, of Holdings ("Holdings Common Stock")
and (vi) $40.0 million of gross proceeds from the private placement of
31,520,000 shares of Non-Voting Common Stock, $.01 par value per share, of
Holdings ("Holdings Non-Voting Common Stock") and 480,000 shares of Holdings
Common Stock. In addition, Hedstrom entered into a new $70.0 million senior
secured revolving credit facility (the "Revolving Credit Facility") to finance
certain seasonal working capital requirements.
The acquisition of ERO has been accounted for under the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based upon fair value at the date of the
acquisition of ERO. The excess of the purchase price over the fair values of the
tangible net assets acquired was approximately $146.8 million, has been recorded
as goodwill and is being amortized on a straight-line basis over 40 years. In
the event that facts and circumstances indicate that the goodwill may be
impaired, an
F-27
<PAGE> 179
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset would be
compared to the assets carrying amount to determine if an adjustment is
required.
The net purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 59,400
Net property, plant and equipment........................... 20,000
Goodwill.................................................... 146,800
Liabilities assumed......................................... (103,600)
---------
Cash paid for ERO................................. $ 122,600
=========
</TABLE>
In connection with the acquisition of ERO, management implemented a plan
(the "Rationalization Plan") that will result in annual cost savings of $6
million as a result of rationalizing sales, marketing and general and
administrative functions, closings of duplicate facilities and reductions in
external administrative expenditures including legal, insurance, tax, audit and
public relations expenditures. The cost savings outlined below reflect personnel
terminations that have already occurred or that have been formally communicated
to the employees, closings of duplicate facilities that have occurred and
reductions in external administrative expenses that have been negotiated.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Salaries and benefits from personnel terminations..... $$3,700
Duplicative functions and facilities that have been
closed.............................................. 900
External administrative expenses that have been
reduced............................................. 1,400
------
Total Annual Cost Savings................... $6,000
======
</TABLE>
The unaudited pro forma results below assume the Acquisition occurred at
the beginning of the periods presented and that the Rationalization Plan
discussed in the preceding paragraph were implemented at the beginning of the
periods presented (in thousands, except per share amounts):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Net sales.............................................. $142,355 $144,551
Net income (loss)...................................... $ (26) $ (4,447)
Net income (loss) per share............................ $ 0.00 $ (0.07)
</TABLE>
The above pro forma results include adjustments to give effect to
amortization of goodwill, interest expense related to the Senior Subordinated
Notes, the Discount Notes and the Senior Credit Facilities and implementation of
the Rationalization Plan, together with the related tax effects. The pro forma
results are not necessarily indicative of the operating results that would have
occurred had the Acquisition been consummated and had the Rationalization Plan
been implemented as of the beginning of the periods presented, nor are they
necessarily indicative of future operating results.
F-28
<PAGE> 180
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
Senior Subordinated Notes................................... $110,000 $ --
Term Loans.................................................. 113,500 38,500
Senior Discount Notes....................................... 21,618 --
Revolving Credit Facility................................... 2,700 17,400
Other....................................................... 7,571 4,571
-------- -------
$255,389 $60,471
======== =======
</TABLE>
if redeemed during the 12-month period commencing on June 1 of the years
set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2002........................................................ 105.000
2003........................................................ 103.333
2004........................................................ 101.667
2005 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to June 1, 2000,
Hedstrom may redeem in the aggregate up to $44.0 million principal amount of
Senior Subordinated Notes with the proceeds of one or more equity offerings so
long as there is a public market at the time of such redemption (provided that
if the equity offering is an offering by Holdings, a portion of the net cash
proceeds thereof equal to the amount required to redeem any such Senior
Subordinated Notes is contributed to the equity capital of Hedstrom), at a
redemption price (expressed as a percentage of principal amount) of 110%, plus
accrued and unpaid interest, if any, to the redemption date; provided, however,
that at least $66.0 million aggregate principal amount of the Senior
Subordinated Notes remains outstanding after each such redemption.
The Senior Subordinated Notes are unsecured senior subordinated obligations
of Hedstrom and are unconditionally and fully guaranteed (jointly and severally)
on a senior basis by Holdings and on a senior subordinated basis by each
domestic subsidiary of Hedstrom. The Senior Subordinated Notes are subordinated
to all senior indebtedness (as defined) of Hedstrom rank pari passu in right of
payment with all senior subordinated indebtedness (as defined) of Hedstrom.
The Senior Subordinated Notes Indenture contains certain covenants that,
among other things, limit (i) the incurrence of additional indebtedness by
Hedstrom and its restricted subsidiaries (as defined), (ii) the payment of
dividends and other restricted payments by Hedstrom and its restricted
subsidiaries, (iii) restrictions on distributions from restricted subsidiaries,
(iv) asset sales, (v) transactions with affiliates, (vi) sales or issuances of
restricted subsidiary capital stock and (vii) mergers and consolidations.
Term Loans and Revolving Credit Facility
In connection with the Acquisition, Hedstrom's existing term loans of $35.0
million and its existing revolving credit facility borrowings were repaid and
the facilities were terminated. Hedstrom's $3.5 million Industrial Revenue Bond
from Bedford County, which bears interest at 7.13%, was not retired in
connection with the Acquisition.
As discussed in Note 2, in connection with the Acquisition, Hedstrom
obtained the Term Loan Facilities and the Revolving Credit Facility
(collectively, the "Senior Credit Facilities"). The Senior Credit Facilities
consist of (a) a six-year Tranche A Senior Secured Term Loan Facility providing
for term loans to Hedstrom in a principal
F-29
<PAGE> 181
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amount of $75 million; (b) an eight-year Tranche B Senior Secured Term Loan
Facility providing for term loans to Hedstrom in a principal amount of $35
million; and (c) a Senior Secured Revolving Credit Facility providing for
revolving loans to Hedstrom and the issuance of letters of credit for the
account of Hedstrom in an aggregate principal and stated amount at any time not
to exceed $70 million. Borrowings under the Revolving Credit Facility will be
available based upon a borrowing base not to exceed 85% of eligible accounts
receivable and 50% of eligible inventory.
At Hedstrom's option, the interest rates per annum applicable to the Senior
Credit Facilities will be either (i) the Eurocurrency Rate (as defined) plus
2.5% in the case of the Tranche A Term Loan Facility and the Revolving Credit
Facility or 3.0% in the case of the Tranche B Term Loan Facility or (ii) the
Alternate Base Rate (as defined) plus 1.5% in the case of the Tranche A Term
Loan Facility and the Revolving Credit Facility or 2.0% in the case of the
Tranche B Term Loan Facility. The Alternate Base Rate is the highest of (a)
Credit Suisse First Boston's Prime Rate (as defined) or (b) the federal funds
effective rate from time to time plus 0.5%. The applicable margin in respect of
the Tranche A Term Loan Facility and the Revolving Credit Facility will be
adjusted from time to time by amounts to be agreed upon based on the achievement
of certain performance targets to be determined.
The obligations of Hedstrom under the Senior Credit Facilities are
unconditionally, fully and irrevocably guaranteed (jointly and severally) by
Holdings and each of Hedstrom's direct or indirect domestic subsidiaries
(collectively, the "Senior Credit Facilities Guarantors"). In addition, the
Senior Credit Facilities will be secured by first priority or equivalent
security interests in (i) all the capital stock of, or other equity interests
in, each direct or indirect domestic subsidiary of Hedstrom and 65% of the
capital stock of, or other equity interests in, each direct foreign subsidiary
of Hedstrom, or any of its domestic subsidiaries and (ii) all tangible and
intangible assets (including, without limitation, intellectual property and
owned real property) of Hedstrom and the Senior Credit Facilities Guarantors.
The Senior Credit Facilities contain a number of significant covenants
that, among other things, restrict the ability of Hedstrom to dispose of assets,
incur additional indebtedness, repay other indebtedness or amend other debt
instruments, pay dividends, create liens on assets, make investments or
acquisitions, engage in mergers or consolidations, make capital expenditures, or
engage in certain transactions with affiliates. In addition, under the Senior
Credit Facilities, Hedstrom is required to comply with specified minimum
interest coverage and maximum leverage ratios.
Senior Discount Notes
In connection with the Acquisition, Holdings received $25.0 million of
gross proceeds from the issuance by Holdings of 44,612 units, consisting of the
Discount Notes and 2,705,896 shares of Holdings common stock. Of the $25.0
million in gross proceeds, $3.4 million ($1.25 per share) was allocated to the
common stock, based upon management's estimate of fair market value, and $21.6
million was allocated to Discount Notes.
The Discount Notes are unsecured obligations of Holdings and have an
aggregate principal amount at maturity (June 1, 2009) of $44.6 million,
representing a yield to maturity of 12%. No cash interest will accrue on the
Discount Notes prior to June 1, 2002. Thereafter, cash interest will be payable
on June 1 and December 1 of each year, commencing December 1, 2002.
Except as set forth below, the Discount Notes will not be redeemable at the
option of Holdings prior to June 1, 2002. On and after such date, the Discount
Notes will be redeemable, at Holdings' option, in whole or in part, at the
following redemption prices (expressed in percentages of principal amount at
maturity), plus accrued and unpaid interest to the redemption date:
F-30
<PAGE> 182
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
if redeemed during the 12-month period commencing on June 1 of the years
set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2002........................................................ 106.000
2003........................................................ 104.000
2004........................................................ 102.000
2005 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to June 1, 2000,
Holdings may redeem in the aggregate up to 40% of the accreted value of the
Discount Notes with the proceeds of one or more equity offerings by Holdings so
long as there is a public market at the time of such redemption, at a redemption
price (expressed as a percentage of accreted value on the redemption date) of
112%, plus accrued and unpaid interest, if any, to the redemption date; provided
however, that at least $26.8 million aggregate principal amount at maturity of
the Discount Notes remains outstanding after each such redemption.
Senior Subordinated Notes
The $110.0 million Senior Subordinated Notes bear interest at 10% per
annum, payable on June 1 and December 1 of each year, commencing December 1,
1997. The Senior Subordinated Notes mature on June 1, 2007. Except as set forth
below, the Senior Subordinated Notes are not redeemable at the option of
Hedstrom prior to June 1, 2002. On and after such date, the Senior Subordinated
Notes are redeemable, at Hedstrom's option, in whole or in part, at the
following redemption prices (expressed in percentages of principal amount), plus
accrued and unpaid interest to the redemption date:
At any time on or prior to June 1, 2002, the Discount Notes may also be
redeemed as a whole at the option of Holdings upon the occurrence of a change of
control (as defined) at a redemption price equal to 100% of the accreted value
thereof plus the applicable premium as of, and accrued and unpaid interest, if
any, to the date of redemption.
The Discount Notes Indenture contains certain covenants that, among other
things, limit (i) the incurrence of additional indebtedness by Holdings and its
restricted subsidiaries (as defined), (ii) the payment of dividends and other
restricted payments by Holdings and its restricted subsidiaries, (iii)
restrictions on distributions from restricted subsidiaries, (iv) asset sales,
(v) transactions with affiliates, (vi) sales or issuances of restricted
subsidiary capital stock and (vii) mergers and consolidations.
Other Debt
Other debt consists of a $2.5 million Holdings note payable to the previous
owners of Holdings as well as various other mortgages, capital leases and
equipment loans. The $2.5 million note payable bears interest at 10% per annum
and is payable at the earlier of April 30, 2002, or when the Company has met
certain cash flow levels and the mortgages and equipment loans have varying
interest rates and maturities.
F-31
<PAGE> 183
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SUBSIDIARY GUARANTORS/NONGUARANTORS FINANCIAL INFORMATION
The following is financial information pertaining to Hedstrom and its
subsidiary guarantors and subsidiary nonguarantors (with respect to the Senior
Subordinated Notes and the Senior Credit Facilities) for the periods in which
they are included in Holding's accompanying consolidated financial statements.
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AT JUNE 30, 1997 AT DECEMBER 31, 1996
----------------------------------------------------- -------------------------------------
HEDSTROM HEDSTROM HEDSTROM HEDSTROM
SUBSIDIARY SUBSIDIARY ADJUSTMENTS/ TOTAL SUBSIDIARY SUBSIDIARY TOTAL
GUARANTORS NON-GUARANTORS ELIMINATIONS HEDSTROM GUARANTORS NON-GUARANTOR HEDSTROM
---------- -------------- ------------ -------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....... $ 2,666 $ 516 $ (17) $ 3,165 $ 467 $ 66 $ 533
Trade accounts receivable,
net........................... 64,441 5,829 (39) 70,231 13,126 460 13,586
Inventories..................... 32,353 14,627 140 47,120 23,368 448 23,816
Deferred income taxes........... 3,611 -- -- 3,611 5,027 -- 5,027
Prepaid expenses and other...... 3,696 691 -- 4,387 674 16 690
-------- -------- --------- -------- -------- ------- --------
Total current assets...... 106,767 21,663 84 128,514 42,662 990 43,652
PROPERTY, PLANT, AND EQUIPMENT,
net............................. 27,153 15,289 -- 42,442 21,735 8 21,743
Investment in and Advances to
Nonguarantor Subsidiaries..... 241,637 (30,468) (211,169) -- -- -- --
GOODWILL, net..................... 132,672 18,503 (4,375) 146,800 -- -- --
DEFERRED CHARGES AND OTHER, net... 24,241 -- -- 24,241 2,318 -- 2,318
DEFERRED INCOME TAXES(d).......... 7,496 (510) -- 6,986 4,251 -- 4,251
-------- -------- --------- -------- -------- ------- --------
Total assets.............. $539,966 $ 24,477 $(215,460) $348,983 $ 70,966 $ 998 $ 71,964
======== ======== ========= ======== ======== ======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Revolving line of credit........ 2,700 -- -- 2,700 15,430 1,970 17,400
Current portion of term loans... 1,736 4,282 -- 6,018 1,750 -- 1,750
Current portion of capital
leases........................ 353 -- -- 353 215 -- 215
Advances from Nonguarantor
Subsidiaries.................. 143,812 5,718 (149,530) -- -- -- --
Accounts payable(c)............. 21,632 2,988 (1,999) 22,621 11,275 131 11,406
Accrued expenses................ 24,498 3,327 (505) 27,320 3,006 (3) 3,003
-------- -------- --------- -------- -------- ------- --------
Total current
liabilities............. 194,731 16,315 (152,034) 59,012 31,676 2,098 33,774
LONG-TERM DEBT(a):
Senior subordinated notes....... 110,000 -- -- 110,000 -- -- --
Term loans...................... 108,375 -- -- 108,375 36,750 -- 36,750
Capital leases.................. 1,745 -- -- 1,745 1,556 -- 1,556
Other........................... 1,792 588 -- 2,380 300 -- 300
-------- -------- --------- -------- -------- ------- --------
Total long-term debt...... 221,912 588 -- 222,500 38,606 -- 38,606
STOCKHOLDER'S EQUITY
Total Stockholder's equity
(deficit)(b)............ 123,323 7,574 (63,426) 67,471 684 (1,100) (416)
-------- -------- --------- -------- -------- ------- --------
Total liabilities and
Stockholder's equity.... $539,966 $ 24,477 $(215,460) $348,983 $ 70,966 $ 998 $ 71,964
======== ======== ========= ======== ======== ======= ========
</TABLE>
footnotes to follow
F-32
<PAGE> 184
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING INCOME STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997, AND JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997 SIX MONTHS ENDED JUNE 30, 1996
----------------------------------------------------- -------------------------------------
HEDSTROM HEDSTROM HEDSTROM HEDSTROM
SUBSIDIARY SUBSIDIARY ADJUSTMENTS/ TOTAL SUBSIDIARY SUBSIDIARY TOTAL
GUARANTORS NON-GUARANTORS ELIMINATIONS HEDSTROM GUARANTORS NON-GUARANTOR HEDSTROM
---------- -------------- ------------ -------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET SALES............. $100,923 $ 7,024 $(3,896) $104,051 $ 93,403 $ 2,656 $ 96,059
COST OF SALES......... 71,344 4,762 (2,527) 73,579 70,465 2,432 72,897
-------- ------- ------- -------- -------- ------- --------
Gross
profit..... 29,579 2,262 (1,369) 30,472 22,938 224 23,162
SG&A EXPENSES......... 15,270 986 (14) 16,242 14,582 525 15,107
-------- ------- ------- -------- -------- ------- --------
Operating
income
(loss)..... 14,309 1,276 (1,355) 14,230 8,356 (301) 8,055
INTEREST EXPENSE(c)... 4,364 219 -- 4,583 3,404 15 3,419
-------- ------- ------- -------- -------- ------- --------
INCOME (LOSS) BEFORE
TAXES............... 9,945 1,057 (1,355) 9,647 4,952 (316) 4,636
INCOME TAX BENEFIT
(EXPENSE)(d)........ (3,849) (21) 285 (3,585) (1,979) 119 (1,860)
-------- ------- ------- -------- -------- ------- --------
NET INCOME
(LOSS).............. $ 6,096 $ 1,036 $(1,070) $ 6,062 $ 2,973 $ (197) $ 2,776
======== ======= ======= ======== ======== ======= ========
</TABLE>
footnotes to follow
F-33
<PAGE> 185
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997, AND JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997 SIX MONTHS ENDED JUNE 30, 1996
------------------------------------------------------ --------------------------------------
HEDSTROM HEDSTROM HEDSTROM HEDSTROM
SUBSIDIARY SUBSIDIARY ADJUSTMENTS/ TOTAL SUBSIDIARY SUBSIDIARY TOTAL
GUARANTORS NON-GUARANTORS ELIMINATIONS HEDSTROM GUARANTORS NON-GUARANTORS HEDSTROM
---------- -------------- ------------ --------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)(c)(d)....... 6,096 1,036 (1,070) $ 6,062 $ 2,973 $ (197) $ 2,776
Depreciation and
amortization................ 2,614 153 -- 2,767 2,317 5 2,322
Deferred income tax provision
(benefit)(d)................ (2,676) -- -- (2,676) 48 -- 48
Changes in assets and
liabilities:
Accounts receivable......... (30,173) (2,126) 39 (32,260) (26,466) (1,103) (27,569)
Inventories................. 7,830 (1,451) (140) 6,239 3,933 (326) 3,607
Prepaid expenses and
other..................... 979 4 -- 983 (338) (5) (343)
Deferred charges and
other..................... (4,089) 12 -- (4,077) -- -- --
Accounts payable(c)......... (805) 1,100 654 949 2,589 106 2,695
Accrued expenses............ 12,124 1,266 500 13,890 3,931 (192) 3,739
--------- ------- ------- --------- -------- ------- --------
Net cash provided by
(used for) operating
activities............ (8,100) (6) (17) (8,123) (11,013) (1,712) (12,725)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of ERO, Inc....... (122,600) -- -- (122,600) -- -- --
Acquisitions of PP&E.......... (3,444) (2) -- (3,446) (4,791) (1) (4,792)
--------- ------- ------- --------- -------- ------- --------
Net cash used for
investing
activities............ (126,044) (2) -- (126,046) (4,791) (1) (4,792)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from issuance of
Senior Subordinated notes... 110,000 -- -- 110,000 -- -- --
Net proceeds from issuance of
new term loans.............. 110,000 -- -- 110,000 -- -- --
Equity contribution from
Holdings(b)................. 63,062 -- -- 63,062 -- -- --
Borrowings on new revolving
line of credit.............. 2,700 -- -- 2,700 -- -- --
Repayments of old term
loans....................... (91,851) -- -- (91,851) -- -- --
Debt financing cost(b)........ (16,550) -- (16,550) -- -- --
Repayments on old revolving
lines of credit, net........ (38,925) 458 -- (38,467) 14,330 1,728 16,058
Other......................... (2,093) -- -- (2,093) 1,648 -- 1,648
--------- ------- ------- --------- -------- ------- --------
Net cash provided by
(used for) financing
activities............ 136,343 458 -- 136,801 15,978 1,728 17,706
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS.......... 2,199 450 (17) 2,632 174 15 189
CASH AND CASH EQUIVALENTS:
Beginning of period........... 467 66 -- 533 383 5 388
--------- ------- ------- --------- -------- ------- --------
End of period................. $ 2,666 $ 516 $ (17) $ 3,165 $ 557 20 $ 577
========= ======= ======= ========= ======== ======= ========
</TABLE>
The column "Total Hedstrom" represents the consolidated financial statements
of Hedstrom Corporation and its subsidiaries. Hedstrom Corporation is Holdings'
only subsidiary. The primary differences between the consolidated amounts of
Hedstrom Corporation and the consolidated amounts included in the accompanying
consolidated financial statements of Holdings are as follows:
(a) Hedstrom Corporation's Long-Term Debt does not include a $2.5 million note
payable issued by Holdings in connection with the 1995 Recapitalization, and
as of June 30, 1997, the $21.6 million in proceeds from the Units Offering
ascribed to the Holdings' Discount Notes.
(b) Hedstrom Corporation's stockholder's equity includes Holdings' stockholders'
equity plus, as of June 30, 1997 only, $21.6 million in proceeds from the
Units Offering ascribed to the Holdings' Discount Notes (net of certain
transaction costs), which proceeds were contributed as equity by Holdings to
Hedstrom Corporation, and, as of both June 30, 1997 and December 31, 1996,
the $2.5 million related to the 1995 Recapitalization note payable.
(c) Accounts Payable and Interest Expense do not reflect the accrued interest
and interest expense, respectively, on the obligations discussed in (a)
above.
(d) Deferred income taxes does not reflect the deferred tax benefit of accrued
interest on the obligations discussed in (a) above.
F-34
<PAGE> 186
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30,
1997
--------
<S> <C>
Raw materials............................................... $15,806
Work-in-progress............................................ 7,907
Finished goods.............................................. 23,407
-------
$47,120
=======
</TABLE>
6. 1996 COST REDUCTION PLAN:
During fiscal 1996, the Company incurred a loss before income taxes and
recapitalization expenses of $2.4 million. In order to improve Hedstrom's
profitability in 1997 and thereafter, management implemented a plan in the fall
of 1996 (the "1996 Cost Reduction Plan") to reduce costs by over $9 million in
1997 and thereafter as compared with fiscal 1996 levels. Important elements of
the plan include:
- Implementing Just-in-Time Manufacturing. In late 1996, Hedstrom
restructured certain of its manufacturing operations to increase its
daily production capacity of outdoor gym sets. This restructuring has
enabled Hedstrom to manufacture outdoor gym sets to specific customer
orders rather than producing outdoor gym sets in anticipation of customer
orders, which Hedstrom had done in the past because of capacity
constraints. In fiscal 1996, prior to implementing this restructuring,
Hedstrom experienced a significant and unexpected change in its sales mix
of outdoor gym sets, requiring Hedstrom to use third party warehouses to
store many of the outdoor gym sets it had produced in anticipation of
customer demand. As a result, Hedstrom incurred approximately $2.1
million of higher warehouse and material handling costs. The
implementation of just-in-time manufacturing of outdoor gym sets will
enable Hedstrom to carry a lower level of outdoor gym set inventory and,
as a result, to eliminate the need for utilizing third party warehouses
for outdoor gym sets. Management believes the Company will save
approximately $2.1 million of warehouse and material handling expense in
1997 and thereafter as a result of implementing just-in-time
manufacturing of outdoor gym sets.
- Improved Manufacturing Procedures. In an effort to streamline outdoor gym
set production and improve manufacturing efficiencies, in 1996 Hedstrom
(i) reduced its number of outdoor gym set product offerings, (ii)
redesigned certain outdoor gym set components to reduce the cost of such
components and (iii) further standardized many of the components among
its various outdoor gym set product offerings. Management believes these
actions will improve profitability by approximately $2.0 million in 1997
and thereafter over fiscal 1996 levels.
- In-sourcing Certain Plastic Components. Hedstrom periodically evaluates
the economics of producing internally certain plastic components used in
the production and assembly of its outdoor gym sets versus purchasing
such components externally. In 1996, Hedstrom invested approximately $3.0
million in new plastic blow-molding equipment to manufacture many of the
plastic slides that it had previously purchased from third-party vendors.
Management estimates that producing these slides internally will provide
annual cost savings of approximately $1.5 million as compared to fiscal
1996 levels.
- Discontinuation of Trial Advertising Campaign. Hedstrom historically has
advertised its products in cooperation with its retail customers,
principally through print media such as newspaper circulars and
free-standing inserts sponsored by its customers. In fiscal 1996,
Hedstrom initiated, on a trial basis, its own multi-media advertising
program designed to increase consumer awareness of the Hedstrom brand
over time. The total cost for this advertising program was approximately
$1.5 million. After careful review, management determined that this trial
advertising campaign would not provide an acceptable
F-35
<PAGE> 187
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
return on investment and elected to discontinue it. Therefore, such costs
will not be incurred in 1997 and thereafter.
- Restructure Promotional Programs. Consistent with industry practice,
Hedstrom provides retailers with certain promotional allowances, a
portion of which typically is fixed in nature and a portion of which is
based on the volume of customer purchases of Hedstrom products. In late
1996, Hedstrom reduced the fixed component of certain of its promotional
allowances and restructured its promotional programs with several
customers by raising the required volumes necessary to achieve certain
promotional discounts. Management believes these initiatives will improve
profitability in 1997 and thereafter by approximately $1.4 million over
fiscal 1996 levels.
- Personnel Reductions. Hedstrom reduced its number of full-time employees
by approximately 30 people in a variety of departments in the second half
of 1996. Management believes that such personnel reductions will result
in savings of approximately $0.7 million in 1997 and thereafter over
fiscal 1996 levels.
7. RECENT ACCOUNTING PRONOUNCEMENTS
Holdings will adopt SFAS No. 128 "Earnings Per Share", effective December
15, 1997. SFAS No. 128 requires the calculation of basic and diluted earnings
per share. Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share is computed by dividing the net income by the
weighted average number of shares of common stock and common stock equivalents.
As required, Holdings will restate the reported earnings per share upon adoption
of SFAS No. 128. Assuming adoption of SFAS No. 128 basic and diluted earnings
per share for the six months ended June 30, 1997 and 1996, respectively, would
have been the same as reported earnings per share.
Holdings will adopt SFAS No. 129 "Disclosure of information about Capital
Structure", effective December 15, 1997. SFAS No. 129 requires companies to
disclose the pertinent rights and privileges of all securities other than
ordinary common stock. Those disclosures include such things as dividend and
liquidation preferences, participation rights, call prices and dates, conversion
prices, unusual voting rights and others. As required, Holdings will make such
disclosures, if applicable, upon adoption. Management does not believe that SFAS
No. 129 will have a significant impact on Holdings' financial statements.
Holdings will adopt SFAS No. 130, "Reporting Comprehensive Income"
effective January 1, 1998. SFAS No. 130 established standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined as the
total of net income and all other non-owner changes in equity. Management does
not believe that SFAS No. 130 will have a significant impact on Holdings'
financial statements.
Holdings will adopt SFAS No. 131, "Disclosure about Segments of An
Enterprise and Related Information", effective January 1, 1998. This
pronouncement changes the requirements under which public businesses must report
segment information. The objective of the pronouncement is to provide
information about a company's different types of business activities and
different economic environments. SFAS No. 131 will require companies to select
segments based on their internal reporting system. Restatement of prior year
segment disclosure will be required upon adoption of SFAS No. 131. Adoption of
this pronouncement will not have a significant impact on Holdings results of
operations or financial position. Management is evaluating what impact, if any,
adoption will have on Holdings' financial statement disclosures.
F-36
<PAGE> 188
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of ERO, Inc.
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of income, of stockholders' equity, and of cash flows
present fairly, in all material respects, the financial position of ERO, Inc.
and its subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Price Waterhouse LLP
Chicago, Illinois
February 7, 1997, except as to Note 13,
which is as of June 12, 1997
F-37
<PAGE> 189
ERO, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............. $ 5,094 $ 154
Trade accounts receivable, net of
allowance for doubtful accounts of
$287 and $1,038, respectively...... 48,296 38,679
Inventories........................... 22,058 17,001
Prepaid expenses and other current
assets............................. 4,085 2,662
-------- --------
TOTAL CURRENT ASSETS.......... 79,533 58,496
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost,
net of accumulated
depreciation.......................... 20,871 20,348
-------- --------
OTHER ASSETS:
Deferred charges, net of accumulated
amortization....................... 2,648 3,283
Intangible assets, net of accumulated
amortization....................... 56,942 61,212
Deferred income tax benefit........... -- 799
-------- --------
TOTAL OTHER ASSETS............ 59,590 65,294
-------- --------
TOTAL ASSETS.................. $159,994 $144,138
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt..... $ 8,893 $ 6,728
Accounts payable...................... 9,389 6,398
Accrued expenses:
Compensation....................... 1,131 1,207
Commissions and royalties.......... 4,793 2,861
Advertising, freight and other
allowances........................ 3,821 4,777
Purchase price..................... -- 2,960
Other.............................. 1,600 1,991
Income taxes payable.................. 70 2,882
-------- --------
TOTAL CURRENT LIABILITIES..... 29,697 29,804
-------- --------
LONG-TERM DEBT:
Revolving loan........................ 31,525 15,225
Term loan............................. 46,000 54,000
Other loans........................... 9,222 9,045
-------- --------
TOTAL LONG-TERM DEBT.......... 86,747 78,270
-------- --------
DEFERRED INCOME TAX LIABILITY........... 536 --
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value,
9,947,700 shares authorized, no
shares issued and outstanding...... -- --
Common stock, $0.01 par value,
50,000,000 shares authorized,
10,373,300 and 10,346,300 shares
issued, respectively............... 104 103
Capital in excess of par value........ 39,173 38,990
Foreign currency translation
adjustment......................... 3 324
Retained earnings/(accumulated
deficit), per accompanying
statement.......................... 4,507 (3,251)
Common stock held in treasury, 120,000
and 15,000 shares, respectively, at
cost............................... (773) (102)
-------- --------
TOTAL STOCKHOLDERS' EQUITY.... 43,014 36,064
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY........ $159,994 $144,138
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-38
<PAGE> 190
ERO, INC.
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................... $157,913 $128,722 $126,734
Cost of sales............................................... 97,802 80,693 79,776
-------- -------- --------
Gross profit................................................ 60,111 48,029 46,958
Selling, general and administrative expense................. 38,896 33,183 34,078
-------- -------- --------
Operating income............................................ 21,215 14,846 12,880
Interest expense............................................ 9,062 1,997 1,939
-------- -------- --------
Income before income taxes.................................. 12,153 12,849 10,941
Income tax provision........................................ 4,395 5,167 4,482
-------- -------- --------
Net income.................................................. $ 7,758 $ 7,682 $ 6,459
======== ======== ========
Net income per share........................................ $ 0.75 $ 0.73 $ 0.61
Weighted average number of shares outstanding (in
thousands)................................................ 10,316 10,487 10,580
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-39
<PAGE> 191
ERO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 7,758 $ 7,682 $ 6,459
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation of property, plant and equipment.......... 2,739 1,422 1,018
Amortization of other assets........................... 3,395 2,237 2,184
Deferred income taxes.................................. 1,335 (588) (294)
Loss (gain) on the disposition of property, plant and
equipment............................................ 21 (3) 21
Provision for losses on accounts receivable............ 770 343 460
Tax benefit of stock options exercised................. 9 -- 162
Changes in current assets and current liabilities, net
of acquisitions:
Accounts receivable.................................. (10,405) (59) (8,600)
Inventories.......................................... (4,958) 3,626 3,425
Prepaid expenses..................................... (1,414) (936) 471
Accounts payable..................................... 2,942 (7,907) 1,682
Accrued expenses..................................... (657) (1,735) 1,268
Income taxes payable................................. (2,812) 1,500 576
-------- -------- -------
Net cash provided by (used for) operating activities........ (1,277) 5,582 8,832
-------- -------- -------
Cash flows from investing activities:
Acquisitions of property, plant and equipment............. (3,625) (1,772) (1,287)
Proceeds from the sale of property, plant and equipment... 6 3 --
Acquisition of Amav Industries Ltd. ...................... -- (55,098) --
Acquisition of Impact, Inc. .............................. -- -- (4,400)
Acquisition of ERO Canada, Inc. .......................... -- -- (755)
-------- -------- -------
Net cash used for investing activities...................... (3,619) (56,867) (6,442)
-------- -------- -------
Cash flows from financing activities:
Net borrowings (repayments) under revolving loan.......... 16,300 (5,236) (2,775)
Net borrowings (repayments) under term loan............... (6,000) 60,000 --
Net borrowings (repayments) under other loans............. 342 (315) --
Financing fees paid....................................... (310) (3,210) --
Net proceeds from the exercise of stock options........... 175 -- 260
Purchase of common stock for treasury..................... (671) -- --
-------- -------- -------
Net cash provided by (used for) financing activities........ 9,836 51,239 (2,515)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents........ 4,940 (46) (125)
Cash and cash equivalents:
Beginning of year......................................... 154 200 325
-------- -------- -------
End of year............................................... $ 5,094 $ 154 $ 200
======== ======== =======
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 8,515 $ 1,574 $ 1,822
Income taxes paid......................................... 5,872 4,295 4,038
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-40
<PAGE> 192
ERO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL FOREIGN RETAINED
COMMON STOCK IN EXCESS CURRENCY EARNINGS/
---------------------- OF PAR TRANSLATION (ACCUMULATED TREASURY
SHARES PAR VALUE VALUE ADJUSTMENT DEFICIT) STOCK TOTAL
---------- --------- --------- ----------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993............ 10,257,300 $103 $38,568 -- $(17,392) $(102) $21,177
Stock options exercised................. 89,000 -- 260 -- -- -- 260
Tax benefit from stock options
exercised............................. -- -- 162 -- -- -- 162
Foreign currency translation
adjustment............................ -- -- -- $(61) -- -- (61)
Net income.............................. -- -- -- -- 6,459 -- 6,459
---------- ---- ------- ---- -------- ----- -------
Balance at December 31, 1994............ 10,346,300 103 38,990 (61) (10,933) (102) 27,997
Foreign currency translation
adjustment............................ -- -- -- 385 -- -- 385
Net income.............................. -- -- -- -- 7,682 -- 7,682
---------- ---- ------- ---- -------- ----- -------
Balance at December 31, 1995............ 10,346,300 103 38,990 324 (3,251) (102) 36,064
Stock options exercised................. 27,000 1 174 -- -- -- 175
Tax benefit from stock options
exercised............................. -- -- 9 -- -- -- 9
Purchase of common stock for treasury... -- -- -- -- -- (671) (671)
Foreign currency translation
adjustment............................ -- -- -- (321) -- -- (321)
Net income.............................. -- -- -- -- 7,758 -- 7,758
---------- ---- ------- ---- -------- ----- -------
Balance at December 31, 1996............ 10,373,300 $104 $39,173 $ 3 $ 4,507 $(773) $43,014
========== ==== ======= ==== ======== ===== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-41
<PAGE> 193
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF OPERATIONS:
ERO, Inc. ("ERO" or the "Company") is a leading designer, manufacturer,
importer and marketer of children's leisure products. ERO's major product areas
are grouped into four business units: ERO Industries, Inc., which consists of
Slumber Shoppe and water sports products; Impact, Inc., which consists of
back-to-school products; Priss Prints, Inc., which consists of children's room
decor products; and Amav Industries, Inc., which consists of children's
activities, arts and crafts. The Company's products are sold to all major mass
retailers, sporting goods stores, toy retailers and specialty craft chains.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, ERO Industries, Inc., Impact,
Inc., Priss Prints, Inc., Amav Industries, Inc., ERO Canada, Inc. and ERO
Marketing, Inc. All intercompany balances and transactions have been eliminated
in consolidation. These consolidated financial statements include estimates that
are determined by the Company's management.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term investments with original
maturities of three months or less. These investments are stated at cost which
approximates market.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. The cost of manufactured products
includes materials, direct labor and an allocation of plant overheads. The cost
of the purchased products includes inbound freight and duty.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Additions
and improvements are capitalized, while expenditures for maintenance and repairs
are charged to operations as incurred. The cost and accumulated depreciation of
property sold or retired are removed from the respective accounts and the
resultant gains or losses, if any, are included in current operations.
The estimated useful lives of these assets are as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 5-20 years
Machinery and equipment..................................... 3-10 years
Computer hardware and software.............................. 3-5 years
Furniture and fixtures...................................... 5-10 years
</TABLE>
Depreciation is allocated to cost of sales and selling, general and
administrative expense based upon the related asset's use. Depreciation of
approximately $2,046,000, $786,000 and $482,000 is included in cost of sales for
the years ended December 31, 1996, 1995 and 1994, respectively. Depreciation of
approximately $693,000, $636,000 and $536,000 is included in selling, general
and administrative expense for the years ended December 31, 1996, 1995 and 1994,
respectively.
DEFERRED CHARGES
Deferred charges consist of costs associated with certain prepaid
noncompetition agreements and professional fees and other costs incurred in
connection with obtaining borrowings under long-term debt agreements.
F-42
<PAGE> 194
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The costs of noncompetition agreements are amortized over their terms using the
straight-line method. Deferred financing costs are amortized over the life of
the related debt. Fully amortized items are removed from the accounts.
Amortization of noncompetition agreements of approximately $100,000,
$435,000 and $483,000 is included in selling, general and administrative expense
for the years ended December 31, 1996, 1995 and 1994, respectively. Amortization
of deferred financing costs of approximately $845,000, $94,000 and $133,000 is
included as additional interest expense for the years ended December 31, 1996,
1995 and 1994, respectively.
INTANGIBLE ASSETS
Capitalized intangible assets include license agreements, trademarks and
trade names, patents and the excess of cost over the fair value of identifiable
assets acquired (goodwill). License agreements are amortized using an
accelerated method over their average estimated useful lives of 10 years.
Trademarks and trade names and goodwill are amortized using the straight-line
method over their estimated useful lives of 10 years and 15-40 years,
respectively. Patents are amortized using the straight-line method over their
remaining lives.
Amortization of intangible assets of $2,450,000, $1,708,000 and $1,568,000
is included in selling, general and administrative expense for the years ended
December 31, 1996, 1995 and 1994, respectively.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" (SFAS 121). SFAS 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In the event that facts and circumstances indicate that the cost of
long-lived assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow is
required. The Company did not write-down any long-lived assets during the year
ended December 31, 1996.
INCOME TAXES
Deferred income taxes are determined under the asset and liability method
in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". Deferred income taxes arise from temporary
differences between the income tax basis of assets and liabilities and their
reported amounts in the financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, accounts payable and accrued expenses
approximates fair value because of the immediate or short-term maturity of these
financial instruments. The carrying amount reported for long-term debt
approximates fair market value because the underlying instruments are at rates
similar to current rates offered to the Company for debt with the same remaining
maturities.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's foreign
subsidiaries are measured using each subsidiary's local currency as the
functional currency. Assets and liabilities of the foreign subsidiaries are
translated to U.S. dollars using exchange rates in effect at balance sheet
dates. Income and expense items are translated at monthly average rates of
exchange. The resultant translation gains or losses are included in the
component of stockholders' equity designated as foreign currency translation
adjustment. Transaction gains or losses were not significant in any year.
F-43
<PAGE> 195
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER COMMON SHARE
Earnings per share are determined by dividing net income by the weighted
average number of common shares outstanding, including common stock equivalents
(stock options granted), using the treasury stock method.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), encourages, but does not require companies
to record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount the employee must pay to acquire
the stock. See Note 7.
SIGNIFICANT CONCENTRATION OF CUSTOMERS
All trade accounts receivable are unsecured. A significant level of the
Company's net sales is generated from approximately five retail companies that
serve national markets. Sales to the Company's top five customers aggregated
approximately 56%, 60% and 61% of net sales for the years ended December 31,
1996, 1995 and 1994, respectively. Net sales, as a percentage of total net
sales, to the Company's top four customers for the years ended December 31,
1996, 1995 and 1994 were:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
CUSTOMER 1996 1995 1994
-------- ---- ---- ----
<S> <C> <C> <C>
Toys "R" Us................................................. 16% 21% 22%
Wal-Mart.................................................... 17% 16% 20%
Kmart....................................................... 10% 7% 5%
Target...................................................... 7% 12% 11%
</TABLE>
SIGNIFICANT CONCENTRATION OF LICENSORS
The Company has entered into numerous license agreements with multiple
licensors. Typically, these licenses have a life of two years. A significant
level of the Company's net sales is generated from a variety of products
licensed from four licensors. Sales of these products aggregated approximately
42%, 62% and 73% of net sales for the years ended December 31, 1996, 1995 and
1994, respectively. One of the Company's licensors, The Walt Disney Company,
accounted for over 10% of the Company's net sales during 1996, aggregating
approximately 33% of net sales. Two of the Company's licensors, The Walt Disney
Company and Warner Bros., each accounted for over 10% of the Company's net sales
during 1995, aggregating approximately 48% of net sales. Three of the Company's
licensors, The Walt Disney Company, Warner Bros. and Saban Merchandising, Inc.,
each accounted for over 10% of the Company's net sales during 1994, aggregating
approximately 70% of net sales.
NOTE 3 -- ACQUISITIONS:
AMAV INDUSTRIES LTD.
Pursuant to the terms of an asset purchase agreement, on October 1, 1995
(the date effective control was transferred to the Company), the Company,
through its newly formed subsidiary, Amav Industries, Inc. ("Amav"), acquired
certain assets and assumed certain liabilities of Amav Industries Ltd.
("Seller") of Montreal, Quebec and its wholly-owned U.S. subsidiary, and
acquired the stock of its wholly-owned U.K. subsidiary for $54.4 million in
cash. The purchase price for the assets acquired, including related transaction
costs, was approximately $61.3 million. The Company financed the acquisition
through borrowings under a new $110 million credit facility (Note 5).
F-44
<PAGE> 196
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company recorded a $2,960,000 current liability to account for an
estimate of an unpaid purchase price contingency as well as unpaid transaction
costs relating to the acquisition. The actual amount of this liability was paid
in 1996 and approximated the estimate. The purchase agreement also incudes an
additional C$5 million (Canadian dollars) of purchase price contingent upon the
achievement of certain conditions. If these conditions are met, the contingent
purchase price is due to be paid March 1, 1998.
This transaction has been accounted for using the purchase method.
Accordingly, the total purchase price of $61.3 million, which includes
transaction costs, was allocated to the assets acquired and liabilities assumed
based upon their fair market values at the effective date of acquisition.
The fair value of assets acquired and liabilities assumed, reflecting the
final allocation, was as follows:
<TABLE>
<S> <C>
Net working capital......................................... $ 17,748,000
Property, plant and equipment............................... 15,229,000
Goodwill.................................................... 43,755,000
Deferred financing fees..................................... 3,210,000
Debt assumed................................................ (18,674,000)
------------
$ 61,268,000
============
</TABLE>
The income statement for the year ended December 31, 1995 reflects the
operations of Amav since October 1, 1995. Unaudited pro forma combined results
of operations for the Company and Amav for the years ended December 31, 1995 and
1994, as if the acquisition had occurred on January 1, 1994, would be as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Net sales............................................... $154,144,000 $151,530,000
Net income.............................................. $ 6,792,000 $ 3,806,000
Net income per share.................................... $ 0.65 $ 0.36
Weighted average shares outstanding..................... 10,487,000 10,580,000
</TABLE>
The unaudited pro forma amounts are not necessarily indicative of the
actual results of operations had the acquisition occurred on January 1, 1994.
IMPACT, INC.
Effective January 1, 1994, pursuant to the terms of an asset purchase
agreement, the Company, through its newly formed subsidiary, Impact, Inc.,
acquired for $4,400,000 in cash, certain assets of Impact International, Inc.
and Impact Designs, Ltd., marketers of licensed school supplies.
The acquisition has been accounted for using the purchase method.
Accordingly, the net purchase price was allocated to the assets acquired and
liabilities assumed based upon their fair values at the date of acquisition. The
income statement for the year ended December 31, 1994 reflects the operations of
Impact, Inc. since January 1, 1994.
ERO CANADA, INC.
During the third quarter of 1994, the Company incorporated a wholly-owned
subsidiary, ERO Canada, Inc., which subsequently purchased certain assets of a
Canadian manufacturer and distributor of licensed products for a purchase price
of $755,000. These assets primarily consisted of inventories and prepaid
expenses.
F-45
<PAGE> 197
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- COMPOSITION OF BALANCE SHEET ACCOUNTS:
The composition of certain balance sheet accounts is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
INVENTORIES
Raw materials............................................. $ 6,823,000 $ 6,333,000
Work-in-process........................................... 1,720,000 3,090,000
Finished goods............................................ 13,515,000 7,578,000
------------ ------------
$ 22,058,000 $ 17,001,000
============ ============
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements................................ $ 9,049,000 $ 9,066,000
Machinery and equipment................................... 12,817,000 10,490,000
Computer hardware and software............................ 2,856,000 2,186,000
Furniture and fixtures.................................... 1,084,000 1,045,000
------------ ------------
25,806,000 22,787,000
Less: Accumulated depreciation............................ (8,745,000) (6,324,000)
------------ ------------
17,061,000 16,463,000
Land...................................................... 3,810,000 3,885,000
------------ ------------
$ 20,871,000 $ 20,348,000
============ ============
DEFERRED CHARGES
Noncompetition agreements................................. $ -- $ 1,200,000
Deferred financing costs.................................. 3,210,000 3,210,000
------------ ------------
3,210,000 4,410,000
Less: Accumulated amortization............................ (562,000) (1,127,000)
------------ ------------
$ 2,648,000 $ 3,283,000
============ ============
INTANGIBLE ASSETS
License agreements........................................ $ 6,463,000 $ 6,463,000
Trademarks and trade names................................ 3,984,000 3,984,000
Patents................................................... 335,000 335,000
Goodwill.................................................. 60,134,000 61,999,000
------------ ------------
70,916,000 72,781,000
Less: Accumulated amortization............................ (13,974,000) (11,569,000)
------------ ------------
$ 56,942,000 $ 61,212,000
============ ============
</TABLE>
NOTE 5 -- LONG-TERM DEBT:
On December 14, 1995, in connection with the Amav acquisition (Note 3), the
Company amended its existing credit agreement with a group of banks to provide a
$110,000,000 Credit Facility (the "Credit Facility") consisting of a $60,000,000
Term Loan (the "Term Loan"), a $40,000,000 Revolving Credit Facility (the
"Revolving Loan"), and a $10,000,000 Letter of Credit Facility. During 1996, the
Company amended the Credit Facility to provide a seasonal increase of
$10,000,000 to the Revolving Loan limit. This increase was in effect from
September 1, 1996 through January 15, 1997. Borrowings under the Credit Facility
bear interest, at the option of the Company, at either the prime rate plus 1.75%
or a Eurodollar rate plus 3.0%. The Company is also required to pay a commitment
fee of 0.50% per annum on the daily unborrowed portion of the Revolving Loan.
F-46
<PAGE> 198
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Credit Facility, which expires on December 14, 2001, is secured by
substantially all of the Company's assets and contains customary restrictive
covenants requiring the maintenance of certain minimum financial ratios and
limiting the amount of any dividends paid by the Company.
As of December 31, 1996, the Company had two three-year interest rate swap
agreements (the "Swap Agreements") in place with two of its lenders, with
notional amounts totaling $27 million. These Swap Agreements expire on December
31, 1998, however the lenders have the right to extend the expiration dates to
December 29, 2000. Under the Swap Agreements, the Company exchanged a variable
interest rate for a fixed interest rate of 8.41%. The Company anticipates that
the counter parties to the Swap Agreements will fully perform their obligations.
During the year ended December 31, 1996 ERO recognized an immaterial gain on the
Swap Agreements.
The Company also maintains various other mortgages, equipment loans and
other loans ("Other Loans") with varying interest rates and maturities,
including the mortgage on Amav's Montreal, Quebec facility ("Amav Mortgage")
with a balance and interest rate of $5,750,000 and 9.88% at December 31, 1996,
respectively. The Amav Mortgage is payable in full on December 14, 2002, is held
by the Seller and is secured by the Montreal Facility.
Aggregate maturities of long-term debt over the next five years are as
follows: 1997 -- $8,893,000; 1998 -- $10,847,000; 1999 -- $10,658,000;
2000 -- $12,383,000; 2001 -- $14,213,000
NOTE 6 -- INCOME TAXES:
The sources of pretax income (loss) are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Domestic................................ $ (397,000) $ 5,419,000 $10,941,000
Foreign................................. 12,550,000 7,430,000 --
----------- ----------- -----------
$12,153,000 $12,849,000 $10,941,000
=========== =========== ===========
</TABLE>
The Company has not provided for U.S. federal income and foreign income
withholding taxes on its foreign subsidiaries' undistributed earnings as of
December 31, 1996, because such earnings are considered to be indefinitely
reinvested. Repatriation of these earnings would not materially increase the
Company's tax liability. If these earnings were distributed in the form of
dividends or otherwise, foreign tax credits could be used to offset the U.S.
income taxes due on income earned from foreign sources.
The components of the provisions for income taxes are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current:
State................................. $ (21,000) $ 498,000 $ 860,000
U.S. Federal.......................... (102,000) 2,403,000 3,916,000
Foreign............................... 3,183,000 2,854,000 --
---------- ---------- ----------
3,060,000 5,755,000 4,776,000
---------- ---------- ----------
Deferred:
State................................. (7,000) (114,000) (53,000)
U.S. Federal.......................... (33,000) (518,000) (241,000)
Foreign............................... 1,375,000 44,000 --
---------- ---------- ----------
1,335,000 (588,000) (294,000)
---------- ---------- ----------
$4,395,000 $5,167,000 $4,482,000
========== ========== ==========
</TABLE>
F-47
<PAGE> 199
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provisions for income taxes differ from those computed using the
statutory U.S. federal income tax rate as a result of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ---- ---------- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Expected provision.................... $4,132,000 34% $4,369,000 34% $3,720,000 34%
Rate difference on foreign income..... 279,000 2 372,000 3 -- --
State income taxes, net of federal
benefit............................. 1,000 -- 254,000 2 521,000 5
Amortization of goodwill.............. 106,000 1 106,000 1 106,000 1
Other................................. (123,000) (1) 66,000 -- 135,000 1
---------- -- ---------- -- ---------- --
Actual provision...................... $4,395,000 36% $5,167,000 40% $4,482,000 41%
========== == ========== == ========== ==
</TABLE>
The net deferred tax asset (liability) is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
Depreciation of property, plant and equipment............... $(946,000) $(411,000)
Amortization of package design costs........................ 871,000 714,000
Amortization of intangible assets........................... (547,000) 146,000
Allowance for doubtful accounts............................. 70,000 191,000
Additional inventory capitalization......................... 18,000 65,000
Accrued restructuring costs................................. -- 64,000
Other....................................................... (2,000) 30,000
--------- ---------
$(536,000) $ 799,000
========= =========
</TABLE>
NOTE 7 -- STOCK OPTION PLANS:
The Company maintains three stock option plans, the 1988 Key Employee Stock
Option Plan, the 1992 Key Employee Stock Option Plan and the 1992 Directors'
Stock Option Plan, which entitle certain employees and directors of the Company
to acquire up to 490,000, 900,000 and 15,000 shares, respectively, of the
Company's authorized common stock. Options granted under these plans have a
maximum term of 10 years. Awards can no longer be granted under the 1988 plan.
Options granted under the 1992 plans are made at the discretion of the
Compensation Committee of the Board of Directors, are to be issued at no less
than the fair market value of the Company's common stock at the date of the
grant, and vest over periods of time, as determined by the Compensation
Committee.
Additionally, during 1993, options to purchase 540,000 shares of the
Company's common stock were granted to the Company's Chairman, President and
Chief Executive Officer at the fair market value of the Company's common stock
on the date of grant. These options vest in equal annual installments over three
years and have a maximum term of 10 years.
F-48
<PAGE> 200
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of stock option transactions during the three
years ended December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES OPTION PRICES EXERCISE PRICE
--------- ----------------- ----------------
<S> <C> <C> <C>
Shares under option at December 31, 1993........ 1,270,000 $0.974 to $12.750 $ 7.275
Options granted............................... 481,000 6.750 to 8.750 8.005
Options exercised............................. (89,000) 0.974 to 7.250 2.928
Options terminated............................ (451,000) 1.160 to 12.750 10.154
--------- ----------------- -------
Shares under option at December 31, 1994........ 1,211,000 0.974 to 10.125 6.646
Options granted............................... 91,500 6.250 to 8.625 6.773
Options exercised............................. --
Options terminated............................ (62,934) 8.000 to 8.500 8.076
--------- ----------------- -------
Shares under option at December 31, 1995........ 1,239,566 0.974 to 10.125 6.583
Options granted............................... 317,000 5.750 to 6.500 6.020
Options exercised............................. (27,000) 6.456 to 6.456 6.456
Options terminated............................ (111,066) 6.250 to 9.750 7.605
--------- ----------------- -------
Shares under option at December 31, 1996........ 1,418,500 0.974 to 10.125 6.370
--------- ----------------- -------
Shares exercisable at December 31, 1996......... 853,367 0.974 to 10.125 6.168
Shares exercisable at December 31, 1995......... 636,600 0.974 to 10.125 6.122
Shares exercisable at December 31, 1994......... 312,400 $0.974 to $10.125 $ 5.515
--------- ----------------- -------
</TABLE>
At December 31, 1996, 202,500 remaining options are available for grant
under the 1992 Key Employee Stock Option Plan and 9,000 remaining options are
available for grant under the 1992 Director's Stock Option Plan.
The following table summarizes information about shares under option at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE --------------------------
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
- ---------------- --------- ---------------- ---------------- ------- ----------------
<C> <C> <C> <C> <C> <C>
$0.974 - $ 1.320 55,000 2.42 $1.100 55,000 $1.100
5.250 - 5.750 187,000 9.10 5.737 1,000 5.250
6.110 - 6.750 851,500 7.13 6.212 646,900 6.164
7.000 - 7.875 115,000 7.19 7.353 50,000 7.330
8.000 - 8.750 206,600 7.62 8.394 97,067 8.348
9.750 - 10.125 3,400 6.04 9.816 3,400 9.816
--------- ----- ------- ------- -------
$0.974 - $10.125 1,418,500 7.28 $6.370 853,367 $6.168
--------- ----- ------- ------- -------
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's plans been determined based on
the fair value at the grant date for awards in the years ended December 31, 1996
and 1995, the Company's net income and net income per share would not have been
materially different from the amounts reported by the Company.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for options granted during the years ended December 31, 1996
and 1995: dividend yield of 0.0%; risk-free interest rate of 7.5%; and expected
term of 7.5 years. For options granted during the years ended December 31, 1996
and 1995, an expected volatility of 40.0% and 41.7%, respectively, was assumed.
The weighted-average fair value of options granted during the year ended
December 31, 1996 totaled $3.47.
F-49
<PAGE> 201
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- EMPLOYEE BENEFIT PLAN:
The Company maintains a contributory profit sharing plan established
pursuant to the provisions of Section 401(k) of the Internal Revenue Code which
provides retirement benefits for eligible employees of the Company. The Company
may make annual discretionary contributions to the plan. Discretionary
contributions during the years ended December 31, 1996, 1995 and 1994 aggregated
$187,000, $72,000 and $296,000, respectively.
NOTE 9 -- COMMITMENTS UNDER OPERATING LEASE AGREEMENTS:
The Company leases certain office and distribution facilities and
manufacturing and office equipment under operating lease agreements with terms
expiring at various times through 2001.
Aggregate future minimum lease commitments, exclusive of escalation
payments, for noncancellable leases that have initial or remaining lease terms
in excess of one year as of December 31, 1996 are as follows: 1997 --
$1,159,000; 1998 -- $982,000; 1999 -- $421,000; 2000 -- $55,000;
2001 -- $53,000.
Rent expense under operating leases for the years ended December 31, 1996,
1995 and 1994 aggregated approximately $1,035,000, $1,544,000 and $1,006,000,
respectively.
NOTE 10 -- STOCK REPURCHASE:
On October 19, 1995, the Company's Board of Directors approved the
repurchase of up to 500,000 shares of the Company's common stock. Such
repurchases can be made from time to time in the open market, in privately
negotiated transactions or otherwise. As of December 31, 1996, the Company had
repurchased 105,000 shares of common stock under this program at a total cost of
$671,000. The Company's Credit Facility allows for annual stock repurchases of
up to 10% of the prior year's net income, or $776,000, in 1997.
NOTE 11 -- GEOGRAPHIC INFORMATION:
Summarized geographic information for the years ended December 31, 1996 and
1995 is as follows (in thousands):
<TABLE>
<CAPTION>
UNITED OTHER FOREIGN
1996 STATES CANADA OPERATIONS ELIMINATIONS TOTAL
---- -------- ------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers......... $139,579 $11,205 $7,129 $ -- $157,913
Transfers between geographic areas...... 9,649 52,637 -- (62,286) --
-------- ------- ------ --------- --------
Total net sales......................... $149,228 $63,842 $7,129 $ (62,286) $157,913
-------- ------- ------ --------- --------
Operating income........................ $ 6,206 $15,760 $ 675 $ (1,426) $ 21,215
-------- ------- ------ --------- --------
Identifiable assets..................... $210,106 $64,761 $5,145 $(120,018) $159,994
-------- ------- ------ --------- --------
</TABLE>
<TABLE>
<CAPTION>
UNITED OTHER FOREIGN
1995 STATES CANADA OPERATIONS ELIMINATIONS TOTAL
---- -------- ------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers....... $121,314 $ 6,261 $1,147 $ -- $128,722
Transfers between geographic areas.... 2,389 18,332 -- (20,721) --
-------- ------- ------ --------- --------
Total net sales....................... $123,703 $24,593 $1,147 $ (20,721) $128,722
-------- ------- ------ --------- --------
Operating income...................... $ 8,029 $ 7,544 $ 334 $ (1,061) $ 14,846
-------- ------- ------ --------- --------
Identifiable assets................... $194,500 $66,026 $5,645 $(122,033) $144,138
-------- ------- ------ --------- --------
</TABLE>
The Company generated no material foreign income for the year ended
December 31, 1994 and owned no material foreign assets at December 31, 1994.
F-50
<PAGE> 202
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized unaudited quarterly data for the years ended December 31, 1996
and 1995 are as follows (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER
------------------------------------------------
1996 FIRST SECOND THIRD FOURTH TOTAL
---- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net sales................................... $18,883 $29,609 $49,633 $59,788 $157,913
Gross profit................................ 5,619 11,115 18,310 25,067 60,111
Operating income (loss)..................... (1,934) 2,812 7,771 12,566 21,215
Net income (loss)........................... (2,228) 483 3,067 6,436 7,758
Net income (loss) per share................. $(0.21) $ 0.05 $ 0.30 $ 0.62 $ 0.75
Weighted average number of shares
outstanding (in thousands)................ 10,364 10,324 10,305 10,406 10,316
Market price of common stock:
High...................................... $ 7.250 $ 7.250 $ 6.250 $ 8.750 $ 8.750
Low....................................... 5.750 $ 5.750 4.250 5.125 4.250
</TABLE>
<TABLE>
<CAPTION>
QUARTER
------------------------------------------------
1995 FIRST SECOND THIRD FOURTH TOTAL
---- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net sales................................... $14,807 $37,478 $28,238 $48,199 $128,722
Gross profit................................ 5,622 13,081 9,983 19,343 48,029
Operating income............................ 375 3,576 2,026 8,869 14,846
Net income.................................. 65 1,906 1,014 4,697 7,682
Net income per share........................ $ 0.01 $ 0.18 $ 0.10 $ 0.45 $ 0.73
Weighted average number of shares
outstanding (in thousands)................ 10,495 10,540 10,529 10,380 10,487
Market price of common stock:
High...................................... $ 8.250 $ 9.250 $ 9.000 $ 7.250 $ 9.250
Low....................................... 6.750 7.000 6.500 5.250 5.250
</TABLE>
NOTE 13 -- SUBSEQUENT EVENT:
On April 10, 1997, Hedstrom Holdings, Inc. and HC Acquisition Corp., a
wholly owned subsidiary of Hedstrom Holdings, Inc., entered into an Agreement
and Plan of Merger (the "Merger Agreement") with ERO to acquire the Company for
a total enterprise value of approximately $200 million. Pursuant to the Merger
Agreement, HC Acquisition Corp. commenced and, on June 12, 1997, consummated a
tender offer for all of the outstanding shares of common stock of the Company.
Following is consolidating financial information pertaining to the Company
and its subsidiary guarantors and its subsidiary nonguarantors (with respect to
Hedstrom Holdings, Inc.'s 10% Senior Subordinated Notes Due 2007, which are
unsecured senior subordinated obligations of Hedstrom, and Senior Credit
Facilities, which are secured by 100% of the stock of Hedstrom Corporation and
its domestic subsidiaries and 65% of the capital stock of each foreign
subsidiary of Hedstrom) for the years ended December 31, 1996 and 1995.
F-51
<PAGE> 203
ERO, INC.
CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
------------------------------------------------------------ -------------------------------
PARENT PARENT
COMPANY COMPANY
AND TOTAL AND TOTAL
SUBSIDIARY SUBSIDIARY ERO, INC. SUBSIDIARY SUBSIDIARY
GUARANTORS NON-GUARANTORS ELIMINATION CONSOLIDATED GUARANTORS NON-GUARANTORS
-------------- -------------- ----------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.............. $ 3,992 $ 1,102 $ -- $ 5,094 $ 154 $ --
Accounts receivable........ 40,496 8,118 (318) 48,296 32,944 5,737
Inventories................ 16,073 7,595 (1,610) 22,058 12,596 5,437
Prepaid expenses and
other.................... 3,784 301 -- 4,085 2,709 575
-------- ------- --------- -------- -------- --------
Total current assets..... 64,345 17,116 (1,928) 79,533 48,403 11,749
-------- ------- --------- -------- -------- --------
Property, plant, and
equipment, net........... 6,118 14,753 -- 20,871 6,522 13,826
-------- ------- --------- -------- -------- --------
Goodwill................... 26,835 30,107 -- 56,942 28,188 33,024
Deferred financing costs... 1,460 1,188 -- 2,648 1,855 1,428
Deferred income taxes...... -- -- -- -- 843 --
Investment in/advances to
Subsidiaries............. 107,344 -- (107,344) -- 104,716 --
-------- ------- --------- -------- -------- --------
Total other assets....... 135,639 31,295 (107,344) 59,590 135,602 34,452
-------- ------- --------- -------- -------- --------
Total assets................. $206,102 $63,164 $(109,272) $159,994 $190,527 $ 60,027
======== ======= ========= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of
long-term debt........... $ 8,120 $ 773 $ -- $ 8,893 $ 6,123 $ 605
Accounts payable........... 6,289 4,235 (1,135) 9,389 3,400 3,319
Accrued expenses........... 9,527 2,156 (338) 11,345 11,618 2,872
Income taxes payable
(receivable)............. (408) (866) 1,344 70 1,047 1,284
-------- ------- --------- -------- -------- --------
Total current
liabilities............ 23,528 6,298 (129) 29,697 22,188 8,080
-------- ------- --------- -------- -------- --------
Revolving loan............. 29,727 1,798 -- 31,525 15,225 --
Term loan.................. 40,250 5,750 -- 46,000 54,000 --
Intercompany advance and
other.................... 70,490 -- (61,268) 9,222 63,050 7,263
-------- ------- --------- -------- -------- --------
Total long-term debt..... 140,467 7,548 (61,268) 86,747 132,275 7,263
Intercompany -- other long-
term liability and
equity................... -- 33,831 (33,831) -- -- 40,188
Deferred income taxes...... (907) 1,443 -- 536 -- --
-------- ------- --------- -------- -------- --------
Total stockholders' equity... 43,014 14,044 (14,044) 43,014 36,064 4,496
-------- ------- --------- -------- -------- --------
Total liabilities and
stockholders' equity....... $206,102 $63,164 $(109,272) $159,994 $190,527 $ 60,027
======== ======= ========= ======== ======== ========
<CAPTION>
AT DECEMBER 31, 1995
--------------------------
ERO, INC.
ELIMINATION CONSOLIDATED
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash
equivalents.............. $ -- $ 154
Accounts receivable........ (2) 38,679
Inventories................ (1,032) 17,001
Prepaid expenses and
other.................... (622) 2,662
--------- ---------
Total current assets..... (1,656) 58,496
--------- ---------
Property, plant, and
equipment, net........... -- 20,348
--------- ---------
Goodwill................... -- 61,212
Deferred financing costs... -- 3,283
Deferred income taxes...... (44) 799
Investment in/advances to
Subsidiaries............. (104,716) --
--------- ---------
Total other assets....... (104,760) 65,294
--------- ---------
Total assets................. $(106,416) $ 144,138
========= =========
Current liabilities:
Current portion of
long-term debt........... $ -- $ 6,728
Accounts payable........... (321) 6,398
Accrued expenses........... (694) 13,796
Income taxes payable
(receivable)............. 551 2,882
--------- ---------
Total current
liabilities............ (464) 29,804
--------- ---------
Revolving loan............. -- 15,225
Term loan.................. -- 54,000
Intercompany advance and
other.................... (61,268) 9,045
--------- ---------
Total long-term debt..... (61,268) 78,270
Intercompany -- other long-
term liability and
equity................... (40,188) --
Deferred income taxes...... -- --
--------- ---------
Total stockholders' equity... (4,496) 36,064
--------- ---------
Total liabilities and
stockholders' equity....... $(106,416) $ 144,138
========= =========
</TABLE>
F-52
<PAGE> 204
ERO, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------
PARENT
COMPANY
AND TOTAL
STATEMENT OF SUBSIDIARY SUBSIDIARY ERO, INC.
OPERATIONS GUARANTORS NON-GUARANTORS ELIMINATION CONSOLIDATED
------------ ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales............ $90,074 $67,839 $ -- $157,913
Cost of sales........ 50,593 47,209 -- 97,802
------- ------- ------- --------
Gross profit......... 39,481 20,630 -- 60,111
Selling, general and
administrative..... 34,329 4,567 -- 38,896
------- ------- ------- --------
Operating income..... 5,152 16,063 -- 21,215
Interest............. 6,126 2,936 -- 9,062
------- ------- ------- --------
Income before income
taxes.............. (974) 13,127 -- 12,153
Income tax
provision.......... 816 3,579 -- 4,395
------- ------- ------- --------
Net income (loss)
before equity
income
adjustment......... (1,790) 9,548 -- 7,758
Equity income in
subsidiaries....... 9,548 -- (9,548) --
------- ------- ------- --------
Net income (loss).... $ 7,758 $ 9,548 $(9,548) $ 7,758
======= ======= ======= ========
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------
PARENT
COMPANY
AND TOTAL
STATEMENT OF SUBSIDIARY SUBSIDIARY ERO, INC.
OPERATIONS GUARANTORS NON-GUARANTORS ELIMINATION CONSOLIDATED
------------ ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales............ $107,911 $20,811 $ -- $128,722
Cost of sales........ 67,643 13,050 -- 80,693
-------- ------- ------- --------
Gross profit......... 40,268 7,761 -- 48,029
Selling, general and
administrative..... 31,551 1,632 -- 33,183
-------- ------- ------- --------
Operating income..... 8,717 6,129 -- 14,846
Interest............. 1,633 364 -- 1,997
-------- ------- ------- --------
Income before income
taxes.............. 7,084 5,765 -- 12,849
Income tax
provision.......... 3,898 1,269 -- 5,167
-------- ------- ------- --------
Net income (loss)
before equity
income
adjustment......... 3,186 4,496 -- 7,682
Equity income in
subsidiaries....... 4,496 -- (4,496) --
-------- ------- ------- --------
Net income (loss).... $ 7,682 $ 4,496 $(4,496) $ 7,682
======== ======= ======= ========
</TABLE>
F-53
<PAGE> 205
ERO, INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------
PARENT
COMPANY TOTAL
AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC.
GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income..................... $ 7,758 $ 9,548 $(9,548) $ 7,758
Adjustments to reconcile net
income to net cash (used for)
provided by operating
activities:
Equity income in
subsidiaries............... (9,548) -- 9,548 --
Depreciation of property,
plant and equipment........ 1,255 1,484 -- 2,739
Amortization of other
assets..................... 2,370 1,025 -- 3,395
Deferred income taxes........ (110) 1,445 -- 1,335
(Gain) loss on the
disposition of property,
plant and equipment........ -- 21 -- 21
Provision for losses on
accounts receivable........ 716 54 -- 770
Tax benefit of stock options
exercised.................. 9 -- -- 9
Changes in current assets and
current liabilities, net of
acquisitions:
Accounts receivable........ (8,024) (2,381) -- (10,405)
Inventories................ (2,800) (2,158) -- (4,958)
Prepaid expenses and other
current assets........... (1,688) 274 -- (1,414)
Accounts payable........... 1,556 1,386 -- 2,942
Accrued expenses........... 529 (1,186) -- (657)
Intercompany other
long-term liability...... 6,179 (6,179) -- --
Income taxes............... (1,341) (1,471) -- (2,812)
------- ------- ------- --------
Net cash (used for) provided by
operating activities........... (3,139) 1,862 -- (1,277)
------- ------- ------- --------
Cash flows from investing
activities:
Acquisitions of property, plant
and equipment................ (2,406) (1,219) -- (3,625)
Acquisition of Amav Industries,
Ltd. ........................ -- -- -- --
Proceeds from the sale of
property, plant and
equipment.................... -- 6 -- 6
------- ------- ------- --------
Net cash used for investing
activities..................... (2,406) (1,213) -- (3,619)
------- ------- ------- --------
Cash flows from financing
activities:
Net borrowings under revolving
loan facility................ 16,189 111 -- 16,300
Net repayments under term loan
facility..................... (6,000) -- -- (6,000)
Net repayments under other
loans........................ -- 342 -- 342
Financing fees paid............ (310) -- -- (310)
Purchase of common stock for
treasury..................... 175 -- -- 175
Net proceeds from the exercise
of stock options............. (671) -- -- (671)
------- ------- ------- --------
Net cash provided (used) by
financing activities........... 9,383 453 -- 9,836
------- ------- ------- --------
Net increase (decrease) in cash
and cash equivalents........... 3,838 1,102 -- 4,940
Cash and cash equivalents:
Beginning of period............ 154 -- -- 154
------- ------- ------- --------
End of period.................. $ 3,992 $ 1,102 $ -- $ 5,094
======= ======= ======= ========
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------
PARENT
COMPANY TOTAL
AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC.
GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income..................... $ 7,682 $ 4,496 $(4,496) $ 7,682
Adjustments to reconcile net
income to net cash (used for)
provided by operating
activities:
Equity income in
subsidiaries............... (4,496) -- 4,496 --
Depreciation of property,
plant and equipment........ 1,189 233 -- 1,422
Amortization of other
assets..................... 2,024 213 -- 2,237
Deferred income taxes........ (632) 44 -- (588)
(Gain) loss on the
disposition of property,
plant and equipment........ (3) -- -- (3)
Provision for losses on
accounts receivable........ 214 129 -- 343
Tax benefit of stock options
exercised.................. -- -- -- --
Changes in current assets and
current liabilities, net of
acquisitions:
Accounts receivable........ 2,894 (2,953) -- (59)
Inventories................ 671 2,955 -- 3,626
Prepaid expenses and other
current assets........... (1,069) 133 -- (936)
Accounts payable........... (3,289) (4,618) -- (7,907)
Accrued expenses........... (2,021) 286 -- (1,735)
Intercompany other
long-term liability...... (7,399) 7,399 -- --
Income taxes............... 196 1,304 -- 1,500
-------- ------- ------- --------
Net cash (used for) provided by
operating activities........... (4,039) 9,621 -- 5,582
-------- ------- ------- --------
Cash flows from investing
activities:
Acquisitions of property, plant
and equipment................ (1,052) (720) -- (1,772)
Acquisition of Amav Industries,
Ltd. ........................ (55,098) -- -- (55,098)
Proceeds from the sale of
property, plant and
equipment.................... 3 -- -- 3
-------- ------- ------- --------
Net cash used for investing
activities..................... (56,147) (720) -- (56,867)
-------- ------- ------- --------
Cash flows from financing
activities:
Net borrowings under revolving
loan facility................ 3,350 (8,586) -- (5,236)
Net repayments under term loan
facility..................... 60,000 -- -- 60,000
Net repayments under other
loans........................ -- (315) -- (315)
Financing fees paid............ (3,210) -- -- (3,210)
Purchase of common stock for
treasury..................... -- -- -- --
Net proceeds from the exercise
of stock options............. -- -- -- --
-------- ------- ------- --------
Net cash provided (used) by
financing activities........... 60,140 (8,901) -- 51,239
-------- ------- ------- --------
Net increase (decrease) in cash
and cash equivalents........... (46) -- -- (46)
Cash and cash equivalents:
Beginning of period............ 200 -- -- 200
-------- ------- ------- --------
End of period.................. $ 154 $ -- $ -- $ 154
======== ======= ======= ========
</TABLE>
F-54
<PAGE> 206
ERO, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents............... $ 1,364 $ 5,094
Trade accounts receivable, net of
allowance for doubtful accounts....... 22,419 48,296
Inventories............................. 25,237 22,058
Prepaid expenses and other current
assets................................ 5,067 4,085
Prepaid income taxes.................... 3,084 --
-------- --------
TOTAL CURRENT ASSETS.................... 57,171 79,533
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost,
net of accumulated depreciation....... 20,244 20,871
-------- --------
OTHER ASSETS:
Deferred charges, net of accumulated
amortization....................... 2,592 2,648
Intangible assets, net of accumulated
amortization....................... 56,374 56,942
-------- --------
TOTAL OTHER ASSETS...................... 58,966 59,590
-------- --------
TOTAL ASSETS............................ $136,381 $159,994
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt....... $ 9,393 $ 8,893
Accounts payable........................ 7,765 9,389
Accrued expenses:
Compensation.......................... 1,139 1,131
Commissions and royalties............. 2,578 4,793
Advertising, freight and other
allowances......................... 1,963 3,821
Other................................. 2,160 1,600
Income taxes payable.................... -- 70
-------- --------
TOTAL CURRENT LIABILITIES............... 24,998 29,697
-------- --------
LONG-TERM DEBT:
Revolving loan........................ 17,600 31,525
Term loan............................. 43,500 46,000
Other loans........................... 8,938 9,222
-------- --------
TOTAL LONG-TERM DEBT.................... 70,038 86,747
-------- --------
DEFERRED TAX LIABILITY.................. 696 536
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value,
9,947,700 shares authorized, no
shares issued and outstanding...... -- --
Common stock, $0.01 par value,
50,000,000 shares authorized,
10,394,300 shares issued........... 104 104
Capital in excess of par value........ 39,329 39,173
Foreign currency translation
adjustment......................... (365) 3
Retained earnings..................... 2,354 4,507
Common stock held in treasury, 120,000
shares and 15,000 shares,
respectively, at cost.............. (773) (773)
-------- --------
TOTAL STOCKHOLDERS' EQUITY.............. 40,649 43,014
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................ $136,381 $159,994
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-55
<PAGE> 207
ERO, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1997 1996
------- -------
<S> <C> <C>
Net sales................................................... $19,939 $18,883
Cost of sales............................................... 13,814 13,264
------- -------
Gross profit................................................ 6,125 5,619
Selling, general and administrative expense................. 7,763 7,553
------- -------
Operating loss.............................................. (1,638) (1,934)
Interest expense............................................ 2,010 1,846
------- -------
Loss before income taxes.................................... (3,648) (3,780)
Income tax benefit.......................................... (1,495) (1,552)
------- -------
Net loss.................................................... $(2,153) $(2,228)
======= =======
Net loss per share.......................................... $ (0.20) $ (0.21)
Weighted average number of shares outstanding (in
thousands)................................................ 10,652 10,364
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-56
<PAGE> 208
ERO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1997 1996
--------- --------
<S> <C> <C>
Net loss.................................................... $ (2,153) $(2,228)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation of property, plant and equipment............. 742 631
Amortization of other assets.............................. 715 847
Deferred income taxes..................................... 160 592
Provision for losses on accounts receivable............... 68 164
Tax benefit of stock options exercised.................... 18 --
Changes in current assets and current liabilities, net of
acquisitions:
Accounts receivable.................................... 25,659 16,523
Inventories............................................ (3,304) (3,181)
Prepaid expenses and other current assets.............. (982) (611)
Accounts payable....................................... (1,592) 102
Accrued expenses....................................... (3,469) (3,648)
Income taxes payable................................... (3,154) (4,398)
-------- -------
Net cash provided by operating activities................... 12,708 4,793
-------- -------
Cash flows from investing activities:
Acquisitions of property, plant and equipment............. (289) (448)
-------- -------
Net cash used for investing activities...................... (289) (448)
-------- -------
Cash flows from financing activities:
Net repayments under revolving loan facility.............. (13,925) (1,275)
Net repayments under term loan facility................... (2,000) (1,500)
Net repayments under other loans.......................... (284) (182)
Financing fees paid....................................... (78) --
Net proceeds from the exercise of stock options........... 138 --
Purchase of common stock for treasury..................... -- (671)
-------- -------
Net cash used for financing activities...................... (16,149) (3,628)
-------- -------
Net increase (decrease) in cash and cash equivalents........ (3,730) 717
Cash and cash equivalents:
Beginning of period....................................... 5,094 154
-------- -------
End of period............................................. $ 1,364 $ 871
======== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-57
<PAGE> 209
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- PRINCIPLES OF CONSOLIDATION:
The accompanying interim consolidated financial statements include the
accounts of ERO, Inc. (the "Company") and its wholly-owned subsidiaries, ERO
Industries, Inc., Impact, Inc., Priss Prints, Inc., Amav Industries, Inc., ERO
Canada, Inc. and ERO Marketing, Inc. These financial statements are unaudited
but, in the opinion of management, contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
condition, results of operations and cash flows of the Company.
The interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, as
filed with the Securities and Exchange Commission.
The results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results to be expected for the entire fiscal year.
NOTE 2 -- INVENTORIES:
Inventories at March 31, 1997 and December 31, 1996 consist of the
following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
Raw materials..................................... $ 7,277,000 $ 6,823,000
Work-in-process................................... 4,161,000 1,720,000
Finished goods.................................... 13,799,000 13,515,000
----------- -----------
$25,237,000 $22,058,000
=========== ===========
</TABLE>
NOTE 3 -- SUBSEQUENT EVENT:
On April 10, 1997, Hedstrom Holdings, Inc. and HC Acquisition Corp., a
wholly owned subsidiary of Hedstrom Holdings, Inc., entered into an Agreement
and Plan of Merger (the "Merger Agreement") with ERO to acquire the Company for
a total enterprise value of approximately $200 million. Pursuant to the Merger
Agreement, HC Acquisition Corp. commenced and, on June 12, 1997, consummated a
tender offer for all of the outstanding shares of common stock of the Company.
Following is consolidating financial information pertaining to the Company
and its subsidiary guarantors and its subsidiary nonguarantors (with respect to
Hedstrom Holdings, Inc.'s 10% Senior Subordinated Notes Due 2007, which are
unsecured senior subordinated obligations of Hedstrom, and Senior Credit
Facilities, which are secured by 100% of the stock of Hedstrom Corporation and
its domestic subsidiaries and 65% of the capital stock of each foreign
subsidiary of Hedstrom) for the three months ended March 31, 1997 and 1996.
F-58
<PAGE> 210
ERO, INC.
CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AT MARCH 31, 1997 AT MARCH 31, 1996
---------------------------------------------------- -----------------------
PARENT PARENT
COMPANY TOTAL COMPANY TOTAL
AND SUBSIDIARY AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC. SUBSIDIARY NON-
GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED GUARANTORS GUARANTORS
---------- ---------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............................. $ 904 $ 460 $ -- $ 1,364 $ 454 $ 417
Accounts receivable....................... 18,698 3,721 -- 22,419 18,595 3,138
Inventories............................... 16,137 9,216 (116) 25,237 14,731 6,753
Prepaid expenses and
other................................... 4,364 703 -- 5,067 3,280 1,484
Deferred income taxes..................... 4,694 (1,610) -- 3,084 -- --
-------- ------- --------- -------- -------- -------
Total current assets.................... 44,797 12,490 (116) 57,171 37,060 11,792
-------- ------- --------- -------- -------- -------
Property, plant, and equipment, net....... 5,933 14,311 -- 20,244 6,319 13,674
-------- ------- --------- -------- -------- -------
Goodwill.................................. 26,469 29,905 -- 56,374 27,786 32,813
Deferred financing costs.................. 1,464 1,128 -- 2,592 1,682 1,367
Deferred income taxes..................... -- -- -- -- 160 1
Investment in/advances to Subsidiaries.... 107,139 -- (107,139) -- 94,731 --
-------- ------- --------- -------- -------- -------
Total other assets...................... 135,072 31,033 (107,139) 58,966 124,359 34,181
-------- ------- --------- -------- -------- -------
Total assets................................ $185,802 $57,834 $(107,255) $136,381 $167,738 $59,647
======== ======= ========= ======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......... $ 8,620 $ 773 $ -- $ 9,393 $ 6,623 $ 605
Accounts payable.......................... 5,548 2,214 3 7,765 2,950 3,201
Accrued expenses.......................... 4,718 3,122 -- 7,840 6,505 3,461
Income taxes payable (receivable)......... 1,604 (2,329) 725 -- 156 (511)
-------- ------- --------- -------- -------- -------
Total current liabilities............... 20,490 3,780 728 24,998 16,234 6,756
-------- ------- --------- -------- -------- -------
Revolving loan............................ 17,600 -- -- 17,600 13,950 --
Term loan................................. 43,500 -- -- 43,500 52,000 --
Intercompany advance and other............ 62,916 7,290 (61,268) 8,938 52,811 17,320
-------- ------- --------- -------- -------- -------
Total long-term debt.................... 124,016 7,290 (61,268) 70,038 118,761 17,320
Intercompany -- other long-term liability
and equity.............................. -- 33,372 (33,372) -- -- 31,569
Deferred revenue.......................... 647 49 -- 696 (46) 46
-------- ------- --------- -------- -------- -------
Total stockholders' equity.................. 40,649 13,343 (13,343) 40,649 32,789 3,956
-------- ------- --------- -------- -------- -------
Total liabilities and stockholders'
equity.................................... $185,802 $57,834 $(107,255) $136,381 $167,738 $59,647
======== ======= ========= ======== ======== =======
<CAPTION>
AT MARCH 31, 1996
--------------------------
ERO, INC.
ELIMINATION CONSOLIDATED
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash
equivalents............................. $ -- $ 871
Accounts receivable....................... 155 21,888
Inventories............................... (1,502) 19,982
Prepaid expenses and
other................................... -- 4,764
Deferred income taxes..................... -- --
-------- --------
Total current assets.................... (1,347) 47,505
-------- --------
Property, plant, and equipment, net....... -- 19,993
-------- --------
Goodwill.................................. -- 60,599
Deferred financing costs.................. -- 3,049
Deferred income taxes..................... 46 207
Investment in/advances to Subsidiaries.... (94,731) --
-------- --------
Total other assets...................... (94,685) 63,855
-------- --------
Total assets................................ $(96,032) $131,353
======== ========
Current liabilities:
Current portion of long-term debt......... $ -- $ 7,228
Accounts payable.......................... 299 6,450
Accrued expenses.......................... 107 10,073
Income taxes payable (receivable)......... 355 --
-------- --------
Total current liabilities............... 761 23,751
-------- --------
Revolving loan............................ -- 13,950
Term loan................................. -- 52,000
Intercompany advance and other............ (61,268) 8,863
-------- --------
Total long-term debt.................... (61,268) 74,813
Intercompany -- other long-term liability
and equity.............................. (31,569) --
Deferred revenue.......................... -- --
-------- --------
Total stockholders' equity.................. (3,956) 32,789
-------- --------
Total liabilities and stockholders'
equity.................................... $(96,032) $131,353
======== ========
</TABLE>
F-59
<PAGE> 211
ERO, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
----------------------------------------------------
PARENT
COMPANY TOTAL
AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC.
STATEMENT OF OPERATIONS GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
----------------------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales................................... $12,804 $7,135 $ -- $19,939
Cost of sales............................... 7,895 5,919 -- 13,814
------- ------ ---- -------
Gross profit................................ 4,909 1,216 -- 6,125
Selling, general and administrative......... 6,472 1,291 -- 7,763
------- ------ ---- -------
Operating income
(loss).................................... (1,563) (75) -- (1,638)
Interest.................................... 1,338 672 -- 2,010
------- ------ ---- -------
Income (loss) before income taxes........... (2,901) (747) -- (3,648)
Income tax provision (benefit).............. (1,495) -- -- (1,495)
------- ------ ---- -------
Net income (loss) before equity income
adjustment................................ (1,406) (747) -- (2,153)
Equity income in subsidiaries............... (747) -- 747 --
------- ------ ---- -------
Net income (loss)........................... $(2,153) $ (747) $747 $(2,153)
======= ====== ==== =======
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
----------------------------------------------------
PARENT
COMPANY TOTAL
AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC.
STATEMENT OF OPERATIONS GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
----------------------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales................................... $ 9,296 $9,587 $ -- $18,883
Cost of sales............................... 5,972 7,292 -- 13,264
------- ------ ---- -------
Gross profit................................ 3,324 2,295 -- 5,619
Selling, general and administrative......... 5,912 1,641 -- 7,553
------- ------ ---- -------
Operating income
(loss).................................... (2,588) 654 -- (1,934)
Interest.................................... 651 1,195 -- 1,846
------- ------ ---- -------
Income (loss) before income taxes........... (3,239) (541) -- (3,780)
Income tax provision (benefit).............. (1,552) -- -- (1,552)
------- ------ ---- -------
Net income (loss) before equity income
adjustment................................ (1,687) (541) -- (2,228)
Equity income in subsidiaries............... (541) -- 541 --
------- ------ ---- -------
Net income (loss)........................... $(2,228) $ (541) $541 $(2,228)
======= ====== ==== =======
</TABLE>
F-60
<PAGE> 212
ERO, INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
----------------------------------------------------
PARENT
COMPANY TOTAL
AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC.
GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ (2,153) $ 747 $747 $ (2,153)
Adjustments to reconcile net income to net
cash (used for) provided by operating
activities:
Equity income in subsidiaries........... 747 -- (747) --
Depreciation of property, plant
and equipment......................... 309 433 -- 742
Amortization of other assets............ 453 262 -- 715
Deferred income taxes................... 1,770 (1,610) -- 160
(Gain) loss on the disposition of
property,
plant and equipment................... -- -- -- --
Provision for losses on accounts
receivable............................ 60 8 -- 68
Tax benefit of stock options
exercised............................. 18 -- -- 18
Changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable................... 21,262 4,397 -- 25,659
Inventories........................... (1,683) (1,621) -- (3,304)
Prepaid expenses and other current
assets.............................. (580) (402) -- (982)
Accounts payable...................... 429 (2,021) -- (1,592)
Accrued expenses...................... (4,435) 966 -- (3,469)
Intercompany other long-term
liability........................... 1,226 (1,226) -- --
Income taxes.......................... (4,609) 1,455 -- (3,154)
-------- ------- ---- --------
Net cash (used for) provided by
operating activities...................... 12,814 (106) -- 12,708
-------- ------- ---- --------
Cash flows from investing activities:
Acquisitions of property, plant and
equipment............................... (71) (218) -- (289)
-------- ------- ---- --------
Net cash used for investing activities...... (71) (218) -- (289)
-------- ------- ---- --------
Cash flows from financing activities:
Net borrowings under revolving loan
facility................................ (13,925) -- -- (13,925)
Net repayments under term loan facility... (2,000) -- -- (2,000)
Net repayments under other loans.......... (26) (258) -- (284)
Financing fees paid....................... (18) (60) -- (78)
Purchase of common stock for treasury..... -- -- -- --
Net proceeds from the exercise of
stock options........................... 138 -- -- 138
-------- ------- ---- --------
Net cash provided (used) by financing
activities................................ (15,831) (318) -- (16,149)
-------- ------- ---- --------
Net increase (decrease) in cash and
cash equivalents.......................... (3,088) (642) -- (3,730)
Cash and cash equivalents:
Beginning of period....................... 3,992 1,102 -- 5,094
-------- ------- ---- --------
End of period............................. $ 904 $ 460 $ -- $ 1,364
======== ======= ==== ========
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
----------------------------------------------------
PARENT
COMPANY TOTAL
AND SUBSIDIARY
SUBSIDIARY NON- ERO, INC.
GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ (2,228) $ (541) $ 541 $(2,228)
Adjustments to reconcile net income to net
cash (used for) provided by operating
activities:
Equity income in subsidiaries........... 541 -- (541) --
Depreciation of property, plant
and equipment......................... 322 309 -- 631
Amortization of other assets............ 559 288 -- 847
Deferred income taxes................... 2,036 (1,444) -- 592
(Gain) loss on the disposition of
property,
plant and equipment................... -- -- -- --
Provision for losses on accounts
receivable............................ 201 (37) -- 164
Tax benefit of stock options
exercised............................. -- -- -- --
Changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable................... 11,506 5,017 -- 16,523
Inventories........................... (4,023) 842 -- (3,181)
Prepaid expenses and other current
assets.............................. 572 (1,183) -- (611)
Accounts payable...................... 3,682 (3,580) -- 102
Accrued expenses...................... (5,283) 1,635 -- (3,648)
Intercompany other long-term
liability........................... 10,990 (10,990) -- --
Income taxes.......................... (4,753) 355 -- (4,398)
-------- ------- ----- -------
Net cash (used for) provided by
operating activities...................... 14,122 (9,329) -- 4,793
-------- ------- ----- -------
Cash flows from investing activities:
Acquisitions of property, plant and
equipment............................... (422) (26) -- (448)
-------- ------- ----- -------
Net cash used for investing activities...... (422) (26) -- (448)
-------- ------- ----- -------
Cash flows from financing activities:
Net borrowings under revolving loan
facility................................ (1,275) -- -- (1,275)
Net repayments under term loan facility... (1,500) -- -- (1,500)
Net repayments under other loans.......... (9,954) 9,772 -- (182)
Financing fees paid....................... -- -- -- --
Purchase of common stock for treasury..... (671) -- -- (671)
Net proceeds from the exercise of
stock options........................... -- -- -- --
-------- ------- ----- -------
Net cash provided (used) by financing
activities................................ (13,400) 9,772 -- (3,628)
-------- ------- ----- -------
Net increase (decrease) in cash and
cash equivalents.......................... 300 417 -- 717
Cash and cash equivalents:
Beginning of period....................... 154 -- -- 154
-------- ------- ----- -------
End of period............................. $ 454 $ 417 $ -- $ 871
======== ======= ===== =======
</TABLE>
F-61
<PAGE> 213
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY HEDSTROM CORPORATION OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE ISSUERS
SINCE SUCH DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 4
Risk Factors.......................... 26
Use of Proceeds....................... 34
Capitalization........................ 35
Unaudited Pro Forma Consolidated
Financial Information............... 36
Selected Consolidated Historical
Financial Data of Holdings.......... 41
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of Hedstrom and
Holdings............................ 42
Selected Consolidated Historical
Financial Data of ERO............... 52
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of ERO................ 53
Business.............................. 56
Management............................ 67
Stock Ownership and Certain
Transactions........................ 72
Description of the Senior Credit
Facilities.......................... 75
The Exchange Offers................... 77
Certain United States Federal Income
Tax Considerations Relating to the
Exchange Offers..................... 86
Description of New Senior Subordinated
Notes............................... 87
Description of the New Discount
Notes............................... 115
Certain Material United States Federal
Income Tax Considerations with
Respect to the New Notes............ 140
Description of Capital Stock.......... 147
Plan of Distribution.................. 149
Legal Matters......................... 149
Independent Auditors.................. 149
Index to Financial Statements......... F-1
</TABLE>
---------------------
UNTIL MARCH 5, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
[HEDSTROM LOGO]
Offer for All Outstanding
10% Senior Subordinated Notes
Due 2007
in Exchange for
10% Senior Subordinated Notes
Due 2007
of
Hedstrom Corporation
Offer for All Outstanding
12% Senior Discount Notes
Due 2009
in Exchange for
12% Senior Discount Notes
Due 2009
of
Hedstrom Holdings, Inc.
PROSPECTUS
November 4, 1997
- ------------------------------------------------------
<PAGE> 214
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses payable in connection with the
offering of the securities to be registered and offered hereby. All of such
expenses are estimates, other than the registration fee payable to the
Securities and Exchange Commission.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 41,018.08
-----------
Printing and Engraving Expenses............................. 100,000.00
-----------
Legal Fees and Expenses..................................... 62,500.00
-----------
Accounting Fees and Expenses................................ 42,500.00
-----------
Miscellaneous............................................... 10,000.00
-----------
Total............................................. $256,018.08
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware law authorizes corporations to limit or to eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. The certificate of
incorporation of each Issuer, as amended, limits the liability of such Issuer's
directors to such Issuer or its stockholders to the fullest extent permitted by
the Delaware statute as in effect from time to time. Specifically, directors of
an Issuer will not be personally liable for monetary damages for breach of a
director's fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to such Issuer or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in the Delaware law, or (iv) for
any transaction from which the director derived an improper personal benefit.
The certificate of incorporation, as amended, of each Issuer provides that
such Issuer shall indemnify its officers and directors and former officers and
directors to the fullest extent permitted by the General Corporation Law of the
State of Delaware. Pursuant to the provisions of Section 145 of the General
Corporation Law of the State of Delaware, each Issuer has the power to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit, or proceeding (other than an
action by or in the right of such Issuer) by reason of the fact that he is or
was a director, officer, employee, or agent of such Issuer, against any and all
expenses, judgments, fines, and amounts paid in actually and reasonably incurred
in connection with such action, suit, or proceeding. The power to indemnify
applies only if such person acted in good faith and in a manner he reasonably
believed to be in the best interest or not opposed to the best interest, of the
Issuer and with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of an
Issuer as well, but only to the extent of defense and settlement expenses and
not to any satisfaction of a judgment or settlement of the claim itself, and
with the further limitation that in such actions no indemnification shall be
made in the event of any adjudication of negligence or misconduct unless the
court, in its discretion, believes that in light of all the circumstances
indemnification should apply.
The statute further specifically provides that the indemnification
authorized thereby shall not be deemed exclusive of any other rights to which
any such officer or director may be entitled under any bylaws, agreements, vote
of stockholders or disinterested directors, or otherwise.
Insofar as indemnifications for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of an Issuer pursuant to the foregoing
provisions, or otherwise, the Issuers have been advised that in the opinion of
the Securities and
II-1
<PAGE> 215
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by an
Issuer of expenses incurred or paid by a director, officer or controlling person
thereof in the successful defense of any action, suit or proceeding) is asserted
by a director, officer or controlling person in connection with the securities
being registered, such Issuer will, unless in the opinion of its counsel the
matter has been settled by controlled precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On June 12, 1997, Hedstrom sold $110,000,000 aggregate principal amount of
Old Senior Subordinated Notes in a private placement in reliance on Section 4(2)
under the Securities Act, at a price equal to 100% of the stated principal
amount of such Old Senior Subordinated Notes. The Old Senior Subordinated Notes
were immediately resold by the initial purchasers thereof in reliance on Rule
144A under the Securities Act.
On June 12, 1997, Holdings sold 44,612 Units consisting of $44,612,000
aggregate principal amount at maturity of Old Discount Notes and 2,705,896
shares of Holdings Common Stock in a private placement in reliance of Section
4(2) under the Securities Act, for a total price of $25,000,000. The Old
Discount Notes were immediately resold by the initial purchasers thereof in
reliance on Rule 144A under the Securities Act.
On October 27, 1995, in connection with the 1995 Recapitalization, Holdings
issued (i) to HM Fund II and certain other parties, an aggregate of 32,941,499
shares of Holdings Common Stock, and (ii) to certain officers of Hedstrom and
other individuals, Subordinated Notes, Promissory Notes (Series A) and
Promissory Notes (Series B) in private placements in reliance on Section 4(2)
under the Securities Act. The aggregate amount of the Subordinated Notes issued
was $2.5 million. The Promissory Notes (Series A) and the Promissory Notes
(Series B) are earn-out notes, the principal amounts of which are determined
according to sales and EBITDA levels during 1996 and 1997, subject to aggregate
limits of $6,000,000 and $9,000,000 respectively. No cash was received by
Holdings upon issuance of any of the Notes.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
<C> <S>
2.1 -- Agreement and Plan of Merger, dated as of April 10, 1997,
among Hedstrom Corporation, HC Acquisition Corp. and ERO,
Inc.*
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.*
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.*
3.3 -- Restated Bylaws of Hedstrom Holdings, Inc.*
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.*
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.*
3.6 -- By-Laws of Hedstrom Corporation.*
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.*
3.8 -- Amended and Restated Bylaws of ERO, Inc.*
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.*
</TABLE>
II-2
<PAGE> 216
<TABLE>
<CAPTION>
<C> <S>
3.10 -- By-Laws of ERO Industries, Inc.*
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.*
3.12 -- Bylaws of ERO Marketing, Inc.*
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.*
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.*
3.15 -- By-Laws of Priss Prints, Inc.*
3.16 -- Certificate of Incorporation of Impact, Inc., as filed
with the Secretary of State of the State of Delaware on
November 3, 1993.*
3.17 -- By-Laws of Impact, Inc.*
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.*
3.19 -- By-Laws of ERO Canada, Inc.*
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.*
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.*
3.22 -- By-Laws of Amav Industries, Inc.*
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.*
4.2 -- Form of Old Senior Subordinated Note (included as Exhibit
1 to the Appendix of Exhibit 4.1 hereto).*
4.3 -- Form of New Senior Subordinated Note (included as Exhibit
A to Exhibit 4.1 hereto).*
4.4 -- Indenture, dated as of June 1, 1997, among Hedstrom
Holdings, Inc. and United States Trust Company of New
York, as Trustee.*
4.5 -- Form of Old Discount Note (included as Exhibit 1 to the
Appendix of Exhibit 4.4 hereto).*
4.6 -- Form of New Discount Note (included as Exhibit A to
Exhibit 4.4 hereto).*
4.7 -- Purchase Agreement, dated as of June 9, 1997, among
Hedstrom Corporation and Hedstrom Holdings, Inc., as
Issuers, and Credit Suisse First Boston Corporation,
Societe Generale Securities Corporation and UBS
Securities LLC, as Initial Purchasers.*
4.8 -- Registration Rights Agreement, dated as of June 9, 1997,
among Hedstrom Corporation and Hedstrom Holdings, Inc.,
as Issuers, and Credit Suisse First Boston Corporation,
Societe Generale Securities Corporation and UBS
Securities LLC, as Initial Purchasers.*
4.9 -- Common Stock Registration Rights Agreement, dated as of
June 9, 1997, among Hedstrom Holdings, Inc. and Credit
Suisse First Boston Corporation, Societe Generale
Securities Corporation and UBS Securities LLC, as Initial
Purchasers.*
5.1 -- Opinion of Weil, Gotshal & Manges LLP as to the New
Senior Subordinated Notes issued hereby.*
5.2 -- Opinion of Weil, Gotshal & Manges LLP as to the New
Discount Notes issued hereby.*
</TABLE>
II-3
<PAGE> 217
<TABLE>
<CAPTION>
<C> <S>
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.*
10.2 -- Form of Tranche A Note (included as Exhibit A to Exhibit
10.1 hereto).*
10.3 -- Form of Tranche B Note (included as Exhibit B to Exhibit
10.1 hereto).*
10.4 -- Form of Revolving Credit Note (included as Exhibit C to
Exhibit 10.1 hereto).*
10.5 -- Form of Swing Line Note (included as Exhibit D to Exhibit
10.1 hereto).*
10.6 -- Master Guarantee and Collateral Agreement, dated as of
June 12, 1997, made by Hedstrom Corporation, Hedstrom
Holdings, Inc. and the other Grantors party thereto in
favor of Credit Suisse First Boston Corporation, as
Administrative Agent.*
10.7 -- Open End Mortgage, dated as of June 12, 1997, from
Hedstrom Corporation, as Mortgagor, to Credit Suisse
First Boston Corporation, as Mortgagee.*
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.*
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.*
10.10 -- Mortgage of Shares, dated as of June 12, 1997, between
Hedstrom Corporation, as Chargor, and Credit Suisse First
Boston, as Administrative Agent.*
10.11 -- Mortgage of Shares, dated as of June 12, 1997, between
Amav Industries, Inc., as Chargor, and Credit Suisse
First Boston, as Administrative Agent.*
10.12 -- Stockholders Agreement, dated as of October 27, 1995,
among Hedstrom Holdings and the Holders listed on the
signature pages thereof.*
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.*
10.14 -- Form of Subordinated Note issued by Hedstrom Holdings,
Inc.*
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.*
10.16 -- Form of Promissory Note (Series A) issued by Hedstrom
Holdings, Inc.*
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.*
10.18 -- Form of Promissory Note (Series B) issued by Hedstrom
Holdings, Inc.*
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.*
10.20 -- Executive Employment Agreement, dated as of October 27,
1995, among Hedstrom Holdings, Inc., Hedstrom Corporation
and Arnold E. Ditri.*
10.21 -- Executive Employment Agreement, dated as of October 27,
1995, between Hedstrom Corporation and Alastair
McKelvie.*
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.*
10.23 -- Financial Advisory Agreement, dated as of October 27,
1995, among Hedstrom Holdings, Inc., Hedstrom Corporation
and HM2/Management Partners, L.P.*
10.24 -- Hedstrom Holdings, Inc. 1995 Stock Option Plan.*
10.25 -- Manufacturing Agreement, dated as of July 21, 1987,
between Euro-Matic Ltd. and Hedstrom Corporation.*
10.26 -- Manufacturing and Royalty Agreement, dated as of April
13, 1994, between Euro-Matic Ltd. and Hedstrom
Corporation.*
</TABLE>
II-4
<PAGE> 218
<TABLE>
<CAPTION>
<C> <S>
10.27 -- Manufacturing Agreement, dated as of December 21, 1994,
between Euro-Matic Limited and Hedstrom Corporation.*
10.28 -- Lease, dated as of January 24, 1992, between J.J.D.
Properties and Hedstrom Corporation.*
10.29 -- Net Lease Agreement, dated as of May 26, 1992, between
Opus North Corporation and ERO Industries, Inc.*
10.30 -- Specimen of Disney License Agreement (with Schedule of
other Disney license agreements).* (Portions of this
document have been redacted and filed with the Commission
pursuant to a request for confidential treatment)
10.31 -- Consent to Assignment, effective as of June 12, 1997,
among ERO Marketing, Inc., Impact International, Inc.,
Priss Prints, Inc., Amav Industries, Ltd., ERO Canada,
Inc., Hedstrom Corporation and Disney Enterprises, Inc.*
(Portions of this document have been redacted and filed
with the Commission pursuant to a request for
confidential treatment)
12.1 -- Statement Re: Computation of Ratio of Earnings to Fixed
Charges.*
21.1 -- Subsidiaries of the Company.*
23.1 -- Consent of Weil, Gotshal & Manges LLP (included in the
opinion filed as Exhibit 5.1 to this Registration
Statement).*
23.2 -- Consent of Weil, Gotshal & Manges LLP (included in the
opinion filed as Exhibit 5.2 to this Registration
Statement).*
23.3 -- Consent of Arthur Andersen LLP, independent auditors.**
23.4 -- Consent of Price Waterhouse LLP, independent auditors.**
24.1 -- Power of Attorney for Hedstrom Corporation.*
24.2 -- Power of Attorney for Hedstrom Holdings, Inc.*
24.3 -- Power of Attorney for ERO, Inc.*
24.4 -- Power of Attorney for ERO Industries, Inc.*
24.5 -- Power of Attorney for ERO Marketing, Inc.*
24.6 -- Power of Attorney for Priss Prints, Inc.*
24.7 -- Power of Attorney for Impact, Inc.*
24.8 -- Power of Attorney for ERO Canada, Inc.*
24.9 -- Power of Attorney for Amav Industries, Inc.*
25.1 -- Form T-1 of IBJ Schroder Bank & Trust Company, as Trustee
under the Indenture filed as Exhibit 4.1.*
25.2 -- Form T-1 of United States Trust Company of New York, as
Trustee under the Indenture filed as Exhibit 4.4.*
99.1 -- Form of Letter of Transmittal for 10% Senior Subordinated
Notes due 2007 of Hedstrom Corporation.**
99.2 -- Form of Notice of Guaranteed Delivery for 10% Senior
Subordinated Notes due 2007 of Hedstrom Corporation.**
99.3 -- Form of Letter of Transmittal for 12% Senior Discount
Notes due 2009 of Hedstrom Holdings, Inc.**
99.4 -- Form of Notice of Guaranteed Delivery for 12% Senior
Discount Notes due 2009 of Hedstrom Holdings, Inc.**
</TABLE>
- ---------------
* Previously filed
** Filed herewith.
II-5
<PAGE> 219
(B) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted since the required information is either
not present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or the notes thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned Co-registrants hereby undertaken:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at the time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) See Item 14.
II-6
<PAGE> 220
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Co-Registrants have duly caused this Registration Statement to be signed on
their behalf by the undersigned, thereunto duly authorized, in the City of Mount
Prospect, State of Illinois, on the 3rd day of November, 1997.
HEDSTROM CORPORATION
HEDSTROM HOLDINGS, INC.
By: /s/ DAVID F. CROWLEY
----------------------------------
David F. Crowley
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board of Directors November 3, 1997
- ----------------------------------------------------- of the Co-Registrants listed
Robert H. Elman above
* President, Chief Executive Officer November 3, 1997
- ----------------------------------------------------- and Director of the
Arnold E. Ditri Co-Registrants listed above
(Principal Executive Officer)
/s/ DAVID F. CROWLEY Chief Financial Officer of the November 3, 1997
- ----------------------------------------------------- Co-Registrants listed above
David F. Crowley (Principal Financial and
Accounting Officer)
* Director of the Co-Registrants November 3, 1997
- ----------------------------------------------------- listed above
Alan B. Menkes
* /s/ DAVID F. CROWLEY
- -----------------------------------------------------
David F. Crowley
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 221
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Co-Registrants have duly caused this Registration Statement to be signed on
their behalf by the undersigned, thereunto duly authorized, in the City of Mount
Prospect, State of Illinois, on the 3rd day of November, 1997.
ERO, INC.
ERO, INDUSTRIES, INC.
ERO MARKETING, INC.
PRISS PRINTS INC.
IMPACT, INC.
ERO CANADA, INC.
AMAV INDUSTRIES, INC.
By: /s/ DAVID F. CROWLEY
----------------------------------
David F. Crowley
Treasurer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President and sole Director of the November 3, 1997
- ----------------------------------------------------- Co-Registrants listed above
Arnold E. Ditri (Principal Executive Officer)
/s/ DAVID F. CROWLEY Treasurer of the Co-Registrants November 3, 1997
- ----------------------------------------------------- listed above (Principal
David F. Crowley Financial and Accounting
Officer)
* /s/ DAVID F. CROWLEY
- -----------------------------------------------------
David F. Crowley
Attorney-In-Fact
</TABLE>
II-8
<PAGE> 222
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated as of April 10, 1997,
among Hedstrom Corporation, HC Acquisition Corp. and ERO,
Inc.*
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.*
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.*
3.3 -- Restated Bylaws of Hedstrom Holdings, Inc.*
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.*
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.*
3.6 -- By-Laws of Hedstrom Corporation.*
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.*
3.8 -- Amended and Restated Bylaws of ERO, Inc.*
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.*
3.10 -- By-Laws of ERO Industries, Inc.*
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.*
3.12 -- Bylaws of ERO Marketing, Inc.*
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.*
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.*
3.15 -- By-Laws of Priss Prints, Inc.*
3.16 -- Certificate of Incorporation of Impact, Inc., as filed
with the Secretary of State of the State of Delaware on
November 3, 1993.*
3.17 -- By-Laws of Impact, Inc.*
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.*
3.19 -- By-Laws of ERO Canada, Inc.*
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.*
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.*
3.22 -- By-Laws of Amav Industries, Inc.*
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.*
</TABLE>
<PAGE> 223
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
4.2 -- Form of Old Senior Subordinated Note (included as Exhibit
1 to the Appendix of Exhibit 4.1 hereto).*
4.3 -- Form of New Senior Subordinated Note (included as Exhibit
A to Exhibit 4.1 hereto).*
4.4 -- Indenture, dated as of June 1, 1997, among Hedstrom
Holdings, Inc. and United States Trust Company of New
York, as Trustee.*
4.5 -- Form of Old Discount Note (included as Exhibit 1 to the
Appendix of Exhibit 4.4 hereto).*
4.6 -- Form of New Discount Note (included as Exhibit A to
Exhibit 4.4 hereto).*
4.7 -- Purchase Agreement, dated as of June 9, 1997, among
Hedstrom Corporation and Hedstrom Holdings, Inc., as
Issuers, and Credit Suisse First Boston Corporation,
Societe Generale Securities Corporation and UBS
Securities LLC, as Initial Purchasers.*
4.8 -- Registration Rights Agreement, dated as of June 9, 1997,
among Hedstrom Corporation and Hedstrom Holdings, Inc.,
as Issuers, and Credit Suisse First Boston Corporation,
Societe Generale Securities Corporation and UBS
Securities LLC, as Initial Purchasers.*
4.9 -- Common Stock Registration Rights Agreement, dated as of
June 9, 1997, among Hedstrom Holdings, Inc. and Credit
Suisse First Boston Corporation, Societe Generale
Securities Corporation and UBS Securities LLC, as Initial
Purchasers.*
5.1 -- Opinion of Weil, Gotshal & Manges LLP as to the New
Senior Subordinated Notes issued hereby.*
5.2 -- Opinion of Weil, Gotshal & Manges LLP as to the New
Discount Notes issued hereby.*
10.1 -- Credit Agreement, dated as of June 12, 1997, among
Hedstrom Corporation, Hedstrom Holdings, Inc., the
Lenders from time to time parties thereto, Societe
Generale, as Documentation Agent, UBS Securities LLC, as
Syndication Agent, and Credit Suisse First Boston
Corporation, as Administrative Agent.*
10.2 -- Form of Tranche A Note (included as Exhibit A to Exhibit
10.1 hereto).*
10.3 -- Form of Tranche B Note (included as Exhibit B to Exhibit
10.1 hereto).*
10.4 -- Form of Revolving Credit Note (included as Exhibit C to
Exhibit 10.1 hereto).*
10.5 -- Form of Swing Line Note (included as Exhibit D to Exhibit
10.1 hereto).*
10.6 -- Master Guarantee and Collateral Agreement, dated as of
June 12, 1997, made by Hedstrom Corporation, Hedstrom
Holdings, Inc. and the other Grantors party thereto in
favor of Credit Suisse First Boston Corporation, as
Administrative Agent.*
10.7 -- Open End Mortgage, dated as of June 12, 1997, from
Hedstrom Corporation, as Mortgagor, to Credit Suisse
First Boston Corporation, as Mortgagee.*
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.*
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.*
10.10 -- Mortgage of Shares, dated as of June 12, 1997, between
Hedstrom Corporation, as Chargor, and Credit Suisse First
Boston, as Administrative Agent.*
10.11 -- Mortgage of Shares, dated as of June 12, 1997, between
Amav Industries, Inc., as Chargor, and Credit Suisse
First Boston, as Administrative Agent.*
10.12 -- Stockholders Agreement, dated as of October 27, 1995,
among Hedstrom Holdings and the Holders listed on the
signature pages thereof.*
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.*
</TABLE>
<PAGE> 224
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.14 -- Form of Subordinated Note issued by Hedstrom Holdings,
Inc.*
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.*
10.16 -- Form of Promissory Note (Series A) issued by Hedstrom
Holdings, Inc.*
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.*
10.18 -- Form of Promissory Note (Series B) issued by Hedstrom
Holdings, Inc.*
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.*
10.20 -- Executive Employment Agreement, dated as of October 27,
1995, among Hedstrom Holdings, Inc., Hedstrom Corporation
and Arnold E. Ditri.*
10.21 -- Executive Employment Agreement, dated as of October 27,
1995, between Hedstrom Corporation and Alastair
McKelvie.*
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.*
10.23 -- Financial Advisory Agreement, dated as of October 27,
1995, among Hedstrom Holdings, Inc., Hedstrom Corporation
and HM2/Management Partners, L.P.*
10.24 -- Hedstrom Holdings, Inc. 1995 Stock Option Plan.*
10.25 -- Manufacturing Agreement, dated as of July 21, 1987,
between Euro-Matic Ltd. and Hedstrom Corporation.*
10.26 -- Manufacturing and Royalty Agreement, dated as of April
13, 1994, between Euro-Matic Ltd. and Hedstrom
Corporation.*
10.27 -- Manufacturing Agreement, dated as of December 21, 1994,
between Euro-Matic Limited and Hedstrom Corporation.*
10.28 -- Lease, dated as of January 24, 1992, between J.J.D.
Properties and Hedstrom Corporation.*
10.29 -- Net Lease Agreement, dated as of May 26, 1992, between
Opus North Corporation and ERO Industries, Inc.*
10.30 -- Specimen of Disney License Agreement (with Schedule of
other Disney license agreements).* (Portions of this
document have been redacted and filed with the Commission
pursuant to a request for confidential treatment)
10.31 -- Consent to Assignment, effective as of June 12, 1997,
among ERO Marketing, Inc., Impact International, Inc.,
Priss Prints, Inc., Amav Industries, Ltd., ERO Canada,
Inc., Hedstrom Corporation and Disney Enterprises, Inc.*
(Portions of this document have been redacted and filed
with the Commission pursuant to a request for
confidential treatment)
12.1 -- Statement Re: Computation of Ratio of Earnings to Fixed
Charges.*
21.1 -- Subsidiaries of the Company.*
23.1 -- Consent of Weil, Gotshal & Manges LLP (included in the
opinion filed as Exhibit 5.1 to this Registration
Statement).*
23.2 -- Consent of Weil, Gotshal & Manges LLP (included in the
opinion filed as Exhibit 5.2 to this Registration
Statement).*
23.3 -- Consent of Arthur Andersen LLP, independent auditors.**
23.4 -- Consent of Price Waterhouse LLP, independent auditors.**
24.1 -- Power of Attorney for Hedstrom Corporation.*
24.2 -- Power of Attorney for Hedstrom Holdings, Inc.*
</TABLE>
<PAGE> 225
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
24.3 -- Power of Attorney for ERO, Inc.*
24.4 -- Power of Attorney for ERO Industries, Inc.*
24.5 -- Power of Attorney for ERO Marketing, Inc.*
24.6 -- Power of Attorney for Priss Prints, Inc.*
24.7 -- Power of Attorney for Impact, Inc.*
24.8 -- Power of Attorney for ERO Canada, Inc.*
24.9 -- Power of Attorney for Amav Industries, Inc.*
25.1 -- Form T-1 of IBJ Schroder Bank & Trust Company, as Trustee
under the Indenture filed as Exhibit 4.1.*
25.2 -- Form T-1 of United States Trust Company of New York, as
Trustee under the Indenture filed as Exhibit 4.4.*
99.1 -- Form of Letter of Transmittal for 10% Senior Subordinated
Notes due 2007 of Hedstrom Corporation.**
99.2 -- Form of Notice of Guaranteed Delivery for 10% Senior
Subordinated Notes due 2007 of Hedstrom Corporation.**
99.3 -- Form of Letter of Transmittal for 12% Senior Discount
Notes due 2009 of Hedstrom Holdings, Inc.**
99.4 -- Form of Notice of Guaranteed Delivery for 12% Senior
Discount Notes due 2009 of Hedstrom Holdings, Inc.**
</TABLE>
- ---------------
* Previously filed
** Filed herewith.
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our firm) included in or made a part of this
registration statement.
Dallas, Texas,
November 3, 1997
/s/ ARTHUR ANDERSEN LLP
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 7, 1997, except
as to Note 13 which is as of June 12, 1997, relating to the financial statements
of ERO, Inc., which appears in such Prospectus. We also consent to the
references to us under the headings "Independent Auditors" and "Selected
Consolidated Financial Data of ERO" in such Prospectus. However, it should be
noted that Price Waterhouse LLP has not prepared or certified such "Selected
Consolidated Historical Financial Data of ERO."
PRICE WATERHOUSE LLP
Chicago, Illinois
November 3, 1997
<PAGE> 1
LETTER OF TRANSMITTAL
TO TENDER
UNREGISTERED 10% SENIOR SUBORDINATED NOTES DUE 2007
OF
HEDSTROM CORPORATION
PURSUANT TO THE EXCHANGE OFFER AND PROSPECTUS DATED NOVEMBER 4, 1997
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON DECEMBER 4, 1997 (THE "EXPIRATION DATE"), UNLESS THE EXCHANGE OFFER IS
EXTENDED BY THE COMPANY.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
IBJ SCHRODER BANK & TRUST COMPANY
<TABLE>
<C> <C> <C>
By Mail: By Facsimile Transmission: By Hand/Overnight Delivery:
IBJ Schroder Bank & Trust (212) 858-2611 IBJ Schroder Bank & Trust
Company Company
P.O. Box 84 To Confirm, One State Street
Bowling Green Station Facsimile Transmissions Call: New York, New York 10004
New York, New York 10274-0084 (212) 858-2103 Attn: Securities Processing
Attn: Reorganization Operations Window, Subcellar One, (SC-1)
Department
</TABLE>
(Originals of all documents sent by facsimile should be sent promptly by
registered
or certified mail, hand delivery, or overnight delivery service.)
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
IF YOU WISH TO EXCHANGE UNREGISTERED 10% SENIOR SUBORDINATED NOTES DUE 2007
FOR AN EQUAL AGGREGATE PRINCIPAL AMOUNT OF REGISTERED 10% SENIOR SUBORDINATED
NOTES DUE 2007 PURSUANT TO THE EXCHANGE OFFER, YOU MUST VALIDLY TENDER (AND NOT
WITHDRAW) SUCH UNREGISTERED NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION
DATE.
SIGNATURES MUST BE PROVIDED
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
<PAGE> 2
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF TENDERED NOTES
- --------------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED OWNER(S)
AS THEY APPEAR ON THE UNREGISTERED 10% SENIOR SUBORDINATED CERTIFICATE NUMBER(S) PRINCIPAL AMOUNT
NOTES DUE 2007 (PLEASE FILL IN, IF BLANK) OF NOTES TENDERED OF NOTES TENDERED
- --------------------------------------------------------------------------------------------------------------------
======================================================
======================================================
TOTAL PRINCIPAL AMOUNT
OF NOTES TENDERED
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 3
Ladies and Gentlemen:
1. The undersigned hereby tenders to Hedstrom Corporation, a Delaware
corporation (the "Company"), the 10% Senior Subordinated Notes due 2007 (the
"Old Notes") described above pursuant to the Company's offer of $1,000 principal
amount of 10% Senior Subordinated Notes due 2007 (the "New Notes"), in exchange
for each $1,000 principal amount of the Old Notes, upon the terms and subject to
the conditions contained in the Prospectus dated November 4, 1997 (the
"Prospectus"), receipt of which is hereby acknowledged, and in this Letter of
Transmittal (which together constitute the "Exchange Offer").
2. The undersigned hereby represents and warrants that it has full
authority to tender the Old Notes described above. The undersigned will, upon
request, execute and deliver any additional documents deemed by the Company to
be necessary or appropriate to complete the tender of Old Notes.
3. The undersigned understands that the tender of the Old Notes pursuant to
all of the procedures set forth in the Prospectus will constitute an agreement
between the undersigned and the Company as to the terms and conditions set forth
in the Prospectus.
4. Unless the box under the heading "Special Registration Instructions" is
checked, the undersigned hereby represents and warrants that:
(i) the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the undersigned, whether or
not the undersigned is the holder of the Old Notes;
(ii) neither the undersigned nor any such other person has an
arrangement or understanding with any person to participate in the
distribution of such New Notes within the meaning of the Securities Act of
1933, as amended (the "Securities Act");
(iii) neither the undersigned nor any such other person is an
"affiliate," as such term is defined under Rule 405 promulgated under the
Securities Act, of the Company or any of the guarantors of the Notes, or if
it is an affiliate, the undersigned or such other person will comply with
the registration and prospectus delivery requirements of the Securities Act
to the extent applicable;
(iv) if the undersigned or such other person is not a broker-dealer,
neither the undersigned nor any such other person is engaged in or intends
to engage in the distribution of such New Notes; and
(v) if the undersigned or such other person is a broker-dealer, the
undersigned or such other person will receive New Notes for its own account
in exchange for Old Notes that were acquired as the result of market making
activities or other trading activities.
5. The undersigned may, IF, AND ONLY IF, UNABLE TO MAKE ALL OF THE
REPRESENTATIONS AND WARRANTIES CONTAINED IN ITEM 4 ABOVE, elect to have its Old
Notes registered in the shelf registration described in the Registration Rights
Agreement, dated June 9, 1997, among the Company, certain guarantors of the
obligations under the Old Notes (the "Guarantors") and the initial purchasers of
the Old Notes (the "Registration Rights Agreement;" all capitalized terms used
in this Item 5, unless otherwise defined herein, shall have the meanings given
them in the Registration Rights Agreement), a conformed copy of which has been
filed as an exhibit to the Registration Statement of which the Prospectus
constitutes a part. Such election may be made by checking the box under "Special
Registration Instructions." By making such election, the undersigned agrees, as
a holder of Transfer Restricted Securities participating in a shelf
registration, to indemnify and hold harmless the Company, the Guarantors, their
respective directors and officers and each person, if any, who controls the
Company or any of the Guarantors within the meaning of either Section 15 of the
Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), from and against any losses, claims, damages or
liabilities, joint or several, or any actions in respect thereof (including, but
not limited to, any losses, claims, damages, liabilities or actions relating to
purchases and sales of the New Notes) to which the Company, any Guarantor or any
such director, officer or controlling person may become subject under the
Securities Act, the Exchange Act or otherwise, insofar as such losses, claims,
damages, liabilities or actions arise out of, or are based upon, any untrue
statement or alleged untrue statement of a material fact contained in a
registration statement or prospectus or in any amendment or supplement
<PAGE> 4
thereto or in any preliminary prospectus relating to a shelf registration, or
arise out of, or are based upon, the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in light of the circumstances under which
they were made, but in each case only to the extent that the untrue statement or
omission or alleged untrue statement or omission was made in reliance upon and
in conformity with written information pertaining to the undersigned and
furnished to the Company by or on behalf of the undersigned specifically for
inclusion therein. Any such indemnification shall be governed by the terms and
subject to the conditions set forth in the Registration Rights Agreement,
including, without limitation, the provisions regarding notice, retention of
counsel, contribution and payment of expenses set forth therein. The above
summary of the indemnification provisions of the Registration Rights Agreement
is not intended to be exhaustive and is qualified in its entirety by reference
to the Registration Rights Agreement.
6. If the undersigned is a broker-dealer that will receive New Notes for
its own account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities, it acknowledges that it
will deliver a prospectus in connection with any resale of such New Notes;
however, by so acknowledging and delivering a prospectus, the undersigned will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. If the undersigned is a broker-dealer and Old Notes held for its
own account were not acquired as a result of market-making or other trading
activities, such Old Notes cannot be exchanged pursuant to the Exchange Offer.
7. Any obligation of the undersigned hereunder shall be binding upon the
successors, assigns, executors, administrators, trustees in bankruptcy and legal
and personal representatives of the undersigned.
8. Unless otherwise indicated herein under "Special Delivery Instructions,"
the certificates for the New Notes will be issued in the name of the
undersigned.
SPECIAL DELIVERY INSTRUCTIONS
(See Instruction 1)
To be completed ONLY IF the New Notes are to be issued or sent to someone
other than the undersigned or to the undersigned at an address other than that
provided above.
Mail [ ] Issue [ ] (check appropriate boxes) certificates to:
Name:
- --------------------------------------------------------------------------------
(Please Print)
Address:
- --------------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Including Zip Code)
<PAGE> 5
SPECIAL REGISTRATION INSTRUCTIONS
(See Item 5)
To be completed ONLY IF (i) the undersigned satisfies the conditions set
forth in Item 5 above, (ii) the undersigned elects to register its Old Notes in
the shelf registration described in the Registration Rights Agreement, and (iii)
the undersigned agrees to indemnify certain entities and individuals as set
forth in the Registration Rights Agreement and summarized in Item 5 above.
[ ] By checking this box the undersigned hereby (i) represents that it is
unable to make all of the representations and warranties set forth in Item 4
above, (ii) elects to have its Old Notes registered pursuant to the shelf
registration described in the Registration Agreement, and (iii) agrees to
indemnify certain entities and individuals identified in, and to the extent
provided in, the Registration Rights Agreement and summarized in Item 5 above.
SPECIAL BROKER-DEALER INSTRUCTIONS
(See Item 6)
[ ] Check here if you are a broker-dealer and wish to receive 10 additional
copies of the Prospectus and 10 copies of any amendments or supplements thereto.
Name:
- --------------------------------------------------------------------------------
(Please Print)
Address:
- --------------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Including Zip Code)
<PAGE> 6
SIGNATURE
To be completed by all exchanging noteholders. Must be signed by the
registered holder exactly as such holder's name appears on the Old Notes. If the
signature is by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation or other person acting in a fiduciary or representative
capacity, please set forth such person's full title. See Instruction 3.
X
- --------------------------------------------------------------------------------
X
- --------------------------------------------------------------------------------
Signature(s) of Registered Holder(s) or Authorized Signature
Dated:
- --------------------------------------------------------------------------------
Name(s):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please Type or Print)
Capacity:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Including Zip Code)
Area Code and Telephone No.:
- -------------------------------------------------------------------------
SIGNATURE GUARANTEE (IF REQUIRED BY INSTRUCTION 1)
Certain Signatures Must be Guaranteed by an Eligible Institution
- --------------------------------------------------------------------------------
(Name of Eligible Institution Guaranteeing Signatures)
- --------------------------------------------------------------------------------
(Address (including zip code) and Telephone Number (including area code) of
Firm)
- --------------------------------------------------------------------------------
(Authorized Signature)
- --------------------------------------------------------------------------------
(Printed Name)
- --------------------------------------------------------------------------------
(Title)
Dated:
- --------------------------------------------------------------------------------
PLEASE READ THE INSTRUCTIONS BELOW,
WHICH FORM A PART OF THIS LETTER OF TRANSMITTAL.
<PAGE> 7
INSTRUCTIONS
1. GUARANTEE OF SIGNATURES. Signatures on this Letter of Transmittal must
be guaranteed by an eligible guarantor institution that is a member of or
participant in the Securities Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Program, the Stock Exchange Medallion
Program, or by an "eligible guarantor institution" within the meaning of Rule
17Ad-15 promulgated under the Exchange Act (an "Eligible Institution") unless
the box entitled "Special Registration Instructions" or "Special Delivery
Instructions" above has not been completed or the Old Notes described above are
tendered for the account of an Eligible Institution.
2. DELIVERY OF LETTER OF TRANSMITTAL AND OLD NOTES. The Old Notes, together
with a properly completed and duly executed Letter of Transmittal (or copy
thereof), should be mailed or delivered to the Exchange Agent at the address set
forth above.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ENSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES, OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
3. SIGNATURE ON LETTER OF TRANSMITTAL, BOND POWERS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by a person other than a registered holder
of any Old Notes, such Old Notes must be endorsed or accompanied by appropriate
bond powers, signed by such registered holder exactly as such registered
holder's name appears on such Old Notes.
If this Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted with this Letter of Transmittal.
4. MISCELLANEOUS. All questions as to the validity, form, eligibility
(including time of receipt), acceptance, and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding on all parties. The Company reserves the absolute
right to reject any or all Old Notes not properly tendered or any Old Notes the
Company's acceptance of which would, in the opinion of counsel for the Company,
be unlawful. The Company also reserves the right to waive any defects,
irregularities, or conditions of tender as to particular Old Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in this Letter of Transmittal) will be final and
binding. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall determine.
Neither the Company, the Exchange Agent, nor any other person shall be under any
duty to give notification of defects in such tenders or shall incur any
liability for failure to give such notification. Tenders of Old Notes will not
be deemed to have been made until such defects or irregularities have been cured
or waived. Any Old Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering holder thereof as
soon as practicable following the Expiration Date.
<PAGE> 1
NOTICE OF GUARANTEED DELIVERY
TO TENDER
UNREGISTERED 10% SENIOR SUBORDINATED NOTES DUE 2007
(INCLUDING THOSE IN BOOK-ENTRY FORM)
OF
HEDSTROM CORPORATION
PURSUANT TO THE EXCHANGE OFFER AND PROSPECTUS DATED NOVEMBER 4, 1997
As set forth in the Prospectus (as defined below), this form or one
substantially equivalent hereto must be used to accept the Exchange Offer (as
defined in the Prospectus) if certificates for unregistered 10% Senior
Subordinated Notes due 2007 (the "Old Notes") of Hedstrom Corporation are not
immediately available or time will not permit a holder's Old Notes or other
required documents to reach the Exchange Agent (as defined below) on or prior to
the Expiration Date (as defined below), or the procedure for book-entry transfer
cannot be completed on a timely basis. This form may be delivered by facsimile
transmission, by registered or certified mail, by hand, or by overnight delivery
service to the Exchange Agent. See "THE EXCHANGE OFFERS -- Procedures for
Tendering" in the Prospectus.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON DECEMBER 4, 1997 (THE "EXPIRATION DATE"), UNLESS THE EXCHANGE OFFER IS
EXTENDED BY THE COMPANY.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
IBJ SCHRODER BANK & TRUST COMPANY
<TABLE>
<C> <C> <C>
By Mail: By Facsimile Transmission: By Hand/Overnight Delivery:
IBJ Schroder Bank & Trust (212) 858-2611 IBJ Schroder Bank & Trust
Company Company
P.O. Box 84 To Confirm, One State Street
Bowling Green Station Facsimile Transmissions Call: New York, New York 10004
New York, New York 10274-0084 (212) 858-2103 Attn: Securities Processing
Attn: Reorganization Operations Window, Subcellar One, (SC-1)
Department
</TABLE>
(Originals of all documents sent by facsimile should be sent promptly by
registered
or certified mail, by hand, or by overnight delivery service.)
DELIVERY OF THIS NOTICE TO AN ADDRESS OR TRANSMISSION OF INSTRUCTIONS VIA
FACSIMILE OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
<PAGE> 2
Ladies and Gentlemen:
The undersigned hereby tenders to Hedstrom Corporation, a Delaware
corporation (the "Company"), in accordance with the Company's offer, upon the
terms and subject to the conditions set forth in the Prospectus dated November
4, 1997 (the "Prospectus"), and in the accompanying Letter of Transmittal,
receipt of which is hereby acknowledged, $ in aggregate
principal amount of Old Notes pursuant to the guaranteed delivery procedures
described in the Prospectus.
Name(s) of Registered Holder(s):
- -------------------------------------------------------------------------
(Please Type or Print)
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Area Code & Telephone No.:
- ----------------------------------------------------------------------------
Certificate Number(s) for
Old Notes (if available):
- --------------------------------------------------------------------------------
Total Principal Amount
Tendered and Represented
by Certificate(s): $
- --------------------------------------------------------------------------------
Signature of Registered Holder(s):
- ------------------------------------------------------------------------
Dated:
- --------------------------------------------------------------------------------
[ ] The Depository Trust Company
(Check if Old Notes will be tendered
by book-entry transfer)
Account Number:
- --------------------------------------------------------------------------------
THE GUARANTEE BELOW MUST BE COMPLETED
<PAGE> 3
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, being a member of or participant in the Securities
Transfer Agents Medallion Program, the New York Stock Exchange Medallion
Signature Program or the Stock Exchange Medallion Program or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), hereby guarantees (a)
that the above named person(s) "own(s)" the Old Notes tendered hereby within the
meaning of Rule 14e-4 under the Exchange Act ("Rule 14e-4"), (b) that such
tender of such Old Notes complies with Rule 14e-4 and (c) to deliver to the
Exchange Agent the certificates representing the Old Notes tendered hereby or
confirmation of book-entry transfer of such Old Notes into the Exchange Agent's
account at The Depository Trust Company, in proper form for transfer, together
with a Letter of Transmittal (or facsimile thereof), properly completed and duly
executed, with any required signature guarantees and any other required
documents, within three New York Stock Exchange trading days after the earlier
of (i) the date of execution hereof and (ii) the Expiration Date.
Name of Firm:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Area Code and Telephone No.:
- ---------------------------------------------------------------------------
Authorized Signature:
- --------------------------------------------------------------------------------
Name:
- --------------------------------------------------------------------------------
Title:
- --------------------------------------------------------------------------------
Dated:
- --------------------------------------------------------------------------------
NOTE: DO NOT SEND CERTIFICATES OF OLD NOTES WITH THIS FORM. CERTIFICATES OF OLD
NOTES SHOULD BE SENT ONLY WITH A PROPERLY COMPLETED AND DULY EXECUTED
LETTER OF TRANSMITTAL.
<PAGE> 1
LETTER OF TRANSMITTAL
TO TENDER
UNREGISTERED 12% SENIOR DISCOUNT NOTES DUE 2009
OF
HEDSTROM HOLDINGS, INC.
PURSUANT TO THE EXCHANGE OFFER AND PROSPECTUS DATED NOVEMBER 4, 1997
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON DECEMBER 4, 1997 (THE "EXPIRATION DATE"), UNLESS THE EXCHANGE OFFER IS
EXTENDED BY THE COMPANY.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
UNITED STATES TRUST COMPANY OF NEW YORK
<TABLE>
<C> <C> <C>
By Overnight Courier: By Hand: By Registered or Certified
United States Trust Company United States Trust Company Mail:
of New York of New York United States Trust Company
770 Broadway, 13th Floor 111 Broadway of New York
New York, New York 10003 Lower Level P.O. Box 844
Attn: Corporate Trust Services Attn: Corporate Trust Services Attn: Corporate Trust Services
Telephone: (800) 548-6565 New York, New York 10006 Cooper Station
Facsimile: (212) 420-6152 New York, New York 10276-0844
Telephone: (800) 548-6565
Facsimile: (212) 420-6152
</TABLE>
(Originals of all documents sent by facsimile should be sent promptly by
registered
or certified mail, hand delivery, or overnight delivery service.)
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
IF YOU WISH TO EXCHANGE UNREGISTERED 12% SENIOR DISCOUNT NOTES DUE 2009 FOR
AN EQUAL AGGREGATE PRINCIPAL AMOUNT AT MATURITY OF REGISTERED 12% SENIOR
DISCOUNT NOTES DUE 2009 PURSUANT TO THE EXCHANGE OFFER, YOU MUST VALIDLY TENDER
(AND NOT WITHDRAW) SUCH UNREGISTERED NOTES TO THE EXCHANGE AGENT PRIOR TO THE
EXPIRATION DATE.
SIGNATURES MUST BE PROVIDED
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
<PAGE> 2
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF TENDERED NOTES
- --------------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED OWNER(S)
AS THEY APPEAR ON THE UNREGISTERED 12% SENIOR DISCOUNT CERTIFICATE NUMBER(S) PRINCIPAL AMOUNT AT
NOTES DUE 2009 (PLEASE FILL IN, IF BLANK) OF NOTES TENDERED MATURITY OF NOTES TENDERED
- --------------------------------------------------------------------------------------------------------------------
======================================================
======================================================
TOTAL PRINCIPAL AMOUNT AT
MATURITY OF NOTES TENDERED
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 3
Ladies and Gentlemen:
1. The undersigned hereby tenders to Hedstrom Holdings, Inc., a Delaware
corporation (the "Company"), the 12% Senior Discount Notes due 2009 (the "Old
Notes") described above pursuant to the Company's offer of $1,000 principal
amount at maturity of 12% Senior Discount Notes due 2009 (the "New Notes"), in
exchange for each $1,000 principal amount at maturity of the Old Notes, upon the
terms and subject to the conditions contained in the Prospectus dated November
4, 1997 (the "Prospectus"), receipt of which is hereby acknowledged, and in this
Letter of Transmittal (which together constitute the "Exchange Offer").
2. The undersigned hereby represents and warrants that it has full
authority to tender the Old Notes described above. The undersigned will, upon
request, execute and deliver any additional documents deemed by the Company to
be necessary or appropriate to complete the tender of Old Notes.
3. The undersigned understands that the tender of the Old Notes pursuant to
all of the procedures set forth in the Prospectus will constitute an agreement
between the undersigned and the Company as to the terms and conditions set forth
in the Prospectus.
4. Unless the box under the heading "Special Registration Instructions" is
checked, the undersigned hereby represents and warrants that:
(i) the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the undersigned, whether or
not the undersigned is the holder of the Old Notes;
(ii) neither the undersigned nor any such other person has an
arrangement or understanding with any person to participate in the
distribution of such New Notes within the meaning of the Securities Act of
1933, as amended (the "Securities Act");
(iii) neither the undersigned nor any such other person is an
"affiliate," as such term is defined under Rule 405 promulgated under the
Securities Act, of the Company or any of the guarantors of the Notes, or if
it is an affiliate, the undersigned or such other person will comply with
the registration and prospectus delivery requirements of the Securities Act
to the extent applicable;
(iv) if the undersigned or such other person is not a broker-dealer,
neither the undersigned nor any such other person is engaged in or intends
to engage in the distribution of such New Notes; and
(v) if the undersigned or such other person is a broker-dealer, the
undersigned or such other person will receive New Notes for its own account
in exchange for Old Notes that were acquired as the result of market making
activities or other trading activities.
5. The undersigned may, IF, AND ONLY IF, UNABLE TO MAKE ALL OF THE
REPRESENTATIONS AND WARRANTIES CONTAINED IN ITEM 4 ABOVE, elect to have its Old
Notes registered in the shelf registration described in the Registration Rights
Agreement, dated June 9, 1997, among the Company, certain guarantors of the
obligations under the Old Notes (the "Guarantors") and the initial purchasers of
the Old Notes (the "Registration Rights Agreement;" all capitalized terms used
in this Item 5, unless otherwise defined herein, shall have the meanings given
them in the Registration Rights Agreement), a conformed copy of which has been
filed as an exhibit to the Registration Statement of which the Prospectus
constitutes a part. Such election may be made by checking the box under "Special
Registration Instructions." By making such election, the undersigned agrees, as
a holder of Transfer Restricted Securities participating in a shelf
registration, to indemnify and hold harmless the Company, the Guarantors, their
respective directors and officers and each person, if any, who controls the
Company or any of the Guarantors within the meaning of either Section 15 of the
Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), from and against any losses, claims, damages or
liabilities, joint or several, or any actions in respect thereof (including, but
not limited to, any losses, claims, damages, liabilities or actions relating to
purchases and sales of the New Notes) to which the Company, any Guarantor or any
such director, officer or controlling person may become subject under the
Securities Act, the Exchange Act or otherwise, insofar as such losses, claims,
damages, liabilities or actions arise out of, or are based upon, any untrue
statement or alleged untrue statement
<PAGE> 4
of a material fact contained in a registration statement or prospectus or in any
amendment or supplement thereto or in any preliminary prospectus relating to a
shelf registration, or arise out of, or are based upon, the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in light of the
circumstances under which they were made, but in each case only to the extent
that the untrue statement or omission or alleged untrue statement or omission
was made in reliance upon and in conformity with written information pertaining
to the undersigned and furnished to the Company by or on behalf of the
undersigned specifically for inclusion therein. Any such indemnification shall
be governed by the terms and subject to the conditions set forth in the
Registration Rights Agreement, including, without limitation, the provisions
regarding notice, retention of counsel, contribution and payment of expenses set
forth therein. The above summary of the indemnification provisions of the
Registration Rights Agreement is not intended to be exhaustive and is qualified
in its entirety by reference to the Registration Rights Agreement.
6. If the undersigned is a broker-dealer that will receive New Notes for
its own account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities, it acknowledges that it
will deliver a prospectus in connection with any resale of such New Notes;
however, by so acknowledging and delivering a prospectus, the undersigned will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. If the undersigned is a broker-dealer and Old Notes held for its
own account were not acquired as a result of market-making or other trading
activities, such Old Notes cannot be exchanged pursuant to the Exchange Offer.
7. Any obligation of the undersigned hereunder shall be binding upon the
successors, assigns, executors, administrators, trustees in bankruptcy and legal
and personal representatives of the undersigned.
8. Unless otherwise indicated herein under "Special Delivery Instructions,"
the certificates for the New Notes will be issued in the name of the
undersigned.
SPECIAL DELIVERY INSTRUCTIONS
(See Instruction 1)
To be completed ONLY IF the New Notes are to be issued or sent to someone
other than the undersigned or to the undersigned at an address other than that
provided above.
Mail [ ] Issue [ ] (check appropriate boxes) certificates to:
Name:
- --------------------------------------------------------------------------------
(Please Print)
Address:
- --------------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Including Zip Code)
<PAGE> 5
SPECIAL REGISTRATION INSTRUCTIONS
(See Item 5)
To be completed ONLY IF (i) the undersigned satisfies the conditions set
forth in Item 5 above, (ii) the undersigned elects to register its Old Notes in
the shelf registration described in the Registration Rights Agreement, and (iii)
the undersigned agrees to indemnify certain entities and individuals as set
forth in the Registration Rights Agreement and summarized in Item 5 above.
[ ] By checking this box the undersigned hereby (i) represents that it is
unable to make all of the representations and warranties set forth in Item 4
above, (ii) elects to have its Old Notes registered pursuant to the shelf
registration described in the Registration Agreement, and (iii) agrees to
indemnify certain entities and individuals identified in, and to the extent
provided in, the Registration Rights Agreement and summarized in Item 5 above.
SPECIAL BROKER-DEALER INSTRUCTIONS
(See Item 6)
[ ] Check here if you are a broker-dealer and wish to receive 10 additional
copies of the Prospectus and 10 copies of any amendments or supplements thereto.
Name:
- --------------------------------------------------------------------------------
(Please Print)
Address:
- --------------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Including Zip Code)
<PAGE> 6
SIGNATURE
To be completed by all exchanging noteholders. Must be signed by the
registered holder exactly as such holder's name appears on the Old Notes. If the
signature is by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation or other person acting in a fiduciary or representative
capacity, please set forth such person's full title. See Instruction 3.
X
- --------------------------------------------------------------------------------
X
- --------------------------------------------------------------------------------
Signature(s) of Registered Holder(s) or Authorized Signature
Dated:
- --------------------------------------------------------------------------------
Name(s):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please Type or Print)
Capacity:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Including Zip Code)
Area Code and Telephone No.:
- -------------------------------------------------------------------------
SIGNATURE GUARANTEE (IF REQUIRED BY INSTRUCTION 1)
Certain Signatures Must be Guaranteed by an Eligible Institution
- --------------------------------------------------------------------------------
(Name of Eligible Institution Guaranteeing Signatures)
- --------------------------------------------------------------------------------
(Address (including zip code) and Telephone Number (including area code) of
Firm)
- --------------------------------------------------------------------------------
(Authorized Signature)
- --------------------------------------------------------------------------------
(Printed Name)
- --------------------------------------------------------------------------------
(Title)
Dated:
- --------------------------------------------------------------------------------
PLEASE READ THE INSTRUCTIONS BELOW,
WHICH FORM A PART OF THIS LETTER OF TRANSMITTAL.
<PAGE> 7
INSTRUCTIONS
1. GUARANTEE OF SIGNATURES. Signatures on this Letter of Transmittal must
be guaranteed by an eligible guarantor institution that is a member of or
participant in the Securities Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Program, the Stock Exchange Medallion
Program, or by an "eligible guarantor institution" within the meaning of Rule
17Ad-15 promulgated under the Exchange Act (an "Eligible Institution") unless
the box entitled "Special Registration Instructions" or "Special Delivery
Instructions" above has not been completed or the Old Notes described above are
tendered for the account of an Eligible Institution.
2. DELIVERY OF LETTER OF TRANSMITTAL AND OLD NOTES. The Old Notes, together
with a properly completed and duly executed Letter of Transmittal (or copy
thereof), should be mailed or delivered to the Exchange Agent at the address set
forth above.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ENSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES, OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
3. SIGNATURE ON LETTER OF TRANSMITTAL, BOND POWERS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by a person other than a registered holder
of any Old Notes, such Old Notes must be endorsed or accompanied by appropriate
bond powers, signed by such registered holder exactly as such registered
holder's name appears on such Old Notes.
If this Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted with this Letter of Transmittal.
4. MISCELLANEOUS. All questions as to the validity, form, eligibility
(including time of receipt), acceptance, and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding on all parties. The Company reserves the absolute
right to reject any or all Old Notes not properly tendered or any Old Notes the
Company's acceptance of which would, in the opinion of counsel for the Company,
be unlawful. The Company also reserves the right to waive any defects,
irregularities, or conditions of tender as to particular Old Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in this Letter of Transmittal) will be final and
binding. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall determine.
Neither the Company, the Exchange Agent, nor any other person shall be under any
duty to give notification of defects in such tenders or shall incur any
liability for failure to give such notification. Tenders of Old Notes will not
be deemed to have been made until such defects or irregularities have been cured
or waived. Any Old Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering holder thereof as
soon as practicable following the Expiration Date.
<PAGE> 1
NOTICE OF GUARANTEED DELIVERY
TO TENDER
UNREGISTERED 12% SENIOR DISCOUNT NOTES DUE 2009
(INCLUDING THOSE IN BOOK-ENTRY FORM)
OF
HEDSTROM HOLDINGS, INC.
PURSUANT TO THE EXCHANGE OFFER AND PROSPECTUS DATED NOVEMBER 4, 1997
As set forth in the Prospectus (as defined below), this form or one
substantially equivalent hereto must be used to accept the Exchange Offer (as
defined in the Prospectus) if certificates for unregistered 12% Senior Discount
Notes due 2009 (the "Old Notes") of Hedstrom Corporation are not immediately
available or time will not permit a holder's Old Notes or other required
documents to reach the Exchange Agent (as defined below) on or prior to the
Expiration Date (as defined below), or the procedure for book-entry transfer
cannot be completed on a timely basis. This form may be delivered by facsimile
transmission, by registered or certified mail, by hand, or by overnight delivery
service to the Exchange Agent. See "THE EXCHANGE OFFERS -- Procedures for
Tendering" in the Prospectus.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON DECEMBER 4, 1997 (THE "EXPIRATION DATE"), UNLESS THE EXCHANGE OFFER IS
EXTENDED BY THE COMPANY.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
UNITED STATES TRUST COMPANY OF NEW YORK
<TABLE>
<C> <C> <C>
By Overnight Courier: By Hand: By Registered or Certified
United States Trust Company United States Trust Company Mail:
of New York of New York United States Trust Company
770 Broadway, 13th Floor 111 Broadway of New York
New York, New York 10003 Lower Level P.O. Box 844
Attn: Corporate Trust Services Attn: Corporate Trust Services Attn: Corporate Trust Services
Telephone: (800) 548-6565 New York, New York 10006 Cooper Station
Facsimile: (212) 420-6152 New York, New York 10276-0844
Telephone: (800) 548-6565
Facsimile: (212) 420-6152
</TABLE>
(Originals of all documents sent by facsimile should be sent promptly by
registered
or certified mail, by hand, or by overnight delivery service.)
DELIVERY OF THIS NOTICE TO AN ADDRESS OR TRANSMISSION OF INSTRUCTIONS VIA
FACSIMILE OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
<PAGE> 2
Ladies and Gentlemen:
The undersigned hereby tenders to Hedstrom Holdings, Inc., a Delaware
corporation (the "Company"), in accordance with the Company's offer, upon the
terms and subject to the conditions set forth in the Prospectus dated November
4, 1997 (the "Prospectus"), and in the accompanying Letter of Transmittal,
receipt of which is hereby acknowledged, $ in aggregate
principal amount at maturity of Old Notes pursuant to the guaranteed delivery
procedures described in the Prospectus.
Name(s) of Registered Holder(s):
- -------------------------------------------------------------------------
(Please Type or Print)
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Area Code & Telephone No.:
- ----------------------------------------------------------------------------
Certificate Number(s) for
Old Notes (if available):
- --------------------------------------------------------------------------------
Total Principal Amount at Maturity
Tendered and Represented
by Certificate(s): $
- --------------------------------------------------------------------------------
Signature of Registered Holder(s):
- ------------------------------------------------------------------------
Dated:
- --------------------------------------------------------------------------------
[ ] The Depository Trust Company
(Check if Old Notes will be tendered
by book-entry transfer)
Account Number:
- --------------------------------------------------------------------------------
THE GUARANTEE BELOW MUST BE COMPLETED
<PAGE> 3
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, being a member of or participant in the Securities
Transfer Agents Medallion Program, the New York Stock Exchange Medallion
Signature Program or the Stock Exchange Medallion Program or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), hereby guarantees (a)
that the above named person(s) "own(s)" the Old Notes tendered hereby within the
meaning of Rule 14e-4 under the Exchange Act ("Rule 14e-4"), (b) that such
tender of such Old Notes complies with Rule 14e-4 and (c) to deliver to the
Exchange Agent the certificates representing the Old Notes tendered hereby or
confirmation of book-entry transfer of such Old Notes into the Exchange Agent's
account at The Depository Trust Company, in proper form for transfer, together
with a Letter of Transmittal (or facsimile thereof), properly completed and duly
executed, with any required signature guarantees and any other required
documents, within three New York Stock Exchange trading days after the earlier
of (i) the date of execution hereof and (ii) the Expiration Date.
Name of Firm:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Area Code and Telephone No.:
- ---------------------------------------------------------------------------
Authorized Signature:
- --------------------------------------------------------------------------------
Name:
- --------------------------------------------------------------------------------
Title:
- --------------------------------------------------------------------------------
Dated:
- --------------------------------------------------------------------------------
NOTE: DO NOT SEND CERTIFICATES OF OLD NOTES WITH THIS FORM. CERTIFICATES OF OLD
NOTES SHOULD BE SENT ONLY WITH A PROPERLY COMPLETED AND DULY EXECUTED
LETTER OF TRANSMITTAL.
