SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Numbers: 333-32385-05 and 333-32385
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
Delaware
(State or other jurisdiction of incorporation or organization)
51-0329830
51-0329829
(I.R.S. Employer Identification No.)
585 Slawin Court, Mount Prospect, Illinois 60056-2183
(Address of principal executive offices, including zip code)
(847) 803-9200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 23, 1998 was $5,072,184.
On March 23, 1998, there were outstanding: (i) 36,142,883 shares of Common
Stock, par value $.01 per share, of Hedstrom Holdings, Inc.,
(ii) 31,520,000 shares of Non-Voting Common Stock, par value $.01 per share,
of Hedstrom Holdings, Inc. and (iii) 10 shares of Common Stock, par value
$.01 per share, of Hedstrom Corporation.
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
Item 1. Business
General
Hedstrom Holdings, Inc. ("Holdings") is a holding company whose primary
operating subsidiary is Hedstrom Corporation ("Hedstrom" or the "Company").
The principal shareholders of Holdings are Hicks, Muse, Tate & Furst Equity
Fund II, L.P. ("HM Fund II"), an affiliate of Hicks, Muse, Tate & Furst
Incorporated ("Hicks Muse"), certain affiliates of Hicks Muse and certain
members of Holding's senior management. Hicks Muse is a private investment
firm based in Dallas, New York, St. Louis and Mexico City that specializes
in acquisitions, recapitalizations and other principal investing activities.
In October 1995, HM Fund II, together with certain other investors (the "HM
Group"), acquired an 82% common equity interest in Holdings in a transaction
that was accounted for as a recapitalization (the "1995 Recapitalization").
The total enterprise value of Hedstrom at the time of the 1995
Recapitalization, including the assumption and refinancing of certain
indebtedness, was approximately $75 million. The HM Group paid approximately
$27 million for its common equity interest, which, together with Holdings
senior management's 18% retained common equity ownership, implied a total
equity value of Holdings at that time of approximately $33 million. In June
of 1997, Hedstrom acquired ERO, Inc. ("ERO") and its subsidiaries,
manufacturers and marketers of children's leisure products (the
"Acquisition"). In connection with the Acquisition, HM Fund II purchased
31,520,000 shares of Holding's non-voting common stock for an aggregate
purchase price of $39,400,000.
Hedstrom is a leading North American manufacturer and marketer of well-
established children's leisure and activity products. The Company's
diversified product lines are in such "evergreen" product categories
as outdoor gym sets, wood gym kits and slides, spring horses, trampolines,
playballs, arts and crafts kits, game tables, and licensed indoor sleeping
bags, play tents and wall decorations. The Company considers such product
categories to be "evergreen" in nature because each is characterized by
proven longevity, demonstrated market demand and consistent sales over time.
For example, the Company believes products such as outdoor gym sets and
playballs have been marketed and sold in the United States for over 30 years.
The Company's products are sold primarily through national retailers, mass
merchants, home improvement centers, sporting goods stores, drug store chains
and supermarkets. For the twelve month period ended December 31, 1997, the
Company's net sales and EBITDA were $256.1 and $45.8 million, respectively.
The Company's outdoor gym set product line accounted for approximately 20%
of the Company's net sales for the fiscal year ended December 31, 1997. No
other product line accounted for more than 10% of the Company's net sales
for the fiscal year ended December 31, 1997.
Hedstrom's operations are conducted through four principal divisions:
- - The Bedford Division in Bedford, Pennsylvania ("Bedford Division"), which
principally manufactures and markets in the United States outdoor gym sets,
wood gym kits and slides, spring horses, trampolines and gym accessories;
- - The Ashland Division in Ashland, Ohio ("Ashland Division"), which
principally manufactures and markets in the United States a wide variety
of children's playballs and ball pit products;
- - The Amav Division in Montreal, Canada ("Amav Division"), which is a fully
integrated manufacturer of children's products, including arts and crafts
kits, game tables and certain other children's bulk play products such as
play kitchens and battery-operated ride-on vehicles. In addition, this
division includes a broad line of school supplies featuring popular
licensed characters, including back packs, book bags, lunch kits and
stationery products such as portfolios, binders, study kits, pencils
and theme books marketed under the Impact name; and
- - The ERO Division in Hazlehurst, Georgia ("ERO Division"), which produces
the Slumber Shoppe line of products, including products such as indoor
sleeping bags and play tents featuring popular licensed characters, a
water sports line of products including flotation jackets, masks, fins,
goggles and snorkels directed at the children's market through ERO's
license portfolio and at the children's and adults' markets under the
Coral brand name and Priss Prints, which produces licensed room
decorations for young children, consisting principally of stick-on and
peel-off wall decorations.
In addition, Hedstrom sells products manufactured by all its divisions
outside of the United States through its International Division. Hedstrom
utilizes excess capacity at both the Bedford Division and the Ashland
Division to supply components to a variety of OEMs of industrial and
consumer products.
Business Strategy
The Company's strategy is to enhance its operating margins and strengthen
its position as a leading manufacturer and marketer of children's leisure
and activity products. The Company plans to improve its profitability by
rationalizing its cost structure and utilizing the Company's excess capacity
at certain of its facilities through, among other things, pursuing counter-
seasonal sales opportunities. Furthermore, the Company has identified several
opportunities for revenue growth, including enhancing existing products,
introducing complementary products, focusing its licensed products on
traditional characters and pursuing international sales opportunities.
- - Achieve Cost Savings. Management anticipates that the Company will realize
annual cost savings in excess of $6 million as a result of cost saving
initiatives implemented or being implemented as a result of the Acquisition,
such as the rationalization of sales, marketing and general administrative
functions, consolidation of purchases of raw materials and elimination of
less profitable product lines. Independent of the Acquisition, the Company
realized in excess of $9 million of permanent cost savings in 1997 as a
result of cost reduction programs implemented at Hedstrom in the second
half of 1996. Management anticipates that the Company will realize similar
cost savings in future years as a result of such reduction programs.
- - Utilize Excess Capacity. The Company produces its outdoor gym sets,
wood gym kits and slides at its facility in Bedford, Pennsylvania,
primarily in the period from December through April. During the balance
of the year, the Bedford facility remains relatively inactive. Management
believes that the Company can enhance its sales and profitability by
identifying products that it can manufacture during the May through
November period, either for itself or for original equipment manufacturers
("OEMs"). The Company began producing several such products in the second
half of 1997 such as the trampoline business it acquired from Bollinger
Industries, Inc. In addition, management is pursuing opportunities to
increase the utilization of its low-cost plastic molding operations at
its Ashland, Ohio facility, which already supplies a variety of components
to OEMs of industrial and consumer products.
- - Enhance Existing Products and Develop Complementary Products. The Company
has maintained sales growth and its leading market shares by continuously
enhancing its principal products and designing and developing complementary
products and accessories. Management believes that by pursuing this
strategy it can continue growth within its core product lines with
relatively low economic risk. In addition, Management will evaluate
opportunities to expand its product lines, increase its market shares
and acquire complementary products through strategic acquisitions.
- - Focus Licensed Products on Traditional Characters. Management believes
that the Company can differentiate and stimulate sales of certain of
its products more effectively and inexpensively through the licensing
of recognized traditional characters rather than the development and
promotion of its own brand names. For product lines that feature licensed
characters, such as sleeping bags, play tents and wall decorations, the
Company emphasizes traditionally popular characters such as the classic
Disney and Looney Tunes(TM) characters, although the Company also
complements such characters by obtaining licenses for selected
event-driven characters. Management estimates that products featuring
licensed traditional characters (including products featuring 101
Dalmatians and the Little Mermaid characters, which experienced increased
sales as a result of recent movie releases) accounted for approximately
22% of the Company's net sales for the fiscal year ended December 31, 1997
assuming the Acquisition took place on January 1, 1997 ("Pro Forma Net
Sales"). Products based on licensed event-driven characters accounted
for approximately 7% of the Company's Pro Forma Net Sales for such period.
- - Pursue International Sales Opportunities. To date, the Company has not
focused a significant amount of resources toward the development of an
international customer base. For the fiscal year ended December 31, 1997,
the Company's Pro Forma Net Sales outside the United States and Canada
totaled approximately 5% of the Company's total Pro Forma Net Sales.
The Company believes there are significant sales opportunities for the
Company's products in Europe and Latin America, particularly its children's
arts and crafts kits, outdoor gym sets, playballs and ball pits.
Acquisitions
See Note 4 to the consolidated financial statements on page 29 for a
discussion of the Company's acquisitions.
Products
Bedford Division
Outdoor Gym Sets. The Bedford Division produces a broad selection of painted
metal gym sets and composite metal and plastic gym sets. Each of the Company's
outdoor gym sets consists of a heavy-duty metal frame which supports several
hanging, swinging rides such as contoured swing seats, glide rides and
trapezes. In addition, the Company's outdoor gym sets often incorporate a
plastic slide and climbing tower. The Company sells its outdoor gym sets as
complete, ready-to-assemble kits. The Company's outdoor gym set line consists
of 19 styles available in a variety of colors that sell at retail prices
between $80 and $600.
Wood Gym Kits and Slides. The Bedford Division produces wood gym kits sold
through home improvement centers and building supply stores. Wood gym kits
consist of certain components necessary to construct a wood gym set, such
as nuts, bolts and framing brackets, and are typically sold together with
accessory products including swings, climbing towers and plastic slides.
The Company does not sell the lumber, nails or the tools required to
construct the wood gym kits. The retailers that carry the Company's
wood gym kits, primarily home improvement centers, benefit from the sale of
such items, particularly the lumber. The Company currently offers wood gym
kits with differing designs and layouts, ranging from simple swing set
designs to more elaborate designs in the shape of pirate ships and trains.
The Company's wood gym kits generally sell for retail prices between $69.99
and $339.99, and the Company's slides generally sell for retail prices
between $79.99 and $269.99. In 1997, the Company began to emphasize wood
complete gym sets, which consists of all components necessary for a wood
gym set. The wood components are cut, pre-drilled and treated by the Company.
These products generally sell for retail prices between $199.99 and $399.99.
Spring Horses. The Bedford Division designs and manufactures 11 different
styles of spring horses for use by children ages two to six. The Company
manufactures the body of the horse, paints it to a specific style and
packages it with a metal frame manufactured by the Company.
Trampolines. The Bedford Division designs, manufactures and imports three
different styles of trampolines primarily for use by children. This
relatively new product line was enhanced during 1997 through the acquisition
of Bollinger Industries, Inc.'s trampoline business.
Gym Accessories, OEM and Other. The Bedford Division designs, manufactures,
sources and sells a broad line of accessories that complement its outdoor gym
sets and wood gym kits. Accessories include swing seats, climbing ropes,
ladders and nets. Many of the Company's outdoor gym sets offer the customer
the ability to customize the gym set with various accessories sold both in
connection with the initial purchase of an outdoor gym set and as upgrades
or replacement parts for the Company's large base of installed units. The
Company currently offers over 65 individual accessory items. In addition,
the Company has undertaken efforts to identify new products that the Bedford
Division can manufacture during the May through November period when its
manufacturing capacity historically has been underutilized. During the
second half of 1997, the Company began producing one such product, "Turbo
Hoops," which is a home version of the popular basketball game found in
taverns and other commercial establishments. In addition, the Company is
seeking opportunities to utilize seasonal excess capacity at the Bedford
Division to manufacture products for OEMs. Sales to OEM customers will better
enable it to cost-effectively maintain a core of full-time, highly skilled
workers and a high level of plant utilization year-round, resulting in a
consistent source of revenue and profitability for the Bedford Division.
For fiscal years 1997, 1996 and 1995, the Bedford Division accounted for
35.4%, 63.0% and 64.4%, respectively, of the Company's net sales.
Ashland Division
The Ashland Division produces a wide variety of children's playballs ranging
in size from 4" to 36" in diameter, including both premium playballs and
non-premium playballs.
Premium Playballs. The Company's premium playballs generally include stylized
printing on 360 degrees or 180 degrees of the ball or contain fun novelty
items inside the ball. The premium playballs that are decorated with stylized
printing feature either popular characters from the Company's extensive
license portfolio or the Company's proprietary playball patterns. The
Company's proprietary playball patterns include holograms, sparkles and
other geometric patterns. In addition to playballs with stylized printing,
the Company recently introduced a line of "goofballs" that contain items
inside the ball such as plastic spiders, worms and beads. The Company's
premium playballs generally sell at retail prices between $1.99 and $8.99.
Non-Premium Playballs. The Company's non-premium playballs include (i)
decorated playballs with stripes or other simple patterns, (ii) undecorated
playballs and (iii) athletic-style playballs such as footballs, basketballs,
baseballs, volleyballs and soccer balls. Non-premium playballs are available
in a wide range of colors and sizes. This product line experienced
significant growth over the last two years from the introduction of an 18"
diameter playball, a new size in the playball category. The Company's non-
premium playballs generally sell at retail prices between $1.99 and $24.99.
Ball Pits. In fiscal 1995, the Company developed and introduced home and
backyard versions of the popular ball pits used by children in commercial
locations such as McDonald's. The Company sells its ball pit product as a
complete, ready-to-assemble set including an inflatable tent-like enclosure
and 250 to 400 ball pit balls. The Company sources the enclosures from
several overseas manufacturers and packages the enclosures with ball pit
balls manufactured at the Ashland Division. Management believes that one
of the Company's competitive advantages in this product category is its
ability to manufacture high-quality ball pit balls using a patented process
for which the Company has an exclusive licensing agreement. Hedstrom
currently offers four ball pit models.
OEM and Other. The Ashland Division complements its core playball and ball
pit businesses and smoothes seasonal production requirements by manufacturing
a variety of custom-fabricated plastic products for toy, sporting goods,
hospital supply, decorating and lighting companies. Sales to OEM customers
enable the Ashland Division to cost-effectively maintain a core of full-time,
highly skilled workers and result in a high level of plant utilization year-
round while providing a consistent source of revenue and profitability.
For fiscal years 1997, 1996 and 1995, the Ashland Division accounted for
15.7%, 37.0% and 35.6%, respectively, of the Company's net sales.
Amav Division
Amav manufactures and markets children's leisure and activity products
including arts and crafts kits, game tables and certain other children's
bulk play products and a line of back-to-school products marketed under the
Impact name. Amav's entire product line consists of approximately 400 items,
approximately 70% of which are in the arts and crafts kits category.
Arts and crafts products include a broad variety of children's activity kits,
chests and boxes that include stickers, doll outfits, mazes, paints, balloons,
stamps, stationery, sun catchers, woodworking kits, magic sets, puzzles, sand
art, egg art and art materials. These products generally are targeted at
children between three and eight years of age.
Game tables include a wide variety of popular table games such as table
tennis, table-top hockey and soccer, pool and shuffleboard that are often
integrated into a single game table. For example, Amav's 3-in-1 game table
includes table tennis, hockey and pool; whereas, Amav's 6-in-1 game table
includes those games plus foosball and both arcade and floor basketball.
The largest game table Amav manufactures is an 18-in-1 game table. In
addition, Amav also recently introduced certain other children's bulk play
products such as play kitchens and battery-operated ride-on vehicles.
Impact offers a broad line of licensed school supplies, including carry bags
(such as backpacks, school bags, lunch kits, luggage, fanny packs and locker
bags) and stationery products (such as theme books, portfolios, binders,
pencils and study kits). This product line capitalizes on the Company's
licensing and graphics strengths and offers opportunities for innovative
products featuring unique designs and other special effects.
The Amav Division was acquired in June of 1997 in connection with the
Acquisition. For fiscal year 1997, the Amav Division accounted for 23.6% of
the Company's net sales.
ERO Division
ERO's product offerings consist of its Slumber Shoppe line of products, its
water sports line of products and its Priss Prints line of products.
The Slumber Shoppe line of products includes indoor sleeping bags, carrying
cases, play tents and selected children's furniture, all of which feature
popular licensed characters and are targeted at children between the ages of
two and ten. The core product within this line is the slumber bag, a
lightweight indoor sleeping bag used for slumber parties, sleepovers and
children's nap times. Carrying cases (called slumber mates) are large enough
to fit a slumber bag and pajamas, toothbrushes and other items a child may
need to spend the night at a friend's house. Play tents (called slumber
tents) are designed to be used indoors and give children a private area that
can be used as a clubhouse, fort or special play area. ERO also sells foam
and bean bag chairs featuring licensed characters.
The water sports line of products includes a full range of personal flotation
devices (such as flotation vests) and swim and pool products (including masks,
fins, snorkels and goggles). These products are directed at the children's
market using the Company's license portfolio, and at the children's and
adults' markets under the Coral brand name.
Priss Prints sells self-adhesive wall decorations for children's rooms that
can be removed without any damage to the wall or paint. Such wall decorations
consist of licensed characters and proprietary designs. For 1997, the Company's
room decoration licenses included Looney Tunes(TM) and 101 Dalmatians, Pooh and
other of Disney's classic characters. Potential new product offerings include
licensed character borders, introduced by Priss Prints for 1997, door
decorations, night-lights and switchplates.
The ERO Division was acquired in June of 1997 in connection with the
Acquisition. For fiscal year 1997, the ERO Division accounted for 25.3% of
the Company's net sales.
Sales and Marketing
The Company's sales force for the Bedford, Ashland and ERO Divisions is
comprised of a Vice President, four sales managers of national accounts,
one sales manager of home centers and one international sales manager who
deal directly with customers and outside vendor representatives. These
outside vendor representatives include approximately 22 manufacturers
representative organizations with over 100 sales representatives that service
Hedstrom's mass merchant and home center customers. The Company's sales force
for the Amav Division is comprised of six in-house sales managers and three
outside vendor representatives.
Hedstrom's marketing activities include customer service, product development
and advertising and promotions. The Company utilizes six customer service
representatives to serve retail customers by tracking and confirming orders
and answering general inquiries. Hedstrom's consumer relations department is
staffed with trained professionals who, through an "800" number, assist
end-users in assembling products and purchasing spare parts. Hedstrom's
product development staff consists of engineering and design professionals.
The product development process involves extensive product engineering,
model making and sample testing.
An important element in the Company's marketing strategy is the ability to
differentiate its products from those of its competitors and stimulate sales
by using popular licensed characters and well-known brand names on its
products. Accordingly, the Company emphasizes the acquisition and maintenance
of a broad portfolio of licensed characters. Rather than pursuing a few
licenses with speculative appeal, the Company maintains multiple licenses in
several categories, including both classic (e.g., Mickey's Stuff for Kids,
Barbie(TM), Pooh and 101 Dalmatians) and contemporary characters. The
Company's license agreements typically run for two years and require payments
by the Company of approximately 12-14% of licensed product revenues. The
renewal terms of certain license agreements are based upon the attainment of
specified sales levels, whereas others are based on informal understandings
or arrangements. License agreements typically are subject to termination by
the licensor upon failure of the licensee to meet various performance
standards. Under the terms of certain of its license agreements, the Company
is required to pay minimum guaranteed fees to the licensors over the life of
the agreement. The guaranteed license fees payable by the Company have been
insignificant due to the Company's having exceeded its minimum royalty
requirements. Approximately 29% of the Company's Pro Forma Net Sales for the
fiscal year ended December 31, 1997 were derived from sales of licensed
products. Approximately 91% of such net sales would have been attributable
to licenses covering ten licensed characters and approximately 65% of such
net sales would have been derived from licenses with Disney Enterprises, Inc.
and its affiliates.
International
See Note 14 to the consolidated financial statements on page 38 for
geographic information.
The Company's sales to customers located outside the United States totaled
$30.8 million, $12.6 million and $10.9 million, for the fiscal year ended
December 31, 1997 and for each of the fiscal years ended July 31, 1996 and
1995, respectively.
Competition
The Company generally operates in a highly-competitive environment.
Competition in the markets for the Company's products is based primarily on
cost, characters licensed (for licensed character products), product design
and quality, reputation, customer service, new product innovation and
creative marketing and distribution approaches. Competitive factors in the
market for character licenses include royalty levels, breadth of product
lines, timely royalty reporting and payment, artistic applications and
compliance with licensors' guidelines.
Bedford Division. Management believes that the Company's sales of outdoor
gym sets for the fiscal year ended December 31, 1997, represented
approximately 80% of the total sales in the U.S. market for outdoor painted
metal gym sets and composite metal and plastic gym sets. The Company's
principal competitor in this product line is RDM, Inc., formerly known as
Roadmaster Corporation (which was recently purchased out of bankruptcy).
Certain custom gym set manufacturers also compete in this market. Management
believes that the Company holds the second largest share of the total U.S.
wood gym kit market behind Swing-N-Slide Corporation.
Ashland Division. Based on the Company's sales of playballs for the fiscal
year ended December 31, 1997, management estimates that the Company accounted
for approximately 85% of total sales in the U.S. market for children's
playballs. The Company's largest competitor in this product line is National
Latex Corporation.
Amav Division. In the arts and activities product market, the Company
competes with Hallmark Corporation's Binney & Smith unit (under the
Crayola(TM) brand name), and a number of smaller arts and crafts suppliers
such as Rose Art, Craft House, Ohio Art and Quincrafts Corporation. In the
game table and children's bulk activity products market, the Company competes
with Fisher Price (a subsidiary of Mattel), Little Tikes (a subsidiary of
Rubbermaid), Monneret and Step 2. The Company competes against companies
such as Mead, Imaginings 3 and Plymouth in the stationery products market.
With respect to its carry bag product line, the Company competes against
companies such as Pyramid Hand Bags and Imaginings 3.
ERO Division. The Company's main competitors with respect to its Slumber
Shoppe product line are Bibb and Coleman, which produces non-licensed slumber
bags, and Fisher Price which produces non-licensed slumber tents. Management
believes that the Company has a market share of greater than 75% with respect
to licensed sleeping bags and slumber tents. With respect to its water sports
product line, the Company's competitors include Sterns, Kent and Aqua Leisure.
The Company competes primarily against Borden, Infantino, Dolly and 3M in the
overall room decor industry. Management believes that the Company is a market
leader in this business.
Manufacturing and Supply; Raw Materials
Bedford Division
Production Process. The Bedford Division's production, warehousing and
distribution facilities are located in a 472,000 square foot facility in
Bedford, Pennsylvania. The manufacturing process for the Company's outdoor
gym sets and accessories consists of eight integrated operations: steel
tube-forming, metal stamping, secondary fabrication, painting, plastic
forming, plastic coating, assembly and packaging. The steel tube-forming
operations consist of three high-speed tube mills which form metal strips
into tubing of various wall thickness, diameters and lengths. These steel
tubes are used primarily for the main structural supports of the Company's
gym sets. The metal stamping operations consist of mechanical presses that
utilize multi-station dies to stamp, form or draw materials from coil metal
stock. The materials from the steel tube-forming and metal stamping operations
are sent to the secondary fabrication operations, which consist of mechanical
presses, bending machines, welding stations and custom fabrication equipment.
After the secondary fabrication operation, the products are painted in one of
four electrostatic spray paint systems. The three plastic forming machines
produce plastic slides and other large plastic parts from HDPE resin (high
density polyethylene). The plastic coating (extruding) process covers
the swing chain and cable for the gym sets with a soft coating of PVC
(polyvinyl chloride) in various colors. Next, the products are sent to one of
three final pack lines where employees at pre-arranged stations place parts
in packing cartons. A hardware bag containing components assembled on the
automatic bagging line, is also placed in the packing carton. The packing
cartons are then placed on large pallets, six to twelve per pallet, depending
on size, and wrapped in thin stretchable plastic and loaded onto trucks or
stored in the warehouse to await the arrival of the trucks. The Bedford
Division can produce up to 8,000 gym sets per day depending on the type
of outdoor gym sets then in production.
Capacity. Management believes that the Bedford Division presently has adequate
capacity to meet anticipated future production requirements at times of peak
demand. The division also has the capability to outsource or increase capacity
in all of its processes in the future should backlog develop.
Quality Assurance. The Bedford Division maintains an extensive quality
assurance program that includes the development of plans for effective
control of manufacturing processes, supplier surveys to assure manufacturing
capability and a formal product release system to assure that product goals
are achieved. Quality assurance personnel verify that manufacturing employees
are correctly performing quality inspections by, among other things, auditing
incoming raw materials, manufacturing processes and finished products. All
manufacturing employees are trained and provided with the tools necessary to
determine whether manufactured parts meet specifications. Employees assemble
one unit from each production lot to verify conformance to safety standards.
Raw Materials. The primary raw materials used by the Bedford Division include
sheet and band steel and plastic resin. Most of the division's steel raw
materials (which represented approximately one-third of the Bedford Division's
total raw materials purchased in 1997) are currently sourced from a single
supplier. The Company typically enters into a one-year supply contract with
this supplier each August. These contracts protect the Company from price
increases while allowing for downward adjustments if market prices should fall.
Management believes that alternative sources of supply are readily available
for substantially all of the raw materials used by the Bedford Division,
including steel.
Components Purchases. Management periodically evaluates the economics of
producing internally rather than purchasing certain plastic components used
in the production and assembly of its outdoor gym sets. In 1996, the Company
invested approximately $3.0 million in new plastic blow-molding equipment to
manufacture many of the plastic slides that it had previously purchased from
third-party vendors. Management believes that producing these slides
internally currently provide annual cost savings of approximately $1.5 million
as compared to fiscal 1996 levels.
Ashland Division
Facilities. The Ashland Division's production facilities are located in two
facilities in Ashland, Ohio. The main plant has 273,000 square feet and houses
most of the division's production capacity. It includes a 115,200 square foot
warehouse and distribution center. A second 95,400 square foot leased facility
is used primarily to serve the division's OEM customer base and, to a lesser
degree, as a source of increased playball capacity. The second plant also
houses the division's administrative offices and showrooms. The Ashland
Division also has two satellite facilities strategically located in
Carrollton, Texas and Dothan, Alabama. These facilities are used primarily to
manufacture undecorated playballs for regional customers and to inflate
premium and non-premium playballs that are shipped from Ashland.
Production Process. The Ashland Division manufactures its products utilizing
two manufacturing processes: (i) rotational molding for polyvinyl playballs
and polyethylene plastic OEM products and (ii) blow molding for plastic ball
pit balls. After completion of the initial manufacturing process, the Ashland
Division employs a variety of value-added operations such as innovative
printing, decorating and packaging, utilizing, among other things, the
Company's state-of-the-art playball printing systems. The Company believes it
is the only manufacturer in the United States utilizing such systems. All
playballs are inflated at Ashland during production to ensure that they meet
the Company's quality standards, then deflated for storage or shipping. The
Company ships deflated playballs to customers with inflation capabilities.
Playballs being delivered to customers without inflation capabilities are
re-inflated and boxed at one of the Ashland Division's satellite playball
plants at the time orders are shipped to such customers. The Company believes
its satellite playball plants provide it with a competitive advantage by
minimizing the distance that inflated balls must be shipped, and thereby
reducing shipping costs.
Capacity. Management believes that the Ashland Division has adequate capacity
to meet anticipated future production requirements at times of peak demand and
has ample space within its existing facilities to expand capacity.
Ball Pit License. The Company has entered into a year-to-year licensing
agreement with Euro-Matic, Ltd. ("Euro-Matic"), a United Kingdom-based company
that holds the patent for the ball pit balls that the Company produces. Using
machinery and molds supplied by Euro-Matic, the Company manufactures ball pit
balls for sale by Euro-Matic to the "institutional market," including
McDonald's, Discovery Zone, hospitals, schools, and similar institutions and
businesses. The Company receives a fixed fee for each ball manufactured. In
addition, Euro-Matic provides the Company with molds that the Company uses
with its own machinery to produce ball pit balls that the Company packages
with its ball bit products for sale to the retail market.
Quality Assurance. The Ashland Division maintains a rigorous quality control
process. The division has three quality assurance personnel who are trained
in methods of statistical process control and continuous improvement. The
quality assurance team selectively audits work-in-process and finished goods
and works closely with customers to establish product standards.
Raw Materials. The Ashland Division manufactures its products from commodity
raw materials such as plastic resins, pigments and other chemicals that
generally are available from numerous sources. The Company has not entered
into any supply contracts with any of the Ashland Division's vendors.
Management believes that alternate sources of supply are readily available
for all of the raw materials used by the Ashland Division.
Amav Division
The Amav Division manufactures all of its arts and crafts kits and children's
bulk activity products in its Montreal, Quebec manufacturing facility. It owns
or leases numerous injection molding machines. It also owns two large printing
presses and four smaller label/sticker printers. The Amav Division
manufactures all of its plastic components and crayons, mixes its own paint
and prints all labels, cartons, coloring books, stickers and instruction
sheets. All of the Amav Division's products are manufactured with non-toxic
materials to comply with industry standards for children's products and
applicable environmental laws.
ERO Division
The ERO Division produces or assembles slumber bags, personal flotation
devices, juvenile furniture and children's wall decoration products at the
ERO Division's Hazlehurst, Georgia facility. To reduce lead times and inventory
levels with respect to these product lines, the ERO Divison utilizes just-in-
time manufacturing and sourcing systems. The ERO Division purchases its play
tents, slumber mates, swim, aqua fitness, back-to-school and wall decoration
products from manufacturers located in the United States, Taiwan, Hong Kong
and the People's Republic of China. The ERO Division's pricing and supply of
imported products has not been affected by the recent problem in the Asian
financial markets.
The ERO Division's largest suppliers for its domestic operations provide
printed fabric for the slumber bags, liners for the slumber bags, vinyl prints
for room decorations, polyester fiber to fill the slumber bags and zippers and
buckles. The ERO Division works closely with its suppliers in order to
consolidate the purchasing function and to foster teamwork between the ERO
Division and its suppliers. For the aforementioned products, the ERO Division
maintains alternative sources of supply.
Backlog
The Company monitors the inventory level of each of its key customers, which
allows the Company to anticipate customer orders and fill such orders within
days. As a result of such monitoring and the Company's just-in-time
manufacturing of several of its principal products, the Company does not
generate significant backlog.
Seasonality
Historically, the Company's sales have been highly seasonal, with its peak
selling season occurring during the first two calendar quarters of the year.
However, management believes the Acquisition will help the Company to better
balance its sales throughout the year because ERO's peak selling season occurs
during the third and fourth calendar quarters of the year. Pro Forma Net Sales
for the Company for each calendar quarter during the fiscal year ended
December 31, 1997 were 22.7%, 25.6%, 20.9% and 30.8%, respectively, of total
Pro Forma Net Sales for such twelve-month period.
Environmental
Certain of the Company's operations, including the use of solvents, paints
and other materials that contain chemicals that are considered hazardous under
various environmental laws, are subject to federal, state, local and foreign
environmental laws and regulations which govern, among other things, the
discharge of pollutants into the air and water, and the handling and disposal
of solid and hazardous wastes. Permits are required for certain of the
Company's operations, and these permits are subject to modification, renewal
and revocation by issuing authorities. Governmental authorities have the
power to enforce compliance with applicable laws and regulations, and
violations may result in fines, injunctions, including the cessation of
operations, or both. Management believes that the Company's operations
currently comply in all material respects with applicable environmental laws
and regulations.
Under the Clean Air Act Amendments of 1990 (the "CAA"), the Environmental
Protection Agency has been directed, among other things, to develop standards
and permit procedures with respect to certain air pollutants. Because many of
the implementing regulations have not yet been promulgated, the Company cannot
make a final assessment of the impact of the CAA. Based upon its preliminary
review of the CAA, management currently believes that compliance with the
CAA and other environmental laws and regulations will not have a material
adverse effect on the Company.
Government Regulations
The Company is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Product Safety Act. These
laws empower the Consumer Product Safety Commission (the "CPSC") to protect
consumers from hazardous products and other articles. The CPSC has the
authority to exclude from the market products which are found to be unsafe
or hazardous and can require a manufacturer to recall such products under
certain circumstances. Similar laws exist in some states and cities in the
United States and in Canada and Europe. While the Company believes that it
is, and will continue to be, in compliance in all material respects with
applicable laws, rules and regulations, there can be no assurance that the
Company's products will not be found to violate such laws, rules and
regulations, or that more restrictive laws, rules or regulations will not be
adopted in the future which could make compliance more difficult or expensive
or otherwise have a material adverse effect on the Company's business,
financial condition and results of operations.
Employees
As of December 31, 1997, the Company employed 1,968 people. Approximately 12%
of the Company's employees are unionized, all of whom are employed in the
Ashland Division. These employees are represented by the Rubber Workers Union,
which is affiliated with the United States Steel Workers Union. The Company's
collective bargaining agreement with the Rubber Workers Union expires on
October 10, 1998. In the past five years, the Company has experienced only
one work stoppage, which occurred in October 1995 and lasted only two days.
The Company believes that it has a good relationship with its employees.
Item 2. Properties
Management believes that the Company's facilities are in good condition and
that it has sufficient capacity to meet its current and projected manufacturing
and distribution needs. The Company's principal executive offices are located
at 585 Slawin Court, Mount Prospect, Illinois 60056.
The following table summarizes certain information regarding the Company's
principal operating facilities all of which are owned by the Company or one of
its subsidiaries.
Approximate
Location Square Footage Description of Use
- ----------------------- -------------- -------------------
Saint Laurent, Quebec 800,000 Amav Division Sales,
Administration, Manufacturing
and Distribution
Bedford, Pennsylvania 472,000 Bedford Division Manufacturing,
Warehouse and Administrative
Ashland, Ohio 273,000 Ashland Division Manufacturing,
Warehouse and Administrative
Hazlehurst, Georgia 230,000 ERO Division Manufacturing and
Distribution
Plattsburgh, New York 80,000 Amav Manufacturing and
Distribution
Leased Facilities
The Company also leases various facilities in the U.S., Canada and United
Kingdom. Such facilities range in size from 95,400 square feet in Ashland,
Ohio to 400 square feet in the United Kingdom.
Item 3. Legal Proceedings
The Company is from time to time involved in lawsuits arising in the ordinary
course of business. The Company maintains product liability insurance and
management does not believe that the outcome of any such lawsuits, individually
or in the aggregate, will have a material adverse effect on the Company's
financial condition. Although historically the Company has not been required
to pay any material liability claims, there can be no assurance that the
Company will not incur claims which are in excess of its insurance.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted during the fourth quarter of the year ended
December 31, 1997.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
There is no established public trading market for the Company's common stock.
As of March 23, 1998, there were 58 record holders and 1 record holder of
Holdings common stock and non-voting common stock, respectively.
The Senior Credit Facilities impose significant restrictions on the Company's
ability to make dividend payments (see further discussion of such in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and Note 7 to the Company's consolidated financial statements
in Item 8). The Company has not paid cash dividends historically, and does
not intend to do so in the foreseeable future.
Item 6. Selected Financial Data
The selected consolidated historical financial data of Holdings presented
below (i) as of and for the fiscal year ended December 31, 1997, as of and
for each of the years in the three-year period ended July 31, 1996 and the
five-month period ended December 31, 1996, were derived from the consolidated
financial statements of Holdings, which have been audited by Arthur Andersen
LLP, independent auditors, and (ii) as of and for the year ended July 31,
1993, were derived from audited financial statements of Hedstrom. The selected
historical consolidated financial data presented below as of and for the
five-month period ended December 31, 1995 have not been audited, but, in the
opinion of management, include all the adjustments (consisting only of normal,
recurring adjustments) necessary to present fairly, in all material respects,
such information in accordance with GAAP applied on a consistent basis.
Income Statement and Other Financial Data for the fiscal year ended December
31, 1997 reflects the operations of ERO since June 1997. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements of Holdings and the notes thereto contained
elsewhere herein. Holdings historically had a fiscal year ending July 31 but
changed its fiscal year to December 31, effective in 1997.
Fiscal Year Five Months
Ended Ended Fiscal Year Ended July 31,
(Dollars in thousands, December 31, December 31, ---------------------------------
except per share amounts) 1997 1996 1995 1996 1995 1994 1993
------------ ---- ---- ---- ---- ---- -----
(unaudited)
Income Statement Data:
Net sales $ 256,146 $ 23,994 $ 31,792 $133,194 $ 133,862 $ 108,655 $ 93,891
Cost of sales 172,390 21,973 26,000 105,068 107,312 87,170 75,592
------- ------ ------ ------- ------- ------- ------
Gross profit 83,756 2,021 5,792 28,126 26,550 21,485 18,299
Selling, general and
administrative expenses 47,052 7,546 7,067 24,603 19,207 18,181 16,890
------- ------ ------ ------- ------- ------- ------
Operating income (loss) 36,704 (5,525) (1,275) 3,523 7,343 3,304 1,409
Recapitalization expenses(a) - - 9,600 9,600 - - -
Restructuring expense(b) - - - - - - 1,476
Interest expense 19,131 2,115 1,773 5,896 4,573 982 2,512
------- ------ ------ ------- ------- ------- ------
Income (loss) before income
taxes 17,573 (7,640) (12,648) (11,973) 2,770 322 (2,579)
Income tax expense (benefit) 7,997 (2,869) (4,074) (3,857) 1,440 103 (663)
------- ------ ------- ------- ------- ------- ------
Income (loss) from continuing
operations 9,576 (4,771) (8,574) (8,116) 1,330 219 (1,916)
Loss from discontinued
operations(c) - - - - - (585) (3,180)
------- ------ ------- ------- -------- ------- ------
Net income (loss) $ 9,576 $ (4,771) $(8,574) $ (8,116) $ 745 $ (2,961) $(1,916)
======= ====== ======= ======= ======== ======= ======
Diluted earnings per share(f) $0.18
Diluted weighted average
shares outstanding(f) 52,416
Other Financial Data:
Net cash provided by (used in):
Operating activities $ (9,779) $ 2,978 $ (19,209)$(17,744) $ 396 $ 1,344 $(3,540)
Investing activities (146,387) (1,309) (1,342) (6,490) (2,574) (2,988) (4,594)
Financing activities 165,622 (9,134) 19,842 31,135 2,899 1,060 8,539
EBITDA(d) 45,772 (3,549) (393) 9,420 10,088 5,529 3,651
Depreciation and
amortization(e) 9,068 1,976 882 3,347 2,745 2,225 2,242
Capital expenditures 6,395 1,376 1,342 6,738 2,574 2,988 3,010
Balance Sheet Data (end of
period):
Total assets $383,145 $ 72,075 $ 70,459 $ 85,024 $ 69,809 $ 60,005 $ 55,607
Total debt (including current
maturities) 289,404 60,471 57,750 69,706 32,710 29,811 28,351
Stockholders' equity (deficit) 44,536 (3,097) 2,055 1,674 15,392 14,647 15,228
________________
(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, as follows: (i) $0.8 million related to a one-time
design adjustment to one of Hedstrom's outdoor gym set accessories to address
certain alleged defects, (ii) a non-cash inventory write-down of $0.75 million
related to the mix shift in Hedstrom's outdoor gym set product line, and (iii)
a $1.0 million non-cash write-off of advertising barter credits by Hedstrom
in connection with its decision to discontinue its trail advertising campaign.
Management believes EBITDA for the twelve months ended July 31, 1996, as
adjusted for these one-time charges, provides a more meaningful comparison of
historical results. EBITDA as determined by Holdings may not be comparable to
the EBITDA measure as reported by other companies. EBITDA is not intended to
represent cash flow from operations as defined by GAAP and should not be
considered as an indicator of operating performance or an alternative to cash
flow or operating income (as measured by GAAP) or as a measure of liquidity.
In addition, this measure does not represent funds available for discretionary
use. It is included herein to provide additional information with respect to
the ability of Holdings to meet its future debt service, capital expenditures
and working capital requirements.
(e) Depreciation and amortization included herein excludes the amortization of
deferred financing costs that is included in interest expense.
(f) Due to the Acquisition, net income (loss) per share for the five months
ended December 31, 1996 and 1995 and for the four fiscal years ended July 31,
1996 has no significant relevance to current amounts.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion generally relates to the historical consolidated
results of operations and financial condition of Holdings and Hedstrom but
does reflect the significant impact of the Acquisition of ERO, Inc. The
following discussion and analysis should be read in conjunction with the
consolidated financial statements of Holdings, and the notes thereto,
included elsewhere herein. For purposes of this discussion, references to
"Hedstrom", where appropriate, include Holdings and Hedstrom and its
subsidiaries (including, with respect to periods after the consummation of
the Acquisition, ERO and its subsidiaries).
General
Hedstrom is a leading United States manufacturer and marketer of well-
established children's leisure and activity products. Hedstrom has four
principal divisions. The Bedford Division principally manufacturers and
markets in the United States painted metal and composite metal and plastic
outdoor gym sets, wood gym kits and slides, spring horses, trampolines and
gym accessories. The Ashland Division manufactures and markets in the United
States a wide variety of children's playballs and ball pit products. The Amav
Division manufactures children's products including arts and craft kits, game
tables, battery operated cars and back-to-school products. The ERO Division
manufactures and distributes slumber products, water sports products and room
decor items.
Fiscal Year Change
Hedstrom historically had a fiscal year ending July 31 but changed its fiscal
year-end to December 31, effective in 1997. Management implemented this change
primarily to improve the accuracy of Hedstrom's annual budgeting process.
Hedstrom's retail customers generally do not determine outdoor gym set product
placements for the upcoming peak Spring selling season until the preceding
Fall. In the past, Hedstrom prepared its budgets without the benefit of knowing
what its outdoor gym set placements would be for the upcoming fiscal year.
Management believes that the adoption of a December 31 fiscal year will
improve the accuracy of its budgeting process.
As a result of the change in Hedstrom's fiscal year, Hedstrom has presented
financial statements for the five-month period ended December 31, 1996 and
for the comparable period in 1995. Management does not believe that the year
over year comparison for such period is meaningful because, given the
concentration of Hedstrom's net sales in the first and second calendar
quarters, overall changes in production levels in the comparably less active
period from August to December can have a significant impact on stated
profitability for such period due to the absorption of fixed manufacturing
costs. This is especially true when comparing the above-mentioned five-month
period in 1996 versus the same five-month period in 1995. In the last few
months of calendar 1995, due to capacity constraints, Hedstrom manufactured
a significant number of outdoor gym sets in anticipation of the Spring 1996
selling season. This production activity resulted in absorption of overhead
expenses of approximately $1.4 million (these costs were capitalized into
inventory) that otherwise would have been expensed during the period had
there been no production of gym sets. In late 1996, management took several
steps to increase the daily production capacity of outdoor gym sets in an
effort to increase its capacity during peak production periods, thereby
reducing inventory levels and related material and warehouse expense. As a
result of these efforts, Hedstrom is now able to manufacture gym sets on a
just-in-time basis in response to specific customer orders. The move to just-
in-time manufacturing in late calendar 1996 precluded the need to begin
manufacturing gym sets in 1996 for sale in 1997 and thus, unlike in late 1995,
Hedstrom expensed the fixed overhead incurred at its idle outdoor gym set
operations. As a result of the switch to just-in-time manufacturing,
Hedstrom's operating results were significantly better in the second calendar
quarter of 1997 versus the second calendar quarter of 1996 because, among
other things, it produced outdoor gym sets in the second calendar quarter of
1997, whereas in the same period of 1996, Hedstrom met consumer demand for
outdoor gym sets out of inventory. Hedstrom's discontinuation in 1996 of sales
of certain low-margin juvenile products (such as tricycles) that had been
sold in 1995 also makes the year over year comparison less meaningful.
Net Sales
Hedstrom computes net sales by deducting sales allowances, including
allowances for returns, volume discounts and co-operative advertising
("promotions"), from its gross sales. Where information concerning net sales
by product line is provided in this filing, Hedstrom has estimated net sales
by attributing sales allowances to each product line in proportion to the
individual product line's percentage of gross sales.
In 1996, Hedstrom revised certain of its promotional policies, effectively
increasing the sales thresholds at which Hedstrom's customers earn certain
promotional discounts, which increased Hedstrom's profitability in 1997.
Results of Operations
The following table sets forth net sales and gross profit for each of
Hedstrom's four operating divisions for the periods indicated:
Twelve Months
Ended Five Months
December 31, Ended December 31, Year Ended July 31,
-------------- ------------------ -------------------
1997 1996 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
(In millions) (unaudited) (unaudited)
Net sales:
Bedford Division $ 90.6 $ 82.4 $ 13.0 $ 14.5 $ 83.9 $ 86.2
Ashland Division 40.2 43.0 11.0 17.3 49.3 47.7
Amav Division 60.5 - - - - -
ERO Division 64.8 - - - - -
------ ------ ------ ------- ------- ------
Total net sales $256.1 $125.4 $ 24.0 $ 31.8 $ 133.2 $133.9
====== ====== ====== ======= ======= ======
Gross profit:
Bedford Division $22.1 $ 13.1 $ - $ 1.0 $ 14.1 $ 12.4
Ashland Division 10.6 11.2 2.0 4.8 14.0 14.2
Amav Division 27.1 - - - - -
ERO Division 24.0 - - - - -
----- ------- ------ ------- ------- -------
Total gross profit $83.8 $ 24.3 $ 2.0 $ 5.8 $ 28.1 $ 26.6
===== ======= ====== ======= ======= =======
Fiscal Year Ended December 31, 1997 Compared to Twelve Months Ended
December 31, 1996
A comparison of Hedstrom's results of operations for the fiscal year ended
December 31, 1997 with the same period in 1996 is necessarily affected by
the impact of the consummation of the ERO Acquisition in June 1997. Due to
the inclusion of seven months of operations of the ERO and Amav Divisions in
the fiscal year ended December 31, 1997, management does not believe that
comparisons with the same period in 1996 is meaningful.
Net Sales. Hedstrom's total net sales increased to $256.1 million in the
fiscal year ended December 31, 1997 from $125.4 million in 1996, an increase
of $130.7 million. Such increase was attributable to the inclusion of the ERO
and Amav Divisions and an increase in sales at the Bedford Division, offset
by a decline in sales at the Ashland Division. Net sales of the Bedford
Division increased primarily as a result of (i) the restructuring of several
promotional allowances, (ii) increased sales of trampolines due to the
business acquired from Bollinger Industries, Inc., (iii) an increase in OEM
sales, (iv) new product introductions and (v) the acquisition of M.A. Henry
Limited in August of 1997. These increases were partially offset by a
decrease resulting from a shift in product mix to lower-priced outdoor gym
sets. Net sales of the Ashland Division decreased primarily as a result of a
decrease in sales of certain undecorated playballs which decrease was
partially offset by the increase in market share of ball pits. On a pro-forma
basis, the net sales of the ERO Division increased approximately 12% in 1997
as compared to 1996 due to increased account penetration in the Slumber
Shoppe and Priss Prints product lines. On a pro-forma basis, the net sales of
the Amav Division decreased by approximately 4% in 1997 primarily due to a
decline in the overall arts and crafts market which decrease was offset by
the introduction of its battery-operated car.
Gross Profit. As a result of the increase in Hedstrom's total net sales,
total gross profit increased to $83.8 million in 1997 from $24.3 million in
1996. As a percentage of net sales, gross profit increased to 32.7% in 1997
from 19.4% in 1996 due in part to the inclusion of the results of the ERO and
Amav Divisions, whose combined gross profit margin of 40.8% is higher than
the other divisions of Hedstrom. The Bedford Division's gross profit margin
in 1997 increased to 24.4% from 15.9% in 1996, primarily as a result of the
benefits of (i) a 1996 Cost Reduction Plan (see Note 3 to the consolidated
financial statements on page 28), and (iii) improvements in promotional
programs, which benefits were partially offset by a decrease in net sales
attributable to sales of lower-priced and lower-margin outdoor gym sets.
Gross profit margin in the Ashland Division increased to 26.4% in 1997 from
26.0% in 1996 primarily as a result of an increase in selling prices and the
favorable effects of the 1996 Cost Reduction Plan, the effects of which were
partially offset by a reduction in production volume. On a pro-forma basis,
the gross profit percentage of the ERO Division increased in 1997 as compared
to 1996 due to increased production volume and lower material costs. On a pro-
forma basis, the gross profit percentage of the Amav Division decreased in
1997 due primarily to (i) decreased production volume, (ii) the start-up
costs of producing a new product, battery-operated cars and (iii) a shift in
sales mix from higher-margin arts and crafts products to lower-margin battery-
operated cars.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $47.1 million in 1997 from $25.1 million
in 1996. As a percentage of net sales, selling, general and administrative
expenses decreased to 18.4% in 1997 from 20.0% in 1996, due principally to a
reduction in warehouse and shipping costs resulting from Hedstrom's
implementation of just-in-time manufacturing of outdoor gym sets and the
discontinuation of certain print advertising programs. This reduction was
partially offset by the inclusion of the ERO and Amav Divisions relatively
high selling, general and administrative expenses, which include the
amortization of acquisition-related intangible assets and royalty expense.
Interest Expense. Interest expense increased as a result of the incurrence of
Acquisition-related indebtedness and higher interest rates.
Income Tax Expense. Holdings' effective income tax rate in 1997 was 45.5% as
compared with an effective income tax rate of 38.1% in 1996. The increase was
attributable to the acquisition of ERO, which generated a large amount of non-
deductible goodwill and a higher amount of income derived from foreign sources
which have a higher effective tax rate than the U.S. sources.
Five months ended December 31, 1996 Compared to December 31, 1995
Net Sales. Hedstrom's total net sales decreased to $24.0 million in the five
months ended December 31, 1996 from $31.8 million in the comparable period in
1995, a decrease of 24.5%. Net sales of the Bedford Division decreased by
$1.5 million, or 10.3%, in the 1996 period from the 1995 period, primarily as
a result of eliminating sales of low-margin juvenile products such as
tricycles and ride-on products. Net sales of the Ashland Division decreased
by $6.3 million, or 36.4%, in the 1996 period from the 1995 period. In the
1995 period, the Ashland Division introduced its new ball pit line of products
and obtained the benefit of the initial "sell-in" of that product during the
1995 Christmas season. In the 1996 period, ball pit products lacked the
benefit of the initial "sell-in" and were more vulnerable to competitive
pressures that management believes have since dissipated, resulting in a
decline in sales of $5.0 million in the 1996 period from the 1995 period. The
decline in the Ashland Division's sales is also attributable to a decline in
OEM sales.
Gross Profit. Hedstrom's total gross profit decreased to $2.0 million in the
five months ended December 1996 from $5.8 million in the same period of 1995.
As a percentage of net sales, gross profit decreased to 8.3% in the 1996
period from 18.2% in the 1995 period. Due to the lower production volume of
outdoor gym sets resulting from the implementation of just-in-time
manufacturing for the 1997 selling season, an additional $1.4 million of
fixed manufacturing costs were unabsorbed in the 1996 period as compared to
the 1995 period. In addition, in December 1996, Hedstrom changed the method
of allocating depreciation for interim reporting periods, resulting in a one-
time adjustment to depreciation of $0.6 million in the 1996 period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $7.5 million in the five months ended
December 31, 1996 from $7.1 million in the same period in 1995. Expressed as
a percentage of net sales, selling, general and administrative expenses
increased to 31.4% in the last five months of 1996 from 22.2% in the same
period of 1995, due principally to the decrease in sales and the inability
to reduce such expenses (which are largely fixed) proportionally. Selling,
general and administrative expenses in the 1996 period included a $0.2
million lawsuit settlement.
Recapitalization Expense. In October of 1995, Holdings effected a
Recapitalization in which Holdings was purchased by an investment group, the
majority of the preferred stock and common stock of Holdings was redeemed,
new shares were issued to the purchaser, new debt facilities were obtained
and existing debt facilities were repaid. In addition, Holdings effected a
common stock split of 39,095 shares for one and increased the number of
authorized shares from 1,000 to 50,000,000. After the Recapitalization, the
majority of the common stock was held by Hicks, Muse, Tate, and First Equity
Fund II, L.P. However, two of the existing shareholders retained a minority
investment in Holdings. Holdings expensed all of its costs associated with
the Recapitalization. These expenses include the following (in millions of
dollars).
Description Amount
- ------------------------------------------------------------- ------
Commitment fees for the new revolver and term loan facilities $ 2.9
Buyer's financing and transaction fees 2.0
Seller's transaction fees 1.7
Equity appreciation payments to employees 2.2
Other 0.8
------
Total Recapitalization Expense $ 9.6
======
Interest Expense. Interest expense increased by 19.3%, due primarily to
increased borrowings associated with capital additions and higher working
capital requirements.
Income Tax Expense. Holdings' effective income tax
rate for the five months ended December 31, 1996 was 37.6% as compared with
an effective income tax rate of 32.2% in the same period of 1995. The
increase was attributable to a decrease in foreign losses, which provide no
U.S. tax benefit, in 1996 relative to 1995. In addition, the 1995 tax benefit
was reduced by non-deductible transaction costs, incurred in connection with
the Recapitalization, and alternative minimum tax incurred by Holdings.
Fiscal 1996 Compared to Fiscal 1995
Net Sales. Hedstrom's total net sales decreased to $133.2 million in fiscal
1996 from $133.9 million in fiscal 1995, a decrease of 0.5%. Net sales in the
Bedford Division decreased by $2.3 million, or 2.7%, in fiscal 1996 as
compared to fiscal 1995. Despite unit volume increases in outdoor gym sets,
net sales declined in fiscal 1996 from fiscal 1995 principally as a result of
an unfavorable product mix shift to lower-priced, lower-margin outdoor gym
sets due, in part, to pricing and promotional policies implemented by certain
of Hedstrom's retail customers. Net sales of the Ashland Division increased
$1.6 million, or 3.4%, in fiscal 1996 as compared to fiscal 1995. This
increase reflected the initial Christmas season "sell-in" effect on ball pit
sales.
Gross Profit. Total gross profit increased to $28.1 million in fiscal 1996
from $26.6 million in fiscal 1995, an increase of 5.6%. As a percentage of
net sales, gross profit increased to 21.1% in fiscal 1996 from 19.9% in
fiscal 1995. In the Bedford Division, gross profit margin increased to 16.8%
in fiscal 1996 from 14.4% in fiscal 1995 primarily as a result of (i) a
reduction in raw materials prices and (ii) higher unit volume, which
increased gross profits by $3.0 million and $2.4 million, respectively, the
effects of which were partially offset by a shift in product mix to lower
priced outdoor gym sets, which reduced gross profits by $3.6 million. The
gross profit margin of the Ashland Division decreased to 28.4% in fiscal
1996 from 29.8% in fiscal 1995. The decrease was attributable to increased
promotional activity, an unfavorable shift in the mix of playballs and a
reduction in sales prices, which reduced gross profits by $1.0 million, $0.9
million and $1.8 million, respectively, the effects of which were partially
offset by a $2.7 million decrease attributable to reductions in material
prices.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $24.6 million in fiscal 1996 from $19.2
million in fiscal 1995 (or stated as a percentage of net sales, to 18.5% in
fiscal 1996 from 14.3% in fiscal 1995). This increase was due primarily to
(i) an increase in material handling and warehousing costs of $2.0 million,
(ii) an increase in advertising expenses of $2.0 million and (iii) a non-
cash charge of $1.0 million related to the write-off of certain advertising
barter credits. The increase in material handling and warehousing costs was
due primarily to higher levels of outdoor gym set inventories arising from
the unexpected shift in product mix and the resultant expense of outside
warehouse space and related material handling. The increased advertising
expenditures related primarily to an unsuccessful trial advertising campaign
that has since been discontinued. As a result of Hedstrom's decision to
reduce its advertising expenditures during fiscal 1997, management determined
that $1.0 million of barter credits available to pay for a portion of future
advertising programs could not be utilized before their expiration and,
accordingly, were written off.
Recapitalization Expense. In October of 1995, Holdings effected a
Recapitalization in which Holdings was purchased by an investment group, the
majority of the preferred stock and common stock of Holdings was redeemed,
new shares were issued to the purchaser, new debt facilities were obtained
and existing debt facilities were repaid. In addition, Holdings effected a
common stock split of 39,095 shares for one and increased the number of
authorized shares from 1,000 to 50,000,000. After the Recapitalization, the
majority of the common stock was held by Hicks, Muse, Tate, and Furst Equity
Fund II, L.P. However, two of the existing shareholders retained a minority
investment in Holdings. Holdings expensed all of its costs associated with
the Recapitalization. These expenses include the following (in millions of
dollars).
Description Amount
- ------------------------------------------------------------- ------
Commitment fees for the new revolver and term loan facilities $ 2.9
Buyer's financing and transaction fees 2.0
Seller's transaction fees 1.7
Equity appreciation payments to employees 2.2
Other 0.8
-----
Total Recapitalization Expense $ 9.6
=====
Interest Expense. Interest expense increased by 28.9%, due primarily to higher
working capital requirements, acquisitions of equipment and increased
borrowings associated with the 1995 Recapitalization.
Income Tax Expense. Holdings' effective income tax rate for fiscal 1996 was
32.2% as compared with an effective income tax rate of 52.0% in fiscal 1995.
The decrease was attributable to non-deductible transaction costs incurred
in fiscal 1995 in connection with the 1995 Recapitalization. In addition,
Holdings incurred alternative minimum tax in 1995 that was not incurred in
1996.
Liquidity and Capital Resources of the Company
Working Capital and Cash Flows
Net cash used for operating activities was $9.8 million for the fiscal year
ended December 31, 1997. The net use of cash reflects the seasonal nature of
sales in the Company's ERO and Amav Divisions. These divisions accumulate
during the second half of the year and liquidate them in the first half of
the following year.
Net cash used for investing activities was $146.4 million for fiscal year
ended December 31, 1997, including the $140.0 million used for the
acquisition of ERO and other companies and $6.4 million used for the
acquisition of property, plant & equipment.
Net cash provided by financing activities, which was used primarily to
consummate the Acquisition and to fund operating cash requirements, was
$165.6 million for the fiscal year ended December 31, 1997, including (i)
$110.0 million of proceeds from the issuance by Hedstrom of its 10% Senior
Subordinated Notes due 2007 (the "Senior Subordinated Notes"), (ii) $110.0
million of proceeds from Hedstrom's term loan facilities consisting of (a) a
six year loan in a principal amount of $75.0 million and (b) an eight year
loan in a principal amount of $35.0 million ("Term Loans"), (iii) $25.0
million from the issuance by Holdings of 44,612 units consisting of 12%
Senior Discount Notes due 2009 (the "Discount Notes") and 2,705,896 shares of
common stock, par value $.01 per share ("Common Stock"), (iv) $40.0 million
of proceeds from the issuance of Holdings non-voting common stock, par value
$.01 per share ("Non-Voting Common Stock"), (v) debt financing and other
transaction costs of $21.0 million, (vi) the repayment of old term loans in
the aggregate amount of $92.8 million, (vii) the repayment of old revolving
loans in the aggregate amount of $42.4 million, (viii) $35.5 million of net
borrowings under Hedstrom's $70.0 million revolving credit facility (the
"Revolving Credit Facility" and together with the Term Loans, the "Senior
Credit Facilities") and (ix) the repayment of $1.1 million of Term Loans.
For the five months ended December 31, 1996, Hedstrom's operations provided
net cash of $3.0 million, largely the result of a $9.7 million decrease in
accounts receivable attributable to the seasonality of Hedstrom's business.
During this period, Hedstrom spent $1.4 million on capital expenditures and
made net payments of $9.1 million under its revolving credit facility.
For the fiscal year ended July 31, 1996, Hedstrom used $17.7 million of cash
in its operating activities. This net use of cash was attributable primarily
to (i) Hedstrom's $8.1 million net loss (which included $9.6 million in costs
that were expensed in connection with the 1995 Recapitalization) and (ii) a
$7.9 million reduction in accounts payable due to an acceleration of certain
obligations that previously had been extended. During fiscal 1996, Hedstrom
spent $6.7 million on equipment, including $3.3 million related to the
vertical integration of the Bedford Divisions plastics operations. Holdings
and Hedstrom's financing activities during this period generated $31.1 million
in cash. The 1995 Recapitalization involved, among other things, (i) the
redemption of $29.8 million of common stock and $3.1 million of preferred
stock, (ii) the issuance of notes to related parties in the amount of $2.5
million, (iii) proceeds of $27.2 million from the sale of common stock to the
HM Group and (iv) term loan borrowings of $35.0 million.
For the fiscal year ended July 31, 1995, Hedstrom's operations provided cash
of $0.4 million. Net income of $0.7 million included (i) non-cash charges of
$1.2 million related to the discontinuation of its traffic controls business
and (ii) non-cash credits of $2.0 million related to certain barter sales. In
connection with higher sales activity, Hedstrom increased its accounts
receivable by $2.1 million, spent $6.9 million to build up its inventories
and had an increase of $2.4 million in prepaid expenses related to certain
barter credits. The effects of these actions were partially offset by the
extension of credit terms with certain vendors, which generated $5.8 million
of cash. During fiscal 1995, Hedstrom spent $2.6 million on capital
expenditures and incurred net borrowings of $2.9 million under its revolving
credit facility.
Liquidity
Interest payments on the Senior Subordinated Notes and interest and principal
payments under the Senior Credit Facilities represent significant cash
requirements for the Company. The Senior Subordinated Notes require semiannual
interest payments of $5.5 million. Borrowings under the Senior Credit
Facilities bear interest at floating rates and require interest payments on
varying dates depending on the interest rate option selected by the Company.
The Term Loan Facilities will require principal repayments in 1998 according
to the following schedule:
Date Tranche A Term Loan Tranche B Term Loan
---------------- ------------------- -------------------
March 31, 1998 $3,000,000 $125,000
June 30, 1998 750,000 125,000
September 30, 1998 3,000,000 125,000
December 31, 1998 750,000 125,000
The Revolving Credit Facility terminates and all amounts outstanding
thereunder mature on the maturity date of the Tranche A Term Loan Facility.
At present, the Discount Notes do not require cash interest payments. Rather,
principal will accrete to an aggregate principal amount of $44,612,000 on
June 1, 2002. Commencing on such date, Holdings will be required to make
semiannual interest payments of $2,676,720.
The Company's remaining liquidity demands are for capital expenditures and
for working capital needs. For the foreseeable future, the Company expects
that its capital expenditures will be limited primarily to maintaining
existing facilities and equipment and completing its insourcing of
manufacturing certain components. The Senior Credit Facilities impose an
annual limit of $10.0 million on the Company's capital expenditures and
investments (subject in any given year to a roll-over of up to $4.0 million
of unused capital expenditure capacity from the previous year). In addition,
to achieve the estimated net cost savings of over $9.0 million described
herein, the Company may incur expenditures related to the restructuring of
its operations. The Senior Credit Facilities impose significant restrictions
on the Company's ability to make dividend payments.
The Company's primary sources of liquidity are cash flows from operations and
borrowings under the Revolving Credit Facility. As of December 31, 1997,
approximately $34.5 million was available to the Company (subject to
borrowing base limitations) for borrowings under the Revolving Credit
Facility. Management believes that cash generated from operations, together
with borrowings under the Revolving Credit Facility, will be sufficient to
meet the Company's working capital and capital expenditures needs for the
foreseeable future.
The Company believes it is more likely than not to realize the net deferred
tax asset and accordingly no valuation allowance has been provided. This
conclusion is based on, (i) changes in operations that have recently occurred
(which resulted in income before taxes of $17.6 million in 1997), including
the 1996 Cost Reduction Plan and the acquisition of ERO, Inc., which has a
lengthy and consistent history of profitable operations, (ii) projections
(which include the ERO and Amav Divisions) of sufficient taxable U.S. income
to fully realize the net deferred tax asset by the end of calendar year 1998,
(iii) the tax loss carryforwards included in the net deferred tax asset were
generated in very recent periods and do not begin to expire until the years
2008-2011, (iv) the significant excess of book basis over tax basis relative
to the net assets of ERO, Inc. and (v) the 1997 utilization of approximately
$4.5 million in net operating loss carryforwards. Management continually
evaluates the realizability of the net deferred tax assets and the need for
a valuation allowance on such assets.
Amav Division
Subsequent to the acquisition of ERO, the Amav Division experienced a decline
in sales of its arts and crafts product line, a new product line experienced
initial quality problems and the former owners of Amav announced they were
leaving the Company. These events triggered an assessment of recoverability
of the book value of the non-current assets, including goodwill, of Amav.
The net book value of the non-current assets of the Amav Division were
approximately $130 million at December 31, 1997. Cash flows for 1998 and
future years were estimated using management's current forecast and business
plan. Results of the assessment indicated there was no impairment of value
under Statement of Financial Accounting Standards No. 121 ("SFAS 121") as of
December 31, 1997. Although management is actively addressing these factors,
since the acquisition of the Amav Division occurred on June 12, 1997, the
Company has not developed enough operating experience to determine if the
factors that led to the impairment assessment under SFAS 121 can be overcome
in future periods.
Seasonality of the Company
Hedstrom's peak selling season is the first half of the calendar year whereas
ERO's peak selling season is the second half of the calendar year. Management
believes that the Acquisition will smooth the historical seasonality of
Hedstrom's and ERO's businesses, thereby balancing working capital
requirements and enabling the Company to generate more consistent cash flows
throughout the year. Pro Forma Net Sales for the Company for each calendar
quarter during the fiscal year ended December 31, 1997 were 22.7%, 25.6%,
20.9% and 30.8%, respectively, of total Pro Forma Net Sales for such twelve-
month period.
Adoption of Recently Issued Accounting Pronouncements
Holdings will adopt SFAS No. 130, "Reporting Comprehensive Income," effective
January 1, 1998. SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the total of net
income and all other non-owner changes in equity. Management does not believe
that SFAS No. 130 will have a significant impact on Holdings' financial
statements.
Holdings will adopt SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," effective January 1, 1998. This pronouncement
changes the requirements under which public businesses must report segment
information. The objective of the pronouncement is to provide information
about a company's different types of business activities and different
economic environments. SFAS No. 131 will require companies to select segments
based on their internal reporting system. Restatement of prior year segment
disclosure will be required upon adoption of SFAS No. 131. Adoption of this
pronouncement will have no significant impact on Holdings results of
operations or financial position. Management is evaluating what impact, if
any, adoption will have on Holdings' financial statement disclosures;
however, management anticipates that each of Hedstrom's operating divisions
will be reported as a segment in fiscal year 1998.
Year 2000 Date Conversion
The Company recognizes the need to ensure that its operations will not be
adversely impacted by year 2000 software failures. The company has
established processes for evaluating and managing the risks and costs
associated with the problem and is currently in the process of implementing
necessary changes. It is anticipated that implementation will be completed
by 1999. The additional cost of achieving Year 2000 compliance is estimated
to be approximately $500,000 and will be incurred through 1999. The Company
is in the process of conducting an additional assessment of certain year 2000
issues on their manufacturing equipment, time based operating equipment and
significant suppliers which will be completed in 1999. It is anticipated that
corrective action, if any, will be made by year 2000.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Hedstrom Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Hedstrom
Holdings, Inc. (a Delaware corporation) and subsidiary as of December 31,
1997 and 1996, and the related consolidated income statements, stockholders'
equity, and cash flows for the fiscal year ended December 31, 1997, for the
five months ended December 31, 1996, and for each of the fiscal years ended
July 31, 1996 and 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hedstrom Holdings, Inc. and
subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the fiscal year ended December 31, 1997,
for the five months ended December 31, 1996, and for each of the fiscal years
ended July 31, 1996 and 1995, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule appearing
on page 56 of this form 10-K is presented for the purpose of complying with
the Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/Arthur Andersen
ARTHUR ANDERSEN LLP
Dallas, Texas
February 13, 1998
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, December 31,
1997 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,844 $ 533
Trade accounts receivable, net of
allowance for bad debts of $2,297 and
$505 82,702 13,586
Inventories 47,464 23,816
Deferred income taxes 7,045 5,027
Prepaid expenses and other current assets 4,801 690
-------- --------
Total current assets 152,856 43,652
-------- --------
PROPERTY, PLANT, AND EQUIPMENT, at cost,
net of accumulated depreciation 42,823 21,743
GOODWILL, net of accumulated amortization 161,176 -
OTHER ASSETS:
Deferred financing fees, net of
accumulated amortization 17,474 -
Deferred charges and other, net of
accumulated amortization 1,387 2,318
Deferred income taxes 10,057 4,362
-------- --------
Total other assets 28,918 6,680
-------- --------
Total assets $385,773 $ 72,075
======== ========
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, December 31,
1997 1996
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 35,500 $ 17,400
Current portion of long-term debt 9,222 1,965
Accounts payable 23,381 11,698
Accrued expenses -
Compensation 4,066 1,061
Commissions and royalties 5,365 206
Acquisition costs 6,354 -
Customer allowances 7,193 1,585
Other 2,846 151
--------- --------
Total current liabilities 93,927 34,066
--------- --------
LONG-TERM DEBT
Senior Subordinated Notes 110,000 -
Senior Discount Notes 23,288 -
Term loans 104,375 36,750
Notes payable to related parties 2,500 2,500
Capital leases 1,605 1,556
Other 2,914 300
--------- --------
Total long-term debt 244,682 41,106
--------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
10,000,000 shares authorized, no
shares issued or outstanding - -
Common stock, $.01 par value,
50,000,000 shares authorized,
36,142,883 and 32,941,499 shares
issued and outstanding, respectively 361 329
Non-voting common stock, $.01 par
value, 40,000,000 shares authorized,
31,520,000 shares issued and outstanding 315 -
Additional paid-in capital 51,553 10,437
Foreign currency translation adjustment (778) -
Accumulated deficit (4,287) (13,863)
--------- --------
Total stockholders' equity (deficit) 47,164 (3,097)
--------- --------
Total liabilities and stockholders'
equity $ 385,773 $ 72,075
========= ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share amounts)
For the For the Five
Fiscal Year Months For the Fiscal Years
Ended Ended Ended July 31,
December 31, December 31, ----------------------
1997 1996 1996 1995
------------ ------------ --------- ---------
NET SALES $256,146 $ 23,994 $ 133,194 $ 133,862
COST OF SALES 172,390 21,973 105,068 107,312
-------- --------- --------- ---------
Gross profit 83,756 2,021 28,126 26,550
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 47,052 7,546 24,603 19,207
Operating income (loss) 36,704 (5,525) 3,523 7,343
RECAPITALIZATION EXPENSES - - 9,600 -
INTEREST EXPENSE 19,131 2,115 5,896 4,573
-------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 17,573 (7,640) (11,973) 2,770
INCOME TAX EXPENSE (BENEFIT) 7,997 (2,869) (3,857) 1,440
-------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS 9,576 (4,771) (8,116) 1,330
LOSS FROM DISCONTINUED OPERATIONS
(net of tax benefit of $619) - - - (585)
-------- --------- --------- ---------
NET INCOME (LOSS) $ 9,576 $ (4,771) $ (8,116) $ 745
======== ========= ========= =========
BASIC NET INCOME PER COMMON SHARE:
Net income $ 0.18
Weighted average shares outstanding 52,153
DILUTED NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS:
Net income $ 0.18
Weighted average shares and common
share equivalents outstanding 52,416
The accompanying notes to consolidated financial statements are an integral
part of these statements.
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Fiscal For the Five
Year Months For the Fiscal Years Ended
Ended Ended July 31,
December 31, December 31, --------------------------
1997 1996 1996 1995
-------------- ------------ --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 9,576 $ (4,771) $ (8,116) $ 745
Adjustments to reconcile net income
(loss) to net cash provided by
(used for) operating activities-
Depreciation of property, plant and
equipment 5,802 1,626 2,903 2,365
Amortization of goodwill and
deferred charges 3,266 350 511 582
Amortization of deferred financing
fees and original issue discount 3,246 - - -
Discontinued operations - - - 1,204
Deferred income tax provision
(benefit) 7,027 (2,862) (3,808) 755
Gain on the disposition of property,
plant, and equipment (1) (60) (182) -
Provision for losses on accounts
receivable, net of recoveries 1,246 64 37 100
Changes in assets and liabilities
Accounts receivable (46,754) 9,734 (892) (2,139)
Inventories 4,874 (2,042) (139) (6,941)
Prepaid expenses 298 (119) 6 (2,428)
Accounts payable 1,709 1,851 (7,906) 5,757
Accrued expenses (68) (793) (158) 396
-------- -------- -------- -------
Net cash provided by (used for)
operating activities (9,779) 2,978 (17,744) 396
-------- -------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of ERO, Inc. (122,600) - - -
Acquisition of certain assets of
Bollinger Industries, Inc. (14,928) - - -
Acquisitions of property, plant,
and equipment (6,395) (1,376) (6,738) (2,574)
Proceeds from the sale of property,
plant, and equipment 8 67 248 -
Other acquisitions (2,472) - - -
-------- -------- -------- -------
Net cash used for investing
activities (146,387) (1,309) (6,490) (2,574)
-------- -------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of
Senior, Subordinated Notes 110,000 - - -
Net proceeds from the issuance of
new Term Loans 110,000 - - -
Net proceeds from the issuance of
Senior Discount Notes 21,618 - - -
Borrowings on new Revolving Credit
Facility, net 35,500 - - -
Repayments on new term loans (1,125) - - -
Borrowings (repayments) of old
term loans, net (92,767) - 35,000 -
Debt financing and other transaction
costs (21,000) - - -
Borrowings (repayments) on old
revolving lines of credit, net (42,400) (9,050) (2,360) 2,899
Net proceeds from issuance of voting
common stock 3,401 - 27,242 -
Net proceeds from issuance of non-
voting common stock 40,000 - - -
Redemption of common stock from
existing stockholders - - (29,772) -
Redemption of preferred stock from
existing stockholders - - (3,072) -
Notes payable to related parties - - 2,500 -
Capital lease (payments) borrowings
and other 2,395 (84) 1,597 -
-------- -------- -------- -------
Net cash provided by (used for)
financing activities 165,622 (9,134) 31,135 2,899
-------- -------- -------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 9,456 (7,465) 6,901 721
CASH AND CASH EQUIVALENTS:
Purchased cash 855 - - -
Beginning of year/period 533 7,998 1,097 376
-------- -------- -------- -------
End of year/period $ 10,844 $ 533 $ 7,998 $ 1,097
======== ======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Income taxes paid $ 4,431 $ 45 $ 503 $ 46
Interest paid $ 13,922 $ 1,534 $ 5,036 $ 4,405
SUPPLEMENTAL DISCLOSURE OF ASSETS
ACQUIRED:
See Note 4
The accompanying notes to consolidated financial statements are an integral part of these statements.
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Preferred Stock Common Stock
---------------- --------------- Foreign
Additional Currency
Par Par Paid-In Translation Accumulated
Shares Value Shares Value Capital Adjustment Deficit Total
-------- ------ ------ ------ -------- ------------ ------------ -----
BALANCE AT JULY 31, 1994 2,749,403 $2,750 33,231,090 $ 332 $ 12,964 $ - $ (1,399) $ 14,647
Paid-in-kind dividends
on preferred stock 256,152 256 - - - - (256) -
Net income - - - - - - 745 745
--------- ------ ---------- ----- -------- ------- -------- --------
BALANCE AT JULY 31, 1995 3,005,555 3,006 33,231,090 332 12,964 - (910) 15,392
Paid-in-kind dividends
on preferred stock 66,277 66 - - - - (66) -
Redemption of common
stock from existing
stockholders - - (27,531,941) (275) (29,497) - - (29,772)
Redemption of preferred
stock from existing
stockholders (3,071,832) (3,072) - - - - - (3,072)
Sale of common stock
to new stockholders - - 27,242,350 272 26,970 - - 27,242
Net loss - - - - - - (8,116) (8,116)
--------- ------ ---------- ---- ------- ------- -------- --------
BALANCE AT JULY 31, 1996 - - 32,941,499 329 10,437 - (9,092) 1,674
Net loss - - - - - - (4,771) (4,771)
--------- ------ ---------- ---- ------- ------- -------- --------
BALANCE AT
DECEMBER 31, 1996 - - 32,941,499 329 10,437 - (13,863) (3,097)
Issuance of voting
common stock - - 3,201,384 32 3,369 - - 3,401
Issuance of non-voting
common stock - - 31,520,000 315 39,685 - - 40,000
Foreign currency
translation adjustment - - - - - (778) - (778)
Acquisition transaction
costs - - - - (1,938) - - (1,938)
Net income - - - - - - 9,576 9,576
--------- ------ ---------- ----- -------- ------- -------- --------
BALANCE AT
DECEMBER 31, 1997 - $ - 67,662,883 $ 676 $ 51,553 $ (778) $ (4,287) $ 47,164
========= ====== ========== ===== ======== ======= ======== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Hedstrom Holdings, Inc. ("Holdings") is a holding Company with no operations,
other than its 100% ownership of Hedstrom Corporation ("Hedstrom", and
together with Holdings, the "Company"). The Company is a manufacturer and
marketer of well-established children's leisure and activity products. The
Company's products fall within four principal divisions: Bedford, Ashland,
Amav and ERO. Through its facility in Bedford, Pennsylvania, the Bedford
Division manufactures and distributes gym set products consisting of painted
metal gym sets, composite metal and plastic gym sets, wood gym kits, plastic
outdoor slides and gym set accessories. Through its facility in Ashland,
Ohio, the Ashland Division manufactures playball products, which consist of
premium playballs made of plastic or vinyl and decorated with popular
licensed characters or designs, nonpremium playballs that generally have
minimal decoration, athletic balls targeted at young children, and ball
pit products. Through its facility in Montreal, Canada, the Amav Division
manufactures children's products including arts and crafts kits, game tables,
battery operated ride-on vehicles and back-to-school items. Through its
facility in Hazlehurst, Georgia, the ERO Division manufactures and distributes
slumber products, water sports products and room decorations for children.
The Company sells its products through major national toy retailers, mass
merchants, supermarkets, drug store chains, and home centers primarily in
the United States, Canada, and the United Kingdom. The Company employed
1,968 people at December 31, 1997 12% of which are represented by the Rubber
Workers Union. The collective bargaining agreement expires on October 10, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Hedstrom Holdings, Inc. and its wholly owned subsidiary, Hedstrom Corporation.
Effective June 12, 1997, Hedstrom acquired ERO, Inc. ("ERO"), which became a
wholly owned subsidiary of Hedstrom (see Note 4). The accompanying
consolidated financial statements reflect the operations of ERO since June 1,
1997. Management does not believe that the year over year comparisons are
meaningful, given the 1997 acquisition of ERO. All intercompany balances and
transactions have been eliminated in consolidation.
Fiscal Year
Prior to August 1, 1996, the Company's fiscal year ended on July 31. Effective
January 1, 1997, the Company changed its fiscal year to a calendar year ending
on December 31. The following consolidated financial statements include the
twelve month period from January 1, 1996 to December 31, 1996 for comparative
purposes only.
Consolidated Income Statement
For the twelve months ended December 31, 1996
(Unaudited)
(In thousands)
NET SALES $ 125,396
COST OF SALES 101,041
---------
Gross profit 24,355
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES 25,082
---------
Operating loss (727)
INTEREST EXPENSE 6,238
---------
LOSS BEFORE INCOME TAXES (6,965)
INCOME TAX BENEFIT (2,652)
---------
NET LOSS $ (4,313)
=========
Consolidated Statement of Cash Flows
For the twelve months ended December 31, 1996
(Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,313)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 4,401
Changes in assets and liabilities:
Accounts receivable 3,804
Inventories 4,088
Accounts payable (5)
Accrued expenses 1,434
Other (4,966)
---------
Net cash used for operating activities 4,443
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant and
equipment (6,457)
---------
Net cash used for investing activities (6,457)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on loans 2,159
---------
Net cash provided by financing
activities 2,159
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 145
CASH AND CASH EQUIVALENTS:
Beginning of period 388
---------
End of period $ 533
=========
Cash and Cash Equivalents
Cash and cash equivalents include short-term investments with original
maturities of three months or less. These investments are stated at cost
which approximates market.
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 in the normal course of business are
stated at cost. Property, plant, and equipment acquired in connection with
the acquisitions of ERO and other companies are stated at fair market value
as of that date as determined by independent appraisals, where appropriate.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Additions and improvements are capitalized, while
expenditures for maintenance and repairs are charged to operations as
incurred. The cost and accumulated depreciation of property sold or retired
are removed from the respective accounts and the resultant gains or losses,
if any, are included in current operations.
The estimated useful lives of property, plant, and equipment are as follows:
Buildings and improvements 5-40 years
Machinery and equipment 3-12 years
Computer hardware and software 3-5 years
Furniture and fixtures 5-10 years
Depreciation is allocated to cost of sales and selling, general, and
administrative expense based upon the related asset's use. Depreciation of
approximately $5,184,000, $1,576,000, $2,797,000 and $2,248,000 is included
in cost of sales for the fiscal year ended December 31, 1997, for the five
months ended December 31, 1996, and for each of the fiscal years ended July
31, 1996 and 1995, respectively. Depreciation of approximately $618,000,
$50,000, $106,000 and $117,000 is included in selling, general, and
administrative expense for the fiscal year ended December 31, 1997, for the
five months ended December 31, 1996, and for each of the fiscal years ended
July 31, 1996 and 1995, respectively.
Effective August 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). SFAS 121
requires that long-lived assets and certain identifiable intangibles,
including goodwill, to be held and used by an entity be reviewed for
impairment whenever changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In the event that facts and
circumstances indicate that the cost of long-lived assets may be impaired,
an evaluation of recoverability would be performed. If an evaluation is
required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow is required. The Company
did not write-down any long-lived assets during the year ended December 31,
1997. The adoption of SFAS 121 had no effect on the Company's financial
position or results of operations as of and for the five months ended
December 31, 1996.
Goodwill
Goodwill, representing the excess of the cost over the net tangible and
identifiable intangible assets of acquired businesses, is stated at cost and
is amortized on a straight-line basis over forty years. Amortization of
goodwill of $2,384,000 is included in selling, and administrative expense
for the fiscal year ended December 31, 1997. Goodwill is reviewed for
impairment in accordance with SFAS 121, as discussed above.
Deferred Financing Fees
Deferred financing fees, representing costs incurred in connection with
obtaining borrowings under long-term debt agreements, are stated at cost and
are amortized over the life of the related debt. Amortization of deferred
financing fees of $1,576,000 is included in interest expense for the fiscal
year ended December 31, 1997.
Deferred Charges and Other, Net
Deferred charges and other on the accompanying balance sheets is comprised of
the following (in thousands):
December 31, December 31,
1997 1996
------------ ------------
Deferred expenses $ 2,546 $ 2,546
Barter credits 470 519
-------- -------
3,016 3,065
Less-Accumulated amortization (1,629) (747)
-------- -------
$ 1,387 $ 2,318
======== =======
Deferred expenses primarily relate to costs the Company incurs to obtain
shelf space, and replace competitors products, at certain of its retail
customers. In connection with these transactions, the Company obtains a
commitment from the retailer that it will exclusively stock the Company's
products for a period not less than three years. As a result, these costs are
deferred and amortized over a 36-month period on a straight-line basis.
Amortization expense is included in selling, general, and administrative
expense on the accompanying income statements and was $882,000, $350,000,
$358,000 and $37,000 for the fiscal year ended December 31, 1997, for the
five months ended December 31, 1996 and for each of the fiscal years ended
July 31, 1996 and 1995, respectively.
Prior to the recapitalization discussed in Note 13, the Company had
capitalized certain financing costs and organizational costs. These costs
were immediately expensed in connection with the recapitalization and are
included in recapitalization expenses on the accompanying July 31, 1996,
income statement. The deferred financing costs were being amortized over the
period of the underlying debt on a straight-line basis and organizational
costs were being amortized over a 60-month period. Prior to the
recapitalization, amortization of deferred financing costs were $67,000 and
$202,000 in the fiscal years ended July 31, 1996 and 1995, respectively, and
are included in interest expense on the accompanying income statements.
Amortization of organizational costs prior to the recapitalization were
$85,000 and $341,000 in the fiscal years ended July 31, 1996 an 1995,
respectively, and are included in selling, general, and administrative expense
on the accompanying income statements.
During the fiscal year ended July 31, 1995, the Company exchanged certain
finished goods inventory with a cost basis of approximately $2,000,000 for
barter credits. Although the barter credits had a stated value of
approximately $3,200,000, they were recorded at an amount equal to the cost
basis of the inventory exchanged, such that no profit was recognized on the
transaction. The barter credits can be used principally for the purchase of
print and media advertising; however, cash must be used in addition to the
barter credits to secure the advertising. During the fiscal year ended
December 31, 1997, the five months ended December 31, 1996 and the fiscal
year ended July 31, 1996, the Company utilized approximately $49,000, $262,000
and $262,000, respectively, of these barter credits. As a result of the
Company's decision to reduce its advertising expenditures during calendar
1997, management determined that all of its barter credits may not be fully
utilized prior to their expiration in August 1998. Therefore, the Company
wrote-off an additional $1,000,000 of the barter credits during the fiscal
year ended July 31, 1996. Management believes that the remaining recorded
credits will be utilized prior to their expiration.
Revenue Recognition
The Company recognizes revenue when title to the goods transfers. For the
majority of the Company's sales, this occurs at the time of shipment.
Income Taxes
Deferred income taxes are determined under the asset and liability method in
accordance with Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" (SFAS 109). Deferred income taxes arise from
temporary differences between the income tax basis of assets and liabilities
and their reported amounts in the financial statements.
Net Income (Loss) Per Common Share
Holdings adopted SFAS No. 128 "Earnings Per Share", effective December 15,
1997. SFAS No. 128 requires the calculation of basic and diluted earnings
per share. Basic earnings per share is computed by dividing net income by
the weighted average number of shares of common stock outstanding during the
period. Diluted earnings per share is computed by dividing the net income by
the weighted average number of shares of common stock and other dilutive
securities. Due to the ERO acquisition, described in Note 4, net income
(loss) per share for the five months ended December 31, 1996 and for the
fiscal years ended July 31, 1996 and 1995 have no significant relevance to
current amounts. Refer to Note 4 for pro-forma amounts.
Fair Value of Financial Instruments
The carrying amount reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable, accounts payable, and accrued expenses
approximates fair value because of the immediate or short-term maturity of
these financial instruments. The carrying amount reported for long-term debt
approximates fair market value because the underlying instruments are at
rates similar to current rates offered to the Company for debt with the same
remaining maturities.
Significant Concentration of Customers
All trade accounts receivable are unsecured. A significant level of the
Company's net sales is generated from approximately four retail companies
that serve national markets. Sales to the Company's top four customers
aggregated approximately 54%, 46%, 48% and 43% of net sales for the fiscal
year ended December 31, 1997, for the five months ended December 31, 1996,
and for each of the fiscal years ended July 31, 1996 and 1995, respectively.
Two of the Company's customers, Toys "R" Us and Wal-Mart, each accounted for
over 10% of the Company's net sales during the fiscal year ended December 31,
1997 and the fiscal year ended July 31, 1995, aggregating approximately 38%
and 29% of net sales, respectively. Three of the Company's customers, Toys
"R" Us, Wal-Mart and K-Mart, each accounted for over 10% of the Company's
net sales during the five months ended December 31, 1996, and for the fiscal
year ended July 31, 1996, aggregating approximately 38% and 43% of net sales,
respectively.
Foreign Currency Translation
The financial position and results of operations of the Company's foreign
subsidiaries are measured using each subsidiary's local currency as the
functional currency. Assets and liabilities of the foreign subsidiaries are
translated to U.S. dollars using exchange rates in effect at balance sheet
dates. Income and expense items are translated at monthly average rates of
exchange. The resultant translation gains or losses are included as a
component of stockholders' equity designated as foreign currency translation
adjustment. Transaction gains or losses were not significant in any year.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS 123), encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. Accordingly, compensation cost for stock options
is measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount the employee must pay to
acquire the stock. See Note 10.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses for the reporting period.
Actual results could differ from those estimates.
Recent Accounting Pronouncements
Holdings will adopt SFAS No. 130, "Reporting Comprehensive Income," effective
January 1, 1998. SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the total of net
income and all other non-owner changes in equity. Management does not believe
that SFAS No. 130 will have a significant impact on Holdings' financial
statements.
Holdings will adopt SFAS No. 131, "Disclosure about Segments of An Enterprise
and Related Information," effective January 1, 1998. This pronouncement
changes the requirements under which public businesses must report segment
information. The objective of the pronouncement is to provide information
about a company's different types of business activities and different
economic environments. SFAS No. 131 will require companies to select segments
based on their internal reporting system. Restatement of prior year segment
disclosure will be required upon adoption of SFAS No. 131. Adoption of this
pronouncement will have no significant impact on Holdings results of
operations or financial position. Management is evaluating what impact, if
any, adoption will have on Holdings' financial statement disclosures;
however, management anticipates that each of Hedstrom's operating divisions
will be reported as a segment in fiscal 1998.
3. 1996 COST REDUCTION PLAN:
During fiscal 1996, the Company incurred a loss before income taxes and
recapitalization expenses of $2.4 million. In order to improve Hedstrom's
profitability in 1997 and thereafter, management implemented a plan in the
fall of 1996 (the "1996 Cost Reduction Plan") to reduce costs by over $9
million in 1997 and thereafter as compared with fiscal 1996 levels. Important
elements of the plan included:
- - Implementing Just-in-Time Manufacturing. In late 1996, Hedstrom restructured
certain of its manufacturing operations to increase its daily production
capacity of outdoor gym sets. This restructuring has enabled Hedstrom to
manufacture outdoor gym sets to specific customer orders rather than producing
outdoor gym sets in anticipation of customer orders, which Hedstrom had done
in the past because of capacity constraints. In fiscal 1996, prior to
implementing this restructuring, Hedstrom experienced a significant and
unexpected change in its sales mix of outdoor gym sets, requiring Hedstrom to
use third party warehouses to store many of the outdoor gym sets it had
produced in anticipation of customer demand. As a result, Hedstrom incurred
approximately $2.1 million of higher warehouse and material handling costs.
The implementation of just-in-time manufacturing of outdoor gym sets has
enabled Hedstrom to carry a lower level of outdoor gym set inventory and, as
a result, to eliminate the need for utilizing third party warehouses for
outdoor gym sets. Management believes the Company saved in excess of $2.1
million of warehouse and material handling expense in 1997 and will continue
to save an equivalent amount annually as a result of implementing just-in-time
manufacturing of outdoor gym sets.
- - Improved Manufacturing Procedures. In an effort to streamline outdoor gym set
production and improve manufacturing efficiencies, in 1996 Hedstrom (i)
reduced its number of outdoor gym set product offerings, (ii) redesigned
certain outdoor gym set components to reduce the cost of such components
and (iii) further standardized many of the components among its various
outdoor gym set product offerings. Management believes these actions
improved profitability by in excess of $2.0 million in 1997 and will continue
to save an equivalent amount annually over fiscal 1996 levels.
- - In-sourcing Certain Plastic Components. Hedstrom periodically evaluates the
economics of producing internally certain plastic components used in the
production and assembly of its outdoor gym sets versus purchasing such
components externally. In 1996, Hedstrom invested approximately $3.0 million
in new plastic blow-molding equipment to manufacture many of the plastic
slides that it had previously purchased from third-party vendors. Management
estimates that producing these slides internally provided cost savings in
excess of $1.5 million in 1997 and will continue to save an equivalent amount
annually as compared to fiscal 1996 levels.
- - Discontinuation of Trial Advertising Campaign. Hedstrom historically has
advertised its products in cooperation with its retail customers, principally
through print media such as newspaper circulars and free-standing inserts
sponsored by its customers. In fiscal 1996, Hedstrom initiated, on a trial
basis, its own multi-media advertising program designed to increase consumer
awareness of the Hedstrom brand over time. The total cost for this
advertising program was in excess of $1.5 million. After careful review,
management determined that this trial advertising campaign would not provide
an acceptable return on investment and elected to discontinue it. Therefore,
such costs were not incurred in 1997.
- - Restructure Promotional Programs. Consistent with industry practice, Hedstrom
provides retailers with certain promotional allowances, a portion of which
typically is fixed in nature and a portion of which is based on the volume of
customer purchases of Hedstrom products. In late 1996, Hedstrom reduced the
fixed component of certain of its promotional allowances and restructured its
promotional programs with several customers by raising the required volumes
necessary to achieve certain promotional discounts. Management believes
these initiatives improved profitability in 1997 by in excess of $1.4 million
and will continue to save an equivalent amount annually over fiscal 1996
levels.
- - Personnel Reductions. Hedstrom reduced its number of full-time employees by
approximately 30 people in a variety of departments in the second half of
1996. Management believes that such personnel reductions resulted in savings
in excess of $0.7 million in 1997 and will continue to save an equivalent
amount annually over fiscal 1996 levels.
4. ACQUISITION OF ERO, INC.:
On April 10, 1997, Hedstrom and HC Acquisition Corp., a wholly owned subsidiary
of Hedstrom, entered into an Agreement and Plan of Merger (the "Merger
Agreement") with ERO to acquire ERO for a total enterprise value of
approximately $200 million. Pursuant to the Merger Agreement, HC Acquisition
Corp. commenced and, on June 12, 1997, consummated a tender offer for all of
the outstanding shares of the common stock of ERO at a purchase price of
$11.25 per share (the "Tender Offer"). Holdings also assumed a purchase price
contingency related to ERO, Inc.'s acquisition of Amav in October of 1995.
The contingency includes an additional $3.7 million of purchase price
contingent upon achievement of certain conditions. As those conditions were
met as of December 31, 1997, Holdings accrued a liability for the contingency
against goodwill. This is reflected in accrued expenses-acquisition costs in
the consolidated balance sheet. The payment will be made in March 1998. Upon
consummation of the Tender Offer, (i) HC Acquisition Corp. was merged with
and into ERO (the "Merger") with ERO surviving the Merger as a wholly owned
subsidiary of Hedstrom, (ii) certain of ERO's outstanding indebtedness was
refinanced by Hedstrom (the "ERO Refinancing") and (ii) Hedstrom refinanced
(the "Hedstrom Refinancing") its existing revolving credit facility and term
loan facility (the Merger, the Tender Offer, the ERO Refinancing and the
Hedstrom Refinancing, are collectively referred to herein as the
"Acquisition").
Holdings and Hedstrom required approximately $301.1 million in cash to
consummate the Acquisition, including approximately (i) $122.6 million paid in
connection with the Tender Offer and the Merger, (ii) $82.6 million paid in
connection with the ERO Refinancing, (iii) $74.9 million paid in connection
with the Hedstrom Refinancing and (iv) $21.0 million incurred in respect of
fees and expenses. The funds required to consummate the Acquisition were
provided by (i) $75.0 million of term loans under a new six-year senior secured
term loan facility (the "Tranche A Term Loan Facility"), (ii) $35.0 million of
term loans under a new eight-year senior secured term loan facility
(the "Tranche B Term Loan Facility" and, together with the Tranche A Term Loan
Facility, the "Term Loan Facilities"), (iii) $16.1 million of borrowings under
a new $70.0 million senior secured revolving credit facility (the "Revolving
Credit Facility" and, together with the Term Loan Facilities, the "Senior
Credit Facilities"), (iv) $110.0 million of gross proceeds from the offering
by Hedstrom of 10% Senior Subordinated Notes Due 2007 (the "Senior Subordinated
Notes"), (v) $25.0 million of gross proceeds from the offering by Holdings
of 44,612 units consisting of 12% Senior Discount Notes Due 2009
(the "Discount Notes") and 2,705,896 shares of Common Stock, $.01 par value
per share, of Holdings ("Holdings Common Stock") and (vi) $40.0 million of
gross proceeds from the private placement of 31,520,000 shares of Non-Voting
Common Stock, $.01 par value per share, of Holdings ("Holdings Non-Voting
Common Stock") and 480,000 shares of Holdings Common Stock. The Revolving
Credit Facility will also be used to finance certain seasonal working capital
requirements.
The acquisition of ERO has been accounted for under the purchase method of
accounting, and accordingly, the purchase price has been allocated to the
assets acquired and the liabilities assumed based upon fair value at the date
of the acquisition of ERO. The excess of the purchase price over the fair
values of the tangible net assets acquired was approximately $145.5 million,
has been recorded as goodwill and is being amortized on a straight-line basis
over 40 years. In the event that facts and circumstances indicate that the
goodwill may be impaired, an evaluation of recoverability would be performed.
If an evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the assets carrying amount to
determine if an adjustment is required.
The fair value of assets acquired and liabilities assumed, reflecting the
final allocation, was as follows (in thousands):
Current assets $ 56,200
Net property, plant and equipment 20,000
Other assets 14,700
Goodwill 148,100
Liabilities assumed (116,400)
---------
Cash paid for ERO $ 122,600
=========
In connection with the acquisition of ERO, management implemented a plan (the
"Rationalization Plan") that will result in annual cost savings of $6 million
as a result of rationalizing sales, marketing and general and administrative
functions, closings of duplicate facilities and reductions in external
administrative expenditures including legal, insurance, tax, audit and public
relations expenditures. The cost savings reflect personnel terminations that
have already occurred or that have been formally communicated to the employees,
closings of duplicate facilities that have occurred and reductions in external
administrative expenses that have been negotiated.
The cost savings are comprised of the following (in thousands):
Salaries and benefits from personnel terminations $ 3,700
Duplicative functions and facilities that have
been closed 900
External administrative expenses that have been reduced 1,400
--------
Total Annual Cost Savings $ 6,000
========
The unaudited pro forma results below assume the Acquisition occurred and that
the Rationalization Plan was implemented at the beginning of the periods
presented and the 1996 Cost Reduction Plan was implemented at the beginning
of the fiscal year ended July 31, 1996 (in thousands, except per share amounts):
Twelve Months Fiscal Year
Ended December 31, Ended
-------------------- July 31,
1997 1996 1996
-------- -------- -----------
Net sales $294,450 $283,307 $260,008
Net income (loss) 9,298 (3,552) (12,792)
Net income (loss)
per share basic $0.14 $(0.05) $(0.19)
Net income (loss)
per share diluted 0.14 (0.05) (0.19)
The above pro forma results include adjustments to give effect to amortization
of goodwill, interest expense related to the Senior Subordinated Notes, the
Discount Notes and the Senior Credit Facilities and implementation of the
Rationalization Plan, together with the related tax effects. The pro forma
results are not necessarily indicative of the operating results that would
have occurred had the Acquisition been consummated and had the Rationalization
Plan and the Cost Reduction Plan been implemented as of the beginning of the
periods presented, nor are they necessarily indicative of future operating
results.
Subsequent to the acquisition of ERO, the Amav Division experienced a decline
in sales of its arts and crafts product-line, a new product line experienced
initial quality problems and the former owners of Amav announced they were
leaving the Company. These events triggered an assessment of the recoverability
of the book value of the non-current assets, including goodwill, of Amav. The
net book value of the non-current assets of the Amav Division were approximately
$130 million at December 31, 1997. Cash flows for 1998 and future years were
estimated using management's current forecast and business plan. Results of
the assessment indicated there was no impairment of value under SFAS 121 as of
December 31, 1997. Although management is actively addressing these factors,
since the acquisition of the Amav Division occurred on June 12, 1997, the
Company has not developed enough operating experience to determine if the
factors that led to the impairment assessment under SFAS 121 can be overcome
in future periods.
5. INVENTORIES:
Inventories are comprised of the following (in thousands):
December 31, December 31,
1997 1996
------------ ------------
Raw materials $ 16,502 $ 7,534
Work-in-process 5,690 2,298
Finished goods 25,272 13,984
---------- ----------
$ 47,464 $ 23,816
========== ==========
6. PROPERTY, PLANT, AND EQUIPMENT:
Property, plant, and equipment is comprised of the following (in thousands):
December 31, December 31,
1997 1996
------------ ------------
Buildings and improvements $ 16,567 $ 7,695
Machinery and equipment 40,131 25,218
Computer software and hardware 1,469 -
Furniture and fixtures 1,277 758
--------- ---------
59,444 33,671
Less - Accumulated depreciation (20,430) (12,074)
--------- ---------
39,014 21,597
Land 3,809 146
--------- ---------
$ 42,823 $ 21,743
========= =========
7. DEBT
Debt consists of the following (in thousands):
December 31, December 31,
1997 1996
------------ ------------
Senior Subordinated Notes $ 110,000 $ -
Term Loans 112,375 38,500
Senior Discount Notes 23,288 -
Revolving Credit Facility 35,500 17,400
Other 8,241 4,571
--------- ---------
$ 289,404 $ 60,471
========= =========
Term Loans and Revolving Credit Facility
In connection with the Acquisition, Hedstrom's existing term loans of $35.0
million and its existing revolving credit facility borrowings were repaid and
the facilities were terminated. Hedstrom's $3.5 million Industrial Revenue
Bond from Bedford County, which bears interest at 7.13%, was not retired in
connection with the Acquisition.
As discussed in Note 4, in connection with the Acquisition, Hedstrom obtained
the Senior Credit Facilities. The Senior Credit Facilities consist of (a) a
six-year Tranche A Senior Secured Term Loan Facility providing for term loans
to Hedstrom in a principal amount of $75 million; (b) an eight-year Tranche B
Senior Secured Term Loan Facility providing for term loans to Hedstrom in a
principal amount of $35 million; and (c) a Senior Secured Revolving Credit
Facility providing for revolving loans to Hedstrom and the issuance of letters
of credit for the account of Hedstrom in an aggregate principal and stated
amount at any time not to exceed $70 million. Borrowings under the Revolving
Credit Facility will be available based upon a borrowing base not to exceed 85%
of eligible accounts receivable and 50% of eligible inventory.
At Hedstrom's option, the interest rates per annum applicable to the Senior
Credit Facilities will be either (i) the Eurocurrency Rate (as defined) plus
2.5% in the case of the Tranche A Term Loan Facility and the Revolving Credit
Facility or 3.0% in the case of the Tranche B Term Loan Facility or (ii) the
Alternate Base Rate (as defined) plus 1.5% in the case of the Tranche A Term
Loan Facility and the Revolving Credit Facility or 2.0% in the case of the
Tranche B Term Loan Facility. The Alternate Base Rate is the highest of (a)
Credit Suisse First Boston's Prime Rate (as defined) or (b) the federal funds
effective rate from time to time plus 0.5%. The applicable margin in respect
of the Tranche A Term Loan Facility and the Revolving Credit Facility will be
adjusted from time to time by amounts to be agreed upon based on the
achievement of certain performance targets to be determined.
The obligations of Hedstrom under the Senior Credit Facilities are
unconditionally, fully and irrevocably guaranteed (jointly and severally) by
Holdings and each of Hedstrom's direct or indirect domestic subsidiaries
(collectively, the "Senior Credit Facilities Guarantors"). In addition, the
Senior Credit Facilities will be secured by first priority or equivalent
security interests in (i) all the capital stock of, or other equity interests
in, each direct or indirect domestic subsidiary of Hedstrom and 65% of the
capital stock of, or other equity interests in, each direct foreign subsidiary
of Hedstrom, or any of its domestic subsidiaries and (ii) all tangible and
intangible assets (including, without limitation, intellectual property and
owned real property) of Hedstrom and the Senior Credit Facilities Guarantors.
The Senior Credit Facilities contain a number of significant covenants that,
among other things, restrict the ability of Hedstrom to dispose of assets,
incur additional indebtedness, repay other indebtedness or amend other debt
instruments, pay dividends, create liens on assets, make investments or
acquisitions, engage in mergers or consolidations, make capital expenditures,
or engage in certain transactions with affiliates. In addition, under the
Senior Credit Facilities, Hedstrom is required to comply with specified
minimum interest coverage and maximum leverage ratios.
Senior Discount Notes
In connection with the Acquisition, Holdings received $25.0 million of gross
proceeds from the issuance by Holdings of 44,612 units, consisting of the
Discount Notes and 2,705,896 shares of Holdings common stock. Of the $25.0
million in gross proceeds, $3.4 million ($1.25 per share) was allocated to
the common stock, based upon management's estimate of fair market value, and
$21.6 million was allocated to Discount Notes.
The Discount Notes are unsecured obligations of Holdings and have an aggregate
principal amount at maturity (June 1, 2009) of $44.6 million, representing a
yield to maturity of 12%. No cash interest will accrue on the Discount Notes
prior to June 1, 2002. Thereafter, cash interest will be payable on June 1 and
December 1 of each year, commencing December 1, 2002. Amortization of the
original issue discount, which is included in interest expense, totaled
$1,670,000 during the fiscal year ended December 31, 1997.
Except as set forth below, the Discount Notes will not be redeemable at the
option of Holdings prior to June 1, 2002. On and after such date, the Discount
Notes will be redeemable, at Holdings' option, in whole or in part, at the
following redemption prices (expressed in percentages of principal amount at
maturity), plus accrued and unpaid interest to the redemption date:
if redeemed during the 12-month period commencing on June 1 of the years set
forth below:
Period Redemption Price(%)
------ -------------------
2002 106.000
2003 104.000
2004 102.000
2005 and thereafter 100.000
In addition, at any time and from time to time prior to June 1, 2000, Holdings
may redeem in the aggregate up to 40% of the accreted value of the Discount
Notes with the proceeds of one or more equity offerings by Holdings so long as
there is a public market at the time of such redemption, at a redemption price
(expressed as a percentage of accreted value on the redemption date) of 112%,
plus accrued and unpaid interest, if any, to the redemption date; provided
however, that at least $26.8 million aggregate principal amount at maturity
of the Discount Notes remains outstanding after each such redemption.
At any time on or prior to June 1, 2002, the Discount Notes may also be redeemed
as a whole at the option of Holdings upon the occurrence of a change of control
(as defined) at a redemption price equal to 100% of the accreted value thereof
plus the applicable premium as of, and accrued and unpaid interest, if any, to
the date of redemption.
The Discount Notes Indenture contains certain covenants that, among other
things, limit (i) the incurrence of additional indebtedness by Holdings and
its restricted subsidiaries (as defined), (ii) the payment of dividends and
other restricted payments by Holdings and its restricted subsidiaries, (iii)
restrictions on distributions from restricted subsidiaries, (iv) asset sales,
(v) transactions with affiliates, (vi) sales or issuances of restricted
subsidiary capital stock and (vii) mergers and consolidations.
Senior Subordinated Notes
The $110.0 million Senior Subordinated Notes bear interest at 10% per annum,
payable on June 1 and December 1 of each year, commencing December 1, 1997.
The Senior Subordinated Notes mature on June 1, 2007. Except as set forth
below, the Senior Subordinated Notes are not redeemable at the option of
Hedstrom prior to June 1, 2002. On and after such date, the Senior
Subordinated Notes are redeemable, at Hedstrom's option, in whole or in part,
at the following redemption prices (expressed in percentages of principal
amount), plus accrued and unpaid interest to the redemption date:
if redeemed during the 12-month period commencing on June 1 of the years set
forth below:
Period Redemption Price(%)
------ -------------------
2002 105.000
2003 103.333
2004 101.667
2005 and thereafter 100.000
In addition, at any time and from time to time prior to June 1, 2000, Hedstrom
may redeem in the aggregate up to $44.0 million principal amount of Senior
Subordinated Notes with the proceeds of one or more equity offerings so long
as there is a public market at the time of such redemption (provided that if
the equity offering is an offering by Holdings, a portion of the net cash
proceeds thereof equal to the amount required to redeem any such Senior
Subordinated Notes is contributed to the equity capital of Hedstrom), at a
redemption price (expressed as a percentage of principal amount) of 110%,
plus accrued and unpaid interest, if any, to the redemption date; provided,
however, that at least $66.0 million aggregate principal amount of the Senior
Subordinated Notes remains outstanding after each such redemption.
The Senior Subordinated Notes are unsecured senior subordinated obligations of
Hedstrom and are unconditionally and fully guaranteed (jointly and severally)
on a senior basis by Holdings and on a senior subordinated basis by each
domestic subsidiary of Hedstrom. The Senior Subordinated Notes are
subordinated to all senior indebtedness (as defined) of Hedstrom rank pari
passu in right of payment with all senior subordinated indebtedness
(as defined) of Hedstrom.
The Senior Subordinated Notes Indenture contains certain covenants that, among
other things, limit (i) the incurrence of additional indebtedness by Hedstrom
and its restricted subsidiaries (as defined), (ii) the payment of dividends
and other restricted payments by Hedstrom and its restricted subsidiaries,
(iii) restrictions on distributions from restricted subsidiaries, (iv) asset
sales, (v) transactions with affiliates, (vi) sales or issuances of restricted
subsidiary capital stock and (vii) mergers and consolidations.
Other Debt
Other debt consists of a $2.5 million Holdings note payable to the previous
owners of Holdings as well as various other mortgages, capital leases and
equipment loans. The $2.5 million note payable bears interest at 10% per
annum and is payable at the earlier of April 30, 2002, or when the Company has
met certain cash flow levels and the mortgages and equipment loans have varying
interest rates and maturities.
Interest Rate Swaps
As of December 31, 1997, the Company had interest rate swap agreements
(the "Swap Agreements") in place with two of its lenders under which the
Company exchanged a variable interest rate for a fixed interest rate.
The Company anticipates that the counter parties to the Swap Agreements will
fully perform their obligations. During the fiscal year ended December 31, 1997,
the effect of the Swap Agreements were immaterial. Terms of the Swap Agreements
are as follows at December 31, 1997:
Notional Amounts Fixed Interest Rate Expiration Date
- ---------------- ------------------- ---------------
$30 million 8.05% October 28, 1999
$12 million 8.555% December 31, 1998*
* Expiration date can be extended at the option of the counter party to
December 29, 2000.
Maturities
Aggregate maturities of long-term debt over the next five years are as follows
(in thousands): 1998 - $ 9,222; 1999 - $11,722; 2000 - $14,222; 2001 - $16,722;
and 2002 - $21,722.
8. INCOME TAXES:
The sources of pretax income for the fiscal year ended December 31, 1997 is
as follows (in thousands):
Domestic $ 9,877
Foreign 7,696
--------
$ 17,573
========
The Company has not provided for U.S. federal and foreign income withholding
taxes on its foreign subsidiaries' undistributed earnings as of December 31,
1997, because such earnings are considered to be indefinitely reinvested.
Repatriation of these earnings would not materially increase the Company's
tax liability. If these earnings were distributed in the form of dividends
or otherwise, foreign tax credits could be used to offset the U.S. income
taxes due on income earned from foreign sources.
Pretax income from foreign sources in prior periods was not significant.
Provisions (benefits) for income taxes are as follows (in thousands):
For the Fiscal For the Five For the Fiscal Years Ended
Year Ended Months Ended July 31,
December 31, December 31, --------------------------
1997 1996 1996 1995
-------------- ------------ -------- ---------
Continuing operations $7,997 $(2,869) $(3,857) $ 1,440
Discontinued operations - - - (619)
------ ------- ------- --------
$7,997 $(2,869) $(3,857) $ 821
====== ======= ======= ========
The components of the provisions (benefits) for income taxes are as follows
(in thousands):
For the Fiscal For the Five For the Fiscal Years
Year Ended Months Ended Ended July 31,
December 31, December 31, -----------------------
1997 1996 1996 1995
-------------- ------------ --------- -------
Current:
State $ 339 $ 33 $ 43 $ 179
U.S. federal (2,745) (40) (92) (113)
Foreign 3,376 - - -
-------- --------- -------- ------
970 (7) (49) 66
-------- --------- -------- ------
Deferred:
State 412 - - -
U.S. federal 6,133 (2,862) (3,808) 755
Foreign 482 - - -
-------- --------- -------- ------
7,027 (2,862) (3,808) 755
-------- --------- -------- ------
$ 7,997 $ (2,869) $ (3,857) $ 821
======== ========= ======== ======
The provisions (benefits) for income taxes differ from those computed using
the statutory U.S. federal income tax rate as a result of the following
(in thousands):
For the Fiscal For the Five For the Fiscal Years Ended
Year Ended Months Ended July 31,
December 31, December 31, ----------------------------
1997 1996 1996 1995
-------------- ------------ ------------- -----------
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
Expected provision (benefit) $5,975 34% $ (2,598) (34)% $(4,071) (34)% $ 532 34%
State income taxes, net of
federal benefit 495 3 (219) (3) (183) (1) 82 5
Foreign corporate earnings 826 5 47 - 151 1 169 11
Goodwill 727 4 - - - - - -
Recapitalization costs - - - - 479 4 - -
Other (26) - (99) (1) (233) (2) 38 2
------ --- -------- ----- ------- ----- ----- ---
Actual provision (benefit) $7,997 46% $ (2,869) (38)% $(3,857) (32)% $ 821 52%
====== === ======== ===== ======= ===== ===== ===
Deferred tax assets are comprised of the following (in thousands):
December 31, December 31,
1997 1996
------------ ------------
Current deferred tax asset:
Net operating loss carryforward $ 2,429 $ 2,246
Inventory reserves 192 248
Costs capitalized to inventory for tax
purposes 346 304
Allowances for accounts receivable 1,190 938
Nondeductible accruals 2,781 1,243
Other 107 48
------- -------
Current deferred tax asset $ 7,045 $ 5,027
======= =======
Noncurrent deferred tax asset (liability):
Goodwill $10,263 $ -
Net operating loss carryforward - 4,408
Tax over book depreciation (3,411) (1,898)
Recapitalization costs 1,169 1,592
Other 2,036 260
------- -------
Noncurrent deferred tax asset $10,057 $ 4,362
======= =======
The Company has net operating loss carryforwards of $7,145,000 to apply against
future taxable income. Such carryforwards expire as follows: $36,000 in 2008,
$1,225,000 in 2010, and $5,884,000 in 2011.
The Company believes it is more likely than not to realize the net deferred
tax asset and accordingly no valuation allowance has been provided. This
conclusion is based on, (i) changes in operations that have recently occurred,
including the 1996 Cost Reduction Plan (see Note 3) and the acquisition of ERO,
Inc. (see Note 4), which has a lengthy and consistent history of profitable
operations, (ii) projections (which include ERO, Inc.) of sufficient taxable
U.S. income to fully realize the net deferred tax asset by the end of 1998,
(iii) the tax loss carryforwards included in the net deferred tax asset were
generated in very recent periods and do not begin to expire until the years
2008-2011, (iv) the significant excess of book basis over tax basis relative
to the net assets of ERO, Inc. and (v) the 1997 utilization of approximately
$4.5 million in net operating loss carryforwards. Management continually
evaluates the realizability of the net deferred tax assets and the need for a
valuation allowance on such assets.
9. EMPLOYEE BENEFIT PLANS:
All employees of the Bedford and Ashland Divisions are eligible to participate
in either the Union Employees' Tax Sheltered Savings Plan or the tax-sheltered
Savings Plan (collectively the "Hedstrom Plans"), depending upon the employment
status of the employees as union or nonunion after meeting certain requirements.
The Union Employees' Tax Sheltered Savings Plan covers all union employees 18
years of age or older who have worked for 1,000 consecutive hours within a
12-month period. The tax-sheltered Savings Plan covers all nonunion employees
18 years of age or older who have been employed for 120 consecutive days
within a 12-month period.
For the Hedstrom Plans, the employees may contribute from 1% to 15% of their
compensation (either before tax, after tax, or a combination thereof) to the
Plans. The Company provides matching contributions at the rate of 50% of the
employee's contribution up to 6% of gross wages as defined by the Plans
agreements.
The Company may make annual discretionary contributions to the Hedstrom Plans.
Discretionary contributions during the fiscal year ended December 31, 1997,
the five months ended December 31, 1996, and for each of the fiscal years
ended July 31, 1996 and 1995, aggregated approximately $607,000, $218,000,
$634,000 and $642,000, respectively.
U.S. Employees of the ERO and Amav Divisions are covered by a contributory
profit sharing plan established pursuant to the provisions of Section 401(k)
of the Internal Revenue Code which provides retirement benefits for eligible
employees of the Company (the "ERO Plan"). Eligible employees may contribute
from 1% to 15% of their compensation. The Company may provide matching
contributions at the rate of 50% of the employee's contribution up to 6% of
the employee's gross wages. Discretionary contributions during the fiscal
year ended December 31, 1997, aggregated $171,000.
10. STOCK-BASED COMPENSATION PLAN:
The company maintains two stock option plans, the 1995 Stock Option Plan and
the 1997 Stock Option Plan (the "Plans") which authorize grants of stock
options of up to 2,446,236 and 2,750,000 shares, respectively, to key
employees of the Company. Options are granted at the fair market value at the
date of grant, as determined by management.
Options issued under the Plan expire ten years from date of grant and vest
equally over periods of time ranging from two to three years, as determined
by the Company's Option Committee of the Board of Directors.
The following is a summary of stock option transactions from July 31, 1995
through December 31, 1997:
Weighted
Average
Exercise
Shares Option Prices Price
--------- ------------ --------
Shares under option at July 31, 1995 - - -
Options granted 2,174,216 $1.00 $1.00
Options exercised - - -
Options terminated - - -
--------- ------------- -----
Shares under option at July 31, 1996 2,174,216 1.00 1.00
Options granted 200,000 1.00 1.00
Options exercised - - -
Options terminated - - -
--------- ------------- -----
Shares under option at December 31, 1996 2,374,216 1.00 1.00
Options granted 1,767,912 1.25 1.25
Options exercised - - -
Options terminated - - -
--------- ------------- -----
Shares under option at December 31, 1997 4,142,128 $1.00 to 1.25 $1.11
========= =============
Shares exercisable at December 31, 1997 1,516,144 $1.00 $1.00
Shares exercisable at December 31, 1996 724,739 $1.00 $1.00
Shares exercisable at July 31, 1996 - - -
Shares exercisable at July 31, 1995 - - -
At December 31, 1997, 22,020 and 1,032,088 remaining options are available for
grant under the 1995 Stock Option Plan and the 1997 Stock Option Plan,
respectively.
The Company has adopted APB Opinion 25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock option
plan. Accordingly, no compensation cost has been recognized for the stock
option plans. Due to the Acquisition, net income per share for the fiscal
years ended July 31, 1996 and 1995 have no significant relevance to current
amounts. Had compensation cost for the Company's plans been determined based
on the fair value at the date of grant for awards in the fiscal year ended
December 31, 1997, the Company's total and per share net income would have
been as follows (dollars in thousands, except per share amounts):
Net income:
As reported $ 9,576
Pro forma 9,212
Basic net income
per common share:
As reported $0.18
Pro forma 0.18
Diluted net income
per common share and
common share equivalents:
As reported $0.18
Pro forma 0.18
The weighted average fair value of options granted is $0.71 during the fiscal
year ended December 31, 1997. The fair value of each option is estimated on
the date of the grant using the minimum value method with the following
assumptions used for the grant in December 1997; risk free interest rates of
5.89%; expected dividend yield of 0% and expected life of ten years.
11. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases production equipment under capital leases with terms expiring
at various times through 2004. The net capital lease asset of $1,825,000 and
$1,767,000 of December 31, 1997 and December 31, 1996, respectively, is
included in property, plant, and equipment on the accompanying consolidated
balance sheets. Aggregate future minimum lease payments related to capital
leases are as follows: 1998 - $419,000; 1999 - $419,000; 2000 - $419,000;
2001 - $419,000; 2002 - $419,000; and thereafter - $214,000. The portion
related to interest over the remaining life of the capital leases was $486,000
at December 31, 1997.
The Company leases production equipment under operating lease agreements with
terms expiring at various times through 2003. Rent expense under operating
leases for the fiscal year ended December 31, 1997, for the five months ended
December 31, 1996, and for the fiscal years ended July 31, 1996 and 1995,
aggregated $2,309,000, $936,000, $2,500,000 and $1,167,800, respectively.
Aggregate future minimum lease commitments for noncancelable operating leases
that have initial or remaining lease terms in excess of one year as of December
31, 1997, are as follows: 1998 - $2,888,000; 1999 - $2,127,000;
2000 - $1,230,000; 2001 - $838,000; 2002 - $677,000; and thereafter $1,339,000.
Legal Matters
There are various claims and pending legal actions against the Company,
primarily involving product liability, seeking damages in varying amounts.
In the opinion of management, the amount of ultimate liability with respect
to these actions will not materially affect the financial position or results
of operations of the Company.
Year 2000 Date Conversion (unaudited)
The Company recognizes the need to ensure its operations will not be adversely
impacted by year 2000 software failures. The company has established processes
for evaluating and managing the risks and costs associated with the problem
and is currently in the process of implementing necessary changes. It is
anticipated that implementation will be completed by 1999. The cost of achieving
Year 2000 compliance is estimated to be approximately $500,000 over the cost
of normal software upgrades and replacements and will be incurred through
1999. The Company is in the process of conducting an additional assessment
of certain year 2000 issues on their manufacturing equipment, time based
operating equipment and significant suppliers which will be completed in 1999.
It is anticipated that corrective action, if any, will be made by year 2000.
12. RELATED-PARTY TRANSACTIONS:
On October 27, 1995, in connection with the recapitalization discussed in Note
13, the Company entered into a ten-year agreement with Hicks Muse, pursuant to
which it pays Hicks Muse an annual fee (initially $175,000) for management and
advisory services in connection with the organization, management, and
operations of the Company. The annual fee is adjustable each July 31st to an
amount equal to 0.1% of the consolidated net sales of the Company during the
previous twelve months, but in no event less than $175,000. Management fees
and related expenses under this agreement amounted to $257,000, $82,000 and
$207,000 for the fiscal year ended December 31, 1997, for the five months
ended December 31, 1996, and for the fiscal year ended July 31, 1996,
respectively, and are included in selling, general, and administrative
expenses on the accompanying income statements.
On October 27, 1995, in connection with the recapitalization discussed in
Note 13, the Company entered into a ten-year agreement with an affiliate of
Hicks Muse pursuant to which it paid this affiliate a financial advisory fee
of approximately $1,175,000 as compensation for its services as financial
advisor in connection with the recapitalization. In addition, this Hicks Muse
affiliate will be entitled to receive a fee equal to 1.5% of the transaction
value, as defined, for each add-on transaction, as defined, in which the
Company is involved.
13. RECAPITALIZATION:
Prior to October 27, 1995, the majority of Holdings common stock was held by
Arnold E. Ditri, President and Chief Executive Officer, and Alastair H.
McKelvie, Executive Vice President. The remaining common stock was held by
John H. Hurshman and the Fidelity Investment Charitable Gift Trust.
On October 27, 1995, Holdings was purchased by Hicks, Muse, Tate & Furst Equity
Fund II, L.P. ("Hicks Muse"). Concurrently, all of the outstanding preferred
stock was redeemed, the outstanding common stock held by John H. Hurshman and
the Fidelity Investment Charitable Trust was redeemed, a majority of the
outstanding common stock of Arnold E. Ditri and Alastair H. McKelvie was
redeemed, new common shares were issued to the purchaser, new debt facilities
were obtained and existing debt facilities were repaid as part of the
transaction. As Arnold Ditri and Alastair H. McKelvie retained a minority
investment in Holdings, the transaction was accounted for as a recapitalization,
and existing account balances were carried forward. The Company expensed all
of its costs associated with the recapitalization, which totaled approximately
$9,600,000.
In connection with the recapitalization, Holdings effected a common stock
split of 39,095.40 shares for one and increased the authorized shares from
1,000 (par value $.01) to 50,000,000 (par value $.01). After the
recapitalization, the majority of the common stock is held by (Hicks Muse).
The remaining common stock is held by Arnold E. Ditri, Alastair H. McKelvie,
various other members of management, and various other investment groups.
14. GEOGRAPHIC INFORMATION:
Summarized geographic information as of and for the fiscal year ended December
31, 1997 is as follows (in thousands):
Other
United Foreign
States Canada Operations Eliminations Total
-------- ------- ---------- ------------ -----
Sales to unaffiliated customers $229,601 $14,322 $12,223 $ - $256,146
Transfers between geographic areas 5,344 38,306 - (43,650) -
-------- ------- ------- -------- --------
Total net sales $234,945 $52,628 $12,223 $(43,650) $256,146
======== ======= ======= ======== ========
Operating income $ 23,936 $13,259 $ (451) $ (40) $ 36,704
======== ======= ======= ======== ========
Indentifiable assets $356,574 $52,176 $ 8,440 $(34,045) $383,145
======== ======= ======= ======== ========
The Company generated no material foreign income for the fiscal years ended
July 31, 1996 and 1995 and owned no material foreign assets at July 31, 1996
and 1995.
15. QUARTERLY FINANCIAL DATA (unaudited; in thousands):
Fiscal Year Ended December 31, 1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
- ----------------------------------- ----------- ----------- ----------- ----------- --------
Net sales $ 47,937 $ 56,114 $ 61,462 $ 90,633 $256,146
Gross profit 13,396 17,076 19,740 33,544 83,756
Net income (loss) 3,216 2,769 (919) 4,510 9,576
Basic net income (loss)
per common share $0.10 $0.05 $(0.01) $0.07 $0.18
Diluted net income (loss)
per common share and
common share equivalents 0.10 0.05 (0.01) 0.07 0.18
Fiscal Year Ended July 31, 1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
- ------------------------------- ----------- ----------- ----------- ----------- -------
Net Sales $ 19,115 $ 24,217 $ 60,430 $ 29,432 $133,194
Gross profit 3,160 5,713 16,125 3,128 28,126
Net income (loss) (7,782) (387) 4,415 (4,362) (8,116)
16. SUBSIDIARY GUARANTORS/NONGUARANTORS FINANCIAL INFORMATION
The following is financial information pertaining to Hedstrom and its subsidiary
guarantors and subsidiary nonguarantors (with respect to the Senior Subordinated
Notes and the Senior Credit Facilities) for the periods in which they are
included in Holding's accompanying consolidated financial statements.
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(In thousands)
ASSETS
At December 31, 1997 At December 31, 1996
--------------------------------------------------- ------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Total
Guarantors Guarantor Eliminations Hedstrom Guarantors Guarantor Hedstrom
---------- ---------- ------------ -------- ---------- ---------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 8,984 $ 1,860 $ - $ 10,844 $ 467 $ 66 $ 533
Trade accounts receivable, net 73,625 9,077 - 82,702 13,126 460 13,586
Inventories 38,429 9,075 (40) 47,464 23,368 488 23,816
Deferred income taxes 7,045 - - 7,045 5,027 - 5,027
Prepaid expenses and other 4,310 491 - 4,801 674 16 690
--------- --------- -------- --------- ------- -------- -------
Total current assets 132,393 20,503 (40) 152,856 42,662 990 43,652
--------- --------- -------- --------- ------- -------- -------
PROPERTY, PLANT, AND EQUIPMENT,
net 27,448 15,375 - 42,823 21,735 8 21,743
GOODWILL, net 142,692 18,484 - 161,176 - - -
OTHER ASSETS:
Investment in and Advances to
Nonguarantor Subsidiaries 44,799 - (44,799)
Deferred financing fees, net 16,328 - - 16,328 - - -
Deferred charges and other, net 1,387 - - 1,387 2,318 - 2,318
Deferred income taxes 10,579 (522) - 10,057 4,251 - 4,251
--------- --------- -------- --------- ------- -------- -------
Total other assets 73,093 (522) (44,799) 27,772 6,569 - 6,569
--------- --------- -------- --------- ------- -------- -------
Total assets $ 375,626 $ 53,840 $(44,839) $ 384,627 $70,966 $ 998 $71,964
========= ========= ======== ========= ======= ======== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 33,282 $ 2,218 $ - $ 35,500 $15,430 $ 1,970 $ 17,400
Current portion of long term debt 8,492 730 - 9,222 1,965 1,965
Advances from Nonguarantor
Subsidiaries - 31,956 (31,956) - - - -
Accounts payable(c) 20,784 2,597 - 23,381 11,275 131 11,406
Accrued expenses(c) 23,939 2,432 (16) 26,355 3,006 (3) 3,003
--------- -------- -------- --------- ------- -------- --------
Total current liabilities 86,497 39,933 (31,972) 94,458 31,676 2,098 33,774
--------- -------- -------- --------- ------- -------- --------
LONG-TERM DEBT(a):
Senior subordinated notes 110,000 - - 110,000 - - -
Term loans 104,375 - - 104,375 36,750 - 36,750
Capital leases 1,605 - - 1,605 1,556 - 1,556
Other 1,857 1,057 - 2,914 300 - 300
--------- -------- -------- --------- ------- -------- --------
Total long-term debt 217,837 1,057 - 218,894 38,606 - 38,606
--------- -------- -------- --------- ------- -------- --------
STOCKHOLDER'S EQUITY
Total Stockholder's equity
(deficit)(b) 71,292 12,850 (12,867) 71,275 684 (1,100) (416)
--------- -------- -------- --------- ------- -------- --------
Total liabilities and
Stockholder's equity $ 375,626 $ 53,840 $(44,839) $ 384,627 $70,966 $ 998 $ 71,964
========= ======== ======== ========= ======= ======== ========
footnotes to follow
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING INCOME STATEMENTS
(In thousands)
For the Five Months Ended
For the Fiscal Year Ended December 31, 1997 December 31, 1996
------------------------------------------- -------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Total
Guarantors Guarantors Eliminations Hedstrom Guarantors Guarantor Hedstrom
----------- ---------- ------------ --------- ---------- ---------- --------
NET SALES $ 243,344 $ 56,452 $ (43,650) $ 256,146 $ 23,074 $ 920 $ 23,994
COST OF SALES 175,834 40,166 (43,610) 172,390 21,238 735 21,973
---------- -------- ---------- --------- --------- ------ --------
Gross profit 67,510 16,286 (40) 83,756 1,836 185 2,021
SG&A EXPENSES 42,655 4,397 - 47,052 7,225 321 7,546
---------- -------- ---------- --------- --------- ------ --------
Operating income(loss) 24,855 11,889 (40) 36,704 (5,389) (136) (5,525)
INTEREST EXPENSE(c) 15,614 1,492 - 17,106 2,010 1 2,011
---------- -------- ---------- --------- --------- ------ --------
INCOME (LOSS) BEFORE TAXES 9,241 10,397 (40) 19,598 (7,399) (137) (7,536)
INCOME TAX EXPENSE (BENEFIT) 4,532 4,263 (16) 8,779 (2,775) (54) (2,829)
---------- -------- ---------- --------- --------- ------ --------
NET INCOME (LOSS) $ 4,709 $ 6,134 $ (24) $ 10,819 $ (4,624) $ (83) $ (4,707)
========== ======== ========== ========= ========= ====== ========
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING INCOME STATEMENTS
(In thousands)
For the Fiscal Year Ended
For the Fiscal Year Ended July 31, 1996 July 31, 1995
--------------------------------------- ----------------------------- July 31, 1995
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Total Subsidiary Non- Total
Guarantors Guarantors Hedstrom Guarantors Guarantor Hedstrom
----------- ---------- --------- ---------- ---------- --------
NET SALES $ 129,074 $ 4,120 $ 133,194 $ 131,551 $ 2,311 $133,862
COST OF SALES 101,482 3,586 105,068 105,223 2,089 107,312
---------- --------- --------- --------- ------- --------
Gross profit 27,592 534 28,126 26,328 222 26,550
SG&A EXPENSES 23,659 944 24,603 18,508 699 19,207
---------- --------- --------- --------- ------- --------
Operating income (loss) 3,933 (410) 3,523 7,820 (477) 7,343
RECAPITALIZATION EXPENSE 9,600 - 9,600 - -
INTEREST EXPENSE 5,674 34 5,708 4,555 18 4,573
---------- --------- --------- --------- ------- --------
INCOME (LOSS) BEFORE TAXES (11,341) (444) (11,785) 3,265 (495) 2,770
INCOME TAX EXPENSE (BENEFIT) (3,786) - (3,786) 1,577 (137) 1,440
---------- --------- --------- --------- ------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS (7,555) (444) (7,999) 1,688 (358) 1,330
LOSS FROM DISCONTINUED
OPERATIONS (NET OF TAX
BENEFIT) - - - - - (585)
---------- --------- --------- --------- ------- --------
NET INCOME (LOSS) $ (7,555) $ (444) $ (7,999) $ 1,103 $ (358) $ 745
========== ========= ========= ========= ======= ========
footnotes to follow
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
For the Five Months Ended
For the Fiscal Year Ended December 31, 1997 December 31, 1996
----------------------------------------------- --------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Total
Guarantors Guarantors Eliminations Hedstrom Guarantors Guarantor Hedstrom
---------- ---------- ------------ --------- ---------- ---------- --------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)(c) $ 4,709 $ 6,134 $ (24) $ 10,819 $ (4,624) $ (83) $ (4,707)
Depreciation and amortization 9,212 1,328 - 10,540 1,973 3 1,976
Deferred income tax provision
(benefit)(c) 6,916 - - 6,916 (2,862) - (2,862)
Gain on the disposition of
property, plant and equipment (1) - - (1) (60) - (60)
Provision for losses on accounts
receivable 1,246 - - 1,246 64 - 64
Changes in assets and
liabilities:
Accounts receivable (40,150) (6,604) - (46,754) 8,794 940 9,734
Inventories 461 4,373 40 4,874 (2,089) 47 (2,042)
Prepaid expenses and other 789 (491) - 298 (132) 13 (119)
Accounts payable(c) 2,535 (534) - 2,001 1,793 (6) 1,787
Accrued expenses(c) (1,768) 1,935 (16) 151 (163) (630) (793)
-------- ------- ------ --------- -------- ------ --------
Net cash provided by (used
for) operating activities (16,051) 6,141 - (9,910) 2,694 284 2,978
-------- ------- ------ --------- -------- ------ --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of ERO, Inc. (122,600) - - (122,600) - - -
Acquisition of certain assets
of Bollinger Industries, Inc. (14,928) - - (14,928) - - -
Acquisitions of PP&E (6,395) - - (6,395) (1,375) (1) (1,376)
Other acquisitions (2,322) - - (2,322) - - -
Proceeds from the sale of PP&E 8 - - 8 67 - 67
-------- ------- ------ --------- -------- ------ --------
Net cash used for investing
activities (146,237) - - (146,237) (1,308) (1) (1,309)
-------- ------- ------ --------- -------- ------ --------
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) 63,750 - - 63,750 - - -
Borrowings on new revolving
line of credit 35,500 - - 35,500 - - -
Repayments of new Term Loans (1,125) - - (1,125) - - -
Repayments of old term loans (87,017) (5,750) - (92,767) - - -
Debt financing cost(b) (19,750) - - (19,750) - - -
Repayments on old revolving
lines of credit, net (42,400) - - (42,400) (8,728) (322) (9,050)
Advances to/(from) Nonguarantor
Subsidiaries (1,078) 1,078 - - - - -
Other 2,395 - - 2,395 (84) - (84)
-------- ------- ------ --------- -------- ------ --------
Net cash provided by (used
for) financing activities 170,275 (4,672) - 165,603 (8,812) (322) (9,134)
-------- ------- ------ --------- -------- ------ --------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS 7,987 1,469 - 9,456 (7,426) (39) (7,465)
CASH AND CASH EQUIVALENTS:
Purchased Cash 530 325 - 855 - - -
Beginning of period 467 66 - 533 7,893 105 7,998
-------- ------- ------ --------- -------- ------ --------
End of period $ 8,984 $ 1,860 - $ 10,844 $ 467 $ 66 $ 533
======== ======= ====== ========= ======== ====== ========
footnotes to follow
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
For the Fiscal Year
For the Fiscal Year Ended July 31, 1996 Ended July 31, 1995
--------------------------------------- -------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Total Subsidiary Non- Total
Guarantors Guarantors Hedstrom Guarantors Guarantor Hedstrom
----------- ---------- -------- ---------- ---------- --------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ (7,555) $ (444) $ (7,999) $ 1,103 $ (358) $ 745
Depreciation and amortization 3,407 7 3,414 2,942 5 2,947
Discontinued operations - - - 1,204 1,204
Deferred income tax provision
(benefit) (3,808) - (3,808) 755 - 755
Other (145) - (145) 100 - 100
Changes in assets and liabilities:
Accounts receivable (817) (75) (892) (1,741) (398) (2,139)
Inventories (64) (75) (139) (6,876) (65) (6,941)
Prepaid expenses and other (20) 26 6 (2,434) 6 (2,428)
Accounts payable (8,012) (11) (8,023) 5,662 95 5,757
Accrued expenses 26 (184) (158) (455) 851 396
-------- -------- --------- -------- ------- -------
Net cash provided by (used
for) operating activities (16,988) (756) (17,744) 260 136 396
-------- -------- --------- -------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisitions of PP&E (6,735) (3) (6,738) (2,565) (9) (2,574)
Proceeds from the sale of PP&E 248 - 248 - - -
-------- -------- --------- -------- ------- -------
Net cash used for investing
activities (6,487) (3) (6,490) (2,565) (9) (2,574)
-------- -------- --------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of common stock (29,772) - (29,772) - - -
Redemption of preferred stock (3,072) - (3,072) - - -
Proceeds from the sale of common
stock 29,742 - 29,742 - - -
Term loan borrowings 35,000 - 35,000 - - -
Borrowings (repayments) on
revolving line of credit (3,162) 802 (2,360) 2,983 (84) 2,899
Capital lease (payments) borrowings
and other 1,597 - 1,597 - - -
-------- -------- --------- -------- ------- -------
Net cash provided by (used
for) financing activities 30,333 802 31,135 2,983 (84) 2,899
-------- -------- --------- -------- ------- -------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 6,858 43 6,901 678 43 721
CASH AND CASH EQUIVALENTS:
Beginning of year 1,035 62 1,097 357 19 376
-------- -------- --------- -------- ------- -------
End of year $ 7,893 $ 105 $ 7,998 $ 1,035 $ 62 $ 1,097
======== ======== ========= ======== ======= =======
footnotes to follow
HEDSTROM CORPORATION AND SUBSIDIARIES
FOOTNOTES
Each domestic subsidiary of Hedstrom (the "Subsidiary Guarantors") has fully
and unconditionally guaranteed the Senior Subordinated Notes on a joint and
several basis. The Company has not presented separate financial statements
and other disclosures concerning the Subsidiary Guarantors because management
has determined that such information is not material to investors.
The column "Total Hedstrom" represents the consolidated financial statements
of Hedstrom Corporation and its subsidiaries. Hedstrom Corporation is
Holdings' only direct subsidiary. The primary differences between the
consolidated amounts of Hedstrom Corporation and the consolidated amounts
included in the accompanying consolidated financial statements of Holdings
are as follows:
(a) Hedstrom Corporation's Long-Term Debt does not include a $2.5 million
note payable issued by Holdings in connection with its 1995 recapitalization,
and the Senior Discount Notes valued at $23.3 million at December 31, 1997.
(b) Hedstrom Corporation's stockholder's equity included Holdings'
stockholders' equity plus, as of December 31, 1997 only, $21.6 million in
proceeds from the issuance of Senior Discount Notes, which proceeds were
contributed as equity by Holdings to Hedstrom Corporation and the loss
incurred by Holding's discontinued subsidiary Holdings II and as of
both December 31, 1997 and December 31, 1996, the $2.5 million note payable
described in (a) above.
(c) Accounts payable, interest expense, income tax expense and accrued
expenses do not reflect the accrued interest, interest expense and the tax
benefit of accrued interest on the obligations discussed in (a) above.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
MANAGEMENT
Directors and Executive Officers of Holdings and Hedstrom
The following table sets forth the age and the position of the directors and
executive officers of each of Holdings and Hedstrom.
Name Age Position
- --------------- ----- ----------------------------------------------------
Robert H. Elman 59 Chairman of the Board of Directors of Holdings and
Hedstrom
Alan B. Menkes 38 Director of Holdings and Hedstrom
Jack D. Furst 39 Director of Holdings and Hedstrom
Arnold E. Ditri 61 Director of Holdings and Hedstrom; Chief Executive
Officer and President of Holdings and Hedstrom
David F. Crowley 48 Chief Financial Officer of Holdings and Hedstrom
Alastair H. McKelvie 66 Executive Vice President - Operations of Hedstrom
Michael J. Johnston 50 Executive Vice President - Manufacturing of Hedstrom
Alfred C. Carosi, Jr. 50 Executive Vice President - Sales and Marketing of
Hedstrom
John D. Dellos 59 Vice President - Manufacturing of Hedstrom
Robert H. Elman has been the Chairman of the Board of Holdings and Hedstrom
since July 1997 and has been a director of Holdings and Hedstrom since
October 1995. Mr. Elman is Chairman and Chief Executive of DESA International,
Inc. ("DESA International"), a manufacturer of indoor and outdoor heating
products and specialty tools. Mr. Elman has served in that capacity since
March 1985 when DESA International was formed as part of the leveraged buy
out of AMCA International, Inc.'s Consumer Products Division. Prior to 1985,
he served as Senior Group Vice President of AMCA International with
responsibilities for the Consumer, Automotive Products, Aerospace, and Food
Packaging Divisions. Mr. Elman joined AMCA International in 1975 when it
acquired DESA Industries, a company he assisted in forming in 1969. Prior to
forming DESA Industries, Mr. Elman was employed with ITT and Singer in various
management positions in the United States and Europe.
Alan B. Menkes has been a director of Holdings and Hedstrom since October
1995. Mr. Menkes is a Managing Director and Principal of Hicks Muse, having
served as such since April 1996. Prior thereto, Mr. Menkes served as a Vice
President of Hicks Muse. Before joining Hicks Muse in 1992, Mr. Menkes was
employed by The Carlyle Group, a Washington D.C.-based private investment
firm, most recently as a Senior Vice President. Mr. Menkes also serves as a
director of International Home Foods, Inc., Venezuela Cable Service Holdings
Ltd. and Ibero American Media Partners.
Jack D. Furst has been a director of Holdings and Hedstrom since July 1997.
Mr. Furst is a Managing Director and Principal of Hicks Muse and has held
such position since 1989. Prior to joining Hicks Muse, Mr. Furst was a Vice
President and subsequently a Partner of Hicks & Haas, Incorporated, a Dallas-
based private investment firm from 1987 to May 1989. From 1984 to 1986, Mr.
Furst was a merger and acquisition/corporate finance specialist for The First
Boston Corporation in New York. Mr. Furst serves on the board of directors of
Omni America Holdings Corporation, International Wire Holding Company,
Viasystems Group, Inc., Viasystems, Inc. and Cooperative Computing Holding
Company, Inc.
Arnold E. Ditri was Chairman of the Board of Hedstrom from December 1991 until
October 1995 and has been a director of Holdings and Hedstrom since October
1995. He has been President and Chief Executive Officer of Hedstrom since
March 1993 and of Holdings since October 1995. Mr. Ditri served as President
of Ditri Associates, Inc. from 1981 until 1994. Ditri Associates, with a
number of financial partners, specialized in acquiring and building under-
achieving companies. From 1984 through 1988, Ditri Associates built Eagle
Industries, Inc. in partnership with Great American Management, Inc. of
Chicago. From 1961 to 1981, Mr. Ditri was a management consultant with Booz
Allen & Hamilton and Touche Ross & Co. He was a partner in Touche Ross from
1967 to 1981.
David F. Crowley has been Chief Financial Officer of Hedstrom since 1994 and
of Holdings since October 1995. Prior to joining Hedstrom, Mr. Crowley served
as Chief Financial Officer and/or Vice President of Finance for various
companies owned and operated by Ditri Associates. Prior to joining Ditri
Associates, from 1986 to 1990, Mr. Crowley was Treasurer of the Ring Screw
Works Company in Detroit, Michigan. From 1974 to 1985, he was employed by
Price Waterhouse where he was a Retail and Banking Industry Specialist and
served in London, England for two years managing strategic planning and
technical projects for the firm.
Alastair H. McKelvie has been Executive Vice President of Operations with
Hedstrom since 1991. Mr. McKelvie has over 40 years of experience chiefly in
manufacturing and general management positions covering a wide range of
products, processes, and geographic locations. From 1989 to 1991, Mr.
McKelvie served as Executive Vice President for various companies owned and
operated by Ditri Associates. Prior to 1989, he served as Executive Vice
President of Eagle Industries. From 1965 to 1982, Mr. McKelvie held a number
of line and staff positions in the Singer Company including Vice President of
Manufacturing in its International Group and General Manager of its two most
profitable operating divisions.
Michael J. Johnston has been Executive Vice President of Manufacturing of
Hedstrom since November 1997. Prior to joining Hedstrom, Mr. Johnston served
as senior Vice President and General Manger Services Company for Philips
Consumer Electronics from 1994 to 1997. From 1991 to 1994, he was Vice
President of Manufacturing for Black & Decker Household Products Group. From
1989 to 1991, Mr. Johnston was Senior Vice President and General Manger of
Danly Die Set, a division of Connell Ltd. Partnership. From 1970 to 1989,
he served in various manufacturing-related positions with General Electric Co.
Alfred A. Carosi, Jr. has been Executive Vice President of Sales and Marketing
with Hedstrom since December 1996. In this position he is also responsible for
corporate product development. Prior to joining Hedstrom, Mr. Carosi was
Senior Vice President of Marketing and Marketing Services for the Parker
Brothers Division of Hasbro, Inc. from 1991 to 1995. From 1990 to 1991, he
was Vice President of Children's and Family Programs at NBC. Before joining
NBC, Mr. Carosi served as Senior Vice President of Marketing and Marketing
Services for Hasbro, Inc. from 1989 to 1990 and for Hasbro's Playskool
Division from 1987 to 1988. Prior to 1987, Mr. Carosi worked in various
marketing-related capacities for Procter and Gamble, Sara Lee Corp. and
Anheuser Busch, Inc.
John D. Dellos was Executive Vice President of Operations with Hedstrom from
1994 to November 1997 and now serves as Vice President-Manufacturing. Previous
to joining Hedstrom, Mr. Dellos was Senior Vice President of Manufacturing of
P.P.M. Cranes, Inc. in Conway, South Carolina from 1990 to 1993. Prior to
that, Mr. Dellos was employed as General Manager of Manufacturing from 1986
to 1989 by Komatsu America Manufacturing Company located in Chattanooga,
Tennessee. Before joining Komatsu, Mr. Dellos served in several capacities
for a division of Dresser Industries in Galion, Ohio from 1974 to 1985. From
1959 to 1973, Mr. Dellos worked for Deere and Company in various positions.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth the compensation awarded to or earned by the
President and Chief Executive Officer of Hedstrom and each other executive
officer of Hedstrom whose total annual salary and bonus for the year ended
December 31, 1997 was in excess of $100,000 (the "Named Executive Officers").
Fiscal year 1997 represents the fiscal year ended December 31, 1997. Fiscal
year 1996 and 1995 represent the twelve months ended July 31, 1996 and 1995,
respectively.
Long Term
Compensation
---------------------------
Annual Compensation Securities All Other
Name and Fiscal ------------------------- Underlying Compensation
Principal Position Year Salary ($)(1) Bonus ($)(2) Options(#)(3) ($)(4)
- ------------------- ------ ------------- ------------ ------------- ------------
Arnold E. Ditri 1997 $340,000 $197,500 456,446 $ 3,791
President and Chief 1996 333,938 - 543,544 3,205
Executive Officer 1995 210,502 - - -
David F. Crowley (5) 1997 121,900 48,760 28,233 251
Chief Financial 1996 107,705 - 271,777 270
Officer 1995 102,937 13,237 - -
John D. Dellos 1997 187,155 61,695 - 855
Vice President 1996 102,322 - 271,777 50,790
Manufacturing 1995 143,863 22,113 - 630
Alfred A. Carosi,Jr.(6) 1997 220,644 90,000 200,000 39,774
Executive Vice 1996 17,917 - - -
President Sales and 1995 - - - -
Marketing
Alastair H. McKelvie(7) 1997 90,000 36,000 28,333 1,008
Executive Vice 1996 82,500 - 271,777 -
President Operations 1995 - - - -
(1) Includes the following amounts deferred by Messrs., Ditri, Dellos
and Carosi, respectively, pursuant to the Company's Savings Plan for
the following fiscal years: 1997, $18,837, $7,528 and $10,014; 1996,
$15,766, $7,901 and $0; 1995, $10,262, $8,184 and $0.
(2) Amount includes bonuses accrued during each fiscal year but paid shortly
thereafter.
(3) All stock option grants were made pursuant to the Company's 1995 and 1997
Stock Option Plans.
(4) Represents premiums paid by the Company under a group term life insurance
plan, the reimbursement of Mr. Carosi's relocation expenses in 1997 and the
reimbursement of Mr. Dellos' relocation expenses in 1996.
(5) Mr. Crowley was named Chief Financial Officer of the Company effective
November, 1994.
(6) Mr. Carosi was named Executive Vice President of Sales and Marketing of
the Company effective December, 1996.
(7) Mr. McKelvie was named Executive Vice President of Operations effective
September, 1997.
The following table summarizes option grants made during the year ended
December 31, 1997 to the Named Executive Officers.
Option Grant Table
Option Grants in Last Fiscal Year
Potential
Realizable Value
at Assumed
Number Percent Annual Rates
of of of Stock Price
Securities Total Excercise Appreciation for
Underlying Options or Option Term
Options Employees Base --------------------
Granted During Price Expiration
(1) Year ($/sh) Date 5% 10%
---------- --------- --------- ---------- --------- --------
Arnold E. Ditri 456,446 25.8% $ 1.25 12/07 $358,821 $909,322
David F. Crowley 28,233 1.6% $ 1.25 12/07 22,194 56,245
Alfred A. Carosi, Jr. 200,000 11.3% $ 1.25 12/07 157,224 398,436
Alastair H. McKelvie 28,233 1.6% $ 1.25 12/07 22,194 56,245
_________
(1) The options to purchase Holdings Common Stock were granted under the
Hedstrom Holdings, Inc. 1997 Stock Option Plan (the "1997 Option Plan") and
become exercisable in three equal annual installments commencing on the first
anniversary of the date of grant.
(2) The potential realizable value portion of the foregoing table illustrates
the value that might be realized upon exercise of the options immediately
prior to the expiration of their term, assuming the specified compound rates
of appreciation of Holdings Common Stock over the term of the options. These
amounts represent certain assumed rates of appreciation only, assuming a fair
market value on the date of grant of $1.25 per share. Because Holdings Common
Stock is privately-held, Hedstrom assumed a per share fair market value on
the date of grant of the foregoing options equal to $1.25 per share based on
the per share price paid by Hicks Muse and its affiliates in connection with
the Acquisition. Actual gains on the exercise of options are dependent on the
future performance of Holdings Common Stock. There can be no assurance that
the potential values reflected in this table will be achieved. All amounts
have been rounded to the nearest whole dollar amount.
The following table summarizes the value of options to acquire Holdings
Common Stock held by the Named Executive Officers as of December 31, 1997.
Option Exercises and Year-End Option Value Table
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Values(1)
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
December 31, 1997 December 31, 1997(2)
--------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Arnold E. Ditri 362,363 637,627 $90,591 $45,296
David F. Crowley 181,185 118,825 45,296 22,648
John D. Dellos 181,185 90,592 45,296 22,648
Alfred A. Carosi, Jr. 66,667 333,333 16,667 33,333
Alastair H. McKelvie 181,185 118,825 45,296 22,648
__________
(1) No options were exercised by a Named Executive Officer in 1997.
(2) Assumes a fair market value of $1.25 per share. Because Holdings
Common Stock is privately-held, for purposes of the calculation of the
value of unexercised options as of December 31, 1997, Hedstrom has
assumed a per share fair market value for Holdings Common Stock equal
to the per share price paid by Hicks Muse and its affiliates in
connection with the Acquisition.
Item 12. Security Ownership of Certain Beneficial Owners and Management
STOCK OWNERSHIP AND CERTAIN TRANSACTIONS
Stock Ownership
All of the issued and outstanding capital stock of Hedstrom is owned by
Holdings. The following table sets forth certain information regarding the
beneficial ownership of the outstanding Holdings Common Stock by each person
who is known by Holdings to beneficially own more than 5% of the Holdings
Common Stock and by the directors of Holdings and the Named Executive
Officers, individually, and by the directors and executive officers of
Holdings as a group as of March 23, 1998.
Shares of Holdings
Common Stock
Beneficially Owned
----------------------------------------
Name Number of Shares Percent of Class
----------------------------- ---------------- ----------------
5% Stockholders
HM Parties(1) 56,030,600 82.8%
c/o Hicks, Muse, Tate & Furst
Incorporated 200 Crescent
Court, Suite 1600
Dallas, Texas 75201
Officers and Directors
Robert H. Elman 1,625,000 2.4%
Alan B. Menkes (1)(2) 55,385,370 81.9%
Jack D. Furst (1)(3) 55,451,640 82.0%
Arnold E. Ditri (4) 4,268,663 6.3%
David E. Crowley (5) 212,764 *
John N. Dellos (6) 260,132 *
Alastair H. McKelvie (7) 1,974,885 3.0%
Alfred C. Carosi, Jr. (8) 66,667 *
All executive officers and
directors as a group (9
persons) 63,896,121 93.1%
__________
* Represents less than 1%
(1) Includes (i) 23,829,000 shares owned of record by HM Fund II, a limited
partnership of which the sole general partner is HM2/GP Partners, L.P., a
limited partnership of which the sole general partner is Hicks, Muse GP
Partners, L.P., a limited partnership of which the sole general partner is
Hicks, Muse, Tate & Furst Fund II Incorporated, a corporation affiliated with
Hicks Muse; (ii) 31,520,000 shares of Non-Voting Common Stock owned of record
by HM Fund II which are convertible into shares of Holdings Common Stock, on
a one-for-one basis, at the option of HM Fund II, (iii) 479,400 shares owned
of record by Thomas O. Hicks; and (iv) 202,200 shares owned of record by four
children's trusts of which Mr. Hicks serves as trustee. Mr. Hicks is a
controlling stockholder of Hicks Muse and serves as Chairman of the Board,
Chief Executive Officer and Secretary of Hicks Muse. Accordingly, Mr. Hicks
may be deemed to be the beneficial owner of Holdings Common Stock held by HM
Fund II. John R. Muse, Charles W. Tate, Jack D. Furst, Lawrence D. Stuart,
Jr. Alan B. Menkes, and Michael J. Levitt are officers, directors and
minority stockholders of Hicks Muse and as such may be deemed to share with
Mr. Hicks the power to vote or dispose of Holdings Common Stock held by HM
Fund II. Each of Messrs. Hicks, Muse, Tate, Furst, Stuart, Menkes and Levitt
disclaims the existence of a group and disclaims beneficial ownership of
Holdings Common Stock not respectively owned of record by him.
(2) Includes 36,370 shares owned of record by Mr. Menkes.
(3) Includes (i) 36,078 shares owned of record by Mr. Furst and (ii) 66,562
shares owned of record by a family trust of which Mr. Furst serves as trustee.
Mr. Furst disclaims beneficial ownership of shares not owned of record by him.
(4) Includes (i) 3,106,300 shares owned of record by Mr. Ditri, (ii)
800,000 shares owned of record by certain members of Mr. Ditri's family, and
(iii) 362,363 shares subject to options that are exercisable within 60 days.
Mr. Ditri disclaims beneficial ownership of shares not owned of record by him.
(5) Includes (i) 31,579 shares owned of record by Mr. Crowley and (ii) 181,185
shares subject to options that are exercisable within 60 days.
(6) Includes (i) 78,947 shares owned of record by Mr. Dellos and (ii) 181,185
shares subject to options that are exercisable within 60 days.
(7) Includes (i) 1,793,700 shares owned of record by Mr. McKelvie and (ii)
181,185 shares subject to options that are exercisable within 60 days.
(8) Consists of shares subject to options that are exercisable within 60 days.
Item 13. Certain Relationships and Related Transactions
Certain Transactions
Monitoring and Oversight Agreement
On October 27, 1995, Holdings and Hedstrom entered into a ten-year agreement
(the "Monitoring and Oversight Agreement") with Hicks, Muse & Co. Partners,
L.P. ("Hicks Muse Partners"), pursuant to which they pay Hicks Muse Partners
an annual fee (initially $175,000) for oversight and monitoring services to
Holdings and Hedstrom. The annual fee is adjustable each July 31st to an
amount equal to 0.1% of the consolidated net sales of Hedstrom during the
previous twelve months, but in no event less than $175,000. Messrs. Furst and
Menkes, directors of Holdings and Hedstrom, are each principals of Hicks Muse
Partners. In addition, Holdings and Hedstrom have agreed to indemnify Hicks
Muse Partners, its affiliates and their respective directors, officers and
controlling persons, if any, and, agents and employees of Hicks Muse Partners
or any of its affiliates from and against all claims, liabilities, losses,
damages, and expenses, including legal fees, arising out of or in connection
with the services rendered by Hicks Muse Partners in connection with the
Monitoring and Oversight Agreement.
The Monitoring and Oversight Agreement makes available the resources of Hicks
Muse Partners concerning a variety of financial and operational matters. The
services that have been and will continue to be provided by Hicks Muse
Partners could not otherwise be obtained by Holdings and Hedstrom without the
addition of personnel or the engagement of outside professional advisors. In
management's opinion, the fees provided for under this agreement reasonably
reflect the benefits received and to be received by Holdings and Hedstrom.
Financial Advisory Agreement
On October 27, 1995, Holdings and Hedstrom entered into a ten-year agreement
(the "Financial Advisory Agreement") with HM2/Management Partners, L.P.
("HM2"), pursuant to which they paid HM2 a cash financial advisory fee of
approximately $1.175 million as compensation for its services as financial
advisor in connection with the acquisition of Holdings and Hedstrom by Hicks
Muse. HM2 also will be entitled to receive a fee equal to 1.5% of the
transaction value (as defined) for each add-on transaction (as defined) in
which Hedstrom is involved. The term "transaction value" means the total
value of any add-on transaction (excluding any fees payable pursuant to the
Financial Advisory Agreement in connection with such add-on transaction)
including the amount of any indebtedness, preferred stock or similar items
assumed (or remaining outstanding). The term "add-on transaction" means any
future proposal for a tender offer, acquisition, sale, merger, exchange
offer, recapitalization, restructuring, or other similar transaction directly
or indirectly involving Holdings, Hedstrom, or any of their respective
subsidiaries, and any other person or entity. In connection with the
Acquisition, Holdings and Hedstrom paid HM2 a cash financial advisory fee
under the Financial Advisory Agreement of approximately $3 million as
compensation for its services as financial advisor in connection with the
Acquisition.
Messrs. Furst and Menkes, directors of Holdings and Hedstrom, are each
principals of HM2. In addition, Holdings and Hedstrom have agreed to
indemnify HM2, its affiliates and their respective directors, officers and
controlling persons, if any, and agents and employees of HM2 from and against
all claims, liabilities, losses, damages, and expenses, including legal fees,
arising out of or in connection with the services rendered by HM2 in
connection with the Financial Advisory Agreement. The Financial Advisory
Agreement makes available the resources of HM2 concerning a variety of
financial matters. The services that have been and will continue to be
provided by HM2 could not otherwise be obtained by Holdings and Hedstrom
without the addition of personnel or the engagement of outside professional
advisors. In management's opinion, the fees provided for under this agreement
reasonably reflect the benefits received and to be received by Holdings and
Hedstrom.
Stockholders Agreement
The investors who purchased or received Holdings Common Stock in connection
with or subsequent to the acquisition of Holdings and Hedstrom by Hicks Muse
and its affiliates have entered into a stockholders agreement (the
"Stockholders Agreement"). The Stockholders Agreement grants preemptive
rights and certain piggy-back registration rights to the parties thereto and
contains provisions requiring the parties thereto to sell their shares of
Holdings Common Stock in connection with certain sales of Holdings Common
Stock by HM Fund II ("drag-along rights") and grants the parties thereto
other than HM Fund II the right to include a portion of their shares of
Holdings Common Stock in certain sales in which HM Fund II does not exercise
its drag-along rights ("tag-along rights"). The Stockholders Agreement
terminates on its tenth anniversary date, although the preemptive rights,
drag-along rights and tag-along rights contained therein will terminate
earlier upon the consummation of a registered underwritten public offering of
Holdings Common Stock by Holdings.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
Report of Independent Accountants
Consolidated Income Statements for the Fiscal Year Ended December 31,
1997, for the Five Months Ended December 31, 1996 and for the Fiscal
Years Ended July 31, 1996 and 1995.
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the Fiscal Year Ended
December 31, 1997, for the Five Months Ended December 31, 1996 and
for the Fiscal Years Ended July 31, 1996 and 1995.
Consolidated Statements of Stockholders' Equity for the Fiscal Year
Ended December 31, 1997, for the Five Months Ended December 31, 1996
and for the Fiscal Years Ended July 31, 1996 and 1995.
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
Schedule IX - Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted because they are not applicable
or are not required, or because the required information has been
included in the Consolidated Financial Statements or Notes thereto.
(3) Exhibits
Description of Exhibits
(1) 2.1 - Agreement and Plan of Merger, dated as of April 10, 1997,
among Hedstrom Corporation, HC Acquisition Corp. and ERO,
Inc.
(1) 3.1 - Restated Certificate of Incorporation of Hedstrom Holdings,
Inc., as filed with the Secretary of State of the State of
Delaware on October 27, 1995.
(1) 3.2 - Certificate of Amendment of Restated Certificate of
Incorporation of Hedstrom Holdings, Inc., as filed with the
Secretary of State of the State of Delaware on June 6, 1997.
(1) 3.3 - Restated Bylaws of Hedstrom Holdings, Inc.
(1) 3.4 - Certificate of Incorporation of New Hedstrom Corp., as filed
with the Secretary of State of the State of Delaware on
November 20, 1990.
(1) 3.5 - Certificate of Amendment of the Certificate of Incorporation
of New Hedstrom Corp., as filed with the Secretary of State
of the State of Delaware on January 14, 1991.
(1) 3.6 - By-Laws of Hedstrom Corporation.
(1) 3.7 - Amended and Restated Certificate of Incorporation of ERO,
Inc., as filed as Annex A to that certain Certificate of
Ownership and & Merger filed with the Secretary of State of
the State of Delaware on June 12, 1997 merging HC Acquisition
Corp. with and into ERO, Inc.
(1) 3.8 - Amended and Restated Bylaws of ERO, Inc.
(1) 3.9 - Certificate of Incorporation of ERO Industries, Inc., as
filed as Annex A to that certain Certificate of Merger filed
with the Secretary of State of the State of Delaware on July
15, 1988 merging GTC Leisure, Inc. with and into ERO
Industries, Inc.
(1) 3.10 - By-Laws of ERO Industries, Inc.
(1) 3.11 - Articles of Incorporation of ERO Marketing, Inc., as filed
with the Secretary of State of the State of Illinois on
January 21, 1992.
(1) 3.12 - Bylaws of ERO Marketing, Inc.
(1) 3.13 - Certificate of Incorporation of Priss Prints Acquisition
Corp., as filed with the Secretary of State of the State
of Delaware on September 19, 1986.
(1) 3.14 - Certificate of Amendment of Certificate of Incorporation
of Priss Prints Acquisition Corp., as filed with the
Secretary of State of the State of Delaware on November 5,
1986.
(1) 3.15 - By-Laws of Priss Prints, Inc.
(1) 3.16 - Certificate of Incorporation of Impact, Inc., as filed with
the Secretary of State of the State of Delaware on November
3, 1993.
(1) 3.17 - By-Laws of Impact, Inc.
(1) 3.18 - Certificate of Incorporation of ERO Canada, Inc., as filed
with the Secretary of State of the State of Delaware on
August 3, 1994.
(1) 3.19 - By-Laws of ERO Canada, Inc.
(1) 3.20 - Certificate of Incorporation of ERO NY Acquisition, Inc.,
as filed with the Secretary of State of the State of
Delaware on October 12,1995.
(1) 3.21 - Certificate of Amendment of Certificate of Incorporation
of ERO NY Acquisition, Inc., as filed with the Secretary
of State of the State of Delaware on January 23, 1996.
(1) 3.22 - By-Laws of Amav Industries, Inc.
(1) 4.1 - Indenture, dated as of June 1, 1997, among Hedstrom
Corporation, Hedstrom Holdings, Inc., the Subsidiary
Guarantors identified on the signature pages thereto and
IBJ Schroder Bank & Trust Company, as Trustee.
(1) 4.2 - Form of Old Senior Subordinated Note.
(1) 4.3 - Form of New Senior Subordinated Note.
(1) 4.4 - Indenture, dated as of June 1, 1997, among Hedstrom
Holdings, Inc. and United States Trust Company of New
York, as Trustee.
(1) 4.5 - Form of Old Discount Note.
(1) 4.6 - Form of New Discount Note.
(1) 4.7 - [Intentionally Omitted]
(1) 4.8 - Registration Rights Agreement, dated as of June 9, 1997,
among Hedstrom Corporation and Hedstrom Holdings, Inc.,
as Issuers, and Credit Suisse First Boston Corporation,
Societe Generale Securities Corporation and UBS Securities
LLC, as Initial Purchasers.
(1) 4.9 - Common Stock Registration Rights Agreement, dated as of
June 9, 1997, among Hedstrom Holdings, Inc. and Credit
Suisse First Boston Corporation, Societe Generale
Securities Corporation and UBS Securities LLC, as Initial
Purchasers.
(1) 10.1 - Credit Agreement, dated as of June 12, 1997, among Hedstrom
Corporation, Hedstrom Holdings, Inc., the Lenders from time
to time parties thereto, Societe Generale, as Documentation
Agent, UBS Securities LLC, as Syndication Agent, and Credit
Suisse First Boston Corporation, as Administrative Agent.
(1) 10.2 - Form of Tranche A Note.
(1) 10.3 - Form of Tranche B Note.
(1) 10.4 - Form of Revolving Credit Note.
(1) 10.5 - Form of Swing Line Note.
(1) 10.6 - Master Guarantee and Collateral Agreement, dated as of June
12, 1997, made by
(1) 10.7 - Open End Mortgage, dated as of June 12, 1997, from
Hedstrom Corporation, as Mortgagor, to Credit Suisse First
Boston Corporation, as Mortgagee.
(1) 10.8 - Open End Mortgage and Security Agreement, dated as of June
12, 1997, from Hedstrom Corporation, as Mortgagor, to
Credit Suisse Corporation, as Mortgagee.
(1) 10.9 - Deed and Security Agreement, dated as of June 12, 1997, from
ERO Industries, Inc., as Grantor, to Credit Suisse First
Boston Corporation, as Grantee.
(1) 10.10 - Mortgage of Shares, dated as of June 12, 1997, between
Hedstrom Corporation, as Chargor, and Credit Suisse First
Boston, as Administrative Agent.
(1) 10.11 - Mortgage of Shares, dated as of June 12, 1997, between Amav
Industries, Inc., as Chargor, and Credit Suisse First
Boston, as Administrative Agent.
(1) 10.12 - Stockholders Agreement, dated as of October 27, 1995, among
Hedstrom Holdings and the holders listed on the signature
pages thereof.
(1) 10.13 - First Amendment to Stockholders Agreement, dated as of June
1, 1997, between Hedstrom Holdings, Inc. and Hicks, Muse,
Tate & Furst Equity Fund II, L.P.
(1) 10.14 - Form of Subordinated Note issued by Hedstrom Holdings, Inc.
(1) 10.15 - Amendment and Waiver, dated as of June 12, 1997, between
Hedstrom Holdings, Inc. and Alan Plotkin, as Holder
Representative, regarding the Subordinated Notes of
Hedstrom Holdings, Inc.
(1) 10.16 - Form of Promissory Note (Series A) issued by Hedstrom
Holdings, Inc.
(1) 10.17 - Amendment and Waiver, dated as of June 12, 1997,
between Hedstrom Holdings, Inc. and Alan Plotkin, as
Holder Representative, regarding the Promissory Notes
(Series A) of Hedstrom Holdings, Inc.
(1) 10.18 - Form of Promissory Note (Series B) issued by Hedstrom
Holdings, Inc.
(1) 10.19 - Amendment and Waiver, dated as of June 12, 1997, between
Hedstrom Holdings, Inc. and Alan Plotkin, as Holder
Representative, regarding the Promissory Notes (Series B)
of Hedstrom Holdings, Inc.
(1) 10.20 - Executive Employment Agreement, dated as of October 27,
1995, among Hedstrom Holdings, Inc., Hedstrom Corporation
and Arnold E. Ditri.
(1) 10.21 - Executive Employment Agreement, dated as of October 27,
1995, between Hedstrom Corporation and Alastair McKelvie.
(1) 10.22 - Monitoring and Oversight Agreement, dated as of October 27,
1995, among Hedstrom Holdings, Inc., Hedstrom Corporation
and Hicks, Muse & Co. Partners, L.P.
(1) 10.23 - Financial Advisory Agreement, dated as of October 27, 1995,
among Hedstrom Holdings, Inc., Hedstrom Corporation and
HM2/Management Partners, L.P.
(1) 10.24 - Hedstrom Holdings, Inc. 1995 Stock Option Plan.
(2) 10.25 - The Third Restatement of ERO Industries, Inc. Retirement
Income Plan (401(k)).
10.26 - The Hedstrom Corporation Tax Sheltered Savings Plan
(401(k)).
10.27 - 1997 Hedstrom Holdings, Inc. Stock Option Plan.
10.28 - Amendment Number One, dated November 11, 1997, and Amendment
Number Two, dated December 19, 1997, to the Credit Agreement,
dated as of June 12, 1997, among Hedstrom Corporation,
Hedstrom Holdings, Inc., the financial institutions party
thereto and Credit Suisse First Boston, as agent.
10.29 - Specimen and listing of all license agreements between
Disney Enterprises, Inc. and Hedstrom Corporation and its
Subsidiaries.
(3) 10.30 - Second Amendment to the Third Restatement of ERO Industries,
Inc. Retirement Income Plan (401(k)).
11.1 - Computation of Earnings Per Share.
(1) 21.1 - Subsidiaries of the Company.
23.1 - Consent of Arthur Andersen LLP, independent auditors.
____________
(1) Incorporated by reference to the respective exhibit to Holdings' and
Hedstrom's Registration Statement on Form S-1 (File Nos. 333-32385-05
and 333-32385).
(2) Incorporated by reference to ERO, Inc.'s Report on Form 10-K (File
No. 0-19942) for the fiscal year ended December 31, 1993.
(3) Incorporated by reference to ERO, Inc.'s Report on Form 10-K (File
No. 0-19942) for the fiscal year December 31, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth
quarter of 1997.
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, each of the Co-Registrants has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Mount Prospect, State of Illinois, on the 23rd day of March, 1998.
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
By: /s/ ARNOLD E. DITRI
Arnold E. Ditri
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, as amended, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ ROBERT H. ELMAN Chairman of the Board of Directors March 23, 1998
- --------------------- Directors of the Co-Registrants
Robert H. Elman listed above
/s/ ARNOLD E. DITRI President, Chief Executive Officer March 23, 1998
- --------------------- and Director of the Co-Registrants
Arnold E. Ditri listed above
(Principal Executive Officer)
/s/ DAVID F. CROWLEY Chief Financial Officer of the March 23, 1998
- --------------------- Co-Registrants listed above
David F. Crowley (Principal Financial and
Accounting Officer)
/s/ ALAN B. MENKES Director of the Co-Registrants March 23, 1998
- --------------------- listed above
Alan B. Menkes
/s/ JACK D. FURST Director of the Co-Registrants March 23, 1998
- --------------------- listed above
Jack D. Furst
Hedstrom Holdings, Inc.
Schedule IX
Valuation and Qualifying Accounts and Reserves
As of and for the Fiscal Year Ended December 31, 1997
and as of and for the Fiscal Years Ended July 31, 1996 and 1995
Additions Deletions
------------------------- -----------------------
Foreign
Balance at Charged to Charged Currency Balance
Beginning Costs and to Other Write- Translation at End
of Year Expenses Accounts offs Adjustment of Year
---------- ---------- ----------- ----------- ----------- ------------
1997
Allowance for doubtful accounts $ 505,000 $1,258,000 $ 751,000(1) $ (196,000) $(21,000) $2,297,000
Accumulated amortization of
goodwill - 2,384,000 - - - 2,384,000
Amortization of deferred
financing fees - 3,246,000 - - - 3,246,000
Accumulated amortization of
deferred charges 747,000 882,000 - - - 1,629,000
1996
Allowance for doubtful accounts $ 405,000 $ 76,000 - $ (39,000) $ (1,000) $ 441,000
Accumulated amortization of
deferred charges 2,907,000 520,000 - (3,030,000)(2) - 397,000
1995
Allowance for doubtful accounts $ 305,000 $ 224,000 $(124,000) - - $ 405,000
Accumulated amortization of
deferred charges 2,325,000 582,000 - - - 2,907,000
(1) Represents reserve established on the opening balance sheet pursuant to
the ERO, Inc. acquisition.
(2) Represents a write-off in connection with the Company's 1995
Recapitalization.