-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HACoBvERYaswCCr0omIXKnjmYB0hzJbAFNAUcRw2NwoVfj9S5TsAZV9Rbse+RUv2 AuobYJ+tr4ZUriE1VgRMJQ== 0001042422-98-000012.txt : 19980817 0001042422-98-000012.hdr.sgml : 19980817 ACCESSION NUMBER: 0001042422-98-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEDSTROM HOLDINGS INC CENTRAL INDEX KEY: 0001042422 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 541389361 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-32385-05 FILM NUMBER: 98687087 BUSINESS ADDRESS: STREET 1: 585 SLAWIN COURT CITY: MOUNT PROSPECT STATE: IL ZIP: 60056 BUSINESS PHONE: 8478039200 MAIL ADDRESS: STREET 1: 585 SLAWIN COURT CITY: MOUNT PROSPECT STATE: IL ZIP: 60056 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITES AND EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 Commission File Numbers: 333-32385-05 and 333-32385 HEDSTROM HOLDINGS, INC. HEDSTROM CORPORATION (Exact name of registrant as specified in its charter) Delaware 51-0329830 Delaware 51-0329829 (State or other jurisdiction (IRS Employer of incorporation Identification or organization) Number) 585 Slawin Court, Mount Prospect, Illinois 60056 (Address of principal executive offices, including zip code) (847) 803-9200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No At August 13, 1998, there were outstanding: (i) 36,142,883 shares of the Common Stock, par value $.01 per share, of Hedstrom Holdings, Inc., (ii) 31,520,000 shares of the Non-Voting Common Stock, par value $.01 per share, of Hedstrom Holdings, Inc. and (iii) 10 shares of the Common Stock, par value $.01 per share, of Hedstrom Corporation. HEDSTROM HOLDINGS, INC. HEDSTROM CORPORATION FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 TABLE OF CONTENTS Page Number PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets As of June 30, 1998 and December 31, 1997 Consolidated Income Statements Three months ended June 30, 1998 and 1997 Six months ended June 30, 1998 and 1997 Consolidated Statements of Cash Flows Six months ended June 30, 1998 and 1997 Consolidated Statement of Stockholders' Equity As of and for the six months ended June 30, 1998 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition PART II OTHER INFORMATION Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K Signature PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements HEDSTROM HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands, except share data) June 30, December 31, 1998 1997 (unaudited) ASSETS ----------- ------------ CURRENT ASSETS: Cash and cash equivalents $ 7,233 $ 10,844 Trade accounts receivable, net of allowance for doubtful accounts 81,681 82,702 Inventories 53,564 47,464 Deferred income taxes 7,050 7,045 Prepaid expenses and other current assets 4,735 4,801 -------- -------- TOTAL CURRENT ASSETS 154,263 152,856 -------- -------- PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated depreciation 44,474 42,823 -------- -------- OTHER ASSETS: Deferred charges, net of accumulated amortization 17,025 18,861 Goodwill, net of accumulated amortization 162,254 161,176 Deferred income taxes 10,096 10,057 -------- -------- TOTAL OTHER ASSETS 189,375 190,094 -------- -------- TOTAL ASSETS $388,112 $385,773 ======== ========
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands, except share data) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Revolving line of credit $ 44,152 $ 35,500 Current portion of long-term debt and capital leases 10,466 9,222 Accounts payable 28,900 23,381 Accrued expenses 17,486 25,824 -------- ------- TOTAL CURRENT LIABILITIES 101,004 93,927 -------- ------- LONG-TERM DEBT: Senior Subordinated Notes 110,000 110,000 Senior Discount Notes 24,897 23,288 Term Loans 99,125 104,375 Notes payable to related parties 2,500 2,500 Capital leases 1,878 1,605 Other 2,417 2,914 -------- -------- TOTAL LONG-TERM DEBT 240,817 244,682 -------- -------- STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding - - Common stock, $0.01 par value, 100,000,000 shares authorized, 36,142,883 and 36,142,883 shares issued and outstanding, respectively 361 361 Non-voting common stock, $0.01 par value, 40,000,000 shares authorized, 31,520,000 and 31,520,000 issued and outstanding, respectively 315 315 Additional paid-in capital 51,553 51,553 Foreign currency translation adjustment (1,053) (778) Accumulated deficit (4,885) (4,287) -------- -------- TOTAL STOCKHOLDERS' EQUITY 46,291 47,164 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $388,112 $385,773 ======== ======== The accompanying notes to consolidated financial statements are an integral part of these statements.
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED INCOME STATEMENTS (In thousands, except per share data) (Unaudited) For the three months ended June 30, ----------------------------------- 1998 1997 ---- ---- Net sales $83,272 $56,114 Cost of sales 60,191 39,038 ------- ------- Gross profit 23,081 17,076 Selling, general and administrative expense 15,874 9,454 ------- ------- Operating income 7,207 7,622 Interest expense 7,793 3,174 ------- ------- Income (loss) before income taxes (586) 4,448 Income tax (benefit) expense (247) 1,679 ------- ------- Net income (loss) $ (339) $ 2,769 ======= ======= Basic earnings (loss) per share: Net income (loss) per share ($0.01) $0.08 Weighted average number of common shares outstanding (in thousands) 67,633 36,393 Diluted earnings (loss) per share: Net income (loss) per share ($0.01) $0.08 Weighted average number of common shares outstanding (in thousands) 67,633 36,868 The accompanying notes to consolidated financial statements are an integral part of these statements.
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED INCOME STATEMENTS (In thousands, except per share data) (Unaudited) For the six months ended June 30, --------------------------------- 1998 1997 ---- ---- Net sales $ 161,661 $104,051 Cost of sales 116,516 73,579 --------- -------- Gross profit 45,145 30,472 Selling, general and administrative expense 30,689 16,242 --------- -------- Operating income 14,456 14,230 Interest expense 15,481 4,709 --------- -------- Income (loss) before income taxes (1,025) 9,521 Income tax (benefit) expense (427) 3,536 --------- -------- Net income (loss) $ (598) $ 5,985 ========= ======== Basic earnings (loss) per share: Net income (loss) per share ($0.01) $0.16 Weighted average number of common shares outstanding (in thousands) 67,663 36,393 Diluted earnings (loss) per share: Net income (loss) per share ($0.01) $0.16 Weighted average number of common shares outstanding (in thousands) 67,663 36,868 The accompanying notes to consolidated financial statements are an integral part of these statements.
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) For the six months ended June 30, -------------------------------- 1998 1997 ---- ---- Cash flows from operating activities: Net income (loss) $ (598) $ 5,985 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation of property, plant and equipment and amortization of goodwill 6,580 2,767 Amortization of deferred financing fees 3,445 - Deferred income tax benefit (44) (2,676) Changes in current assets and current liabilities, net of acquisitions: Accounts receivable 1,682 (32,260) Inventories (5,454) 6,239 Prepaid expenses and other current assets 6 983 Accounts payable 5,519 949 Accrued expenses (7,730) 13,890 Other - (2,845) ------- -------- Net cash provided by (used for) operating activities 3,466 (6,968) ------- Cash flows from investing activities: Acquisitions of property, plant and equipment (4,962) (3,446) Acquisition of ERO, Inc. (3,037) (122,600) Other acquisitions (3,500) - ------- -------- Net cash used for investing activities (11,499) (126,046) ------- --------- Cash flows from financing activities: Net proceeds from issuance of Senior Subordinated Notes - 110,000 Net proceeds from issuance of new term loans - 110,000 Net proceeds from issuance of Senior Discount Notes - 21,618 Principal payments on Term Loans (4,066) - Borrowings on Revolving Credit Facility, net 8,652 2,700 Repayments of old term loans - (91,393) Repayments of old revolving lines of credit, net - (38,925) Debt financing costs - (17,800) Net proceeds from issuance of voting common stock - 3,982 Net proceeds from issuance of non-voting common stock - 37,462 Other (164) (1,998) ------- ---------- Net cash provided by financing activities 4,422 135,646 ------- ---------- Net increase (decrease) in cash and cash equivalents (3,611) 2,632 Cash and cash equivalents: Beginning of period 10,844 533 ------- ---------- End of period $ 7,233 $ 3,165 ======= ========== The accompanying notes to consolidated financial statements are an integral part of these statements.
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands, except shares) (Unaudited) Common Stock Foreign ------------ Additional Currency Par Paid-In Translation Accumulated Shares Value Capital Adjustment Deficit Total ---------- ------ ------- ---------- ----------- ----- Balance at December 31, 1997 67,662,883 $ 676 $51,553 $ (778) $(4,287) $47,164 Foreign currency translation - - - (275) - (275) adjustment Net loss - - - - (598) (598) (5 (598) ---------- ------ ------- ------- ------- ------ Balance at June 30, 1998 67,662,883 $ 676 $51,553 $(1,053) $(4,885) $46,291 ========== ====== ======= ======= ======= ======= The accompanying notes to consolidated financial statements are an integral part of these statements.
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 1 - PRINCIPLES OF CONSOLIDATION: The accompanying interim consolidated financial statements include the accounts of Hedstrom Holdings, Inc. ("Holdings") and its wholly owned subsidiary, Hedstrom Corporation ("Hedstrom," and together with Holdings, the "Company"). Effective June 12, 1997, the Company acquired ERO, Inc. ("ERO"), which became a wholly owned subsidiary of Hedstrom (see Note 2). The accompanying consolidated financial statements reflect the operations of ERO since June 1, 1997. These financial statements are unaudited but, in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial condition, results of operations and cash flows of the Company. Certain prior period amounts have been reclassified to conform with the current period presentation. All intercompany balances and transactions have been eliminated in consolidation. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 as filed with the Securities and Exchange Commission. The results of operations for the three months and six months ended June 30, 1998 are not necessarily indicative of the results to be expected for the entire fiscal year. NOTE 2 - ACQUISITION OF ERO, INC.: On April 10, 1997, Hedstrom and HC Acquisition Corp., a wholly owned subsidiary of Hedstrom, entered into an Agreement and Plan of Merger (the "Merger Agreement") with ERO to acquire ERO for a total enterprise value of approximately $200 million. Pursuant to the Merger Agreement, HC Acquisition Corp. commenced and, on June 12, 1997, consummated a tender offer for all of the outstanding shares of the common stock of ERO at a purchase price of $11.25 per share (the "Tender Offer"). The Company also assumed a purchase price contingency related to ERO, Inc.'s acquisition of Amav in October of 1995. The contingency included an additional $3.0 million of purchase price contingent upon achievement of certain conditions. As those conditions were met as of December 31, 1997, the Company accrued a liability for the contingency against goodwill. This was reflected in accrued expenses in the consolidated balance sheet as of December 31, 1997. The payment was made in March 1998. Upon consummation of the Tender Offer, (i) HC Acquisition Corp. was merged with and into ERO (the "Merger") with ERO surviving the Merger as a wholly owned subsidiary of Hedstrom, (ii) certain of ERO's outstanding indebtedness was refinanced by Hedstrom (the "ERO Refinancing") and (ii) Hedstrom refinanced (the "Hedstrom Refinancing")its existing revolving credit facility and term loan facility. The Merger, the Tender Offer, the ERO Refinancing and the Hedstrom Refinancing are collectively referred to herein as the "Acquisition". Holdings and Hedstrom required approximately $301.1 million in cash to consummate the Acquisition, including approximately (i) $122.6 million paid in connection with the Tender Offer and the Merger, (ii) $82.6 million paid in connection with the ERO Refinancing, (iii) $74.9 million paid in connection with the Hedstrom Refinancing and (iv) $21.0 million incurred in respect of fees and expenses. The funds required to consummate the Acquisition were provided by (i) $75.0 million of term loans under a new six- year senior secured term loan facility (the "Tranche A Term Loan Facility"), (ii) $35.0 million of term loans under a new eight-year senior secured term loan facility (subsequent to June 30, 1998 the Tranche B Term Loan was amended to $65.0 million to allow for the acquisition of Backyard Products Limited, see further discussion at Note 8) (the "Tranche B Term Loan Facility" and, together with the Tranche A Term Loan Facility, the "Term Loan Facilities"), (iii) $16.1 million of borrowings under a new $70.0 million senior secured revolving credit facility (the "Revolving Credit Facility" and, together with the Term Loan Facilities, the "Senior Credit Facilities"), (iv) $110.0 million of gross proceeds from the offering by Hedstrom of 10% Senior Subordinated Notes Due 2007 (the "Senior Subordinated Notes"), (v) $25.0 million of gross proceeds from the offering by Holdings of 44,612 units consisting of 12% Senior Discount Notes Due 2009 (the "Discount Notes") and 2,705,896 shares of Common Stock, $.01 par value per share, of Holdings ("Holdings Common Stock") and (vi) $40.0 million of gross proceeds from the private placement of 31,520,000 shares of Non-Voting Common Stock, $.01 par value per share, of Holdings ("Holdings Non-Voting Common Stock") and 480,000 shares of Holdings Common Stock. The Revolving Credit Facility will also be used to finance certain seasonal working capital requirements. The acquisition of ERO has been accounted for under the purchase method of accounting, and accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based upon fair value at the date of the acquisition of ERO. The excess of the purchase price over the fair values of the tangible net assets acquired was approximately $150.0 million, has been recorded as goodwill and is being amortized on a straight-line basis over 40 years. In the event that facts and circumstances indicate that the goodwill may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the assets carrying amount to determine if an adjustment is required. The fair value of assets acquired and liabilities assumed, reflecting the final allocation, was as follows (in thousands): Current assets $56,200 Net property, plant and equipment 20,000 Other assets 14,700 Goodwill 150,000 Liabilities assumed (118,300) -------- Cash paid for ERO $122,600 ======== The unaudited pro forma results below assume the Acquisition occurred at the beginning of the six month period ended June 30, 1997 (in thousands, except per share amounts): Six Months Ended June 30, 1997 ---------------- Net sales $142,355 Net loss $ (26) Net loss per share basic $ (0.00) Net loss per share diluted $ (0.00) The above pro forma results include adjustments to give effect to amortization of goodwill, interest expense related to the Senior Subordinated Notes, the Discount Notes and the Senior Credit Facilities and cost savings resulting from the rationalization of the sales, marketing and general and administrative functions, closings of duplicate facilities and reductions in external administrative expenditures including legal, insurance, tax, audit and public relations expenditures. These cost savings reflect personnel terminations that have already occurred or that have been formally communicated to the employees, closings of duplicate facilities that have occurred and reductions in external administrative expenses that have been negotiated, together with the related tax effects. The pro forma results are not necessarily indicative of the operating results that would have occurred had the acquisition of ERO been consummated and had the cost actions giving rise to the cost savings been implemented as of the beginning of the six month period ended June 30, 1997 nor are they necessarily indicative of future operating results. NOTE 3 - INCOME PER COMMON SHARE: Holdings adopted SFAS No. 128 "Earnings Per Share", effective December 15, 1997. SFAS No. 128 requires the calculation of basic and diluted earnings per share. Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing the net income by the weighted average number of shares of common stock and other dilutive securities. NOTE 4 - INVENTORIES: Inventories at June 30, 1998 and December 31, 1997 consist of the following (in thousands): June 30, December 31, 1998 1997 -------- ------------ Raw materials $18,527 $16,502 Work-in-process 10,109 5,690 Finished goods 24,928 25,272 ------- ------- $53,564 $47,464 ======= ======= NOTE 5 - DEBT: Debt consists of the following (in thousands): June 30, December 31, 1998 1997 -------- ----------- Senior Subordinated Notes $110,000 $110,000 Term Loans 108,375 112,375 Revolving Credit Facility 44,152 35,500 Senior Discount Notes 24,897 23,288 Other 8,011 8,241 -------- -------- $295,435 $289,404 ======== ======== Senior Subordinated Notes The $110.0 million Senior Subordinated Notes bear interest at 10% per annum, payable on June 1 and December 1 of each year, commencing December 1, 1997. The Senior Subordinated Notes mature on June 1, 2007. Except as set forth below, the Senior Subordinated Notes are not redeemable at the option of the Company prior to June 1, 2002. On and after such date, the Senior Subordinated Notes are redeemable, at the Company's option, in whole or in part, at the following redemption prices (expressed in percentages of principal amount), plus accrued and unpaid interest to the redemption date: if redeemed during the 12-month period commencing on June 1 of the years set forth below: Redemption Period Price ------ ---------- 2002 105.000 2003 103.333 2004 101.667 2005 and thereafter 100.000% In addition, at any time and from time to time prior to June 1, 2000, the Company may redeem in the aggregate up to $44.0 million principal amount of Senior Subordinated Notes with the proceeds of one or more equity offerings so long as there is a public market at the time of such redemption (provided that the equity offering is an offering by Holdings, a portion of the net cash proceeds thereof equal to the amount required to redeem any such Senior Subordinated Notes is contributed to the equity capital of the Company), at a redemption price (expressed as a percentage of principal amount) of 110%, plus accrued and unpaid interest, if any, to the redemption date; provided, however, that at least $66.0 million aggregate principal amount of the Senior Subordinated Notes remains outstanding after each such redemption. The Senior Subordinated Notes are unsecured senior subordinated obligations of the Company and are unconditionally and fully guaranteed (jointly and severally) on a senior basis by Holdings and on a senior subordinated basis by each domestic subsidiary of the Company. The Senior Subordinated Notes are subordinated to all senior indebtedness (as defined) of the Company and rank pari passu in right of payment with all senior subordinated indebtedness (as defined) of the Company. The Senior Subordinated Notes Indenture contains certain covenants that, among other things, limit (i) the incurrence of additional indebtedness by the Company and its restricted subsidiaries (as defined), (ii) the payment of dividends and other restricted payments by the Company and its restricted subsidiaries, (iii) distributions from restricted subsidiaries, (iv) asset sales, (v) transactions with affiliates, (vi) sales or issuances of restricted subsidiary capital stock and (vii) mergers and consolidations. Term Loans and Revolving Credit Facility As discussed in Note 2, in connection with the Acquisition, the Company obtained the Senior Credit Facilities. The Senior Credit Facilities consisted of (a) the six-year $75.0 million Tranche A Senior Secured Term Loan Facility; (b) the eight-year $35.0 million Tranche B Senior Secured Term Loan Facility (As discussed in Note 8, subsequent to June 30, 1998 the Tranche B Term Loan was amended to $65.0 million to allow for the acquisition of Backyard Products Limited); and (c) the Senior Secured Revolving Credit Facility providing for revolving loans to the Company and the issuance of letters of credit for the account of the Company in an aggregate principal and stated amount at any time not to exceed $70.0 million. Borrowings under the Revolving Credit Facility will be available based upon a borrowing base not to exceed 85% of eligible accounts receivable and 50% of eligible inventory. At the Company's option, the interest rates per annum applicable to the Senior Credit Facilities will be either (i) the Eurocurrency Rate (as defined) plus 2.5% in the case of the Tranche A Term Loan Facility and the Revolving Credit Facility or 3.0% in the case of the Tranche B Term Loan Facility or (ii) the Alternate Base Rate (as defined) plus 1.5% in the case of the Tranche A Term Loan Facility and the Revolving Credit Facility or 2.0% in the case of the Tranche B Term Loan Facility. The Alternate Base Rate is the highest of (a) Credit Suisse First Boston's Prime Rate (as defined) or (b) the federal funds effective rate from time to time plus 0.5%. The applicable margin in respect of the Tranche A Term Loan Facility and the Revolving Credit Facility will be adjusted from time to time by amounts to be agreed upon based on the achievement of certain performance targets to be determined. The obligations of the Company under the Senior Credit Facilities are unconditionally, fully and irrevocably guaranteed (jointly and severally) by Holdings and each of the Company's direct or indirect domestic subsidiaries (collectively, the _Senior Credit Facilities Guarantors_). In addition, the Senior Credit Facilities will be secured by first priority or equivalent security interests in (i) all the capital stock of, or other equity interests in, each direct or indirect domestic subsidiary of the Company and 65% of the capital stock of, or other equity interests in, each direct foreign subsidiary of the Company, or any of its domestic subsidiaries and (ii) all tangible and intangible assets (including, without limitation, intellectual property and owned real property) of the Company and the Senior Credit Facilities Guarantors. The Senior Credit Facilities contain a number of significant covenants that, among other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, repay other indebtedness or amend debt instruments, pay dividends, create liens on assets, make investments or acquisitions, engage in mergers or consolidations, make capital expenditures, or engage in certain transactions with affiliates. In addition, under the Senior Credit Facilities, the Company is required to comply with specified interest coverage and maximum leverage ratios. Senior Discount Notes In connection with the acquisition, Holdings received $25.0 million of gross proceeds from the issuance by Holdings of 44,612 units, consisting of the Discount Notes and 2,705,896 shares of Holdings common stock. Of the $25.0 million in gross proceeds, $3.4 million ($1.25 per share) was allocated to the common stock, based upon management's estimate of fair market value, and $21.6 million was allocated to Discount Notes. The Discount Notes are unsecured obligations of Holdings and have an aggregate principle amount at maturity (June 1, 2009) of $44.6 million, representing a yield to maturity of 12%. No cash interest will accrue on the Discount Notes prior to June 1, 2002. Thereafter, cash interest will be payable on June 1 and December 1 of each year, commencing December 1, 2002. Except as set forth below, the Discount Notes will not be redeemable at the option of Holdings prior to June 1, 2002. On and after such, the Discount Notes will be redeemable, at Holdings' option, in whole or in part, at the following redemption prices (expressed in percentages of principal amount at maturity), plus accrued and unpaid interest to the redemption date: if redeemed during the 12-month period commencing on June 1 of the years set forth below: Redemption Period Price ------ ---------- 2002 106.000 2003 104.000 2004 102.000 2005 and thereafter 100.00% In addition, at any time and from time to time prior to June 1, 2000, Holdings may redeem in the aggregate up to 40% of the accreted value of the Discount Notes with the proceeds of one or more equity offerings by Holdings so long as there is a public market at the time of such redemption, at a redemption price (expressed as a percentage of accreted value on the redemption date) of 112%, plus accrued and unpaid interest, if any, to the redemption date; provided however, that at least $26.8 million aggregate principal amount at maturity of the Discount Notes remains outstanding after each such redemption. At any time on or prior to June 1, 2002, the Discount Notes may also be redeemed as a whole at the option of Holdings upon the occurrence of a change of control (as defined) at a redemption price equal to 100% of the accreted value thereof plus the applicable premium, and accrued and unpaid interest, if any, to the date of redemption. The Discount Notes Indenture contains certain covenants that, among other things, limit (i) the incurrence of additional indebtedness by Holdings and its restricted subsidiaries (as defined), (ii) the payment of dividends and other restricted payments by Holdings and its restricted subsidiaries, (iii) distributions from restricted subsidiaries, (iv) asset sales, (v) transactions with affiliates, (vi) sales or issuances of restricted subsidiary capital stock and (vii) mergers and consolidations. Other Debt Other debt consists of a $2.5 million Holdings note payable to the previous owners of Holdings as well as various other mortgages, capital leases and equipment loans. The $2.5 million note payable bears interest at 10% per annum and is payable at the earlier of April 30, 2002, or when the Company has met certain cash flow levels. The mortgages and equipment loans have varying interest rates and maturities. NOTE 6 - RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS: Holdings has adopted SFAS No. 130, "Reporting Comprehensive Income", as of January 1, 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the total of net income and all other non-owner changes in equity. Holdings Comprehensive Income for the quarter ended and six months ended June 30, 1998 would be as follows (in thousands): 3 months 6 months -------- -------- Net Loss $(339) $(598) Foreign currency translation adjustments (393) (162) ----- ----- Comprehensive Loss $(732) $(760) ===== ===== Adjustments to other non-owner changes will be reflected in comprehensive income and cumulative comprehensive income that will be reported in the consolidated statement of shareholders' equity in Holding's Annual Report on Form 10-K for the fiscal year ending December 31, 1998. Holdings has adopted SFAS No. 131, "Disclosure about Segments of An Enterprise and Related Information", as of January 1, 1998. This pronouncement changes the requirements under which public businesses must report segment information. The objective of the pronouncement is to provide information about a company's different types of business activities and different economic environments. SFAS No. 131 requires companies to select segments based on their internal reporting system. Hedstrom is assessing the impact on its disclosures of this pronouncement. As required by SFAS No 131, compliance with the respective reporting requirements will be reflected in Holdings 1998 Annual Report on Form 10-K for the fiscal year ended December 31, 1998. Holdings has adopted SFAS No. 132, "Employees' Disclosures about Pension and Other Postretirement Benefits," as of January 1, 1998. This pronouncement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans, however, it does require additional information on changes in the benefit obligations and fair values of plan assets in order to facilitate financial analysis. Management does not believe that SFAS No. 132 will have a significant impact on Holdings' financial statements. NOTE 7 - SUBSIDIARY GUARANTORS/NONGUARANTORS FINANCIAL INFORMATION: HEDSTROM CORPORATION AND SUBSIDIARIES CONSOLIDATING BALANCE SHEETS (In thousands) At June 30, 1998 At December 31, 1997 -------------------------------------------- ------------------------------------------ Hedstrom Hedstrom Hedstrom Subsidiary Hedstrom Subsidiary Subsidiary Non- Adjustments/ Total Subsidiary Non- Adjustments/ Total Assets Guarantors guarantors Eliminations Hedstrom Guarantors guarantors Elimination Hedstrom - ------------------------- ---------- ---------- ------------ -------- ---------- ---------- ----------- -------- Cash and cash equivalents $ 6,470 $ 763 $ - $ 7,233 $ 8,984 $ 1,860 $ - $ 10,844 Accounts receivable, net 73,869 7,812 - 81,681 73,625 9,077 - 82,702 Inventories 35,989 17,724 (149) 53,564 38,429 9,075 (40) 47,464 Deferred income taxes (c) 7,050 - - 7,050 7,045 - - 7,045 Prepaid expenses and other current assets 4,254 481 - 4,735 4,310 491 - 4,801 -------- ------- -------- -------- -------- ------- -------- -------- Total current assets 127,632 26,780 (149) 154,263 132,393 20,503 (40) 152,856 -------- ------- -------- -------- -------- ------- -------- -------- 27,511 16,963 - 44,474 27,448 15,375 - 42,823 -------- ------- -------- -------- -------- ------- -------- -------- Investment in and advances to Nonguarantor Subsidiaries 45,121 - (45,121) - 44,799 - (44,799) - Deferred charges, net 15,983 - - 15,983 17,715 - - 17,715 Goodwill, net 143,231 19,023 - 162,254 142,692 18,484 - 161,176 Deferred income taxes 10,574 (478) - 10,096 10,579 (522) - 10,057 Total other assets 214,909 18,545 (45,121) 188,333 215,785 17,962 (44,799) 188,948 -------- ------- -------- -------- -------- ------- -------- -------- $370,052 $62,288 $(45,270) $387,070 $375,626 $53,840 $(44,839) $384,627 ======== ======= ======== ======== ======== ======= ======== ========
HEDSTROM CORPORATION AND SUBSIDIARIES CONSOLIDATING BALANCE SHEETS (In thousands) Liabilities and stockholders equity - ---------------------------- Revolving line of credit $ 35,355 $ 8,797 $ - $ 44,152 $ 33,282 $ 2,218 $ - $ 35,500 Current portion of long-term debt and capital leases 9,736 730 - 10,466 8,492 73 - 9,222 Advances from Guarantor - - Subsidiaries - 32,270 (32,270) 31,956 (31,956) - Accounts payable (c) 25,667 3,233 - 28,900 20,784 2,597 - 23,381 Accrued expenses 14,113 4,664 (132) 18,645 23,939 2,432 (16) 26,355 -------- ------- -------- -------- -------- ------- -------- -------- Total current liabilities 84,871 49,694 (32,402) 102,163 86,497 39,933 (31,972) 94,458 ------- ------- -------- -------- -------- ------- -------- -------- Senior Subordinated Notes 110,000 - - 110,000 110,000 - - 110,000 Term Loans 99,125 - - 99,125 104,375 - - 104,375 Capital leases 1,878 - - 1,878 1,605 - - 1,605 Other 1,765 652 - 2,417 1,857 1,057 - 2,914 -------- ------- -------- -------- -------- ------- -------- -------- Total long-term debt (a) 212,768 652 - 213,420 217,837 1,057 - 218,894 -------- ------- -------- -------- -------- ------- -------- -------- Total Liabilities 297,639 50,346 (32,402) 315,583 304,334 40,990 (31,972) 313,352 -------- ------- -------- -------- -------- ------- -------- -------- Total stockholder's equity (deficit) (b) 72,413 11,942 (12,868) 71,487 71,292 12,850 (12,867) 71,275 -------- ------- -------- -------- -------- ------- -------- -------- Total liabilities and stockholders' equity $370,052 $62,288 $(45,270) $387,070 $375,626 $53,840 $(44,839) $384,627 ======== ======= ======== ======== ======== ======= ======== ========
HEDSTROM CORPORATION AND SUBSIDIARIES CONSOLIDATING INCOME STATEMENTS (In thousands) Three Months Ended June 30, 1998 Three Months Ended June 30, 1997 ------------------------------------------- -------------------------------------- Hedstrom Hedstrom Hedstrom Subsidiary Hedstrom Subsidiary Subsidiary Non- Adjustments/ Total Subsidiary Non- Adjustments/ Total Statement of Operations Guarantors guarantors Eliminations Hedstrom Guarantors guarantors Elimination Hedstrom - ----------------------- ---------- ---------- ------------ -------- ---------- ---------- ----------- -------- Net sales $79,535 $9,664 $(5,927) $83,272 $54,396 $5,614 $(3,896) $56,114 Cost of sales 59,672 6,445 (5,926) 60,191 37,940 3,625 (2,527) 39,038 ------- ------ ------- ------- ------- ------ ------- ------- Gross profit (loss) 19,863 3,219 (1) 23,081 16,456 1,989 (1,369) 17,076 Selling, general and administrative expense 13,411 2,463 - 15,874 8,750 718 (14) 9,454 ------- ------ ------- ------- ------- ------ ------- ------- Operating income (loss) 6,452 756 (1) 7,207 7,706 1,271 (1,355) 7,622 Interest expense (c) 6,238 623 - 6,861 2,893 218 - 3,111 ------- ------ ------- ------- ------- ------ ------- ------- Income (loss) before income taxes 214 133 (1) 346 4,813 1,053 (1,355) 4,511 Income tax provision (benefit) (c) 12 122 - 134 1,970 20 (285) 1,705 ------- ------ ------- ------- ------- ------ ------- ------- Net income (loss) $ 202 $ 11 $ (1) $ 212 $ 2,843 $1,033 $(1,070) $ 2,806 ======= ====== ======= ======= ======= ====== ======= =======
HEDSTROM CORPORATION AND SUBSIDIARIES CONSOLIDATING INCOME STATEMENTS (In thousands) Six Months Ended June 30, 1998 Six Months Ended June 30, 1997 -------------------------------------------- ------------------------------------------- Hedstrom Hedstrom Hedstrom Subsidiary Hedstrom Subsidiary Subsidiary Non- Adjustments/ Total Subsidiary Non Adjustments Total Statement of Operations Guarantors guarantors Eliminations Hedstrom Guarantors guarantors Elimination Hedstrom - ----------------------- ---------- ---------- ------------ -------- ---------- ---------- ----------- -------- Net sales $156,274 $ 15,605 $(10,218) $ 161,661 $100,923 $7,024 $(3,896) $104,051 Cost of sales 115,110 11,685 (10,279) 116,516 71,344 4,762 (2,527) 73,579 -------- -------- -------- --------- -------- ------ ------- -------- Gross profit 41,164 3,920 61 45,145 29,579 2,262 (1,369) 30,472 Selling, general and administrative expense 26,488 4,201 - 30,689 15,270 986 (14) 16,242 -------- -------- -------- --------- -------- ------ ------- -------- Operating income (loss) 14,676 (281) 61 14,456 14,309 1,276 (1,355) 14,230 Interest expense 12,460 1,183 - 13,643 4,364 219 - 4,583 -------- --------- -------- --------- -------- ------ ------- -------- Income (loss) before income taxes 2,216 (1,464) 61 813 9,945 1,057 (1,355) 9,647 Income tax provision (benefit) (c) 806 (505) 25 326 3,849 21 (285) 3,585 -------- -------- -------- -------- -------- ------ ------- -------- Net income (loss) $ 1,410 $(959) $ 36 $ 487 $ 6,096 $1,036 $(1,070) $ 6,062 6,062 ======== ======= ======== ======== ======= ====== ======= ========
HEDSTROM CORPORATION AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended March 31, 1998 Three Months Ended March 31, 1997 --------------------------------------- --------------------------------------- Hedstrom Hedstrom Hedstrom Subsidiary Hedstrom Subsidiary Subsidiary Non- Adjustment Total Subsidiary Non- Adjustments Total Guarantor guarantor Eliminations Hedstrom Guarantor guarantor Eliminations Hedstrom --------- --------- ------------ -------- --------- --------- ----------- -------- Cash Flows from operating activities: Net income(loss)(c) $ 1,410 $ (959) $ 36 $ 487 $6,096 $ 1,036 $(1,070) $ 6,062 Adjustments to reconcile net income (loss) to net cash (used for) provided by operating activities Depreciation of property, plant and equipment and amortization of goodwill and deferreds 6,834 1,478 - 8,312 2,614 153 - 2,767 Deferred income tax provision(c) (44) - - (44) (2,676) - - (2,676) Changes in current assets and current liabilities, net of acquisitions: Accounts receivable 417 1,265 - 1,682 (30,173) (2,126) 39 (32,260) Inventories 3,384 (8,649) (189) (5,454) 7,830 (1,451) (140) 6,239 Prepaid expenses and other current assets 56 10 - 66 979 4 - 983 Deferred charges and other - - - - 4,089 12 - 4,077 Accounts payable(c) 4,884 636 - 5,520 805 1,100 654 949 Accrued expenses (9,488) 2,232 153 (7,103) 12,124 1,266 500 13,890 Other - - - - - - - - Net cash(used for) provided by ------- ------- ------- ------- ------- ------- ------- ------- operating activities 7,453 (3,987) - 3,466 (8,100) (6) (17) (8,123) ------- ------- ------- ------- ------- ------- ------- -------
HEDSTROM CORPORATION AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended March 31, 1998 Three Months Ended March 31, 1997 --------------------------------------- --------------------------------------- Hedstrom Hedstrom Hedstrom Subsidiary Hedstrom Subsidiary Subsidiary Non- Adjustment Total Subsidiary Non- Adjustments Total Guarantor guarantor Eliminations Hedstrom Guarantor guarantor Eliminations Hedstrom --------- --------- ------------ -------- --------- --------- ----------- -------- Cash flows from investing activities: Acquisitions of property, plant and equipment (3,621) (1,341) - (4,962) (3,444) (2) - (3,446) Acquisition of ERO, Inc. (3,037) - - (3,037) (122,600) - - (122,600) Other Acquisition - (3,500) - (3,500) - - - - ------ ------ ------- ------- -------- ------- ------- -------- Net cash used for investing activities (6,658) (4,841) - (11,499) (126,044) (2) - (126,046) ------ ------ ------- ------- -------- ------- ------- -------- Cash flows from financing activities: Net proceeds from issuance of Senior Subordinated notes - - - - 110,000 - - 110,000 Net proceeds from issuance of new term loans - - - - 110,000 - - 110,000 Equity contribution from Holdings (b) - - - 63,062 - - 63,062 Principal payments on term loans (4,066) - - (4,066) - - - - Equity contribution from Holdings (b) - - - - - - - - Borrowings on new revolving line of credit 8,652 - - 8,652 2,700 - - 2,700 Repayment of old term loans - - - - (91,851) - - (91,851) Debt financing cost (b) - - - - (16,550) - - (16,550) Borrowings(repayments)on old revolving loans of credit, net - - - - (38,925) 458 - (38,467) Advances to/(from) Nonguarantor subsidiaries (8,136) 8,136 - - - - - - Other 241 (405) - (164) (2,093) - - (2,093) ------ ------ ------- ------- ------- ------- ------- -------- Net increase(decrease)in cash and cash equivalents (3,309) 7,731 - 4,422 136,343 458 - 136,801 ------ ------ ------- ------- -------- ------- ------- --------- Cash and cash equivalents (6,498) (598) - (3,611) 2,199 450 (17) 2,632 Beginning of period 8,984 1,860 - 10,844 467 66 - 533 ------ ------ ------- ------- -------- ------- ------- --------- End of period $6,470 $ 763 $ - $ 7,233 $ 2,666 $ 516 $ (17) $ 3,165 ====== ====== ======= ======= ======== ======= ======= =========
Each of the Subsidiary Guarantors is a wholly-owned subsidiary of Hedstrom and has fully and unconditionally guaranteed the Senior Subordinated Notes on a joint and several basis. The Company has not presented separate financial statements and other disclosures concerning each Subsidiary Guarantor because management has determined that such information is not material to investors. The column "Total Hedstrom" represents the consolidated financial statements of Hedstrom Corporation and its subsidiaries. Hedstrom Corporation is Holdings' only direct subsidiary. The primary differences between the consolidated amounts of Hedstrom Corporation and the consolidated amounts included in the accompanying consolidated financial statements of Holdings are as follows: (a) Hedstrom Corporation's Long-Term Debt does not include a $2.5 million note payable issued by Holdings in connection with its 1995 recapitalization, and the issuance of Senior Discount Notes valued at $24.1 million at March 31, 1998. (b) Hedstrom Corporation's stockholder's equity includes Holdings' stockholders' equity plus $21.6 million in proceeds from the issuance of Senior Discount Notes, which proceeds were contributed as equity by Holdings to Hedstrom Corporation less the interest, net of taxes, accrued thereon and as of both March 31, 1998 and December 31, 1997, the $2.5 million note payable described in (a) above less the interest, net of taxes, accrued thereon. (c) Accounts payable, interest expense, and deferred income taxes do not reflect the accrued interest, interest expense and the deferred tax benefit of accrued interest on the obligations discussed in (a) above. NOTE 8 - SUBSEQUENT EVENTS: On July 24, 1998 the Company acquired 100% of the outstanding shares of Backyard Products Limited, which has annual sales of approximately $13.9 million, is a leading Canadian manufacturer and supplier of wood gym sets and accessories. The purchase price of approximately $17.1 million was financed through an amendment to the Company's existing Senior Credit Facilities, which increased the Tranche B Term Loan to $65 million. The $30 million proceeds from the amendment was used to fund the acquisition as well as pay down borrowings under the revolving credit facility. The acquisition will be accounted for as a purchase; accordingly, the purchase price will be allocated to the underlying assets and liabilities based on their respective estimated fair values at the date of the acquisition. The estimated value of assets acquired was $7.5 million and the liabilities assumed was $4.2 million. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion of the Company's results of operations and financial condition should be read in conjunction with the consolidated financial statements of the Company and the notes thereto contained herein, as well as included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 as filed with the Securities and Exchange Commission. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such statements. These risks, which are further detailed below as well as included in the Registration Statement on Form S-1 of the Company and Hedstrom as filed with the Securities and Exchange Commission (File Nos. 333-32385-05 and 333-32385), include, but are not limited to, the Company's recent net losses, substantial leverage and debt service, financing restrictions and covenants, reliance on key customers, dependence on key licenses and obtaining new licenses, raw materials prices and product liability risks. In addition, such forward-looking statements are necessarily dependent upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Forward-looking statements can be identified by, among other things, the use of forward - looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "pro-forma," "anticipates" or intends' or the negative of any thereof, or other variations or comparable terminology, or by discussions of strategy or intentions. Given these uncertainties, undue reliance should not be placed on any forward-looking statements. The Company and Hedstrom disclaim any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. Results of Operations The following table sets forth net sales and gross profit for each of Hedstrom's operating divisions for the periods indicated: Three months Six Months Ended June 30, Ended June 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net sales Bedford Division....... $42.1 $27.8 $82.0 $58.7 Ashland Division....... 10.6 11.0 24.3 24.8 International Division.. 8.8 3.3 13.9 6.6 ERO Division............ 11.9 5.6 25.5 5.6 Amav Division........... 9.9 8.4 16.0 8.4 ----- ----- ------ ------ Total net sales $83.3 $56.1 $161.7 $104.1 ===== ===== ====== ====== Gross profit: Bedford Division........ $ 9.7 $ 7.8 $19.4 $16.2 Ashland Division........ 3.2 3.5 7.3 7.7 International Division.. 2.0 0.8 3.2 1.6 ERO Division............ 4.1 1.8 10.1 1.8 Amav Division........... 4.1 3.2 5.1 3.2 ----- ----- ----- ----- Total gross profit $23.1 $17.1 $45.1 $30.5 ===== ===== ===== ===== A comparison of the Company's results of operations for the three months and six months ended June 30, 1998 with the same period in 1997 is necessarily affected by the impact of the consummation of the acquisition of ERO on June 12, 1997. Due to the inclusion of ERO's results from and after June 12, 1997, management does not believe the comparison of operating results with the same period in 1997 is meaningful. Net Sales. Net sales for the second quarter ended June 30, 1998 increased to $83.3 million from $56.1 million for the comparable prior year quarter, an increase of $27.2 million. The increase was attributable to increased sales at the Bedford Division, the inclusion of the ERO and AMAV Divisions and increased sales at the International Division. Net sales of the Bedford Division increased by $14.3 million for the second quarter of 1998 versus the prior year comparable period. The Bedford Division increase was primarily a result of increased sales of trampolines due to the business acquired from Bollinger Industries, Inc. and increased gym set sales as a result of increased market share. The inclusion of the ERO and AMAV Divisions acquired in June 1997 resulted in an increase in net sales of $ 7.8 million for the quarter ended June 30, 1998 compared to the comparable period in 1997. The net sales of the International division increased to $8.8 million for the second quarter 1998 from $3.3 million in the comparable quarter of 1997. The International Division increase can be attributed to the acquisition of certain assets of a U.K. Manufacturer made during the first quarter of 1998. and sales associated with the acquisition of M.A. Henry Limited in August of 1997. Net sales for the Ashland Division for the second quarter of 1998 versus the second quarter of 1997 remained relatively unchanged. Net sales for the six months ended June 30, 1998 versus the six months ended June 30, 1997 increased to $161.7 million from $104.1 million an increase of $57.6 million. The increase was attributable to the inclusion of the ERO and AMAV Divisions and increased sales at the Bedford and International Divisions. The inclusion of the ERO and AMAV Divisions resulted in an increase in net sales of $27.5 million for the six months ended June 30, 1998 compared to the comparable period in 1997. Net sales of the Bedford Division increased by $23.3 million for the second quarter of 1998 versus the prior year comparable period. The Bedford Division increase is primarily a result of increased sales of trampolines due to the business acquired from Bollinger Industries, Inc. and increased gym set sales as a result of increased market share. The net sales of the International division increased to $13.9 million for the first six months of 1998 from $6.6 million in the comparable period of 1997. The International Division increase can be attributed to the acquisition of certain assets of a U.K. Manufacturer made during the first quarter of 1998 and sales associated with the acquisition of M.A. Henry Limited in August of 1997. Net sales for the Ashland Division for the first six months of 1998 versus the same period of 1997 remained relatively unchanged. Gross Profit. Gross profit for the second quarter ended June 30, 1998 increased by $6.0 million to $23.1 million as compared to $17.1 million for the quarter ended June 30, 1997 as a result of higher consolidated net sales. As a percentage of consolidated net sales, consolidated gross profit percentage decreased to 27.7% in the second quarter of 1998 from 30.5% for the second quarter of 1997. The decrease was primarily the result of the Bedford Division's gross profit margin decreasing to 23.0% for the second quarter of 1998, from 28.1% for the quarter ended June 30, 1997. The decline in the Bedford Division's gross profit percentage was due to increased sales of trampolines, which carry a lower overall gross profit margin, and decreased wood kit sales, which generally carry a higher overall gross margin. These unfavorable product sales mix items at the Bedford Division were partially offset by lower material costs. In addition, slight decreases in the gross margin percentage of the Ashland and International Divisions were offset by the inclusion of the ERO and AMAV Divisions whose combined gross profit margins of 37.6% for the second quarter ended June 30, 1998 were higher than the other divisions of Hedstrom. Gross profit for the six months ended June 30, 1998 increased by $14.6 million to $45.1 million as compared to $30.5 million for the six months ended June 30, 1997 as a result of higher consolidated net sales. As a percentage of consolidated net sales, consolidated gross profit percentage decreased to 27.9% for the six months ended June 30, 1998 from 29.3% for the comparable prior year period. The decrease was primarily the result of the Bedford Division's gross profit margin decreasing to 23.7% for the six months ended June 30, 1998, from 27.6% for the six months ended June 30, 1997. The decline in the Bedford Division's gross profit percentage was due to increased sales of trampolines, which carry a lower overall gross profit margin, and decreased wood kit sales, which generally carry a higher overall gross margin. These unfavorable product sales mix items at the Bedford Division were partially offset by lower material costs. The decrease in the consolidated gross profit percentage was partially offset by the inclusion of the ERO and AMAV Divisions, which had a higher gross profit margin of 36.6% for the six month period ended June 30, 1998, than the other divisions of Hedstrom. Gross profit margin at the Ashland Division for the six months ended June 30, 1998 decreased slightly to 30.0% from 31.0% versus the comparable period in 1997 due to unfavorable product sales mix. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $6.4 million to $ 15.9 million in the second quarter ended June 30, 1998 versus $9.5 million in the prior years second quarter. As a percentage of net sales, selling, general and administrative expenses increased to 19.1% from 16.8%. For the six months ended June 30, 1998 selling, general and administrative expenses increased $14.5 million to $30.7 million from $16.2 million in the six months ended June 30, 1997. Expressed as a percentage of sales, selling, general and administrative expenses increased to 19.0% from 15.6%. The increases for the three and six month periods ended June 30, 1998 were primarily due to the inclusion of the ERO and AMAV Divisions which experience relatively high selling, general and administrative expenses, and include the amortization of acquisition-related intangible assets and royalty expense. Interest expense. Interest expense for the three and six month periods ended June 30, 1998 versus June 30, 1997 increased as a result of the incurrence of Acquisition-related indebtedness. Income Tax Expense. Holdings effective tax rate for the quarter ended June 30, 1998 was 42.2% versus 37.7% for the quarter ended June 30, 1997. The effective tax rate for the six months ended June 30, 1998 was 41.7% compared to 37.1% for the prior year comparable period. The increase was attributable to the acquisition of ERO, which generated a large amount of non-deductible goodwill. Liquidity and Capital Resources of the Company Working Capital and Cash Flows Net cash provided from the operating activities was $3.5 million for the six months ended June 30, 1998. The cash provided by operations reflects the seasonal nature of sales. The ERO and Amav Divisons Sales and Accounts Receivable build during the second half of the year and are liquidated in the first half of the following year. The Bedford, Ashland and International Divisions build Sales and Accounts Receivable during the first half of the year and liquidate during the second half of the year. Net cash used for investing activities was $11.5 million during the six months ended June 30, 1998, including $5.0 million used for the acquisition of property, plant and equipment, $3.0 million of contingency payments relating to the ERO Acquisition as discussed in Note 2 and $3.5 million used to purchase certain assets of a United Kingdom Manufacturer. Net cash provided for financing activities was $4.4 million representing net proceeds on the Companies revolving loan to fund operating cash requirements of $8.7 million offset by the $4.3 million of principal payments on the Companies term loans. Liquidity Interest payments on the Senior Subordinated Notes and interest and principal payments under the Senior Credit Facilities, as detailed in the Registration Statements, represent significant cash requirements for the Company. The senior subordinated notes require semiannual interest payments of $5.5 million commencing in December 1997. Borrowings under the Senior Credit Facilities will bear interest at floating rates and will require interest payments on varying dates depending on the interest rate option selected by the Company. Borrowings under the Senior Credit Facilities consisted of $110 million under the Term Loan Facilities, comprised of a $75 million Tranche A Term Loan maturing in 2003 and a $35 million Tranche B term loan maturing in 2005 (subsequent to June 30, 1998 the Tranche B Term Loan was amended to $65 million to allow for the acquisition of Backyard Products Limited, see further discussion at Note 8 of the Notes to Consolidated Financial Statements.) In addition, the Senior Credit Facilities include a $70 million Revolving Credit Facility. At present, the Discount Notes do not require cash interest payments. Rather, principal will accrete to an aggregate principal amount of $44.6 million on June 1, 2002. Commencing on such date, Holdings will be required to make semiannual interest payments of $2.7 million. The Company's remaining liquidity demands will be for capital expenditures and for working capital needs. For the foreseeable future, the Company expects that its capital expenditures will be limited primarily to maintaining existing facilities and equipment and completing its insourcing of manufacturing certain components. The Company's credit agreement imposes an annual limit of $10.0 million on its capital expenditures and investments (subject in any given year to a roll-over of up to $4.0 million of unused capital expenditure capacity from the previous year). In addition, the Company may incur expenditures in order to achieve certain anticipated cost savings. The Company's primary sources of liquidity are cash flows from operations and borrowings under the Revolving Credit Facility. As of June 30, 1998, approximately $21.3 million was available to the Company as cash and available borrowings under the Revolving Credit Facility (subject to borrowing base limitations). Management believes that cash generated from operations, together with borrowings under the Revolving Credit Facility, will be sufficient to meet the Company's working capital and capital expenditures needs for the foreseeable future. Year 2000 Date Conversion The Company recognizes the need to ensure that its operations will not be adversely impacted by year 2000 software failures. The company has established processes for evaluating and managing the risks and costs associated with the problem and is currently in the process of implementing necessary changes. It is anticipated that implementation will be completed by February 1999. The additional cost of achieving Year 2000 compliance is estimated to be approximately $500,000 and will be incurred through December 1999. The Company is in the process of conducting an additional assessment of certain year 2000 issues on their manufacturing equipment, time based operating equipment and significant suppliers which will be completed during 1999. It is anticipated that corrective action, if any, will be made by year 2000. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is currently involved in several lawsuits arising in the ordinary course of business. The Company maintains insurance covering such liability, and does not believe that the outcome of any such lawsuits will have a material adverse effect on the Company's financial condition. Item 6. Exhibits and Reports on Form 8-K a) Exhibits (1) 2.1 - Agreement and Plan of Merger, dated as of April 10, 1997, among Hedstrom Corporation, HC Acquisition Corp. and ERO, Inc. (1) 3.1 - Restated Certificate of Incorporation of Hedstrom Holdings, Inc., as filed with the Secretary of State of the State of Delaware on October 27, 1995. (1) 3.2 Certificate of Amendment of Restated Certificate of Incorporation of Hedstrom Holdings, Inc., as filed with the Secretary of State of the State of Delaware on June 6, 1997. (1) 3.3 - Restated Bylaws of Hedstrom Holdings, Inc. (1) 3.4 - Certificate of Incorporation of New Hedstrom Corp., as filed with the Secretary of State of the State of Delaware on November 20, 1990. (1) 3.5 - Certificate of Amendment of the Certificate of Incorporation of New Hedstrom Corp., as filed with the Secretary of State of the State of Delaware on January 14, 1991. (1) 3.6 - By-Laws of Hedstrom Corporation. (1) 4.1 - Indenture, dated as of June 1, 1997, among Hedstrom Corporation, Hedstrom Holdings, Inc., the Subsidiary Guarantors identified on the signature pages thereto and IBJ Schroder Bank & Trust Company, as Trustee. (1) 4.2 - Form of Old Senior Subordinated Note. (1) 4.3 - Form of New Senior Subordinated Note. (1) 4.4 - Indenture, dated as of June 1, 1997, among Hedstrom Holdings, Inc. and United States Trust Company of New York, as Trustee. (1) 4.5 - Form of Old Discount Note. 10.1 - Stock Purchase Agreement, dated July 24, 1998 by and between Hedstrom Corporation and Richard Boyer. 10.2 - Amendment Number Three dated July 24, 1998 to the Credit Agreement, dated as of June 12, 1997, among Hedstrom Corporation, Hedstrom Holdings, Inc., the financial institution party thereto and Credit Suisse First Boston, as agent. 11.1 - Computation of Earnings Per Share. 27.1 - Financial Data Schedule. (1) Incorporated by reference to the respective exhibit to Holdings' and Hedstrom's Registration Statement on Form S-1 (File Nos. 333-32385-05 and 333-32385). b) Reports on Form 8-K The registrant has not filed any reports on Form 8-K during the quarter. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. Date: August 13, 1998 HEDSTROM HOLDINGS, INC. HEDSTROM CORPORATION /s/ David F. Crowley David F.Crowley Chief Financial Officer EX-10.1 2 Execution Copy STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (the "Agreement") is made and entered into this 24th day of July, 1998 by and between Hedstrom Corporation, a Delaware corporation (the "Purchaser") and Richard Boyer, an individual residing at 21 Grandbridge Drive, West Montrose, Township of Woolwich, Regional Municipality of Waterloo, Ontario N0B2V0 (the "Seller")and the individuals whose names are set forth on schedule I annexed hereto (the Seller and such individuals are hereinafter referred to collectively as the "Sellers"). RECITALS: A. Sellers own 100 Common shares, 1000 Class A Preference Shares and 11000 Class B Preference Shares (the "Shares") in the capital of Backyard Products Limited., an Ontario corporation (the "Company"), constituting all the issued and outstanding shares in the capital of the Company; B. Sellers desire to sell the Shares to Purchaser, and Purchaser desires to purchase the Shares from Sellers, all on the terms and subject to the conditions set forth herein; THEREFORE, Purchaser and Sellers agree as follows: ARTICLE I SALE OF SHARES AND CLOSING 1.1 Purchase and Sale of Shares. Subject to the terms and conditions of this Agreement, Sellers agree to sell the Shares to Purchaser and Purchaser agrees to purchase the Shares from Sellers. 1.2 Purchase Price. Subject to adjustment as provided in Section 1.2(b), Purchaser shall pay to Sellers, on the Closing Date, the amount of $ 24,785,767 in cash in consideration () for the sale of the Shares (the "Unadjusted Purchase Price"), allocated amongst the Sellers in accordance with Schedule I. (ba) If, for the fiscal year ending August 31, 1998, the Company's earnings before interest expense, taxes, depreciation and amortization (determined in accordance with Section 1.3) (the "Company's 1998 EBITDA") is other than $3,813,195, the Unadjusted Purchase Price will be increased or decreased, as appropriate, by an amount equal to 6.5 times that excess or deficiency. Seller shall be responsible to pay any deficiency and Purchaser shall be responsible to pay any excess. The party required to make any payment due under this Section 1.2(b) shall make that payment to the other party in immediately available funds not more than three days after the determination of the Company's 1998 EBITDA. The Unadjusted Purchase Price, as adjusted pursuant to this Section 1.2(b), constitutes the "Purchase Price" for the Shares. 1.3 Determination of the Company's 1998 EBITDA. (a) As promptly as practicable after August 31, 1998 (but in no event more than 90 days thereafter), Purchaser will deliver to Seller a certificate prepared and executed by Purchaser's chief financial officer setting forth the calculation by Purchaser of the Company's 1998 EBITDA in sufficient detail to permit Seller and its independent auditors to verify that calculation. Within 15 days after Seller's receipt of Purchaser's calculation of the Company's 1998 EBITDA, Seller shall provide Purchaser with written notice (in reasonable detail) indicating whether Seller disagrees with the calculation of the Company's 1998 EBITDA. If Seller fails to object in writing to the calculation of the Company's 1998 EBITDA within that 15-day period, Seller will be deemed conclusively to have agreed to that calculation, which thereafter shall be deemed to be the "Company's 1998 EBITDA." 1. (b) Within 15 days after Purchaser's receipt of notice of Seller's disagreement with the calculation of the Company's 1998 EBITDA, Purchaser and Seller will cause their independent auditors to begin good faith negotiations to resolve such disagreement. If the disagreement is resolved within the 15-day period, the Company's 1998 EBITDA amount agreed to by Seller's and Purchaser's independent accountants shall be deemed conclusively to be the Company's 1998 EBITDA. If the independent auditors are unable to resolve Seller's disagreement within 15 days after such negotiations begin, such disagreement will be submitted to the Settlement Auditor (as defined below) for resolution. Purchaser and Seller will cooperate, and will cause their respective independent auditors to cooperate, with the Settlement Auditor and will proceed in good faith to cause the Settlement Auditor to resolve such disagreement not later than 15 days after the engagement of the Settlement Auditor. Purchaser and Seller each will pay one-half of the fees and expenses of the Settlement Auditor. "Settlement Auditor" shall mean Ernst and Young, Toronto office, or if such firm is unable or unwilling to serve as Settlement Auditor, such other of the "Big Six" nationally recognized independent auditing firms (other than the accounting firms regularly engaged by Purchaser, Seller, the Company, or any Subsidiary) that Purchaser and Seller may agree upon. (c) The Settlement Auditor, in its sole discretion, will determine (i) the nature and extent of the participation by Purchaser, Seller and their respective independent auditors in connection with the resolution of any disagreement submitted to the Settlement Auditor, (ii) the nature and extent of the information that Purchaser and Seller may submit to the Settlement Auditor for consideration in connection with such resolution and (iii) the personnel of the Settlement Auditor who will review such information and resolve such disagreement. The Settlement Auditor's resolution of any such disagreement will be reflected in a written report which will be delivered promptly to, and will be final and binding upon, Purchaser and Seller. The Company's 1998 EBITDA will be adjusted to reflect the Settlement Auditor's determination and, as adjusted, will be deemed to be the Company's 1998 EBITDA. (d) In connection with the determination of the Company's 1998 EBITDA, Purchaser and its independent auditors, assisted by the Company's employees and observed by Seller and his representatives, shall conduct a physical inventory as of August 31, 1998. Purchaser will cause its independent auditors (i) to provide to Seller and his independent auditors copies of such work papers and other documents relating to the calculation of the Company's 1998 EBITDA as Seller and his independent auditors reasonably may request and (ii) cooperate with and be reasonably available to Seller and his independent auditors to provide such other information reasonably requested by Seller or his independent auditors concerning such calculation and the accounting and auditing issues relating to such calculation. (e) For the purposes of this Agreement the Company's 1998 EBITDA shall be determined by applying generally accepted accounting principles as applied in Canada("GAAP"). Schedule 1.3 sets forth certain accounting matters to which Purchaser and Seller agree, subject to only the memo of July 1, 1998 being in accordance with GAAP. 1.4 Closing. (a) The Closing will take place at the offices of Gowling, Strathy and Henderson, at 9:00 a.m., local time on July 31, 1998,(the "Closing Date") or at such other place and at such other time as Seller and Purchaser may agree in writing. (b) At the Closing, Purchaser shall deliver to Sellers (i) via wire transfer of immediately available funds, cash in the amount of the Unadjusted Purchase Price less $2,220,000 (the "Hold-Back Amount"), which will be retained by Purchaser in accordance with the Escrow Agreement attached as Exhibit A and (ii) such documents and instruments required to be delivered by Purchaser pursuant to this Agreement. (c) At the Closing, Sellers will deliver to Purchaser (i) a certificate or certificates representing all the Shares in appropriate form for transfer to Purchaser or accompanied by stock powers duly executed in blank and (ii) such other documents and instruments required to be delivered by Sellers pursuant to this Agreement and as otherwise reasonably required by Purchaser to complete the transactions contemplated hereby. ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER The Seller and the Sellers, as the case may be, hereby represent and warrant to Purchaser as follows: 2.1 Residence of Seller. Sellers are individuals and a trust residing in the Province of Ontario. 2.2 Authority. Sellers have all requisite power and authority to enter into this Agreement and the other agreements to be entered into in connection herewith and to perform their obligations hereunder and thereunder. This Agreement has been duly and validly executed and delivered by Sellers and constitutes legal, valid and binding obligations of Sellers, enforceable against them in accordance with its terms and does not violate the terms of any other agreement to which they are a party. 2.3 Organization of the Company; No Subsidiaries. The Company is a corporation duly organized and validly existing under the laws of its province of incorporation and has all requisite corporate power and authority to own, lease and operate its assets and carry on its business as it is now being conducted. The Company does not own or have any interest in the capital stock of any other company. Schedule 2.3 lists all jurisdictions in which the Company is duly qualified as a foreign corporation, and the Company is in good standing in each such jurisdiction, and there are no other jurisdictions in which the ownership, leasing or use of its assets or the conduct or nature of businesses make such qualification necessary. The Company is a private company(as that term is defined in the Securities Act (Ontario)). 2.4 Capital Stock of the Company. The authorized capital stock of the Company consists of an unlimited number of common shares and an unlimited number of Class A Preference Shares and unlimited member of Class B Preference Shares , of which the Shares are the only shares issued and outstanding. The Shares are duly authorized, validly issued, fully paid and nonassessable, and have not been issued in violation of any preemptive or similar rights. Sellers are the owners of record and beneficially of the Shares, free and clear of all mortgages, pledges, encumbrances, security interests, charges, agreements or claims of any kind (collectively, "Liens). There are no authorized or outstanding options, warrants, calls, subscriptions or rights, commitments or other agreements of any kind to purchase shares in the capital of the Company or to cause the Company to issue any shares or securities convertible into or exchangeable or exercisable for any shares. There are no authorized or outstanding securities of the Company convertible into or exchangeable or exercisable for any shares in the capital of the Company. There are no agreements or understandings to which the Sellers or the Company are parties ,or by which it or they are bound with respect to the voting, sale or transfer of the Shares. Upon delivery of the Shares against payment therefor in accordance with this Agreement, Purchaser will acquire good and marketable title to the Shares, free and clear of any and all Liens. 2.5 Intentionally Omitted 2.6 Consents and Approvals. (a) Neither Sellers nor the Company is required to make any filing with, or to obtain any permit, authorization, consent or approval of or from, any governmental authority as a condition to the consummation of the transactions contemplated by this Agreement. The execution, delivery of this Agreement by Sellers does not, and the performance by Sellers of its obligations under this Agreement will not: (i) conflict with or result in a breach of any of the terms, conditions or provisions of the articles of incorporation or bylaws of the Company; (ii) except as set forth in Schedule 2.6, conflict with or constitute a default under, or give rise to any right to terminate, cancel, modify or accelerate, or to the loss of any material right under, any contract, agreement, license, mortgage, note, debenture or other evidence of indebtedness to which Seller or the Company is a party or by which any of their respective properties may be bound; (iii) violate any term or provision of any law, rule or regulation or any permit, concession, grant, franchise, license, writ, judgment, decree, injunction, order or ruling of any court or governmental or regulatory authority applicable to Seller or the Company; (iv) result in the creation or imposition of any Lien upon Sellers, the Company or any of their respective assets; or (v) require the consent or approval of any third party. (b)Competition Act. The Company does not have assets in Canada that exceed, in the aggregate, $35 million in aggregate value or does not have gross revenues from sales in, from or into Canada that exceed, in the aggregate, $35 million in value, determined for purposes of and in the manner prescribed by the Competition Act (Canada). 2.7 Financial Statements; Contingent Liabilities. (a) Schedule 2.7 contains true, correct and complete copies of (i) the unaudited balance sheets of the Company at August 31, 1996 and 1997 and the related unaudited statements of income, stockholder's equity and cash flows of the Company for the years ended August 31, 1996 and 1997, together with the notes related thereto and the reviews thereof of KPMG; and (ii) the unaudited balance sheet of the Company at June 30, 1998 (the "Interim Balance Sheet") and the related unaudited statements of income, stockholder's equity and cash flows for the 10-month period ended June 30, 1998. The foregoing financial statements have been prepared in accordance with GAAP and present fairly the financial position of the Company at the respective dates thereof and the related results of operations and cash flow and changes in shareholder's equity of the Company for the respective periods covered thereby except, with respect to the unaudited interim financial statements, for normal recurring year-end audit adjustments and the absence of notes. (b) All debts, obligations and other liabilities (whether absolute, accrued, contingent, fixed or otherwise) (collectively, "Liabilities") of the Company (i) are fully reflected and quantified in, or reserved against on the Interim Balance Sheet (or are disclosed in the notes thereto) or (ii) were incurred in arms' length transactions in the ordinary course of business since the date of the Interim Balance Sheet and through the date of this Agreement and do not exceed $1,000,000 individually,with respect to trade payables or (iii) were incurred after the date of this Agreement in transactions permitted by Section 4.5 hereof. 2.8 Absence of Changes. Except as set forth in Schedule 2.8, since August 31, 1997, the Company has conducted business only in the ordinary course of business and consistent with past practices and, since August 31, 1997, there has not been (i) any material adverse change in the condition, financial or otherwise, business, assets, properties or results of operations of the Company taken as a whole, or any event, occurrence or circumstance that could reasonably be expected to result in such a material adverse change, (ii) any event which, if it had taken place after the execution of this Agreement, would not have been permitted by Article IV hereof, or (iii) any condition, event or occurrence which could reasonably be expected to prevent, hinder or materially delay the ability of the Company to consummate the transactions contemplated by this Agreement. Without limiting the generality of the foregoing, since August 31, 1997, there has not been: (a) any declaration, setting aside, or payment of any dividend or distribution (whether in cash, securities, property or a combination thereof) in respect of any of the shares in the capital of the Company or any direct or indirect redemption, purchase, or other acquisition by the Company of any shares in the capital of the Company or of any interest in or right to acquire any such shares; (b) (i)except for the payment of a deferred bonus to the Seller in February, 1998, any employment, deferred compensation, or other salary, wage, or compensation contract entered into between the Company or any subsidiary and any of its officers, directors, employees, agents, consultants or representatives; (ii) any increase in the salary, wages, or other compensation, whether current or deferred, of any officer, director, employee, agent, consultant or representative of the Company or any subsidiary other than increases in the ordinary course of business and consistent with past practice and not resulting in an increase of more than 25% of the respective salary, wages, or other compensation of any such person, or (iii) any creation of Plans (as defined in Section 11.3(p) hereof) or any contribution to (other than required contributions in the ordinary course of business and consistent with past practice), or amendment or modification of, any Plans; (c) any issuance, sale, or other disposition by the Company of any debenture, note, share, or other security of the Company, or any modification or amendment of any of the foregoing (or any contract pursuant to which such securities were issued or such Liabilities were incurred); (d) any Liability incurred by the Company for borrowed money or for the deferred and unpaid purchase price of goods or services (other than trade payables incurred in the ordinary course of business and consistent with past practice); (e) any Liability incurred by the Company in any transaction not involving the borrowing of money which Liability individually or in the aggregate could subject the Company to liability for an amount in excess of $1,000,000, as to trade payables; (f) any mortgage or pledge of, or the creation of any Lien on, any assets of the Company securing Liabilities of the Company or another person in an amount in excess of $5,000,000; (g) any damage, destruction or loss (whether or not covered by insurance) (a "Casualty Event") of any assets having a replacement value, individually or in the aggregate, in excess of $50,000.00 or, regardless of the replacement value of the assets involved, any Casualty Event that has had or could reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), assets, results of operations or prospects of the Company taken as a whole; (h) any material change in any financial reporting, tax, or accounting practice or policy followed by the Company or in any assumption underlying such a practice or policy, or in any method of calculating any bad debt, contingency, or other reserve for financial reporting purposes or for any other tax or accounting purposes; (i) any material payment, prepayment, discharge, or satisfaction by the Company of any Lien or Liability other than Liens or Liabilities that were paid, discharged, or satisfied in the ordinary course of business and consistent with past practice; (j) any material cancellation of any Liability owed to the Company by any other person (other than trade credit concessions made in the ordinary course of business and consistent with past practice); (k) any material write-off or write-down of, or any determination to materially write off or write down, the assets of the Company or any portion thereof; (l) any sale, transfer, or conveyance of any material assets of the Company except dispositions of obsolete inventory or equipment or dispositions of inventory in the ordinary course of business and consistent with past practice; (m) any amendment, termination, waiver, disposal, or lapse of, or other failure to preserve, any license, permit, or other form of governmental authorization of the Company , the result of which individually or in the aggregate has had or could have a material adverse effect on the business, condition (financial or otherwise), assets, results of operations or prospects of the Company taken as a whole; (n) any sale, transfer, conveyance or lapse of any interest in any material franchise, patent, trademark, trade name, copyright, license or similar intangible asset of the Company used or useful in their businesses as now conducted; (o) any transaction or arrangement under which the Company paid, lent, advanced or invested any amount to or in respect of, or sold, transferred, or leased any of its assets or any services to, (i) Seller, (ii) any officer or director of the Company or of any affiliate of Seller; (iii) any affiliate of Seller, or the Company or of any such officer or director, or (iv) any business or other person in which Seller, the Company, any such officer or director, or any such affiliate has any material interest, except for payments of salaries, wages and other employee benefits to officers or directors of the Company or any subsidiary in the ordinary course of business and consistent with past practice and except for advances made to, or reimbursements of, officers or directors of the Company for travel and other business expenses in reasonable amounts in the ordinary course of business and consistent with past practice; (p) any amendment of, any failure to perform any of its obligations under, any default under, any waiver of any right under, or any termination (other than on the stated expiration date) of, any contract that involves or may reasonably be expected to involve the annual expenditure or receipt by the Company or any subsidiary of more than $50,000.00 or that individually or in the aggregate is material to the business, condition (financial or otherwise), assets, results of operations or prospects of the Company taken as a whole; (q) any amendment to the articles or certificate of incorporation or bylaws of the Company or any subsidiary; (r) any expenditure or commitment for additions to property, plant, equipment, or other tangible or intangible capital assets of the Company or any subsidiary, which expenditure or commitment exceeds $750,000.00, individually or in the aggregate; or (s) any agreement or commitment to take any of the actions that should be disclosed as exceptions to this Section 2.8. 2.9 Taxes. Except as disclosed in Schedule 2.9: (a) Adequate provision has been made by the Company in the Interim Balance Sheet for any Taxes due and unpaid at the date of the Interim Balance Sheet and any Tax installments due in respect of the current taxation year of the Company. Except to the extent reflected or reserved against in the Interim Balance Sheet, the Company is not liable for any Taxes, covering all past periods through the 1997 fiscal year. Canadian federal and provincial income tax assessments or reassessments have been received by the Company covering all past periods through the 1997 fiscal year, and the Company has paid all such assessments and reassessments, or where permitted by law, security therefor has been provided. There are no notices of objection or appeals outstanding with respect to any assessment, reassessment or determination of the Company by any Tax Authority. There are no actions, suits, investigations, claims or other proceedings pending or, to the best of the Seller's knowledge, after due inquiry, threatened, against the Company in respect of any Taxes, and there are no facts or circumstances known to the Seller, or to the best of Seller's knowledge, acts, omissions, events, transactions or series of transactions (including the transactions contemplated by this Agreement) occurring wholly or partly on or before the Time of Closing, which could, or are likely to, give rise to any such actions, suits, audits, proceedings, investigations or claims. There are no agreements, waivers or other arrangements providing for an extension of time with respect to the filing of any Tax return or the payment of any Taxes by the Company. Purchaser acknowledges that Revenue Canada shall be proceeding with a standard GST audit of the Company in July, 1998. (b) The Company has on a timely basis filed all Tax returns, information returns, elections or designations in respect of any Taxes required to be filed by them under any Tax legislation. No such filing has contained any material misstatement or omitted any statement of material fact that should have been included therein. The Company has not and is not required to file any Tax returns, information returns or designations in any jurisdiction outside Canada, provided, however, a United States tax information return. (c) The Company has withheld and remitted to the proper authority, or where permitted by law, provided security for, on a timely basis and in a form required under the appropriate Tax legislation all amounts in respect of Taxes, including Canadian pension plan contributions, employment insurance premiums and any other deductions, required to be withheld and remitted by them. (d) There is no deductible outlay or expense owing by the Company to a person with whom it was not dealing at Arm's Length at the time the outlay or expense was incurred which is unpaid and which will be included in the Company's income for any taxation year ending on or after the Closing Date. (e) The Company does not have any loans in excess of $10,000, or indebtedness outstanding which have been made to shareholders, directors, officers or employees, or former shareholders, directors, officers or employees of the Company, or to any person or corporation not dealing at Arm's Length with the Company. (f) The Company is a registrant for purposes of the ETA and its registration number for purposes of goods and services tax is 137839304 RT. (g) The Company has not, directly or indirectly, transferred property to or acquired property from a person with whom the Company was not dealing at Arm's Length for consideration other than consideration equal to the fair market value of the property at the time of the disposition or acquisition thereof. (h) All of the interest which has been paid or is payable by the Company in respect of its current liabilities and long-term debt is deductible in calculating the Company's income for tax purposes. (i) The Company is not a financial institution within the meaning of the ETA. (j) The Company is not a party to any elections made under the ETA. 2.10 Litigation. Except as disclosed in Schedule 2.10: (a) There are no actions, suits, investigations, arbitrations, or proceedings pending, or, to the knowledge of Seller or the Company, threatened, against Seller or any of his assets that questions the validity or enforceability of this Agreement or that could have an adverse effect on the ability of Seller to perform its obligations hereunder. (b) There are no actions, suits, investigations, arbitrations, or proceedings pending, or, to the knowledge of Seller , threatened, against the Company or any of its assets or which questions the safety, reliability or suitability of any of the Company's products. (c) There are no writs, judgments, decrees, injunctions, or similar orders of any court or governmental or arbitral authority outstanding against the Company or any of its respective assets. 2.11 Compliance With Laws. Except as disclosed in Schedule 2.11, since August 31, 1995 the Company has not been in violation (or with or without notice or lapse of time or both would be in violation) of any term or provision of any applicable law, rule or regulation (including without limitation any Environmental Law, as defined in Section 11.3) or any writ, judgment, decree, injunction, or similar order applicable to such entity or any of its assets. Without limiting the generality of the foregoing the Company has duly and validly filed or caused to be filed all reports, statements, documents, registrations, filings, or submissions that were required by applicable law, rule or regulation to be filed with any court or other governmental authority. All such filings complied with applicable laws, rule or regulation in all material respects when filed and to the knowledge of Seller and the Company, no deficiencies have been asserted by any person with respect to any such filings. 2.12 Employment Matters; Pension and Benefit Plans. (a) Employment Matters (i) Schedule 2.12 sets forth a true and complete list of all directors, officers and salaried employees of the Company, their respective positions, current salaries, benefits and other remuneration and indicating which officers and employees are parties to a written or oral agreement with the Company (including confidentiality and non-competition agreements). Except as disclosed in Schedule 2.12, the Company is not a party to any agreement with former or present officers, employees, agents or independent contractors in connection with the business of the Company. (ii) The Company has no obligation to reinstate any former officer or employee of the Company. (iii) There are no oral contracts of employment entered into with any officers or employees employed by the Company which are not terminable in accordance with applicable law. The Company has not entered into any agreement with any officer or employee employed by the Company with respect to termination of employment, and no officer or employee employed by the Company has indicated his or her intention to resign. (iv) There has been no material change in the directors, officers and salaried employees of the Company, their positions or the terms and conditions of their employment since August 31, 1997 which is not identified in Schedule 2.12, and no such change is anticipated. (v) All wages, salaries, vacation pay, bonuses, commissions and other emoluments relating to the Company's business or the directors, officers and employees of the Company are reflected and accrued in the records of the Company , except with respect to vacation pay, for which no accrual is provided for salaried employees. Such vacation pay is expensed as incurred and will be reflected appropriately in the Company's 1998 EBITDA. (vi) The Company has withheld from each payment made to any of their directors, officers and employees, and their former directors, officers and employees, the amount of all Taxes and other deductions (including income taxes, pension plan, unemployment insurance and disability contributions) required to be withheld, and have paid the same together with the employer's share of same, if any (to the extent required to be paid so that no such amount is past due), to the proper Tax and other receiving officers within the time required under applicable legislation. (vii) There are no outstanding, pending, or to the best of the Seller's knowledge, threatened or anticipated assessments, actions, causes of action, claims, complaints, demands, orders, prosecutions or suits against the Company, or their former or present directors, officers or agents pursuant to or under any applicable law, statutes, rules, regulations, ordinances or orders, including social security, unemployment insurance, income tax, employer health tax, employment standards, labor relations, occupational health and safety, human rights, worker's compensation and pay equity. (viii) The Company has not made any agreement, directly or indirectly, with any labor union, employee association or other similar entity or made commitments to or conducted negotiations with any labor union or employee association or other similar entity with respect to any future agreements. No trade union, employee association or other similar entity holds any bargaining rights with respect to any of the employees of the Company acquired by certification, interim certification, voluntary recognition, designation or successor rights, or has applied to be certified as the bargaining agent of the employees of the Company. The Seller is not aware of any current attempts to organize or establish any labor union, employee association or other similar entity affecting the Company or the Company's business. (ix) The Company has not experienced any strikes, work stoppages, claims of unfair labor practice or other material labor disputes. (x) To the best of the Seller's knowledge, after due inquiry, no officer or employee of the Company is eligible for short-term or long-term disability benefits. (xi) All of the officers and employees of the Company identified in Schedule 2.12 are in good standing under the terms and conditions of their employment, and the Seller is not aware of any problem or difficulty associated with any such officer or employee, or the employment of any such officer or employee. (b)Pension and Benefit Matters The Company does not maintain or provide Plans and has no liabilities under or to any Plans. Schedule 2.12 sets forth a true and complete list of all employee benefits of any kind including but not limited to health, life or disability insurance plans or programs, and with respect to such benefits there is no unfunded liability, solvency deficiency, unpaid regular or special payment, experience deficiency, whether due or not and the costs of such benefits are reflected or accrued in the records of the Company.. 2.13 Properties. (a) The Company does not own any real property. (b) Schedule 2.13(b) contains a true and complete list and description of all real property leased by the Company. The Company has a valid leasehold interest in all real property leased in connection with the business, operations, or affairs of the Company. No improvement on any leased real property encroaches upon any real property of any other person. The Company leases, or has a valid right under contract to use, adequate means of ingress and egress to, from and over all such real property. (c) Except as set forth as Schedule 2.13(c), the Company has good and marketable title to, or has a valid leasehold interest in or has a valid right under contract to use, all tangible personal property that is used in the conduct of the business, operations, or affairs of the Company, free and clear of all Liens (including without limitation the assets reflected on the Interim Balance Sheet which have not been disposed of since its date in the ordinary course of business and consistent with past practice). All such tangible personal property is in good operating condition and repair (reasonable wear and tear excepted), is suitable for its current uses and such property is, in the aggregate, adequate and sufficient for the operation of the business of the Company, as currently conducted at the current production level and conforms in all material respects to all applicable laws. (d) Schedule 2.13(d) contains a true and complete list and description of all registered (i) marks, names, trademarks, service marks, patents, patent rights, assumed names, logos, trade secrets, copyrights, trade names and service marks, and all applications in respect thereof, that are used in the conduct of the business, operations, or affairs of the Company and (ii) all computer software, programs and similar systems owned by or licensed to the Company or used in the conduct of the business, operations, or affairs of the Company. The Company has and, after the Closing, will have, the right to use, in the manner currently used by the Company, free and clear of any royalty or other payment obligations or other Liens, such intellectual property and computer software, programs and similar systems, except for such royalties, licensing fees or other payment obligations set forth in Schedule 2.13(d), subject to all standard licensing agreements with respect to the software programs licensed by the Company. The Company is not in conflict with or in violation or infringement of, nor has Seller or the Company received any notice of any conflict with or violation or infringement of or any claimed conflict with, any asserted rights of any other person with respect to any such intellectual property or computer software, programs, or similar systems. 2.14 Environmental Matters. Except as disclosed in Schedule 2.14: (a) The Company's business has been and is being carried on, and the Property is, in compliance with all applicable environmentally related common law and all Environmental Laws, Environmental Regulations and Environmental Orders. (b) No Environmental Permits are required for carrying on the Business as it is presently being conducted and as it is anticipated it will be conducted hereafter. (c) The Company has not used and does not use any of its facilities or permit them to be used to generate, manufacture, refine, treat, transport, handle, store, dispose, transfer, produce or process Hazardous Waste. (d) The Company has not received any written or oral notice of any alleged violation of any Environmental Laws or other damage to the environment or human health emanating from or occurring on the Property or any of the facilities of the Company situated on the Property and to the best of the Seller's knowledge, after due inquiry, no fact or circumstance exists which would give rise to such a claim. (e) The Company does not own or operate, and the Seller has no knowledge of, any underground storage tanks under the Property or any of the facilities of the Company. (f) There is no radon at levels deemed unacceptable by any health, labor or environmental authority of any Authority present at, on, in or under, or discharged or emitted from the property or any of the facilities of the Company situated on the Property. (g) The Company has not been convicted of an offense for non-compliance with any Environmental Laws, Environmental Regulations or Environmental Order or has been fined or otherwise sentenced or settled any prosecution short of conviction in connection with the Business. The Seller does not know, or have reasonable grounds to know, of any fact which could give rise to a notice of non-compliance with any Environmental Laws, Environmental Regulations or Environmental Orders. (h) The Company is not required to maintain environmental records relating to its business. The Company has not conducted an environmental audit of its business. (i) The Company has not caused or permitted, and the Seller does not have any knowledge of any predecessor having caused or permitted, the Release of any Hazardous Substances on or off-site from the place or places where the Company carries on the Business, and all wastes and substances disposed of, treated or stored by the Company or to the knowledge of Sellers, by any predecessor on or off-site such places of business, whether hazardous or non-hazardous, have been and are disposed of, treated and stored in compliance with all Environmental Laws, Environmental Regulations or Environmental Orders. 2.15 Contracts. Schedule 2.15 contains a true and complete list of each of the following contracts (whether or not in writing) or other documents or arrangements (true and complete copies, or, in the case of oral contracts or arrangements, written summaries of the terms, of which have been furnished to Purchaser), to which the Company is a party or by which any of its assets is or may be bound: (a) all employment, agency, consultation, or representation contracts or other contracts of any type (including without limitation agreements relating to loans or advances) with any present officer, director, employee, agent, consultant, or other similar representative (or any former officer, director, employee, agent, consultant or similar representative if there exists any present or future Liability with respect to such contract), other than contracts with consultants, agents and similar representatives who do not receive compensation of $35,000.00 or more per year; (b) all contracts with any person containing any stipulation, provision, or covenant limiting the ability of any person to compete with or to provide products or services to the Company or limiting the ability of the Company to (i) sell any products or services of any other person, (ii) transact business or engage in any line of business, or (iii) compete with or to obtain products or services from any person; (c) except with respect to trade payables incurred in the ordinary course of business, all contracts relating to the borrowing of money by the Company, relating to the deferred purchase price for property or services, or relating to the direct or indirect guarantee by the Company of any Liability that individually or in the aggregate exceeds $10,000.00, including, without limitation, any contract relating to (i) the maintenance of compensating balances that are not terminable without penalty upon not more than 60 calendar days' notice, (ii) any line of credit or similar facility, (iii) the payment for property, products, or services of any other person, or (iv) the obligation to take-or-pay, keep-well, make-whole, or maintain surplus or earnings levels or perform other financial ratios or requirements; (d) all contracts pursuant to which the Company has agreed to indemnify or hold harmless any person; (e) all leases or subleases of real property used in the business, operations, or affairs of the Company; (f) all contracts or arrangements (including, without limitation, those relating to allocations of expenses, personnel, services, or facilities) between or among the Company, or Seller or any affiliate of Seller; (g) all outstanding proxies, powers of attorney, or similar delegations of authority of the Company; (h) all collective bargaining or similar labor contracts; (i) all leases or subleases of personal property that involve the payment or potential payment, pursuant to the terms of such lease or sublease, by the Company of more than $10,000.00 per year (it being understood that any such leases not listed on Schedule 2.15 do not have an aggregate annual cost to the Company in excess of $10,000.00; (j) all other contracts that involve the payment or potential payment, pursuant to the terms of such contracts, by or to the Company of more than $10,000.00 individually or in the aggregate or that are otherwise material to the business, condition (financial or otherwise), results of operations or prospects of the Company. Each contract or arrangement disclosed or required to be disclosed in Schedule 2.15 is in full force and effect and constitutes a legal, valid and binding obligation of each party thereto, and to the best of Seller's knowledge enforceable against each party in accordance with its terms. Neither Seller nor the Company has received any notice, whether written or oral, of termination or intention to terminate from any other party to such contract. Neither the Company nor, to the knowledge of Seller and the Company, any other party to such contract is in violation or breach of or default under any such contract (or with or without notice or lapse of time or both, would be in violation or breach of or default under any such contract). 2.16 Licenses and Permits. Except as disclosed in Schedule 2.16, the Company owns or validly holds all licenses, franchises, permits, approvals, authorizations, exemptions, classifications, certificates, registrations and similar documents or instruments that are required for its business, operations and affairs. All such licenses, franchises, permits, approvals, authorizations, exemptions, classifications, certificates, registrations and similar documents or instruments are and will remain, immediately following the Closing, valid, binding and in full force and effect. 2.17 Insurance. Schedule 2.17 contains a true and complete list of all liability, property, workers compensation, directors and officers liability and other similar insurance contracts that insure the business, operations, or affairs of the Company or that affect or relate to the ownership, use, or operations of any of its assets. All such insurance is in full force and effect and copies of all such contracts have been made available to Purchaser. 2.18 Intercompany Liabilities. Except as disclosed in Schedule 2.18, (a) neither Seller nor any Affiliate of Seller or the Company provides or causes to be provided to the Company any products, services, equipment, facilities, or similar items and (b) there are no Liabilities between the Company and Seller or any other Affiliate of the Company or the Seller. Except as disclosed in Schedule 2.18, since the date of the Interim Balance Sheet, such intercompany Liabilities have been paid in the ordinary course of business and consistent with past practice. 2.19 Corporate Records. The minute books and corporate records of the Company contain complete and accurate records of all proceedings and actions taken at all meetings, or by written consent in lieu of meetings, of the stockholders and the Board of Directors and all authorized committees of the Board of Directors thereof. 2.20 Bank Accounts. Schedule 2.20 contains (a) a true and complete list of the names and locations of all banks, trust companies, securities brokers and other financial institutions at which the Company has accounts or safe deposit boxes or maintains banking, custodial, trading, or other similar relationships and (b) a true and complete list and description of each such account, box and relationship. 2.21 Warranties and Returns. Schedule 2.21 hereto sets forth a summary of present practices and policies followed by the Company with respect to guarantees, warranties, servicing, or repairs of any products manufactured or sold and services rendered by it, whether such practices are oral or in writing or are deemed to be legally enforceable. Except as set forth on Schedule 2.21 hereto, to the knowledge of Seller or of the Company, there are no written statements, citations, or decisions by any court, arbitrator, governmental authority or nationally recognized standards organization stating that any product actually sold by the Company is defective or unsafe or fails to meet any standards promulgated by any court, arbitrator, governmental authority or nationally recognized standards organization . Except as set forth on Schedule 2.21 hereto, there is not presently, nor has there been, any failure of a product sold by the Company such as to require, or which may require, a general recall or replacement campaign with respect to such product or a reformulation or change of such product. Except as set forth on Schedule 2.21 hereto, there is no (a) fact, known to the Seller, relating to any product of the Company that may impose upon the Company a duty to recall any such product or a duty to warn customers of a defect in any such product, (b) material design, manufacturing, or other defect, known to the Seller, in any such product, or (c) material liability for warranty claims, returns, or servicing with respect to any such product not fully reflected on the Interim Balance Sheet. 2.22 Customers and Suppliers. Schedule 2.22 sets forth (a) list of the Company's ten largest customers based on sales during the ten month period ending June 30, 1998, showing: (i) the approximate total sales by the Company to each such customer during such period, and (ii) current prices, anticipated volumes and principal terms and conditions of sale to each such customer respectively, and (iii) and the questions to be asked of each such customer pursuant to Section 4.3 and the Seller's anticipated answers; and (b) a list of the Company's ten largest suppliers for such periods, showing the approximate total purchases by the Company from each such supplier during each such period. Since August 31, 1997, there has not been any material adverse change in the business relationship of the Company with any material customer or supplier. Seller has no actual knowledge of the existence of any such material adverse change (whether as a result of the consummation of the transactions contemplated by this Agreement or otherwise). 2.23 Disclosure. No representation or warranty made by Seller in this Agreement, in the schedules hereto, or in any certificate furnished by Seller to Purchaser in connection with this Agreement or the transactions contemplated hereby contains any untrue statement of material fact or omits to state a material fact necessary to make the statements herein or therein not misleading in light of the circumstances under which they were made. 2.24 Residency. Each of the Sellers is not a non-resident of Canada within the meaning of the Tax Act. ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to Sellers as follows: 3.1 Organization. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 3.2 Corporate Authority. Purchaser has full corporate power and authority to enter into this Agreement and to perform its obligations hereunder. The Purchaser's execution and delivery of this Agreement and the performance of its obligations hereunder have been duly and validly authorized by all necessary corporate action on the part of Purchaser. This Agreement constitutes a legal, valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms. 3.3 Consents and Approvals. Purchaser is not required to make any filing with, or to obtain any permit, authorization, consent or approval of, any governmental authority as a condition to the lawful consummation of the transactions contemplated by this Agreement. The execution and delivery of this Agreement by Purchaser does not, and the performance by Purchaser of its obligations under this Agreement will not: (i) conflict with or result in a breach of any of the terms, conditions or provisions of the certificate of incorporation or bylaws of Purchaser; (ii) except as set forth in Schedule 3.3, conflict with or constitute a default under, or give rise to any right to terminate, cancel, modify or accelerate, any contract, agreement, license, mortgage, note, bond, debenture or other evidence of indebtedness to which Purchaser is a party or by which any of its assets may be bound; (iii) violate any term or provision of any law, rule or regulation or any permit, concession, grant, franchise, license, writ, judgment, decree, injunction, order or ruling of any court or governmental or regulatory authority applicable to Purchaser; or (iv) result in the creation or imposition of any Lien upon Purchaser or any of it assets. 3.4 Purchase for Investment. Purchaser is acquiring the Shares for its own account for investment purposes and not with a view to the distribution of the Shares. Purchaser has such knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investment in the Shares. Purchaser will not, directly or indirectly, dispose of the Shares except in compliance with applicable federal and state securities laws. ARTICLE IV COVENANTS OF SELLER Seller covenants and agrees with Purchaser as follows: 4.1 Contract and Regulatory Approvals. Seller will take and will cause the Company (a) to take all commercially reasonable steps necessary or desirable, and to proceed diligently and in good faith and to use all commercially reasonable efforts, to obtain as promptly as practicable all (i) approvals and consents of any person under all contracts to which the Seller or the Company is a party, or by which their respective assets may be bound, necessary to permit Seller to consummate the transactions contemplated hereby and (ii) all approvals, authorizations and clearances of governmental authorities required of the Seller or the Company to consummate the transactions contemplated hereby, (b) to provide such other information and communications to such governmental authorities as Purchaser or such authorities may reasonably request and (c) to cooperate with Purchaser in obtaining, as promptly as practicable, all approvals, authorizations and clearances of governmental authorities and other persons required of Purchaser to consummate the transactions contemplated hereby Without limiting the generality of the foregoing, Seller shall obtain the assignment by Boyer Investments Ltd. as Lessee of its lease dated April 4 , 1997 with D. Graeme Investments Ltd. as Lessor to the Company (the "Assignment") and the consent to the Assignment by Lessor (the "Consent"). The Assignment and Consent shall be in form and substance satisfactory to Purchaser. 4.2 Intentionally Omitted. 4.3 Investigation by Purchaser. Seller will provide and will cause the Company to provide, Purchaser, its counsel, accountants and other representatives (including its financing sources and their respective representatives) with full access, upon prior notice and during normal business hours, to all facilities, officers, employees, agents, accountants, assets and books and records of the Company and will furnish Purchaser and such other persons with all such information and data (including without limitation copies of contracts, Plans and other books and records) concerning the business, operations and affairs of the Company as Purchaser or any of such other persons reasonably may request. Not less than 24 hours before the Closing Date, Seller shall arrange for Purchaser to speak with the customers set forth on Schedule 2.22 in accordance with the procedure set forth on Schedule 2.22. 4.4 No Negotiations. Seller shall not initiate or encourage (including by way of furnishing information or assistance), or take any other action to facilitate, any inquiries or the making of any proposal that constitutes, or may be reasonably expected to lead to, any Company Acquisition Proposal (as defined below), or enter into discussions or negotiate with any person or entity in furtherance of such inquiries or to obtain a Company Acquisition Proposal, or authorize or permit any of the officers, directors or employees of Seller or the Company, or any investment bank, financial advisor, attorney, accountant or other representative of Seller or the Company to take any such action. With respect to any such inquires or proposals received after the date of this Agreement, Seller shall promptly notify Purchaser of all relevant terms of any such inquiries and proposals received by it or the Company or by any such officer, director, employee, investment banker, financial advisor, attorney, accountant or other representative relating to such matters, and if such inquiry or proposal is in writing, Seller shall deliver or cause to be delivered to Purchaser a copy of such inquiry or proposal. For purposes of this Agreement, "Company Acquisition Proposal" shall mean any of the following (other than the transactions between Seller and Purchaser contemplated hereunder) involving the Company: (i) any merger, consolidation, share exchange, business combination, or other similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 51 % or more of the assets or securities of the Company in a single transaction or series of transactions; or (iii) any acquisition, issuance or transfer of shares in the capital or other securities of the Company. 4.5 Conduct of Business. Seller will cause the Company to conduct its business only in the ordinary course and consistent with past practice. Seller will not take and will not permit the Company to take action that would cause the representations set forth in Article II hereof to be untrue at any date after the date hereof. Without limiting the generality of the foregoing: (a) Seller will use, and will cause the Company to use, all commercially reasonable efforts to (i) preserve intact the present business organization, reputation and customer relations of the Company, (ii) keep available the services of the present officers, directors, employees, agents, consultants and other similar representatives of the Company, and (iii) maintain in full force and effect all contracts, documents and arrangements referred to in Section 2.15 hereof; (b) Seller will, and will cause the Company to, (i) maintain all licenses, qualifications and authorizations of the Company to do business in each jurisdiction in which it is so licensed, qualified, or authorized, (ii) maintain all assets of the Company in good working order and condition, ordinary wear and tear excepted and (iii) continue all current marketing and selling activities relating to the business, operations and affairs of the Company; (c) Seller will cause the books and records of each of the Company to be maintained in a prudent manner; (d) Seller will cause the Company (i) to prepare properly and to file duly and validly all reports and all Tax Returns required to be filed with any governmental or regulatory authorities with respect to the business, operations, or affairs of the Company and (ii) to pay duly and fully all Taxes indicated by such Tax Returns or otherwise levied or assessed upon the Company or any of its assets and to withhold or collect and pay to the proper taxing authorities or hold in separate bank accounts for such payment all Taxes that the Company is required to so withhold or collect and pay, unless such Taxes are being contested in good faith and, if appropriate, reasonable reserves therefor have been established and reflected in the books and records of such entity and in accordance with GAAP; and (e) Seller will use, and will cause the Company to use, all commercially reasonable efforts to maintain in full force and effect substantially the same levels of coverage as the insurance afforded under the contracts listed in Schedule 2.17. (f) Seller will cause the Company to not declare or pay any dividends or other distributions to stockholders. 4.6 Financial Statements and Reports. (a) As promptly as practicable, Seller will deliver to Purchaser true and complete copies of the following: (i) the unaudited balance sheet of the Company as of the fiscal year ending August 31, 1998 and the related statements of income, shareholder's equity and cash flows of the Company for such year then ending and for the prior year, together with the notes relating thereto, which financial statements (and the notes relating thereto together with the Company's independent accountants report of review) will be prepared in accordance with GAAP and will present fairly the financial position of the Company as of each date thereof and the related results of operations and cash flow and changes in stockholder's equity of the Company for each period covered thereby. (ii) the unaudited balance sheet of the Company as of each month ending after the date of the Interim Balance Sheet up to and including August 31, 1998 and the related statements of income, shareholder's equity and cash flows of the Company for such month and the year-to date period then ending, which financial statements will be prepared in accordance with GAAP (except for the absence of notes) and will present fairly the financial position of the Company as of each date thereof and the related results of operations and cash flow and changes in shareholder's equity of the Company for each period covered thereby. (b) As promptly as practicable, Seller will deliver to Purchaser true and complete copies of such other material financial statements, reports, or analyses as may be prepared or received by Seller or any affiliate of Seller as relate to the business, operations, or affairs of the Company, including, without limitation, routine internal management reports and special reports (such as those prepared by the Seller's or the Company's consultants or advisers). 4.7 Employee Matters. (a) Except as may be required by law, rules or regulations, Seller will refrain, and will cause the Company to refrain, from directly or indirectly: (i) making any representation or promise, oral or written, to any officer, director, employee, agent, consultant, or other similar representative of the Company concerning any Plan; (ii) making any change to, or amending in any way, the contracts, salaries, wages, or other compensation of any officer, director, employee, agent, consultant, or other representative of the Company other than changes or amendments that (a) are made in the ordinary course of business and consistent with past practice, (b) do not and will not result in increases of more than 4% in the salary, wages, or other compensation of any such person and (c) do not and will not exceed, in the aggregate, 5% of the total salaries, wages and other compensation of all employees of such entity; (iii) adopting, entering into, amending, altering, or terminating, partially or completely, any Plans relating to or affecting any employee of the Company; (iv) adopting, entering into, amending, altering, or terminating, partially or completely, any employment, agency, consultation, or representation contract that is, or had it been in existence on the effective date of this Agreement would have been, required to be disclosed in Schedule 2.15; (v) entering into any contract with any officer, director, employee, agent, consultant, or other similar representative of the Company; (vi) assuming, entering into, amending, altering, or terminating any labor or collective bargaining agreement or contract to which the Company is a party or by which it is affected; (vii) hiring any officer, director, employee, agent, consultant, or other representative of the Company whose annual compensation exceeds $50,000; or (viii) implementing any termination of any employee except for cause or with Purchaser's consent. 4.8 Participation in Plans. [Intentionally Omitted] (a) 4.9 No Disposal of Property. Except as expressly permitted in this Agreement, Seller will cause the Company to refrain from (a) disposing of any assets of the Company and from permitting any of such assets to be subjected to any Liens, except for dispositions of assets in the ordinary course of business in the ordinary course of the business and consistent with past practice and except for non- consensual Liens imposed by operation of law, (b) entering into any contracts obligating the Company to administer or manage the operations of any other person and (c) entering into any contracts permitting any person other than the Company to administer or manage the operations of the Company. 4.10 No Breach or Default. Seller will cause the Company to refrain from violating, breaching, or defaulting and from taking or failing to take any action that (with or without notice or lapse of time or both) would constitute a violation, breach, or default, under any term or provision of any contract listed in Schedule 2.15 or which, if permitted by this Agreement to be entered into after the date of this Agreement would have been required to be listed in Schedule 2.15 if such representation had been made at the date of such contract. 4.11 No Acquisitions. Seller will cause the Company to refrain from (a) merging, consolidating, or otherwise combining or agreeing to merge, consolidate, or otherwise combine with any other person, (b) acquiring or agreeing to acquire all or substantially all assets or capital stock or other equity securities of any other person, or (c) otherwise acquiring or agreeing to acquire control or ownership of any other person. 4.12 Intercompany Liabilities. Seller will cause the Company to refrain from incurring any Liabilities between the Company and Seller or any affiliate of Seller (other than the Company) to be outstanding on the Closing Date. At or prior to the Closing, all such Liabilities shall be paid or otherwise settled in full. The Company will not enter into any contract or, except as required by any contract disclosed in Schedule 2.15, engage in any transaction with Seller or any Affiliate of Seller (other than the Company). Except as otherwise specifically provided herein, on the Closing Date Seller will terminate and will cause the Affiliates of Seller (other than the Company) to terminate each contract between the Company and Seller or any such Affiliate. 4.13 Resignations of Directors. Seller will cause such members of the boards of directors and such officers of the Company as are designated by Purchaser to tender, effective at the Closing, their resignations from such boards of directors or from such offices. If requested by Purchaser, Seller will cause the election of Purchaser's nominees to such boards of directors. 4.14 Tax Matters. Seller will refrain and will cause the Company to refrain from making, filing, or entering into (whether before or after the Closing) any election, consent, or agreement with respect to the Company or its assets. 4.15 Books and Records. On the Closing Date, Seller will deliver to Purchaser or will make available to Purchaser all books and records of the Company. If (at any time after the Closing) Seller discovers in its possession or under its control any other books and records of the Company, Seller will forthwith deliver such books and records to Purchaser. 4.16 Notice and Cure. Seller will notify Purchaser promptly in writing of and contemporaneously will provide Purchaser with true and complete copies of any and all information or documents relating to, any event, transaction, or circumstance occurring after the date hereof that causes or will cause any covenant or agreement of Seller under this Agreement to be breached or that renders or will render untrue any representation or warranty of Seller contained in this Agreement. Seller will use all commercially reasonable efforts to cure, before the Closing, (a) any such breach or misrepresentation and (b) any violation or breach of any representation, warranty, covenant, or agreement made by it in this Agreement, whether occurring or arising before or after the date hereof. 4.17 Recoveries. Seller shall pay to Purchaser (i) any net loss incurred in connection with foreign currency transaction described on Schedule 2.15 and (ii) the net loss, if any, from the litigations described on Schedule 2.10, such net loss be inclusive of legal fees and other costs incurred or received by the Company, as the case may be. ARTICLE V COVENANTS OF PURCHASER Purchaser covenants and agrees with Seller as follows: 5.1 Conduct of the Business. Following the Closing and through August 31, 1998 the Purchaser shall operate the business of the Company only in the ordinary course of business consistent with the past practices of the Company. 5.2 Recoveries. Purchaser shall pay to Seller (i) the net gain, if any, obtained in connection with the foreign currency transactions described on Schedule 2.15 and (ii) the net recovery, if any, from the litigations described on Schedule 2.10, such net recovery to be inclusive of legal fees and other costs incurred or received by the Company, as the case may be. ARTICLE VI CONDITIONS TO OBLIGATIONS OF PURCHASER The obligation of Purchaser to close the transaction of purchase and sale contemplated hereby is subject to the following conditions precedent each of which is for the exclusive benefit of Purchaser and may be waived by Purchaser in whole or in part: 6.1 Representations and Warranties. Each representation and warranty made by Sellers in this Agreement, in the certificates delivered by Sellers pursuant to this Agreement and in schedules hereto shall be true in all material respects on the date on which made and shall be true in all material respects on and as of the Closing Date as though such representation and warranty were made on and as of the Closing Date. 6.2 Performance. Seller shall have performed or complied with all its agreements, covenants and obligations required to be performed or complied with by this Agreement on or before the Closing Date. 6.3 Employment Agreement. The Company and Seller shall have entered into an Employment Agreement substantially in the form annexed hereto as Exhibit D. 6.4 No Injunctions. There shall not be in effect on the Closing Date any injunction or similar restraining order of any court or governmental authority of competent jurisdiction preventing either party from consummating any of the transactions contemplated by this Agreement nor shall there be any writ, injunction, decree or similar order or any court or governmental authority of competent jurisdiction that would impose any limitation on Purchaser's ability to exercise full rights of ownership of the Shares. 6.5 Consents and Authorizations. Each of the governmental and other approvals, consents, permits, or waivers listed in Schedule 3.3 including adequate financing to consummate this transaction contemplated hereby shall have been obtained on or before July 31, 1998 unless Purchaser on or before such date has waived such condition to its obligation to close and in Schedule 2.6 shall have been obtained and the Assignment and Consent shall have been obtained. 6.6 No Adverse Change. Except as disclosed in Schedule 2.8, since the date of the Interim Balance Sheet, there shall not have been, occurred, or arisen any change in, or any event (including without limitation any damage, destruction, or loss whether or not covered by insurance), condition, or state of facts of any character that individually or in the aggregate has or may reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), assets, results of operations or properties of the Company. 6.7 Opinion of Counsel. Seller shall have delivered to Purchaser the opinion, dated the Closing Date, of Gowling, Strathy & Henderson, counsel to Seller, to the effect set forth in Exhibit B hereto. 6.8 Officer's Certificates. Seller shall have delivered to Purchaser a certificate, dated the Closing Date , to the effect set forth in Exhibit C-1 hereto. In addition, Seller shall have delivered to Purchaser a certificate, dated the Closing Date and executed by the secretary or any assistant secretary of Company, to the effect set forth in Exhibit_C-2 hereto. 6.9 Resignations. Seller shall have delivered to Purchaser the written resignations of the directors and officers of the Company or requested by Purchaser. 6.10 Escrow Agreement. Purchaser and Seller shall have entered into the Escrow Agreement. ARTICLE VII CONDITIONS TO OBLIGATIONS OF SELLERS The obligation of Sellers to close is subject to the following conditions precedent each of which is for the exclusive benefit of Sellers and may be waived by Sellers in whole or in part: 7.1 Representations and Warranties. Each representation and warranty made by Purchaser in this Agreement, in the certificates delivered by Purchaser pursuant to this Agreement and in schedules hereto shall be true in all material respects on the date on which made and shall be true in all material respects on and as of the Closing Date as though such representations and warranties were made on and as of the Closing Date. 7.2 Performance. Purchaser shall have performed or complied with all its agreements, covenants and obligations required to be performed or complied with by this Agreement on or before the Closing Date. 7.3 Employment Agreement. The Company and Seller shall have entered into an Employment Agreement substantially in the form annexed hereto as Exhibit D. 7.4 No Injunctions. There shall not be in effect on the Closing Date any injunction or similar restraining order of any court or governmental authority of competent jurisdiction preventing either party from consummating any of the transactions contemplated by this Agreement. 7.5 Consents and Authorizations. Each of the governmental and other approvals, consents, permits, or waivers listed in Schedule 3.3 and in Schedule 2.6 shall have been obtained. 7.6 Opinion of Counsel. Purchaser shall have delivered to Seller the opinion, dated the Closing Date, of Alan Plotkin, Esq, counsel to Purchaser, to the effect set forth in Exhibit E hereto. 7.7 Officer's Certificates. Purchaser shall have delivered to Seller a certificate, dated the Closing Date and signed by its chief executive officer, to the effect set forth in Exhibit F-1 hereto. In addition, Purchaser shall have delivered to Seller a certificate, dated the Closing Date and executed by the secretary or any assistant secretary of Purchaser, to the effect set forth in Exhibit F-2 hereto. 7.8 Escrow Agreement. Purchaser and seller shall have entered into the Escrow Agreement. ARTICLE VIII SURVIVAL OF PROVISIONS 8.1 Survival of Representations and Warranties. Subject to Section 8.3 and ARTICLE IX hereof, the representations and warranties respectively made by Sellers, and Purchaser in this Agreement, in the schedules hereto and in any certificate delivered pursuant to this Agreement will survive the Closing and will remain in full force and effect thereafter: (a) indefinitely in the case of Sections 2.2 and 2.4 and 2.13; (b) until 60 days after the expiration of all periods allowed for objecting and appealing the determination of any proceedings relating to any assessment or reassessment of the Company by any Tax Authority in respect of any Tax period ending prior to the Closing in the case of the representations and warranties of Seller set forth in Section 2.9; and (c) until the second anniversary of the Closing Date in the case of all other representations and warranties. 8.2 Survival of Covenants and Agreements. Subject to Section 8.3 and ARTICLE IX hereof, all covenants and agreements respectively made by Sellers and Purchaser in this Agreement to be performed after the date hereof will survive the Closing and will remain in full force and effect thereafter, until the expiration of the terms or periods specified therein or (if there is no such specified term or period) indefinitely without regard to duration. 8.3 Pursuit of Claims. Notwithstanding the foregoing, any representation, warranty, covenant, or agreement as to which a bonafide claim for indemnification has been asserted in accordance with ARTICLE IX hereof during the applicable survival period set forth in Section 8.1 or 8.2 hereof will (with respect to such claim) survive and such claim may be pursued, beyond the expiration of such survival period until such claim is resolved by final, nonappealable judgment or by settlement. ARTICLE IX INDEMNIFICATION 9.1 Indemnification by Sellers. Subject to the provisions of Sections 9.3 and 9.4 hereof and this ARTICLE IX, Sellers will indemnify and hold harmless the Purchaser and its officers, directors, shareholders, employees and agents (each a "Purchaser Party") (whether or not such Purchaser Party owns any Shares) in respect of any and all monetary damages, Liabilities, fines, fees, penalties, interest obligations, deficiencies, losses and expenses (including without limitation punitive, treble, or other exemplary or extra contractual damages, amounts paid in settlement, interest, court costs, costs of investigation, fees and expenses of attorneys, accountants, actuaries, environmental consultants, engineers and geologists and other experts and other expenses of litigation or of any claim, default, or assessment) (collectively, "Damages") resulting from or relating to each of the following: (a) any breach by Sellers of any representation, warranty, covenant, or agreement made by Sellers in this Agreement, in the schedules hereto, or in any certificate delivered by Sellers in connection with this Agreement; (b) the employment or termination of employment (including constructive termination) by the Company of any individual (including without limitation any employee of the Company) attributable to any action or inaction occurring before the Closing Date; and (c) any claim by any employee of the Company for workers compensation or related medical benefits asserted after the Closing Date that relates to an injury or illness originating before the Closing Date. 9.2 Indemnification by Purchaser. Subject to the provisions of Sections 9.3 and 9.4 hereof and this ARTICLE IX hereof, Purchaser will indemnify and hold harmless Sellers and its officers, directors, shareholders, employees and agents (each a "Seller Party") (whether or not such Seller Party sells any Shares) in respect of any and all Damages resulting from or relating to any breach by Purchaser of any representation, warranty, covenant, or agreement made by Purchaser in this Agreement 9.3 Indemnification Procedures. (a) If any Purchaser Party or Seller Party, as the case may be (each an "Indemnitee") becomes aware of any matter for which it believes it is entitled to indemnification hereunder that involves (i) any claim made against the Indemnitee by any person or entity other than a Purchaser Party or a Seller Party or (ii) the commencement of any action, suit, investigation, arbitration, or similar proceeding against the Indemnitee by any person other than a Purchaser Party or a Seller Party, the Indemnitee will give the Seller or Purchaser, as appropriate (each an "Indemnifying Party") prompt written notice of such claim or the commencement of such action, suit, investigation, arbitration, or similar proceeding, provided that the failure of the Indemnitee to give such notice on a timely basis shall not limit the rights of the Indemnitee hereunder, except to the extent that the Indemnifying Party has suffered actual prejudice as a result thereof. Such notice will (A) provide (with reasonable specificity) the basis on which indemnification is being asserted, (B) set forth the actual or estimated amount of Damages for which indemnification is being asserted, if known, and (C) be accompanied by copies of all relevant pleadings, demands and other papers served on the Indemnitee. (b) The Indemnifying Party will have a period of 30 days after the delivery of each notice required by Section 9.3(a) hereof during which to respond to such notice. If the Indemnifying Party elects to defend the claim described in such notice or does not respond within such 30-day period, the Indemnifying Party will be obligated to compromise or defend (and will control the defense of) such claim, at its own expense and by counsel chosen by the Indemnifying Party and reasonably satisfactory to the Indemnitee. The Indemnitee will cooperate fully with the Indemnifying Party and counsel for the Indemnifying Party in the defense against any such claim and the Indemnitee will have the right to participate at its own expense in the defense of any such claim. If the Indemnifying party responds within such 30-day period and elects not to defend such claim, the Indemnitee will be free to compromise or defend (and control the defense of) such claim and to pursue such remedies as may be available to the Indemnitee under applicable law. (c) Any compromise or settlement of any claim (whether defended by the Indemnitee or by the Indemnifying Party) will require the prior written consent of the Indemnitee and the Indemnifying Party (which consent will not be unreasonably withheld). (d) If an Indemnitee becomes aware of any matter for which it believes it is entitled to indemnification hereunder and such matter involves a claim made by any Purchaser Party or Seller Party, the Indemnitee will give the Indemnifying Party prompt written notice of such claim. Such notice will (i) provide (with reasonable specificity) the bases for which indemnification is being asserted and (ii) set forth the actual or estimated amount of Damages for which indemnification is being asserted. The Indemnifying Party will have a period of 30 days after the delivery of each notice required by this Section 9.3(d) during which to respond to such notice. If the Indemnifying Party accepts (in writing) full responsibility for the claim described in such notice, the actual or estimated amount of Damages reflected in such notice will be conclusively deemed a Liability that the Indemnifying Party owes and will pay (in cash) upon demand, to the Indemnitee. If the Indemnifying Party has disputed such claim or does not respond within such 30-day period, the Indemnifying Party and the Indemnitee agree to proceed in good faith to negotiate a resolution of such dispute. If all such disputes are not resolved through negotiations within 30 days after such negotiations begin, either the Indemnifying Party or the Indemnitee may initiate litigation to resolve such disputes. If the Indemnifying Party does not respond within 30 days after delivery of any claim notice required by this Section 9.3(d), the Indemnitee may initiate litigation to resolve such claim. 9.4 Indemnification Payments. Sellers and Purchaser agree that any payment made under ARTICLE IX hereof will be treated by the parties on their Tax Returns as an adjustment to the aggregate consideration for the Shares. If, notwithstanding such treatment by the parties, any indemnity payment is determined to be taxable to Purchaser by any taxing authority, Seller shall indemnify Purchaser for any Taxes payable by Purchaser by reason of the receipt of such indemnity payment (including any payments under this Section 9.4), determined at a Tax rate equal to the appropriate federal, state and local corporate income Tax rate for the taxable year in which the indemnity is determined to be taxable to Purchaser. ARTICLE X TERMINATION 10.1 Termination. Without limiting the rights or remedies that any party hereto may otherwise have, this Agreement may be terminated and the transactions contemplated hereby may be abandoned: (a) at any time before the Closing by written agreement of Seller and Purchaser; or (b) at any time after August 4, 1998, by Seller or Purchaser if the transactions contemplated by this Agreement have not been consummated on or before such date and such failure to consummate is not caused by a breach of this Agreement (or any representation, warranty, covenant, or agreement included herein) by the party electing to terminate pursuant to this Section 10.1(b). (c) by Purchaser, on or prior to July 31, 1998, if the results and findings of Purchaser's discussions with the Company's customers as set forth in Section 4.3 here of are not satisfactory to Purchaser in its sole discretion, provided, however, that Purchaser shall not have the right to terminate this Agreement solely if such customers confirm the information set forth on Schedule 2.22, (d) by Sellers on or after July 31, 1998 if Purchaser on or before such date has not obtained the consents and approvals set forth on Schedule 3.3. (e) by Purchaser on or before July 31, 1998 if Purchaser on or before such date has not obtained the consents and approvals set forth on Schedule 3.3. (f) by either Purchaser or Seller, if, prior to the Closing Date, the other party is in material breach of any material representation, warranty, covenant or agreement herein contained. 10.2 Effect of Termination. If this Agreement is validly terminated pursuant to Section 10.1 hereof, (a) the obligation of Purchaser to purchase the Shares and the obligation of Seller to sell the Shares will terminate, (b) the provisions of Sections 11.5, 11.7 and 11.8 hereof will continue to apply following any such termination and (c) no party hereto will be relieved of any Liability for Damages that such party may have to the other party by reason of such party's breach of this Agreement (or any representation, warranty, covenant, or agreement included herein). ARTICLE XI MISCELLANEOUS 11.1 Section 338(h)(10) Election. (a) Purchaser may elect, at Purchaser's sole option, to file an election under Section 338(h)(10) of the Code and under any comparable provisions of state, local, or foreign law with respect to the purchase of the Shares [and may include in such election any of the Subsidiaries as Purchaser may determine] (collectively the "Election"). Seller shall join and shall cause any affiliate to join, [in both cases] at the request of Purchaser, in the Election. So long as the Election is made, Seller and Purchaser shall report, in connection with the determination of Taxes, the transactions contemplated by this Agreement in a manner consistent with the Election, including the reasonable determination by Purchaser of the fair market value of the assets of the Company [and the Subsidiaries] and the allocation of the deemed purchase price of the assets of the Company [and the Subsidiaries] within the meaning of Section 338(h)(10) of the Code and the Treasury Regulations promulgated thereunder. Purchaser shall notify Seller in writing of its intention to file the Election no later than 15 days prior to the due date for filing the Election (the "Election Notice"). (b) Purchaser shall be responsible for the preparation and filing of all forms and documents required in connection with the Election. On the Closing Date, Seller shall execute five copies of Form 8023 provided by Purchaser. In connection with the Election Notice, Purchaser shall provide Seller with copies of (i) any necessary corrections, amendments, or supplements to such Form 8023, (ii) all attachments required to be filed therewith pursuant to applicable Treasury Regulations and (iii) any comparable forms and attachments with respect to any applicable state, foreign, or local elections being made pursuant to the Election. Seller shall execute and deliver to Purchaser within five days of receipt of the Election Notice such documents or forms as are required by any tax laws to complete properly the Election. Seller and Purchaser shall cooperate fully with each other and make available to each other such Tax data and other information as may be reasonably required by Seller or Purchaser in order to timely file the Election and any other required statements or schedules. Seller shall promptly execute and deliver to Purchaser any amendments made to Form 8023 (and any comparable state, local and foreign forms) subsequent to the filing of the Election and any attachments which are required to be filed under applicable law. (c) Seller shall comply with all of the requirements of Section 338(h)(10) of the Code and the Treasury Regulations thereunder. Seller shall take no action which is inconsistent with the requirements for filing the Election under the Code and the applicable Treasury Regulations. (d) To the extent permitted by state and local laws, the principles and procedures of this Section 11.1 shall also apply with respect to a Section 338(h)(10) election or equivalent or comparable provision under state, local, or foreign law, including, without limitation an election under Section 338(g) of the Code or equivalent or comparable provision under state, local, or foreign law. Seller covenants and agrees that to the extent that an election similar to a Section 338(h)(10) election under the Code is optional under any state, local, or foreign law, Seller shall join in any such election as designated by Purchaser in the Election Notice.] 11.2 Notices. Any notice or other communication given pursuant to this Agreement must be in writing and (a) delivered personally, (b) sent by telefacsimile or other similar facsimile transmission, (c) delivered by overnight express, charges prepaid, or (d) sent by registered or certified mail, postage prepaid, as follows: (i) If to Sellers: Richard Boyer % Gowling, Strathy & Henderson Suite 1020 50 Queen Street North Kitchener, Ontario N2H 6M2 Attention: Thomas Hunter, Esq. Facsimile number: (516) 576-6030 with copy to: Gowling, Strathy and Henderson Suite 1020 50 Queen Street North Suite 1020 Kitchener, Ontario N2H 6M2 Attention: Thomas Hunter, Esq Facsimile number: (519) 576-6030 (ii) If to Purchaser: Hedstrom Corporation 585 Slawin Court Mount Prospect, Illinois 60056 Attention: Arnold E. Ditri Facsimile number: 847-803-1971 with copy to: Law Offices of Alan Plotkin 18 E. 48th Street New York, New York 10017 Attention: Alan Plotkin Facsimile number: 212-758-2268 All notices and other communications required or permitted under this Agreement that are addressed as provided in this Section 11.2 will (A) if delivered personally or by overnight express, be deemed given upon delivery; (B) if delivered by telefacsimile or similar facsimile transmission, be deemed given when electronically confirmed; and (C) if sent by registered or certified mail, be deemed given on the third day after delivery of such notice to the United States post office for delivery. Any party from time to time may change its address for the purpose of notices to that party by giving a similar notice specifying a new address, but no such notice will be deemed to have been given until it is actually received by the party sought to be charged with the contents thereof. 11.3 Definitions. As used in this agreement, the following terms shall have the following meanings: (a) "Affiliate" shall have the meaning given to such term in the Securities Act (Ontario); (b) "Arm's Length" shall have the meaning given to such term in the Tax Act (c) "Authority" means any governmental or regulatory authority, body, agency or department, whether federal, provincial or municipal, having jurisdiction over the Vendor, the Guarantor, the Corporation, any of the Subsidiaries or the Business or any aspect thereof; (d) "Environmental Laws" shall include all applicable federal, provincial, regional, municipal or local laws, statutes, regulations, ordinances, rules, policies, guidelines, decrees, orders, authorizations, approvals, notices, licenses, permits, directives or other requirements of any Authority, court, tribunal or other similar body, relating to environmental or occupational health and safety matters; (e) "Environmental Orders" means applicable orders, decisions or the like rendered by any Authority under or pursuant to any Environmental Laws; (f) "Environmental Permits" means all permits, certificates, approvals, registrations and licenses issued by any Authority and relating to or required for the operation of the Business and the Property in compliance with all Environmental Laws, Environmental Orders or Environmental Regulations; (g) "Environmental Regulations" means all applicable regulations or the like promulgated under or pursuant to any Environmental Laws. (h) "ETA" means Part IX of the Excise Tax Act (Canada); (i) "GST" means all Taxes payable under the ETA or under any provincial legislation similar to the ETA; (j) "Hazardous Substances" means PCBs, asbestos, urea formaldehyde foam insulation or any other substance or material that is prohibited, controlled or regulated under Environmental Laws; (k) "Hazardous Waste" means any contaminants, pollutants and dangerous substances, including asbestos, liquid waste, special waste, toxic substances, hazardous or toxic chemicals, Hazardous Substances or hazardous materials as defined in or pursuant to any Environmental Laws; trust and funding agreements and applicable insurance contracts of the Company; (l) "Plans" means all plans established, organized and administered which provide pensions for officers, employees and former officers and employees of the Company, or predecessor corporations, and their beneficiaries, including, where applicable: (i)the assets and funds maintained to provide benefits under or related to Plans; and (ii) Plan Terms (m) "Predecessors" means any owner, occupier or Person who previously had charge, management or control of the Property or any part thereo (n) "Property" menas all real property, whether owned or leased, used in carrying on the Business or previously used for such purpose; (o) "Release" means a releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing or dumping which is in breach of any Environmental Law, Environmental Regulation or Environmental Order; (p) "Tax Act" means the Income Tax Act (Canada); (q) "Tax" means all governmental taxes, levies, duties, assessments, reassessments, and other charges of any nature whatsoever, whether direct or indirect, including income tax, profits tax, gross receipts tax, corporation tax, commodity tax, sales and use tax, wage tax, payroll tax, worker's compensation levy, employer health tax, capital tax, stamp duty, real and personal property tax, land transfer tax, customs or excise duty, excise tax, turnover or value added tax on goods sold or services rendered, withholding tax, Canada pension plan, social security and unemployment insurance charges or retirement contributions, and any interest, fines, additions to tax and penalties thereon. 11.4 Entire Agreement; Interpretation. Except for documents executed by Seller and Purchaser pursuant hereto, this Agreement supersedes all prior discussions and agreements between the parties with respect to the subject matter of this Agreement and this Agreement contains the sole and entire agreement between the parties hereto with respect to the subject matter hereof. Unless the context of this Agreement otherwise requires, (a) words of any gender are deemed to include each other gender; (b) words using the singular or plural number also include the plural or singular number, respectively; (c) the terms "hereof," "herein," "hereby," "hereto," and derivative or similar words refer to this entire Agreement; (d) the terms "ARTICLE" or "Section" refer to the specified ARTICLE or Section of this Agreement; (e) the term "or" means "and/or"; (f) the term "party" means, on the one hand, Purchaser and, on the other hand, Seller; (g) the phrase "in the ordinary course of business and consistent with past practice" refers to the business, operations, affairs and practice of the Company consistent with past practices of such business, operations and affairs and consistent with all applicable laws; and (h) all references to "dollars" or "$" refer to currency of Canada. 11.5 Expenses. Except as otherwise expressly provided in this Agreement (including without limitation as provided in ARTICLE IX hereof), each of Seller and Purchaser will pay its own costs and expenses in connection with this Agreement and the transactions contemplated hereby. For greater certainty, the Seller shall not change to the Company any fees, costs or expenses relating to the negotiations and execution of this Agreement or the completion of the transaction of purchase and sale contemplated hereby. 11.6 Public Announcements. At all times at or before the Closing, Seller and Purchaser will each consult with the other before issuing or making any reports, statements, or releases to the public with respect to this Agreement or the transactions contemplated hereby and will use good faith efforts to agree on the text of a joint public report, statement, or release or will use good faith efforts to obtain the other party's approval of the text of any public report, statement, release to be made solely on behalf of a party. If Seller and Purchaser are unable to agree on or approve any such public report, statement, or release and such report, statement, or release is, in the opinion of legal counsel to a party, required by law or appropriate to discharge such party's disclosure obligations, then such party may make or issue the legally required or appropriate report, statement, or release. Any such report, statement, or release approved or permitted to be made pursuant to this Section 11.6 may be disclosed or otherwise provided by Seller or Purchaser to any person, including without limitation to any employee or customer of either party hereto and to any governmental or regulatory authority. 11.7 Confidentiality. For a period of three years after the date hereof, (a) each of Purchaser and Seller will refrain, and will cause its respective officers, directors, employees, agents and other representatives to refrain, from disclosing to any other person any confidential documents or confidential information concerning the other party hereto furnished to it in connection with this Agreement or the transactions contemplated hereby and (b) Seller will refrain, and will cause its respective officers, directors, employees, agents and other representatives to refrain, from disclosing to any person any confidential documents or confidential information concerning the Company unless (i) such disclosure is compelled by judicial or administrative process or by other requirements of law and notice of such disclosure is furnished to such other party hereto; (ii) either party hereto deems it advisable (upon advice of such party's legal counsel) to disclose any such confidential documents or information in connection with the requirements of any securities law; or (iii) such confidential documents or information can be shown to have been (A) previously known by the party hereto receiving such documents or information, (B) in the public domain through no fault of such receiving party, or (C) later acquired by such receiving party from other public sources. 11.8 Brokers. Seller will indemnify and hold harmless Purchaser in respect of any and all claims or demands for commission, compensation, or other Damages by any broker, finder, or other agent (whether or not a present or former employee or agent of Seller or the Company) claiming to have been engaged by Seller or the Company in connection with the transactions contemplated by this Agreement and Seller will bear the cost of the reasonable out-of-pocket expenses incurred by each Purchaser in investigating, defending against, or appealing any such claim or demand. 11.9 Further Assurances. Seller and Purchaser agree that, from time to time after the Closing, upon the reasonable request of the other, they will cooperate and will cause their respective Affiliates to cooperate with each other to effect the orderly transition of the business, operations and affairs of the Company. Without limiting the generality of the foregoing, (a) Seller will provide, and will cause its Affiliates to provide, representatives of Purchaser reasonable access to all Books and Records of the Company reasonably requested by Purchaser in the preparation of any post-Closing financial statements, reports, or Tax Returns of the Company; (b) Purchaser will provide representatives of Seller reasonable access to all post-Closing Books and Records of the Company or any Subsidiary reasonably requested by Seller in the preparation of any post-Closing financial statements, reports, or Tax Returns of Seller; and (c) each party hereto will execute such documents and instruments as the other party hereto may reasonably request containing terms and conditions mutually satisfactory to each party hereto to further effectuate the terms hereof. Purchaser agrees to retain, until the sixth anniversary of the Closing Date, all books and records of the Company. 11.10 Waiver. Any term or condition of this Agreement may be waived at any time by the party that is entitled to the benefit thereof. Such waiver must be in writing and must be executed by an executive officer of such party. A waiver on one occasion will not be deemed to be a waiver of the same or any other breach or nonfulfillment on a future occasion. All remedies, either under this Agreement, or by law or otherwise afforded, will be cumulative and not alternative. 11.11 Amendment. This Agreement may be modified or amended only by a writing duly executed by or on behalf of Seller and Purchaser. 11.12 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which will be deemed an original, but all of which will constitute one and the same instrument. 11.13 No Third Party Beneficiary. The terms and provisions of this Agreement are intended solely for the benefit of Seller, Purchaser, each Seller Party, each Purchaser Party and their respective successors and permitted assigns and it is not the intention of the parties to confer third-party beneficiary rights upon any other person. 11.14 Governing Law. This Agreement will be governed by and construed and enforced in accordance with the laws of Ontario (without regard to the principles of conflict of laws) applicable to a contract executed and performable in such state. 11.15 Binding Effect. This Agreement is binding upon and will inure to the benefit of the parties and their respective successors and permitted assigns. 11.16 No Assignment. Neither this Agreement nor any right or obligation hereunder or part hereof may be assigned by any party hereto without the prior written consent of the other party hereto (and any attempt to do so will be void), except as otherwise specifically provided herein and except that Purchaser may assign all or any part of the rights or obligations of Purchaser hereunder to one or more Affiliates of Purchaser without the consent Seller; provided, however, that upon such assignment Purchaser shall not be deemed to be released from any of its obligations hereunder. 11.17 Time of Essence. Time is of the essence to every 11.18 Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under any present or future law and if the rights or obligations under this Agreement of Seller and Purchaser will not be materially and adversely affected thereby, (a) such provision will be fully severable; (b) this Agreement will be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof; (c) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid, or unenforceable provision or by its severance herefrom; and (d) in lieu of such illegal, invalid, or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible. IN WITNESS WHEREOF, this Agreement has been duly executed and delivered as of the date first written above by the duly authorized officers of Seller and Purchaser. PURCHASER: Hedstrom Corporation By: Name: Title: SELLERS: ______________________________ Richard Boyer ______________________________ Robert G. Boyer ______________________________ Belinda Boyer The Richard Boyer Family Trust By:___________________________ Richard Boyer, Trustee ________________________ Robert G. Boyer, Trustee ________________________ Belinda Boyer, Trustee STOCK PURCHASE AGREEMENT Dated as of July__, 1998 Between Hedstrom Corporation and Richard Boyer With Respect to all of the Outstanding Capital Stock of Backyard Products Ltd. TABLE OF CONTENTS Page ARTICLE I .................................................1 1.1 Purchase and Sale of Shares ......................2 1.2 Purchase Price ...................................2 1.3 Determination of Net Working Capital .............3 1.4 Closing ..........................................5 ARTICLE II ................................................6 2.1 Organization of Seller. ..........................6 2.2 Corporate Authority ..............................6 2.3 Organization of the Company and Subsidiaries. ....6 2.4 Capital Stock of the Company .....................7 2.6 Consents and Approvals ...........................7 2.7 Financial Statements .............................9 2.8 Absence of Changes ...............................9 2.9 Taxes ...........................................13 2.10 Litigation .....................................15 2.11 Compliance With Laws ...........................16 2.12 Pension and Benefit Plans; ERISAError! Bookmark not defined. 2.13 Properties. ....................................19 2.14 Environmental Matters ..........................20 2.15 Contracts ......................................22 2.16 Licenses and Permits ...........................24 2.17 Insurance ......................................24 2.18 Intercompany Liabilities .......................24 2.19 Corporate Records ..............................24 2.20 Bank Accounts ..................................25 2.21 Disclosure .....................................26 ARTICLE III ..............................................26 3.1 Organization ....................................26 3.2 Corporate Authority .............................26 3.3 Consents and Approvals ..........................26 3.4 Purchase for Investment .........................27 ARTICLE IV ...............................................28 4.1 Contract and Regulatory Approvals ...............28 4.2 Intentionally Omitted ...........................28 4.3 Investigation by Purchaser ......................28 4.4 No Negotiations .................................28 4.5 Conduct of Business .............................29 4.6 Financial Statements and Reports ................30 4.7 Employee Matters ................................31 4.8 Participation in Benefit Plans ..................33 4.9 No Disposal of Property .........................34 4.10 No Breach or Default ...........................34 4.11 No Acquisitions ................................34 4.12 Intercompany Liabilities .......................34 4.13 Resignations of Directors ......................35 4.14 Tax Matters ....................................35 4.15 Books and Records ..............................35 4.16 Notice and Cure ................................35 ARTICLE V ................................................36 5.1 Governmental Approvals ..........................36 ARTICLE VI ...............................................37 6.1 Representations and Warranties ..................37 6.2 Performance .....................................37 6.3 Regulatory Approvals ............................37 6.4 No Injunctions ..................................37 6.5 Consents and Authorizations .....................37 6.6 No Adverse Change ...............................37 6.7 Opinion of Counsel ..............................38 6.8 Officer's Certificates ..........................38 6.9 Resignations ....................................38 ARTICLE VII ..............................................38 7.1 Representations and Warranties ..................38 7.2 Performance .....................................38 7.3 Regulatory Approvals ............................38 7.4 No Injunctions ..................................39 7.5 Consents and Authorizations .....................39 7.6 Opinion of Counsel ..............................39 7.7 Officer's Certificates ..........................39 ARTICLE VIII .............................................39 8.1 Survival of Representations and Warranties ......39 8.2 Survival of Covenants and Agreements ............40 8.3 Pursuit of Claims ...............................40 ARTICLE IX ...............................................40 9.1 Indemnification by Seller .......................40 9.2 Indemnification by Purchaser ....................41 9.3 Indemnification Procedures ......................42 9.4 Tax Indemnification .............................43 9.5 Indemnification Payments ........................43 ARTICLE X ................................................44 10.1 Termination ....................................44 10.2 Effect of Termination ..........................44 ARTICLE XI ...............................................45 11.1 Section 338(h)(10) Election ....................45 11.2 Notices ........................................46 11.3 [Intentionally Omitted] ........................47 11.4 Entire Agreement; Interpretation ...............49 11.5 Expenses .......................................50 11.6 Public Announcements ...........................50 11.7 Confidentiality ................................50 11.8 Brokers ........................................51 11.9 Further Assurances .............................51 11.10 Waiver ........................................52 11.11 Amendment .....................................52 11.12 Counterparts ..................................52 11.13 No Third Party Beneficiary ....................52 11.14 Governing Law .................................52 11.15 Binding Effect ................................52 11.16 No Assignment .................................52 11.17 Invalid Provisions ............................53 EXHIBIT LIST EX-10.2 3 THIRD AMENDMENT, dated as of July 29, 1998 (this "Third Amendment"), to the CREDIT AGREEMENT, dated as of June 12, 1997, among: (a) HEDSTROM CORPORATION, a Delaware corporation (the "Borrower"); (b) HEDSTROM HOLDINGS, INC., a Delaware corporation (the "Parent"); (c) the Lenders from time to time parties thereto; (d) SOCIETE GENERALE, as Documentation Agent for the Lenders; (e) UBS SECURITIES LLC, as Syndication Agent for the Lenders; and (f) CREDIT SUISSE FIRST BOSTON, as Administrative Agent for the Lenders. W I T N E S S E T H : WHEREAS, the parties hereto wish to amend certain provisions of the Credit Agreement on the terms set forth herein; NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein contained, the parties hereto agree as follows: 1. Definitions. Unless otherwise defined herein, terms defined in the Credit Agreement shall be used as so defined. 2. Amendment to Subsection 1.1 of the Credit Agreement. Subsection 1.1 of the Credit Agreement is hereby amended by deleting in its entirety the definition of "Aggregate Tranche B Commitment" and by adding the following definitions: "'Aggregate Tranche B Commitment': $65,000,000, as such amount may be reduced from time to time pursuant to this Agreement. 'Third Amendment Effective Date': as defined in the Third Amendment to this Agreement dated as of July 29, 1998." 3. Amendment to Section 3. Section 3 of the Credit Agreement is hereby amended in its entirety by deleting such Section in its entirety and substituting in lieu thereof the following: "SECTION III. AMOUNT AND TERMS OF TRANCHE B LOAN COMMITMENTS 3.1. Tranche B Loans. (a) Subject to the terms and conditions hereof, each Tranche B Lender severally agrees to (a) continue the Tranche B Loans outstanding on the Third Amendment Effective Date pursuant to the terms hereof and (b) make a term loan (the Tranche B Loans continued or made pursuant to clauses (a) and (b), collectively, the "Tranche B Loans") to the Borrower on the Third Amendment Effective Date in an amount not to exceed such Tranche B Lender's Tranche B Commitment Percentage (after giving effect to subsection 3.1(b)) of $30,000,000. The Tranche B Loans may from time to time be (a) Eurodollar Loans, (b) ABR Loans or (c) a combination thereof, as determined by the Borrower and notified to the Administrative Agent in accordance with subsections 3.2 and 7.6. The Borrower shall have the right, upon not less than one Business Day's notice to the Administrative Agent, to terminate up to $30,000,000 of the Aggregate Tranche B Commitment or, from time to time prior to any borrowing pursuant to subsection 3.2, to reduce the amount thereof. Any such reduction shall be in an amount equal to $1,000,000 or a whole multiple of $250,000 in excess thereof and shall reduce permanently the Aggregate Tranche B Commitment then in effect. (b) Subsequent to a Notice of Borrowing given by the Borrower pursuant to subsections 3.1(a) and 3.2 and immediately prior to any borrowing of Tranche B Loans, without the necessity of further action by any party, one or more Tranche B Lenders (the "Selling Lenders") as specified on Schedule 1.1D hereto shall sell, transfer and assign to one or more other Tranche B Lenders (the "Purchasing Lenders") as specified on Schedule 1.1D hereto a portion of the Selling Lender's right, title and interest in and to its Tranche B Loans as specified on Schedule 1.1D hereto, without recourse, representation or warranty, and each Purchasing Lender shall purchase, take and acquire from a Selling Lender a portion of such Selling Lender's right, title and interest in and to its Tranche B Loans as specified on Schedule 1.1D hereto, so that after giving effect to all such transfers, each Tranche B Lender's interest in the Tranche B Loans shall be as specified on Schedule 1.1D hereto. 3.2. Procedure for Tranche B Loan Borrowing. The Borrower shall give the Administrative Agent its irrevocable Notice of Borrowing (which notice must be received by the Administrative Agent prior to 11:00 A.M., New York City time, (a) three Business Days prior to the requested Borrowing Date, if all or any part of the requested Tranche B Loans are to be initially Eurodollar Loans or (b) on the requested Borrowing Date, otherwise) requesting that the Tranche B Lenders make the Tranche B Loans on the requested Borrowing Date and specifying the amount to be borrowed. Upon receipt of such Notice of Borrowing, the Administrative Agent shall promptly notify each Tranche B Lender thereof. Each Tranche B Lender will make the amount of its pro rata share of the Tranche B Loans available to the Administrative Agent for the account of the Borrower at the office of the Administrative Agent specified in subsection 14.2 prior to 11:00 A.M., New York City time, on the Borrowing Date in funds immediately available to the Administrative Agent. Such Tranche B Loans will then be made available to the Borrower by the Administrative Agent transferring to the account directed by the Borrower (which account need not be maintained by the Administrative Agent) with the aggregate of the amounts made available to the Administrative Agent by the Tranche B Lenders and in like funds as received by the Administrative Agent. 3.3. Amortization of Tranche B Loans. (a) The Borrower shall repay the Tranche B Loans on each date set forth below by the amount set forth below opposite such date: Period Amount September 30, 1998 $233,303.25 December 31, 1997 233,303.25 March 31, 1999 233,303.25 June 30, 1999 233,303.25 September 30, 1999 233,303.25 December 31, 1999 233,303.25 March 31, 2000 233,303.25 June 30, 2000 233,303.25 September 30, 2000 233,303.25 December 31, 2000 233,303.25 March 31, 2001 233,303.25 June 30, 2001 233,303.25 September 30, 2001 233,303.25 December 31, 2001 233,303.25 March 31, 2002 233,303.25 June 30, 2002 233,303.25 September 30, 2002 233,303.25 December 31, 2002 233,303.25 March 31, 2003 9,332,129.96 June 30, 2003 2,333,032.49 September 30, 2003 9,332,129.96 December 31, 2003 2,333,032.49 March 31, 2004 10,078,700.36 June 30, 2004 2,519,675.09 September 30, 2004 10,078,700.36 December 31, 2004 2,519,675.09 March 31, 2005 9,518,772.56 June 30, 2005 2,379,693.14 Total $64,625,000.00 ; provided that in the event the aggregate principal amount of Tranche B Loans outstanding on the Third Amendment Effective Date is less than $64,625,000, an amount equal to such difference shall be applied to reduce the then remaining scheduled installments set forth above in the table above pro rata based on the then remaining principal amount of each such amount." (b) The Borrower shall repay any then outstanding Tranche B Loans on June 30, 2005. 3.4. Use of Proceeds of Tranche B Loans. (i) The proceeds of the Tranche B Loans borrowed prior to the Third Amendment Effective Date shall be utilized by the Borrower only (a) to finance the purchase by AcquisitionCo of the Tendered Shares, (b) to finance the Merger, (c) to refinance outstanding Indebtedness of the Borrower and its Subsidiaries (including, without limitation, ERO), (d) to finance the acquisition permitted by subsection 11.10(n)(ii) and (e) to pay any fees and expenses relating thereto and (ii) the proceeds of the Tranche B Loans borrowed on or subsequent to the Third Amendment Effective Date shall be utilized only to finance the acquisition permitted by subsection 11.10(o), to pay related fees and expenses and to repay Revolving Credit Loans." 4. Amendment to Subsection 11. A. Subsection 11.1 is hereby amended by deleting the paragraph at the end of such subsection (which paragraph begins with the word "Notwithstanding") and substituting the following paragraph in lieu thereof: "Notwithstanding anything to the contrary herein, for the purposes of determining the Leverage Ratio and the Consolidated Interest Coverage Ratio for the periods ending on or about September 30, 1998, December 31, 1998 and March 31, 1999, Consolidated EBITDA for the relevant period shall be deemed to equal actual Consolidated EBITDA for such period plus $3,800,000, $2,600,000 and $1,200,000, respectively." B. Subsection 11.10 is hereby amended (i) by adding a reference in paragraph (h) in the proper order to subsection "11.2", (ii) by deleting the reference in paragraph (k) thereof to "$5,000,000" and substituting in lieu thereof a reference to "$20,000,000", (iii) by deleting the reference in paragraph (l) to "$3,000,000" and substituting in lieu thereof a reference to $4,000,000" and (iv) by adding the following paragraphs at the end of such subsection (and adjusting the punctuation at the end of paragraph (n) accordingly): "(o) so long as after giving effect thereto no Default or Event of Default shall have occurred and be continuing or would result therefrom, the Borrower may purchase all of the capital stock of Backyard Products Limited, an Ontario corporation ("Backyard"), on terms and conditions reasonably satisfactory to the Administrative Agent, so long as the aggregate amount of consideration paid in connection therewith (which may include Indebtedness permitted by subsection 11.2(m)) shall not exceed $17,200,000, provided that (A) such actions as may be required or reasonably requested to ensure that the Administrative Agent, for the ratable benefit of the Lenders, has a perfected first priority security interest in at least 65% of the outstanding capital stock issued by Backyard shall have been taken, (B) (I) on a pro forma basis for the period of four consecutive fiscal quarters most recently ended (assuming the consummation of such acquisition and the incurrence or assumption of any Indebtedness in connection therewith occurred on the first day of such period of four consecutive fiscal quarters), the Borrower shall be in compliance with the covenants contained in subsection 11.1 and (II) the Administrative Agent shall have received calculations in reasonable detail reasonably satisfactory to it showing compliance with the requirements of this clause (B) certified by a Responsible Officer of the Borrower and (C) such acquisition is a Permitted Acquisition; and (p) an equity contribution by the Borrower to Hedstrom (U.K.) Limited in an aggregate amount not to exceed $5,000,000 to eliminate an intercompany account deficit in an equal amount, so long as in connection therewith the Borrower satisfies the requirements of subsection 10.10(c)." 5. Amendment to Schedule 1.1A. Schedule 1.1A to the Credit Agreement is hereby amended by deleting Schedule 1.1A in its entirety and substituting in lieu thereof Annex A hereto. 6. Addition of Schedule 1.1D. Schedule 1.1D in the form of Annex B hereto is hereby added to the Credit Agreement. 7. Effective Date. This Third Amendment will become effective as of the date (the "Third Amendment Effective Date") hereof upon (i) its execution by the Parent, the Borrower and the Required Lenders in accordance with the terms of the Credit Agreement, (ii) delivery to the Administrative Agent of resolutions of the Borrower authorizing the execution and delivery of this Third Amendment and (iii) delivery to the Administrative Agent of stock certificates (and stock powers in respect thereof) in respect of at least 65% of the outstanding voting stock of Backyard. 8. Representations and Warranties. The Parent and the Borrower represent and warrant to each Lender that (a) this Third Amendment constitutes the legal, valid and binding obligation of the Parent and the Borrower, enforceable against it in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, fraudulent conveyances, reorganization, moratorium or similar laws affecting creditors' rights generally, by general equitable principles (whether enforcement is sought by proceedings in equity or at law) and by an implied covenant of good faith and fair dealing, (b) the representations and warranties made by the Credit Parties in the Credit Documents are true and correct in all material respects on and as of the date hereof (except to the extent that such representations and warranties are expressly stated to relate to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects on and as of such earlier date) and (c) no Default or Event of Default has occurred and is continuing as of the date hereof. 9. Continuing Effect. Except as expressly waived or amended hereby, the Credit Agreement shall continue to be and shall remain in full force and effect in accordance with its terms. This Third Amendment shall constitute a Credit Document. 10. GOVERNING LAW. THIS THIRD AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 11. Counterparts. This Third Amendment may be executed by the parties hereto in any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 12. Payment of Expenses. The Borrower agrees to pay and reimburse the Administrative Agent for all of its out-of- pocket costs and reasonable expenses incurred in connection with this Third Amendment, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent. 13. Acknowledgement with Respect to Various Credit Documents. Each Credit Party, by its execution and delivery of a copy of this Third Amendment, hereby consents to the extensions of credit pursuant to the Credit Agreement. Each Credit Party further acknowledges and agrees to the provisions of this Third Amendment and hereby agrees for the benefit of the Lenders that all extensions of credit (including without limitation all Tranche B Loans) pursuant to the Credit Agreement (as same is amended by this Third Amendment, and as same may be further amended, modified or supplemented from time to time) shall be fully entitled to all benefits of (and shall be fully guaranteed pursuant to) the Master Guarantee and Collateral Agreement and shall be fully secured pursuant to, and in accordance with the terms of, all the Security Documents. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. HEDSTROM CORPORATION By: Title: HEDSTROM HOLDINGS, INC. By: Title: CREDIT SUISSE FIRST BOSTON, as Administrative Agent and as a Lender By: Title: By: Title: SOCIETE GENERALE, as a Lender By: Title: UNION BANK OF SWITZERLAND, NEW YORK BRANCH, as a Lender By: Title: By: Title: BANK POLSKA KASA OPIEKI S.A. - PEKAO S.A. GROUP By: Title: BHF-BANK AKTIENGESELLSCHAFT By: Title: By: Title: CITICORP USA, INC. By: Title: DEEPROCK & COMPANY By: Eaton Vance Management, as Investment Advisor By: Title: THE FIRST NATIONAL BANK OF CHICAGO By: Title: FIRST SOURCE FINANCIAL, LLP By: First Source Financial, Inc., as Agent/Manager By: Title: MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. By: Title: MERRILL LYNCH DEBT STRATEGIES FUND, INC. By: Title: MERRILL LYNCH PRIME RATE PORTFOLIO By:Merrill Lynch Asset Management, L.P., as Investment Advisor By: Title: MERRILL LYNCH DEBT STRATEGIES PORTFOLIO By:Merrill Lynch Asset Management, L.P., as Investment Advisor By: Title: VAN KAMPEN AMERICAN CAPITAL PRIME RATE By: Title: ORIX USA CORPORATION By: Title: SANWA BUSINESS CREDIT CORPORATION By: Title: SENIOR DEBT PORTFOLIO By:BOSTON MANAGEMENT AND RESEARCH, as Investment Advisor By: Title: PAMCO CAYMAN LTD., by Protective Asset Management as Collateral Manager By: Title: THE CHASE MANHATTAN BANK By: Title: IMPERIAL BANK By: Title: ACKNOWLEDGED AND AGREED: ERO, INC. By: Name: Title: ERO INDUSTRIES, INC. By: Name: Title: ERO MARKETING, INC. By: Name: Title: PRISS PRINTS, INC. By: Name: Title: IMPACT, INC. By: Name: Title: ERO CANADA, INC. By: Name: Title: AMAV INDUSTRIES INC. By: Name: Title: EX-11 4 EXHIBIT 11.1 HEDSTROM HOLDINGS, INC. AND SUBSIDIARY EARNINGS PER SHARE DISCLOSURE For the six month period ended June 30, 1998 (Dollars in thousands) Income Shares Share (Numerator) (Denominator) Amount Basic Earnings Per Share: Net loss $(598) $67,663 $(0.01) Effect of Dilutive Securities: Stock options in the money - - - Buyback of shares at average price of $1.64 - - - ---- ------- ------ Net effect of stock options - - - Diluted Earnings Per Share: Net income $(598) $67,663 $(0.01) ===== ======= ====== Options to purchase 4,087,216 shares of common stock at prices ranging from $1.00 - $1.64 per share were outstanding at June 30, 1998 but were not included in the computation of diluted EPS as they were anti-dilutive at the end of the period. EX-27 5
5 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 7,233 0 81,681 0 53,564 154,263 44,474 0 388,112 101,044 0 0 0 676 0 388,112 161,661 161,661 116,516 116,516 30,689 0 15,481 (1,025) (427) 0 0 0 0 (598) (0.01) (0.01)
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