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 September 30, 1999
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 November 11, 1999, there were outstanding: (i) 36,142,883 shares of
the Common Stock, par value $.01 per share, of Hedstrom Holdings, Inc.,
(ii) 31,520,000 shares of the Non-Voting Common Stock, par value $.01 per
share, of Hedstrom Holdings, Inc. and (iii) 10 shares of the Common
Stock, par value $.01 per share, of Hedstrom Corporation.
<PAGE>
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
Page
Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
As of September 30, 1999 and December 31, 1998
Consolidated Income Statements
Three months ended September 30, 1999 and 1998
Nine months ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998
Consolidated Statement of Stockholders' Equity
As of and for the nine months ended September 30, 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signature
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S>
ASSETS
CURRENT ASSETS: <C> <C>
Cash and cash equivalents $ 13,569 $ 4,334
Trade accounts receivable, net of
allowance for doubtful accounts 51,106 69,522
Taxes receivable 6,745 6,745
Inventories 74,897 53,722
Deferred income taxes 6,016 6,016
Prepaid expenses and other current assets 5,729 4,130
-------- --------
TOTAL CURRENT ASSETS 158,062 144,469
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost,
net of accumulated depreciation 48,337 48,102
-------- --------
OTHER ASSETS:
Deferred charges, net of accumulated
amortization 12,598 14,795
Goodwill, net of accumulated
amortization 185,562 186,826
Deferred income taxes 740 1,575
-------- --------
TOTAL OTHER ASSETS 198,900 203,196
-------- --------
TOTAL ASSETS $405,299 $395,767
======== ========
</TABLE>
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: <C> <C>
Revolving line of credit $ 53,950 $ 34,920
Current portion of long-term debt
and capital leases 14,132 11,905
Accounts payable 25,512 20,709
Accrued expenses 18,241 22,970
-------- --------
TOTAL CURRENT LIABILITIES 111,835 90,504
-------- --------
LONG-TERM DEBT:
Senior Subordinated Notes 110,000 110,000
Senior Discount Notes 29,284 26,584
Term Loans 111,275 123,736
Notes payable to related parties 2,500 2,500
Capital leases 1,324 1,690
Other 1,538 2,154
-------- --------
TOTAL LONG-TERM DEBT 255,921 266,664
-------- --------
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
Accumulated other comprehensive loss 568 (2,616)
Accumulated deficit (15,254) (11,014)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 37,543 38,599
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' $405,299 $395,767
======== ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
For the three months ended September 30,
---------------------------------------
1999 1998
---- ----
<S> <C> <C>
Net sales $56,936 $64,353
Cost of sales 40,661 40,809
------- -------
Gross profit 16,275 23,544
Selling, general and administrative expense 18,832 15,383
------- -------
Operating income (2,557) 8,161
Interest expense 9,022 7,896
------- -------
Income (loss) before income taxes (11,579) 265
Income tax (benefit) expense (4,747) 115
------- -------
Net income (loss) $(6,832) $ 150
======= =======
Basic earnings (loss) per share:
Net income (loss) per share ($0.10) $0.00
Weighted average number of common shares
outstanding (in thousands) 67,633 67,663
Diluted earnings (loss) per share:
Net income (loss) per share ($0.10) $0.00
Weighted average number of common shares
outstanding (in thousands) 67,663 68,968
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
For the nine months ended September 30,
---------------------------------------
1999 1998
---- ----
<S> <C> <C>
Net sales $247,923 $226,014
Cost of sales 175,410 157,325
-------- --------
Gross profit 72,513 68,689
Selling, general and administrative expense 53,627 46,072
-------- --------
Operating income 18,886 22,617
Interest expense 26,073 23,377
-------- --------
Income (loss) before income taxes (7,187) (760)
Income tax (benefit) expense (2,947) (312)
-------- --------
Net income (loss) $ (4,240) $ (448)
-------- --------
Basic earnings (loss) per share:
Net income (loss) per share ($0.06) ($0.01)
Weighted average number of common shares
outstanding (in thousands) 67,633 67,663
Diluted earnings (loss) per share:
Net income (loss) per share ($0.06) ($0.01)
Weighted average number of common shares
outstanding (in thousands) 67,663 67,663
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the nine months ended September 30,
--------------------------------------
1999 1998
---- ----
<S>
Cash flows from operating activities: <C> <C>
Net (loss) $ (4,240) $ (448)
Adjustments to reconcile net (loss) to
net cash provided by operating activities:
Depreciation of property, plant and equipment and
amortization of goodwill 10,007 9,572
Amortization of deferred financing fees 5,387 5,333
Deferred income tax benefit 835 (44)
Changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable 21,138 19,591
Inventories (21,175) (10,892)
Prepaid expenses and other current assets (1,599) 172
Accounts payable 4,803 (1,678)
Accrued expenses (7,620) (8,435)
-------- -------
Net cash provided by operating activities 7,536 13,171
-------- -------
Cash flows from investing activities:
Acquisitions of property, plant and equipment (6,115) (7,305)
Acquisition of ERO, Inc. - (3,037)
Acquisition of Backyard Products Ltd. - (16,805)
Other acquisitions - (3,579)
-------- -------
Net cash used for investing activities (6,115) (30,726)
-------- -------
</TABLE>
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the nine months ended September 30,
--------------------------------------
1999 1998
---- ----
<S>
Cash flows from financing activities: <C> <C>
Proceeds from Term Loans - 30,000
Principal payments on Term Loans (9,699) (7,249)
Borrowings on Revolving Credit Facility, net 19,030 (11,900)
Other (1,517) (594)
-------- -------
Net cash provided by financing activities 7,814 10,257
-------- -------
Net increase (decrease) in cash and cash
equivalents 9,235 (7,298)
Cash and cash equivalents:
Beginning of period 4,334 10,844
-------- -------
End of period $ 13,569 $ 3,546
======== =======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except shares)
(Unaudited)
Common Stock Accumulated
-------------- Additional Other
Par Paid-In Comprehensive Accumulated
Shares Value Capital Losses Deficit Total
--------------------------------------------------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 67,662,883 $676 $51,553 $(2,616) $(11,014) $38,599
Foreign currency translation
adjustment - - - 3,184 - 3,184
Net income - - - - (4,240) (4,240)
--------
Comprehensive income - - - - - (1,056)
--------------------------------------------------------- --------
Balance at September 30, 1999 67,662,883 $676 $51,553 $ 568 $(15,254) $37,543
===================================================================
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
<PAGE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - PRINCIPLES OF CONSOLIDATION:
The accompanying interim consolidated financial statements include
the accounts of Hedstrom Holdings, Inc. (Holdings) and its wholly
owned subsidiary, Hedstrom Corporation (Hedstrom, and together
with Holdings, the Company). 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, 1998 as filed with the Securities and
Exchange Commission.
The results of operations for the three months and nine months ended
September 30, 1999 are not necessarily indicative of the results to
be expected for the entire fiscal year.
NOTE 2 - INVENTORIES:
Inventories at September 30, 1999 and December 31, 1998 consist of
the following (in thousands):
September 30, December 31,
1999 1998
------------ -----------
Raw materials $25,564 $21,421
Work-in-process 11,564 9,013
Finished goods 37,769 23,288
------- -------
$74,897 $53,722
======= =======
NOTE 3 - DEBT:
Debt consists of the following (in thousands):
September 30, December 31,
1999 1998
------------ -----------
Senior Subordinated Notes $110,000 $110,000
Term Loans 124,459 134,158
Revolving Credit Facility 53,950 34,920
Senior Discount Notes 29,284 26,584
Other 6,310 7,827
-------- --------
$324,003 $313,489
======== ========
<PAGE>
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. 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.
<PAGE>
Term Loans and Revolving Credit Facility
The Senior Credit Facilities consist of (a) the six-year $75.0
million Tranche A Senior Secured Term Loan Facility; (b) the eight-
year $65.0 million Tranche B Senior Secured Term Loan Facility; 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 are available based upon a borrowing
base equal to the sum of 85% of eligible accounts receivable and 50%
of eligible inventory.
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 are 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.
On September 30, 1999, the Company amended the Senior Credit
Facility. The amendment allows for less restrictive covenants. In
addition, the amendment allows, at Hedstrom's option, the interest
rates per annum applicable to the Senior Credit Facilities to be
either (i) the Eurocurrency Rate (as defined) plus 3.5% in the case
of the Tranche A Term Loan Facility and the Revolving Credit
Facility or 4.0% in the case of the Tranche B Term Loan Facility or
(ii) the Alternate Base 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. 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 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. At September 30,
1999, the Company was in compliance with all of the amended
restrictive covenants contained in the Senior Credit Facilities.
<PAGE>
Senior Discount Notes
Holdings received $25.0 million of gross proceeds from the issuance
of 44,612 units consisting of the Discount Notes described below 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 the Discount Notes.
The Discount Notes are unsecured obligations of Holdings and have an
aggregate principle amount at maturity 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. The Discount Notes mature on June 1,
2009.
Except as set forth below, the Discount Notes are not redeemable at
the option of Holdings prior to June 1, 2002. On and after such
date, the Discount Notes are redeemable at Holdings' option, in
whole or in part, at the following redemption prices (expressed in
percentages of principal amount at maturity), plus accrued and
unpaid interest to the redemption date:
if redeemed during the 12-month period commencing on June 1 of the
years set forth below:
Redemption
Period Price
------ ----------
2002 106.000
2003 104.000
2004 102.000
2005 and thereafter 100.000
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.
<PAGE>
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 4 - SEGMENT INFORMATION:
Effective January 1, 1998, the Company adopted SFAS No. 131,
Disclosure About Segments of an Enterprise and Related
Information. SFAS 131 requires companies to identify their
operating segments based upon the internal financial information
reported to the company's chief operating decision maker. The
Company's operating decision maker is its Chief Executive Officer
(CEO). Financial information reported to the CEO reflects five
business segments: the Bedford Division, the Ashland Division, the
ERO Division, the Montreal Division and the International Division.
The CEO evaluates performance of each segment based upon the
operating earnings (loss) of each segment.
The Company develops, manufactures and sells a variety of children's
leisure and activity products.
The Bedford Division principally manufactures and markets in the
United States and Canada outdoor gym sets, wood gym kits and slides,
spring horses, trampolines and gym accessories.
The Ashland Division principally manufactures and markets in the
United States a wide variety of children's playballs and ball pit
products.
The Montreal Division principally manufactures and markets
children's products including arts and crafts, game tables, certain
other children's bulk play products such as play kitchens and
battery-operated ride-on vehicles. In addition, this division
includes a broad line of school supplies featuring popular licensed
characters.
The ERO Division produces the Slumber Shoppe line of products
including products such as indoor sleeping bags and play tents
featuring popular licensed characters, a water sports line of
products including flotation jackets, masks, fins, goggles and
snorkels. Additionally the division produces licensed room
decorations for young children, consisting principally of stick-on
and peel-off wall decorations.
<PAGE>
The International Division produces and distributes gym sets, and
other products, manufactured by domestic divisions, outside of the
United States.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- ------------------
1999 1998 1999 1998
(Dollars in thousands) ---- ---- ---- ----
Bedford Division
Net revenues $9,511 $11,388 $117,211 $93,385
Operating earnings (4,740) (1,814) 13,047 8,745
Identifiable assets 44,492 47,249 44,492 47,249
Ashland Division
Net revenues 7,515 6,304 30,526 30,612
Operating earnings (65) (723) 3,206 2,307
Identifiable assets 22,031 20,628 22,031 20,628
ERO Division
Net revenues 20,018 20,157 48,179 45,674
Operating earnings 3,450 6,715 6,772 9,278
Identifiable assets 46,818 39,633 46,818 39,633
Montreal Division
Net revenues 15,787 23,295 32,058 39,270
Operating earnings 212 5,238 (2,850) 3,233
Identifiable assets 76,160 66,822 76,160 66,822
International Division
Net revenues 4,105 3,209 19,949 17,073
Operating earnings (1,414) (1,255) (1,289) (946)
Identifiable assets 10,152 8,303 10,152 8,303
Corporate, other non-
segments and Intercompany
Eliminations
Identifiable assets 205,646 213,132 205,646 213,132
Consolidated totals from
continuing operations
Net revenues 56,936 64,353 247,923 226,014
Operating earnings (2,557) 8,161 18,886 22,617
Identifiable assets 405,299 395,767 405,299 395,767
<PAGE>
NOTE 5 - RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS:
The Financial Accounting Standards Board has issued SFAS No. 133,
Accounting for Derivative and Similar Financial Instruments For
Hedging Activities. This pronouncement revises the accounting for
derivative financial instruments. It requires entities to recognize
all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The adoption of this
statement is required for fiscal years beginning after June 15,
1999. The Company has entered into interest rate swap agreements to
hedge exposure to variable interest rate debt. The Company will
recognize these derivatives at fair value in its financial
statements if these agreements are outstanding as of January 1,
2000. The adoption of this pronouncement is not expected to have a
significant impact on the Company's financial position or results of
operations.
The Financial Accounting Standards Board has issued SFAS No. 134
Accounting For Mortgage-Backed Securities. SFAS No. 134 will have
no effect on the financial condition or results of operations of the
Company.
NOTE 6 - SUBSIDIARY GUARANTORS / NONGUARANTORS FINANCIAL INFORMATION:
The following is financial information pertaining to Hedstrom and its
subsidiary guarantors and subsidiary nonguarantors (with respect to
the Senior Subordinated Notes and the Senior Credit Facilities) for
the periods in which they are included in Holding's accompanying
consolidated financial statements.
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(In thousands)
At September 30, 1999 At December 31, 1998
------------------------------------------ -----------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustment Total Subsidiary Non- Adjustments/ Total
Assets Guarantor guarantor Eliminations Hedstrom Guarantors guarantors Eliminations Hedstrom
========================== ========== ========= ============ ======== ========== ========== ============ ========
<S>
Current assets: <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 12,988 $ 581 $ - $ 13,569 $ 1,839 $ 2,495 $ - $ 4,334
Accounts receivable, net 41,651 9,455 - 51,106 59,193 10,329 - 69,522
Taxes receivable 6,095 650 - 6,745 6,095 650 - 6,745
Inventories 47,244 27,709 (56) 74,897 40,742 13,036 (56) 53,722
Deferred income taxes(c) 6,016 - - 6,016 6,016 - - 6,016
Prepaid expenses and other
current assets 5,004 725 - 5,729 3,849 281 - 4,130
-------- ------- -------- -------- -------- -------- -------- --------
Total current assets 118,998 39,120 (56) 158,062 117,734 26,791 (56) 144,469
-------- ------- -------- -------- -------- -------- -------- --------
Property, plant, and
equipment, net 29,985 18,352 - 48,337 31,361 16,741 - 48,102
-------- ------- -------- -------- -------- -------- -------- --------
Other assets:
Investment in and advances
to Nonguarantor
Subsidiaries 63,821 - (63,821) - 56,190 - (56,190) -
Deferred charges, net 11,816 - - 11,816 13,857 - - 13,857
Goodwill, net 165,529 20,033 - 185,562 165,835 20,991 - 186,826
Deferred income taxes 1,201 (2,555) - (1,354) 1,092 (1,611) - (519)
-------- ------- -------- -------- -------- -------- -------- --------
Total other assets 242,367 17,478 (63,821) 196,024 236,974 19,380 (56,190) 200,164
-------- ------- -------- -------- -------- -------- -------- --------
Total assets $391,350 $74,950 $(63,877) $404,423 $386,069 $ 62,912 $(56,246) $392,735
======== ======= ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(In thousands)
At September 30, 1999 At December 31, 1998
------------------------------------------ -----------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustment Total Subsidiary Non- Adjustments/ Total
Guarantor guarantor Eliminations Hedstrom Guarantors guarantors Eliminations Hedstrom
========== ========= ============ ======== ========== ========== ============ ========
Liabilities and
stockholders' equity
==========================
<S>
Current liabilities: <C> <C> <C> <C> <C> <C> <C> <C>
Revolving line of credit $ 53,950 $ - $ - $53,950 $ 34,920 $ - $ - $ 34,920
Current portion of long
term debt and capital
leases 13,692 440 - 14,132 11,417 488 - 11,905
Advances from Guarantor
Subidiaries - 46,722 (46,722) - - 39,091 (39,091) -
Accounts payable (c) 17,652 7,860 - 25,512 17,170 3,539 - 20,709
Accrued expenses 17,274 1,775 (23) 19,026 20,520 2,198 (23) 22,695
-------- ------- -------- -------- -------- ------- -------- --------
Total current
liabilities 102,568 56,797 (46,745) 112,620 84,027 45,316 (39,114) 90,229
-------- ------- -------- -------- -------- ------- -------- --------
Senior Subordinated
Notes 110,000 - - 110,000 110,000 - - 110,000
Term Loans 111,275 - - 111,275 123,736 - - 123,736
Capital leases 1,324 - - 1,324 1,690 - - 1,690
Other 1,367 171 - 1,538 1,667 487 - 2,154
-------- ------- -------- -------- -------- ------- -------- --------
Total long-term debt(a) 223,966 171 - 224,137 237,093 487 - 237,580
-------- ------- -------- -------- -------- ------- -------- --------
Total liabilities 326,534 56,968 (46,745) 336,757 321,120 45,803 (39,114) 327,809
-------- ------- -------- -------- -------- ------- -------- --------
Total stockholder's
equity (deficit)(b) 64,816 17,982 (17,132) 65,666 64,949 17,109 (17,132) 64,926
-------- ------- -------- -------- -------- ------- -------- --------
Total liabilities and
stockholders' equity $391,350 $74,950 $(63,877) $402,423 $386,069 $62,912 $(56,246) $392,735
======== ======= ======== ======== ======== ======= ======== ========
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATING INCOME STATEMENTS
(In thousands)
Three Months Ended September 30, 1999 Three Months Ended September 30, 1998
------------------------------------------- -----------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Adjustments/ Total
Statement of Operations Guarantor guarantor Eliminations Hedstrom Guarantors guarantors Eliminations Hedstrom
======================= ========= ========= ============ ======== ========== ========== ============ ========
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $52,459 $19,511 $(15,034) $56,936 $59,524 $18,112 $(13,283) $ 64,353
Cost of sales 43,351 12,344 (15,034) 40,661 41,033 13,048 (13,272) 40,809
------- ------- -------- ------- ------- ------- -------- --------
Gross profit (loss) 9,108 7,167 - 16,275 18,491 5,064 (11) 23,544
Selling, general and
administrative expense 15,491 3,341 - 18,832 12,519 2,864 - 15,383
------- ------- -------- ------- ------- ------- -------- --------
Operating income (loss) (6,383) 3,826 - (2,557) 5,972 2,200 (11) 8,161
Interest expense (c) 7,388 610 - 7,998 6,239 684 - 6,923
------- ------- -------- ------- ------- ------- -------- --------
Income (loss) before
income taxes (13,771) 3,216 - (10,555) (267) 1,516 (11) 1,238
Income tax provision
(benefit) (c) (5,645) 1,318 - (4,327) (114) 633 (4) 515
------- ------- -------- ------- ------- ------- -------- --------
Net income (loss) $(8,126) $ 1,898 $ - $(6,228) $ (153) $ 883 $ (7) $ 723
======= ======= ======== ======= ======= ======= ======== ========
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATING INCOME STATEMENTS
(In thousands)
Nine Months Ended September 30, 1999 Nine Months Ended September 30, 1998
------------------------------------------- -----------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Adjustments/ Total
Statement of Operations Guarantor guarantor Eliminations Hedstrom Guarantors guarantors Eliminations Hedstrom
======================= ========= ========= ============ ======== ========== ========== ============ ========
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $235,669 $39,459 $(27,205) $247,923 $215,798 $33,717 $(23,501) $226,014
Cost of sales 175,612 27,003 (27,205) 175,410 156,143 24,733 (23,551) 157,325
-------- ------- -------- -------- -------- ------- -------- --------
Gross profit (loss) 60,057 12,456 - 72,513 59,655 8,984 50 68,689
Selling, general and
administrative expense 45,021 8,606 - 53,627 39,007 7,065 - 46,072
-------- ------- -------- -------- -------- ------- -------- --------
Operating income (loss) 15,036 3,850 - 18,886 20,648 1,919 50 22,617
Interest expense (c) 21,395 1,635 - 23,030 18,699 1,867 - 20,566
-------- ------- -------- -------- -------- ------- -------- --------
Income (loss) before
income taxes (6,359) 2,215 - (4,144) 1,949 52 50 2,051
Income tax provision
(benefit) (c) (2,608) 908 - (1,700) 692 128 21 841
-------- ------- -------- -------- -------- ------- -------- --------
Net income (loss) $ (3,751) $ 1,307 $ - $ (2,444) $ 1,257 $ (76) $ 29 $ 1,210
======= ======= ======== ======== ======== ======= ======== ========
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended September 30, 1999 Nine Months Ended September 30, 1998
------------------------------------ -------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adustments/ Total Subsidiary Non- Adjustments/ Total
Guarantor guarantor Eliminations Hedstrom guarantor guarantor Eliminations Hedstrom
========= ========= ============ ======== ========= ========== ============ ========
<S>
Cash flows from operating
activities: <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)(c) $ (3,751) $ 1,307 $ - $ (2,444) $ 1,257 $ (76) $ 29 $ 1,210
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 10,275 2,263 - 12,538 10,277 2,004 - 12,281
Deferred income tax
provision (c) (109) 944 - 835 (44) - - (44)
Changes in current assets and
current liabilities, net of
acquisitions:
Accounts receivable 20,264 874 - 21,138 20,992 (1,401) - 19,591
Inventories (6,502) (14,673) - (21,175) (2,351) (8,341) (200) (10,892)
Prepaid expenses and other
current assets (1,155) (444) - (1,599) 20 152 - 172
Accounts payable 482 4,321 - 4,803 (3,168) 1,490 - (1,678)
Accrued expenses (6,137) (423) - (6,560) (10,517) 2,877 171 (7,469)
Other - - - - - - - -
-------- ------- ----- -------- -------- ------ ---- --------
Net cash (used for) provided by
operating activities 13,367 (5,831) - 7,536 16,466 (3,295) - 13,171
-------- ------- ----- -------- -------- ------ ---- --------
Cash flows from investing
activities:
Acquisitions of property plant
and equipment (3,108) (3,007) - (6,115) (5,409) (1,896) - (7,305)
Acquisition of ERO, Inc. - - - (3,037) - - (3,037)
Other Acquisition - - - - (16,805) (3,500) - (20,305)
-------- ------- ----- -------- -------- ------ ---- ---------
Net cash used for investing
activities (3,108) (3,007) - (6,115) (25,251) (5,396) - (30,647)
-------- ------- ----- -------- -------- ------ ---- ---------
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended September 30, 1999 Nine Months Ended September 30, 1998
------------------------------------ -------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adustments/ Total Subsidiary Non- Adjustments/ Total
Guarantor guarantor Eliminations Hedstrom guarantor guarantor Eliminations Hedstrom
========= ========= ============ ======== ========= ========== ============ ========
<S>
Cash flows from financing
activities:
Net proceeds from issuance <C> <C> <C> <C> <C> <C> <C> <C>
of new term loans $ - $ - $ - $ - $30,000 $ - $ - $ 30,000
Principal payments on term
loans (9,699) - - (9,699) (7,249) - - (7,249)
Borrowings on new revolving
line of credit 19,030 - - 19,030 (11,900) - - (11,900)
Advances to/(from)
Nonguarantor subsidiaries (7,631) 7,631 - - (9,099) 9,099 - -
Other (810) (707) - (1,517) (10) (663) - (673)
-------- ------ ----- -------- -------- ------ ---- --------
Net cash (used for) provided
by financing activities 890 6,924 - 7,814 1,742 8,436 - 10,178
-------- ------ ----- -------- -------- ------ ---- --------
Net increase (decrease) in
cash and cash equivalents 11,149 (1,914) - 9,235 (7,043) (255) - (7,298)
Cash and cash equivalents:
Beginning of period 1,839 2,495 - 4,334 8,984 1,860 - 10,844
-------- ------ ----- -------- -------- ------ ---- --------
End of period $ 12,988 $ 581 $ - $ 13,569 $ 1,941 $1,605 $ - $ 3,546
======== ====== ===== ======== ======== ====== ==== ========
</TABLE>
<PAGE>
<TABLE>
<S>
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.
<S>
The column "Total Hedstrom" represents the consolidated financial statements of Hedstrom 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:
<S>
(a) Hedstrom Corporation's Long-Term Debt does not include a $2.5 million note payable issued by Holdings in
connection withe its 1995 recapitalization, and the issuance of Senior Discount Notes valued at $29.3 million
at September 30, 1999.
(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 September 30, 1999 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.
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
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, 1998 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 disclaims 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.
The following table sets forth net sales and operating profit for
each of Hedstrom's operating divisions for the periods indicated
(amounts in thousands):
<PAGE>
Three months Nine months
Ended Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Net sales
Bedford Division $ 9.5 $11.4 $117.2 $93.4
Ashland Division 7.5 6.3 30.5 30.6
International Division 4.1 3.2 19.9 17.0
Montreal Division 15.8 23.3 32.1 39.3
ERO Division 20.0 20.2 48.2 45.7
----- ----- ------ ------
Total net sales $56.9 $64.4 $247.9 $226.0
===== ===== ====== ======
Operating profit:
Bedford Division $(4.8) $(1.8) $ 13.0 $ 8.7
Ashland Division (0.2) (0.7) 3.2 2.3
International Division (1.4) (1.3) (1.2) (1.0)
Montreal Division 0.3 5.3 (2.9) 3.3
ERO Division 3.5 6.7 6.8 9.3
----- ----- ----- ------
Total gross profit $(2.6) $ 8.2 $18.9 $ 22.6
===== ===== ===== ======
Net Sales. Net sales for the third quarter ended September 30, 1999
decreased to $56.9 million from $64.4 million for the comparable
prior quarter, a decrease of $7.5 million. The decrease was
attributable to decreased sales at the Montreal, Bedford, and ERO
Divisions. Net sales at the Montreal Division decreased $7.5
million for the third quarter of 1999 versus the prior year
comparable quarter. This decrease was due to the lower than
anticipated sales of new Expressways! branded products and a
shifting of orders from major retailers, relating to game tables, to
the fourth quarter of the year. This decrease was partially offset
by the increase in power rider cars, as a result of the introduction
of new licensed products. Net sales at the Bedford Division
decreased $1.9 million versus the prior year comparable quarter due
to lower demand for trampolines, and sports related products. This
decrease in net sales at the Bedford Division was partially offset
by the increase in sales of wood gym sets achieved through Backyard
Products Limited, a manufacturer of wood gym sets acquired in August
1998. In addition, net sales at the ERO Division decreased by
approximately $0.2 million as decreased demand for Slumber Shoppe and
Coral products were only partially offset by increased demand for
Priss Prints products. The aforementioned decreases in net sales
were partially offset by higher net sales at the Ashland, and
International Divisions. The Ashland Division net sales increased
by $1.2 million to $7.5 million for the quarter ended September 30,
1999, from $6.3 million for the prior year's comparable quarter, due
to increased demand for Hops, decorated, undecorated, and premium
licensed play balls. The International Division's net sales for the
third quarter ended September 30, 1999, increased by $0.9 million
versus the prior year comparable period as a result of greater
market penetration.
<PAGE>
Net sales for the nine months ended September 30, 1999 versus the
nine months ended September 30, 1998, increased to $247.9 million
from $ 226.0 million an increase of $21.9 million. The increase was
attributable to the Bedford, International, and ERO divisions. Net
sales at the Bedford Division increased to $117.2 million for the
nine months ended September 30, 1999, versus $93.4 million for the
comparable period in 1998. The increase was as a result of sales of
wood gym sets achieved through the acquisition of Backyard Products
Limited. In addition, slightly lower sales of metal gym sets, wood
gym kits and sports related products were partially offset by higher
sales of trampolines. The net sales of the International Division
increased to $19.9 million for the first nine months of 1999 from
$17.0 million in the comparable period of 1998 as a result of
favorable exchange rates and market penetration. The ERO Division's
net sales increased $2.5 million to $48.2 million for the nine
months ending September 30, 1999, from $45.7 million for the prior
year's comparable period. The increase in net sales was primarily a
result of higher demand for Slumber Shoppe products resulting mainly
from the movie release of Star Wars _ Episode I. The ERO Division
increase in net sales was partially offset by a decrease in net
sales of Coral products, due to a decrease in listings of Swim and
Dive products at major retailers. The aforementioned increases in
net sales were partially offset by lower net sales at the Montreal
Division. Net sales for the Montreal Division for the nine months
ended September 30, 1999 decreased by $7.2 million to $32.1 million
from $39.3 million for the prior year's comparable period. The
decrease in net sales at the Montreal Division was due to the timing
of placement of new Express Ways! branded products and a shifting of
orders from major retailers relating to game tables to the fourth
quarter of the year. The decrease in net sales at the Montreal
Division was partially offset by increased net sales of Impact back
to school products, due to new product introductions and new
licenses. Net sales of the Ashland Division were relatively
unchanged between 1999 and 1998.
Gross Profit. Gross profit for the third quarter ended September
30, 1999, decreased by $7.2 million to $16.3 million as compared to
$23.5 million for the quarter ended September 30, 1998. As a
percentage of consolidated net sales, consolidated gross profit
percentage decreased to 28.6% in the third quarter of 1999, from
36.6% for the quarter ended September 30, 1999. The decrease was
due to lower gross profit margins at the Montreal, Bedford and ERO
Divisions. The gross profit margin at the Montreal Division
decreased to 37.3% for the quarter ended September 30, 1999 from
39.1% for the prior year comparable quarter. The Montreal
Division's decrease was primarily due to unfavorable product sales
mix and unfavorable manufacturing variances as a result of lower
production volume as compared to the prior years third quarter. The
Bedford Division's gross profit margin decreased to negative 6.3%
for the quarter ended September 30, 1999, from 14.9% for the prior
year's comparable quarter. The decrease in the Division's gross
profit percentage was due to unfavorable product sales mix resulting
from sales of trampolines, higher production employee fringe
benefits, including medical costs and unfavorable manufacturing
variances relating to the timing of the acquisition of Backyard
Products Limited. Backyard Products Limited was acquired late in
August, 1998. Due to the timing of the acquisition, the Company was
<PAGE>
not negatively impacted, in the prior year, by unfavorable
manufacturing variances which usually occur during July and August
as a result of low production volume. The gross profit margin at
the ERO Division decreased to 47.0% for the three month ended
September 30, 1999 from 54.0% for the comparable period ended
September 30, 1998. The decrease in the ERO Division's gross profit
percentage was a result of unfavorable material costs, unfavorable
product sales mix and close out sales relating to water sports
products. The aforementioned decreases were partially offset by
increased gross profit margin at the Ashland Division. The Ashland
Division's gross profit margin increased to 22.7% for the quarter
ended September 30, 1999 from 19.0% for the prior year's comparable
quarter. The increase at the Ashland Division was due to cost
reduction programs that included reducing unauthorized customer
deductions, overhead costs and material costs.
Gross profit for the nine months ended September 30, 1999 increased
by $3.8 million to $72.5 million as compared to $68.7 million for
the nine months ended September 30, 1998 as a result of higher
consolidated net sales. As a percentage of consolidated net sales,
the consolidated gross profit percentage decreased slightly to 29.2%
for the nine months ended September 30, 1999, from 30.4% for the
nine months ended September 30, 1998. The decrease in consolidated
gross profit percentage was mainly due to the lower gross margin
percentages at the ERO and International Division's. The ERO
Division's gross profit percentage decreased to 43.2% for the nine
months ended September 30, 1999, from 46.0% for the prior year's
comparable period while the International Division's gross profit
percentage decreased to 17.6% from 22.4%. These decreases were
mainly a result of unfavorable product sales mix as well as low
margin close out sales of water sports products at the ERO Division.
The decrease in the gross margin percentage at the ERO Division was
partially offset by slightly higher gross profit margin percentages
at the Company's other divisions.
Selling general and administrative expenses increased $3.4 million
to $18.8 million for the third quarter ended September 30, 1999,
versus $15.4 million for the prior years third quarter. As a
percentage of net sales, selling, general and administrative
expenses increased to 33.0% from 23.9% for the quarter ended
September 30, 1999. The increase was a result of lower sales volume
to cover fixed expenses and product sales mix as consolidated net
sales included a greater percentage of royalty bearing products as
compared to the prior year. For the nine months ended September 30,
1999 selling, general and administrative expenses increased $7.5
million to $53.6 million from $46.1 million for the nine months
ended September 30, 1998. As a percentage of net sales, selling,
general and administrative expenses increased slightly to 21.6% from
20.4% for the nine months ended September 30, 1998. This increase
was mainly a result of product sales mix as consolidated net sales
included a greater percentage of royalty bearing products as
compared to the prior year.
Interest Expense. Interest expense for the three and nine months
ended September 30, 1999, versus September 30, 1998 increased as a
result of higher debt levels associated with greater working
capital.
<PAGE>
Income Tax Expense. Holdings' effective income tax rate for the
three months ended September 30, 1999, and the nine months ended
September 30, 1999 and 1998 was 41.0%.
Liquidity and Capital Resources of the Company
Working Capital and Cash Flows
Net cash provided by operating activities was $7.5 million for the
nine months ended September 30, 1999 versus $13.2 million provided
by operations for the prior year comparable period. The decrease
was mainly a result of higher inventory levels.
Net cash used for investing activities was $6.1 million, all
relating to the acquisitions of property, plant and equipment.
Net cash provided by financing activities for the nine months ended
September 30, 1999, was $7.8 million resulting from $19.0 million of
net proceeds on the Company's revolving loan to fund additional
working capital requirements and meet debt service requirements
partially offset by principal repayments of $9.7 million on the
Company's term loans and $1.5 million of scheduled principal
repayments on capital leases for the nine months ended September 30,
1999.
Liquidity
The Company's primary liquidity demands are for capital
expenditures, term loan principal payments and for working capital
needs. The Senior Credit Facilities impose an annual limit of $10.0
million on the Company's capital expenditures and investments
(subject in any given year to a roll-over of up to $4.0 million of
unused capital expenditure capacity from the previous year). The
Senior Credit Facilities impose significant restrictions on the
Company's ability to make dividend payments.
The Company's primary sources of liquidity are cash flows from
operations and borrowings under the Revolving Credit Facility. As of
September 30, 1999, approximately $13.6 million was available to the
Company (subject to borrowing base limitations) from cash on hand
and available borrowings under the Revolving Credit Facility.
Management believes that cash generated from operations, together
with borrowings under the Revolving Credit Facility and cash on
hand, will be sufficient to meet the Company's working capital and
capital expenditures needs for the foreseeable future.
Interest payments on the Senior Subordinated Notes and interest and
principal payments under the Senior Credit Facilities represent
significant cash requirements for the Company. The Senior
Subordinated Notes require semiannual interest payments of $5.5
million. Borrowings under the Senior Credit Facilities bear interest
at floating rates and require interest payments on varying dates
depending on the interest rate option selected by the Company.
<PAGE>
Outstanding borrowings under the Senior Credit Facilities consisted
of $121.0 million under the Term Loan Facilities, comprised of
$57.5million of Tranche A Term Loans maturing in 2003 and $63.5
million of Tranche B Term Loans maturing in 2005. The Senior Credit
Facilities also include a $70 million Revolving Credit Facility. As
of September 30, 1999, a balance of $54.0 million was outstanding
under the Revolving Credit Facility.
On September 30, 1999, the Company entered into its Fifth Amendment
to the Senior Credit Facility. The Fifth Amendment, among other
things, provided for less restrictive financial covenants for the
third and fourth quarters of 1999. As of the date hereof, management
believes the Company may not be able to meet the fourth quarter
financial covenants set forth in the Fifth Amendment. Accordingly,
the Company intends to begin negotiations with the bank group to
amend the financial ratio covenants for the period ending December
31, 1999 as well as for the year 2000. Although the Company
anticipates that it will be able to obtain amendments to the Senior
Credit Facility, there can be no assurance that the Company will be
able to obtain such amendments.
Year 2000 Date Conversion
The Company relies on a significant number of computer programs and
computer technologies (collectively, IT) and non-IT Systems for
its key operations, including product design, finance and various
administrative functions. In July of 1997 the Company began an
impact assessment of the Year 2000 on its business systems and
ability to provide product, information, and services to its
business partners before, during and after the Year 2000. As a
result of this assessment the Company adopted a two phase plan to
attain Year 2000 compliance.
Phase I of the Company's Year 2000 compliance plan addresses its
mainframe business systems which need to be converted to handle
Year 2000 dates. Phase II addresses computer hardware, stand-alone
systems, and embedded systems which may need to be upgraded by the
end of 1999.
Conversion of Phase I data bases and programs was completed in July
1998. The systems testing phase was completed in the first quarter
of 1999, and the Company installed the converted business system in
April, 1999.
Assessment of all computer hardware, stand-alone systems,
communications hardware and software which may require replacement
or upgrade by January 2000 is now complete. The Company has
identified all systems which it believes are not Year 2000
compliant. Remediation of these systems will take place throughout
1999.
In addition, the Company is evaluating the Year 2000 readiness of
its key vendors to ensure that its ability to produce and deliver
products is not materially impacted. As this evaluation is
completed, the Company will decide what further actions, if any, are
appropriate.
<PAGE>
The Company anticipates that its total Year 2000 compliance costs
will approximate $1.0 million. The Company believes that it has
sufficient funds available through its existing credit facilities to
address the Year 2000 costs. These costs will include software,
hardware and consulting expenses which are being expensed as
incurred. The Company believes its current worse case scenario would
be the inability of suppliers to deliver key raw materials. The
Company is currently devising contingency plans which could among
other things include carrying excess stock of key raw materials such
as steel at December 31, 1999. Although the Company is confident
that the Year 2000 issues are manageable and will be dealt with in a
timely fashion, this conclusion is forward looking and involves
uncertainty and risks. The ultimate result may be impacted by a
variety of factors such as, but not limited to, the ability to
successfully remediate existing IT systems, the failure to identify
problems associated with non-IT systems and problems associated with
supplier or customer information systems, any of which could have a
material adverse effect on the Company's ability to successfully
address Year 2000 issues.
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.
<PAGE>
(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 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 Discount Note.
10.1 - Amendment Number Five dated September 30, 1999
to the Credit Agreement, dated as of June 12,
1997, among Hedstrom Corporation, Hedstrom
Holdings, Inc., the finacial institutions
party thereto and Credit Suisse First Boston,
as agent.
11.1 - Computation of Earnings Per Share.
27.1 - Financial Data Schedule.
b) Reports on Form 8-K
The registrant has not filed any reports on Form 8-K
during the quarter.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrants have duly caused this report to be signed on
their behalf by the undersigned thereunto duly authorized.
Date: November 11, 1999
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
/s/ David F. Crowley
David F.Crowley
Chief Financial Officer
FIFTH AMENDMENT
FIFTH AMENDMENT, dated as of September 30, 1999 (this Fifth
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.
WITNESSETH
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 Agreement shall be used as so defined.
2. Amendment to Subsection 1.1. Subsection 1.1 of the Credit
Agreement is hereby amended by:
(a) deleting in its entirety the definition of the term AApplicable Margin
contained therein and by substituting therefor the following:
Applicable Margin=: with respect to:
(a) Tranche B Loans, (i) 3.50% per annum, in the case of Eurodollar
Loans and (ii) 2.50% per annum, in the case of ABR Loans;
provided that, during such time as the Leverage Ratio is greater
than or equal to 6.0 to 1.0, the Applicable Margin with respect
to Tranche B Loans shall be (x) 4.00% per annum, in the case of
Eurodollar Loans and (y) 3.00% per annum, in the case of ABR
Loans; and
(b) Tranche A Loans and Revolving Credit Loans, the rate per annum
set forth under the relevant column heading below opposite the
Leverage Ratio then in effect:
Applicable Margin
Eurodollar
Leverage Ratio ABR Loans Loans
Greater than or equal to
6.0 to 1.0 2.50% 3.50%
Less than 6.0 to 1.0,
but greater than or
equal to 5.0 to 1.00 2.00% 3.00%
Less than 5.0 to 1.0,
but greater than or
equal to 4.5 to 1.0 1.75% 2.75%
Less than 4.5 to 1.0,
but greater than or
equal to 4.0 to 1.0 1.50% 2.50%
Less than 4.0 to 1.0,
but greater than or
equal to 3.5 to 1.0 1.25% 2.25%
Less than 3.5 to 1.0,
but greater than or
equal to 3.0 to 1.0 1.00% 2.00%
Less than 3.0 to 1.0 .75% 1.75%
; provided that any change in the interest rate on a Loan resulting
from a change in the Leverage Ratio of the Borrower and its
Subsidiaries shall become effective as of the opening of business
on the date which is the earlier of (A) the date upon which the
Administrative Agent receives the financial statements required to
be delivered pursuant to subsection 10.1 which evidence such change
in the Leverage Ratio and (B) the date upon which such financial
statements are required to be delivered pursuant to subsection 10.1;
provided, further, that, in the event that the financial statements
required to be delivered pursuant to subsection 10.1(a) or (b), as
applicable, are not delivered when due (after giving effect to the
applicable cure period), then during the period from the date upon
which such financial statements were required to be delivered until
the date upon which they actually are delivered, the Leverage Ratio
shall be deemed for purposes of this definition to be greater than
or equal to 6.0 to 1.0; and provided, further, however, that the
"Applicable Margin" from time to timefor Swing Line Loans shall be
the same as the "Applicable Margin" then in effect for ABR Loans.
(b) deleting in its entirety the definition of the term Clean-Down Amount
contained therein and by substituting therefor the following:
Clean Down Amount: the amount equal to $10,000,000 for the 1998
fiscal year and $15,000,000 for each fiscal year (other than the
19 (fiscal year) thereafter; provided that with respect to each
such fiscal year such amount shall be increased by the lesser of
(a) $15,000,000 and (b) the aggregate principal amount of the
Revolving Credit Loans borrowed to consummate the acquisition
permitted by subsection 11.10(n)(i). Notwithstanding the foregoing,
the Clean-Down Amount for the 1999 fiscal year shall be $34,000,000.
3. Amendment to Subsection 11.1(a). Subsection 11.1(a) of the
Credit Agreement hereby is amended by:
(a) deleting therefrom the ratio 1.50 to 1.00" which is set forth opposite
the Third Fiscal Quarter 1999" and by substituting therefor the ratio
1.25 to 1.00"; and
(b) deleting therefrom the ratio 1.85 to 1.00" which is set forth opposite
the Fourth Fiscal Quarter 1999" and by substituting therefor the ratio
1.50 to 1.00.
4. Amendment to Subsection 11.1(b). Subsection 11.1(b) of the
Credit Agreement hereby is amended by:
(a) deleting therefrom the ratio 6.00 to 1.00" which is set forth opposite
the Third Fiscal Quarter 1999" and by substituting therefor the ratio
7.80 to 1.00"; and
(b) deleting therefrom the ratio 5.00 to 1.00" which is set forth opposite
the Fourth Fiscal Quarter 1999" and by substituting therefor the ratio
6.75 to 1.00.
4. Effective Date. This Fifth Amendment will become effective
as of the date hereof (the Fifth Amendment Effective Date) upon
(i) its execution by the Parent, the Borrower and the Required
Lenders in accordance with the terms of the Credit Agreement and
(ii) payment to each of the Lenders that executes and delivers
this Fifth Amendment to the Administrative Agent prior to October
12, 1999 (or such later date as the Administrative Agent and the
Borrower may agree) of an amendment fee equal to .25% of such
Lenders Commitments and Loans on the Fifth Amendment Effective Date.
5. Representations and Warranties. The Parent and the Borrower
represent and warrant to each Lender that (a) this Fifth 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.
6. Continuing Effect. Except as expressly waived or amended
hereby, the Agreement shall continue to be and shall remain in full
force and effect in accordance with its terms. This Fifth Amendment
shall constitute a Credit Document.
7. Governing Law. This Fifth Amendment shall be governed by, and
construed and interpreted in accordance with, the laws of the State
of New York.
8. Counterparts. This Fifth 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.
9. 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 Fifth Amendment,
including, without limitation, the reasonable fees and disbursements
of counsel to the Administrative Agent.
10. Acknowledgment with Respect to Various Credit Documents. Each
Credit Party, by its execution and delivery of a copy of this Fifth 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
Fifth 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 Fifth 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 Fifth
Amendment 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:
Lender Name:
By:
Title:
ACKNOWLEDGED AND AGREED
ERO, INC. ERO INDUSTRIES, INC.
By: By:
Name:
Title:
ERO MARKETING, INC. PRISS PRINTS, INC.
By: By:
Name:
Title:
IMPACT, INC. ERO CANADA, INC.
By: By:
Name:
Title:
AMAV INDUSTRIES INC.
By:
<TABLE>
EXHIBIT 11.1
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
EARNINGS PER SHARE DISCLOSURE
For the nine month period ended September 30, 1999
(Dollars in thousands)
Income Shares Share
(Numerator) (Denominator) Amount
<S>
Basic Earnings Per Share: <C> <C> <C>
Net loss $(4,240) 67,663 $(0.06)
Effect of Dilutive Securities:
Stock options in the money - - - -
Buyback of shares at average price of $1.65 - - -
------- ------ ------
Net effect of stock options - - -
------- ------ ------
Diluted Earnings Per Share:
Net loss $(4,240) 67,663 $(0.06)
======= ====== ======
All options outstanding at September 30, 1999 were excluded from the calculation of
diluted earnings per share as they are anti-dilutive.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 13,569
<SECURITIES> 0
<RECEIVABLES> 51,106
<ALLOWANCES> 0
<INVENTORY> 74,897
<CURRENT-ASSETS> 158,062
<PP&E> 48,337
<DEPRECIATION> 0
<TOTAL-ASSETS> 405,299
<CURRENT-LIABILITIES> 111,835
<BONDS> 0
0
0
<COMMON> 676
<OTHER-SE> 36,867
<TOTAL-LIABILITY-AND-EQUITY> 405,299
<SALES> 247,923
<TOTAL-REVENUES> 247,923
<CGS> 175,410
<TOTAL-COSTS> 53,627
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,073
<INCOME-PRETAX> (7,187)
<INCOME-TAX> (2,947)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,240)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
