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, 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 August 13, 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 JUNE 30, 1999
TABLE OF CONTENTS
Page
Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
As of June 30, 1999 and December 31, 1998
Consolidated Income Statements
Three months ended June 30, 1999 and 1998
Six months ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998
Consolidated Statement of Stockholders' Equity
As of and for the six months ended June 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)
June 30 December 31,
1999 1998
------------- ------------
(unaudited)
<S>
ASSETS
CURRENT ASSETS: <C> <C>
Cash and cash equivalents $ 5,811 $ 4,334
Trade accounts receivable, net of
allowance for doubtful accounts 82,153 69,522
Taxes receivable 6,745 6,745
Inventories 58,999 53,722
Deferred income taxes 6,016 6,016
Prepaid expenses and other current assets 6,371 4,130
-------- --------
TOTAL CURRENT ASSETS 166,095 144,469
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost,
net of accumulated depreciation 47,522 48,102
-------- --------
OTHER ASSETS:
Deferred charges, net of accumulated
amortization 13,456 14,795
Goodwill, net of accumulated
amortization 185,438 186,826
Deferred income taxes 793 1,575
-------- --------
TOTAL OTHER ASSETS 199,687 203,196
-------- --------
TOTAL ASSETS $413,304 $395,767
======== ========
</TABLE>
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: <C> <C>
Revolving line of credit $ 54,200 $ 34,920
Current portion of long-term debt
and capital leases 13,187 11,905
Accounts payable 25,228 20,709
Accrued expenses 18,275 22,970
-------- --------
TOTAL CURRENT LIABILITIES 110,890 90,504
-------- --------
LONG-TERM DEBT:
Senior Subordinated Notes 110,000 110,000
Senior Discount Notes 28,374 26,584
Term Loans 116,509 123,736
Notes payable to related parties 2,500 2,500
Capital leases 1,367 1,690
Other 1,668 2,154
-------- --------
TOTAL LONG-TERM DEBT 260,418 266,664
-------- --------
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 (1,811) (2,616)
Accumulated deficit (8,422) (11,014)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 41,996 38,599
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' $413,304 $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 June 30,
---------------------------------------
1999 1998
---- ----
<S> <C> <C>
Net sales $102,203 $83,272
Cost of sales 73,288 60,191
------- -------
Gross profit 28,915 23,081
Selling, general and administrative expense 18,524 15,874
------- -------
Operating income 10,391 7,207
Interest expense 9,019 7,793
------- -------
Income (loss) before income taxes 1,372 (586)
Income tax (benefit) expense 561 (247)
------- -------
Net income (loss) $ 811 $ (339)
======= =======
Basic earnings (loss) per share:
Net income (loss) per share $0.01 ($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 $0.01 ($0.01)
Weighted average number of common shares
outstanding (in thousands) 68,994 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 INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
For the six months ended June 30,
---------------------------------------
1999 1998
---- ----
<S> <C> <C>
Net sales $190,987 $161,661
Cost of sales 134,749 116,516
------- -------
Gross profit 56,238 45,145
Selling, general and administrative expense 34,795 30,689
------- -------
Operating income 21,443 14,456
Interest expense 17,051 15,481
------- -------
Income (loss) before income taxes 4,392 (1,025)
Income tax (benefit) expense 1,800 (427)
------- -------
Net income (loss) $ 2,592 $ (598)
======= =======
Basic earnings (loss) per share:
Net income (loss) per share $0.04 ($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 $0.04 ($0.01)
Weighted average number of common shares
outstanding (in thousands) 68,994 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 six months ended June 30,
--------------------------------------
1999 1998
---- ----
<S>
Cash flows from operating activities: <C> <C>
Net income (loss) $ 2,592 $ (598)
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 6,715 6,580
Amortization of deferred financing fees 3,619 3,445
Deferred income tax benefit 782 (44)
Changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable (12,090) 1,682
Inventories (5,277) (5,454)
Prepaid expenses and other current assets (2,241) 66
Accounts payable 4,519 5,519
Accrued expenses (6,305) (7,730)
-------- -------
Net cash provided by (used for) operating activities (7,686) 3,466
-------- -------
Cash flows from investing activities:
Acquisitions of property, plant and equipment (3,363) (4,962)
Acquisition of ERO, Inc. - (3,037)
Other acquisitions - (3,500)
-------- --------
Net cash used for investing activities (3,363) (11,499)
-------- --------
</TABLE>
<PAGE>
<TABLE>
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the three months ended March 31,
--------------------------------------
1999 1998
---- ----
<S>
Cash flows from financing activities: <C> <C>
Principal payments on Term Loans (5,466) (4,066)
Borrowings on Revolving Credit Facility, net 19,280 8,652
Other (1,288) (164)
-------- --------
Net cash provided by financing activities 12,526 4,422
-------- --------
Net increase (decrease) in cash and cash
equivalents (1,477) (3,611)
Cash and cash equivalents:
Beginning of period 4,334 10,844
-------- -------
End of period $ 5,811 $ 7,233
======== =======
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 - - - 805 - 805
Net income - - - - 2,592 2,592
--------
Comprehensive income - - - - - 3,397
--------------------------------------------------------- --------
Balance at March 31, 1999 67,662,883 $676 $51,553 $(1,811) $ (8,422) $41,996
===================================================================
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 six months ended
June 30, 1999 are not necessarily indicative of the results to be
expected for the entire fiscal year.
NOTE 2 - INVENTORIES:
Inventories at June 30, 1999 and December 31, 1998 consist of the
following (in thousands):
June 30, December 31,
1999 1998
------- ----------
Raw materials $20,019 $21,421
Work-in-process 10,040 9,013
Finished goods 28,940 23,288
------- -------
$58,999 $53,722
======= =======
NOTE 3 - DEBT:
Debt consists of the following (in thousands):
June 30, December 31,
1999 1998
------- -----------
Senior Subordinated Notes $110,000 $110,000
Term Loans 127,700 134,158
Revolving Credit Facility 54,200 34,920
Senior Discount Notes 28,374 26,584
Other 7,531 7,827
------- --------
$327,805 $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.
At the Company's option, the interest rates per annum applicable to
the Senior Credit Facilities are either (i) the Eurocurrency Rate
(as defined) plus 3.0% in the case of the Tranche A Term Loan
Facility and the Revolving Credit Facility or 3.5% in the case of
the Tranche B Term Loan Facility or (ii) the Alternate Base Rate (as
defined) plus 2.0% in the case of the Tranche A Term Loan Facility
and the Revolving Credit Facility or 2.5% in the case of the Tranche
B Term Loan Facility. The Alternate Base Rate is the highest of (a)
Credit Suisse First Boston's Prime Rate (as defined) or (b) the
federal funds effective rate from time to time plus 0.5%.
The 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.
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 June 30, 1999,
the Company was in compliance with all of the restrictive covenants
contained in the Senior Credit Facilities.
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.
<PAGE>
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.
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.
<PAGE>
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.
The International Division produces and distributes gym sets, and
other products, manufactured by domestic divisions, outside of the
United States.
<PAGE>
<TABLE>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- ------------------
<S> <C> <C> <C> <C>
(Dollars in thousands) 1999 1998 1999 1998
---- ---- ---- ----
Bedford Division
Net revenues $57,313 $42,081 $107,900 $81,997
Operating earnings 8,417 5,500 17,787 10,559
Identifiable assets 72,780 74,602 72,780 74,602
Ashland Division
Net revenues 10,140 10,615 23,011 24,308
Operating earnings 1,499 930 3,271 3,030
Identifiable assets 24,622 26,445 24,622 26,445
ERO Division
Net revenues 14,293 11,917 28,161 25,517
Operating earnings 1,604 439 3,322 2,563
Identifiable assets 36,047 28,968 36,047 28,968
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- ------------------
(Dollars in thousands) 1999 1998 1999 1998
---- ---- ---- ----
Montreal Division
Net revenues 10,841 9,852 16,271 15,975
Operating earnings (1,806) 255 (3,062) (2,005)
Identifiable assets 60,035 52,564 60,035 52,564
International Division
Net revenues 9,616 8,807 15,844 13,864
Operating earnings 677 83 125 309
Identifiable assets 14,035 12,261 14,035 12,261
Corporate, other non-
segments and Intercompany
Eliminations
Identifiable assets 205,785 200,927 205,785 200,927
Consolidated totals from
continuing operations
Net revenues 102,203 83,272 190,987 161,667
Operating earnings 10,391 7,207 21,443 14,456
Identifiable assets 413,304 395,767 413,304 395,767
</TABLE>
<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.
<TABLE>
NOTE 6 - SUBSIDIARY GUARANTORS / NONGUARANTORS FINANCIAL INFORMATION:
The following is financial information pertaining to Hedstrom and
its 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>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(In thousands)
At June 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 $ 5,501 $ 310 $ - $ 5,811 $ 1,839 $ 2,495 $ - $ 4,334
Accounts receivable, net 72,629 9,524 - 82,153 59,193 10,329 - 69,522
Taxes receivable 6,095 650 - 6,745 6,095 650 - 6,745
Inventories 39,281 19,774 (56) 58,999 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 5,095 1,276 - 6,371 3,849 281 - 4,130
-------- ------- -------- -------- -------- -------- -------- --------
Total current assets 134,617 31,534 (56) 166,095 117,734 26,791 (56) 144,469
-------- ------- -------- -------- -------- -------- -------- --------
Property, plant, and
equipment, net 30,627 16,895 - 47,522 31,361 16,741 - 48,102
-------- ------- -------- ------- -------- -------- -------- --------
Other assets:
Investment in and advances
to Nonguarantor
Subsidiaries 61,437 - (61,437) - 56,190 - (56,190) -
Deferred charges, net 12,622 - - 12,622 13,857 - - 13,857
Goodwill, net 165,021 20,417 - 185,438 165,835 20,991 - 186,826
Deferred income taxes 1,254 (2,555) - (1,301) 1,092 (1,611) - (519)
-------- ------- -------- -------- -------- -------- -------- --------
Total other assets 240,334 17,862 (61,437) 196,759 236,974 19,380 (56,190) 200,164
-------- ------- -------- -------- -------- -------- -------- --------
Total assets $405,578 $66,291 $(61,493) $410,376 $386,069 $ 62,912 $ (56,246) $392,735
======== ======= ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(In thousands)
At June 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 $ 54,200 $ - $ - $54,200 $ 34,920 $ - $ - $ 34,920
Current portion of long
term debt and capital
leases 12,749 438 - 13,187 11,417 488 - 11,905
Advances from Guarantor
Subidiaries - 44,338 (44,338) - - 39,091 (39,091) -
Accounts payable (c) 22,463 2,765 - 25,228 17,170 3,539 - 20,709
Accrued expenses 16,938 1,787 (23) 18,702 20,520 2,198 (23) 22,695
-------- ------- -------- --------- -------- ------- -------- --------
Total current
liabilities 106,350 49,328 (44,361) 111,317 84,027 45,316 (39,114) 90,229
-------- ------- -------- --------- -------- ------- -------- --------
Senior Subordinated
Notes 110,000 - - 110,000 110,000 - - 110,000
Term Loans 116,509 - - 116,509 123,736 - - 123,736
Capital leases 1,367 - - 1,367 1,690 - - 1,690
Other 1,368 300 - 1,668 1,667 487 - 2,154
-------- ------- -------- --------- -------- ------- -------- --------
Total long-term debt(a) 229,244 300 - 229,544 237,093 487 - 237,580
-------- ------- -------- --------- -------- ------- -------- --------
Total liabilities 335,594 49,628 (44,361) 340,861 321,120 45,803 (39,114) 327,809
-------- ------- -------- --------- -------- ------- -------- --------
Total stockholder's
equity (deficit)(b) 69,984 16,663 (17,132) 69,515 64,949 17,109 (17,132) 64,926
-------- ------- -------- --------- -------- ------- -------- --------
Total liabilities and
stockholders' equity $405,578 $66,291 $(61,493) $410,376 $386,069 $62,912 $(56,246) $392,735
======== ======= ======== ========= ======== ======= ======== ========
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATING INCOME STATEMENTS
(In thousands)
Three Months Ended June 30, 1999 Three Months Ended June 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 $97,362 $10,747 $ (5,906) $102,203 $79,535 $ 9,664 $ (5,927) $ 83,272
Cost of sales 71,120 8,074 (5,906) 73,288 59,672 6,445 (5,926) 60,191
------- ------- -------- ------- ------- ------- -------- -------
Gross profit (loss) 26,242 2,673 - 28,915 19,863 3,219 (1) 23,081
Selling, general and
administrative expense 15,891 2,633 - 18,524 13,411 2,463 - 15,874
------- ------- -------- ------- ------- ------- -------- -------
Operating income (loss) 10,351 40 - 10,391 6,452 756 (1) 7,207
Interest expense (c) 7,484 520 - 8,004 6,238 623 - 6,861
------- ------- -------- ------- ------- ------- -------- -------
Income (loss) before
income taxes 2,867 (480) - 2,387 214 133 (1) 346
Income tax provision
(benefit) (c) 1,173 (196) - 977 12 122 - 134
------- ------- -------- ------- ------- ------- -------- -------
Net income (loss) $ 1,694 $ (284) $ - $ 1,410 $ 202 $ 11 $ (1) $ 212
======= ======= ======== ======= ======= ======= ======== =======
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATING INCOME STATEMENTS
(In thousands)
Six Months Ended June 30, 1999 Six Months Ended June 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 $183,210 $19,948 $(12,171) $190,987 $156,274 $15,605 $(10,218) $161,661
Cost of sales 132,261 14,659 (12,171) 134,749 115,110 11,685 (10,279) 116,516
-------- ------- -------- ------- -------- ------- -------- -------
Gross profit (loss) 50,949 5,289 - 56,238 41,164 3,920 61 45,145
Selling, general and
administrative expense 29,530 5,265 - 34,795 26,488 4,201 - 30,689
------- ------- -------- ------- -------- ------- -------- -------
Operating income (loss) 21,419 24 - 21,443 14,676 (281) 61 14,456
Interest expense (c) 14,007 1,025 - 15,032 12,460 1,183 - 13,643
------- ------- -------- ------- -------- ------- -------- -------
Income (loss) before
income taxes 7,412 (1,001) - 6,411 2,216 (1,464) 61 813
Income tax provision
(benefit) (c) 3,037 (410) - 2,627 806 (505) 25 326
------- ------- -------- ------- -------- ------- -------- -------
Net income (loss) $ 4,375 $ (591) $ - $ 3,784 $ 1,410 $ (959) $ 36 $ 487
======= ======= ======== ======= ======== ======= ======== =======
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30, 1999 Six Months Ended June 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) $ 4,375 $ (591) $ - $ 3,784 $ 1,410 $ (959) $ 36 $ 487
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 6,961 1,479 - 8,440 6,834 1,478 - 8,312
Deferred income tax
provision (c) (162) 944 - 782 (44) - - (44)
Changes in current assets and
current liabilities, net of
acquisitions:
Accounts receivable (12,895) 805 - (12,090) 417 1,265 - 1,682
Inventories 1,461 (6,738) - (5,277) 3,384 (8,649) (189) (5,454)
Prepaid expenses and other
current assets (1,246) (995) - (2,241) 56 10 - 66
Accounts payable 5,293 (774) - 4,519 4,884 636 - 5,520
Accrued expenses (5,192) (411) - (5,603) (9,488) 2,232 153 (7,103)
-------- ------ ----- --------- -------- ------ ---- --------
Net cash (used for) provided by
operating activities (1,405) (6,281) - (7,686) 7,453 (3,987) - 3,466
-------- ------ ----- --------- -------- ------ ---- --------
Cash flows from investing
activities:
Acquisitions of property plant
and equipment (2,260) (1,103) - (3,363) (3,621) (1,341) - (4,962)
Acquisition of ERO, Inc. - - - (3,037) - - (3,037)
Other Acquisition - - - - - (3,500) - (3,500)
-------- ------ ----- -------- -------- ------ ---- ---------
Net cash used for investing
activities (2,260) (1,103) - (3,363) (6,658) (4,841) - (11,499)
-------- ------ ----- -------- -------- ------ ---- ---------
</TABLE>
<PAGE>
<TABLE>
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30, 1999 Six Months Ended June 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:
Principal payments on term <C> <C> <C> <C> <C> <C> <C> <C>
loans (5,466) - - (5,466) (4,066) - - (4,066)
Borrowings on revolving
line of credit 19,280 - - 19,280 8,652 - - 8,652
Advances to/(from)
Nonguarantor subsidiaries (5,247) 5,247 - - (8,136) 8,136 - -
Other (1,240) (48) - (1,288) 241 (405) - (164)
-------- ------ ----- -------- -------- ------ ---- ---------
Net cash (used for) provided
by financing activities 7,327 5,199 - 12,526 (3,309) 7,731 - (4,422)
-------- ------ ----- -------- -------- ------ ---- ---------
Net increase (decrease) in
cash and cash equivalents 3,662 (2,185) - 1,477 (2,514) (1,097) - (3,611)
Cash and cash equivalents:
Beginning of period 1,839 2,495 - 4,334 8,894 1,860 - 10,844
-------- ------ ----- -------- -------- ------ ---- --------
End of period $ 5,501 $ 310 $ - $ 5,811 $ 6,470 $ 763 $ - $ 7,233
======== ====== ===== ======== ======== ====== ==== ========
</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.
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:
(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 $28.4 million
at June 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, 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.
<S>
</TABLE>
<PAGE>
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, 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.
RESULTS OF OPERATIONS
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 Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
Net sales
Bedford Division $ 57.3 $42.1 $107.7 $ 82.0
Ashland Division 10.1 10.6 23.0 24.3
International Division 9.6 8.8 15.8 13.9
ERO Division 14.3 11.9 28.2 25.5
Montreal Division 10.9 9.9 16.3 16.0
----- ----- ------ -----
Total net income $102.2 $83.3 $191.0 $161.7
====== ===== ====== ======
Operating profit:
Bedford Division $ 8.4 $ 5.5 $17.8 $ 10.6
Ashland Division 1.5 0.9 3.3 3.0
International Division 0.8 0.0 0.2 0.3
ERO Division 1.6 0.5 3.3 2.6
Montreal Division (1.9) 0.3 (3.2) (2.0)
----- ----- ----- ------
Total gross profit $10.4 $ 7.2 $21.4 $ 14.5
===== ===== ===== ======
Net Sales. Net sales for the second quarter ended June 30, 1999
increased to $102.2 million from $83.3 million for the comparable
prior year quarter, an increase of $18.9 million. The increase was
attributable to increased sales at the Bedford, ERO, Montreal, and
International Divisions. Net sales of the Bedford Division
increased by $15.2 million for the second quarter of 1999 versus the
prior year comparable quarter. This increase in net sales was
primarily due to the additional wood gym set sales achieved through
the acquisition of Backyard Products Limited, a manufacturer of wood
gym sets acquired in August 1998. In addition higher sales of
trampolines and metal gym sets were offset by lower demand for wood
gym kits. Net sales at the ERO Division increased $2.4 million
versus the prior year comparable period due to increased demand for
Slumber Shoppe and Priss Prints products, related to the movie
release of Star Wars - Episode I. Net sales at the Montreal
Division increased by $1.0 million compared to the prior years
second quarter resulting primarily from increased sales of Impact
back to school products, due to new product introductions and new
licenses. This increase in net sales at the Montreal Division was
partially offset by the decrease in sales of the arts and activities
products due to delay in timing of placements of new Express Ways!
branded products. The International Division's net sales for the
second quarter ended June 30, 1999 increased by $0.8 million versus
the prior year comparable period. The aforementioned increases in
net sales were partially offset by lower net sales at the Ashland
Division. The Ashland Division's net sales decreased by $0.5
million to $10.1 million for the quarter ended June 30, 1999 from
$10.6 million for the prior year's comparable quarter, due to
decreased demand for the Hops product line.
<PAGE>
Net sales for the six months ended June 30, 1999 versus the six
months ended June 30, 1998 increased to $191.0 million from $161.7
million an increase of $29.3 million. The increase was attributable
to the Bedford, ERO and International divisions. At the Bedford
division, the acquisition of Backyard Products Limited in August
1998 resulted in an increase in net sales of $23.8 million for the
six months ended June 30, 1999 compared to the same period in 1998.
Net sales of the ERO Division increased by $2.7 million for the
first six months of 1999 versus the prior year comparable period as
a result of higher demand for Slumber Shoppe products resulting
mainly from the movie release of Star Wars - Episode I, this
increase was 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 net sales for the International Division increased
to $15.8 million for the first six months of 1999 from $13.9 million
in the comparable period of 1998 as a result of the acquisition of
certain assets of Bestoy; a U.K. Manufacturer made during the first
quarter of 1998. The aforementioned increases were partially offset
by lower net sales at the Ashland Division. The Ashland Division's
net sales decreased by $1.9 million to $13.9 million for the six-
month period ended June 30, 1999 versus the prior year's comparable
period. The decrease was due to lower demand for licensed Hops
products by retailers and lower sales of the undecorated playballs,
resulting from customer inventory reduction efforts, the effects of
which were partially offset by increased sales of ball pits. Net
sales for the Montreal Division for the first six months of 1999
versus the same period of 1998 remained relatively unchanged.
Within the Montreal Division, an increase in net sales of Impact
back to school products, due to new product introductions and new
licenses was offset by decreased sales of arts and activities
products, due to the timing of placement of new Express Ways!
branded products.
Gross Profit. Gross profit for the second quarter ended June 30,
1999 increased by $5.8 million to $28.9 million as compared to $23.1
million for the quarter ended June 30, 1998 as a result of higher
consolidated net sales. As a percentage of consolidated net sales,
consolidated gross profit percentage increased to 28.3% in the
second quarter of 1999, from 27.7% for the quarter ended June 30,
1998. The increase was primarily attributable to the ERO Division's
gross profit margin increasing to 42.7% in the second quarter of
1999, from 34.5% for the quarter ended June 30, 1998. The increase
in the ERO Division's gross profit percentage was due to a more
favorable product sales mix resulting from increased sales of
Slumber Shoppe products, which carry a higher overall gross profit
margin, and decreased sales of Coral products, which generally carry
a lower overall profit margin. Additionally, the ERO Divisions
gross margin percentage was positively impacted by favorable
production variances resulting from increased production volume.
Also, contributing to the increase in gross profit percentage was
the increase in the Ashland Division's gross profit percentage.
The Ashland Division's gross profit percentage increased to 34.7%
for the second quarter ended June 30, 1999 from 30.2% for the prior
year comparable quarter. The increase was due to cost reduction
programs that included reducing unauthorized customer deductions,
overhead costs and material costs. The cost reduction programs at
<PAGE>
the Ashland Division were partially offset by an unfavorable product
sales mix for the second quarter of 1999 versus the second quarter
of 1998. In addition a slight increase in the gross margin
percentage of the International Division due to favorable product
sales mix was offset by a decrease in the gross margin percentage
of the Montreal Division. The Montreal Division's gross profit
percentage decreased to 33.0% for the second quarter ended June 30,
1999 from 41.4% for the prior year comparable quarter ended June 30,
1998, due to an unfavorable product sales mix. The unfavorable
sales mix was a result of increased sales of Impact back to school
products, which generally carry a lower overall gross profit
percentage, and decreased sales of arts and activity products, which
generally carry a higher overall gross profit margin. The Bedford
Division's gross profit margin percentage remained unchanged at
23.0% for the quarters ended June 30, 1999, and 1998.
Gross profit for the six months ended June 30, 1999 increased by
$11.1 million to $56.2 million as compared to $45.1 million for the
six months ended June 30, 1998 as a result of higher consolidated
net sales. As a percentage of consolidated net sales, consolidated
gross profit increased to 29.4% for the six months ended June
30, 1999, from 27.9% for the six months ended June 30, 1998. The
increase in the consolidated gross profit percentage is due to
higher gross margin percentages at the Montreal, Ashland, Bedford,
and ERO Divisions. The Montreal Division's gross profit percentage
for the six months ended June 30, 1999 increased to 36.8% from 31.9%
for the prior years comparable period. The increase was primarily
due to the exclusion of close out sales of Impact products made in
the first quarter of 1998, and lower defective product returns in
the six months ended June 30, 1999 versus the prior year comparable
period. The Ashland Division's gross profit percentage increased to
33.0% for the six months ended June 30, 1999 from 30.0% for the six
months ended June 30, 1998. The increase was primarily due to cost
reduction programs that included reducing unauthorized customer
deductions, overhead costs and material costs. The cost reduction
programs at the Ashland Division were partially offset by an
unfavorable product sales mix for the six months ended June 30, 1999
versus the comparable period in 1998. The Bedford Division's gross
profit percentage increased to 25.5% in the six month ended June 30,
1999 from 23.7% for the six months ended June 30, 1998. The
increase was primarily due to the inclusion of Backyard Products
Limited acquired in August 1998 and more favorable material costs.
Backyard Products wood gym sets carry a higher gross profit
percentage than the overall average of the Bedford Division and more
favorable material costs. The gross profit percentage of the ERO
Division increased to 40.8% for the six months ended June 30, 1999
from 39.6% for the prior year's comparable period. The increase in
the gross margin percentage at the ERO Division was primarily a
result of favorable product sales mix, specifically relating to the
higher sales volume of Slumber Shoppe products in the six months
ended June 30, 1999 versus the comparable period in 1998.
Additionally, the gross profit percentage was impacted by favorable
production variances resulting from increased production volume.
The International Division's gross profit percentage remained
relatively unchanged at 22.8% for the first six month of 1999 versus
23.0% for the prior year's comparable six-month period.
<PAGE>
Selling, General and Administrative Expenses. Selling, general
and administrative expenses increased $2.7 million to $18.6 million
in the second quarter ended June 30, 1999 versus $15.9 million in
the prior years second quarter. For the six months ended June 30,
1999 selling, general and administrative expenses increased $4.1
million to $34.8 million from $30.7 million in the six months ended
June 30, 1998. The increases for the three and six month periods
ended June 30, 1999 versus the prior year comparable period were
mainly a result of increased variable expenses, such as royalties
and commissions, due to higher sales volume. As a percentage of net
sales, selling, general and administrative expenses decreased to
18.1% from 19.1% for the quarter ended June 30, 1999. Expressed as
a percentage of sales, selling, general and administrative expenses
decreased to 18.2% from 19.0% for the six month period ending June
30, 1999. The decrease in the percentage of selling, general and
administrative expenses as compared to net sales for the three and
six month periods ended June 30, 1999 were a result of higher sales
volumes to cover fixed expenses.
Interest Expense. Interest expense for the three and six month
periods ended June 30, 1999 versus June 30, 1998 increased as a
result of higher working capital requirements.
Income Tax Expense. Holdings' effective income tax rate for the
three and six-month periods ended June 30, 1999 and 1998 was 41.0%.
Liquidity and Capital Resources of the Company
Working Capital and Cash Flows
Net cash used for operating activities was $7.7 million for the
six months ended June 30, 1999 versus $3.5 million provided by
operations for the prior year comparable period. The increase was
mainly a result of higher working capital requirements to support
higher sales volumes.
Net cash used for investing activities was $3.4 million, all
relating to the acquisitions of property, plant and equipment.
Net cash provided by financing activities for the six months ended
June 30, 1999, was $12.5 million representing $19.3 million of net
proceeds on the Companies revolving loan to fund additional working
capital requirements to support higher sales levels and meet debt
service requirements. The aforementioned was partially offset by
principal repayments of $5.5 million on the Companies term loans for
the six months ended June 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.
<PAGE>
The Company's primary sources of liquidity are cash flows from
operations and borrowings under the Revolving Credit Facility. As of
June 30, 1999, approximately $9.9 million was available to the
Company (subject to borrowing base limitations) for borrowings under
the Revolving Credit Facility. Management believes that cash
generated from operations, together with borrowings under the
Revolving Credit Facility, will be sufficient to meet the Company's
working capital and capital expenditures needs for the foreseeable
future.
Interest payments on the Senior Subordinated Notes and interest
and principal payments under the Senior Credit Facilities represent
significant cash requirements for the Company. The Senior
Subordinated Notes require semiannual interest payments of $5.5
million. Borrowings under the Senior Credit Facilities bear interest
at floating rates and require interest payments on varying dates
depending on the interest rate option selected by the Company.
Outstanding borrowings under the Senior Credit Facilities
consisted of $125.2 million under the Term Loan Facilities,
comprised of $61.5 million of Tranche A Term Loans maturing in 2003
and $63.7 million of Tranche B Term Loans maturing in 2005. The
Senior Credit Facilities also include a $70 million Revolving Credit
Facility. As of June 30, 1999, a balance of $54.2 million was
outstanding under the Revolving Credit Facility.
During the first half of 1999, the Company experienced higher than
anticipated costs relating to product development and higher than
anticipated costs relating to excess capacity at the Company's U.K.
operations, as well as, lower than expected sales of back to school
products due to the disappointing performance of the Star Wars -
Episode I license. The Company also experienced an unfavorable
product sales mix, as trampoline sales, which generally carry a
lower gross margin percentage, represented a greater portion of
consolidated net sales than anticipated, while sales of Arts &
Activity products, which generally carry a higher gross margin
percentage, represented a smaller portion of consolidated net sales
than anticipated. The Company's management anticipates that these
trends may continue through the third quarter of 1999. Consequently,
the Company's management estimates that the leverage ratio at
September 30, 1999 will approximate the 6.00 times leverage
covenant contained in the Credit Facility. Although the Company
anticipates that it will maintain compliance with its leverage
ratio covenant, there can be no assurance that the Company will
maintain compliance with this ratio requirement if operating
results deteriorate during the third quarter.
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.
<PAGE>
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 in progress. The Company has
identified all systems which it believes are not Year 2000
compliant. Remediation of these systems will take place throughout
1999.
In addition, the Company is evaluating the Year 2000 readiness of
its key vendors to ensure that its ability to produce and deliver
products is not materially impacted. As this evaluation is
completed, the Company will decide what further actions, if any, are
appropriate.
The Company anticipates that its 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.
<PAGE>
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 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.
11.1 - Computation of Earnings Per Share.
27.1 - Financial Data Schedule.
<PAGE>
(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.
<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: August 13, 1999
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
/s/ David F. Crowley
David F.Crowley
Chief Financial Officer
<TABLE>
EXHIBIT 11.1
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
EARNINGS PER SHARE DISCLOSURE
For the six month period ended June 30, 1999
(Dollars in thousands)
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S>
Basic Earnings Per Share: <C> <C> <C>
Net loss $2,592 67,663 $0.04
Effect of Dilutive Securities:
Stock options in the money - 4,007 - -
Buyback of shares at average price of $1.65 - (2,676) -
------ ------ -----
Net effect of stock options - 1,331 -
------ ------ -----
Diluted Earnings Per Share:
Net income $2,592 68,994 $0.04
====== ====== =====
Options to purchase 765,000 shares of common stock at $1.65 per share were
outstanding at June 30, 1999 but were not included in the computation
of diluted EPS as the excercise price did not exceed market value at the
end of the period.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,811
<SECURITIES> 0
<RECEIVABLES> 82,153
<ALLOWANCES> 0
<INVENTORY> 58,999
<CURRENT-ASSETS> 166,095
<PP&E> 47,522
<DEPRECIATION> 0
<TOTAL-ASSETS> 413,304
<CURRENT-LIABILITIES> 110,890
<BONDS> 0
0
0
<COMMON> 676
<OTHER-SE> 41,320
<TOTAL-LIABILITY-AND-EQUITY> 413,304
<SALES> 190,987
<TOTAL-REVENUES> 190,987
<CGS> 134,749
<TOTAL-COSTS> 34,795
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,051
<INCOME-PRETAX> 4,392
<INCOME-TAX> 1,800
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,592
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
