<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________to____________________
Commission File No.: 333-64893
EVENFLO COMPANY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1360477
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Northwoods Business Center II
707 Crossroads Court
Vandalia, Ohio 45377
(Address of principal executive offices, Zip Code)
(937) 415-3300
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities 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 filing requirements for the
past 90 days.
Yes No X
--- ---
The number of shares of common stock outstanding of the registrant's common
stock, par value $1.00 per share, at March 31, 1999 was 10,000,000.
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Pages
-----
<S> <C> <C>
Part I. Financial Information
Condensed Consolidated Balance Sheets -
December 31, 1998 and March 31, 1999 2
Condensed Consolidated Statements of Earnings (Loss) -
For the Three Months Ended March 31, 1998 and 1999 3
Condensed Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 1998 and 1999 4
Notes to Condensed Consolidated Financial Statements 5 - 8
Independent Accountants' Review Report 9
Management's Discussion and Analysis of the Condensed
Consolidated Financial Statements 10 - 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
1.
<PAGE>
<TABLE>
<CAPTION>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND MARCH 31, 1999 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------------------------------------
(Unaudited)
DECEMBER 31, MARCH 31,
ASSETS 1998 1999
- ------ -------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 4,197 $ 1,981
Receivables, less allowance of $ 1,177 and $1,334 79,605 95,576
Inventories 52,542 60,531
Deferred income taxes 11,808 11,891
Prepaid expenses 1,308 1,070
---------- ----------
TOTAL CURRENT ASSETS 149,460 171,049
Property, plant and equipment 113,680 117,130
Accumulated depreciation (48,799) (52,251)
---------- ----------
Property, plant and equipment, net 64,881 64,879
Intangible assets, net 46,329 45,942
Deferred income taxes 7,660 7,525
Other 7,534 7,355
---------- ----------
TOTAL ASSETS $ 275,864 $ 296,750
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 32,260 $ 36,544
Bankers acceptances and letters of credit 19,725 32,839
Accrued expenses 36,652 33,246
---------- ----------
TOTAL CURRENT LIABILITIES 88,637 102,629
Senior notes 110,000 110,000
Revolving credit loans 7,800 14,800
Pension and post-retirement benefits 5,041 5,057
---------- ----------
TOTAL LIABILITIES 211,478 232,486
SHAREHOLDERS' EQUITY:
Preferred stock $.01 par value, 10,000,000 shares authorized,
400,000 shares outstanding (liquidation value, $40,000,000) 40,000 40,000
Common Stock:
Class A, $1 par value, 20,000,000 shares authorized;
10,000,000 shares outstanding 10,000 10,000
Class B, $1 par value, 5,000,000 shares authorized;
none outstanding 0 0
Paid-in capital 61,387 61,387
Retained earnings (deficit) (42,831) (43,031)
Accumulated other comprehensive earnings (loss)-currency
translation adjustments (4,170) (4,092)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 64,386 64,264
---------- ----------
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 275,864 $ 296,750
---------- ----------
---------- ----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED EARNINGS (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 (DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
MARCH 31, MARCH 31,
1998 1999
----------- ----------
<S> <C> <C>
NET SALES $ 93,048 $ 94,860
Cost of sales 73,421 72,806
----------- ----------
GROSS PROFIT 19,627 22,054
Selling, general and administrative expenses 16,426 18,625
Restructuring costs 1,560 0
----------- ----------
INCOME FROM OPERATIONS 1,641 3,429
Interest expense, net 2,584 3,758
Currency (gain) loss, net 170 (387)
----------- ----------
EARNINGS (LOSS) BEFORE INCOME TAXES (1,113) 58
Income taxes (benefit) (1,141) 258
----------- ----------
NET EARNINGS (LOSS) $ 28 $ (200)
----------- ----------
----------- ----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 (DOLLAR AMOUNTS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
MARCH 31, MARCH 31,
INCREASE (DECREASE) IN CASH 1998 1999
- --------------------------- --------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 28 $ (200)
Adjustments to reconcile net earnings to net cash provided (used) by operating
activities:
Depreciation 3,179 3,476
Intangibles amortization 383 387
Deferred income taxes 147 52
Deferred financing cost amortization (200) 185
Change in working capital components:
Receivables (21,826) (15,971)
Inventories 357 (7,989)
Current liabilities, excluding bank loans and payables to Spalding 12,814 13,992
Other, including currency translation adjustment (194) 357
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (5,312) (5,711)
CASH FLOWS FROM INVESTING ACTIVITIES
CAPITAL EXPENDITURES (5,948) (3,505)
-------- --------
NET CASH FLOWS PROVIDED (USED) IN INVESTING ACTIVITIES (5,948) (3,505)
-------- --------
NET CASH PROVIDED (USED) BEFORE FINANCING ACTIVITIES (11,260) (9,216)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from revolving credit facility 0 7,000
Net change in long-term Spalding receivable/payable 22,530 0
Net cash transfers to Spalding (10,587) 0
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 11,943 7,000
-------- --------
CASH - net change 683 (2,216)
beginning of period 1,408 4,197
-------- --------
end of period $ 2,091 $ 1,981
-------- --------
-------- --------
SUPPLEMENTAL CASH FLOW DATA
Interest paid 2,684 6,906
Income taxes paid (refunded) (1,144) 206
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
For the Three Months ended March 31, 1998 and 1999. (Unaudited)
(Dollars in thousands)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of March 31, 1999
and the related statement of earnings (loss) and cash flows for the
three months ended March 31, 1998 and 1999 included herein have been
prepared by Evenflo Company, Inc. and its Subsidiaries (the "Company")
and are unaudited. The condensed balance sheet as of December 31, 1998
is derived from the Company's audited financial statements. In the
opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments,
which are of a normal recurring nature, necessary to present fairly, in
all material respects, the Company's financial position as of March 31,
1999, results of operations for the three months ended March 31, 1998
and 1999, and cash flows for the three months ended March 31, 1998 and
1999. The results of operations for the three months ended March 31,
1999 are not necessarily indicative of the results to be expected for
the full year 1999. Therefore, the accompanying unaudited condensed
financial statements of the Company should be read in conjunction with
the financial statements included in the Company's Amendment No. 3 to
Registration Statement on Form S-4 (file no. 333-64893). During 1998,
the Company adopted December 31 as its fiscal year end.
2. INVENTORIES.
Inventories are valued at the lower of cost or market (net
realizable value). Cost for United States inventories has been
determined by use of the last-in, first-out method. Cost for non-U.S.
inventories has been determined by use of the first-in, first-out
method.
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Finished goods $27,698 $32,968
Work in process 11,240 13,124
Raw material 13,604 14,439
------ ------
Total inventories $52,542 $60,531
------- -------
------- -------
</TABLE>
5.
<PAGE>
3. COMPREHENSIVE INCOME.
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income". This standard requires the Company to report "other
comprehensive income," as defined in the standard, that is not
otherwise presented in its Condensed Consolidated Statements of Income.
Currently the Company's other comprehensive income consists solely of
foreign currency translation adjustments related to its non-U.S.
subsidiaries. For the comparative three months ended March 31, 1998 and
1999, comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1998 1999
---- ----
<S> <C> <C>
Net earnings (loss) $28 $(200)
Foreign currency translation adjustment (3) 78
---- -----
Comprehensive earnings (loss) $25 $(122)
---- -----
---- -----
</TABLE>
4. RESTRUCTURING, UNUSUAL AND NON-CASH CHARGES.
In the 1999 three months the Company incurred no restructuring
costs. In the 1998 three months the Company incurred $1,560 of
restructuring costs principally to relocate the Gerry Baby Products,
Thornton, Colorado administrative and manufacturing operations to the
Company's Piqua, Ohio, and Canton, Georgia plants. The following shows
the changes in the reserve balance from September 30, 1997:
<TABLE>
<CAPTION>
Reserve Activity charged Activity charged Reserve
Balance at to Reserve for to Reserve for Balance at
September 3 months ended 3 months ended March 31,
30,1997 Dec.31, 1997 March 31, 1998 1998
---------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
Severance costs $3,942 $462 $ 686 $2,794
Facility shutdown 2,429 273 1,455 701
Other 656 0 245 411
------ ---- ------ ------
Total $7,027 $735 $2,386 $3,906
------ ---- ------ ------
------ ---- ------ ------
</TABLE>
<TABLE>
<CAPTION>
Reserve Activity charged Activity charged Reserve
Balance at to Reserve for to Reserve for Balance at
September 3 months ended 3 months ended March 31,
30, 1998 Dec. 31, 1998 March 31, 1999 1999
---------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
Severance costs $ 200 $ 3 $ 78 $ 119
Facility shutdown 0 0 0 0
Other 0 0 0 0
------ ---- ------ ------
Total $ 200 $ 3 $ 78 $ 119
------ ---- ------ ------
------ ---- ------ ------
</TABLE>
6.
<PAGE>
5. SHAREHOLDERS EQUITY
PREFERRED STOCK. The holder of the Cumulative Preferred Stock
is entitled to receive, when, as and if declared by the Board of
Directors, dividends on each outstanding share of Cumulative Preferred
Stock, at a variable rate based on the ten-year treasury rate, based on
the then effective liquidation preference per share of Cumulative
Preferred Stock. Dividends on the Cumulative Preferred Stock are
payable quarterly in arrears on August 15, November 15, February 15 and
May 15 of each year, commencing November 15, 1998. The initial dividend
rate with respect to the Cumulative Preferred Stock was 14% per annum.
The right to dividends on the Cumulative Preferred Stock is cumulative
and dividends accrue (whether or not declared), without interest, from
the date of issuance of the Cumulative Preferred Stock. Because the
Board of Directors has not declared any preferred dividends through
March 31, 1999, the amount of the Cumulative Preferred Stock dividends
in arrears as of that date is $3,436.
6. CONTINGENCIES
The Company is both plaintiff and defendant in numerous
lawsuits incidental to its operations, some alleging substantial
claims. In addition, the Company's operations are subject to federal,
state and local environmental laws and regulations. The Company has
entered into settlement agreements with the U. S. Environmental
Protection Agency and other parties on several sites and is still
negotiating on other sites. The settlement amounts and estimated
liabilities are not significant.
Management is of the opinion that, after taking into account
the merits of defenses, insurance coverage and established reserves,
the ultimate resolution of these matters will not have a material
adverse effect in relation to the Company's consolidated financial
statements.
Under an indemnification agreement entered into on August 20,
1998, Spalding agreed to indemnify the Company for all losses and
liabilities of any kind relating to any non-Company matters and the
Company agreed to indemnify Spalding for all losses and liabilities of
any kind relating to the Company's business. In addition, Spalding
agreed to indemnify the Company for the expense of product recalls and
corrective actions relating to products manufactured by the Company
prior to August 20, 1998, the date that Spalding sold control of the
Company to another entity. As of March 31, 1999, for active recalls or
corrective actions indemnified by Spalding, the Company has incurred
actual expenses of approximately $244 and recorded a product recall
liability for additional estimated costs of approximately $242. As a
result of the indemnification, the Company has also recorded a
receivable from Spalding for approximately $1,200, which included
approximately $293 at December 31, 1998 and $217 at March 31, 1999. In
January 1999, the Company purchase product recall coverage for $525 per
year, with a deductible of $500 per occurrence and a limit of $10,000
per year.
7.
<PAGE>
7. SEGMENT REPORTING
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1998 1999
---- ----
<S> <C> <C>
GEOGRAPHIC LOCATION
NET SALES
United States $ 84,958 $ 85,281
Other nations 8,090 9,579
-------- --------
Total net sales $ 93,048 $ 94,860
-------- --------
-------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES
United States $ 2,920 $ 3,463
Other nations 111 353
Restructuring costs ( 1,560) 0
Interest expense, net ( 2,584) (3,758)
-------- --------
Earnings (loss) before income taxes $( 1,113) $ 58
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
December March
31, 1998 31, 1999
-------- ---------
<S> <C> <C>
IDENTIFIABLE ASSETS
United States $257,460 $275,460
Other nations 18,404 21,290
---------- ----------
Total assets $275,864 $296,750
---------- ----------
---------- ----------
</TABLE>
8.
<PAGE>
INDEPENDENT ACCOUNTANT REVIEW REPORT
The Board of Directors & Shareholders
Evenflo Company, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Evenflo Company, Inc. and subsidiaries (the "Company") as of March 31, 1999, and
the related condensed consolidated statements of earnings (loss) and of
condensed consolidated cash flows for the three months ended March 31, 1999 and
1998. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed financial statements for them to be in conformity with
generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company at December 31, 1998,
and the related consolidated statements of earnings (loss) and comprehensive
earnings (loss), cash flows and shareholders' equity for the three month period
ended December 31, 1998 (not presented herein); and in our report dated February
19, 1999 (May 6, 1999, with respect to the note to the table in Note G to those
financial statements), we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1998, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Dayton, Ohio
June 23, 1999
9.
<PAGE>
EVENFLO COMPANY, INC.AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 ("1999 THREE MONTHS") COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 1998 ("1998 THREE MONTHS")
NET SALES. The Company's net sales increased to $94,860 in the 1999
three months from $93,048 for the 1998 three months, an increase of $1,812 or
1.9%. U.S. net sales, including export sales, of $85,281 for the 1999 three
months were slightly above U.S. sales for the 1998 three months of $84,958.
International net sales increased 18.4% to $9,579 in the 1999 three months from
$8,090 for the 1998 three months. International net sales increased principally
due to increased sales in Mexico, Asia and Europe, partially offset by lower
sales in Canada.
GROSS PROFIT. The Company's gross profit increased to $22,054 in the
1999 three months from $19,627 in the 1998 three months, an increase of $2,427
or 12.4%. The increase was due to (i) improved operating margins resulting from
improved manufacturing efficiency, (ii) favorable purchase prices and volume
rebates from major suppliers, and (iii) increased overhead absorption.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. The Company's
SG&A expenses increased to $18,625 in the 1999 three months from $16,426 in the
1998 three months. As a percentage of net sales, SG&A expenses increased to
19.6% in the 1999 three months from 17.7% in the 1998 three months. The increase
in SG&A expenses was principally due to (i) increased outside services to aid in
the re-engineering of some business processes, (ii) increased expense associated
with expanding international operations, (iii) higher customer marketing
promotional costs and (iv) additional recruitment expenses.
RESTRUCTURING COSTS. In the 1999 three months the Company incurred no
restructuring expense. In the 1998 three months the Company incurred $1,560 of
restructuring costs to relocate the Gerry Baby Products, Thornton, Colorado
administrative and manufacturing operations to the Company's Piqua, Ohio, and
Canton, Georgia plants.
INTEREST EXPENSE. Interest expense increased to $3,758 in the 1999
three months from $2,584 in the 1998 three months. The increase was due to (i)
the issuance of the $110 million 11.75% Senior Notes due 2006, which bear a
higher interest rate than the debt refinanced, and (ii) increased amount
outstanding under the revolving credit facility.
CURRENCY (GAIN) LOSS. The $387 currency gain in the 1999 three months
compares to a loss of $170 for the 1998 three months.
10.
<PAGE>
INCOME TAXES (BENEFIT). The 1999 three months reflect a tax expense
principally for non-U.S. income tax. During the 1998 three months the
Company recorded a benefit associated with the loss from U. S. operations.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company's principal sources of liquidity are from cash
flows generated from operations and from borrowings under the Company's $100
million revolving credit facility. The Company's principal uses of liquidity are
to provide working capital, meet debt service requirements and finance the
Company's strategic plans. At March 31, 1999, the Company had $1,981 of cash. In
addition, the Company had $52,361 in available borrowing capacity under its
revolving credit facility.
The Company currently believes that cash flow from operating
activities, together with borrowings available under its revolving credit
facility, will be sufficient to fund the Company's currently anticipated working
capital, capital expenditures, interest payments and other liquidity needs for
the Company's 1999 fiscal year. Any future acquisitions, joint ventures or other
similar transactions will likely require additional capital and there can be no
assurance that any such capital will be available to the Company on acceptable
terms or at all. There can be no assurance, however, that the Company's business
will continue to generate sufficient cash flow from operations in the future to
service its debt, make necessary capital expenditures or meet its other cash
needs. If unable to do so, the Company may be required to refinance all or a
portion of its existing debt, to sell assets or to obtain additional financing.
There can be no assurances that any such refinancings would be possible or that
any such sales of assets or additional financing could be achieved on terms
reasonably favorable to the Company.
CASH FLOWS
1999 THREE MONTHS COMPARED TO THE 1998 THREE MONTHS. For the 1999 three
months, the Company used $9,216 in cash before financing activities to fund
$5,711 in operating activities, and invest $3,505 in capital expenditures. Cash
usage in the 1999 three months was funded from the 1998 year end cash balance
and borrowing $7,000 under the revolving credit facility.
Net cash flow used by operating activities for the 1999 three months
was $5,711 compared to $5,312 in the 1998 three months. The $399 higher use of
cash for the 1999 three months compared to the 1998 three months was primarily
due to lower earnings and changes in working capital components.
Capital expenditures during the 1999 three months relate primarily
to U.S. and international information system upgrades.
11.
<PAGE>
EBITDA AND ADJUSTED EBITDA
EBITDA is defined as earnings before interest expense, income taxes,
depreciation, amortization, extraordinary items and restructuring costs.
Adjusted EBITDA is defined as EBITDA and unusual costs. EBITDA and Adjusted
EBITDA are included because the Company believes it provides useful information
regarding its ability to service its debt and because the Company understands
that such information is considered to be an additional basis for evaluating the
Company's ability to pay interest and repay debt. EBITDA and Adjusted EBITDA
does not, however, represent cash flow from operations as defined by generally
accepted accounting principles and should not be considered as a substitute for
net earnings as an indicator of the Company's operating performance or cash flow
as a measure of liquidity. Because EBITDA and Adjusted EBITDA are not calculated
identically by all companies, the presentation herein may not be comparable to
similarly titled measures of other companies.
The Company's Adjusted EBITDA increased from $7,018 in the 1998 three
months to $7,885 in the 1999 three months as indicated in the table below:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
NET EARNINGS (LOSS) $ 28 $ (200)
Income taxes (benefit) (1,141) 258
Interest expense, net 2,584 3,758
Depreciation and amortization 3,564 4,069
Restructuring 1,560 0
------- ------
EBITDA 6,595 7,885
------- ------
Unusual costs 423 0
------- ------
ADJUSTED EBITDA $ 7,018 $7,885
------- ------
------- ------
</TABLE>
CURRENCY HEDGING
In the 1999 three months, approximately 10.1% of the total Company net
sales were generated in non-U.S. currencies. Fluctuations in the value of these
currencies relative to the U.S. dollar could have a material effect on the
Company's results of operations. The Company's cost could be adversely affected
if the Chinese Renminbi appreciates significantly relative to the U.S. dollar.
12.
<PAGE>
Although the Company generally pays for its products in U.S. dollars, the cost
of such products fluctuates with the value of the Chinese Renminbi. The Company
is exposed to the impact of changes in foreign currency exchange rates on its
results of operations as a result of U.S. dollar-denominated intercompany
balances owed from international subsidiaries, primarily for purchases of
products from the Company's U.S. operations and long-term notes receivable. The
impact of a hypothetical unfavorable change in foreign currency exchange rates
of 10% would result in additional losses before taxes of approximately $800 and
$1,300 based on intercompany balances as of December 31, 1998 and March 31,
1999, respectively.
INTEREST RATE RISK
The Company is subject to market risk from exposure to changes in
interest rates based on its financing, investing and cash management activities.
The Company has the 11.75% Notes due 2006 and the revolving credit facility to
maintain the desired level of exposure to risk of interest rate fluctuations and
to minimize interest expense. The Company utilizes a mix of debt maturities
along with both fixed- and variable-rate debt to manage its exposure to changes
in interest rates. The Company does not expect changes in interest rates to have
a material effect on income or cash flows in calendar 1999, although there can
be no assurances that interest rates will not materially change.
INFLATION
Inflation has not been material to the Company's operations within the
periods presented.
YEAR 2000 COMPLIANCE
Many computer software and hardware systems currently are not able to
read, calculate or provide output correctly using dates after 1999, and such
systems will require significant modifications in order to be "Year 2000
compliant". The Company has reviewed its computer hardware and software systems
and has identified those systems that are not Year 2000 compliant. The Company
expects to spend approximately $7,500 by December 1999 to unify and upgrade the
Company's information systems, to improve the company's electronic data
interchange ("EDI") capabilities and to resolve the Company's Year 2000
compliance issues, $4,800 of which was invested in calendar 1998 and $2,100
during the 1999 three months. The enhanced system will be completed by December
1999 with the upgrades required for Year 2000 compliance to be completed by June
1999. To date, the Company has assessed 97% of its systems and has identified
85% requiring replacement or remediation.
The Company has developed contingency plans in the event that any
critical system upgrades are not completed on time. Contingency plans exist in
each of the business units to correct and upgrade those existing systems where
potential could occur should the targeted implementation dates of the new
systems not be met or if the implementation dates are after the end of 1999. All
costs associated with Year 2000 compliance will be expensed as incurred, other
than acquisition of new software or hardware, which will be capitalized. During
the 1999 three months ended March 31, 1999 the Company capitalized $2,007 for
information system upgrades and expensed $48.
13.
<PAGE>
A Corporate Oversight Committee ("COC") has been formed to deal with
both non-information technology ("non-IT") and information technology ("IT")
issues. Its members coordinate with all functional areas within the Company. The
COC has developed a Year 2000 Concerns list, conducted strategic planning
sessions, launched a Corporate Year 2000 awareness program and is in the process
of corresponding with suppliers requesting Year 2000 certification. Efforts are
underway with major customers to discuss, identify, test and remediate, if
required, potential issues. The COC is working with each business unit to
identify potential impacts on both IT and non-IT system at their specific
location, prioritizing each risk, and developing and implementing remediation
plans where necessary.
Although the Company is not aware of any material impediments
associated with upgrading its computer hardware and software systems to be Year
2000 compliant, the Company cannot make any assurances that the upgrade to the
Company's computer system will be completed on schedule, that the upgraded
systems will be free of defect, or that the Company's alternative plans will
meet the Company's needs. If any such risks materialize, the Company could
experience material adverse consequences, material costs or both.
There are many risks associated with the year 2000 compliance issue and
the most reasonably likely worst case scenario for the Company is undeterminable
in the current environment, but may include, without limitation, the possible
failure of the Company's computer and information systems, the possible failure
in the timely conversion of the systems of other companies on which the
Company's systems rely or the possibility that a conversion may be incompatible
with the Company's systems. Any such failure could have a material adverse
effect on the Company including the inability to bill and collect payments from
customers, the inability to order and receive materials and services from
suppliers and the potential for errors and omissions in accounting and financial
data. In addition, the Company is exposed to the inability of third parties to
perform as a result of year 2000 compliance. Any such failure by a third party,
including a bank, software product or service provider, utility or other entity
may have a material adverse financial or operational effect on the Company. The
Company is developing contingency plans to deal with this scenario.
The Company is contacting its significant suppliers and customers in an attempt
to identify any potential Year 2000 compliance issues with them. The Company is
currently unable to anticipate the magnitude of the operational or financial
impact on the Company of Year 2000 compliance issues with its suppliers and
customers.
FORWARD LOOKING STATEMENTS
Certain statements made in this Management's Discussion and Analysis of
the Condensed Consolidated Financial Statements and in the Notes to Condensed
Consolidated Financial Statements reflect management's estimates and beliefs and
are intended to be, and are hereby identified as, "forward-looking statements"
for purposes of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking terminology, includes but is not
limited to words such as "may," "intend," "will," "expect," anticipate," "plan,"
"the Company believes," "management believes," "estimate," "continue," or
"position" or the negative thereof or other
14.
<PAGE>
variations thereon or comparable terminology. In particular, any statements,
express or implied, concerning future operating results or the ability to
generate revenues, income or cash flow are forward looking statements.
Although the Company believes that the assumptions on which
forward-looking statements contained herein are based are reasonable, any of
those assumptions could be incorrect and the inclusion of a forward-looking
statement herein should not be regarded as a representation by the Company that
its plans and objectives will be achieved. Therefore, the Company cautions
readers that such forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially from those currently
expected by management.
15.
<PAGE>
Part II. OTHER INFORMATION.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
A. The following is an index of the exhibits
included in the Form 10-Q:
Exhibit 27 Financial data Schedule
B. The following Reports were filed by Evenflo
Company, Inc. during the quarter ended
March 31, 1999.
None.
16.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on behalf of the registrant by the following duly authorized
persons.
EVENFLO COMPANY, INC. AND SUBSIDIARIES
(Registrant)
Date June 23, 1999 /s/ Richard W. Frank
----------------------------------------
Richard W. Frank
Chairman of the Board of Directors and
Chief Executive Officer
Date June 23, 1999 /s/ Daryle A. Lovett
----------------------------------------
Daryle A. Lovett
Executive Vice President Finance and
Chief Financial Officer
17.
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