<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 September 30, 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 X No
--- ---
The number of shares of common stock outstanding of the registrant's common
stock, par value $1.00 per share, at September 30, 1999 was 10,000,000.
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
INDEX
Pages
-----
Part I. Financial Information
Condensed Consolidated Balance Sheets -
December 31, 1998 and September 30, 1999 2
Condensed Consolidated Statements of Earnings (Loss) -
Three and Nine Months Ended September 30, 1998 and 1999 3
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 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 - 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
1.
<PAGE>
<TABLE>
<CAPTION>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND SEPT. 30, 1999 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS DECEMBER 31, SEPT. 30,
1998 1999
--------- ---------
<S> <C> <C>
Current assets:
Cash $ 4,197 $ 10,387
Receivables, less allowance of $ 1,177 and $1,220 79,605 71,637
Inventories 52,542 60,397
Deferred income taxes 11,808 9,766
Prepaid expenses 1,308 843
--------- ---------
TOTAL CURRENT ASSETS 149,460 153,030
Property, plant and equipment 113,680 122,461
Accumulated depreciation (48,799) (59,159)
--------- ---------
Property, plant and equipment, net 64,881 63,302
Intangible assets, net 46,329 45,166
Deferred income taxes 7,660 11,714
Other 7,534 6,705
--------- ---------
TOTAL ASSETS $ 275,864 $ 279,917
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,260 $ 33,959
Bankers acceptances and letters of credit 19,725 25,636
Accrued expenses 36,652 31,408
--------- ---------
TOTAL CURRENT LIABILITIES 88,637 91,003
Senior notes 110,000 110,000
Revolving credit loans 7,800 10,000
Pension and post-retirement benefits 5,041 5,087
--------- ---------
TOTAL LIABILITIES 211,478 216,090
Commitments and contingencies
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) (43,414)
Accumulated other comprehensive earnings (loss)-currency
translation adjustments (4,170) (4,146)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 64,386 63,827
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 275,864 $ 279,917
========= =========
</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 AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 (DOLLAR AMOUNTS IN THOUSANDS) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, SEPT. 30,
---------------------------- ----------------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 93,844 $ 93,550 $ 269,427 $ 258,595
Cost of sales 73,589 70,178 212,638 196,155
--------- --------- --------- ---------
GROSS PROFIT 20,255 23,372 56,789 62,440
Selling, general & administrative expenses 18,236 18,049 51,796 52,618
Restructuring costs 3 0 2,606 0
--------- --------- --------- ---------
INCOME FROM OPERATIONS 2,016 5,323 2,387 9,822
Interest expense, net 3,356 4,448 8,964 12,417
Currency (gain) loss, net 566 156 999 (541)
--------- --------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES (1,906) 719 (7,576) (2,054)
Income taxes (benefit) 24 (605) (2,916) (1,471)
--------- --------- --------- ---------
EARNINGS (LOSS) BEFORE EXTRAORDINARY
LOSS (1,930) 1,324 (4,660) (583)
EXTRAORDINARY (LOSS) ON EARLY (1,304) 0 (1,304) 0
EXTINGUISHMENT OF DEBT NET OF TAXES
OF $696
--------- --------- --------- ---------
NET EARNINGS (LOSS) $ (3,234) $ 1,324 $ (5,964) $ (583)
========= ========= ========= =========
</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 NINE MONTHS ENDED SEPT. 30, 1998 AND 1999 (DOLLAR AMOUNTS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
SEPT. 30, SEPT. 30,
INCREASE (DECREASE) IN CASH 1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (5,964) $ (583)
Adjustments to reconcile net earnings to net cash provided (used)
by operating activities:
Depreciation 9,320 10,370
Intangibles amortization 1,140 1,163
Deferred income taxes (6,045) (2,012)
Deferred financing cost amortization 96 561
Extraordinary loss on early extinguishment of debt 2,000 0
Other 468 46
Change in working capital components:
Receivables (33,923) 7,968
Inventories 9,725 (7,855)
Current liabilities, excluding bank loans and payables to Spalding 22,669 2,366
Other, including currency translation adjustment (339) 760
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (853) 12,784
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (13,890) (8,794)
-------- --------
NET CASH FLOWS PROVIDED (USED) IN INVESTING ACTIVITIES (13,890) (8,794)
-------- --------
NET CASH PROVIDED (USED) BEFORE FINANCING ACTIVITIES (14,743) 3,990
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from revolving credit facility 0 2,200
Deferred financing costs (6,000) 0
Payments on non-U.S debt (154) 0
Net change in long-term Spalding receivable/payable 37,361 0
Net cash transfers to Spalding (10,730) 0
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 20,477 2,200
-------- --------
CASH - net change 5,734 6,190
beginning of period 1,408 4,197
-------- --------
end of period $ 7,142 $ 10,387
======== ========
SUPPLEMENTAL CASH FLOW DATA
Interest paid 7,383 15,104
Income taxes paid 3,149 541
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4.
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
For the Three and Nine Months ended September 30, 1998 and 1999. (Unaudited)
(Dollars in thousands)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of September 30,
1999 and the related statement of earnings (loss) for the three and
nine months ended September 30, 1998 and 1999 and the cash flows for
the nine months ended September 30, 1998 and 1999 included herein have
been prepared by Evenflo Company, Inc. and its Subsidiaries (the
"Company") and are unaudited. The condensed consolidated 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 September 30, 1999, results of operations for
the three and nine months ended September 30, 1998 and 1999, and cash
flows for the nine months ended September 30, 1998 and 1999. The
results of operations for the three and nine months ended September 30,
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 September 30, 1999
----------------- ------------------
<S> <C> <C>
Finished goods $27,698 $25,375
Work in process 11,240 10,943
Raw material 13,604 24,079
------- -------
Total inventories $52,542 $60,397
======= =======
</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 Statements of Consolidated
Earnings (Loss). Currently, adjustments for the Company's other
comprehensive income consists solely of foreign currency translation
adjustments related to its non-U.S. subsidiaries. For the comparative
three and nine months ended September 30, 1998 and 1999, comprehensive
income was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30
------------------------ ------------------------
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings (loss) $(3,234) $ 1,324 $(5,964) $ (583)
Foreign currency translation (1,105) (140) (1,407) 24
------- ------- ------- -------
Comprehensive earnings (loss) $(4,339) $ 1,184 $(7,371) $ (559)
======= ======= ======= =======
</TABLE>
4. RESTRUCTURING, UNUSUAL AND NON-CASH CHARGES.
In the 1999 three and nine months the Company incurred no
restructuring or unusual costs. In the 1998 three and nine months the
Company incurred $3 and $2,606 respectively 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. In addition, in the 1998 three and
nine months the Company recorded $4,260 and $4,845 in unusual costs
principally for professional services related to the recapitalization
of the Company. The following shows the changes in the reserve balance
from December 31, 1998:
<TABLE>
<CAPTION>
Reserve Activity charged to Reserve Reserve
Balance at for the 1999 three months ended Balance at
December ------------------------------------ Sept. 30,
31, 1998 Mar. 31 June 30 Sept. 30 1999
-------- ------- ------- -------- ----
<S> <C> <C> <C> <C> <C>
Severance costs $197 $ 78 $ 0 $ 1 $118
Facility shutdown 0 0 0 0 0
Other 0 0 0 0 0
---- ---- ---- ---- ----
Total $197 $ 78 $ 0 $ 1 $118
==== ==== ==== ==== ====
</TABLE>
5. SHAREHOLDERS EQUITY
PREFERRED STOCK. On August 20, 1998, the Company issued
Cumulative Preferred Stock with a liquidation preference of $40,000.
The holder of the Cumulative Preferred Stock
6.
<PAGE>
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 dividend rate
with respect to the Cumulative Preferred Stock bears a variable rate of
interest indexed to the ten year U. S. Treasury rate. The interest rate
used to calculate the dividends in arrears was approximately 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 September 30, 1999, the amount of the Cumulative Preferred
Stock dividends in arrears as of that date is $6,170.
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 a result of the indemnification, the
Company had recorded a $1,200 receivable from Spalding. Approximately
$293 of the receivable was paid through December 31, 1998 and an
additional $596 was paid by September 30, 1999, leaving a balance of
$311 as of September 30, 1999.
In January 1999, the Company purchased 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
The Company manages its operations on the basis of two
operating segments, United States and other nations. Other nations
consist primarily of the following countries, Canada, France, Germany,
Mexico, Philippines and the United Kingdom. The following table is
presented in accordance with Statement of Financial Accounting Standard
No. 131, "Disclosures about Segments of an Enterprise and related
Information".
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
----------------------------- -----------------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
GEOGRAPHIC LOCATION
NET SALES
United States $ 83,845 $ 82,093 $ 242,418 $ 226,628
Other nations 9,999 11,457 27,009 31,967
--------- --------- --------- ---------
Total net sales $ 93,844 $ 93,550 $ 269,427 $ 258,595
========= ========= ========= =========
EARNINGS (LOSS) BEFORE INCOME TAXES
United States $ 1,614 $ 4,750 $ 4,004 $ 8,790
Other nations (161) 417 (10) 1,573
Restructuring costs (3) 0 (2,606) 0
Interest expense, net (3,356) (4,448) (8,964) (12,417)
--------- --------- --------- ---------
Earnings (loss) before
income taxes $ (1,906) $ 719 $ (7,576) $ (2,054)
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December Sept.
31, 1998 30, 1999
-------- --------
<S> <C> <C>
IDENTIFIABLE ASSETS
United States $257,460 $253,200
Other nations 18,404 26,717
-------- --------
Total assets $275,864 $279,917
======== ========
</TABLE>
8.
<PAGE>
INDEPENDENT ACCOUNTANTS' 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 September 30, 1999,
and the related condensed consolidated statements of earnings (loss) for the
three and nine months ended September 30, 1998 and 1999 and of condensed
consolidated cash flows for the nine months ended September 30, 1998 and 1999.
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
November 10, 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 SEPTEMBER 30, 1999 ("1999 THREE MONTHS") AND NINE MONTHS
ENDED SEPTEMBER 30, 1999 ("1999 NINE MONTHS") COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 ("1998 THREE MONTHS") AND NINE MONTHS ENDED SEPTEMBER 30,
1998 ("1998 NINE MONTHS").
NET SALES. The Company's net sales of $93,550 in the 1999 three months
compare to $93,844 for the 1998 three months, a decrease of $294 or 0.3%. The
Company's 1999 nine months net sales of $258,595 compare to $269,427 in the 1998
nine months, a decrease of $10,832 or 4.0%. U.S. net sales, including export
sales, of $82,093 for the 1999 three months declined $1,752 or 2.1% from the
1998 three months of $83,845. U.S. net sales, including export sales, of
$226,628 for the 1999 nine months, decreased $15,790 or 6.5% from 1998 nine
months of $242,418. U.S. sales declined due primarily to a reduction in sales of
juvenile car seats due to strong competitive pressure. International net sales
increased 14.6% to $11,457 in the 1999 three months from $9,999 for the 1998
three months. In the 1999 nine months, international sales increased by $4,958,
or 18.4%, to $31,967 from $27,009 for the 1998 nine 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 $23,372 in the
1999 three months from $20,255 in the 1998 three months. As a percentage of net
sales, gross profit increased to 25.0% in the 1999 three months from 21.6% in
the 1998 three months. For the 1999 nine months, gross profit increased by
$5,651 or 10.0% to $62,440 from $56,789 for the 1998 nine months. As a
percentage of net sales, gross profit rose to 24.1% in the 1999 nine months from
21.1% in the 1998 nine months. The increase was due to (i) improved operating
margins resulting from improved manufacturing efficiencies, (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 decreased to $18,049 in the 1999 three months from $18,236 in the
1998 three months, a decrease of $187 or 1.0%. For the 1999 nine months SG&A
expenses were $52,618, an increase of $822 or 1.6% over the $51,796 reported for
the 1998 nine months. The 1999 nine months increase was due to (i) increased
outside services to aid in the re-engineering of certain 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 and 1999 nine months the
Company incurred no restructuring expense. In the 1998 three months and 1998
nine months the Company incurred $3 and $2,606 respectively 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.
10.
<PAGE>
INTEREST EXPENSE. Interest expense increased to $4,448 in the 1999
three months and $12,417 in the 1999 nine months from $3,356 in the 1998 three
months and $8,964 in the 1998 nine months. The increase for both the 1999 three
and nine months over the respective periods last year 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, (ii) an increased amount outstanding
under the revolving credit facility, and (iii) higher short term interest rates.
CURRENCY (GAIN) LOSS. The $156 currency loss in the 1999 three months
and a $541 gain for the 1999 nine months compares to a $566 loss for the 1998
three months and a $999 loss in the 1998 nine months. The currency improvement
for the 1999 three and nine months over the 1998 three and nine months is due
primarily to the currency effect of a U.S. dollar denominated note payable of
non-U.S. subsidiaries and the translation of the Company's Mexican subsidiary's
operating results into U.S. dollars.
INCOME TAXES (BENEFIT). The Company recorded a tax benefit in the 1999
three months associated with loss from U.S. operations which is offset by income
from international operations. The 1998 three months reflect a tax expense
principally from the allocation of deferred taxes from Spalding, which is offset
in part by a tax benefit associated with a loss from U.S. operations. The 1999
nine months reflect a tax benefit associated with a loss from U.S. operations,
which is offset in part by income from other nations. During the 1998 nine
months, the Company recorded a benefit associated with the loss from U.S.
operations and included a benefit from the allocation of administrative expense
from Spalding.
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 $100,000
revolving credit facility. At September 30, 1999, the Company had $10,000 in
borrowings outstanding under the revolving credit facility and utilized $36,159
for banker's acceptances and letters of credit. The Company's principal uses of
liquidity are to provide working capital, meet debt service requirements and
finance the Company's strategic plans. At September 30, 1999, the Company had
$10,387 of cash. The Company had $53,841 in available borrowing capacity under
its revolving credit facility. In addition, the Company has outstanding $110,000
of 11 3/4% Series B Senior Notes due 2006, issued on August 20, 1998 and $40,000
liquidation preference of Cumulative Preferred Stock that bears a variable rate
of interest indexed to the ten-year U.S. Treasury Rate. For the nine-months
ended September 30, 1999, the dividend rate on the Cumulative Preferred Stock
was approximately 14%.
The Company anticipates cash outlays of $3,500 to $4,500 during the
remainder of 1999 for capital expenditures for new product tooling, which it
expects to be paid out of existing cash balances, cash generated from operations
and borrowings.
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
11.
<PAGE>
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 NINE MONTHS COMPARED TO THE 1998 NINE MONTHS. For the 1999 nine
months, the Company generated $12,784 in cash from operating activities, and
invested $8,794 in capital expenditures. In addition, the Company borrowed
$2,200 under the revolving credit facility.
During the 1998 nine months the Company used $853 in operating
activities. The $13,637 improvement in cash provided by operations for the 1999
nine months compared to the 1998 nine months was primarily due to improved
earnings and changes in working capital components.
Capital expenditures during the 1999 nine months relate primarily to
U.S. and international information system upgrades.
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 adjusted for unusual costs. EBITDA and
Adjusted EBITDA are included because the Company believes they provide 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.
12.
<PAGE>
The Company's Adjusted EBITDA increased from $8,822 and $19,299 in the
1998 three and nine months, respectively, to $9,227 and $22,563 in the 1999
three and nine months, respectively, as indicated in the table below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
--------------------------- ---------------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET EARNINGS (LOSS) $ (1,930) $ 1,324 $ (4,660) $ (583)
Income taxes (benefit) 24 (605) (2,916) (1,471)
Interest expense, net 3,356 4,448 8,964 12,417
Depreciation and amortization 3,109 4,060 10,460 12,200
Restructuring 3 0 2,606 0
-------- -------- -------- --------
EBITDA 4,562 9,227 14,454 22,563
-------- -------- -------- --------
Unusual costs 4,260 0 4,845 0
-------- -------- -------- --------
ADJUSTED EBITDA $ 8,822 $ 9,227 $ 19,299 $ 22,563
======== ======== ======== ========
</TABLE>
CURRENCY HEDGING
In the 1999 nine months, approximately 12% 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.
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. In addition,
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 $1,500 based on intercompany balances as of December 31,
1998 and September 30, 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 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.
13.
<PAGE>
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
has made capital investments of approximately $10,600 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 $5,788
during the 1999 nine months. The upgrades required for Year 2000 compliance to
the primary, mission critical system were completed in June 1999. Certain
ancillary, non-critical systems remain to be upgraded to Year 2000 readiness.
Further, Year 2000 enhancements to the system will be completed by December
1999. To date, the Company has assessed 100% of its systems and has identified
that less than 5% require replacement or remediation.
The Company has developed contingency plans in the event that any
non-critical system upgrades are not completed on time. Contingency plans exist
in each of the Company's business units to correct and upgrade those existing
systems where potential disruptions to the business could occur should the dates
targeted for implementation of 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 and 1999 nine
months the Company capitalized $1,356 and $5,788 respectively, for information
system upgrades and expensed $35 and $149, respectively.
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 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.
14.
<PAGE>
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 has contacted its significant suppliers and customers in an attempt
to identify any potential Year 2000 compliance issues with them. Currently, over
98% of the suppliers, including all mission critical suppliers have responded to
the Company's Year 2000 questionnaire. All responses indicate the suppliers will
be Year 2000 compliant. However, the Company is currently unable to forecast
with certainty the magnitude of the operational or financial impact on the
Company of Year 2000 compliance issues with its suppliers and customers. The
Company's business also could be materially affected by the failure of
governmental agencies to address Year 2000 issues. For example, a significant
amount of the Company's merchandise is manufactured outside the U.S., and the
Company is dependent upon the issuance by foreign governmental agencies of
export visas for, and upon the U.S. Customs Service to process and permit entry
into the U.S. of such merchandise. If failures in government systems result in
the suspension or delay of these agencies' services, the Company could
experience significant interruption or delay in its inventory flow.
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 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, including as a consequence of the
15.
<PAGE>
Company's significant leverage and dividend requirements; the restrictive
covenants included in its debt arrangements; the highly competitive nature of
the juvenile products industry; the potential inability of the Company to
implement its business strategy; the Company's dependence on a small number of
customers and risks arising as a consequence of continued consolidation in the
retail industry; risks involved in relying on increasing foreign sales and
international suppliers; the intense regulation of juvenile products and the
potential for product recalls, and product liability litigation; the need for
product innovation to remain competitive; the availability of materials used in
the Company's operations; the effect of environmental regulations; dependence on
management and a small unionized workforce.
16.
<PAGE>
Part II. Other Information.
Item 1. Legal Proceedings.
There are various claims pending against the Company involving
product liability, patent, employee benefit, environmental,
and other matters arising out of the conduct of the business
of the Company as previously described in the Company's
Amendment No. 3 to Registration Statement on Form S-4 (file
no. 333-64893). The following summarizes significant
developments in previously reported matters and any material
claims asserted since June 30, 1999:
No significant change.
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 on Form 8-K were filed by Evenflo
Company, Inc. during the quarter ended September 30, 1999.
None.
17.
<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 November 10, 1999 /s/ Richard W. Frank
------------------ ----------------------------------------
Richard W. Frank
Chairman of the Board of Directors and
Chief Executive Officer
Date November 10, 1999 /s/ Daryle A. Lovett
----------------- -----------------------------------------
Daryle A. Lovett
Executive Vice President and
Chief Financial Officer
18.
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<PAGE>
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<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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0
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