<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 June 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 June 30, 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 June 30, 1999 2
Condensed Consolidated Statements of Earnings (Loss) -
Three and Six Months Ended June 30, 1998 and 1999 3
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 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
</TABLE>
1.
<PAGE>
<TABLE>
<CAPTION>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND JUNE 30, 1999 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------
(Unaudited)
DECEMBER 31, JUNE 30,
ASSETS 1998 1999
--------- ---------
<S> <C> <C>
Current assets:
Cash $ 4,197 $ 4,855
Receivables, less allowance of $ 1,177 and $1,026 79,605 69,525
Inventories 52,542 77,077
Deferred income taxes 11,808 13,308
Prepaid expenses 1,308 968
--------- ---------
Total current assets 149,460 165,733
Property, plant and equipment 113,680 120,593
Accumulated depreciation (48,799) (55,707)
--------- ---------
Property, plant and equipment, net 64,881 64,886
Intangible assets, net 46,329 45,554
Deferred income taxes 7,660 7,498
Other 7,534 7,154
--------- ---------
Total assets $ 275,864 $ 290,825
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,260 $ 22,172
Bankers acceptances and letters of credit 19,725 35,856
Accrued expenses 36,652 36,982
--------- ---------
Total current liabilities 88,637 95,010
Senior notes 110,000 110,000
Revolving credit loans 7,800 18,100
Pension and post-retirement benefits 5,041 5,072
--------- ---------
Total liabilities 211,478 228,182
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) (44,738)
Accumulated other comprehensive earnings (loss)-currency
translation adjustments (4,170) (4,006)
--------- ---------
Total shareholders' equity 64,386 62,643
--------- ---------
--------- ---------
Total liabilities and shareholders' equity $ 275,864 $ 290,825
--------- ---------
--------- ---------
</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 SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (DOLLAR AMOUNTS IN THOUSANDS) (Unaudited)
- ------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -------------------------
1998 1999 1998 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 82,535 $ 70,185 $ 175,583 $ 165,045
Cost of sales 65,628 53,171 139,049 125,977
-------- -------- --------- ---------
GROSS PROFIT 16,907 17,014 36,534 39,068
Selling, general & administrative expenses 17,134 15,944 33,560 34,569
Restructuring costs 1,043 0 2,603 0
-------- -------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (1,270) 1,070 371 4,499
Interest expense, net 3,024 4,211 5,608 7,969
Currency (gain) loss, net 263 (310) 433 (697)
-------- -------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES (4,557) (2,831) (5,670) (2,773)
Income taxes (benefit) (1,799) (1,124) (2,940) (866)
-------- -------- --------- ---------
NET EARNINGS (LOSS) $ (2,758) $ (1,707) $ (2,730) $ (1,907)
-------- -------- --------- ---------
-------- -------- --------- ---------
</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 SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (DOLLAR AMOUNTS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
JUNE 30, JUNE 30,
INCREASE (DECREASE) IN CASH 1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (2,730) $ (1,907)
Adjustments to reconcile net earnings to net cash provided (used)
by operating activities:
Depreciation 6,579 6,925
Intangibles amortization 773 775
Deferred income taxes 2,339 (1,338)
Deferred financing cost amortization (100) 372
Change in working capital components:
Receivables (20,579) 10,080
Inventories (4,937) (24,535)
Current liabilities, excluding bank loans and payables to Spalding 10,199 6,373
Other, including currency translation adjustment (306) 582
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (8,762) (2,673)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (8,884) (6,969)
-------- --------
-------- --------
NET CASH FLOWS PROVIDED (USED) IN INVESTING ACTIVITIES (8,884) (6,969)
-------- --------
-------- --------
NET CASH PROVIDED (USED) BEFORE FINANCING ACTIVITIES (17,646) (9,642)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from revolving credit facility 0 10,300
Net change in long-term Spalding receivable/payable 3,715 0
Net cash transfers to Spalding 16,279 0
-------- --------
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 19,994 10,300
-------- --------
-------- --------
CASH - net change 2,348 658
beginning of period 1,408 4,197
-------- --------
end of period $ 3,756 $ 4,855
-------- --------
-------- --------
SUPPLEMENTAL CASH FLOW DATA
Interest paid 5,493 7,860
Income taxes paid (refunded) (5,279) 472
</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 Six Months ended June 30, 1998 and 1999. (Unaudited)
(Dollars in thousands)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of June 30, 1999
and the related statement of earnings (loss) for the three and six
months ended June 30, 1998 and 1999 and the cash flows for the six
months ended June 30,1998 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 June 30, 1999, results
of operations for the three and six months ended June 30, 1998 and
1999, and cash flows for the six months ended June 30, 1998 and 1999.
The results of operations for the three and six months ended June 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 June 30, 1999
----------------- -------------
<S> <C> <C>
Finished goods $27,698 $41,897
Work in process 11,240 12,041
Raw material 13,604 23,139
------- -------
Total inventories $52,542 $77,077
------- -------
------- -------
</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 six months ended June 30, 1998 and 1999, comprehensive income
was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30
--------------------- ---------------------
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings (loss) $(2,758) $(1,707) $(2,730) $(1,907)
Foreign currency translation (299) 164 (302) 164
------- ------- ------- -------
Comprehensive earnings (loss) $(3,057) $(1,543) $(3,032) $(1,743)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
4. RESTRUCTURING, UNUSUAL AND NON-CASH CHARGES.
In the 1999 three and six months the Company incurred no
restructuring costs. In the 1998 three and six months the Company
incurred $1,043 and $2,603 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. The following shows the changes in
the reserve balance from December 31, 1998:
<TABLE>
<CAPTION>
Reserve Activity charged Activity charged Reserve
Balance at to Reserve for to Reserve for Balance at
December 3 months ended 3 months ended June 30,
31, 1998 Mar. 31, 1999 June 30, 1999 1999
---------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
Severance costs $197 $78 $0 $119
Facility shutdown 0 0 0 0
Other 0 0 0 0
---- --- -- ----
Total $197 $78 $0 $119
---- --- -- ----
---- --- -- ----
</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 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
6.
<PAGE>
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 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 June 30,
1999, the amount of the Cumulative Preferred Stock dividends in arrears
as of that date is $4,833.
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 June 30, 1999, for active recalls or
corrective actions indemnified by Spalding, the Company has incurred
actual expenses of approximately $277 and recorded a product recall
liability for additional estimated costs of approximately $392. 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 $447 was paid by June 30,
1999, leaving a balance of $460 as of June 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 Six Months Ended
JUNE 30, JUNE 30,
--------------------------- -----------------------------
1998 1999 1998 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
GEOGRAPHIC LOCATION
NET SALES
United States $ 73,615 $ 59,254 $ 158,573 $ 144,535
Other nations 8,920 10,931 17,010 20,510
-------- -------- --------- ---------
Total net sales $ 82,535 $ 70,185 $ 175,583 $ 165,045
-------- -------- --------- ---------
-------- -------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES
United States $ (530) $ 335 $ 2,390 $ 4,040
Other nations 40 1,045 151 1,156
Restructuring costs (1,043) 0 (2,603) 0
Interest expense, net (3,024) (4,211) (5,608) (7,969)
-------- -------- --------- ---------
Earnings (loss) before
income taxes $ (4,557) $ (2,831) $ (5,670) $ (2,773)
-------- -------- --------- ---------
-------- -------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
December June
31, 1998 30, 1999
-------- --------
<S> <C> <C>
IDENTIFIABLE ASSETS
United States $257,460 $266,706
Other nations 18,404 24,119
-------- --------
Total assets $275,864 $290,825
-------- --------
-------- --------
</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 June 30, 1999, and
the related condensed consolidated statements of earnings (loss) for the three
and six months ended June 30, 1998 and 1999 and of condensed consolidated cash
flows for the six months ended June 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
August 11, 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 JUNE 30, 1999 ("1999 THREE MONTHS") AND SIX MONTHS ENDED JUNE
30, 1999 ("1999 SIX MONTHS") COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1998
("1998 THREE MONTHS") AND SIX MONTHS ENDED JUNE 30, 1998 ("1998 SIX MONTHS").
NET SALES. The Company's net sales of $70,185 in the 1999 three
months compare to $82,535 for the 1998 three months, a decrease of $12,350 or
14.9%. The Company's 1999 six months net sales of $165,045 compare to
$175,583 in the 1998 six months, a decrease of $10,538 or 6.0%. U.S. net
sales, including export sales, of $59,254 for the 1999 three months declined
$14,361 or 19.5% from the 1998 three months of $73,615. U.S. net sales,
including export sales, of $144,535 for the 1999 six months, decreased
$14,038 or 8.9% from 1998 six months of $158,573. U.S. sales declined due
primarily to a reduction in sales of juvenile car seats due to strong
competitive pressure. International net sales increased 22.5% to $10,931 in
the 1999 three months from $8,920 for the 1998 three months. In the 1999 six
months, international sales increased by $3,500, or 20.6%, to $20,510 from
$17,010 for the 1998 six 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 $17,014 in the
1999 three months from $16,907 in the 1998 three months. As a percentage of net
sales, gross profit increased to 24.2% in the 1999 three months from 20.5% in
the 1998 three months. For the 1999 six months, gross profit increased by $2,534
or 6.9% to $39,068 from $36,534 for the 1998 six months. As a percentage of net
sales, gross profit rose to 23.7% in the 1999 six months from 20.8% in the 1998
six months. 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 decreased to $15,944 in the 1999 three months from $17,134 in the
1998 three months, a decrease of $1,190 or 6.9%. For the 1999 six months SG&A
expenses were $34,569, a $1,009 or 3.0% increase over the $33,560 reported for
the 1998 six months. The 1999 six 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 six months the
Company incurred no restructuring expense. In the 1998 three months and 1999 six
months the Company incurred $1,043 and $2,603 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 $4,211 in the 1999
three months and $7,969 in the 1999 six months from $3,024 in the 1998 three
months and $5,608 in the 1998 six months. The increase for both the 1999 three
and six months over 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, and (ii) increased amount outstanding under the
revolving credit facility.
CURRENCY (GAIN) LOSS. The $310 currency gain in the 1999 three months
and a $697 for the 1999 six months compares to a $263 loss for the 1998 three
months and a $433 loss in the 1998 six months. The favorable impact of currency
gains for the 1999 three and six months over the 1998 three and six months is
due primarily to the currency effect of a U.S. dollar denominated note payable
on the books of a non-U.S. subsidiary 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 both the
1999 and 1998 three months associated with loss from U.S. operations. The 1999
six months reflect a tax benefit from U.S. operations offset slightly by tax
expense principally from Mexico and other non-U.S. income. During the 1998 six
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 June 30, 1999, the Company had $18,100 in
borrowings outstanding under the revolving credit facility and utilized $47,205
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 June 30, 1999, the Company had $4,855
of cash. The Company had $34,695 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 of
Cumulative Preferred Stock that bears a variable rate of interest indexed to the
ten-year U.S. Treasury Rate. For the six-months ended June 30, 1999, the
dividend rate on the Cumulative Preferred Stock was 14%.
The Company anticipates cash outlays of $4,000 to $5,500 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 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
11.
<PAGE>
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 SIX MONTHS COMPARED TO THE 1998 SIX MONTHS. For the 1999 six
months, the Company used $9,642 in cash before financing activities to fund
$2,673 in operating activities, primarily used cash for increased inventory,
partially offset by lower receivables and increased current liabilities, and
invested $6,969 in capital expenditures. Cash usage in the 1999 six months was
funded from the 1998 year end cash balance and borrowing $10,300 under the
revolving credit facility.
Net cash flow used by operating activities for the 1999 six months was
$2,673 compared to $8,762 in the 1998 six months. The $6,089 lower operating use
of cash for the 1999 six months compared to the 1998 six months was primarily
due to improved earnings and changes in working capital components.
Capital expenditures during the 1999 six 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 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.
12.
<PAGE>
The Company's Adjusted EBITDA increased from $3,459 and $10,477 in the
1998 three and six months, respectively, to $5,451 and $13,336 in the 1999 three
and six months, respectively, as indicated in the table below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ---------------------------
1998 1999 1998 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
NET EARNINGS (LOSS) $(2,758) $(1,707) $ (2,730) $ (1,907)
Income taxes (benefit) (1,799) (1,124) (2,940) (866)
Interest expense, net 3,024 4,211 5,608 7,969
Depreciation and amortization 3,787 4,071 7,351 8,140
Restructuring 1,043 0 2,603 0
------- ------- -------- --------
EBITDA 3,297 5,451 9,892 13,336
------- ------- -------- --------
Unusual costs 162 0 585
------- ------- -------- --------
0
ADJUSTED EBITDA $ 3,459 $ 5,451 $ 10,477 $ 13,336
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
CURRENCY HEDGING
In the 1999 six 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. 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
$1,600 based on intercompany balances as of December 31, 1998 and June 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 expects to spend approximately $9,500 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 $4,500 during the 1999 six 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 98% 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
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 and 1999 six months the Company capitalized $2,425 and
$4,400, respectively, for information system upgrades and expensed $66 and $114,
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 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.
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 failure 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 March 31, 1999:
On May 26, 1999, a Settlement Agreement was executed between
and among the Company, Spalding, Graco and Century settling
the Company's patent infringement action that was originally
filed on April 22, 1998 in the U.S. District Court, for the
Northern District of Ohio. The terms of the Settlement
Agreement are confidential. Century's suit that was filed on
August 7, 1998 in U.S. District Court for the Northern
District of Ohio, against the Company and Spalding, was
dismissed with prejudice.
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 June 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 August 12, 1999 /s/ Richard W. Frank
---------------- ----------------------------------------
Richard W. Frank
Chairman of the Board of Directors and
Chief Executive Officer
Date August 12, 1999 /S/ Daryle A. Lovett
--------------- -----------------------------------------
Daryle A. Lovett
Executive Vice President Finance and
Chief Financial Officer
18.
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,855
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<PP&E> 120,593
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<CURRENT-LIABILITIES> 95,010
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0
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<COMMON> 10,000
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<INCOME-TAX> (866)
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