SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
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 number 0-20450
PlayCore, Inc.
(Exact name of registrant as specified in its charter.)
Delaware 36-3808989
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1212 Barberry Drive, Janesville, Wisconsin 53545
(Address of principal executive office)
Registrant's telephone number, including area code (608) 755-4768.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days. YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: as of November 9, 1998 there
were 7,908,964 shares of Common Stock, par value, $.01 per share, outstanding.
<PAGE>
PLAYCORE, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
INDEX
Part I. Financial Information: Page
Unaudited Consolidated Balance Sheets -
1. December 31, 1997 and September 30, 1998 3
Unaudited Consolidated Interim Statements of Operations
and Retained Earnings -
Three Months Ended September 30, 1997 4
Nine Months Ended September 30, 1997
Three Months Ended September 30, 1998 and
Nine Months Ended September 30, 1998
Unaudited Consolidated Interim Statements of Cash Flows-
Nine Months Ended September 30, 1997 and 5
Nine Months Ended September 30, 1998
Notes to Unaudited Interim Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-11
Part II. Other Information
Item 6 - Exhibits and Reports on Form 8-K 12
Signature 13
<PAGE>
PlayCore, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands, except share data)
December 31, September 30,
ASSETS 1997 1998
----------- -------------
Current assets:
Cash $ 677 $ 365
Accounts receivable, less
allowance for doubtful
accounts of $407 and $490 13,295 21,482
Other receivables 162 1,771
Inventories 12,533 10,371
Refundable income taxes 1,157 -
Prepaid expenses 1,586 1,749
Deferred income taxes 765 765
Total current assets 30,175 36,503
Property, plant and equipment, net 20,535 20,789
Deferred financing and other costs,
net of accumulated amortization of $868
and $1,375 3,639 3,374
Identifiable intangible assets, net of
accumulated amortization of $527 and $761 6,909 6,675
Goodwill, net of accumulated amortization
of $4,049 and $4,872 39,907 39,704
------------ ------------
$ 101,165 $ 107,045
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loan $ 7,615 $ 11,975
Accounts payable 5,949 5,433
Accrued income taxes - 1,001
Accrued expenses 9,396 10,065
Current portion of long-term debt 9,457 7,215
Total current liabilities 32,417 35,689
Long-term debt, net of current portion 49,590 44,592
Convertible subordinated debentures
payable to stockholders 5,869 6,697
Deferred income taxes 1,595 2,790
Stockholders' equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized,
no shares issued or outstanding - -
Common stock, $.01 par value,
25,000,000 shares authorized,
11,542,268 and 11,543,349 shares
issued 115 115
Class B common stock, $.01 par value,
1,750,000 shares authorized,
no shares issued or outstanding - -
Additional paid-in capital 37,518 37,524
Excess purchase price over predecessor
basis (5,627) (5,627)
Retained earnings 20,199 25,776
Less 3,634,385 common shares held in
treasury, at cost
(40,511) (40,511)
---------- ------------
Total stockholders' equity 11,694 17,277
---------- ------------
$ 101,165 $ 107,045
========== ============
Note: The consolidated balance sheet at December 31, 1997 has been derived from
the audited consolidated balance sheet at that date.
See notes to interim consolidated financial statements
3
<PAGE>
<TABLE>
PlayCore, Inc.
Consolidated Interim Statements of Operations and Retained Earnings
(unaudited)
(in thousands, except per share amounts)
<CAPTION>
Three months Nine months Three months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1997 1997 1998 1998
----- ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $ 24,827 $ 70,599 $ 29,533 $ 91,646
Cost of goods sold 13,887 36,953 16,267 47,814
------ ------ ------ ------
Gross profit 10,940 33,646 13,266 43,832
Operating expenses:
Selling 5,454 13,200 7,517 19,655
General and administrative 2,502 6,563 2,232 7,389
Amortization of intangible assets 537 1,408 536 1,573
----- ------ ------ ------
8,493 21,171 10,285 28,617
----- ------ ------ ------
Operating income 2,447 12,475 2,981 15,215
Other expense:
Interest expense
2,017 5,519 1,852 5,800
Other, net
262 317 122 258
----- ----- ----- ------
Total other expense 2,279 5,836 1,974 6,058
----- ----- ----- ------
Income before income taxes and extraordinary item 168 6,639 1,007 9,157
Income tax expense 70 2,532 475 3,580
---- ----- ----- -----
Income before extraordinary item
98 4,107 532 5,577
Extraordinary item, net of income tax benefit of $540
-- 860 -- --
Net income 98 3,247 532 5,577
Retained earnings at beginning of period 22,171 19,022 25,244 20,199
------ ------ ------ ------
Retained earnings at end of period $ 22,269 $22,269 $ 25,776 $ 25,776
====== ====== ====== ======
Basic earnings per share:
Income before extraordinary item $ 0.01 $ 0.60 $ 0.07 $ 0.71
Extraordinary loss -- (0.13) -- --
----- ----- ---- -----
Net income $ 0.01 $ 0.47 $ 0.07 $ 0.71
===== ===== ==== =====
Diluted earnings per share:
Income before extraordinary item $ 0.01 $ 0.52 $ 0.06 $ 0.59
Extraordinary loss -- (0.10) -- --
--------- --------- -------- -------
Net income $ 0.01 $ 0.42 $ 0.06 $ 0.59
========= ========= ======== =======
</TABLE>
See notes to interim consolidated financial statements
4
<PAGE>
PlayCore, Inc.
Consolidated Interim Statements of Cash Flows
(unaudited)
(in thousands)
Nine months Nine months
ended ended
September 30, September 30,
1997 1998
Operating activities
Net income $ 3,247 $ 5,577
Adjustments to reconcile net
income to net cash provided
by operating activities:
Write-off of unamortized
deferred financing costs 1,400 -
Amortization of debt discount 197 274
Deferred income taxes 690 1,195
Depreciation 1,360 1,837
Amortization of intangible
assets 1,408 1,573
Interest converted to convertible
subordinated debentures 265 292
Changes in operating assets and
liabilities (1,783) (5,619)
Net cash provided by operating
activities 6,784 5,129
Investing activities
Purchase of property, plant and equipment (1,061) (2,048)
Acquisitions, net of cash acquired (42,566) (590)
Other (141) -
Net cash used by investing activities (43,768) (2,638)
Financing activities
Increase in revolving loan 1,545 4,360
Issuances of long-term debt 63,777 536
Debt issuance costs incurred (3,027) (191)
Proceeds from issuance of commom
stock warrants 2,723 -
Proceeds from issuance of common stock,
net of offering costs 4,550 6
Payments of long-term debt (31,643) (7,514)
Net cash provided(used) by financing ------- -------
activities 37,925 (2,803)
------- -------
Increase(decrease) in cash 941 (312)
Cash at beginning of period 1 677
------- -------
Cash at end of period $ 942 $ 365
======= =======
Supplemental disclosure of cash
flows information cash paid during
period for: $ 4,164 $ 5,607
Income taxes, net of refunds received 369 134
See notes to interim consolidated financial statements
5
<PAGE>
Notes to Interim Consolidated Financial Statements
Unaudited
(in thousands)
September 30, 1998
1. Basis of presentation of unaudited consolidated financial statements
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for year end financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the nine months ended September 30, 1998 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1998. For
further information refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
2. Earnings per share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three months Nine months Three months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1997 1997 1998 1998
Numerator:
Numerator for basic and diluted earnings per share -
<S> <C> <C> <C> <C>
income before extraordinary item $ 98 $ 4,107 $ 532 $ 5,577
Effect of diluted securities -
10% convertible subordinated debentures -- 252 -- 285
------- ------- ------- -------
Numerator for diluted earnings per share $ 98 $ 4,359 $ 532 $ 5,862
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share -
weighted average shares 7,134 6,823 7,909 7,909
Effect of diluted securities:
Employee stock options(treasury stock
method) 39 39 42 42
Warrants 596 438 620 620
10% convertible subordinated debentures -- 1,164 -- 1,298
----- ----- ----- -----
Denominator for diluted earnings per share 7,769 8,464 8,571 9,869
===== ===== ===== =====
Inventories
Inventories consist of the following:
December 31, September 30,
1997 1998
-------- --------
Finished goods and work in process $ 7,112 $ 5,482
Raw materials 5,421 4,889
------ ------
$12,533 $10,371
======= =======
</TABLE>
6
<PAGE>
Management's Discussion and Analysis
of
Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
Certain matters discussed herein are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as the Company "believes," "anticipates,"
"expects" or words of similar import. Similarly, statements that describe the
Company's future plans, objectives or goals are forward-looking statements. Such
forward-looking statements are subject to certain risks and uncertainties which
are described in close proximity to such statements and which could cause actual
results to differ materially from those currently anticipated. Readers are urged
to consider these factors carefully in evaluating the forward-looking statements
and are cautioned not to place undue reliance on such forward-looking
statements. The forward-looking statements made herein are only made as of the
date of this report and the Company undertakes no obligation to publicly update
such forward-looking statements to reflect subsequent events or circumstances.
Results of Operations:
On March 13, 1997, the Company acquired GameTime, Inc. (GameTime), a leading
manufacturer of modular and custom commercial outdoor playground equipment for
schools, parks and municipalities. GameTime was merged into Newco, Inc. the
Company's wholly owned operating subsidiary, as an independent business unit.
The acquisition of GameTime was accounted for using the purchase method.
Therefore, the results of GameTime are included with those of the Company
beginning with the date of the acquisition. In April 1998, the Company changed
its name to PlayCore, Inc. from Swing-N-Slide Corp.
Three Months Ended September 30, 1998 Compared to the Three Months Ended
September 30, 1997.
Net Sales. Net sales increased $4.7 million, or 19.0 percent, to $29.5 million
for the three months ended September 30, 1998 as compared to $24.8 million for
the same period a year ago. The increase was primarily due to the growth in
sales of commercial playground equipment, which management attributes to the
impact of new playground equipment safety standards.
Gross Profit. Gross profit increased $2.3 million, or 21.3 percent, to $13.3
million and increased as a percentage of net sales to 44.9 percent for the three
months ended September 30, 1998 as compared to $10.9 million and 44.1 percent
for the same period a year ago. The impact of higher sales volume on fixed
overhead costs and ongoing efficiency improvements led to the increase in the
gross profit margin.
Selling Expense. Selling expense increased $2.0 million, or 37.8 percent to $7.5
million, and increased as a percentage of net sales to 25.5 percent for the
three months ended September 30, 1998 as compared to $5.5 million and 22.0
percent for the three months ended September 30, 1997. The increase as a
percentage of net sales mainly results from the increase in commercial
playground equipment sales, which have higher selling costs as a percentage of
net sales.
7
<PAGE>
General and Administrative Expenses. General and administrative expenses
decreased $0.3 million, or 10.8 percent, to $2.2 million and decreased as a
percentage of net sales to 7.6 percent for the three months ended September 30,
1998 as compared to $2.5 million and 10.1 percent for the same period a year
ago. The primary reason for the decrease as a percentage of net sales was the
impact of higher sales volume on fixed general and administrative expenses.
Amortization of Intangible Assets. Amortization of financing fees, goodwill and
other identifiable intangible assets was $0.5 million for the three months ended
September 30, 1998 and for the same period a year ago.
Other Expense. Interest expense decreased $0.2 million to $1.9 million for the
three months ended September 30, 1998. This decrease was primarily due to the
scheduled repayments of principal on the Company's term note and the pay-off of
the Company's $2.5 million Junior Subordinated Bridge Note on December 31, 1997.
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended September
30, 1997.
Net Sales. Net sales for the nine months ended September 30, 1998 increased
$21.0 million, or 29.8 percent, to $91.6 million as compared to $70.6 million
for the same period in 1997. The primary reasons for the increase was the
inclusion of GameTime sales for the entire nine months of 1998 versus the
inclusion of GameTime sales from March 13 through September 30, 1997, and the
increase in sales of commercial playground equipment.
Gross Profit. Gross profit increased $10.2 million, or 30.3 percent, to $43.8
million and increased slightly as a percentage of net sales to 47.8 percent for
the nine months ended September 30, 1998 as compared to $33.6 million and 47.7
percent for the same period a year ago. The main reason for the increase in
gross profit margin was the impact of higher sales volume on fixed overhead
costs.
Selling Expense. Selling and marketing expenses increased $6.5 million, or 48.9
percent, to $19.7 million and increased as a percentage of net sales to 21.4
percent for the nine months ended September 30, 1998 as compared to $13.2
million and 18.7 percent for the same period a year ago. The dollar increase was
primarily due to the inclusion of GameTime's selling and marketing expenses for
the full nine months in 1998. The increase as a percentage of net sales is
mainly due to the higher selling costs as a percent of net sales inherent in
commercial playground equipment sales.
General and Administrative Expenses. General and administrative expenses
increased $0.8 million, or 12.6 percent, to $7.4 million but decreased as a
percentage of net sales to 8.1 percent for the nine months ended September 30,
1998 as compared to $6.6 million and 9.3 percent for the nine months ended
September 30, 1997. The dollar increase was primarily due to the inclusion of
GameTime's general and administrative expenses for the entire nine months of
1998. The main reason for the decrease as a percentage of net sales was the
impact of higher sales volume on fixed general and administrative expenses.
8
<PAGE>
Amortization of Intangible Assets. Amortization of financing fees, goodwill and
other identifiable intangible assets was $1.6 million for the nine months ended
September 30, 1998 as compared to $1.4 million for the same period a year ago.
Additional amortization resulted from goodwill, identifiable intangible assets
and financing fees associated with the GameTime acquisition.
Other Expense. Interest expense increased $0.3 million to $5.8 million for the
nine months ended September 30, 1998. This increase in interest expense was due
to the additional debt that was incurred in connection with the GameTime
acquisition on March 13, 1997.
Seasonality
The Company's sales pattern is seasonal and is concentrated in the period from
April 1 through September 30 (approximately 65 percent). The timing of initial
stocking orders and fluctuations in customer demand through the spring and
summer months contribute to this pattern.
Liquidity and Capital Resources
During the nine months ended September 30, 1998, total indebtedness decreased
approximately $2.1 million. Cash generated from operations was used to pay down
the debt.
The Company's primary sources of working capital are cash flows from operations
and borrowings under Newco's senior credit facility that was entered into in
March 1997 and runs through June 2003. The facility consists of (a) a $20.0
million revolving credit facility; (b) a $45.0 million Term A facility and (c) a
$4.5 million Term B facility. The entire facility is guaranteed by PlayCore,
Inc. and secured by a first priority mortgage or security interest in all of
Newco's tangible and intangible assets, as well as the pledge of all of the
outstanding shares of Newco Common Stock. In addition, the Company and Newco are
subject to certain restrictive covenants which include, among other things,
restrictions on the payment of dividends and a limitation on additional
indebtedness.
Borrowing availability under the revolving credit facility is limited to
specified percentages of qualified inventories and accounts receivable, not to
exceed $20.0 million. At September 30, 1998, the outstanding amount of the
revolving loan facility was $12.0 million, and availability was approximately
$18.0 million.
The Company made capital expenditures totaling approximately $2.0 million in the
nine months ended September 30, 1998. The Company continues to evaluate
opportunities for both internal and external growth and believes that funds
generated from operations and its current and anticipated future capacity for
borrowing will be sufficient to fund current business operations as well as
anticipated future capital expenditures and growth opportunities.
Impact of Year 2000
Certain of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, such older computer
programs could misinterpret a date using "00" as the year 1900 rather than the
year 2000. If not corrected, many computer applications with this defect could
fail or create erroneous results.
9
<PAGE>
The Company's Year 2000 compliance is directed by senior management and includes
four main projects:
1. Information technology;
2. Operating equipment with embedded chips or software;
3. Products; and
4. 3rd party suppliers and customers
These projects generally include four phases:
1. Assessment - assessing equipment and systems for potential Year 2000
non-compliance;
2. Remediation - developing solutions to correct Year 2000 non-compliance;
3. Testing - testing the developed solutions for effectiveness; and
4. Implementation - implementing the fully tested solutions.
The following chart is a summary of our Year 2000 compliance schedule target
dates:
<TABLE>
Resolution Phases
<CAPTION>
<S> <C> <C> <C> <C> <C>
---------------- -------------------- ------------------- -------------------- --------------------
Assessment Remediation Testing Implementation
---------------- -------------------- ------------------- ------------------ --------------------
Information 100% Complete 85% Complete 75% Complete 75% Complete
Technology
E Expected Expected Expected
x completion date completion completion date
p December 1998 date April 1999
o February 1999
s
u
r ---------------- ------------------- ------------------- ------------------- --------------------
e
Operating 90% Complete 75% Complete 50% Complete 50% Complete
T Equipment with
y Embedded Chips Expected completion Expected completion Expected completion Expected completion
p or software date, December 1998 date, March 1999 date, April 1999 date, April 1999
e
----------------- ------------------- ------------------- ------------------- --------------------
Products 100% Complete 100% Complete 100% Complete 90% Complete
Expected completion
date, January 1999
----------------- ------------------- ------------------- ------------------- --------------------
3rd Party 10% Complete for
Suppliers and 50% Complete for system interface 10% Complete for 10% Complete for
Customers system interface system interface system interface
Develop contingency
Expected completion plans as
for surveying appropriate, Expected completion Implement
vendors, February February 1999 date for system contingency plans or
1999 interface work, alternatives as
March 1999 necessary, February
1999
---------------- ------------------- ------------------- ------------------- --------------------
</TABLE>
10
<PAGE>
We believe our Year 2000 compliance will be completed on schedule, but the
schedule is based on a number of factors and assumptions. These assumptions
include the accuracy and completeness of responses by 3rd parties to our
inquiries and the availability of skilled personnel to complete the compliance
work. The compliance schedule could be adversely impacted if any of the factors
and assumptions are incorrect. We cannot give assurance that our Year 2000
compliance projects will be completed on schedule or that we will not uncover
Year 2000 issues that could create a material impact on the operation of the
Company. In addition, disruptions in the economy generally resulting from Year
2000 issues could also materially adversely affect the Company. The Company
could be subject to litigation for computer system failures, equipment shutdowns
or improperly dated business records. The amount of such potential liability and
lost revenue cannot be reasonably estimated at this time.
The Company is in the process of working with third party vendors and customers
to ensure that the Company's systems that interface directly with third parties
are Year 2000 compliant by March 1999. Although management believes a
significant interruption in our suppliers and customers activities (due to Year
2000 issues) is unlikely, such an interruption could have a material impact on
our financial results.
We do not believe that the cost of our Year 2000 compliance will be material to
our financial condition or results of operations. The cost of Year 2000
compliance is not expected to exceed $400,000 and is being funded through
operating cash flows. To date, we have spent approximately $200,000 on Year 2000
compliance.
The Company currently has no contingency plans in place in the event it does not
complete all phases of the Year 2000 program. The Company plans to evaluate the
status of completion in March 1999 and determine whether such a plan is
necessary.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None.
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PlayCore, Inc.
Date: November 11, 1998 /s/ Richard E. Ruegger
--------------------------------------
Richard E. Ruegger,
Vice President-Finance
and Chief Financial Officer
(Duly authorized officer and Principal
Financial and Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED FINANCIAL STATEMENTS OF PLAYCORE, INC., AS OF AND FOR THE
QUARTERLY PERIOD SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 365
<SECURITIES> 0
<RECEIVABLES> 21,482
<ALLOWANCES> 490
<INVENTORY> 10,371
<CURRENT-ASSETS> 36,503
<PP&E> 29,106
<DEPRECIATION> 8,317
<TOTAL-ASSETS> 107,045
<CURRENT-LIABILITIES> 35,689
<BONDS> 51,289
0
0
<COMMON> 115
<OTHER-SE> 17,162
<TOTAL-LIABILITY-AND-EQUITY> 107,045
<SALES> 91,646
<TOTAL-REVENUES> 91,646
<CGS> 47,814
<TOTAL-COSTS> 28,617
<OTHER-EXPENSES> 258
<LOSS-PROVISION> 95
<INTEREST-EXPENSE> 5,800
<INCOME-PRETAX> 9,157
<INCOME-TAX> 3,580
<INCOME-CONTINUING> 5,577
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,577
<EPS-PRIMARY> .71
<EPS-DILUTED> .59
</TABLE>
