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 March 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission file 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)
15 West Milwaukee Street, Janesville, Wisconsin 53545
(Address of principal executive office)
Registrant's telephone number, including area code (608)741-7183.
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 May 6, 1999 there were
7,911,214 shares of Common Stock, par value $.01 per share, outstanding.
<PAGE>
PLAYCORE, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1999
INDEX
Part I. Financial Information: Page
----
Unaudited Consolidated Balance Sheets -
December 31, 1998 and March 31, 1999 3
Unaudited Consolidated Interim Statements of Operations
and Retained Earnings -
Three Months Ended March 31, 1998 and 1999 4
Unaudited Consolidated Interim Statements of Cash Flows-
Three Months Ended March 31, 1998 and 1999 5
Notes to Unaudited Interim Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Quantitative and Qualitative Disclosure about Market Risk 12
Part II. Other Information
Item 6 - Exhibits and Reports on Form 8-K 13
Signature 14
2
<PAGE>
PlayCore, Inc
Consolidated Balance Sheets
(unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1998 1999
------------ ------------
<S> <C> <C>
Current assets
Cash $ 487 $ 627
Accounts receivable, less allowance for doubtful accounts of $801 and $1,295 18,036 21,792
Other receivables 551 832
Inventories 11,754 18,971
Refundable income taxes - 782
Prepaid expenses 1,869 4,065
Deferred income taxes 890 2,310
------------ ------------
Total current assets 33,587 49,379
Property, plant and equipment, net 20,871 24,259
Deferred financing and other costs, net of accumulated amortization of $1,557 and $1,759 3,194 3,835
Identifiable intangible assets, net of accumulated amortization of $843 and $923 6,593 6,513
Goodwill, net of accumulated amortization of $5,156 and $5,464 39,195 48,612
------------ ------------
$ 103,440 $ 132,598
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Revolving loan $ 9,940 $ 23,940
Accounts payable 5,346 8,307
Accrued income taxes 216 -
Accrued expenses 11,106 13,614
Current portion of long-term debt 7,702 5,726
------------ ------------
Total current liabilities 34,310 51,587
Long-term debt, net of current portion 42,288 54,233
Convertible subordinated debentures payable to stockholders 7,021 7,021
Deferred income taxes 3,445 3,075
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,
11,543,349 and 11,545,599 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 37,524 37,538
Retained earnings 19,248 19,540
Less 3,634,385 common shares held in treasury, at cost (40,511) (40,511)
------------ ------------
Total stockholders' equity 16,376 16,682
------------ ------------
$ 103,440 $ 132,598
============ ============
Note: The consolidated balance sheet at December 31, 1998 has been derived from
the audited consolidated balance sheet at that date.
See notes to interim consolidated financial statements
</TABLE>
3
<PAGE>
PlayCore, Inc
Consolidated Interim Statements of Operations and Retained Earnings
(unaudited)
(in thousands, except per share amounts)
Three months Three months
ended ended
March 31, March 31,
1998 1999
-------------- --------------
Net sales $ 25,257 $ 31,473
Cost of goods sold 13,667 18,283
-------------- --------------
Gross profit 11,590 13,190
Operating expenses
Selling 5,945 6,392
General and administrative 2,960 3,666
Amortization of intangible assets 519 590
-------------- --------------
9,424 10,648
-------------- --------------
Operating income 2,166 2,542
Other expense:
Interest expense 1,925 1,938
Other, net 72 112
-------------- --------------
Total other expense 1,997 2,050
-------------- --------------
Income before income taxes 169 492
Income tax expense 60 200
-------------- --------------
Net income 109 292
Retained earnings at beginning of period 14,572 19,248
-------------- --------------
Retained earnings at end of period $ 14,681 $ 19,540
============== ==============
Earnings per share:
Basic $ 0.01 $ 0.04
Diluted 0.01 0.03
See notes to interim consolidated financial statements
4
<PAGE>
PlayCore, Inc
Consolidated Interim Statements of Cash Flows
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, March 31
1998 1999
------------ ------------
<S> <C> <C>
Operating activities
Net income $ 109 $ 292
Adjustments to reconcile net income to
net cash used by operating activities:
Amortization of debt discount 91 91
Deferred income taxes 360 300
Depreciation 613 666
Amortization of intangible assets 519 590
Changes in operating assets and liabilities (6,351) (8,459)
------------ ------------
Net cash used by operating activities (4,659) (6,520)
Investing activities
Purchase of property, plant and equipment (720) (2,241)
Acquisitions, including transaction costs and net
of cash acquired - (14,148)
------------ ------------
Net cash used by investing activities (720) (16,389)
Financing activities
Increase in revolving loan 5,785 14,000
Issuances of long-term debt - 10,323
Debt issuance costs incurred - (843)
Proceeds from issuance of common stock 5 14
Payments of long-term debt (537) (445)
------------ ------------
Net cash provided by financing activities 5,253 23,049
------------ ------------
Increase(decrease) in cash (126) 140
Cash at beginning of period 677 487
------------ ------------
Cash at end of period $ 551 $ 627
============ ============
Supplemental disclosure of cash flows information-
cash paid (received) during period for:
Interest $ 1,998 $ 1,899
Income taxes, net of refunds received (449) -
See notes to interim consolidated financial statements
</TABLE>
5
<PAGE>
PlayCore, Inc
Notes to Interim Consolidated Financial Statements
Unaudited
(in thousands)
March 31, 1999
1. Basis of presentation of unaudited consolidated financial statements
The accompanying unaudited consolidated financial statements have
been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission 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 three months
ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999. 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, 1998.
2. Earnings per share
The following table sets forth the computation of basic and
diluted earnings per share:
Three months Three months
ended ended
March 31, March 31,
1998 1999
------------ ------------
Numerator:
Numerator for basic and diluted
earnings per share -
net income $ 109 $ 292
============ ============
Denominator:
Denominator for basic earnings
per share -
weighted average shares 7,908 7,910
Effect of diluted securities:
Employee stock options(treasury stock
method) 18 114
Warrants 619 627
------------ ------------
Denominator for diluted earnings
per share 8,545 8,651
============ ============
3. Inventories
Inventories consisted of the following:
December 31, March 31,
1998 1999
------------ ------------
Finished goods and work in process $ 7,153 $ 9,979
Raw materials 4,601 8,992
------------ ------------
$ 11,754 $ 18,971
============ ============
6
<PAGE>
PlayCore, Inc.
Notes to Interim Consolidated Financial Statements(continued)
4. Acquisition
On February 16, 1999, the Company acquired all of the capital
stock of Heartland Industries, Inc. (Heartland), a maker of backyard
wooden storage buildings, for approximately $13,300 (including the
repayment of certain indebtedness of Heartland), subject to adjustments
as defined in the Agreement and Plan of Merger. Heartland has a national
network of company-owned sales branches and independent dealers to sell
its products, which include yard barns and custom-build garages.
The acquisition was accounted for using the purchase method of
accounting and the total purchase cost was allocated first to assets and
liabilities based upon their respective fair market values, with the
remainder allocated to goodwill. The allocation of the purchase price
reflected in the financial statements is based on estimates and may
differ from the final allocation.
5. Segment Reporting
Three months ended March 31, 1998
------------------------------------
Commercial Consumer Total
------------ ---------- --------
Revenues from external customers $ 12,190 $ 13,067 $ 25,257
Segment profit (loss) (449) 558 109
Three months ended March 31, 1999
------------------------------------
Commercial Consumer Total
------------ ---------- --------
Revenues from external customers $ 14,011 $ 17,462 $ 31,473
Segment profit (loss) 331 (39) 292
Segment assets 62,681 69,917 (a) 132,598
(a) The increase in assets since December 31, 1998 was due to the inclusion
of Heartland's assets.
7
<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 February 16, 1999, the Company acquired all of the capital stock of Heartland
Industries, Inc. (Heartland), a maker of backyard wooden storage buildings. The
acquisition of Heartland was accounted for using the purchase method. Therefore,
the results of Heartland are included with those of the Company beginning with
the date of acquisition.
Three months ended March 31, 1999, compared to the three months ended March 31,
1998.
Net Sales. Net sales increased $6.2 million, or 24.6 percent, to $31.5 million
for the three months ended March 31, 1999, compared to $25.3 million for the
same period a year ago. Sales of the Company's consumer products increased $4.4
million, or 33.6 percent, to $17.5 million for the three months ended March 31,
1999, compared to $13.1 million for the same period a year ago. This increase in
sales is attributable to the inclusion of Heartland sales for the period
February 16, 1999 through March 31, 1999. Sales of the Company's commercial
products also increased by $1.8 million, or 14.9 percent, to $14.0 million for
the three months ended March 31, 1999, compared to the same period in 1998. The
growth in commercial products sales was primarily due to new product
introductions and the impact of new playground equipment safety standards on the
commercial play industry.
Gross Profit. Gross profit increased $1.6 million, or 13.8 percent, to $13.2
million but decreased as a percentage of net sales to 41.9 percent for the three
months ended March 31, 1999, compared to $11.6 million and 45.9 percent for the
same period a year ago. The main reason for the decline in the gross profit
margin is the inclusion of Heartland's wooden storage building sales that have a
lower profit margin than playground equipment.
Selling Expense. Selling expense increased $0.5 million, or 7.5 percent, to $6.4
million but decreased as a percentage of net sales to 20.3 percent for the first
three months of 1999,
8
<PAGE>
compared to $5.9 million and 23.5 percent for the three months ended March 31,
1998. The decrease as a percentage of net sales was due to the impact of higher
sales volume on fixed selling expenses and the lower selling costs as a
percentage of net sales associated with wooden storage building sales.
General and Administrative Expenses. General and administrative expenses
increased $0.7 million, or 23.9 percent, to $3.7 million but decreased slightly
as a percentage of net sales to 11.6 percent for the three months ended March
31, 1999, compared to $3.0 million and 11.7 percent for the same period a year
ago. The dollar increase was due to the inclusion of Heartland's general and
administrative expenses for the period February 16, 1999 through March 31, 1999.
Amortization of Intangible Assets. Amortization of financing fees, goodwill and
other identifiable intangible assets was $0.6 million for the three months ended
March 31, 1999 as compared to $0.5 million for the same period a year ago.
Additional amortization resulted from the goodwill and financing fees associated
with the Heartland acquisition.
Other Expense. Interest expense for the three months ended March 31, 1999
remained relatively consistent with the same period a year ago. An increase in
interest expense due to the additional debt that was incurred in connection with
the Heartland acquisition on February 16, 1999 was offset by a decrease in
interest due to the scheduled repayments of principal on the Company's term note
made in 1998.
Seasonality
The Company's sales pattern is seasonal and is concentrated in the period from
April 1 through September (approximately 60 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
On February 16, 1999, the Company acquired all of the capital stock of Heartland
Industries, Inc. for approximately $13.3 million (including the repayment of
certain indebtedness of Heartland), subject to certain post-closing adjustments.
The acquisition was financed by amending and restating the existing senior
credit facility at the Company's PlayCore Wisconsin, Inc. subsidiary ("PlayCore
Wisconsin").
The Company's primary sources of working capital are cash flows from operations
and borrowings under PlayCore Wisconsin's senior credit facility, which was
entered into in March 1997, amended in February 1999, and runs through June
2003. The facility consists of (a) a $28.0 million revolving credit facility;
(b) a $38.0 million Term A facility and (c) a $9.0 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 PlayCore Wisconsin's tangible and
intangible assets, as well as the Company's pledge of all of the outstanding
shares of PlayCore Wisconsin common stock. In addition, the Company and PlayCore
Wisconsin are subject to certain restrictive
9
<PAGE>
covenants, which include, among other things, a general restriction 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 $28.0 million. At March 31, 1999, the outstanding amount of the revolving
loan facility was $23.9 million.
Total indebtedness on the revolving loan facility typically increases during the
first five months of each year, primarily as a result of increased levels of
working capital to meet the seasonal increase in production levels.
The Company made capital expenditures totaling approximately $2.2 million in the
three months ended March 31, 1999. Approximately $1.5 million of this total was
spent on the expansion of the GameTime facility in Fort Payne, Alabama. This
expansion will provide needed additional capacity to meet projected sales growth
and also allow for better workflow through the facility. 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.
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. Third 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.
10
<PAGE>
The following chart is a summary of our Year 2000 compliance schedule target
dates:
<TABLE>
<CAPTION>
Resolution Phases
----------------- ----------------------- ---------------------- ----------------------- ---------------------------
Assessment Remediation Testing Implementation
----------------- ----------------------- ---------------------- ----------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
E Information 100% Complete 100% Complete 85% Complete 80% Complete
X Technology
P Expected completion Expected completion
O date, date, August 1999
S June 1999
U ----------------- ----------------------- ---------------------- ----------------------- ---------------------------
E
Operating 100% Complete 100% Complete 85% Complete 85% Complete
Equipment with
T Embedded Chips
Y or software Expected completion Expected completion date,
P date, July 1999
E June 1999
----------------- ----------------------- ---------------------- ----------------------- ---------------------------
Products 100% Complete 100% Complete 100% Complete 100% Complete
----------------- ----------------------- ---------------------- ----------------------- ---------------------------
3rd Party 90% Complete for 30% Complete for 30% Complete for 20% Completion for system
Suppliers system interface system interface system interface interface
and
customers
Expected completion Develop contingency Expected completion Implement contingency
for surveying plans date for plans or
vendors, June 1999 as appropriate, system interface alternatives as
June 1999 work, July 1999 necessary, August
1999
----------------- ----------------------- ---------------------- ----------------------- ---------------------------
</TABLE>
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 third parties to our
inquires 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
11
<PAGE>
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 June 1999. Although management believes a significant
interruption in our supplier's and customer's 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 $0.6 million and is being funded through
operating cash flows. To date, we have spent approximately $0.3 million 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 June 1999 and determine whether such a plan is
necessary.
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk related to changes in interest rates. The
Company's earnings are affected by changes in the interest rate as a result of
its borrowings under the senior credit facility. However, at December 31, 1998
the Company had a swap agreement that effectively converted $20.0 million of the
Company's debt to a fixed rate. If market interest rates for the remaining
borrowings under the senior credit facility average 1% more during the year
ended December 31, 1999 than they did during 1998, the Company's interest
expense would increase, and income before taxes would decrease by approximately
$0.5 million. This analysis does not consider the effects of the reduced level
of overall economic activity that could exist in such an environment. Further,
in the event of a change of such magnitude, management could take actions to
further mitigate its exposure to the change. However, due to the uncertainty of
the specific actions that would be taken and their possible effects, the
sensitivity analysis assumes no changes in the Company's financial structure.
The Company's swap agreement in place at December 31, 1998 had a notional amount
of $20.0 million and ran through June 11, 2000. The agreement required the
Company to pay interest at a defined fixed rate of 6.11% while receiving
interest at a defined variable rate of three-month LIBOR (5.24% at December 31,
1998). This swap effectively converted $20.0 million of the Company's Term Loan
A to a fixed rate. The additional net interest expense recorded in 1998 as a
result of the swap agreement was not material. At December 31, 1998, the swap
agreement had a negative fair market value of approximately $0.3 million as
determined by the lender. In connection with the amendment of the Company's
senior credit facility in February 1999, the swap agreement was terminated. The
Company expects to enter into a new swap agreement with a $20.0 million notional
amount before the end of the second quarter of 1999.
12
<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
A Form 8-K, dated February 16, 1999 was filed on March 2, 1999
with respect to the acquisition of Heartland Industries, Inc.
on February 16, 1999.
13
<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: May 17, 1999 /s/ Richard E. Ruegger
------------------------------------
Richard E. Ruegger,
Vice President-Finance
and Chief Financial Officer
(Duly authorized officer and Principal
Financial and Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PLAYCORE, INC. AS OF AND FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 627
<SECURITIES> 0
<RECEIVABLES> 23,087
<ALLOWANCES> 1,295
<INVENTORY> 18,971
<CURRENT-ASSETS> 49,379
<PP&E> 33,891
<DEPRECIATION> 9,632
<TOTAL-ASSETS> 132,598
<CURRENT-LIABILITIES> 51,587
<BONDS> 54,233
0
0
<COMMON> 115
<OTHER-SE> 16,567
<TOTAL-LIABILITY-AND-EQUITY> 132,598
<SALES> 31,473
<TOTAL-REVENUES> 31,473
<CGS> 18,283
<TOTAL-COSTS> 18,283
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,938
<INCOME-PRETAX> 492
<INCOME-TAX> 200
<INCOME-CONTINUING> 292
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 292
<EPS-PRIMARY> .04
<EPS-DILUTED> .03
</TABLE>
