Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For The Quarter Ended September 30, 1997
Commission File Numbers: 333-32385-05 and 333-32385
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0329830
Delaware 51-0329829
(State or other jurisdiction of incorporation (IRS Employer Identification
or organization) Number)
585 Slawin Court, Mount Prospect, Illinois 60056
(Address of principal executive offices, including zip code)
(847) 803-9200
(Registrant's telephone number, including area code)
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 12 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 90 days.
Yes No __X__
At December 5, 1997, there were outstanding: (i) 36,127,395 shares of the
Common Stock, par value $.01 per share, of Hedstrom Holdings, Inc.,
(ii) 31,520,000 shares of the Non-Voting Common Stock, par value $.01 per
share, of Hedstrom Holdings, Inc. and (iii) 10 shares of the Common Stock,
par value $.01 per share, of Hedstrom Corporation.
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
Page
Number
______
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
As of September 30, 1997 and December 31, 1996
Consolidated Income Statements
Three months ended September 30, 1997 and 1996
Nine months ended September 30, 1997 and 1996
Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996
Consolidated Statement of Stockholders' Equity
As of and for the nine months ended September 30, 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signature
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
HEDSTROM HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
September 30, December 31,
1997 1996
____________ ___________
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,154 $ 533
Trade accounts receivable, net of
allowance for doubtful accounts 59,907 13,586
Inventories 54,484 23,816
Deferred income taxes 3,389 5,027
Prepaid expenses and other current assets 5,369 690
________ _______
TOTAL CURRENT ASSETS 125,303 43,652
________ _______
PROPERTY, PLANT AND EQUIPMENT, at cost,
net of accumulated depreciation 42,911 21,743
________ _______
OTHER ASSETS:
Deferred charges, net of accumulated amortization 18,233 2,318
Goodwill, net of accumulated amortization 147,754 -
Deferred income taxes 7,500 4,362
________ _______
TOTAL OTHER ASSETS 173,487 6,680
________ _______
TOTAL ASSETS $341,701 $72,075
======== =======
HEDSTROM HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
September 30, December 31,
1997 1996
____________ ___________
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 8,300 $17,400
Current portion of long-term debt and capital leases 6,382 1,965
Accounts payable 20,175 11,698
Accrued expenses 20,864 3,003
________ _______
TOTAL CURRENT LIABILITIES 55,721 34,066
________ _______
LONG-TERM DEBT:
Senior Subordinated Notes 110,000 -
Senior Discount Notes 22,267 -
Term Loans 108,375 36,750
Notes payable to related parties 2,500 2,500
Capital leases 1,675 1,556
Other 2,387 300
________ _______
TOTAL LONG-TERM DEBT 247,204 41,106
________ _______
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 10,000,000
shares authorized, no shares issued and outstanding - -
Common stock, $0.01 par value, 100,000,000 shares
authorized, 36,127,395 and 32,941,499 shares
issued and outstanding, respectively 361 329
Non-voting common stock, $0.01 par value, 40,000,000
shares authorized, 31,520,000 and no shares issued
and outstanding, respectively 315 -
Additional paid-in capital 46,968 10,437
Foreign currency translation adjustment (71) -
Accumulated deficit (8,797) (13,863)
________ _______
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 38,776 (3,097)
________ _______
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $341,701 $72,075
======== =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
HEDSTROM HOLDINGS, INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
For the three months ended
September 30,
__________________________
1997 1996
____ ____
Net sales $61,462 $14,969
Cost of sales 41,722 14,996
_______ _______
Gross profit (loss) 19,740 (27)
Selling, general and administrative expense 14,416 5,745
_______ _______
Operating income (loss) 5,324 (5,772)
Interest expense 6,800 1,428
_______ _______
Loss before income taxes (1,476) (7,200)
Income tax benefit (557) (2,888)
_______ _______
Net loss $ (919) $(4,312)
======= =======
Income per common share:
Net loss ($0.01) ($0.13)
Weighted average number of common shares
outstanding (in thousands) 68,122 32,941
The accompanying notes to consolidated financial statements are an integral
part of these statements.
HEDSTROM HOLDINGS, INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
For the nine months ended
September 30,
_________________________
1997 1996
____ ____
Net sales $165,513 $111,028
Cost of sales 115,301 87,893
________ ________
Gross profit 50,212 23,135
Selling, general and administrative expense 30,658 20,852
________ ________
Operating income 19,554 2,283
Interest expense 11,509 4,973
________ _________
Income (loss) before income taxes 8,045 (2,690)
Income tax expense (benefit) 2,979 (1,076)
________ ________
Net income (loss) $ 5,066 $ (1,614)
======== ========
Income per common share:
Net income (loss) per share $0.11 ($0.05)
Weighted average number of common shares
outstanding (in thousands) 47,108 32,941
The accompanying notes to consolidated financial statements are an integral
part of these statements.
HEDSTROM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months For the nine months
ended September 30,
___________________
1997 1996
____ ____
Cash flows from operating activities:
Net income (loss) $ 5,066 $(1,614)
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating activities:
Depreciation of property, plant and equipment and
amortization of other assets and discount notes 7,614 3,470
Deferred income tax provision (benefit) 3,301 -
Changes in current assets and current liabilities,
net of acquisitions:
Accounts receivable (21,834) 7,095
Inventories (3,474) 6,691
Prepaid expenses and other current assets (270) 1,273
Accounts payable (1,497) (4,339)
Accrued expenses (3,096) (1,790)
Deferred charges and other - 3,160
_________ _______
Net cash provided by (used for) operating activities (14,190) 13,946
_________ _______
Cash flows from investing activities:
Acquisitions of property, plant and equipment (5,336) (6,029)
Acquisition of ERO, Inc. (122,600) -
Other acquisitions (2,249) (1,487)
_________ _______
Net cash used for investing activities (130,185) (7,516)
_________ _______
Cash flows from financing activities:
Net proceeds from the issuance of Senior
Subordinated Notes 110,000 -
Net proceeds from the issuance of new Term Loans 110,000 -
Net proceeds from the issuance of Senior Discount Notes 21,618 -
Borrowings on new Revolving Credit Facility, net 8,300 -
Repayments of old term loans (91,393) -
Debt financing cost (17,800) -
Repayments on old revolving lines of credit, net (38,925) (6,512)
Net proceeds from issuance of voting common stock 3,982 -
Net proceeds from issuance of non-voting common stock 37,462 -
Other 1,897 -
_________ _______
Net cash provided by (used for) financing activities 145,141 (6,512)
_________ _______
Net increase (decrease) in cash and cash equivalents 766 (82)
Cash and cash equivalents:
Purchased cash 855 -
Beginning of period 533 388
_________ _______
End of period $ 2,154 $ 306
========= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
HEDSTROM HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except shares)
(Unaudited)
Common Stock
____________ Foreign
Additional Currency
Par Paid-In Translation Accumulated
Shares Value Capital Adjustment Deficit Total
__________ ______ ________ __________ ___________ ________
Balance at December 31, 1996 32,941,499 $329 $10,437 $ - $ (13,863) $(3,097)
Issuance of voting common stock 3,185,896 32 3,950 - - 3,982
Issuance of non-voting common stock 31,520,000 315 37,147 - - 37,462
Foreign currency translation adjustment - - - (71) - (71)
Acquisition transaction costs - - (1,938) - - (1,938)
Write-off of pre-refinancing deferred
financing charges - - (2,628) - - (2,628)
Net income - - - - 5,066 5,066
__________ ____ _______ _______ _________ _______
Balance at September 30, 1997 67,647,395 $676 $46,968 $ (71) $ (8,797) $38,776
========== ==== ======= ======= ========= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
HEDSTROM HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - PRINCIPLES OF CONSOLIDATION:
The accompanying interim consolidated financial statements include the accounts
of Hedstrom Holdings, Inc. ("Holdings") and its wholly owned subsidiary,
Hedstrom Corporation ("Hedstrom," and together with Holdings, the "Company").
Effective June 12, 1997, the Company acquired ERO, Inc. ("ERO"), which became
a wholly owned subsidiary of Hedstrom (see Note 2). The accompanying
consolidated financial statements reflect the operations of ERO since June 1,
1997. These financial statements are unaudited but, in the opinion of
management, contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial condition, results of
operations and cash flows of the Company. Certain prior period amounts have
been reclassified to conform with the current period presentation. All
intercompany balances and transactions have been eliminated in consolidation.
The interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained in
Holdings and Hedstrom's Registration Statements on Form S-1 (Registration Nos.
333-32385-05 and 333-32385, respectively) declared effective on November 4,
1997 by the Securities and Exchange Commission (the "Registration Statements").
The results of operations for the three months and nine months ended September
30, 1997 are not necessarily indicative of the results to be expected for the
entire fiscal year.
NOTE 2 - ACQUISITION OF ERO, INC.:
On April 10, 1997, Hedstrom and HC Acquisition Corp., a wholly owned subsidiary
of Hedstrom, entered into an Agreement and Plan of Merger (the "Merger
Agreement") with ERO to acquire ERO for a total enterprise value of
approximately $200 million. Pursuant to the Merger Agreement, HC Acquisition
Corp. commenced and, on June 12, 1997, consummated a tender offer for all of
the outstanding shares of the common stock of ERO at a purchase price of $11.25
per share (the "Tender Offer"). Upon consummation of the Tender Offer, (i) HC
Acquisition Corp. was merged with and into ERO (the "Merger") with ERO
surviving the Merger as a wholly owned subsidiary of Hedstrom, (ii) certain of
ERO's outstanding indebtedness was refinanced by Hedstrom (the "ERO
Refinancing") and (iii) Hedstrom refinanced (the "Hedstrom Refinancing") its
existing revolving credit facility and term loan facility (The Merger, the
Tender Offer, the ERO Refinancing and the Hedstrom Refinancing are collectively
referred to herein as the "Acquisition").
Holdings and Hedstrom required approximately $301.1 million in cash to
consummate the Acquisition, including approximately (i) $122.6 million paid
in connection with the Tender Offer and the Merger, (ii) $82.6 million in
connection with the ERO Refinancing, (iii) $74.9 million paid in connection
with the Hedstrom Refinancing and (iv) $21.0 million incurred in respect of
fees and expenses.
The funds required to consummate the Acquisition were provided by (i) $75.0
million of term loans under a new six-year senior secured loan facility (the
"Tranche A Term Loan Facility" ), (ii) $35.0 million of term loans under a
new eight-year senior secured term loan facility (the "Tranche B Term Loan
Facility" and, together with the Tranche A Term Loan Facility, the "Term Loan
Facilities"), (iii) $16.1 million in borrowings under a new $70.0 million
senior secured revolving credit facility (the "Revolving Credit Facility" and,
together with the Term Loan Facilities, the "Senior Credit Facilities"), (iv)
$110.0 million of gross proceeds from the offering by Hedstrom of 10% Senior
Subordinated Notes Due 2007 (the "Senior Subordinated Notes"), (v) $25.0
million of gross proceeds from the offering by Holdings of 44,612 units
consisting of 12% Senior Discount Notes Due 2009 (the "Discount Notes") and
2,705,896 shares of Common Stock, $.01 par value per share, of Holdings
("Holdings Common Stock") and (vi) $40.0 million of gross proceeds from the
private placement of 31,520,000 shares of Non-Voting Common Stock, $.01 par
value per share, of Holdings ("Holdings Non-Voting Common Stock") and 480,000
shares of Holdings Common Stock. In addition, Hedstrom's new Revolving
Credit Facility will be utilized to finance certain seasonal working capital
requirements.
The acquisition of ERO has been accounted for under the purchase method of
accounting, and accordingly, the purchase price has been allocated to the
assets acquired and the liabilities assumed based upon fair value at the
date of the Acquisition. The excess of the purchase price over the fair
values of the tangible net assets acquired was approximately $146.8 million,
has been recorded as goodwill and is being amortized on a straight-line basis
over 40 years. In the event that facts and circumstances indicate that the
goodwill may be impaired, an evaluation of recoverability would be performed.
If an evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying amount to
determine if an adjustment is required.
The net purchase price was allocated as follows (in thousands):
Current assets........................... $ 59,400
Net property, plant and equipment........ 20,000
Goodwill................................. 146,800
Liabilities assumed...................... (103,600)
________
Cash paid for ERO.......... $122,600
========
The unaudited pro forma results below assume the Acquisition occurred at the
beginning of the periods presented (in thousands, except per share amounts):
Nine months ended
September 30,
____________________
1997 1996
________ ________
Net sales $203,817 $209,151
Net loss $ ( 538) $ (5,069)
Net loss per share $ (0.01) $ (0.07)
The above pro forma results include adjustments to give effect to amortization
of goodwill, interest expense related to the Senior Subordinated Notes, the
Discount Notes and the Senior Credit Facilities and cost savings resulting
from the rationalization of the sales, marketing and general and administrative
functions, closings of duplicate facilities and reductions in external
administrative expenditures including legal, insurance, tax, audit and public
relations expenditures. These cost savings reflect personnel terminations
that have already occurred or that have been formally communicated to the
employees, closings of duplicate facilities that have occurred and reductions
in external administrative expenses that have been negotiated, together with
the related tax effects. The pro forma results are not necessarily indicative
of the operating results that would have occurred had the acquisition of ERO
been consummated and had the cost actions giving rise to the cost savings
been implemented as of the beginning of the periods presented, nor are they
necessarily indicative of future operating results.
NOTE 3 - INCOME PER COMMON SHARE:
Income per common share is determined by dividing net income by the weighted
average number of common shares outstanding, including common stock equivalents
(stock options granted) using the treasury stock method.
NOTE 4 - INVENTORIES:
Inventories at September 30, 1997 and December 31, 1996 consist of the
following (in thousands):
September 30, December 31,
1997 1996
_____________ ____________
Raw materials $17,428 $ 7,534
Work-in-process 8,315 2,298
Finished goods 28,741 13,984
_______ ________
$54,484 $23,816
======= ========
NOTE 5 - DEBT:
Debt consists of the following (in thousands):
September 30, December 31,
1997 1996
_____________ ____________
Senior Subordinated Notes $110,000 $ -
Senior Discount Notes 22,267 -
Term Loans 113,500 38,500
Revolving Credit Facility 8,300 17, 400
Other 7,819 4,571
________ _______
$261,886 $60,471
======== =======
Senior Subordinated Notes
The $110.0 million Senior Subordinated Notes bear interest at 10% per annum,
payable on June 1 and December 1 of each year, commencing December 1, 1997.
The Senior Subordinated Notes mature on June 1, 2007. Except as set forth
below, the Senior Subordinated Notes are not redeemable at the option of the
Company prior to June 1, 2002. On and after such date, the Senior Subordinated
Notes are redeemable, at the Company's option, in whole or in part, at the
following redemption prices (expressed in percentages of principal amount),
plus accrued and unpaid interest to the redemption date:
if redeemed during the 12-month period commencing on June 1 of the years set
forth below:
Redemption
Period Price
______ __________
2002 105.000
2003 103.333
2004 101.667
2005 and thereafter 100.000%
In addition, at any time and from time to time prior to June 1, 2000, the
Company may redeem in the aggregate up to $44.0 million principal amount
of Senior Subordinated Notes with the proceeds of one or more equity
offerings so long as there is a public market at the time of such redemption
(provided that the equity offering is an offering by Holdings, a portion of
the net cash proceeds thereof equal to the amount required to redeem any such
Senior Subordinated Notes is contributed to the equity capital of the Company),
at a redemption price (expressed as a percentage of principal amount) of 110%,
plus accrued and unpaid interest, if any, to the redemption date; provided,
however, that at least $66.0 million aggregate principal amount of the Senior
Subordinated Notes remains outstanding after each such redemption.
The Senior Subordinated Notes are unsecured senior subordinated obligations
of the Company and are unconditionally and fully guaranteed (jointly and
severally) on a senior basis by Holdings and on a senior subordinated basis
by each domestic subsidiary of the Company. The Senior Subordinated Notes
are subordinated to all senior indebtedness (as defined) of the Company rank
pari passu in right of payment with all senior subordinated indebtedness (as
defined) of the Company.
The Senior Subordinated Notes Indenture contains certain covenants that, among
other things, limit (i) the incurrence of additional indebtedness by the
Company and its restricted subsidiaries (as defined), (ii) the payment of
dividends and other restricted payments by the Company and its restricted
subsidiaries, (iii) restrictions on distributions from restricted subsidiaries,
(iv) asset sales, (v) transactions with affiliates, (vi) sales or issuances
of restricted subsidiary capital stock and (vii) mergers and consolidations.
Term Loans and Revolving Credit Facility
In connection with the Acquisition, the Company's existing term loans of $35.0
million and its existing revolving credit facility borrowings were repaid and
the facilities were terminated. The Company's $3.5 million Industrial Revenue
Bond from Bedford County, which bears interest at 7.13%, was not retired in
connection with the Acquisition.
As discussed in Note 2, in connection with the Acquisition, the Company
obtained the Term Loan Facilities and Revolving Credit Facility (collectively,
the "Senior Credit Facilities"). The Senior Credit Facilities consist of (a)
a six-year Tranche A Senior Secured Term Loan Facility providing for term
loans to the Company in a principal amount of $75 million; (b) an eight-year
Tranche B Senior Secured Term Loan Facility providing for term loans to the
Company in a principal amount of $35 million; and (c) a Senior Secured
Revolving Credit Facility providing for revolving loans to the Company and
the issuance of letters of credit for the account of the Company in an
aggregate principal and stated amount at any time not to exceed $70 million.
Borrowings under the Revolving Credit Facility will be available based upon a
borrowing base not to exceed 85% of eligible accounts receivable and 50% of
eligible inventory.
At the Company's option, the interest rates per annum applicable to the Senior
Credit Facilities will be either (i) the Eurocurrency Rate (as defined) plus
2.5% in the case of the Tranche A Term Loan Facility and the Revolving Credit
Facility or 3.0% in the case of the Tranche B Term Loan Facility or (ii) the
Alternate Base Rate (as defined) plus 1.5% in the case of the Tranche A Term
Loan Facility and the Revolving Credit Facility or 2.0% in the case of the
Tranche B Term Loan Facility. The Alternate Base Rate is the highest of (a)
Credit Suisse First Boston's Prime Rate (as defined) or (b) the federal funds
effective rate from time to time plus 0.5%. The applicable margin in respect
of the Tranche A Term Loan Facility and the Revolving Credit Facility will be
adjusted from time to time by amounts to be agreed upon based on the
achievement of certain performance targets to be determined.
The obligations of the Company under the Senior Credit Facilities are
unconditionally, fully and irrevocably guaranteed (jointly and severally)
by Holdings and each of the Company's direct or indirect domestic subsidiaries
(collectively, the "Senior Credit Facilities Guarantors"). In addition, the
Senior Credit Facilities will be secured by first priority or equivalent
security interests in (i) all the capital stock of, or other equity interests
in, each direct or indirect domestic subsidiary of the company and 65% of the
capital stock of, or other equity interests in, each direct foreign subsidiary
of the Company, or any of its domestic subsidiaries and (ii) all tangible and
intangible assets (including, without limitation, intellectual property and
owned real property) of the Company and the Senior Credit Facilities
Guarantors.
The Senior Credit Facilities contain a number of significant covenants that,
among other things, restrict the ability of the Company to dispose of assets,
incur additional indebtedness, repay other indebtedness or amend debt
instruments, pay dividends, create liens on assets, make investments or
acquisitions, engage in mergers or consolidations, make capital expenditures,
or engage in certain transactions with affiliates. In addition, under the
Senior Credit Facilities, the Company is required to comply with specified
interest coverage and maximum leverage ratios.
Senior Discount Notes
In connection with the acquisition, Holdings received $25.0 million of gross
proceeds from the issuance by Holdings of 44,612 units, consisting of the
Discount Notes and 2,705,896 shares of Holdings common stock. Of the $25.0
million in gross proceeds, $3.4 million ($1.25 per share) was allocated to
the common stock, based upon management's estimate of fair market value, and
$21.6 million was allocated to Discount Notes.
The Discount Notes are unsecured obligations of Holdings and have an aggregate
principle amount at maturity (June 1, 2009) of $44.6 million, representing a
yield to maturity of 12%. No cash interest will accrue on the Discount Notes
prior to June 1, 2002. Thereafter, cash interest will be payable on June 1
and December 1 of each year, commencing December 1, 2002.
Except as set forth below, the Discount Notes will not be redeemable at the
option of Holdings prior to June 1, 2002. On and after such, the Discount
Notes will be redeemable, at Holdings' option, in whole or in part, at the
following redemption prices (expressed in percentages of principal amount at
maturity), plus accrued and unpaid interest to the redemption date:
if redeemed during the 12-month period commencing on June 1 of the years set
forth below:
Redemption
Period Price
______ __________
2002 106.000
2003 104.000
2004 102.000
2005 and thereafter 100.000%
In addition, at any time and from time to time prior to June 1, 2000, Holdings
may redeem in the aggregate up to 40% of the accreted value of the Discount
Notes with the proceeds of one or more equity offerings by Holdings so long
as there is a public market at the time of such redemption, at a redemption
price (expressed as a percentage of accreted value on the redemption date)
of 112%, plus accrued and unpaid interest, if any, to the redemption date;
provided however, that at least $26.8 million aggregate principal amount at
maturity of the Discount Notes remains outstanding after each such redemption.
At any time on or prior to June 1, 2002, the Discount Notes may also be
redeemed as a whole at the option of Holdings upon the occurrence of a
change of control (as defined) at a redemption price equal to 100% of the
accreted value thereof plus the applicable premium as of, and accrued and
unpaid interest, if any, to the date of redemption.
The Discount Notes Indenture contains certain covenants that, among other
things, limit (i) the incurrence of additional indebtedness by Holdings and
its restricted subsidiaries (as defined), (ii) the payment of dividends and
other restricted payments by Holdings and its restricted subsidiaries, (iii)
restrictions on distributions from restricted subsidiaries, (iv) asset sales,
(v) transactions with affiliates, (vi) sales or issuances of restricted
subsidiary capital stock and (vii) mergers and consolidations.
Other Debt
Other debt consists of a $2.5 million Holdings note payable to the previous
owners of Holdings as well as various other mortgages, capital leases and
equipment loans. The $2.5 million note payable bears interest at 10% per
annum and is payable at the earlier of April 30, 2002, or when the Company
has met certain cash flow levels and the mortgages and equipment loans have
varying interest rates and maturities.
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS:
Holdings will adopt SFAS No. 128, "Earnings Per Share", effective December 15,
1997. SFAS No. 128 requires the calculation of basic and diluted earnings
per share. Basic earnings per share is computed by dividing net income by
the weighted average number of shares of common stock outstanding during the
period. Diluted earnings per share is computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents.
As required, Holdings will restate the reported earnings per share upon
adoption of SFAS No. 128. Assuming adoption of SFAS No. 128, basic and diluted
earnings per share for the three and nine months ended September 30, 1997 and
1996, respectively, would have been the same as reported earnings per share.
Holdings will adopt SFAS No. 129, "Disclosure of information about Capital
Structure", effective December 15, 1997. SFAS No. 129 requires companies to
disclose the pertinent rights and privileges of all securities other than
ordinary common stock. Those disclosures include such things as dividend
and liquidation preferences, participation rights, call prices and dates,
conversion prices, unusual voting rights and others. As required, Holdings
will make disclosures, if applicable, upon adoption. Management does not
believe that SFAS No. 129 will have a significant impact on Holdings'
financial statements.
Holdings will adopt SFAS No. 130, "Reporting Comprehensive Income" effective
January 1, 1998. SFAS No. 130 established standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. Comprehensive income is defined as the total
of net income and all other non-owner changes in equity. Management does not
believe that SFAS No. 130 will have a significant impact on Holdings'
financial statements.
Holdings will adopt SFAS No. 131, "Disclosure about Segments of An Enterprise
and Related Information", effective January 1, 1998. This pronouncement
changes the requirements under which public businesses must report segment
information. The objective of the pronouncement is to provide information
about a company's different economic environments. SFAS No. 131 will require
companies to select segments based on their internal reporting system.
Restatement of prior year segment disclosure will be required upon adoption
of SFAS No. 131. Adoption of this pronouncement will not have a significant
impact on Holdings results of operations or financial position. Management
is evaluating what impact, if any, adoption will have on Holdings' financial
statement disclosures.
NOTE 7 - SUBSIDIARY GUARANTORS/NONGUARANTORS FINANCIAL INFORMATION:
__________________________________________________________________
The following is financial information pertaining to Hedstrom and its
subsidiary nonguarantors (with respect to the Senior Subordinated Notes
and the Senior Credit Facilities) for the periods in which they are
included in Holding's accompanying consolidated financial statments.
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(In thousands)
At September 30, 1997 At December 31, 1996
_________________________________________________ __________________________________
Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Total
Assets Guarantors guarantors Eliminations Hedstrom Guarantors guarantors Hedstrom
______________________________ __________ __________ ____________ ________ __________ __________ ________
Current assets:
Cash and cash equivalents $ 1,100 $ 1,054 $ - $ 2,154 $ 467 $ 66 $ 533
Accounts receivable, net 51,088 8,819 - 59,907 13,126 460 13,586
Inventories 37,739 16,774 (29) 54,484 23,368 448 23,816
Deferred income taxes (c) 3,389 - - 3,389 5,027 - 5,027
Prepaid expenses and other
current assets 4,755 614 - 5,369 674 16 690
________ _______ ________ ________ _______ _______ _______
Total current assets 98,071 27,261 (29) 125,303 42,662 990 43,652
________ _______ ________ ________ _______ _______ _______
Property, plant and
equipment, net 27,202 15,709 - 42,911 21,735 8 21,743
________ _______ ________ ________ _______ _______ _______
Investment in and advances to
Nonguarantor Subsidiaries 58,314 - (58,314) - - - -
Deferred charges, net 16,983 - - 16,983 2,318 - 2,318
Goodwill, net 118,232 29,522 - 147,754 - - -
Deferred income taxes 7,732 (524) - 7,208 4,251 - 4,251
________ _______ ________ ________ _______ _______ _______
Total other assets 201,261 28,998 (58,314) 171,945 6,569 - 6,569
________ _______ ________ ________ _______ _______ _______
Total assets $326,534 $71,968 $(58,343) $340,159 $70,966 $ 998 $71,964
======== ======= ======== ======== ======= ======= =======
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(In thousands)
At September 30, 1997 At December 31, 1996
_________________________________________________ __________________________________
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Liabilities and Stockholders' Subsidiary Non- Adjustments/ Total Subsidiary Non- Total
equity Guarantors guarantors Eliminations Hedstrom Guarantors guarantors Hedstrom
______________________________ __________ __________ ____________ ________ __________ __________ ________
Current liabilities:
Revolving line of credit $ 5,633 $ 2,667 $ - $ 8,300 $15,430 $ 1,970 $17,400
Current portion of long-term
debt and capital leases 5,609 773 - 6,382 1,965 - 1,965
Advances from Guarantor
Subsidiaries - 38,978 (38,978) - - - -
Accounts payable (c) 16,938 3,237 - 20,175 11,275 131 11,406
Accrued expenses 15,981 4,485 (12) 20,454 3,006 (3) 3,003
________ _______ ________ ________ _______ _______ _______
Total current liabilities 44,161 50,140 (38,990) 55,311 31,676 2,098 33,774
________ _______ ________ ________ _______ _______ _______
Senior Subordinated Notes 110,000 - - 110,000 - - -
Term Loans 107,205 1,170 - 108,375 36,750 - 36,750
Capital leases 1,675 - - 1,675 1,556 - 1,556
Other 2,387 - - 2,387 300 - 300
________ _______ ________ ________ _______ _______ _______
Total long-term debt (a) 221,267 1,170 - 222,437 38,606 - 38,606
Total liabilities 265,428 51,310 (38,990) 277,748 70,282 2,098 72,380
________ _______ ________ ________ _______ _______ _______
Total stockholder's equity
(deficit) (b) 61,106 20,658 (19,353) 62,411 684 (1,100) (416)
________ _______ ________ ________ _______ _______ _______
Total liabilities and
stockholder's equity $326,534 $71,968 $(58,343) $340,159 $70,966 $ 998 $71,964
======== ======= ======== ======== ======= ======= =======
0 0 0
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING INCOME STATEMENTS
(In thousands)
Three Months Ended
Three Months Ended September 30, 1997 September 30, 1996
_____________________________________ __________________________________
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Total
Statement of Operations Guarantors guarantors Eliminations Hedstrom Guarantors guarantors Hedstrom
___________________________ __________ __________ ____________ ________ __________ __________ ________
Net sales $56,524 $21,039 $(16,101) $61,462 $14,316 $ 653 $14,969
Cost of sales 43,564 15,599 (17,441) 41,722 14,453 543 14,996
_______ _______ ________ _______ _______ _____ _______
Gross profit (loss) 12,960 5,440 1,340 19,740 (137) 110 (27)
Selling, general and
administrative expense 12,743 1,659 14 14,416 5,492 253 5,745
_______ _______ ________ _______ _______ ____ _______
Operating income (loss) 217 3,781 1,326 5,324 (5,629) (143) (5,772)
Interest expense (c) 5,399 690 - 6,089 1,362 4 1,366
_______ _______ _______ _______ _______ ____ _______
Income (loss) before income taxes (5,182) 3,091 1,326 (765) (6,991) (147) (7,138)
Income tax provision
(benefit) (c) (2,141) 1,603 273 (265) (2,966) 111 (2,855)
_______ _______ ________ _______ _______ _____ _______
Net income (loss) $(3,041) $ 1,488 $ 1,053 $ (500) $(4,025) $(258) $(4,283)
======= ======= ======== ======= ======= ===== =======
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING INCOME STATEMENTS
(In thousands)
Nine Months Ended
Nine Months Ended September 30, 1997 September 30, 1996
____________________________________ __________________________________
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Total
Statement of Operations Guarantors guarantors Eliminations Hedstrom Guarantors guarantors Hedstrom
_____________________________ __________ __________ ____________ ________ __________ __________ ________
Net Sales $157,447 $28,063 $(19,997) $165,513 $107,719 $3,309 $111,028
Cost Sales 114,908 20,361 (19,968) 115,301 84,918 2,975 87,893
________ _______ ________ ________ ________ ______ ________
Gross profit (loss) 42,539 7,702 (29) 50,212 22,801 334 23,135
Selling, general and
administrative expense 28,013 2,645 - 30,658 20,074 778 20,852
________ _______ ________ ________ ________ ______ ________
Operating income (loss) 14,526 5,057 (29) 19,554 2,727 (444) 2,283
Interest expense (c) 9,763 909 - 10,672 4,766 19 4,785
________ _______ ________ ________ ________ ______ ________
Income (loss) before
income taxes 4,763 4,148 (29) 8,882 (2,039) (463) (2,502)
Income tax provision
(benefit) (c) 1,708 1,624 (12) 3,320 (987) (8) (995)
________ _______ ________ ________ ________ ______ ________
Net income (loss) $ 3,055 $ 2,524 $ (17) $ 5,562 $ (1,052) $ (455) $ (1,507)
======== ======= ======== ======== ======== ====== ========
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended September 30, 1997 Nine Months Ended September 30, 1996
____________________________________ ____________________________________
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Total
Guarantors guarantors Eliminations Hedstrom Guarantors guarantors Hedstrom
__________ __________ ____________ ________ __________ __________ ________
Cash flows from operating
activities:
Net income (loss) (c) $ 3,055 $ 2,524 $(17) $ 5,562 $(1,052) $(455) $(1,507)
Adjustments to reconcile
net income (loss) to net
cash (used for) provided
by operating activities:
Depreciation of property
plant and equipment and
amortiztion of other
assets 6,602 363 - 6,965 3,464 6 3,470
Deferred income tax
provision 3,468 14 - 3,482 - - -
Changes in current assets
and current liabilities,
net of acquisitions:
Accounts receivable (16,718) (5,116) - (21,834) 6,823 272 7,095
Inventories 95 (3,598) 29 (3,474) 6,810 (119) 6,691
Prepaid expenses and other
current assets (351) 81 - (270) 1,268 5 1,273
Accounts payable (c) (2,554) 1,349 - (1,205) (4,455) 116 (4,339)
Accrued expenses (6,929) 3,525 (12) (3,416) (1,501) (396) (1,897)
Other (12) 12 - - 3,160 - 3,160
_________ _______ __________ _________ _______ _____ _______
Net cash (used for) provided by
operating activities (13,344) (846) - (14,190) 14,517 (571) 13,946
_________ _______ __________ _________ _______ _____ _______
Cash flows from investing
activities:
Acquisitions of property,
plant and equipment (4,495) (841) - (5,336) (6,027) (2) (6,029)
Acquisition of ERO, Inc. (122,600) - - (122,600) - - -
Other acquisition (2,249) - - (2,249) (1,487) - (1,487)
_________ _______ __________ _________ _______ _____ _______
Net cash used for investing
activities: (129,344) (841) - (130,185) (7,514) (2) (7,516)
_________ _______ __________ _________ _______ _____ _______
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended September 30, 1997 Nine Months Ended September 30, 1996
____________________________________ ____________________________________
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Total
Guarantors guarantors Eliminations Hedstrom Guarantors guarantors Hedstrom
__________ __________ ____________ ________ __________ __________ ________
Cash flows from financing
activities:
Net proceeds from the
issuance of Senior
Subordinated notes $ 110,000 $ - $ - $ 110,000 $ - $ - $ -
Net proceeds from the
issuance of new term loans 110,000 - - 110,000 - - -
Equity contribution from
Holdings (b) 63,062 - - 63,062 - - -
Borrowings on new Revolving
Credit Facility, net 8,300 - - 8,300 - - -
Repayments of old term loans (85,643) (5,750) - (91,393) - - -
Debt financing cost (b) (16,550) - - (16,550) - - -
Borrowings (repayments) on
old revolving lines of
credit, net (38,925) - - (38,925) (7,103) 591 (6,512)
Advances to/(from) Nonguarantor
subsidiaries (8,100) 8,100 - - - - -
Other 647 - - 647 - - -
_________ _______ __________ _________ _______ _____ _______
Net cash (used for) provided by
financing activities: 142,791 2,350 - 145,141 (7,103) 591 (6,512)
_________ _______ __________ _________ _______ _____ _______
Net increase (decrease) in cash
and cash equivalents 103 663 - 766 (100) 18 (82)
Cash and cash equivalents:
Purchased cash 530 325 - 855 - - -
Beginning of period 467 66 - 533 383 5 388
_________ _______ __________ _________ _______ _____ _______
End of period $ 1,100 $ 1,054 $ - $ 2,154 $ 283 $ 23 $ 306
========= ======= ========== ========= ======= ===== =======
Each of the Subsidiary Guarantors is a wholly-owned subsidiary of Hedstrom and
has fully and unconditionally guaranteed the Senior Subordinated Notes on a
joint and several basis. The Company has not presented separate financial
statements and other disclosures concerning each Subsidiary Guarantor because
management has determined that such information is not material to investors.
The column "Total Hedstrom" represents the consolidated financial statements
of Hedstrom Corporation and its subsidiaries. Hedstrom Corporation is
Holdings' only direct subsidiary. The primary differences between the
consolidated amounts of Hedstrom Corporation and the consolidated amounts
included in the accompanying consolidated financial statements of Holdings
are as follows:
(a) Hedstrom Corporation's Long-Term Debt does not include a $2.5 million
note payable issued by Holdings in connection with its 1995 recapitalization
and the issuance of Senior Discount Notes valued at $22.3 million at
September 30, 1997.
(b) Hedstrom Corporation's stockholder's equity includes Holdings'
stockholders' equity plus, as of September 30, 1997 only, $21.6 million
in proceeds from the issuance of Senior Discount Notes, which proceeds
were contributed as equity by Holdings to Hedstrom Corporation less the
interest, net of taxes, accrued thereon and, as of both September 30, 1997
and December 31, 1996, the $2.5 million note payable described in (a) above
less the interest, net of taxes, accrued thereon.
(c) Accounts payable, interest expense and deferred income taxes do not
reflect the accrued interest, interest expense and the deferred tax benefit
of accrued interest on the obligations discussed in (a) above.
NOTE 8 - SUBSEQUENT EVENTS:
On November 21, 1997, the Company purchased certain inventory, equipment and
intellectual property, of the N.B.F. division of Bollinger Industries, Inc.
for $14,250,000 in cash, subject in certain circumstances to post-closing
adjustments. In connection with this asset acquisition, Hedstrom amended
its credit agreement to permit the acquisition. The funds required to
consummate the acquisition were obtained through a draw under the Revolving
Credit Facility.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion of the Company's results of operations and financial
condition should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto contained herein, as well as
included in the Registration Statements. This Quarterly Report on Form 10-Q
contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, which are subject to risks and
uncertainties that could cause actual results to differ materially from those
statements. Those risks, which are further detailed in the Registration
Statement, include, but are not limited to, the Company's recent net losses,
substantial leverage and debt service, financing restrictions and covenants,
reliance on key customers, dependence on key licenses and obtaining new
licenses, raw material prices, integration of ERO, and product liability
risks.
Results of Operations
The following table sets forth net sales and gross profit for each of
Hedstrom's operating divisions for the periods indicated:
Three Months Nine Months
Ended September 30, Ended September 30,
___________________ ___________________
1997 1996 1997 1996
____ ____ ____ ____
(in millions)
Net sales
Bedford Division.......... $ 7.4 $ 7.6 $ 66.2 $ 70.6
Ashland Division.......... 5.5 6.3 30.2 33.5
International Division.... 1.4 1.1 7.9 6.9
ERO Division.............. 47.2 -- 61.2 --
_____ _____ ______ ______
Total net sales...... $61.5 $15.0 $165.5 $111.0
===== ===== ====== ======
Gross profit:
Bedford Division........... $ 0.8 $(1.4) $ 17.0 $ 12.8
Ashland Division........... 0.5 1.3 8.1 9.3
International Division..... 0.3 0.1 1.9 1.0
ERO Division............... 18.1 -- 23.2 --
_____ _____ ______ ______
Total gross profit.... $19.7 $ 0.0 $ 50.2 $ 23.1
===== ===== ====== ======
A comparison of the Company's results of operations for the three and nine
months ended September 30, 1997 with the same period in 1996 is necessarily
affected by the impact of the consummation of the acquisition of ERO on June
12, 1997. Due to the inclusion of ERO's results from and after June 1, 1997,
management does not believe the comparison of operating results with the same
period in 1996 is meaningful.
Net Sales. The Company's net sales for the third quarter of 1997 increased
by $46.5 million compared to the third quarter of 1996 due principally to the
inclusion of ERO.
Net sales in the first nine months of 1997 increased by $54.5 million compared
to the same period in 1996. Such increase was attributable to the inclusion
of ERO, certain selling price increases and the restructuring of several
promotional allowances, offset by a decline in sales at the Bedford and
Ashland Divisions. Net sales of the Bedford Division decreased in the first
nine months of 1997 from the first nine months in 1996, primarily as a result
of (i) a shift in product mix to lower-priced outdoor gym sets and (ii) a
decline in sales of Hedstrom's wood kits to home centers. Net sales of the
Ashland Division decreased in the first nine months of 1997 from the first
nine months of 1996, primarily as a result of a decrease in sales of certain
undecorated playballs and a decrease in sales of O.E.M. products. These
decreases were partially offset by the successful introduction of "goofballs"
and the increase in market share of ball pits, respectively. Net sales of
the International Division increased in the first nine months of 1997 over
the first nine months of 1996, due primarily to an increase in playball sales
in Canada.
Gross Profit. As a result of the increase in the Company's net sales, gross
profit for the third quarter of 1997 increased by $19.7 million compared to
the third quarter of 1996.
Gross profit in the first nine months of 1997 increased by $27.1 million
compared to the first nine months of 1996. As a percentage of net sales,
gross profit increased to 32.0% in the third quarter of 1997 from 0.0% in
1996 and 30.3% in the first nine months of 1997 from 20.8% in the first nine
months of 1996 due primarily to (i) the inclusion of the results of ERO,
which had a higher gross profit margin than the other divisions of the
Company, (ii) the implementation of the 1996 Cost Reduction Plan (as described
in the Registration Statements) and (iii) a shift in mix to higher-margin
playballs, the effects of which were partially offset by a reduction in
production volume resulting from the implementation of just-in-time
manufacturing and reduced sales. The Bedford Division's gross profit margin
increased primarily as a result of the benefits of the 1996 Cost Reduction
Plan, selling price increases and improvements in promotional programs, which
benefits were partially offset by a decrease in net sales attributable to
sales of lower-priced and lower-margin outdoor gym sets. Gross profit margin
in the Ashland Division decreased for the three and nine months ended
September 30, 1997 primarily as a result of (i) a reduction in production
volume and (ii) a change in product mix. Gross profit margin in the
International Division increased in the first nine months of 1997 primarily
as a result of sales price increases and a shift to higher-margin products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the third quarter of 1997 increased by $8.7
million compared to the third quarter of 1996 and $9.8 million in the first
nine months of 1997 compared to the same period in 1996. As a percentage of
sales, selling, general and administrative expenses decreased from 38.4% to
23.5% in the third quarter due principally to a reduction in warehouse and
shipping costs resulting from Hedstrom's implementation of just-in-time
manufacturing of outdoor gym sets and the discontinuation of certain print
advertising programs. This reduction was partially offset by the inclusion
of ERO's relatively high selling, general and administrative expenses. As a
percentage of net sales, selling, general and administrative expenses in the
first nine months of 1997 were relatively consistent with the same period in
1996 since ERO was not included until June of 1997.
Interest expense. Interest expense increased to $6.8 million and $11.5 million
in the three and nine months ended September 30, 1997, respectively, from $1.4
million and $5.0 million in the same periods in 1996, respectively, as a result
of the acquisition-related indebtedness and higher interest rates.
Income Tax Expense. Holdings' effective income tax rate for the three and
nine months ended September 30, 1997 was 37.7% and 37.0%, respectively, as
compared with an effective income tax rate of 40.1% and 40.0% in the same
periods in 1996. These decreases are attributable to the inclusion of the
ERO division, whose effective tax rate is lower due to the lower statutory
rates of its foreign operations.
Liquidity and Capital Resources of the Company
Working Capital and Cash Flows
Net cash used for operating activities was $14.2 million for the nine months
ended September 30, 1997. The net use of cash reflects the seasonal nature
of sales in the Company's ERO division. ERO accumulates accounts receivable
and inventory during the second half of the year and subsequently liquidates
them in the first half of the following year.
Net cash used for investing activities was $130.2 million for the first nine
months of 1997, including the $122.6 million used for the acquisition of ERO,
$5.3 million used for the acquisition of property, plant and equipment and
$2.2 million used to fund other acquisitions of machinery and equipment and
inventory.
Net cash provided by financing activities was $145.1 million for the nine
months ended September 30, 1997, including (i) $110.0 million of proceeds
from the issuance of senior subordinated notes, (ii) $110.0 million of
proceeds from the Company's term loans, (iii) $21.6 million from the issuance
of discount notes, (iv) $8.3 million of net borrowings under its revolving
credit facility, (v) the repayment of old term loans in the aggregate of
$91.4 million, (vi) the repayment of old revolving loans in the aggregate
amount of $38.9 million, (vii) debt financing costs of $17.8 million,
(viii) $4.0 million of proceeds from the issuance of Holdings common stock
and (ix) $37.5 million of proceeds from the issuance of Holdings non-voting
common stock. The net cash provided by financing activities was used
primarily to consummate the acquisition of ERO and to fund operating cash
requirements.
Liquidity
Interest payments on the Senior Subordinated Notes and interest and principal
payments under the Senior Credit Facilities, as detailed in the Registration
Statements, represent significant cash requirements for the Company. The
Senior Subordinated Notes require semiannual interest payments of $5.5 million
commencing in December 1997. Borrowings under the Senior Credit Facilities
will bear interest at floating rates and will require interest payments on
varying dates depending on the interest rate option selected by the Company.
Borrowings under the Senior Credit Facilities will consist of $110 million
under the Term Loan Facilities, comprised of a $75 million Tranche A Term
Loan maturing in 2003 and a $35 million Tranche B term loan maturing in 2005.
In addition, the Senior Credit Facilities include a $70 million Revolving
Credit Facility.
At present, the Discount Notes do not require cash interest payments. Rather,
principal will accrete to an aggregate principal amount of $44.6 million on
June 1, 2002. Commencing on such date, Holdings will be required to make
semiannual interest payments of $2.7 million.
The Company's remaining liquidity demands will be for capital expenditures
and for working capital needs. In 1998, the Company expects to make capital
expenditures of approximately $9 million. For the foreseeable future, the
Company expects that its capital expenditures will be limited primarily to
maintaining existing facilities and equipment and completing its insourcing
of manufacturing certain components. The Company's credit agreement imposes
an annual limit of $10.0 million on its capital expenditures and investments
(subject in any given year to a roll-over of up to $4.0 million of unused
capital expenditure capacity from the previous year). In addition, the
Company may incur expenditures in order to achieve certain anticipated cost
savings.
The Company's primary sources of liquidity are cash flows from operations
and borrowings under the Revolving Credit Facility. As of September 30,
1997, approximately $61.7 million was available to the Company (subject to
borrowing base limitations) for borrowings under the Revolving Credit
Facility. Management believes that cash generated from operations, together
with borrowings under the Revolving Credit Facility, will be sufficient to
meet the Company's working capital and capital expenditures needs for the
foreseeable future.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently involved in several lawsuits arising
in the ordinary course of business. The Company maintains
insurance covering such liability, and does not believe that
the outcome of any such lawsuits will have a material adverse
effect on the Company's financial condition.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 27, Financial Data Schedule (included only in the
electronic filing of this document).
b) Reports on Form 8-K
The registrant has not filed any reports on Form 8-K during
the quarter.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
Date: December 5, 1997
HEDSTROM HOLDINGS, INC.
HEDSTROM COROPORATION
/s/ David F. Crowley
_________________________
David F.Crowley
Chief Financial Officer