FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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 (IRS Employer
of incorporation 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 X No
At August 13, 1998, there were outstanding: (i) 36,142,883 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 JUNE 30, 1998
TABLE OF CONTENTS
Page
Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
As of June 30, 1998 and December 31, 1997
Consolidated Income Statements
Three months ended June 30, 1998 and 1997
Six months ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997
Consolidated Statement of Stockholders' Equity
As of and for the six months ended June 30,
1998
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. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
1998 1997
(unaudited)
ASSETS ----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 7,233 $ 10,844
Trade accounts receivable, net of
allowance for doubtful accounts 81,681 82,702
Inventories 53,564 47,464
Deferred income taxes 7,050 7,045
Prepaid expenses and other current assets 4,735 4,801
-------- --------
TOTAL CURRENT ASSETS 154,263 152,856
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost,
net of accumulated depreciation 44,474 42,823
-------- --------
OTHER ASSETS:
Deferred charges, net of accumulated amortization 17,025 18,861
Goodwill, net of accumulated amortization 162,254 161,176
Deferred income taxes 10,096 10,057
-------- --------
TOTAL OTHER ASSETS 189,375 190,094
-------- --------
TOTAL ASSETS $388,112 $385,773
======== ========
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 44,152 $ 35,500
Current portion of long-term debt and capital leases 10,466 9,222
Accounts payable 28,900 23,381
Accrued expenses 17,486 25,824
-------- -------
TOTAL CURRENT LIABILITIES 101,004 93,927
-------- -------
LONG-TERM DEBT:
Senior Subordinated Notes 110,000 110,000
Senior Discount Notes 24,897 23,288
Term Loans 99,125 104,375
Notes payable to related parties 2,500 2,500
Capital leases 1,878 1,605
Other 2,417 2,914
-------- --------
TOTAL LONG-TERM DEBT 240,817 244,682
-------- --------
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, 36,142,883 and 36,142,883 shares
issued and outstanding, respectively 361 361
Non-voting common stock, $0.01 par value, 40,000,000 shares
authorized, 31,520,000 and 31,520,000 issued and outstanding,
respectively 315 315
Additional paid-in capital 51,553 51,553
Foreign currency translation adjustment (1,053) (778)
Accumulated deficit (4,885) (4,287)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 46,291 47,164
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $388,112 $385,773
======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements.
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
For the three months ended June 30,
-----------------------------------
1998 1997
---- ----
Net sales $83,272 $56,114
Cost of sales 60,191 39,038
------- -------
Gross profit 23,081 17,076
Selling, general and administrative expense 15,874 9,454
------- -------
Operating income 7,207 7,622
Interest expense 7,793 3,174
------- -------
Income (loss) before income taxes (586) 4,448
Income tax (benefit) expense (247) 1,679
------- -------
Net income (loss) $ (339) $ 2,769
======= =======
Basic earnings (loss) per share:
Net income (loss) per share ($0.01) $0.08
Weighted average number of common shares
outstanding (in thousands) 67,633 36,393
Diluted earnings (loss) per share:
Net income (loss) per share ($0.01) $0.08
Weighted average number of common shares
outstanding (in thousands) 67,633 36,868
The accompanying notes to consolidated financial statements are an integral part of these statements.
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
For the six months ended June 30,
---------------------------------
1998 1997
---- ----
Net sales $ 161,661 $104,051
Cost of sales 116,516 73,579
--------- --------
Gross profit 45,145 30,472
Selling, general and administrative expense 30,689 16,242
--------- --------
Operating income 14,456 14,230
Interest expense 15,481 4,709
--------- --------
Income (loss) before income taxes (1,025) 9,521
Income tax (benefit) expense (427) 3,536
--------- --------
Net income (loss) $ (598) $ 5,985
========= ========
Basic earnings (loss) per share:
Net income (loss) per share ($0.01) $0.16
Weighted average number of common shares
outstanding (in thousands) 67,663 36,393
Diluted earnings (loss) per share:
Net income (loss) per share ($0.01) $0.16
Weighted average number of common shares
outstanding (in thousands) 67,663 36,868
The accompanying notes to consolidated financial statements are an integral part of these statements.
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the six months ended June 30,
--------------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ (598) $ 5,985
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating activities:
Depreciation of property, plant and equipment and
amortization of goodwill 6,580 2,767
Amortization of deferred financing fees 3,445 -
Deferred income tax benefit (44) (2,676)
Changes in current assets and current liabilities,
net of acquisitions:
Accounts receivable 1,682 (32,260)
Inventories (5,454) 6,239
Prepaid expenses and other current assets 6 983
Accounts payable 5,519 949
Accrued expenses (7,730) 13,890
Other - (2,845)
------- --------
Net cash provided by (used for) operating activities 3,466 (6,968)
-------
Cash flows from investing activities:
Acquisitions of property, plant and equipment (4,962) (3,446)
Acquisition of ERO, Inc. (3,037) (122,600)
Other acquisitions (3,500) -
------- --------
Net cash used for investing activities (11,499) (126,046)
------- ---------
Cash flows from financing activities:
Net proceeds from issuance of Senior Subordinated Notes - 110,000
Net proceeds from issuance of new term loans - 110,000
Net proceeds from issuance of Senior Discount Notes - 21,618
Principal payments on Term Loans (4,066) -
Borrowings on Revolving Credit Facility, net 8,652 2,700
Repayments of old term loans - (91,393)
Repayments of old revolving lines of credit, net - (38,925)
Debt financing costs - (17,800)
Net proceeds from issuance of voting common stock - 3,982
Net proceeds from issuance of non-voting common stock - 37,462
Other (164) (1,998)
------- ----------
Net cash provided by financing activities 4,422 135,646
------- ----------
Net increase (decrease) in cash and cash equivalents (3,611) 2,632
Cash and cash equivalents:
Beginning of period 10,844 533
------- ----------
End of period $ 7,233 $ 3,165
======= ==========
The accompanying notes to consolidated financial statements are an integral part of these statements.
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
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, 1997 67,662,883 $ 676 $51,553 $ (778) $(4,287) $47,164
Foreign currency translation - - - (275) - (275)
adjustment
Net loss - - - - (598) (598) (5 (598)
---------- ------ ------- ------- ------- ------
Balance at June 30, 1998 67,662,883 $ 676 $51,553 $(1,053) $(4,885) $46,291
========== ====== ======= ======= ======= =======
The accompanying notes to consolidated financial statements are an integral part of these statements.
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
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 the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 as filed with the Securities and
Exchange Commission.
The results of operations for the three months and six months ended
June 30, 1998 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"). The Company also assumed a purchase price
contingency related to ERO, Inc.'s acquisition of Amav in October of
1995. The contingency included an additional $3.0 million of
purchase price contingent upon achievement of certain conditions. As
those conditions were met as of December 31, 1997, the Company
accrued a liability for the contingency against goodwill. This was
reflected in accrued expenses in the consolidated balance sheet as
of December 31, 1997. The payment was made in March 1998. 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 (ii) 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 paid 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 term 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 (subsequent to June 30, 1998 the
Tranche B Term Loan was amended to $65.0 million to allow for the
acquisition of Backyard Products Limited, see further discussion at
Note 8) (the "Tranche B Term Loan Facility" and, together with the
Tranche A Term Loan Facility, the "Term Loan Facilities"), (iii)
$16.1 million of 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. The
Revolving Credit Facility will also be used 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 of ERO. The excess of
the purchase price over the fair values of the tangible net assets
acquired was approximately $150.0 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 assets carrying amount to determine if an adjustment is
required.
The fair value of assets acquired and liabilities assumed,
reflecting the final allocation, was as follows (in thousands):
Current assets $56,200
Net property, plant and
equipment 20,000
Other assets 14,700
Goodwill 150,000
Liabilities assumed (118,300)
--------
Cash paid for ERO $122,600
========
The unaudited pro forma results below assume the Acquisition
occurred at the beginning of the six month period ended June 30,
1997 (in thousands, except per share amounts):
Six Months Ended
June 30, 1997
----------------
Net sales $142,355
Net loss $ (26)
Net loss per share basic $ (0.00)
Net loss per share diluted $ (0.00)
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
six month period ended June 30, 1997 nor are they necessarily
indicative of future operating results.
NOTE 3 - INCOME PER COMMON SHARE:
Holdings adopted 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 the net income by the
weighted average number of shares of common stock and other dilutive
securities.
NOTE 4 - INVENTORIES:
Inventories at June 30, 1998 and December 31, 1997 consist of the
following (in thousands):
June 30, December 31,
1998 1997
-------- ------------
Raw materials $18,527 $16,502
Work-in-process 10,109 5,690
Finished goods 24,928 25,272
------- -------
$53,564 $47,464
======= =======
NOTE 5 - DEBT:
Debt consists of the following (in thousands):
June 30, December 31,
1998 1997
-------- -----------
Senior Subordinated Notes $110,000 $110,000
Term Loans 108,375 112,375
Revolving Credit Facility 44,152 35,500
Senior Discount Notes 24,897 23,288
Other 8,011 8,241
-------- --------
$295,435 $289,404
======== ========
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 and 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)
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
As discussed in Note 2, in connection with the Acquisition, the
Company obtained the Senior Credit Facilities. The Senior Credit
Facilities consisted of (a) the six-year $75.0 million Tranche A
Senior Secured Term Loan Facility; (b) the eight-year $35.0 million
Tranche B Senior Secured Term Loan Facility (As discussed in Note 8,
subsequent to June 30, 1998 the Tranche B Term Loan was amended to
$65.0 million to allow for the acquisition of Backyard Products
Limited); and (c) the 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 $70.0 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 100.00%
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, 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) 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. The mortgages and equipment loans have varying interest
rates and maturities.
NOTE 6 - RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS:
Holdings has adopted SFAS No. 130, "Reporting Comprehensive Income",
as of January 1, 1998. SFAS No. 130 establishes standards for the
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. Holdings Comprehensive Income for the quarter
ended and six months ended June 30, 1998 would be as follows (in
thousands):
3 months 6 months
-------- --------
Net Loss $(339) $(598)
Foreign currency translation
adjustments (393) (162)
----- -----
Comprehensive Loss $(732) $(760)
===== =====
Adjustments to other non-owner changes will be reflected in
comprehensive income and cumulative comprehensive income that will
be reported in the consolidated statement of shareholders' equity in
Holding's Annual Report on Form 10-K for the fiscal year ending
December 31, 1998.
Holdings has adopted SFAS No. 131, "Disclosure about Segments of An
Enterprise and Related Information", as of 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 types of
business activities and different economic environments. SFAS No.
131 requires companies to select segments based on their internal
reporting system. Hedstrom is assessing the impact on its disclosures
of this pronouncement. As required by SFAS No 131, compliance with the
respective reporting requirements will be reflected in Holdings 1998
Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
Holdings has adopted SFAS No. 132, "Employees' Disclosures about
Pension and Other Postretirement Benefits," as of January 1, 1998.
This pronouncement revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the
measurement or recognition of those plans, however, it does require
additional information on changes in the benefit obligations and
fair values of plan assets in order to facilitate financial
analysis. Management does not believe that SFAS No. 132 will have a
significant impact on Holdings' financial statements.
NOTE 7 - SUBSIDIARY GUARANTORS/NONGUARANTORS FINANCIAL INFORMATION:
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(In thousands)
At June 30, 1998 At December 31, 1997
-------------------------------------------- ------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Adjustments/ Total
Assets Guarantors guarantors Eliminations Hedstrom Guarantors guarantors Elimination Hedstrom
- ------------------------- ---------- ---------- ------------ -------- ---------- ---------- ----------- --------
Cash and cash equivalents $ 6,470 $ 763 $ - $ 7,233 $ 8,984 $ 1,860 $ - $ 10,844
Accounts receivable, net 73,869 7,812 - 81,681 73,625 9,077 - 82,702
Inventories 35,989 17,724 (149) 53,564 38,429 9,075 (40) 47,464
Deferred income taxes (c) 7,050 - - 7,050 7,045 - - 7,045
Prepaid expenses and other
current assets 4,254 481 - 4,735 4,310 491 - 4,801
-------- ------- -------- -------- -------- ------- -------- --------
Total current assets 127,632 26,780 (149) 154,263 132,393 20,503 (40) 152,856
-------- ------- -------- -------- -------- ------- -------- --------
27,511 16,963 - 44,474 27,448 15,375 - 42,823
-------- ------- -------- -------- -------- ------- -------- --------
Investment in and advances to
Nonguarantor Subsidiaries 45,121 - (45,121) - 44,799 - (44,799) -
Deferred charges, net 15,983 - - 15,983 17,715 - - 17,715
Goodwill, net 143,231 19,023 - 162,254 142,692 18,484 - 161,176
Deferred income taxes 10,574 (478) - 10,096 10,579 (522) - 10,057
Total other assets 214,909 18,545 (45,121) 188,333 215,785 17,962 (44,799) 188,948
-------- ------- -------- -------- -------- ------- -------- --------
$370,052 $62,288 $(45,270) $387,070 $375,626 $53,840 $(44,839) $384,627
======== ======= ======== ======== ======== ======= ======== ========
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(In thousands)
Liabilities and stockholders
equity
- ----------------------------
Revolving line of credit $ 35,355 $ 8,797 $ - $ 44,152 $ 33,282 $ 2,218 $ - $ 35,500
Current portion of long-term
debt and capital leases 9,736 730 - 10,466 8,492 73 - 9,222
Advances from Guarantor - -
Subsidiaries - 32,270 (32,270) 31,956 (31,956) -
Accounts payable (c) 25,667 3,233 - 28,900 20,784 2,597 - 23,381
Accrued expenses 14,113 4,664 (132) 18,645 23,939 2,432 (16) 26,355
-------- ------- -------- -------- -------- ------- -------- --------
Total current liabilities 84,871 49,694 (32,402) 102,163 86,497 39,933 (31,972) 94,458
------- ------- -------- -------- -------- ------- -------- --------
Senior Subordinated Notes 110,000 - - 110,000 110,000 - - 110,000
Term Loans 99,125 - - 99,125 104,375 - - 104,375
Capital leases 1,878 - - 1,878 1,605 - - 1,605
Other 1,765 652 - 2,417 1,857 1,057 - 2,914
-------- ------- -------- -------- -------- ------- -------- --------
Total long-term debt (a) 212,768 652 - 213,420 217,837 1,057 - 218,894
-------- ------- -------- -------- -------- ------- -------- --------
Total Liabilities 297,639 50,346 (32,402) 315,583 304,334 40,990 (31,972) 313,352
-------- ------- -------- -------- -------- ------- -------- --------
Total stockholder's equity
(deficit) (b) 72,413 11,942 (12,868) 71,487 71,292 12,850 (12,867) 71,275
-------- ------- -------- -------- -------- ------- -------- --------
Total liabilities and
stockholders' equity $370,052 $62,288 $(45,270) $387,070 $375,626 $53,840 $(44,839) $384,627
======== ======= ======== ======== ======== ======= ======== ========
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING INCOME STATEMENTS
(In thousands)
Three Months Ended June 30, 1998 Three Months Ended June 30, 1997
------------------------------------------- --------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Adjustments/ Total
Statement of Operations Guarantors guarantors Eliminations Hedstrom Guarantors guarantors Elimination Hedstrom
- ----------------------- ---------- ---------- ------------ -------- ---------- ---------- ----------- --------
Net sales $79,535 $9,664 $(5,927) $83,272 $54,396 $5,614 $(3,896) $56,114
Cost of sales 59,672 6,445 (5,926) 60,191 37,940 3,625 (2,527) 39,038
------- ------ ------- ------- ------- ------ ------- -------
Gross profit (loss) 19,863 3,219 (1) 23,081 16,456 1,989 (1,369) 17,076
Selling, general and
administrative expense 13,411 2,463 - 15,874 8,750 718 (14) 9,454
------- ------ ------- ------- ------- ------ ------- -------
Operating income (loss) 6,452 756 (1) 7,207 7,706 1,271 (1,355) 7,622
Interest expense (c) 6,238 623 - 6,861 2,893 218 - 3,111
------- ------ ------- ------- ------- ------ ------- -------
Income (loss) before
income taxes 214 133 (1) 346 4,813 1,053 (1,355) 4,511
Income tax provision
(benefit) (c) 12 122 - 134 1,970 20 (285) 1,705
------- ------ ------- ------- ------- ------ ------- -------
Net income (loss) $ 202 $ 11 $ (1) $ 212 $ 2,843 $1,033 $(1,070) $ 2,806
======= ====== ======= ======= ======= ====== ======= =======
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING INCOME STATEMENTS
(In thousands)
Six Months Ended June 30, 1998 Six Months Ended June 30, 1997
-------------------------------------------- -------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non Adjustments Total
Statement of Operations Guarantors guarantors Eliminations Hedstrom Guarantors guarantors Elimination Hedstrom
- ----------------------- ---------- ---------- ------------ -------- ---------- ---------- ----------- --------
Net sales $156,274 $ 15,605 $(10,218) $ 161,661 $100,923 $7,024 $(3,896) $104,051
Cost of sales 115,110 11,685 (10,279) 116,516 71,344 4,762 (2,527) 73,579
-------- -------- -------- --------- -------- ------ ------- --------
Gross profit 41,164 3,920 61 45,145 29,579 2,262 (1,369) 30,472
Selling, general and
administrative expense 26,488 4,201 - 30,689 15,270 986 (14) 16,242
-------- -------- -------- --------- -------- ------ ------- --------
Operating income (loss) 14,676 (281) 61 14,456 14,309 1,276 (1,355) 14,230
Interest expense 12,460 1,183 - 13,643 4,364 219 - 4,583
-------- --------- -------- --------- -------- ------ ------- --------
Income (loss) before
income taxes 2,216 (1,464) 61 813 9,945 1,057 (1,355) 9,647
Income tax provision
(benefit) (c) 806 (505) 25 326 3,849 21 (285) 3,585
-------- -------- -------- -------- -------- ------ ------- --------
Net income (loss) $ 1,410 $(959) $ 36 $ 487 $ 6,096 $1,036 $(1,070) $ 6,062 6,062
======== ======= ======== ======== ======= ====== ======= ========
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31, 1998 Three Months Ended March 31, 1997
--------------------------------------- ---------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustment Total Subsidiary Non- Adjustments Total
Guarantor guarantor Eliminations Hedstrom Guarantor guarantor Eliminations Hedstrom
--------- --------- ------------ -------- --------- --------- ----------- --------
Cash Flows from operating activities:
Net income(loss)(c) $ 1,410 $ (959) $ 36 $ 487 $6,096 $ 1,036 $(1,070) $ 6,062
Adjustments to reconcile net income
(loss) to net cash (used for)
provided by operating activities
Depreciation of property, plant
and equipment and amortization
of goodwill and deferreds 6,834 1,478 - 8,312 2,614 153 - 2,767
Deferred income tax provision(c) (44) - - (44) (2,676) - - (2,676)
Changes in current assets and
current liabilities, net of
acquisitions:
Accounts receivable 417 1,265 - 1,682 (30,173) (2,126) 39 (32,260)
Inventories 3,384 (8,649) (189) (5,454) 7,830 (1,451) (140) 6,239
Prepaid expenses and other
current assets 56 10 - 66 979 4 - 983
Deferred charges and other - - - - 4,089 12 - 4,077
Accounts payable(c) 4,884 636 - 5,520 805 1,100 654 949
Accrued expenses (9,488) 2,232 153 (7,103) 12,124 1,266 500 13,890
Other - - - - - - - -
Net cash(used for) provided by ------- ------- ------- ------- ------- ------- ------- -------
operating activities 7,453 (3,987) - 3,466 (8,100) (6) (17) (8,123)
------- ------- ------- ------- ------- ------- ------- -------
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31, 1998 Three Months Ended March 31, 1997
--------------------------------------- ---------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustment Total Subsidiary Non- Adjustments Total
Guarantor guarantor Eliminations Hedstrom Guarantor guarantor Eliminations Hedstrom
--------- --------- ------------ -------- --------- --------- ----------- --------
Cash flows from investing activities:
Acquisitions of property, plant
and equipment (3,621) (1,341) - (4,962) (3,444) (2) - (3,446)
Acquisition of ERO, Inc. (3,037) - - (3,037) (122,600) - - (122,600)
Other Acquisition - (3,500) - (3,500) - - - -
------ ------ ------- ------- -------- ------- ------- --------
Net cash used for investing
activities (6,658) (4,841) - (11,499) (126,044) (2) - (126,046)
------ ------ ------- ------- -------- ------- ------- --------
Cash flows from financing activities:
Net proceeds from issuance of
Senior Subordinated notes - - - - 110,000 - - 110,000
Net proceeds from issuance of
new term loans - - - - 110,000 - - 110,000
Equity contribution from
Holdings (b) - - - 63,062 - - 63,062
Principal payments on term loans (4,066) - - (4,066) - - - -
Equity contribution from
Holdings (b) - - - - - - - -
Borrowings on new revolving line
of credit 8,652 - - 8,652 2,700 - - 2,700
Repayment of old term loans - - - - (91,851) - - (91,851)
Debt financing cost (b) - - - - (16,550) - - (16,550)
Borrowings(repayments)on old
revolving loans of credit, net - - - - (38,925) 458 - (38,467)
Advances to/(from) Nonguarantor
subsidiaries (8,136) 8,136 - - - - - -
Other 241 (405) - (164) (2,093) - - (2,093)
------ ------ ------- ------- ------- ------- ------- --------
Net increase(decrease)in cash and
cash equivalents (3,309) 7,731 - 4,422 136,343 458 - 136,801
------ ------ ------- ------- -------- ------- ------- ---------
Cash and cash equivalents (6,498) (598) - (3,611) 2,199 450 (17) 2,632
Beginning of period 8,984 1,860 - 10,844 467 66 - 533
------ ------ ------- ------- -------- ------- ------- ---------
End of period $6,470 $ 763 $ - $ 7,233 $ 2,666 $ 516 $ (17) $ 3,165
====== ====== ======= ======= ======== ======= ======= =========
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 $24.1 million at March 31,
1998.
(b) Hedstrom Corporation's stockholder's equity includes Holdings'
stockholders' equity plus $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 March 31, 1998 and December 31, 1997, 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 July 24, 1998 the Company acquired 100% of the outstanding shares
of Backyard Products Limited, which has annual sales of
approximately $13.9 million, is a leading Canadian manufacturer and
supplier of wood gym sets and accessories. The purchase price of
approximately $17.1 million was financed through an amendment to the
Company's existing Senior Credit Facilities, which increased the
Tranche B Term Loan to $65 million. The $30 million proceeds from
the amendment was used to fund the acquisition as well as pay down
borrowings under the revolving credit facility. The acquisition will
be accounted for as a purchase; accordingly, the purchase price will
be allocated to the underlying assets and liabilities based on their
respective estimated fair values at the date of the acquisition. The
estimated value of assets acquired was $7.5 million and the
liabilities assumed was $4.2 million.
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 Company's
Annual Report on Form 10-K for the year ended December 31, 1997 as
filed with the Securities and Exchange Commission. 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 expressed or
implied in such statements. These risks, which are further detailed
below as well as included in the Registration Statement on Form S-1
of the Company and Hedstrom as filed with the Securities and
Exchange Commission (File Nos. 333-32385-05 and 333-32385), 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 materials prices and product liability risks. In
addition, such forward-looking statements are necessarily dependent
upon assumptions, estimates and dates that may be incorrect or
imprecise and involve known and unknown risks, uncertainties and
other factors. Accordingly, any forward-looking statements included
herein do not purport to be predictions of future events or
circumstances and may not be realized. Forward-looking statements
can be identified by, among other things, the use of forward -
looking terminology such as "believes," "expects," "may," "will,"
"should," "seeks," "pro-forma," "anticipates" or intends' or the
negative of any thereof, or other variations or comparable
terminology, or by discussions of strategy or intentions. Given
these uncertainties, undue reliance should not be placed on any
forward-looking statements. The Company and Hedstrom disclaim any
obligation to update any such factors or to publicly announce the
results of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
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 Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
Net sales
Bedford Division....... $42.1 $27.8 $82.0 $58.7
Ashland Division....... 10.6 11.0 24.3 24.8
International Division.. 8.8 3.3 13.9 6.6
ERO Division............ 11.9 5.6 25.5 5.6
Amav Division........... 9.9 8.4 16.0 8.4
----- ----- ------ ------
Total net sales $83.3 $56.1 $161.7 $104.1
===== ===== ====== ======
Gross profit:
Bedford Division........ $ 9.7 $ 7.8 $19.4 $16.2
Ashland Division........ 3.2 3.5 7.3 7.7
International Division.. 2.0 0.8 3.2 1.6
ERO Division............ 4.1 1.8 10.1 1.8
Amav Division........... 4.1 3.2 5.1 3.2
----- ----- ----- -----
Total gross profit $23.1 $17.1 $45.1 $30.5
===== ===== ===== =====
A comparison of the Company's results of operations for the three
months and six months ended June 30, 1998 with the same period in
1997 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 12, 1997, management does not
believe the comparison of operating results with the same period in
1997 is meaningful.
Net Sales. Net sales for the second quarter ended June 30, 1998
increased to $83.3 million from $56.1 million for the comparable
prior year quarter, an increase of $27.2 million. The increase was
attributable to increased sales at the Bedford Division, the
inclusion of the ERO and AMAV Divisions and increased sales at the
International Division. Net sales of the Bedford Division increased
by $14.3 million for the second quarter of 1998 versus the prior
year comparable period. The Bedford Division increase was primarily
a result of increased sales of trampolines due to the business
acquired from Bollinger Industries, Inc. and increased gym set
sales as a result of increased market share. The inclusion of the ERO
and AMAV Divisions acquired in June 1997 resulted in an increase in
net sales of $ 7.8 million for the quarter ended June 30, 1998
compared to the comparable period in 1997. The net sales of the
International division increased to $8.8 million for the second
quarter 1998 from $3.3 million in the comparable quarter of 1997.
The International Division increase can be attributed to the
acquisition of certain assets of a U.K. Manufacturer made during the
first quarter of 1998. and sales associated with the acquisition of
M.A. Henry Limited in August of 1997. Net sales for the Ashland
Division for the second quarter of 1998 versus the second quarter of
1997 remained relatively unchanged.
Net sales for the six months ended June 30, 1998 versus the six
months ended June 30, 1997 increased to $161.7 million from $104.1
million an increase of $57.6 million. The increase was attributable
to the inclusion of the ERO and AMAV Divisions and increased sales
at the Bedford and International Divisions. The inclusion of the
ERO and AMAV Divisions resulted in an increase in net sales of
$27.5 million for the six months ended June 30, 1998 compared to the
comparable period in 1997. Net sales of the Bedford Division
increased by $23.3 million for the second quarter of 1998 versus the
prior year comparable period. The Bedford Division increase is
primarily a result of increased sales of trampolines due to the
business acquired from Bollinger Industries, Inc. and increased gym
set sales as a result of increased market share. The net sales of
the International division increased to $13.9 million for the first
six months of 1998 from $6.6 million in the comparable period of
1997. The International Division increase can be attributed to the
acquisition of certain assets of a U.K. Manufacturer made during the
first quarter of 1998 and sales associated with the acquisition of
M.A. Henry Limited in August of 1997. Net sales for the Ashland
Division for the first six months of 1998 versus the same period of
1997 remained relatively unchanged.
Gross Profit. Gross profit for the second quarter ended June
30, 1998 increased by $6.0 million to $23.1 million as compared to
$17.1 million for the quarter ended June 30, 1997 as a result of
higher consolidated net sales. As a percentage of consolidated net
sales, consolidated gross profit percentage decreased to 27.7% in
the second quarter of 1998 from 30.5% for the second quarter of
1997. The decrease was primarily the result of the Bedford
Division's gross profit margin decreasing to 23.0% for the second
quarter of 1998, from 28.1% for the quarter ended June 30, 1997.
The decline in the Bedford Division's gross profit percentage was
due to increased sales of trampolines, which carry a lower overall
gross profit margin, and decreased wood kit sales, which generally
carry a higher overall gross margin. These unfavorable product
sales mix items at the Bedford Division were partially offset by
lower material costs. In addition, slight decreases in the gross
margin percentage of the Ashland and International Divisions were
offset by the inclusion of the ERO and AMAV Divisions whose combined
gross profit margins of 37.6% for the second quarter ended June 30,
1998 were higher than the other divisions of Hedstrom.
Gross profit for the six months ended June 30, 1998 increased by
$14.6 million to $45.1 million as compared to $30.5 million for the
six months ended June 30, 1997 as a result of higher consolidated
net sales. As a percentage of consolidated net sales, consolidated
gross profit percentage decreased to 27.9% for the six months ended
June 30, 1998 from 29.3% for the comparable prior year period. The
decrease was primarily the result of the Bedford Division's gross
profit margin decreasing to 23.7% for the six months ended June 30,
1998, from 27.6% for the six months ended June 30, 1997. The
decline in the Bedford Division's gross profit percentage was due to
increased sales of trampolines, which carry a lower overall gross
profit margin, and decreased wood kit sales, which generally carry a
higher overall gross margin. These unfavorable product sales mix
items at the Bedford Division were partially offset by lower material
costs. The decrease in the consolidated gross profit percentage was
partially offset by the inclusion of the ERO and AMAV Divisions,
which had a higher gross profit margin of 36.6% for the six month
period ended June 30, 1998, than the other divisions of Hedstrom.
Gross profit margin at the Ashland Division for the six months ended
June 30, 1998 decreased slightly to 30.0% from 31.0% versus the
comparable period in 1997 due to unfavorable product sales mix.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses increased $6.4 million to $ 15.9 million
in the second quarter ended June 30, 1998 versus $9.5 million in the
prior years second quarter. As a percentage of net sales, selling,
general and administrative expenses increased to 19.1% from 16.8%.
For the six months ended June 30, 1998 selling, general and
administrative expenses increased $14.5 million to $30.7 million
from $16.2 million in the six months ended June 30, 1997. Expressed
as a percentage of sales, selling, general and administrative
expenses increased to 19.0% from 15.6%. The increases for the three
and six month periods ended June 30, 1998 were primarily due to the
inclusion of the ERO and AMAV Divisions which experience relatively
high selling, general and administrative expenses, and include the
amortization of acquisition-related intangible assets and royalty
expense.
Interest expense. Interest expense for the three and six month
periods ended June 30, 1998 versus June 30, 1997 increased as a
result of the incurrence of Acquisition-related indebtedness.
Income Tax Expense. Holdings effective tax rate for the quarter
ended June 30, 1998 was 42.2% versus 37.7% for the quarter ended
June 30, 1997. The effective tax rate for the six months ended June
30, 1998 was 41.7% compared to 37.1% for the prior year comparable
period. The increase was attributable to the acquisition of ERO,
which generated a large amount of non-deductible goodwill.
Liquidity and Capital Resources of the Company
Working Capital and Cash Flows
Net cash provided from the operating activities was $3.5 million
for the six months ended June 30, 1998. The cash provided by
operations reflects the seasonal nature of sales. The ERO and Amav
Divisons Sales and Accounts Receivable build during the second half
of the year and are liquidated in the first half of the following
year. The Bedford, Ashland and International Divisions build Sales
and Accounts Receivable during the first half of the year and
liquidate during the second half of the year.
Net cash used for investing activities was $11.5 million during the
six months ended June 30, 1998, including $5.0 million used for the
acquisition of property, plant and equipment, $3.0 million of
contingency payments relating to the ERO Acquisition as discussed in
Note 2 and $3.5 million used to purchase certain assets of a United
Kingdom Manufacturer.
Net cash provided for financing activities was $4.4 million
representing net proceeds on the Companies revolving loan to fund
operating cash requirements of $8.7 million offset by the $4.3
million of principal payments on the Companies term loans.
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 consisted 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 (subsequent to June 30, 1998
the Tranche B Term Loan was amended to $65 million to allow for the
acquisition of Backyard Products Limited, see further discussion at
Note 8 of the Notes to Consolidated Financial Statements.) 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. 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
June 30, 1998, approximately $21.3 million was available to the
Company as cash and available borrowings under the Revolving Credit
Facility (subject to borrowing base limitations). 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.
Year 2000 Date Conversion
The Company recognizes the need to ensure that its operations will
not be adversely impacted by year 2000 software failures. The
company has established processes for evaluating and managing the
risks and costs associated with the problem and is currently in the
process of implementing necessary changes. It is anticipated that
implementation will be completed by February 1999. The additional
cost of achieving Year 2000 compliance is estimated to be
approximately $500,000 and will be incurred through December 1999.
The Company is in the process of conducting an additional assessment
of certain year 2000 issues on their manufacturing equipment, time
based operating equipment and significant suppliers which will be
completed during 1999. It is anticipated that corrective action, if
any, will be made by year 2000.
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
(1) 2.1 - Agreement and Plan of Merger, dated as of
April 10, 1997, among Hedstrom Corporation,
HC Acquisition Corp. and ERO, Inc.
(1) 3.1 - Restated Certificate of Incorporation of
Hedstrom Holdings, Inc., as filed with the
Secretary of State of the State of Delaware
on October 27, 1995.
(1) 3.2 Certificate of Amendment of Restated
Certificate of Incorporation of Hedstrom
Holdings, Inc., as filed with the Secretary of
State of the State of Delaware on June 6,
1997.
(1) 3.3 - Restated Bylaws of Hedstrom Holdings, Inc.
(1) 3.4 - Certificate of Incorporation of New Hedstrom
Corp., as filed with the Secretary of
State of the State of Delaware on November
20, 1990.
(1) 3.5 - Certificate of Amendment of the Certificate of
Incorporation of New Hedstrom Corp., as
filed with the Secretary of State of the State
of Delaware on January 14, 1991.
(1) 3.6 - By-Laws of Hedstrom Corporation.
(1) 4.1 - Indenture, dated as of June 1, 1997, among
Hedstrom Corporation, Hedstrom
Holdings, Inc., the Subsidiary Guarantors
identified on the signature pages thereto and
IBJ Schroder Bank & Trust Company, as Trustee.
(1) 4.2 - Form of Old Senior Subordinated Note.
(1) 4.3 - Form of New Senior Subordinated Note.
(1) 4.4 - Indenture, dated as of June 1, 1997, among
Hedstrom Holdings, Inc. and United States
Trust Company of New York, as Trustee.
(1) 4.5 - Form of Old Discount Note.
10.1 - Stock Purchase Agreement, dated July 24,
1998 by and between Hedstrom Corporation
and Richard Boyer.
10.2 - Amendment Number Three dated July 24, 1998
to the Credit Agreement, dated as of June
12, 1997, among Hedstrom Corporation, Hedstrom
Holdings, Inc., the financial institution party
thereto and Credit Suisse First Boston, as
agent.
11.1 - Computation of Earnings Per Share.
27.1 - Financial Data Schedule.
(1) Incorporated by reference to the respective exhibit
to Holdings' and Hedstrom's Registration Statement on
Form S-1 (File Nos. 333-32385-05 and 333-32385).
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: August 13, 1998
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
/s/ David F. Crowley
David F.Crowley
Chief Financial Officer