FORM 10-Q/A
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 September 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 November 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/A
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
Page
Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
As of September 30, 1998 and December 31, 1997
Consolidated Income Statements
Three months ended September 30, 1998 and 1997
Nine months ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997
Consolidated Statement of Stockholders' Equity
As of and for the nine months ended September
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
The undersigned registrant hereby files this Amendment No. 1 to its
Form 10-Q filing for the quarterly period ended September 30, 1998
for the purpose of amending and restating the Gross Profit Data
for the nine month period ended September 30, 1998 as set forth
under the results of operations section of the Management's
Discussion and Analysis of Results of Operations and Financial
Condition.
PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
1998 1997 1997
------------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,546 $ 10,844
Trade accounts receivable, net of
allowance for doubtful accounts 64,213 82,702
Inventories 61,411 47,464
Deferred income taxes 7,050 7,045
Prepaid expenses and other current assets 4,719 4,801
-------- --------
TOTAL CURRENT ASSETS 140,939 152,856
PROPERTY, PLANT AND EQUIPMENT, at cost,
net of accumulated depreciation 45,619 42,823
-------- --------
OTHER ASSETS:
Deferred charges, net of accumulated
amortization 15,996 18,861
Goodwill, net of accumulated
amortization 176,265 161,176
Deferred income taxes 10,096 10,057
-------- --------
TOTAL OTHER ASSETS 202,357 190,094
-------- --------
TOTAL ASSETS $388,915 $385,773
======== ========
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
1998 1997 1997
------------- ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 23,600 $ 35,500
Current portion of long-term debt
and capital leases 11,924 9,222
Accounts payable 22,661 23,381
Accrued expenses 17,502 25,824
-------- --------
TOTAL CURRENT LIABILITIES 75,687 93,927
-------- --------
LONG-TERM DEBT:
Senior Subordinated Notes 110,000 110,000
Senior Discount Notes 25,756 23,288
Term Loans 124,484 104,375
Notes payable to related parties 2,500 2,500
Capital leases 1,796 1,605
Other 2,069 2,914
-------- --------
TOTAL LONG-TERM DEBT 266,605 244,682
-------- --------
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 (871) (778)
Accumulated deficit (4,735) (4,287)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 46,623 47,164
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' $388,915 $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 September 30,
---------------------------------------
1998 1997
---- ----
Net sales $64,353 $61,462
Cost of sales 40,809 41,722
------- -------
Gross profit 23,544 19,740
Selling, general and administrative expense 15,383 14,416
------- -------
Operating income 8,161 5,324
Interest expense 7,896 6,800
------- -------
Income (loss) before income taxes 265 (1,476)
Income tax (benefit) expense 115 (557)
------- -------
Net income (loss) $ 150 $ (919)
------- -------
Basic earnings (loss) per share:
Net income (loss) per share $0.00 ($0.01)
Weighted average number of common shares
outstanding (in thousands) 67,633 68,122
Diluted earnings (loss) per share:
Net income (loss) per share $0.00 ($0.01)
Weighted average number of common shares
outstanding (in thousands) 68,968 68,122
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 nine months ended September 30,
--------------------------------------
1998 1997
---- ----
Net sales $226,014 $165,513
Cost of sales 157,325 115,301
-------- --------
Gross profit 68,689 50,212
Selling, general and administrative expense 46,072 30,658
-------- --------
Operating income 22,617 19,554
Interest expense 23,377 11,509
-------- --------
Income (loss) before income taxes (760) 8,045
Income tax (benefit) expense (312) 2,979
-------- --------
Net income (loss) $ (448) $ 5,066
-------- --------
Basic earnings (loss) per share:
Net income (loss) per share ($0.01) $0.11
Weighted average number of common shares
outstanding (in thousands) 67,663 47,108
Diluted earnings (loss) per share:
Net income (loss) per share ($0.01) $0.11
Weighted average number of common shares
outstanding (in thousands) 67,663 47,108
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 nine months ended September 30
--------------------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ (448) $ 5,066
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 9,572 7,614
Amortization of deferred financing fees 5,333 -
Deferred income tax benefit (44) 3,301
Changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable 19,591 (21,834)
Inventories (10,892) (3,474)
Prepaid expenses and other current assets 172 (270)
Accounts payable (1,678) (1,497)
Accrued expenses (8,435) (3,096)
-------- -------
Net cash provided by (used for) operating activities 13,171 (14,190)
-------- -------
Cash flows from investing activities:
Acquisitions of property, plant and equipment (7,305) (5,336)
Acquisition of ERO, Inc. (3,037) (122,600)
Acquisition of Backyard Products Ltd. (16,805) -
Other acquisitions (3,579) (2,249)
-------- --------
Net cash used for investing activities (30,726) (130,185)
-------- --------
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the nine months ended September 30
--------------------------------------
1998 1997
---- ----
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
Proceeds from term loans 30,000 -
Net proceeds from issuance of Senior
Discount Notes - 21,618
Principal payments on Term Loans (7,249) -
Borrowings on Revolving Credit Facility, net (11,900) 8,300
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 (594) 1,897
-------- --------
Net cash provided by financing activities 10,257 145,141
-------- --------
Net increase (decrease) in cash and cash
equivalents (7,298) 766
Cash and cash equivalents:
Purchased cash - 855
Beginning of period 10,844 533
-------- --------
End of period $ 3,546 $ 2,154
======== ========
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
adjustment - - - (93) - (93)
Net loss - - - - (448) (448)
--------------------------------------------------------- --------
Balance at September 30, 1998 67,662,883 $676 $51,553 $(871) $(4,735) $46,623
===================================================================
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 nine months ended
September 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 (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 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 (on July 24, 1998 the
Tranche B Term Loan was increased 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 is also 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 nine month period ended September 30, 1997 (in
thousands, except per share amounts):
Nine Months Ended
September 30, 1997
------------------
Net sales $ 203,817
Net loss $ (538)
Net loss per share basic $ (0.01)
Net loss per share diluted $ (0.01)
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 nine month period ended September 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 September 30, 1998 and December 31, 1997 consist of the
following (in thousands):
September 30, December 31,
1998 1997
------------ -----------
Raw materials $20,948 $16,502
Work-in-process 7,325 5,690
Finished goods 33,138 25,272
------- -------
$61,411 $47,464
======= =======
NOTE 5 - DEBT:
Debt consists of the following (in thousands):
September 30, December 31,
1998 1997
------------- -----------
Senior Subordinated Notes $110,000 $110,000
Term Loans 136,408 112,375
Revolving Credit Facility 23,600 35,500
Senior Discount Notes 25,756 23,288
Other 6,365 8,241
-------- --------
$302,129 $289,404
======== ========
The recent and well-publicized changes in inventory policies and
purchasing practices of Toys R Us - the Company's largest customer in
1997 - and, to a lesser extent, those of the Company's other customers
have adversely affected the 1998 sales levels of the Company and of the
industry generally. Management anticipates that the effects of these
changes will persist at least through the fourth quarter of 1998. As a
consequence, it is projected that the Company will not be in compliance
with certain financial covenants under its Senior Credit Facilities as of
the end of 1998. The Company has notified the agent for the Company's
senior lenders of these developments and will soon commence discussions
with its senior lenders regarding possible amendments to the financial
covenants under the Senior Credit Facilities. Although the Company
anticipates that it will be able to obtain the necessary amendments,
there can be no assurances as to the outcome of the Company's discussions
with its senior lenders.
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, the Company obtained the Senior Credit
Facilities in connection with the Acquisition. The Senior Credit
Facilities consist of (a) the six-year $75.0 million Tranche A Senior
Secured Term Loan Facility; (b) the eight-year $65.0 million Tranche B
Senior Secured Term Loan Facility (As discussed in Note 8, on July 24,
1998 the Tranche B Term Loan was increased from $35.0 million to $65.0
million to, among other things, 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 are 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 are 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 is adjusted from
time to time by amounts to be agreed upon based on the achievement of
certain financial performance targets.
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 are 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 shares of 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 are not 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, 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 note payable by Holdings 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 nine months
ended September 30, 1998 would be as follows (in thousands):
3 months 9 months
-------- --------
Net income (loss) $150 $(448)
Foreign currency translation
adjustments (net of tax) 107 (55)
---- -----
Comprehensive income (loss) $257 $(503)
==== =====
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.
The Financial Accounting Standards Board has issued SFAS No. 133,
Accounting for Derivative and Similar Financial Instruments For Hedging
Activities. This pronouncement revises the accounting for derivative
financial instruments. It requires entities to recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. The adoption of this statement is required
for fiscal years beginning after June 15, 1999. The Company has entered
into interest rate swap agreements to hedge exposure to variable interest
rate debt. The Company will recognize these derivatives at fair value in
its financial statements if these agreements are outstanding as of
January 1, 1999. The adoption of this pronouncement is not expected to
have a significant impact on the Company's financial position or results
of operations.
The Financial Accounting Standards Board has issued SFAS No. 134
Accounting For Mortgage-Backed Securities. SFAS No. 134 will have no
effect on the financial condition or results of operations of the
Company.
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 statements.
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(In thousands)
At September 30, 1998 At December 31, 1997
------------------------------------------ -----------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustment Total Subsidiary Non- Adjustments/ Total
Assets Guarantor guarantor Eliminations Hedstrom Guarantors guarantors Eliminations Hedstrom
========================== ========== ========= ============ ======== ========== ========== ============ ========
Current assets:
Cash and cash equivalents $ 1,941 $ 1,605 $ - $ 3,546 $ 8,984 $ 1,860 $ - $ 10,844
Accounts receivable, net 53,735 10,478 - 64,213 73,625 9,077 - 82,702
Inventories 44,155 17,416 (160) 61,411 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 4,380 339 - 4,719 4,310 491 - 4,801
-------- ------- -------- -------- -------- -------- -------- --------
Total current assets 111,261 29,838 (160) 140,939 132,393 20,503 (40) 152,856
-------- ------- -------- -------- -------- -------- -------- --------
Property, plant, and
equipment, net 29,249 16,370 - 45,619 27,448 15,375 - 42,823
-------- ------- -------- -------- -------- -------- -------- --------
Other assets:
Investment in and advances
to Nonguarantor
Subsidiaries 45,080 - (45,080) - 44,799 - (44,799) -
Deferred charges, net 15,006 - - 15,006 17,715 - - 17,715
Goodwill, net 157,207 19,058 - 176,265 142,692 18,484 - 161,176
Deferred income taxes 10,574 (478) - 10,096 10,579 (522) - 10,057
-------- ------- -------- -------- -------- -------- -------- --------
Total other assets 227,867 18,580 $45,240 201,367 215,785 17,962 (44,799) 188,948
-------- ------- -------- -------- -------- -------- -------- --------
Total assets $368,377 $64,788 $45,240 $387,925 $375,626 $ 53,840 $(44,839) $384,627
======== ======= ======== ======== ======== ======== ======== ========
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(In thousands)
At September 30, 1998 At December 31, 1997
------------------------------------------ -----------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustment Total Subsidiary Non- Adjustments/ Total
Guarantor guarantor Eliminations Hedstrom Guarantors guarantors Eliminations Hedstrom
========== ========= ============ ======== ========== ========== ============ ========
Liabilities and
stockholders' equity
==========================
Current liabilities:
Revolving line of credit $ 14,551 $ 9,049 $ - $23,600 $ 33,282 $ 2,218 $ - $ 35,500
Current portion of long
term debt and capital
leases 11,184 740 - 11,924 8,492 730 - 9,222
Advances from Guarantor
Subidiaries - 32,270 (32,270) - - 31,956 (31,956) -
Accounts payable (c) 18,574 4,087 - 22,661 20,784 2,597 - 23,381
Accrued expenses 13,821 5,309 (132) 18,998 23,939 2,432 (16) 26,355
-------- ------- -------- --------- -------- ------- -------- --------
Total current
liabilities 58,130 51,455 (32,402) 77,183 86,497 39,933 (31,972) 94,458
-------- ------- -------- --------- -------- ------- -------- --------
Senior Subordinated
Notes 110,000 - - 110,000 110,000 - - 110,000
Term Loans 124,484 - - 124,484 104,375 - - 104,375
Capital leases 1,796 - - 1,796 1,605 - - 1,605
Other 1,675 394 - 2,069 1,857 1,057 - 2,914
-------- ------- -------- --------- -------- ------- -------- --------
Total long-term debt(a) 237,955 394 - 283,349 217,837 1,057 - 218,894
-------- ------- -------- --------- -------- ------- -------- --------
Total liabilities 296,085 51,849 (32,402) 315,532 304,334 40,990 (31,972) 313,352
-------- ------- -------- --------- -------- ------- -------- --------
Total stockholder's
equity 72,292 12,939 (12,838) 72,393 71,292 12,850 (12,867) 71,275
-------- ------- -------- --------- -------- ------- -------- --------
Total liabilities and
stockholders' equity $368,377 $64,788 $(45,240) $387,925 $375,626 $53,840 $(44,839) $384,627
======== ======= ======== ========= ======== ======= ======== ========
CONSOLIDATING INCOME STATEMENTS
(In thousands)
Three Months Ended September 30, 1998 Three Months Ended September 30, 1997
------------------------------------------- -----------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Adjustments/ Total
Statement of Operations Guarantor guarantor Eliminations Hedstrom Guarantors guarantors Eliminations Hedstrom
======================= ========= ========= ============ ======== ========== ========== ============ ========
Net sales $59,524 $18,112 $(13,283) $64,353 $56,524 $21,039 $(16,101) $61,462
Cost of sales 41,033 13,048 (13,272) 40,809 43,564 15,599 (17,441) 41,722
------- ------- -------- ------- ------- ------- -------- -------
Gross profit (loss) 18,491 5,064 (11) 23,544 12,960 5,440 1,340 19,740
Selling, general and
administrative expense 12,519 2,864 - 15,383 12,743 1,659 14 14,416
------- ------- -------- ------- ------- ------- -------- -------
Operating income (loss) 5,972 2,200 (11) 8,161 217 3,781 1,326 5,324
Interest expense (c) 6,239 684 - 6,923 5,399 690 - 6,089
------- ------- -------- ------- ------- ------- -------- -------
Income (loss) before
income taxes (267) 1,516 (11) 1,238 (5,182) 3,091 1,326 (765)
Income tax provision
(benefit) (c) (114) 633 (4) 515 (2,141) 1,603 273 (265)
------- ------- -------- ------- ------- ------- -------- -------
Net income (loss) $ (153) $ 883 $ (7) $ 723 $(3,041) $1,488 $ 1,053 $(500)
======= ======= ======== ======= ======= ======= ======== =======
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING INCOME STATEMENTS
(In thousands)
Nine Months Ended September 30, 1998 Nine Months Ended September 30, 1997
------------------------------------------- ----------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adjustments/ Total Subsidiary Non- Adjustments/ Total
Statement of Operations Guarantor guarantor Eliminations Hedstrom Guarantors guarantors Eliminations Hedstrom
======================= ========= ========= ============ ======== ========== ========== ============ ========
Net sales $215,798 $33,717 $(23,501) $226,014 $157,447 $28,063 $(19,997) $165,513
Cost of sales 156,143 24,733 (23,551) 157,325 114,908 20,361 (19,968) 115,301
-------- ------- -------- -------- -------- ------- -------- --------
Gross profit 59,655 8,984 50 68,689 42,539 7,702 (29) 50,212
Selling, general and
administrative expense 39,007 7,065 - 46,072 28,013 2,645 - 30,658
-------- ------- -------- -------- -------- ------- -------- --------
Operating income (loss) 20,648 1,919 50 22,617 14,526 5,057 (29) 19,554
Interest expense (c) 18,699 1,867 - 20,566 9,763 909 - 10,672
-------- ------- -------- -------- -------- ------- -------- --------
Income (loss) before
income taxes 1,949 52 50 2,051 4,763 4,148 (29) 8,882
Income tax provision
(benefit) (c) 692 128 21 841 1,708 1,624 (12) 3,320
-------- ------- -------- -------- -------- ------- -------- --------
Net income (loss) $ 1,257 $ (76) $ 29 $ 1,210 $ 3,055 $2,524 $ (17) $ 5,562
======== ======= ======== ======== ======== ======= ======== ========
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended September 30, 1998 Nine Months Ended September 30, 1997
------------------------------------ -------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adustments/ Total Subsidiary Non- Adjustments/ Total
Guarantor guarantor Eliminations Hedstrom guarantor guarantor Eliminations Hedstrom
========= ========= ============ ======== ========= ========== ============ ========
Cash flows from operating
activities:
Net income (loss) $ 1,257 $ (76) $ 29 $ 1,210 $ 3,055 $2,524 $(17) $ 5,562
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 10,277 2,004 - 12,281 6,602 363 - 6,965
Deferred income tax
provision (c) (44) - - (44) 3,468 14 - 3,482
Changes in current assets and
current liabilities, net of
acquisitions:
Accounts receivable 20,992 (1,401) - 19,591 (16,718) (5,116) - (21,834)
Inventories (2,351) (8,341) (200) (10,892) 95 (3,598) 29 (3,474)
Prepaid expenses and other 20 152 - 172 (351) 81 - (270)
Accounts payable (3,168) 1,490 - (1,678) (2,554) 1,349 - (1,205)
Accrued expenses (10,517) 2,877 171 (7,469) (6,929) 3,525 (12) (3,416)
Other - - - - (12) 12 - -
-------- ------ ----- --------- -------- ------ ---- --------
Net cash (used for) provided by
operating activities 16,466 (3,295) - 13,171 (13,344) (846) - (14,190)
-------- ------ ----- --------- -------- ------ ---- --------
Cash flows from investing
activities:
Acquisitions of property plant
and equipment (5,409) (1,896) - (7,305) (4,495) (841) - (5,336)
Acquisition of ERO, Inc. (3,037) - (3,037) (122,600) - - (122,600)
Other Acquisition (16,805) (3,500) - (20,305) (2,249) - - (2,249)
-------- ------ ----- -------- -------- ------ ---- ---------
Net cash used for investing
activities (25,251) (5,396) - (30,647) (129,344) (841) - (130,185)
-------- ------ ----- -------- -------- ------ ---- ---------
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended September 30, 1998 Nine Months Ended September 30, 1997
------------------------------------ -------------------------------------------
Hedstrom Hedstrom
Hedstrom Subsidiary Hedstrom Subsidiary
Subsidiary Non- Adustments/ Total Subsidiary Non- Adjustments/ Total
Guarantor guarantor Eliminations Hedstrom guarantor guarantor Eliminations Hedstrom
========= ========= ============ ======== ========= ========== ============ ========
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 30,000 - - 30,000 110,000 - - 110,000
Equity contribution from
Holdings (b) - - - - 63,062 - - 63,062
Principal payments on (7,249) - - (7,249) - - - -
Borrowings on new revolving
line of credit (11,900) - - (11,900) 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)
Advances to/(from)
Nonguarantor subsidiaries (9,099) 9,099 - - (8,100) 8,100 - -
Other (10) (663) - (673) 647 - - 647
-------- ------ ----- -------- -------- ------ ---- ---------
Net cash (used for) provided
by financing activities 1,742 8,436 - 10,178 142,791 2,350 - 145,141
-------- ------ ----- -------- -------- ------ ---- ---------
Net increase (decrease) in
cash and cash equivalents (7,043) (255) - (7,298) 103 663 - 766
Cash and cash equivalents:
Purchased cash - - - - 530 325 - 855
Beginning of period 8,984 1,860 - 10,844 467 66 - 533
-------- ------ ----- -------- -------- ------ ---- ---------
End of period $ 1,941 $1,605 $ - $ 3,546 $ 1,100 $1,054 $ - $ 2,154
======== ====== ===== ======== ======== ====== ==== =========
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 $25.8 million at
September 30, 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 September 30, 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 - ACQUISITIONS:
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, a leading Canadian manufacturer and supplier of wood gym sets
and accessories. The purchase price of approximately $16.8 million was
financed through an amendment to the Company's existing Senior Credit
Facilities, which increased the Tranche B Term Loan by $30 million. The
$30 million proceeds from the amendment were used to fund the acquisition
as well as to pay down borrowings under the Revolving Credit Facility.
The acquisition was accounted for as a purchase; accordingly, the
purchase price was 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 $4.9 million and
the liabilities assumed was $2.7 million. The excess of the purchase
price over the value of the net assets acquired was recorded as goodwill
and will be amortized over 40 years.
NOTE 9 - SUBSEQUENT EVENTS:
Members of the Rubber Workers Union in Ashland, Ohio ceased production at
the Ashland Division Plant on October 3, 1998. The work stoppage at the
Ashland facility was resolved on October 10, 1998 when a tentative agreement
was reached. The new collective bargaining agreement was ratified by the rank
and file on October 12, 1998 and will expire on October 2, 2001. The work
stoppage did not have a material effect on the Company's operations or its
ability to service its customers on a timely basis.
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 those 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/A 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 in the Registration Statement on Form S-1 of the
Company 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 disclaims 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 Nine months
Ended September 30, Ended September 30,
------------------- -------------------
(In Millions)
-------------
1998 1997 1998 1997
---- ---- ---- ----
Net sales
Bedford Division $11.4 $7.4 $ 93.4 $ 66.1
Ashland Division 6.3 5.5 30.6 30.2
International Division 3.2 1.4 17.1 8.0
ERO Divisioin 20.2 21.9 45.6 27.5
Amav Division 23.3 25.3 39.3 33.7
----- ----- ----- ------
Total net income $64.4 $61.5 $226.0 $165.5
===== ===== ====== ======
Gross profit:
Bedford Division $1.7 $0.8 $21.1 17.0
Ashland Division 1.2 0.5 8.6 8.2
International Division 0.6 0.3 3.8 1.9
ERO Division 10.9 9.7 21.0 11.5
Amav Division 9.1 8.4 14.2 11.6
----- ----- ----- -----
Total gross profit $23.5 $19.7 $68.7 $50.2
===== ===== ===== =====
A comparison of the Company's results of operations for the nine months
ended September 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. Consolidated net sales for the third quarter ended
September 30, 1998 increased to $64.4 million from $61.5 million for the
comparable prior year quarter, an increase of $2.9 million. The increase
was a result of higher sales at the Bedford, International and Ashland
Divisions which were partially offset by lower sales at the ERO and AMAV
divisions. Net sales of the Bedford Division increased by $4.0 million
for the third quarter versus the prior year comparable quarter. The
increase was primarily a result of increased sales of trampolines as a
result of the acquisition of Bollinger Industries, Inc.'s trampoline
business, increased sales of sports related items such as Turbo Hoops,
and increased wood kit sales as a result of the acquisition of Backyard
Products Limited (see Note 8 of the Notes to Consolidated Financial
Statements). These increases were partially offset by lower sales of
Spring Horses during the quarter due to inventory reduction efforts by
Toys R Us. The net sales of the International Division for the third
quarter increased by $1.8 million as compared to the prior years third
quarter. The increase can be attributed to the acquisition of certain
assets of Bestoy, a U.K. manufacturer, made during the first quarter of
1998. Net sales of the Ashland Division increased by $0.8 million
versus the prior year comparable quarter mainly as a result of greater
demand for children's ball pits, the effects of which were partially
offset by lower sales of OEM products. The aforementioned increases in
third quarter sales, as compared to the prior years third quarter, were
partially offset by lower net sales at the ERO and AMAV Divisions. The
ERO Division's net sales decreased by $1.7 million to $20.2 million for
the quarter ended September 30, 1998 as compared to the prior years third
quarter. The decrease was primarily attributable to fewernew product
introductions of Priss Prints products, inventory reduction efforts by
Toys R Us (which impacted all ERO product lines), reduced offerings of the
Coral product lines and timing of licenses relating to the Slumber Shoppe
line of products. Net sales of the AMAV division decreased by $2.0 million
to $23.3 million for the third quarter of 1998 versus the third quarter of
1997. The decrease was primarily due to close-out sales of Impact product
which increased sales made during the third quarter of 1997.
Consolidated net sales for the nine months ended September 30, 1998
versus the nine months ended September 30, 1997 increased to $226.0
million from $165.5 million, an increase of $60.5 million. The increase
was attributable to increased sales at the Bedford Division, the
inclusion of the ERO and AMAV Divisions for the full year to date period
versus their inclusion for only four months during the same period of
1997, and increased sales at the International and Ashland Divisions.
Net sales of the Bedford Division increased by $27.3 million for the
year to date period ended September 30, 1998 versus the same period of
1997. The increase was primarily due to increased sales of trampolines
as a result of the acquisition of Bollinger Industries, Inc.'s trampoline
business, increased gym set sales as a result of increased market share,
and higher sales of OEM, Preschool and Sports products. The higher OEM,
Preschool and Sports products net sales were partially offset by lower
sales of Spring Horses due to inventory reduction efforts by Toys R Us.
The inclusion of the ERO and AMAV Divisions for the full nine months of
the year to date period ended September 30, 1998 versus their inclusion
for only four months for the same period of 1997 resulted in increased
sales of $23.7 million. The International Division's increase can be
attributed to the acquisition of certain assets of Bestoy, a U.K.
Manufacturer, during the first quarter of 1998 and sales associated with
the acquisition of M.A. Henry Limited, a Canadian manufacturer, in August
of 1997. Net sales for the Ashland Division for the first nine months of
1998 versus the same period of 1997 increased slightly as a result of
greater demand for children's ball pits.
Gross Profit. Consolidated gross profit for the third quarter ended
September 30, 1998 increased by $3.8 million to $23.5 million as compared
to $19.7 million for the third quarter ended September 30, 1997,
primarily as a result of higher consolidated net sales and favorable
manufacturing variances. As a percentage of consolidated net sales,
consolidated gross profit percentage increased to 36.6% in the third
quarter of 1998 from 32.1% in the third quarter of 1997. The increase
was due to higher gross margins at the ERO, AMAV, Bedford and Ashland
divisions during the third quarter of 1998 versus the third quarter of
1997, though primarily at the ERO and AMAV Divisions which represented
68% of consolidated net sales for the quarter. The ERO Division's gross
profit percentage increased to 53.9% in the third quarter of 1998 versus
44.4% during the third quarter of 1997. The increase was due primarily
to favorable manufacturing variances related to increased production
volume as the ERO Division was building inventory in anticipation of fourth
quarter sales, as well as a more favorable product sales mix and more
favorable material costs. The AMAV Division's gross profit percentage
increased to 39.2% for the third quarter of 1998 from 33.4% for the third
quarter of 1997. The increase was primarily a result of higher average
selling prices of Impact products, as sales during the third quarter of 1997
included a relatively high level of low margin close-out sales. The gross
profit percentage of the AMAV Division was also impacted by a more favorable
product sales mix.
The gross profit percentage at the Bedford Division increased to 15.0 during
the third quarter of 1998 from 10.8% during the third quarter of 1997. The
increase was a result of favorable manufacturing cost absorption caused by
increased volume of trampoline production and sales, the effects of which
more than offset the negative impact of an unfavorable product sales mix.
The gross profit percentage at the Ashland Division increased to 19.8% for
the quarter ended September 30, 1998 versus 8.3% for the quarter ended
September 30, 1997. The increase was due to increased sales of ball pits,
which have relatively high gross profit margins. The International
Division's gross profit percentage decreased from 20.9% to 17.6% as a result
of unfavorable product mix.
Consolidated gross profit for the nine months ended September 30, 1998
increased by $18.5 million to $68.7 million as compared to $50.2 million
for the nine months ended September 30, 1997, primarily as a result of
higher consolidated net sales. As a percentage of consolidated net
sales, the consolidated gross profit percentage increased slightly to
30.4% for the nine months ended September 30, 1998 from 30.3% for the
comparable period in 1997. Increases from the inclusion of the ERO and
AMAV Divisions, for the nine month period ended September 30, 1998
(versus only four months during the same period in 1997), which have a
higher overall gross profit percentage than the other divisions of
Hedstrom, were partially offset by a decrease in the Bedford Division's
gross profit percentage. The Ashland and International Divisions gross
profit percentages remained relatively flat during the nine month period
ended September 30, 1998 when compared to the same period of 1997. The
Bedford Division's gross profit percentage for the nine months ended
September 30, 1998 decreased from 25.6% to 22.6% compared to the prior
year. The decline in the Bedford Division's gross profit percentage for
the nine months ended September 30, 1998 was due to increased sales of
trampolines, which carry a lower gross profit percentage, and decreased
sales, as a percentage of total Bedford Division sales, of gym sets and
wood kits, which generally carry a higher overall gross margin.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.0 million to $15.4 million in the
third quarter of 1998 from $14.4 million in the third quarter of 1997
mainly as a result of higher sales. As a percentage of net sales,
selling, general and administrative expenses for the quarter ended
September 30, 1998 were 23.9% versus 23.4% for the quarter ended
September 30, 1997.
For the nine month period ended September 30, 1998, selling, general and
administrative expenses increased $15.4 million to $46.1 million from
$30.7 for the nine month period ended September 30, 1997. As a
percentage of net sales, selling, general and administrative expenses for
the nine month period ended September 30, 1998 were 20.4% versus 18.5%
for the comparable period of 1998. The increase was primarily due to the
inclusion of the ERO and AMAV Divisions, which experience relatively high
selling, general and administrative expenses, and the inclusion of
amortization of acquisition-related intangible assets and royalty
expenses.
Interest Expense. For the three month period ended September 30, 1998,
interest expense increased by $1.1 million to $7.9 million. The
increase in interest expense was a result of higher average debt levels
associated with higher working capital requirements and the additional
debt associated with the acquisition of Backyard Products Limited (see
Note 8 of the Notes to Consolidated Financial Statements).
Interest expense for the nine month period ended September 30, 1998
versus the comparable period in 1997 increased $11.9 million to $23.4
million. The increase in interest expense was a result of higher average
debt levels associated with the acquisition related debt and
higher working
capital requirements.
Income Tax Expense. Holdings effective tax rate for the quarter ended
September 30, 1998 was 43.3% versus 37.8% for the quarter ended September
30, 1997. The effective rate for the nine months ended September 30,
1998 was 41.0% versus 37.0% 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 by operating activities was $13.2 million for the
nine months ended September 30, 1998. The cash provided by operations
reflects the seasonal nature of the Company's sales. The ERO and Amav
Division's 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 $30.7 million during the nine
months ended September 30, 1998, including $16.8 million used for the
acquisition of Backyard Products Limited (as discussed in Note 8 of the
Notes to Consolidated Financial Statements), $7.3 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 of the
Notes to Consolidated Financial Statements) and $3.5 million used to
purchase certain assets from Bestoy, a U.K. manufacturer.
Net cash provided by financing activities was $10.3 million, representing
net proceeds from an additional $30.0 million of Tranche B Term Loans
used to fund the acquisition of Backyard Products Limited and paydown a
portion of the Company's outstanding Revolver Balance. The Company also
made $7.2 million of principal payments on the Company's other term
loans.
Liquidity
Interest payments on the Senior Subordinated Notes and interest and
principal payments under the Senior Credit Facilities, represent
significant cash requirements for the Company. The Senior Subordinated
Notes require semiannual interest payments of $5.5 million. Borrowings
under the Senior Credit Facilities bear interest at floating rates and
require interest payments on varying dates depending on the interest rate
option selected by the Company. Borrowings under the Senior Credit
Facilities consisted of $140 million under the Term Loan Facilities,
comprised of a $75 million Tranche A Term Loan maturing in 2003 and a $65
million Tranche B term loan maturing in 2005 (on July 24, 1998, the
Tranche B Term Loan was increased $30 million to $65 million to, among
other things, fund the acquisition of Backyard Products Limited, (see
further discussion at Note 8 of the Notes to Consolidated Financial
Statements)). The Senior Credit Facilities also include a $70 million
Revolving Credit Facility. As of September 30, 1998, a balance of
$23.6 million was outstanding under the 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).
The Company's primary sources of liquidity are cash flows from operations
and borrowings under the Revolving Credit Facility. As of September 30,
1998, the Company had $3.5 million of cash on hand and approximately
$31.6 million was available to the Company 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.
The recent and well-publicized changes in inventory policies and
purchasing practices of Toys R Us - the Company's largest customer in
1997 - and, to a lesser extent, those of the Company's other customers
have adversely affected the 1998 sales levels of the Company and of the
industry generally. Management anticipates that the effects of these
changes will persist at least through the fourth quarter of 1998. As a
consequence, it is projected that the Company will not be in compliance
with certain financial covenants under its Senior Credit Facilities as of
the end of 1998. The Company has notified the agent for the Company's
senior lenders of these developments and will soon commence discussions
with its senior lenders regarding possible amendments to the financial
covenants under the Senior Credit Facilities. Although the Company
anticipates that it will be able to obtain the necessary amendments,
there can be no assurances as to the outcome of the Company's discussions
with its senior lenders.
Year 2000 Date Conversion
The Company relies on a significant number of computer programs and
computer technologies (collectively, IT) and non-IT Systems for its key
operations, including product design, finance and various administrative
functions. In July of 1997 the Company began an impact assessment of the
Year 2000 on our business systems and our ability to provide product,
information, and services to our business partners before, during and
after the Year 2000. The result of this assessment was a two phase plan
to ensure Year 2000 compliance. Phase I of our Year 2000 compliance plan
addresses our mainframe business systems which need to be converted to
handle Year 2000 dates. Phase II addresses computer hardware, stand-alone
systems, and embedded systems which may need to be upgraded by year end 1999.
Conversion of Phase I data bases and programs was completed in July,
1998. The systems testing phase is now in progress and is anticipated to
be completed in the first quarter of 1999. The Company plans to install
the converted business systems in April 1999.
Assessment of all computer hardware, stand-alone systems, communications
hardware and software (phase II) which may require replacement or upgrade
by January 2000 is now in progress and these systems will be replaced or
upgraded throughout 1999.
In addition, the Company is evaluating the status of key vendors as it
relates to their Year 2000 readiness to ensure that our ability to
produce and deliver product is not impacted by Year 2000 issues. As this
evaluation is completed the Company will decide what further actions, if
any, are appropriate.
The Company anticipates that costs related to ensuring Year 2000
compliance will approximate $1.0 million. The Company believes that it
has funds available through its existing credit facilities to address the
Year 2000 costs. These costs will include software, hardware and
consulting expenses which are being expensed as incurred. While the
Company is confident that the Year 2000 issues are manageable and will be
dealt with in a timely fashion, this conclusion is forward looking and
involves uncertainty and risks. The ultimate result may be impacted by a
variety of factors such as, but not limited to, remediation of existing
IT systems, the failure to identify problems associated with non-IT
systems which could materially impact the Company's ability to transact
its business and problems associated with supplier or customer
information systems which could have a similar impact.
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 Senior Subordinated Note.
(1) 4.3 - Indenture, dated as of June 1, 1997, among Hedstrom
Holdings, Inc. and United States Trust Company of New
York, as Trustee.
(1) 4.4 - Form of Discount Note.
(2) 10.1 - Stock Purchase Agreement, dated July 24, 1998 by
and between Hedstrom Corporation and Richard Boyer.
(2) 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.
(3) 10.3 - Collective Bargaining Agreement, dated October 3,
1998 by and between Hedstrom Corporation and The United
Steel Workers of America, AFL-CIO-CLC, on behalf of
its affiliated Local Union No. 524L
(3) 11.1 - Computation of Earnings Per Share.
(3) 27.1 - Financial Data Schedule.
(1) Incorporated by reference to the respective exhibit in
Holdings' and Hedstrom's Registration Statement on Form S-1
(File Nos. 333-32385-05 and 333-32385).
(2) Incorporated by reference to the respective exhibit in
Holdings' and Hedstrom's Quarterly Report on Form10-Q for the
quarterly period ended June 30, 1998 filed with the Commission
on or about August 14, 1998
(3) Filed herewith
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 23, 1998
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
/s/ David F. Crowley
David F.Crowley
Chief Financial Officer