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 March 31, 1999
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 May 14, 1999, 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 MARCH 31, 1999
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
As of March 31, 1999 and December 31, 1998
Consolidated Income Statements
Three months ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998
Consolidated Statement of Stockholders' Equity
As of and for the three months ended March 31,
1999
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)
March 31, December 31,
1999 1998
------------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,495 $ 4,334
Trade accounts receivable, net of
allowance for doubtful accounts 94,434 69,522
Taxes receivable 6,745 6,745
Inventories 65,491 53,722
Deferred income taxes 6,016 6,016
Prepaid expenses and other current assets 6,253 4,130
-------- --------
TOTAL CURRENT ASSETS 181,434 144,469
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost,
net of accumulated depreciation 47,654 48,102
-------- --------
OTHER ASSETS:
Deferred charges, net of accumulated
amortization 14,365 14,795
Goodwill, net of accumulated
amortization 186,279 186,826
Deferred income taxes 1,575 1,575
-------- --------
TOTAL OTHER ASSETS 202,219 203,196
-------- --------
TOTAL ASSETS $431,307 $395,767
======== ========
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
1999 1998
------------- ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 55,200 $ 34,920
Current portion of long-term debt
and capital leases 12,919 11,905
Accounts payable 36,560 20,709
Accrued expenses 24,607 22,970
-------- --------
TOTAL CURRENT LIABILITIES 129,286 90,504
-------- --------
LONG-TERM DEBT:
Senior Subordinated Notes 110,000 110,000
Senior Discount Notes 24,474 26,584
Term Loans 117,992 123,736
Notes payable to related parties 2,500 2,500
Capital leases 1,537 1,690
Other 1,993 2,154
-------- --------
TOTAL LONG-TERM DEBT 261,496 266,664
-------- --------
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
Accumulated other comprehensive loss (2,471) (2,616)
Accumulated deficit (9,233) (11,014)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 40,525 38,599
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' $431,307 $395,767
======== ========
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 March 31,
---------------------------------------
1999 1998
---- ----
Net sales $88,784 $78,389
Cost of sales 61,461 56,325
------- -------
Gross profit 27,323 22,064
Selling, general and administrative expens 16,271 14,815
------- -------
Operating income 11,052 7,249
Interest expense 8,032 7,688
------- -------
Income (loss) before income taxes 3,020 (439)
Income tax (benefit) expense 1,239 (180)
------- -------
Net income (loss) $ 1,781 $ (259)
------- -------
Basic earnings (loss) per share:
Net income (loss) per share $0.03 ($0.00)
Weighted average number of common shares
outstanding (in thousands) 67,633 67,663
Diluted earnings (loss) per share:
Net income (loss) per share $0.03 ($0.00)
Weighted average number of common shares
outstanding (in thousands) 68,994 67,663
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 three months ended March 31,
--------------------------------------
1999 1998
---- ----
Cash flows from operating activities:
Net income (loss) $ 1,781 $ (259)
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 3,274 3,354
Amortization of deferred financing fees 1,810 1,539
Deferred income tax benefit - 15
Changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable (24,807) (1,120)
Inventories (11,769) (3,527)
Prepaid expenses and other current assets (2,123) 55
Accounts payable 15,851 8,015
Accrued expenses 445 (5,433)
-------- -------
Net cash provided by (used for) operating activities (15,538) 2,639
-------- -------
Cash flows from investing activities:
Acquisitions of property, plant and equipment (1,537) (1,772)
Acquisition of ERO, Inc. - (3,037)
Other acquisitions - (3,500)
-------- --------
Net cash used for investing activities (1,537) (8,309)
-------- --------
HEDSTROM HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the three months ended March 31,
--------------------------------------
1999 1998
---- ----
Cash flows from financing activities:
Principal payments on Term Loans (4,158) (3,125)
Borrowings on Revolving Credit Facility, net 20,280 2,000
Other (886) (301)
-------- --------
Net cash provided by financing activities 15,236 (1,426)
-------- --------
Net increase (decrease) in cash and cash
equivalents (1,839) (7,096)
Cash and cash equivalents:
Beginning of period 4,334 10,844
-------- -------
End of period $ 2,495 $ 3,748
======== =======
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 Accumulated
-------------- Additional Other
Par Paid-In Comprehensive Accumulated
Shares Value Capital Losses Deficit Total
--------------------------------------------------------- --------
Balance at December 31, 1998 67,662,883 $676 $51,553 $(2,616) $(11,014) $38,599
Foreign currency translation
adjustment - - - 145 - 145
Net income - - - - 1,781 1,781
--------
Comprehensive income - - - - - 1,926
--------------------------------------------------------- --------
Balance at March 31, 1999 67,662,883 $676 $51,553 $(2,471) $ (9,233) $40,525
===================================================================
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). 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, 1998 as filed with the Securities and
Exchange Commission.
The results of operations for the three months ended March 31, 1999
are not necessarily indicative of the results to be expected for the
entire fiscal year.
NOTE 2 - INVENTORIES:
Inventories at March 31, 1999 and December 31, 1998 consist of the
following (in thousands):
March 31, December 31,
1999 1998
-------- ----------
Raw materials $24,403 $21,421
Work-in-process 9,162 9,013
Finished goods 31,926 23,288
------- -------
$65,491 $53,722
======= =======
NOTE 3 - DEBT:
Debt consists of the following (in thousands):
March 31, December 31,
1999 1998
-------- -----------
Senior Subordinated Notes $110,000 $110,000
Term Loans 130,000 134,158
Revolving Credit Facility 55,200 34,920
Senior Discount Notes 27,474 26,584
Other 6,941 7,827
-------- --------
$329,615 $313,489
======== ========
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
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; 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 the sum of 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 3.0% in the case of the Tranche A Term Loan
Facility and the Revolving Credit Facility or 3.5% in the case of
the Tranche B Term Loan Facility or (ii) the Alternate Base Rate (as
defined) plus 2.0% in the case of the Tranche A Term Loan Facility
and the Revolving Credit Facility or 2.5% 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 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. At March 31, 1999,
the Company was in compliance with all of the restrictive covenants
contained in the Senior Credit Facility.
Senior Discount Notes
In connection with the ERO 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 are not redeemable at
the option of Holdings prior to June 1, 2002. On and after such,
the Discount Notes are 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 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 4 - SEGMENT INFORMATION:
Effective January 1, 1998, the Company adopted SFAS No. 131,
Disclosure About Segments of an Enterprise and Related
Information. SFAS 131 requires companies to identify their
operating segments based upon the internal financial information
reported to the company's chief operating decision maker. The
Company's operating decision maker is its Chief Executive Officer
(CEO). Financial information reported to the CEO reflects five
business segments: the Bedford Division, the Ashland Division, the
ERO Division, the Montreal Division and the International Division.
The CEO evaluates performance of each segment based upon the
operating earnings (loss) of each segment.
The Company develops, manufactures and sells a variety of children's
leisure and activity products.
The Bedford Division principally manufactures and markets in the
United States and Canada outdoor gym sets, wood gym kits and slides,
spring horses, trampolines and gym accessories.
The Ashland Division principally manufactures and markets in the
United States a wide variety of children's playballs and ball pit
products.
The Montreal Division principally manufactures and markets
children's products including arts and crafts, game tables, certain
other children's bulk play products such as play kitchens and
battery-operated ride-on vehicles. In addition, this division
includes a broad line of school supplies featuring popular licensed
characters.
The ERO Division produces the Slumber Shoppe line of products
including products such as indoor sleeping bags and play tents
featuring popular licensed characters, a water sports line of
products including flotation jackets, masks, fins, goggles and
snorkels. Additionally the division produces licensed room
decorations for young children, consisting principally of stick-on
and peel-off wall decorations.
The International Division produces and distributes gym sets, and
other products, manufactured by domestic divisions, outside of the
United States.
For the Quarter
Ended March 31,
---------------
1999 1998
---- ----
Bedford Division
Net revenues $50,387 $39,916
Operating earnings 9,370 5,059
Identifiable assets 94,707 77,963
Ashland Division
Net revenues 12,871 13,693
Operating earnings 1,772 2,100
Identifiable assets 20,517 30,649
ERO Division
Net revenues 13,868 13,600
Operating earnings 1,718 2,124
Identifiable assets 30,522 28,538
Montreal Division
Net revenues 5,430 6,123
Operating earnings (1,256) (2,260)
Identifiable assets 54,470 45,266
International Division
Net revenues 6,228 5,057
Operating earnings (552) 226
Identifiable assets 14,070 9,219
Corporate, other non-
segments and Intercompany
Eliminations
Identifiable assets 217,021 192,794
Consolidated totals from
continuing operations
Net revenues 88,784 78,389
Operating earnings 11,052 7,249
Identifiable assets 431,307 384,429
NOTE 5 - RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS:
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,
2000. 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 6 - 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 March 31, 1999 At December 31, 1998
------------------------------------------ -----------------------------------------------
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 $ 1,518 $ 977 $ - $ 2,495 $ 1,839 $ 2,495 $ - $ 4,334
Accounts receivable, net 86,089 8,345 - 94,434 59,193 10,329 - 69,522
Taxes receivable 6,095 650 - 6,745 6,095 650 - 6,745
Inventories 49,448 16,099 (56) 65,491 40,742 13,036 (56) 53,722
Deferred income taxes(c) 6,016 - - 6,016 6,016 - - 6,016
Prepaid expenses and other
current assets 5,240 1,013 - 6,253 3,849 281 - 4,130
-------- ------- -------- -------- -------- -------- -------- --------
Total current assets 154,406 27,084 (56) 181,434 117,734 26,791 (56) 144,469
-------- ------- -------- -------- -------- -------- -------- --------
Property, plant, and
equipment, net 30,930 16,724 - 47,654 31,361 16,741 - 48,102
-------- ------- -------- ------- -------- -------- -------- --------
Other assets:
Investment in and advances
to Nonguarantor
Subsidiaries 56,768 - (56,768) - 56,190 - (56,190) -
Deferred charges, net 13,479 - - 13,479 13,857 - - 13,857
Goodwill, net 165,362 20,917 - 186,279 165,835 20,991 - 186,826
Deferred income taxes 1,092 (1,611) - (519) 1,092 (1,611) - (519)
-------- ------- -------- -------- -------- -------- -------- --------
Total other assets 236,701 19,306 (56,768) 199,239 236,974 19,380 (56,190) 200,164
-------- ------- -------- -------- -------- -------- -------- --------
Total assets $422,037 $63,114 $(56,824) $428,327 $386,069 $ 62,912 $ (56,246) $392,735
======== ======= ======== ======== ======== ======== ======== ========
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
(In thousands)
At March 31, 1999 At December 31, 1998
------------------------------------------ -----------------------------------------------
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 $ 55,200 $ - $ - $55,200 $ 34,920 $ - $ - $ 34,920
Current portion of long
term debt and capital
leases 12,425 494 - 12,919 11,417 488 - 11,905
Advances from Guarantor
Subidiaries - 39,669 (39,669) - - 39,091 (39,091) -
Accounts payable (c) 33,585 2,975 - 36,560 17,170 3,539 - 20,709
Accrued expenses 21,956 2,748 (23) 24,681 20,520 2,198 (23) 22,695
-------- ------- -------- --------- -------- ------- -------- --------
Total current
liabilities 123,166 45,886 (39,692) 129,360 84,027 45,316 (39,114) 90,229
-------- ------- -------- --------- -------- ------- -------- --------
Senior Subordinated
Notes 110,000 - - 110,000 110,000 - - 110,000
Term Loans 117,992 - - 117,992 123,736 - - 123,736
Capital leases 1,537 - - 1,537 1,690 - - 1,690
Other 1,633 360 - 1,993 1,667 487 - 2,154
-------- ------- -------- --------- -------- ------- -------- --------
Total long-term debt(a) 231,162 360 - 231,522 237,093 487 - 237,580
-------- ------- -------- --------- -------- ------- -------- --------
Total liabilities 354,328 46,246 (39,692) 360,882 321,120 45,803 (39,114) 327,809
-------- ------- -------- --------- -------- ------- -------- --------
Total stockholder's
equity (deficit)(b) 67,709 16,868 (17,132) 67,445 64,949 17,109 (17,132) 64,926
-------- ------- -------- --------- -------- ------- -------- --------
Total liabilities and
stockholders' equity $422,037 $63,114 $(56,824) $428,327 $386,069 $62,912 $(56,246) $392,735
======== ======= ======== ========= ======== ======= ======== ========
CONSOLIDATING INCOME STATEMENTS
(In thousands)
Three Months Ended March 31, 1999 Three Months Ended March 31, 19987
------------------------------------------- -----------------------------------------------
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 $85,848 $ 9,201 $ (6,265) $88,784 $76,739 $ 5,941 $ (4,291) $ 78,389
Cost of sales 61,141 6,585 (6,265) 61,461 55,438 5,240 (4,353) 56,325
------- ------- -------- ------- ------- ------- -------- -------
Gross profit (loss) 24,707 2,616 - 27,323 21,301 701 62 22,064
Selling, general and
administrative expense 13,639 2,632 - 16,271 13,077 1,738 - 14,815
------- ------- -------- ------- ------- ------- -------- -------
Operating income (loss) 11,068 (16) - 11,052 8,224 (1,037) 62 7,249
Interest expense (c) 6,523 505 - 7,028 6,222 560 - 6,782
------- ------- -------- ------- ------- ------- -------- -------
Income (loss) before
income taxes 4,545 (521) - 4,024 2,002 (1,597) 62 467
Income tax provision
(benefit) (c) 1,864 (214) - 1,650 794 (627) 25 192
------- ------- -------- ------- ------- ------- -------- -------
Net income (loss) $ 2,681 $ (307) $ - $ 2,374 $ 1,208 $ (970) $ 37 $ 275
======= ======= ======== ======= ======= ======= ======== =======
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31, 1999 Three Months Ended March 31, 1998
------------------------------------ -------------------------------------------
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)(c) $ 2,681 $ (307) $ - $ 2,374 $ 1,208 $ (970) $ 37 $ 275
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 3,423 719 - 4,142 3,597 452 - 4,049
Deferred income tax
provision (c) - - - - 15 - - 15
Changes in current assets and
current liabilities, net of
acquisitions:
Accounts receivable (26,791) 1,984 - (24,807) (4,668) 3,548) - (1,120)
Inventories (8,706) (3,063) - (11,769) (1,108) (2,230) (189) (3,527)
Prepaid expenses and other
current assets (1,391) (732) - (2,123) 456 (401) - 55
Accounts payable 16,415 (564) - 15,851 8,575 (560) - 8,015
Accrued expenses 244 550 - 794 (1,907) 3,368 152 (5,123)
Other - - - - - - - -
-------- ------ ----- --------- -------- ------ ---- --------
Net cash (used for) provided by
operating activities (14,125) (1,413) - (15,538) 6,168 (3,529) - (2,639)
-------- ------ ----- --------- -------- ------ ---- --------
Cash flows from investing
activities:
Acquisitions of property plant
and equipment (1,261) (276) - (1,537) (688) (1,084) - (1,772)
Acquisition of ERO, Inc. - - - (3,037) - - (3,037)
Other Acquisition - - - - - (3,500) - (3,500)
-------- ------ ----- -------- -------- ------ ---- ---------
Net cash used for investing
activities (1,261) 276 - (1,537) (3,725) (4,584) - (8,309)
-------- ------ ----- -------- -------- ------ ---- ---------
HEDSTROM CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31, 1999 Three Months Ended March 31, 1998
------------------------------------ -------------------------------------------
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:
Principal payments on term
loans (4,158) - - (4,158) (3,125) - - (3,125)
Borrowings on new revolving
line of credit 20,280 - - 20,280 2,000 - - 2,000
Advances to/(from)
Nonguarantor subsidiaries (578) 578 - - (7,924) 7,924 - -
Other (479) (407) - (886) 108 (409) - (301)
-------- ------ ----- -------- ------- ------ ---- --------
Net cash (used for) provided
by financing activities 15,065 171 - 15,236 (8,941) 7,515 - (1,426)
-------- ------ ----- -------- -------- ------ ---- --------
Net increase (decrease) in
cash and cash equivalents (321) (1,518) - (1,839) (6,498) (598) - (7,096)
Cash and cash equivalents:
Beginning of period 1,839 2,495 - 4,334 8,894 1,860 - 10,844
-------- ------ ----- -------- -------- ------ ---- --------
End of period $ 1,518 $ 977 $ - $ 2,495 $ 2,486 $1,262 $ - $ 3,748
======== ====== ===== ======== ======== ====== ==== ========
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 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 withe 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.
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, 1998 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
Ended March 31,
---------------
1999 1998
---- ----
Net sales
Bedford Division $50.4 $39.9
Ashland Division 12.9 13.7
International Division 6.2 5.1
ERO Divisioin 13.9 13.6
Montreal Division 5.4 6.1
----- -----
Total net income $88.8 $78.4
===== =====
Gross profit:
Bedford Division $14.3 $ 9.7
Ashland Division 4.1 4.1
International Division 1.1 1.2
ERO Division 5.4 6.0
Montreal Division 2.4 1.1
----- -----
Total gross profit $27.3 $22.1
===== =====
Net Sales. Total net sales increased to $88.8 million for the
quarter ended March 31, 1999 from $78.4 million for the comparable
prior year quarter, an increase of $10.4 million. The increase was
primarily attributable to increases in sales at the Bedford and
International Divisions. Net sales of the Bedford Division
increased $10.5 million versus the prior year first quarter. The
increase in sales was primarily due to the additional Wood Gym Sales
achieved through the acquisition of Backyard Products Limited, a
manufacturer of wood gym sets acquired in August 1998. Additionally,
increased demand for Trampolines was partially offset by lower
sales of the Metal Gym Set product line. Sales at the International
Division increased by $1.1 million versus the prior year comparable
period due mainly to the acquisition of certain assets of Bestoy,
an U.K. manufacturer, made during the first quarter of 1998.
The aforementioned increases were partially offset by lower net
sales at the Ashland and Montreal Divisions. The Ashland Division's
net sales decreased by $0.8 million to $12.9 million for the quarter
ended March 31, 1999 as compared to the prior years first quarter.
The decrease was primarily due to lower sales of undecorated
playballs, resulting from customer inventory reduction efforts, the
effects of which were partially offset by increased sales of ball
pit products. The Montreal Division's net sales decreased to $5.4
million for the first quarter 1999 from $6.1 million for the prior
year comparable period, a decrease of $0.7 million. The decrease in
net sales at the Montreal Division was primarily due to lower sales
of arts and activities products and Impact products, the effects of
which were partially offset by the increased sales of battery
powered ride-on cars as a result of engineering improvements on the
product. The ERO Division's net sales for the quarter ended March
31, 1999 were relatively flat compared to the prior year comparable
quarter as greater demand for Slumber Shoppe products was partially
offset by lower demand for Coral and Priss Prints products.
Gross Profit. Gross Profit for the quarter ended March 31, 1999
increased $5.2 million to $27.3 million as compared to $22.1 million
for the quarter ended March 31, 1998. The increase was primarily
due to higher sales as compared to the prior years first quarter.
As a percentage of consolidated net sales, consolidated gross profit
increased to 30.7% for the first quarter of 1999 versus 28.2% for
the first quarter of 1998. The increase in the consolidated gross
profit percentage was primarily due to higher gross margin
percentages at the Bedford, Ashland and Montreal Divisions. The
Bedford Division's gross margin percentage increased to 28.4% for
the first quarter of fiscal 1999 from 24.3% in the first quarter of
fiscal 1998. The increase was primarily due to more favorable
material costs, more favorable production variances due to increased
volume and the inclusion of the first quarter 1999 results of
Backyard Products Limited. Backyard Product's wood gyms carry a
higher gross profit percentage than the overall average of the
Bedford Division. The Montreal Division's gross profit margin for
the first quarter of 1999 increased to 44.4% from 18.0% for the
prior years comparable quarter. The increase was attributable to a
more favorable product sales mix, the exclusion of close out sales
of Impact products made in the first quarter of 1998, and lower
defective product returns in the first quarter 1999 versus the prior
year first quarter. The Ashland Division's gross profit percentage
increased in the first quarter of fiscal 1999 to 31.8% from 29.9% in
the first quarter of fiscal 1998. The increase was due primarily to
more favorable material costs. The gross profit percentage of the
ERO Division decreased to 38.8% for the quarter ended March 31, 1999
from 44.1% for the prior years comparable quarter. The decrease in
the gross margin percentage at the ERO Division was primarily a
result of a less favorable product sales mix, specifically relating
to a higher sales volume of relatively low-margin inflatable water
sport products in the first quarter of 1999 versus the first quarter
of 1998. The gross profit percentage of the International Division
decreased to 17.7% in the first quarter of 1999 versus 23.5% in the
first quarter of 1998 mainly as a result of unfavorable production
variances associated with the start up of the Bestoy Production
facility.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses increased $1.5 million to $16.3 million
in the first quarter of 1999 versus $14.8 million in the prior years
first quarter. The increase in selling, general and administrative
expenses was mainly a result of increased variable selling expenses,
such as royalties and commissions, due to higher sales volume.
Expressed as a percentage of net sales, selling, general and
administrative expenses decreased to 18.3% in the first quarter
ended March 31, 1999 form 18.9% for the prior year comparable
quarter. The decrease in the percentage of selling, general and
administrative expenses as compared to net sales was a result of
higher sales volume to cover fixed expenses.
Interest Expense. Interest expense increased due to higher
average debt levels as a result of higher working capital
requirements. Additionally, interest expense increased as the
result of higher interest rates.
Income Tax Expense. Holdings' effective income tax rate for the
quarters ended March 31, 1999 and 1998 was 41.0%.
Liquidity and Capital Resources of the Company
Working Capital and Cash Flows
Net cash used for operating activities was $15.5 million for the
fiscal quarter ended March 31, 1999 versus cash provided by
operations of $2.6 million for the prior year comparable quarter.
The increase was mainly a result of higher working capital
requirements to support higher sales volumes.
Net cash used for investing activities was $1.5 million, all
relating to acquisitions of property, plant and equipment.
Net cash provided by financing activities was $15.2 million
representing $20.2 million of net proceeds on the Companies
revolving loan to fund additional working capital requirements to
support higher sales levels, partially offset by principal
repayments of $4.2 million on the Company's term loans for the
quarter ended March 31, 1999.
Liquidity
The Company's primary liquidity demands are for capital
expenditures and for working capital needs. The Senior Credit
Facilities impose an annual limit of $10.0 million on the Company's
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 Senior Credit Facilities
impose significant restrictions on the Company's ability to make
dividend payments.
The Company's primary sources of liquidity are cash flows from
operations and borrowings under the Revolving Credit Facility. As of
March 31, 1999, approximately $8.4 million was available to the
Company (subject to borrowing base limitations) for borrowings under
the Revolving Credit Facility. Management believes that cash
generated from operations, together with borrowings under the
Revolving Credit Facility, will be sufficient to meet the Company's
working capital and capital expenditures needs for the foreseeable
future.
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.
Outstanding borrowings under the Senior Credit Facilities
consisted of $130.7 million under the Term Loan Facilities,
comprised of $66.5 million of Tranche A Term Loans maturing in 2003
and $64.2 million of Tranche B Term Loans maturing in 2005. The
Senior Credit Facilities also include a $70 million Revolving Credit
Facility. As of March 31, 1999, a balance of $55.2 million was
outstanding under the Revolving Credit Facility.
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 its business systems and
ability to provide product, information, and services to its
result of this assessment the Company adopted a two phase plan to
attain Year 2000 compliance.
Phase I of the Company's Year 2000 compliance plan addresses its
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 the
end of 1999.
Conversion of Phase I data bases and programs was completed in
July 1998. The systems testing phase was completed in the first
quarter of 1999, and the Company installed the converted business
system in April, 1999.
Assessment of all computer hardware, stand-alone systems,
communications hardware and software which may require replacement
or upgrade by January 2000 is now in progress. The Company has
identified all systems which it believes are not Year 2000
compliant. Remediation of these systems will take place throughout
1999.
In addition, the Company is evaluating the Year 2000 readiness of
its key vendors to ensure that its ability to produce and deliver
products is not materially impacted. As this evaluation is
completed, the Company will decide what further actions, if any, are
appropriate.
The Company anticipates that its total Year 2000 compliance costs
will approximate $1.0 million. The Company believes that it has
sufficient 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. The Company believes its current worse case scenario would
be the inability of suppliers to deliver key raw materials. The
Company is currently devising contingency plans which could among
other things include carrying excess stock of key raw materials such
as steel at December 31, 1999. 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, the ability to
successfully remediate existing IT systems, the failure to identify
problems associated with non-IT systems and problems associated with
supplier or customer information systems, any of which could have a
material adverse effect on the Company's ability to successfully
address Year 2000 issues.
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.
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: May 14, 1999
HEDSTROM HOLDINGS, INC.
HEDSTROM CORPORATION
/s/ David F. Crowley
------------------------
David F. Crowley
Chief Financial Officer