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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 333-14569
EVENFLO & SPALDING HOLDINGS CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 59-2439656
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
601 South Harbour Island Boulevard, Suite 200, Tampa, Florida 33602-3141
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(Address of Principal Executive Offices) (Zip Code)
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Registrant's Telephone Number, Including Area Code: (813) 204-5200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
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Securities registered pursuant to Section 12(g) of the Act:
None
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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 report) and (2) has been subject to such
filing requirements for the past 90 days. Yes. [x] No.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The number of shares of the registrant's Common stock, par value $.01
per share, outstanding at December 15, 1997, was 96,885,075 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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EVENFLO & SPALDING HOLDINGS CORPORATION
Form 10-K Annual Report
Table of Contents
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Part I Page
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Item 1 Business................................................................................ 4
Item 2 Properties.............................................................................. 15
Item 3 Legal Proceedings....................................................................... 17
Item 4 Submission of Matters to a Vote of Security Holders..................................... 18
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters................... 19
Item 6 Selected Financial Data................................................................. 20
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 23
Item 8 Financial Statements and Supplementary Data............................................. 34
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................................ 61
Part III
Item 10 Directors and Executive Officers of the Company......................................... 62
Item 11 Executive Compensation.................................................................. 65
Item 12 Security Ownership of Certain Beneficial Owners and Management.......................... 70
Item 13 Certain Relationships and Related Transactions.......................................... 72
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 73
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PART I
ITEM 1: BUSINESS
Evenflo & Spalding Holdings Corporation (formerly E&S Holdings Corporation)
and subsidiaries (the "Company") is a diversified, global manufacturer and
marketer of branded consumer products serving the sporting goods and juvenile
products markets under the primary trade names Spalding(R), Top-Flite(R),
Etonic(R), Dudley(R), Evenflo(R), Gerry(R), and Snugli(R). The primary
subsidiaries of the Company are Spalding & Evenflo Companies, Inc. ("S&E") and
subsidiaries, of which Spalding Sports Worldwide ("Spalding") is a division,
Etonic Worldwide Corporation ("Etonic") and Evenflo Company, Inc. ("Evenflo"),
of which Gerry Baby Products Company ("Gerry") is a division. All references to
fiscal year in this Form 10-K refer to the fiscal year ending on September 30 of
each year. All references to market share and demographic data in this Form 10-K
are based on industry publications and Company data.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements concerning the
Company's operations, economic performance, and financial condition, including,
in particular, the likelihood of the Company's success in developing and
expanding its business. These statements are based upon a number of assumptions
and estimates which are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company, and reflect
future business decisions which are subject to change. Some of these assumptions
inevitably will not materialize, and unanticipated events will occur which will
affect the Company's results.
GENERAL
Spalding is one of the most recognized consumer product companies serving
the sporting goods industry, and in 1996, sold more golf balls, basketballs and
softballs than any other company in the U.S. Evenflo is one of the largest
manufacturers in the juvenile products industry and is widely recognized by new
mothers for high quality, safety-tested infant and juvenile products. In 1996,
Evenflo held the number one market share in a number of juvenile product
categories, including car seats, stationary activity products, breastfeeding
products, gates, baths, soft and frame carriers and car seat/stroller travel
systems. The Company markets its products in over 100 countries and had net
sales of $827 million in fiscal 1997.
Spalding was founded in 1876 by Hall of Fame baseball pitcher Albert G.
Spalding and is one of the oldest, largest and best-known sporting goods
companies in the world. Spalding produced the first official major league
baseball in 1876 and the first basketballs and volleyballs in the 1890's.
Additional early achievements were the first U.S.-made footballs, golf clubs,
golf balls, tennis rackets and tennis balls. Spalding introduced the first
"dimpled" golf ball in the United States in 1908; the first two-piece, solid
golf ball in 1966, which today is the most commonly played type of ball; and the
Surlyn cut-resistant golf ball cover in 1971. Spalding continues to focus on
creating innovative new products and Spalding's products are endorsed by
numerous leagues and players.
Evenflo was established in 1920, and its early successes came from the
development in 1935 of the modern nursing bottle nipple, which is held in place
with a screw-on bottle cap, versus the then-standard nipples which were
stretched over the bottle top. Evenflo has since developed a large
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number of innovative infant feeding products, including the first fully
transparent baby bottle, the first decorated nursers, the first convertible
(infant to toddler) car seat to pass applicable federal testing standards, and
the first juvenile stationary activity product. Evenflo seeks to distinguish
itself from its competitors by continually developing innovative, high quality
products and offering them at competitive prices.
In July 1996, the Company acquired the net assets of Etonic (the "Etonic
Acquisition"), which manufactures and/or markets golf shoes, gloves and other
golf accessories, as well as an established line of running and walking shoes.
On September 30, 1996, the Company underwent a recapitalization (the
"Recapitalization") under the Recapitalization and Stock Purchase Agreement (the
"Recapitalization Agreement") whereby Strata Associates L.P. ("Strata"), an
entity organized by Kohlberg Kravis Roberts & Co., L.P. ("KKR"), acquired
control of the Company from Abarco N.V. ("Abarco"), the prior parent of the
Company. For additional information on the Recapitalization, see Note A of the
Notes to the Consolidated Financial Statements appearing elsewhere in this Form
10-K.
In April 1997, the Company acquired the net assets of Gerry (the "Gerry
Acquisition"), which manufactures and/or markets specialty juvenile products
including baby baths, health and safety items, monitors and other baby care
products and accessories, as well as juvenile car seats, strollers, high chairs,
cribs, dressers and changing tables, gates, and soft and frame carriers marketed
under the Gerry(R) and Snugli(R) brand names.
In November 1997, the Company acquired certain assets of the Ben Hogan Co.
("Hogan"), which manufactures and/or markets golf clubs, golf balls, and golf
accessories.
SPALDING
Spalding, with net sales of $530 million in fiscal 1997, is a leader in the
$2.4 billion U.S. wholesale golf industry and in the $60 billion U.S. wholesale
sporting goods industry, with some of the most widely recognized branded
consumer product names such as Spalding(R), Top-Flite(R), Etonic(R) and
Dudley(R). Spalding's brand names are currently featured on over 2,000 products
with an emphasis on three primary categories: (i) golf products, (ii) sporting
goods products, and (iii) licensed athletic products, including apparel and
footwear. To broaden Spalding's line of golf products, in July 1996 the Company
acquired Etonic's line of golf accessories and in November 1997 the Company
acquired Hogan's line of golf clubs, balls, and accessories.
For information on sales by industry segment and foreign and domestic
operations and export sales, see Note S of the Notes to the Consolidated
Financial Statements appearing elsewhere in this Form 10-K.
Golf Products
General. Golf products are Spalding's largest product category, generating
worldwide net sales of $380 million in fiscal 1997, or approximately 72% of
Spalding's total net sales. Spalding is the U.S. market share leader in the
manufacture and marketing of golf balls, primarily under its Top-Flite(R) brand
name, as well as an industry leader in introducing innovative new golf products.
Spalding offers a comprehensive array of golf clubs, golf bags, golf shoes and
other golf accessories. Spalding's golf products are endorsed by leading golf
professionals including Lee Trevino, Payne
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Stewart, Bill Glasson, Craig Stadler, Mark O'Meara, D. A. Weibring, Kelli
Kuehne, and Chris Johnson. Spalding golf club products are played worldwide by
over 100 touring golf professionals and many PGA club professionals.
Golf Balls. Spalding was the leading manufacturer of golf balls in the
$595 million U.S. wholesale market in 1996 and with worldwide net sales in
fiscal 1997 of $218 million is a leader in the global golf ball market.
Spalding currently markets its line of golf balls under numerous names
including Top-Flite(R) Strata Tour(TM) and Top-Flite(R) Strata Advance(TM),
Top-Flite(R) Aero(R), Top-Flite(R) Z-Balata(R), Top-Flite Magna(TM), Top-Flite
XL(R) and Flying Lady(R). Spalding believes that its family of Top-Flite(R)
golf balls has sold more golf balls than any other family of golf balls in the
world. Spalding focuses its marketing efforts on pro shops, off-course golf
specialty shops, sporting goods stores and other retail outlets where the
Top-Flite(R) name is widely recognized. In addition, the Company seeks to
increase sales to women, who represent one of the fastest growing segments of
the golf market.
Spalding believes that the golf ball market is highly receptive to new
product development, and therefore, Spalding seeks to lead the industry in
product innovation. Through its research and development efforts, Spalding has
successfully introduced new lines of advanced performance golf balls in each of
the last five years. Spalding also customizes its golf balls with customers'
names or logos (a market which management believes to represent approximately
20% of the U.S. golf ball market).
Golf Clubs. In fiscal 1997, sales of Spalding golf clubs generated $96
million in worldwide net sales. In 1996, U.S. wholesale sales of golf clubs
were estimated at $1.3 billion. Spalding's strategy is to design golf clubs for
men, women and seniors of all ability levels. Spalding pursues a pricing
strategy that covers all price points, using its Top-Flite(R) and Spalding(R)
brand names to satisfy the high performance and recreational/value segments of
the market, respectively. Top-Flite Tour(R) irons have been widely used on the
Senior Tour and the Company believes that the increased exposure of
Top-Flite(R) golf products on professional tours has resulted in an increase in
demand for Top-Flite(R) golf club products. The Company believes that the
November 1997 Hogan acquisition will further enhance its offering of high
quality golf clubs.
Spalding irons incorporate technological and design features, such as
perimeter weighting, graphite shafts under the Muscle(TM) trademark, titanium
head inserts and Top-Flite's(R) patented stabilizer bar design. Through the use
of computer-aided design and modeling software, Spalding is continually
developing new golf club features. Spalding recently announced the addition to
its club line of the Top-Flite(R) Intimidator 400(TM) fairway woods with a
patented Spoiler(TM) sole. This followed the earlier introduction of the
Top-Flite(R) Micro Groove(TM) putter to fill out the Top-Flite(R) golf club
line.
Golf Shoes and Accessories. Spalding also designs and markets golf shoes
and accessories, including golf bags, club covers, tees, towels, sports luggage
and hats. By acquiring Etonic in 1996, Spalding expanded and upgraded its line
of golf products with Etonic golf shoes (which are ranked second in domestic
market share) and Etonic golf gloves. Spalding had fiscal 1997 net sales of $66
million of golf shoes and accessories. In 1996, the U.S. wholesale market for
golf accessories was approximately $535 million.
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Sporting Goods Products
The sporting goods products segment includes basketballs, a broad line of
softball and baseball products, volleyballs, soccer balls and other sports
products. Spalding's sporting goods products (other than golf) accounted for
$150 million, or 28% of total Spalding's fiscal 1997 net sales.
Basketballs. Spalding produced the first basketball in 1894 and is the
market share leader in the estimated $100 million U.S. market for basketballs
with $44 million of U.S. net sales of basketballs in fiscal 1997. Spalding's
worldwide net sales of basketballs in fiscal 1997 were $63 million. Spalding is
the exclusive official basketball of the NBA and WNBA and has used these
endorsements, as well as the endorsement of other leagues and professional
players, to gain worldwide market share in this product category. Spalding's NBA
license extends through July 2001, while its WNBA license extends through
September 1999. Internationally, the Spalding basketball is the official
basketball of professional leagues and national teams in more than 25 basketball
markets.
Spalding continues to develop its leadership in the basketball market
through innovative product designs such as the ZK-Composite(R) basketball and
the Zi/O(R) indoor/outdoor basketball. Introduced in 1991, the ZK-Composite(R)
basketball utilizes composite materials technology to offer excellent
performance characteristics at lower price points than leather balls.
Other Sports Products. Spalding markets a number of other sporting goods
and sports related products serving baseball, softball, volleyball, soccer,
football, tennis, racquetball, handball and other sports activities. Net sales
of such items totaled $87 million in fiscal 1997, though no single product area
accounted for more than 10% of the Company's revenues.
Spalding's Dudley(R) brand is the leading supplier of softballs in the
world. Spalding also sells a broad line of baseball products worldwide under
the Spalding(R) name. In both softball and baseball, Spalding has focused
resources on growing its share of the glove and high performance bat markets.
Spalding produced the first volleyball in 1895 and today is a leading
provider of volleyballs in the U.S. Spalding has the endorsement for volleyballs
of the NCAA, the American Volleyball Association (AVA) and the California Beach
Volleyball Association. Spalding's tennis racquets are endorsed by the
Association of Tennis Professionals (ATP).
Licensing
Spalding is one of the leading general sports brand licensors with over 100
licensees and sub-licensees worldwide. In exchange for royalty fees, Spalding
grants licensees the exclusive right to use specified Spalding trademarks in
product categories and geographical areas where Spalding does not enjoy
competitive advantages as a manufacturer of sporting goods. The Spalding(R) and
Top-Flite(R) brand names are licensed in over 45 product categories, including
the Hakeem Olajuwon shoe line by Mercury International Trading Corp., one of
the largest shoe companies in the world, and apparel lines by Mitsubishi
Corporation in Japan and Sara Lee Corporation in the U.S. Other Spalding
licensed products include sport bags and other accessories. Sales of licensed
Spalding products totaled approximately $321 million in fiscal 1997, $139
million of which was in international markets.
Spalding maintains quality control by inspecting licensed products to
ensure that they meet Spalding's quality standards. Spalding believes that
selectively licensing its brand names for use on
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quality products promotes greater consumer awareness of its name and increases
its visibility in the marketplace. Spalding expects continued growth and market
penetration through licensing of footwear, active apparel and accessories for
all sports.
International
Spalding sells or licenses its products in over 95 countries through
approximately 100 independent distributors and 11 wholly-owned foreign
subsidiaries and branches in Australia, Canada, Germany, Italy, Japan, Mexico,
New Zealand, Spain, Sweden and the United Kingdom. Spalding's international
sales were $143 million, or 27% of Spalding's net sales in fiscal 1997, due in
large part to the popularity of golf and basketball outside the United States.
Sales, Marketing and Distribution
Spalding sells its products directly to approximately 20,000 retailers,
including pro shops and ranges, off-course golf specialty shops, sporting goods
stores and mass merchants. The Company also markets to corporations for special
events, the military and warehouse clubs and generates sales from catalogs. No
single customer accounted for more than 10% of Spalding's worldwide net sales.
Marketing for Spalding's golf and sporting goods products utilizes the
endorsements of professional and amateur leagues and players. Spalding believes
that endorsements by professional athletes and affiliations with sports
organizations enhance Spalding's image and improve sales of its products.
Spalding's golf marketing campaign incorporates all of its golf products
and is intended to develop Top-Flite(R) as a global "megabrand" for performance
grade golf products. In 1997 Spalding expanded its advertising campaign for
premium golf products including the Top-Flite(R) Strata Tour(TM) golf ball and
the Top-Flite(R) club line. Advertising, promotion and endorsement expenditures
amounted to 14%, 12% and 12% of Spalding's net sales in fiscal 1997, 1996 and
1995, respectively.
Manufacturing, Product Procurement and Raw Materials
The manufacture of Spalding products involves a number of highly
specialized processes. Spalding manufactures golf balls, finishes custom golf
balls and assembles most of its golf clubs at its own facilities. Spalding's
primary manufacturing facility is located in Chicopee, Massachusetts and
comprises approximately 700,000 square feet of manufacturing, office and
distribution space. Additionally, Etonic produces a portion of its shoes at its
facility in Richmond, Maine. Spalding believes that it is one of the lowest cost
producers of golf balls in the world.
Spalding utilizes third party manufacturers, located primarily in China,
Thailand, Taiwan and other countries in Southeast Asia, to produce most of its
non-golf ball products. Products and components representing approximately 57%
of Spalding's net sales in fiscal 1997 were produced by such third-party
manufacturers. No supplier accounted for products representing more than 10% of
Spalding's fiscal 1997 net sales. Spalding believes it has alternative sources
of supply for substantially all of the products currently produced by third
party manufacturers.
Sourced products are manufactured according to Spalding's strict quality
control specifications. To assure the quality of its sourced products, the
Company works closely with third-party manufacturers, emphasizing product
reliability and performance standards and strict quality controls to which all
producers must adhere. Spalding continually monitors its sourced products to
ensure that they meet Spalding's quality standards. Certain of Spalding's
third-party manufacturers produce only
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Spalding products. In addition, Spalding jointly develops new products with
certain of its suppliers as part of Spalding's increasingly global product
development efforts. Spalding maintains a liaison office in Taiwan to assist in
order expediting and quality control.
The principal raw materials used by Spalding in the manufacture of its
products include synthetic rubber, ionomers, metals, synthetic leathers,
composite materials and other chemical compounds, as well as plastic, paper and
cardboard in packaging. While all raw materials are purchased from outside
sources, Spalding is not dependent upon a single supplier in any of its
operations for any material essential to its business or not otherwise
commercially available to the Company. Spalding has not experienced, and does
not anticipate, any material shortages of sourced products or supplies used in
manufacturing. Certain materials used in the production of golf balls are
petroleum derivatives and are therefore sensitive to fluctuations in the price
of oil.
Trademarks and Patents
Spalding has proprietary rights to a number of trademarks which are
important to its business, including Spalding(R), Top-Flite(R), Etonic(R) and
Dudley(R). The Company actively guards against trademark infringement through
legal and other measures.
The policy of the Company is to protect proprietary products by obtaining
patents for such products when practicable. At September 30, 1997, Spalding
owned 148 patents and had 123 applications pending at the U.S. Patent and
Trademark Office. In addition, the Company also maintains patent protection for
certain of its products in other countries. Although the Company believes that,
collectively, its patents are important to its business, the loss of any one
patent would not have a material adverse effect of the Company's business and
results of operations.
Seasonality
Spalding's business is seasonal, as many sporting goods marketed by
Spalding, especially golf products, experience higher levels of sales in the
spring and summer months. For fiscal 1997, Spalding's quarterly net sales as a
percentage of its total net sales were approximately 14%, 27%, 30% and 29%,
respectively, for the first through the fourth quarters of the fiscal year. In
addition, for fiscal 1997, Spalding's quarterly income from operations as a
percentage of its total income from operations was approximately (14%), 29%, 41%
and 44%, respectively, for the first through fourth quarters of such fiscal
year.
Competition
The sporting goods industry is highly competitive. Spalding competes
primarily on the basis of product features, brand recognition, quality and
price. Spalding competes with numerous national and international companies
which manufacture and distribute sporting goods and related equipment and sports
apparel. Certain of Spalding's competitors offer types of sports equipment not
sold by Spalding. Some of Spalding's competitors are larger and have
substantially greater financial and other resources than the Company. Spalding
competes in one or several individual market segments against competitors such
as Acushnet Company (a subsidiary of Fortune Brands, Inc. the producer of
Titleist, Footjoy and Cobra golf products), Callaway Golf Co., Karsten
Manufacturing Corp. (producers of Ping golf products), Nike, Inc., Rawlings
Sporting Goods Company, Inc., Taylor Made (a subsidiary of Adidas AG) and Wilson
Sporting Goods Co. (a subsidiary of Amer Group Ltd.).
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EVENFLO
Evenflo, with net sales of $297 million in fiscal 1997, is a leader in the
$2.1 billion U.S. market for juvenile and infant hardgood products, as well as
a market leader in such products in several international markets. Evenflo,
established in 1920, is one of the oldest and most recognized names in the
infant and juvenile products industry, with a 97% brand awareness for infant
feeding products among new mothers in the U.S. Evenflo brands, such as
Evenflo(R), Gerry(R) and Snugli(R), currently appear on a wide variety of
products, with emphasis on two principal categories: (i) juvenile furniture,
which includes car seats, strollers, stationary activity products, play yards,
high chairs, carriers, gates, cribs and mattresses, and (ii) infant feeding and
baby care, which includes reusable and disposable nurser systems, breastfeeding
aids, oral development items such as pacifiers, and other baby care
accessories.
For information on sales by industry segment and foreign and domestic
operations and export sales, see Note S of the Notes to the Consolidated
Financial Statements appearing elsewhere in this Form 10-K.
Juvenile Furniture Products
Evenflo is a leader in the $1.3 billion U.S. market for juvenile furniture
products. Furniture operations generated fiscal 1997 sales of $232 million
worldwide, or 78% of Evenflo's total net sales.
Car Seats. Evenflo sold more juvenile car seats in the U.S. in 1996
than any other company. The U.S. juvenile car seat market was estimated at $211
million in 1996 and consists of infant car seats, convertible car seats and
booster car seats. Evenflo sells products in each area and in fiscal 1997 had
worldwide car seat net sales of $90 million.
Evenflo's car seats offer features such as detachable bases, five-point
harness systems, adjustable shields, removable pad and pillow inserts and the
exclusive Carry Right(TM) handle which incorporates a uniquely curved shape
designed for ease of carrying.
Other Juvenile Furniture Products. Evenflo's sales of other juvenile
furniture products amounted to $142 million in fiscal 1997 and included
strollers, stationary activity products, high chairs, play yards, carriers,
gates, cribs and mattresses. No single product area accounted for more than 10%
of the Company's revenues.
Evenflo has realized success in the stroller market with its On My Way
Travel System(R), a car seat/stroller combination product. Evenflo believes this
has provided Evenflo with a substantial opportunity because it has leveraged
Evenflo's leadership position in car seats into a competitive advantage in
strollers.
Evenflo's strong market position in stationary activity products is the
result of its Exersaucer(R) product line, a preferred alternative to traditional
walkers. Additionally, Evenflo's Snugli(R) brand is virtually synonymous with
infant carrier or "baby backpack" products, and Evenflo is by far the leader in
this category.
Infant Feeding and Baby Care Products
Evenflo is a leading competitor in infant feeding and baby care products
and generated fiscal 1997 net sales of approximately $65 million worldwide.
Infant feeding products consist of breast
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pumps and other breastfeeding products and reusable and disposable nurser
systems. Baby care products consist of a wide range of accessories including
pacifiers, cups, bibs, bath items and toilet trainers. Wholesale sales in this
segment of the juvenile products market amounted to approximately $439 million
in 1996.
Evenflo's reusable nurser systems were the second best selling brand in the
U.S. in 1996. Evenflo manufactures a full line of nursers, nipples and
accessories at all price points. Evenflo also markets an entire line of
disposable bottle-feeding items, including disposable bottle liners, nipples,
holders and kits. Evenflo also maintained its number one position in 1996 in the
U.S. breastfeeding market. Evenflo offers a complete line of breast pumps,
including manual pumps for both reusable and disposable nursers, as well as
battery and electric operated pumps. Evenflo also markets washable and
disposable nursing pads.
On many of its feeding and baby care products Evenflo utilizes its right to
use the Disney Babies, Peter Rabbit & Friends, Paddington Bear and Precious
Moments licensed characters in the United States, as well as in numerous
international markets. Evenflo also uses its own line of characters in its
Evenflo Babies collection.
International
While births in the U.S. have been relatively flat in recent years, Evenflo
has benefited from a trend of increased spending per child. Internationally,
Evenflo has capitalized on higher birth rates as well as the adoption of
mandatory automobile child restraint laws in certain international markets.
Evenflo believes that higher birth rates, increasing income levels and the
lowering of trade barriers in certain world markets present significant growth
opportunities. Evenflo has had an international presence for over 50 years,
selling its products in over 60 countries, with established subsidiaries in
Canada, Mexico, and the Philippines, as well as a new subsidiary in France. To
date, international operations for Evenflo have focused largely on infant
feeding products and, in Canada, on juvenile furniture. International sales
represented $43 million, or 14% of Evenflo's net sales, in fiscal 1997.
Sales, Marketing and Distribution
Evenflo uses a sales force of 14 direct sales people, 32 manufacturer's
representatives and 61 independent brokers to sell to over 2,000 mass merchants,
supermarkets, drug stores, grocery stores, toy stores and other retail outlets.
For fiscal 1997, the five largest customers of Evenflo represented approximately
60% of Evenflo's net sales with Toys "R" Us and Wal-Mart representing 23% and
16%, respectively, of net sales for such period. For fiscal 1996, the five
largest customers of Evenflo represented approximately 51% of Evenflo's net
sales with Toys "R' Us and Wal-Mart representing 19% and 15%, respectively, of
net sales for such period. No other customer accounted for more than 10% of
Evenflo's worldwide net sales.
Marketing efforts are focused on building brand identity through
advertising and packaging programs. Marketing programs are national in scope and
primarily consist of print advertising, trade and consumer promotions and
targeted sampling. Advertising and promotion expenditures amounted to
approximately 5% of Evenflo's net sales in fiscal 1997, 1996 and 1995.
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Manufacturing, Procurement and Raw Materials
Evenflo currently maintains seven primary manufacturing and assembly
plants. Facilities are located in Ohio, Georgia, Alabama and two in Mexico,
while the Gerry Acquisition added facilities in Colorado and Wisconsin. Evenflo
also operates distribution centers in the Philippines and Canada and is opening
a new distribution center in France. Evenflo manufactures bottles and nipples
and assembles certain infant feeding and baby care products primarily at its
facilities in Canton, Georgia and Mexico City. Car seats, high chairs,
mattresses and activity products are assembled at Evenflo's plant in Piqua,
Ohio. Jasper, Alabama serves as a soft goods manufacturing feeder plant for the
final assembly operations in Ohio. Evenflo's cribs are manufactured and
assembled at a facility in Tijuana, Mexico. See the "Liquidity and Capital
Resources" section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional information on capital
expenditures.
Gerry's primary manufacturing facility is located in Thornton, Colorado,
while its wood products (such as gates and cribs) are produced at its plant in
Suring, Wisconsin. Evenflo is currently in the process of transferring the
Thornton administrative, manufacturing, and distribution operations to Canton
and Piqua and expects to close the Thornton facility by the end of fiscal 1998.
Evenflo's sourced products are manufactured according to its specifications
by third-party manufacturers located within the U.S. and abroad, primarily in
China, Thailand, Taiwan, Hong Kong and other Southeast Asian countries. Products
representing 27% of Evenflo's net sales in fiscal 1997 were produced by such
third party manufacturers and only one supplier accounted for products
representing more than 10% of Evenflo's fiscal 1997 net sales (Lordship
Industrial Co. accounted for products representing approximately 16% of
Evenflo's fiscal 1997 net sales). Evenflo continually monitors its sourced
products with a staff headquartered in Taiwan to ensure that products meet
Evenflo's quality standards. Evenflo believes it has alternative sources of
supply for most of the products currently produced by third party manufacturers.
The principal raw materials used by Evenflo in the manufacture of its
products include various plastic resins, natural and synthetic rubbers, textiles
and corrugated paper, all of which are normally readily available. While all raw
materials are purchased from outside sources, Evenflo is not dependent upon a
single supplier in any of its operations for any material essential to its
business or not otherwise commercially available to Evenflo. Evenflo does not
anticipate any significant material shortages or price movements in its inputs.
Trademarks and Patents
Evenflo has proprietary rights to a number of trademarks which are
important to its business, including Evenflo(R), Gerry(R) and Snugli(R). The
Company actively guards against trademark infringement through legal and other
measures.
The policy of the Company is to protect proprietary products by obtaining
patents for such products when practicable. At September 30, 1997, Evenflo owned
186 patents and had 50 applications pending at the U.S. Patent and Trademark
Office. In addition, the Company also maintains patent protection for certain of
its products in other countries. Although the Company believes that,
collectively, its patents are important to its business, the loss of any one
patent would not have a material adverse effect on the Company's business and
results of operations.
12
<PAGE> 13
Seasonality
Evenflo's business is somewhat seasonal, based on the juvenile product
buying patterns of Evenflo's major customers. For fiscal 1997, Evenflo's
quarterly net sales as a percentage of its total net sales were approximately
17%, 21%, 32% and 30%, respectively, for the first through the fourth quarters
of the fiscal year. In addition, for fiscal 1997, Evenflo's quarterly income
from operations as a percentage of its total income from operations was
approximately 5%, 27%, 32% and 36%, respectively, for the first through fourth
quarters of such fiscal year.
Competition
The markets for Evenflo's products are highly competitive and are
characterized by the frequent introduction of new products, often accompanied by
major advertising and promotional programs. Evenflo competes primarily on the
basis of product quality, product features, price and brand name recognition.
Evenflo competes with numerous national and international companies which
manufacture and distribute infant feeding products and/or infant and juvenile
furniture. Some of Evenflo's competitors are larger and have substantially
greater financial and other resources than the Company. Evenflo's principal
competitors include Century Products Company, Inc., Cosco Inc. (a subsidiary of
Dorel Industries Inc.), The First Years, Inc., Fisher-Price (a division of
Mattel, Inc.), Gerber Products Company (a subsidiary of Sandoz Ltd.), Graco
Children's Products, Inc. (a subsidiary of Rubbermaid, Inc.), Johnson & Johnson,
Playtex Products, Inc., and Safety 1st, Inc.
Evenflo also competes with private label manufacturers, particularly in the
reusable and disposable bottle and nipple markets. The Company believes that
Evenflo has strong customer loyalty which has helped it compete with private
label products.
RESEARCH AND DEVELOPMENT
The Spalding research and development department consists of more than 70
scientists, engineers and technicians. Spalding introduced the first dimpled
golf ball in the U.S., invented the first two-piece golf ball, developed and
patented the blended Surlyn cut-resistant golf ball cover and in the fourth
quarter of fiscal 1997 introduced the Top-Flite(R) Aero(R), Spalding's latest
introduction in the premium golf ball market. Spalding has also introduced a
number of golf club innovations, including one of the first titanium irons in
the market. In addition, the popularity of Spalding's patented ZK-Composite(R)
materials for basketballs has contributed to the number one market share in that
market. Research and development expenditures amounted to 1.6%, 1.3% and 1.3% of
Spalding's net sales in fiscal 1997, 1996 and 1995, respectively.
Evenflo dedicates substantial resources to its product development efforts,
including over 30 professionals in research and development. In addition to
Evenflo's in-house professionals, outside sources are used for research and
development, including individual designers/inventors, design houses,
universities and engineering services. Each new product Evenflo develops is
subjected to extensive evaluation to ensure it meets Evenflo's standards for
quality and safety. Research and development expenditures amounted to
approximately 1% of Evenflo's net sales in each of fiscal 1997, 1996 and 1995.
13
<PAGE> 14
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state, and local
environmental laws and regulations that impose limitations on the discharge of
pollutants into the environment and establish standards for the handling,
generation, emission, release, discharge, treatment, storage, and disposal of
certain materials, substances, and wastes and the remediation of environmental
contaminants ("Environmental Laws") that continue to be adopted and amended.
These Environmental Laws regulate, among other things, air and water emissions
and discharges at the Company's manufacturing facilities; the generation,
storage, treatment, transportation and disposal of solid and hazardous waste by
the Company; the remediation of environmental contamination; the release of
toxic substances, pollutants and contaminants into the environment at properties
operated by the Company and at other sites; and, in some circumstances, the
environmental condition of property prior to a transfer or sale (including
certain facilities previously owned or operated by the Company). Risks of
significant costs and liabilities are inherent in the Company's operations and
facilities, as they are with other companies engaged in like businesses. The
Company believes, however, that its operations are in substantial compliance
with all applicable Environmental Laws.
While historically the costs of environmental compliance have not had a
material adverse effect on the consolidated financial condition, results of
operations or cash flows of the Company, the Company cannot predict with
certainty its future costs of environmental compliance because of continually
changing compliance standards and technology. The Company expects that future
regulations and changes in the text or interpretation of existing Environmental
Laws may subject its operations to increasingly stringent standards. Compliance
with such requirements may make it necessary, at costs which may be substantial,
to retrofit existing facilities with additional pollution-control equipment and
to undertake new measures in connection with the storage, transportation,
treatment and disposal of by-products and wastes.
The Company has been named as a potentially responsible party ("PRP") with
respect to the generation and disposal of hazardous substances at 16 sites under
the federal "Superfund" statute and/or certain analogous state statutes.
Pursuant to various federal, state and local laws and regulations, PRPs can
become liable for the costs of removal and/or remediation of those hazardous
substances disposed on, in or about such properties. The liability imposed by
the Superfund statute and analogous state statutes generally is joint and
several and imposed without regard to whether the generator knew of, or was
responsible for, the presence of such hazardous substances. The Company
estimates its liabilities with respect to such sites could approximate $0.6
million in the aggregate.
Regulations resulting from the 1990 Amendments to the Clean Air Act (the
"1990 Amendments") that will pertain to the Company's manufacturing operations
are currently not expected to be promulgated for 3 to 5 years. The Company
cannot predict the level of required capital expenditures resulting from future
environmental regulations such as those forthcoming as a result of the 1990
Amendments; however, the Company does not anticipate expenditures that will be
required by such regulations to be material.
EMPLOYEES
The Company's worldwide workforce consisted of approximately 4,470
employees as of September 30, 1997. Of the total number of employees,
approximately 1,940 or 44% were employed by Spalding, and approximately 2,510 or
56% were employed by Evenflo.
14
<PAGE> 15
On July 18, 1997, Evenflo announced its plan to consolidate the Gerry
operations located in Thornton, Colorado into Evenflo's other facilities. As a
result, approximately 400 positions at the Thornton facility will be terminated
by the end of fiscal 1998.
At the Company's facilities, approximately 1,220 of the Company's employees
(including approximately 240 in Gerry's Thornton, Colorado, facility) are
represented under collective bargaining agreements, which agreements expire from
1998 through 2001. The Company does not anticipate any difficulty in extending
or negotiating these agreements as they expire. The Company believes that its
labor relations are good and no material labor cost increases, other than in the
ordinary course of business, are anticipated.
ITEM 2: PROPERTIES
The Company's manufacturing and distribution facilities and U.S. sales
operations are generally located on owned premises or leased premises. The
Company conducts a significant portion of its international sales operations on
leased premises, which have remaining terms generally ranging from two to five
years. Substantially all leases contain renewal options pursuant to which the
Company may extend the lease terms in increments of three to five years. The
Company does not anticipate any difficulties in renewing its leases as they
expire. The Company believes that its facilities are suitable for their present
and intended purposes and are adequate for the Company's current and expected
levels of operations.
The following table sets forth information as of September 30, 1997 with
respect to the manufacturing, warehousing and office facilities used by the
Company in its businesses:
15
<PAGE> 16
<TABLE>
<CAPTION>
OWNED/ SQUARE
LOCATION DESCRIPTION LEASED FOOTAGE
- -------- ----------- ------ -------
<S> <C> <C> <C>
Spalding
Chicopee, MA Manufacturing/Warehousing/Office Owned 560,500
Chicopee, MA Manufacturing/Warehousing/Office Owned 110,725
Gloversville, NY Manufacturing/Warehousing/Office Leased 80,000
Gloversville, NY Manufacturing/Warehousing/Office Owned 65,225
Reno, NV Warehousing/Office Leased 157,000
Brockton, MA Manufacturing/Warehousing/Office Leased 15,000
Richmond, ME Manufacturing Owned 61,000
Clinton, CT Retail Outlet Store Leased 3,254
Sellersville, PA Office Leased 1,200
West Palm Beach, FL Golf equipment test site Leased 625
Woodbridge, Ontario Manufacturing/Warehousing/Office Leased 85,000
Australia Manufacturing/Warehousing/Office Owned 59,493
Australia Warehousing/Office Leased 10,000
Australia Warehousing/Office Leased 3,875
Australia Warehousing/Office Leased 2,820
Australia Warehousing/Office Leased 2,260
France Warehousing/Office Leased 10,549
Germany Warehousing/Office Leased 3,546
Italy Warehousing/Office Leased 8,396
Japan Warehousing Leased 14,203
Japan Office Leased 5,578
Mexico Warehousing/Office Leased 23,250
New Zealand Warehousing/Office Leased 9,297
Spain Office Leased 2,690
Sweden Warehousing/Office Leased 15,424
Taiwan Office Leased 3,744
United Kingdom Warehousing/Office Leased 25,860
Evenflo
Canton, GA Manufacturing/Warehousing/Office Owned 293,500
Piqua, OH Manufacturing/Warehousing/Office Owned 347,400
Piqua, OH Warehousing Leased 74,060
Piqua, OH* Warehousing Leased 50,000
Piqua, OH Office Leased 10,000
Sidney, OH Warehousing Leased 84,375
Sidney, OH Warehousing Leased 44,000
Suring, WI Manufacturing/Warehousing/Office Owned 139,984
Thornton, CO Manufacturing/Warehousing/Office Leased 381,006
Jasper, AL Manufacturing/Office Owned 103,000
Jasper, AL Warehousing Leased 73,000
Mexico City, Mexico Manufacturing/Warehousing/Office Owned 76,308
Tijuana, Mexico Manufacturing Owned 50,061
Oakville, Ontario Warehousing/Office Leased 26,780
Philippines Office Leased 2,422
Hong Kong Office Leased 1,730
France Office Leased 900
Taiwan Office Leased 700
Corporate
Tampa, FL Office Leased 9,216
</TABLE>
* On October 3, 1997, the Company purchased this building which has
155,000 square feet (previously only 50,000 square feet were leased).
16
<PAGE> 17
ITEM 3: LEGAL PROCEEDINGS
Due to the nature of its products, the Company has been engaged in, and
will continue to be engaged in, the defense of product liability claims related
to its products, particularly with respect to juvenile car seats and cribs. Such
claims have caused the Company to incur material litigation and insurance
expenses. Since 1987, approximately 135 product liability lawsuits have been
brought against the Company, 100 of which related to juvenile car seats.
Over the past ten policy periods (April 1, 1987 to March 30, 1997),
reserves, out-of-pocket indemnities and expenses (exclusive of payments by
insurers and insurance premiums) for car seat claims (including damage awards,
settlements, attorneys' fees and other related expenses) have averaged
approximately $1.4 million per year, when allocated to the policy periods when
the related injuries occurred, while the total reserves, out-of-pocket
indemnities and expenses (exclusive of payments by insurers and insurance
premiums) for all product liability claims have averaged approximately $1.9
million per year, on a similar basis. From fiscal 1993 through fiscal 1997, the
Company has incurred average annual costs for out-of-pocket indemnities and
expenses (exclusive of payments by insurers and insurance premiums) for all
product liability claims of approximately $2.9 million. The increase in average
costs for product liability claims from $1.9 million per year for the ten-year
average to $2.9 million per year for the five-year average is due to an increase
in the Company's insurance policy deductibles. The Company believes that it will
incur average product liability claims of levels similar to the five year
average for the next several years.
Based on its experience with product liability claims, the amount of
reserves established for product liability claims against it and the levels of
insurance that it maintains, the Company believes that there are no product
liability claims pending which would have a material adverse effect on its
consolidated financial position, results of operations or cash flows. However,
due to the inherent uncertainty of litigation, it is possible that the Company
may be subject to adverse judgments which could be substantial in amount and may
not be covered by insurance or reserves. In addition, no assurance can be given
that in the future a claim will not be brought against the Company which would
have a material adverse effect on its consolidated financial position, results
of operations or cash flows.
From time to time the Company also is involved in patent infringement
actions. The Company believes that it is not presently a defendant or plaintiff
in any patent infringement action, the outcome of which would have a material
adverse effect on its consolidated financial position, results of operations or
cash flows.
In addition to such product liability and patent infringement claims, the
Company is a party to various lawsuits arising in the ordinary course of
business. None of these other lawsuits is believed to be material with respect
to the business, assets and continuing operations of the Company.
17
<PAGE> 18
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
(through the solicitation of proxies or otherwise) during the last quarter of
the fiscal year ended September 30, 1997.
18
<PAGE> 19
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is not registered under the Exchange Act and no
trading market exists for such common stock. No dividends were paid on the
Company's common stock in fiscal 1997. As of December 15, 1997, there were 76
holders of the Company's common stock.
19
<PAGE> 20
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth certain selected historical consolidated
financial data of the Company. The historical consolidated financial statements
of the Company for the five fiscal years ended September 30, 1997 have been
audited. The historical consolidated financial data for the three fiscal years
ended September 30, 1997 have been derived from, and should be read in
conjunction with, the audited consolidated financial statements of the Company
and the related notes thereto included elsewhere in this Form 10-K. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------
(DOLLARS IN THOUSANDS)
OPERATING STATEMENT DATA 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Spalding net sales $ 530,448 451,915 424,118 411,574 378,010
Evenflo net sales 296,743 237,165 210,039 171,533 158,234
--------- -------- -------- -------- --------
Total net sales 827,191 689,080 634,157 583,107 536,244
Cost of sales (1) 565,959 452,037 407,334 370,328 342,276
--------- -------- -------- -------- --------
Gross profit 261,232 237,043 226,823 212,779 193,968
Selling, general and administrative expenses (2) 229,313 196,741 178,637 178,678 150,106
Royalty income, net (14,109) (14,339) (13,514) (12,789) (9,328)
Restructuring costs (3) 12,001 0 0 0 0
1994 Management Stock Ownership Plan expense (4) 0 20,828 1,130 0 0
Recapitalization costs (5) 0 7,700 0 0 0
Litigation settlement expense (6) 0 0 2,400 0 0
--------- -------- -------- -------- --------
Income from operations 34,027 26,113 58,170 46,890 53,190
Interest expense, net 71,326 37,718 38,108 17,073 8,913
Currency loss (gain), net 1,236 775 381 (144) 2,238
--------- -------- -------- -------- --------
Earnings (loss) before income taxes (38,535) (12,380) 19,681 29,961 42,039
Income taxes (benefit) (8,500) 9,300 8,683 11,938 18,000
--------- -------- -------- -------- --------
Earnings (loss) before extraordinary loss and cumulative
effect of accounting changes (30,035) (21,680) 10,998 18,023 24,039
Extraordinary loss on early extinguishment of debt, net
of $3,200 tax benefit 0 (5,987) 0 0 0
Cumulative effect of accounting changes (7) 0 0 0 0 (9,620)
--------- -------- -------- -------- --------
Net earnings (loss) (30,035) (27,667) 10,998 18,023 14,419
Other comprehensive earnings (loss) - currency
translation adjustments net of tax expense (benefits) of
$(285), $(239), $(662), $59, $(114) (819) (43) (1,269) 587 (3,547)
--------- -------- -------- -------- --------
Comprehensive earnings (loss) $ (30,854) (27,710) 9,729 18,610 10,872
========= ======== ======== ======== ========
Ratio of earnings to fixed charges (8)(9) -- -- 1.49x 2.61x 5.08x
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
------------------------------------------------------------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital (deficiency) $ 130,076 169,551 88,124 (110,193) 61,079
Total assets 771,845 690,761 536,261 508,022 404,231
Long-term debt (net of current portion) 609,900 625,800 313,073 129,788 141,512
Shareholders' equity (deficiency) (10) (170,631) (348,596) (12,360) (22,730) 67,698
</TABLE>
- ---------------------
(1) Included in cost of sales are unusual charges of (i) $3.8 million in
1993 for the conversion of two Evenflo manufacturing facilities to
distribution centers and for the closure of two Spalding softball
manufacturing facilities, (ii) $1.6 million in 1996 as a result of
expensing the increase to fair value of the Etonic inventories as of the
date of the Etonic Acquisition, and (iii) $8.8 million in 1997 for the
following items: (a) $2.8 million attributable to Evenflo manufacturing
and warehouse reconfiguration, (b) $3.1 million inventory write-down
resulting from a decision to discontinue the sale of certain Gerry
products, (c) $1.3 million as a result of expensing the increase to fair
value of the Gerry inventories as of the date of the Gerry Acquisition,
and (d) $1.6 million inventory write-down resulting from a decision to
discontinue the sale of certain products by certain Spalding
international affiliates.
(2) In fiscal 1996, selling, general and administrative expenses included
$17.6 million of the following unusual items: (i) $5.4 million in
transaction bonus payments arising in connection with the
Recapitalization, (ii) $5.6 million of expenses related to the
completion of the Etonic Acquisition and consolidating the operations of
Etonic with those of Spalding, (iii) $2.8 million of expenses incurred
by the Company on behalf of its former parent, (iv) $2.3 million of
accounts receivable charge-offs, as a result of the bankruptcy of two of
its customers, (v) $1.2 million of costs to consolidate Evenflo's
feeding and furniture operations, which were separately managed, into
one entity, and (vi) $0.3 million of costs related to the relocation of
the corporate office. In fiscal 1997, selling, general and
administrative expenses included $4.3 million of the following unusual
items: (i) $2.6 million of costs to consolidate Evenflo's feeding and
furniture operations, (ii) $1.2 million in Gerry and other related
acquisition costs, (iii) $0.8 million to purchase the Etonic Canadian
distribution rights, (iv) $0.1 million accounts receivable write-offs,
and (v) a partially offsetting $0.4 million from settlement of a 1996
Etonic computer software dispute.
(3) In fiscal 1997, the Company had $12.0 million of restructuring costs
comprised of $9.6 million to relocate the Gerry Colorado administrative
and manufacturing operations to Evenflo's Ohio and Georgia locations and
$2.4 million to restructure Spalding international operations. See Note
F of the Notes to the Consolidated Financial Statements appearing
elsewhere in this Form 10-K.
(4) Represents compensation expense related to the increase in the estimated
fair value of common stock of certain members of senior management
through the 1994 Management Stock Ownership Plan which were redeemed in
the Recapitalization.
(5) Represents non-capitalized expenses, such as legal, printing costs, and
other professional fees and costs incurred in connection with the
Recapitalization.
(6) In 1995 the Company settled an indemnification dispute involving an
environmental matter of a former operation for $2.4 million.
21
<PAGE> 22
(7) Effective October 1, 1992, the Company adopted SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and SFAS No.
109 "Accounting for Income Taxes." As of October 1, 1992, the Company
recorded one-time charges against earnings in the form of cumulative
effects of accounting changes of $4.8 million on an after-tax basis with
respect to SFAS 106 and $4.8 million with respect to SFAS 109.
(8) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings (loss) before income taxes,
extraordinary loss, cumulative effect of accounting changes, and other
comprehensive earnings (loss) plus "fixed charges" (except that
capitalized interest is to be excluded). "Fixed charges" consist of
interest on all indebtedness, whether expensed or capitalized,
amortization of deferred financing costs, and one-third of rental
expense on operating leases, representing that portion of rental expense
deemed by the Company to be attributable to interest.
(9) The deficiency of earnings to "fixed charges" for fiscal 1997 and 1996
was approximately $38.5 million and $12.4 million, respectively.
(10) Shareholders' equity (deficiency) as of September 30, 1994 reflects the
acquisition of the Acquired Trademarks in May 1994 (see Note I to the
Consolidated Financial Statements). Shareholders' equity (deficiency) as
of September 30, 1996 reflects the Recapitalization of the Company as of
that date (see Note A to the Consolidated Financial Statements).
Shareholders' equity (deficiency) as of September 30, 1997 includes the
effects of the exchange of all the Company's outstanding Preferred Stock
for the Company's common stock (see Note L to the Consolidated Financial
Statements).
22
<PAGE> 23
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth operating results of the Company for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------
(Dollars in thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Spalding net sales............................................................ $530,448 451,915 424,118
Evenflo net sales............................................................. 296,743 237,165 210,039
-------- ------- -------
Total net sales............................................................... 827,191 689,080 634,157
Cost of sales................................................................. 565,959 452,037 407,334
-------- ------- -------
Gross profit.................................................................. 261,232 237,043 226,823
Selling, general and administrative expenses.................................. 229,313 196,741 178,637
Royalty income, net........................................................... (14,109) (14,339) (13,514)
Restructuring costs........................................................... 12,001 0 0
1994 Management Stock Ownership Plan expense.................................. 0 20,828 1,130
Recapitalization costs........................................................ 0 7,700 0
Litigation settlement expense from discontinued operations.................... 0 0 2,400
-------- ------- -------
Income from operations........................................................ 34,027 26,113 58,170
Interest expense, net......................................................... 71,326 37,718 38,108
Currency loss, net............................................................ 1,236 775 381
-------- ------- -------
Earnings (loss) before income taxes and extraordinary loss.................... (38,535) (12,380) 19,681
Income taxes (benefit)........................................................ (8,500) 9,300 8,683
-------- ------- -------
Earnings (loss) before extraordinary loss..................................... (30,035) (21,680) 10,998
Extraordinary loss on early extinguishment of debt, net of $3,200 tax benefit 0 (5,987) 0
-------- ------- -------
Net earnings (loss)........................................................... (30,035) (27,667) 10,998
Other comprehensive earnings (loss) - currency translation adjustment net
of tax benefits of $(285), $(239), and $(662).............................. (819) (43) (1,269)
-------- ------- -------
Comprehensive earnings (loss)................................................. $(30,854) (27,710) 9,729
======== ======= =======
<CAPTION>
Year Ended September 30,
------------------------
(Percentage of total net sales)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Spalding net sales .......................................................... 64.1% 65.6% 66.9%
Evenflo net sales ........................................................... 35.9 34.4 33.1
----- ----- -----
Total net sales ............................................................. 100.0% 100.0% 100.0%
Cost of sales ............................................................... 68.4 65.6 64.2
----- ----- -----
Gross profit ................................................................ 31.6 34.4 35.8
Selling, general and administrative expenses ................................ 27.7 28.6 28.2
Royalty income, net ......................................................... (1.7) (2.1) (2.1)
Restructuring costs ......................................................... 1.5 0.0 0.0
1994 Management Stock Ownership Plan expense ................................ 0.0 3.0 0.1
Recapitalization costs ...................................................... 0.0 1.1 0.0
Litigation settlement expense from discontinued operations .................. 0.0 0.0 0.4
----- ----- -----
Income from operations ...................................................... 4.1 3.8 9.2
Interest expense, net ....................................................... 8.6 5.5 6.0
Currency loss, net .......................................................... 0.2 0.1 0.1
----- ----- -----
Earnings (loss) before income taxes and extraordinary loss .................. (4.7) (1.8) 3.1
Income taxes (benefits) ..................................................... (1.1) 1.3 1.4
----- ----- -----
Earnings (loss) before extraordinary loss ................................... (3.6) (3.1) 1.7
Extraordinary loss on early extinguishment of debt, net of $3,200 tax benefit 0.0 (0.9) 0.0
----- ----- -----
Net earnings (loss) ......................................................... (3.6) (4.0) 1.7
Other comprehensive earnings (loss) - currency translation adjustment net
of tax $(285), $(239), and $(662) ........................................ (0.1) 0.0 (0.2)
----- ----- -----
Comprehensive earnings (loss) ............................................... (3.7)% (4.0)% 1.5%
===== ===== =====
</TABLE>
23
<PAGE> 24
FORWARD LOOKING STATEMENTS
With the exception of historical information (information relating to the
Company's financial condition and results of operations at historical dates or
for historical periods), the matters discussed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are
forward-looking statements that necessarily are based on certain assumptions and
are subject to certain risks and uncertainties. The forward-looking statements
are based on management's expectations as of the date hereof. Actual future
performance and results could differ from that contained in or suggested by
these forward-looking statements as a result of the factors set forth in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in the September 30, 1997, Form 10-K and related
filings with the Securities and Exchange Commission.
YEAR ENDED SEPTEMBER 30, 1997 ("FISCAL 1997")
COMPARED TO YEAR ENDED SEPTEMBER 30, 1996 ("FISCAL 1996")
NET SALES. Net sales are gross sales net of returns, allowances, trade
discounts, freight on goods sold and royalties paid on third-party trademarks
used on the Company's products. The Company's net sales increased to $827.2
million in fiscal 1997 from $689.1 million for fiscal 1996, an increase of
$138.1 million or 20.0%.
Spalding's net sales increased to $530.4 million for fiscal 1997 from
$451.9 million for fiscal 1996, an increase of $78.5 million or 17.4%. Etonic,
which was acquired in July 1996, contributed $57.4 million of the Spalding
fiscal 1997 net sales increase. Results for fiscal 1997 include a full year of
Etonic net sales while fiscal 1996 includes three months. On a pro forma basis,
Etonic net sales increased 25.0% in fiscal 1997 over fiscal 1996. The Etonic
growth is driven by innovative new product introductions of The Difference(R)
and Dri-Lite(R) Softspikes(TM) golf shoes. Golf ball net sales were up 3%
overall from fiscal 1996 led by a 48% increase in Top-Flite(R) Strata Tour(TM),
Top-Flite(R) Strata Advance(TM) and Top-Flite(R) Aero(R) net sales to the
premium on and off course channels, a 20% increase in custom balls, and a 17%
increase in range balls; partially offset by decreases in net sales to off
course channels where numerous retailers changed inventory management practices
and reduced inventory levels. Golf club net sales accelerated in fiscal 1997,
up 35% from continued strong demand for Spalding clubs, Top-Flite Tour(R) irons
with titanium inserts and Muscle(TM) shafts, and Intimidator(TM) drivers.
Basketball net sales were down 4% in fiscal 1997 principally due to the success
of Space Jam(TM) basketball promotions in fiscal 1996. International net sales
at Spalding declined 5.8% or $8.8 million in fiscal 1997 compared to fiscal
1996. The decrease resulted from lower net sales of golf products in Japan and
Europe, and lower net sales in Australia from the discontinuation of the NBA
clothing line by the Company's Australian subsidiary; the decrease is partially
offset by increases of golf product net sales in Mexico, Southeast Asia, and
Canada. Weaker currencies compared to the U.S. dollar negatively impacted
fiscal 1997 net sales approximately $5.8 million compared to fiscal 1996.
Management anticipates Japan fiscal 1998 net sales to be below fiscal 1997 net
sales due to weak Japanese economic conditions, competitive conditions, and
restructuring programs (see "Restructuring Costs").
Evenflo's net sales increased to $296.7 million for fiscal 1997 from $237.2
million for fiscal 1996, an increase of $59.5 million or 25.1%. When compared to
fiscal 1996, Evenflo net sales were flat after excluding the April 1997 Gerry
Acquisition which contributed $60.3 million in net sales for the five months of
fiscal 1997. Evenflo net sales of car seats, play yards, and activity products
24
<PAGE> 25
decreased from fiscal 1996 levels, principally from supplier product shortages,
safety campaigns, and competitive pricing. Offsetting the decreases were 1997
net sales of strollers and high chairs which were up 74% and 27%, respectively,
over the fiscal 1996 comparable period. Evenflo's international net sales were
up $4.7 million compared to fiscal 1996 due primarily to higher Mexico feeding
net sales, higher Canada feeding and stroller net sales, and increased export
net sales.
GROSS PROFIT. Gross profit is net sales less cost of sales which includes
the costs necessary to make the Company's products, including the costs of raw
materials, production, warehousing and procurement. The Company's gross profit
increased to $261.2 million in fiscal 1997 from $237.0 million for fiscal 1996,
an increase of $24.2 million or 10.2%. Gross margin declined to 31.6% in fiscal
1997 from 34.4% in fiscal 1996. Spalding's gross profit increased to $200.4
million in fiscal 1997 from $178.6 million in fiscal 1996, an increase of $21.8
million or 12.2%. Evenflo's gross profit increased to $60.8 million in fiscal
1997 from $58.4 million in fiscal 1996, an increase of $2.4 million or 4.1%.
Spalding's gross margin declined to 37.8% in fiscal 1997 from 39.5% in
fiscal 1996 principally due to (i) increased sales of products with lower
margins such as golf clubs, golf bags, and golf shoes (as compared to golf
balls), (ii) lower international net sales, (iii) $1.6 million in inventory
write-downs resulting from a decision to discontinue the sale of certain
products by certain international affiliates, (iv) increased manufacturing cycle
time for multi-layer golf balls (Strata(TM)), and (v) higher wages, utility,
shipping and freight costs.
Evenflo's gross margin declined 4.1% to 20.5% in fiscal 1997 from 24.6% in
fiscal 1996 principally due to (i) increased sales of lower margin Gerry
products, strollers, and high chairs (as compared to car seats), (ii) $2.8
million in unusual costs associated with the re-engineering of its Piqua, Ohio
operations, (iii) $3.1 million in inventory write-downs resulting from a
decision to discontinue the sale of certain Gerry products, and (iv) $1.3
million in purchase accounting effects of Gerry's inventory turnover.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses
include the costs necessary to sell the Company's products and the general and
administrative costs of managing the business, including salaries and related
benefits, commissions, advertising and promotion expenses, bad debts, travel,
amortization of intangible assets, insurance and product liability costs,
consumer corrective action campaign costs, and professional fees. The Company's
SG&A expenses increased to $229.3 million for fiscal 1997 from $196.7 million
for fiscal 1996, an increase of $32.6 million or 16.6%. As a percentage of net
sales, SG&A expenses decreased to 27.7% for fiscal 1997 from 28.6% for fiscal
1996.
Spalding's SG&A expenses increased $28.0 million during fiscal 1997 as
compared with fiscal 1996. As a percentage of net sales, SG&A expenses increased
to 31.9% for fiscal 1997 from 31.3% for fiscal 1996. The increase in fiscal 1997
is principally due to (i) $9.0 million from the inclusion of Etonic for the full
1997 fiscal year compared to three months in fiscal 1996 (excluding advertising,
promotion, and endorsement costs), (ii) $23.0 million in higher advertising,
promotion, and endorsement costs, (iii) $0.8 million of unusual costs associated
with obtaining the Etonic Canadian distribution rights, and (iv) $2.0 million in
higher research and development costs; the increase is partially offset by (i)
$5.2 million in fiscal 1996 expenses related to the completion of the Etonic
acquisition which did not recur in fiscal 1997, (ii) $0.4 million in recovery
from settlement of a 1996 Etonic computer software dispute, and (iii) $1.2
million in lower bad debts and other costs.
25
<PAGE> 26
Evenflo's SG&A expenses increased $10.9 million during fiscal 1997 as
compared with fiscal 1996. As a percentage of net sales, SG&A expenses increased
to 17.8% for fiscal 1997 from 17.6% for fiscal 1996. The fiscal 1997 increase is
principally due to (i) $6.5 million for five months of Gerry expenses (excluding
promotion costs) in fiscal 1997, (ii) $3.6 million in higher consumer corrective
action campaign costs (in fiscal 1997, Evenflo incurred $4.4 million on four
consumer corrective action campaigns on certain car seats and play yards), (iii)
$2.6 million in unusual costs to consolidate certain operations that were
previously managed separately, and (iv) $2.9 million in higher promotion costs;
partially offset by (i) $2.7 million lower product liability expenses from a
lower number of claims, and (ii) $2.0 million in lower bad debts and other
costs.
The corporate office had $6.3 million lower general, administrative, and
unusual costs from (i) $5.4 million in unusual fiscal 1996 transaction costs
which did not recur in fiscal 1997, (ii) $1.1 million in lower compensation, net
of recruiting expenses, (iii) $0.4 million Etonic acquisition costs, and (iv)
$0.6 million in lower other costs; partially offset by (i) $1.0 million in
acquisition costs related to Gerry and other potential acquisition candidates,
and (ii) $0.2 million in costs related to new equity investments in the Company
ROYALTY INCOME. Royalty income is primarily from licensing Spalding's
worldwide trademarks. Royalty income decreased to $14.1 million in fiscal 1997
from $14.3 million in fiscal 1996. The $0.2 million decrease was principally due
to the weaker Japanese yen compared to the U.S. dollar.
RESTRUCTURING COSTS. In fiscal 1997, the Company had $12.0 million of
restructuring costs comprised of $9.6 million in Gerry restructuring costs and
$2.4 million in Spalding international restructuring costs.
In July 1997, Company management adopted a plan to relocate the Gerry
Colorado administrative and manufacturing operations to Evenflo's Ohio and
Georgia locations. As a result, the Company accrued $9.6 million of
restructuring costs consisting of (i) $4.1 million of severance costs for the
Colorado employees, (ii) $2.6 million in shut-down costs of the Colorado
facility, (iii) $1.3 million of computer conversion costs to preserve prior
manufacturing information for future purposes, and (iv) $1.6 million of other
costs. The Company has funded $1.3 million of the restructuring costs, leaving
an accrual of $8.3 million as of September 30, 1997. The Company estimates it
will incur approximately $1.8 million of additional unusual expenses in fiscal
1998 to complete its Gerry integration.
In fiscal 1997, the Company implemented a plan to restructure Spalding
international operations. As a result, the Company accrued $2.4 million of
restructuring costs consisting of (i) $0.8 million of warehouse studies,
consolidations, and lease terminations, (ii) $0.9 million of severance costs,
and (iii) $0.7 million of other costs. The Company has funded $1.3 million of
the restructuring costs, leaving an accrual of $1.1 million as of September 30,
1997. The Company estimates it will incur approximately $1.3 million of
additional unusual expenses in fiscal 1998 to complete this restructuring
program.
INTEREST EXPENSE. Interest expense increased $33.6 million to $71.3 million
in fiscal 1997 from $37.7 million for fiscal 1996. The increase is due
principally to the issuance of $200 million of senior subordinated notes and
higher levels of borrowings under the Credit Facility (as defined in "Liquidity
and Capital Resources") in fiscal 1997 versus fiscal 1996. The Company's
weighted average
26
<PAGE> 27
outstanding balances for fiscal 1997 was $679.0 million compared to $363.7
million under the Company's borrowing arrangements then in effect during fiscal
1996. Additionally, the Company's increased interest expense in fiscal 1997 over
fiscal 1996 is attributable to $2.4 million in higher deferred financing costs
amortization and an increase in the Company's average U.S. borrowing rate to
9.8% from 9.1% in fiscal 1996.
CURRENCY LOSS. Currency loss of $1.2 million was $0.4 million higher in
fiscal 1997 than fiscal 1996. See "Liquidity and Capital Resources."
INCOME TAXES. Fiscal 1997 had an $8.5 million tax benefit which represents
an effective income tax rate of 22% in relation to a loss before income taxes of
$38.5 million. The inability to assure a tax benefit on losses from non-U.S.
operations, coupled with payments of certain non-U.S. withholding taxes,
resulted in a lower effective tax rate.
NET LOSS. The Company recorded a net loss of $30.0 million for fiscal 1997
compared to a $27.7 million net loss for fiscal 1996. The primary variances were
increases to earnings of (i) a $24.2 million increase in gross profit as a
result of having a full year of Etonic net sales and five months of Gerry net
sales, (ii) $20.8 million of 1996 expenses related to the 1994 Management Stock
Ownership Plan, (iii) a $17.8 million increase in income tax benefits, (iv) $7.7
million of 1996 recapitalization costs, (v) $6.0 million of 1996 extraordinary
loss on early extinguishment of debt, and offsetting decreases to earnings of
(i) a $33.6 million increase in interest expense from higher debt levels due to
the Recapitalization, (ii) a $32.6 million increase in SG&A expenses principally
from higher advertising, promotion and endorsement expenses, (iii) $12.0 million
of 1997 restructuring costs, and (iv) a net increase of $0.6 million from a
higher currency loss and lower royalty income.
UNUSUAL COSTS. The Company's fiscal 1997 net loss includes $25.1 million of
unusual costs compared to $45.5 million of unusual costs in fiscal 1996. The
$25.1 million unusual costs in fiscal 1997 consist of (i) $12.0 million of
restructuring costs, (ii) $8.8 million of unusual expenses in cost of sales and
(iii) $4.3 million of unusual expenses in SG&A expenses. See other items
affecting historical EBITDA in "Liquidity and Capital Resources". The Company's
fiscal 1996 unusual costs of $45.5 million includes (i) $20.8 million of 1994
Management Stock Ownership Plan expense, (ii) $11.0 million of unusual expenses
in SG&A expenses, (iii) $7.7 million of Recapitalization expenses, and (iv) $6.0
million related to the extraordinary loss on early extinguishment of debt.
YEAR ENDED SEPTEMBER 30, 1996 ("FISCAL 1996")
COMPARED TO YEAR ENDED SEPTEMBER 30, 1995 ("FISCAL 1995")
NET SALES. The Company's net sales increased to $689.1 million in fiscal
1996 from $634.2 million for fiscal 1995, an increase of $54.9 million or 8.7%.
Spalding's net sales increased to $451.9 million for fiscal 1996 from $424.1
million for fiscal 1995, an increase of $27.8 million or 6.6%. Evenflo's net
sales increased to $237.2 million for fiscal 1996 from $210.0 million for fiscal
1995, an increase of $27.2 million or 13.0%.
The Etonic Acquisition increased Spalding's net sales by $14.8 million
in fiscal 1996. Furthermore, Spalding experienced a 22.4% increase in fiscal
1996 net sales of golf clubs such as Top-Flite Tour(R) irons and Intimidator(R)
drivers which continued to gain consumer acceptance as a result of advertising
and on-course demonstrations by Spalding technical representatives. Spalding's
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<PAGE> 28
net sales of golf balls and golf bags for fiscal 1996 were up $4.1 million over
fiscal 1995 with the introduction of the Top-Flite(R) Strata(TM) and strong
sales of the Top-Flite(R) Magna EX(TM) and Top-Flite(R) Hot XL(TM), despite a
long winter and wet spring in the Northeast and Midwest. Basketball sales were
up 9.2% over fiscal 1995 with the introduction of the Space Jam(TM) basketball
and increased sales of ZK-Composite(R) basketball lines. However, sales of
diamond sports products, such as softballs and gloves, were down 22.2% compared
to fiscal 1995, partially due to the long winter and wet spring. Spalding's
international net sales were down $2.9 million, or 1.9%, in fiscal 1996
compared to fiscal 1995. The decrease resulted from lower net sales in golf,
basketball and court sports products in Japan, as well as lower NBA clothing
net sales in Australia due to the discontinuation of the NBA clothing line and
lower net sales of basketballs in Canada and Australia. This decrease was
partially offset by strong golf ball and golf club net sales in Europe, Canada,
Mexico and Southeast Asia.
The net sales increase at Evenflo was principally due to a 22.7% increase
in U.S. net sales of car seats when compared to fiscal 1995, as well as the
impact of new product introductions, including the On My Way Travel System(TM)
stroller, the Phases(TM) high chair, and the angled reusable nurser.
Exersaucer(R) net sales decreased due to increased competition and lower
production caused by manufacturing downtime to modify tooling for new
Exersaucer(R) versions. Evenflo's international net sales were down $1.0 million
compared to fiscal 1995 due primarily to increased car seat competition in
Canada and lower net sales in the Philippines.
GROSS PROFIT. The Company's gross profit increased to $237.0 million in
fiscal 1996 from $226.8 million for fiscal 1995, an increase of $10.2 million or
4.5%. Gross margin declined to 34.4% in fiscal 1996 from 35.8% in fiscal 1995.
Spalding's gross profit increased to $178.6 million in fiscal 1996 from $174.4
million in fiscal 1995, an increase of $4.2 million or 2.4%. Evenflo's gross
profit increased to $58.4 million in fiscal 1996 from $52.4 million in fiscal
1995, an increase of $6.0 million or 11.5%.
For fiscal 1996, Spalding's gross margin declined to 39.5% from 41.1% for
fiscal 1995 as manufacturing efficiencies and lower material costs were more
than offset by (i) lower international sales in Japan and Australia, (ii) the
purchase accounting effects of Etonic's inventory turnover, and (iii) increased
sales of products with a lower margin such as golf clubs, Etonic golf shoes and
basketballs (as compared to golf balls). Evenflo's gross margin declined 0.2%
during fiscal 1996 as compared with fiscal 1995 as a result of (i) lower selling
prices of Exersaucer(R) and disposable nursers, (ii) lower international sales
(which typically have higher gross margins), and (iii) a less favorable sales
mix within the car seat line due to production tool repairs.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. The Company's SG&A
expenses increased to $196.7 million for fiscal 1996 from $178.6 million for
fiscal 1995, an increase of $18.1 million or 10.1%. As a percentage of sales,
SG&A expenses increased to 28.6% for fiscal 1996 from 28.1% for fiscal 1995.
Spalding's SG&A expenses increased $7.0 million during fiscal 1996 as
compared with fiscal 1995 as a result of (i) $3.7 million higher advertising and
selling expenses, (ii) $3.3 million in SG&A expenses at Etonic, and (iii) $1.7
million increase in the allowance for doubtful accounts. These increases in SG&A
expenses were partially offset by $1.7 million of lower employee benefit costs
and other expenses.
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<PAGE> 29
Evenflo had $1.2 million higher SG&A expenses in fiscal 1996. The increase
was comprised of (i) $2.3 million increase in allowance for doubtful accounts
and (ii) $3.2 million higher advertising, promotion, consolidation expenses and
other costs. These expense increases were partially offset by (i) $2.0 million
lower product liability costs, (ii) $1.2 million of expense in fiscal 1995
relating to a consumer corrective action on pacifiers which did not recur in
fiscal 1996, and (iii) $1.1 million lower expenses in Mexico and Canada due to
reduced marketing activities in these countries.
The corporate office had $0.3 million lower general and administrative
expenses in fiscal 1996 primarily from lower compensation, employee benefit and
other costs. Fiscal 1995 includes $0.7 million minority interest.
In fiscal 1996, the Company incurred additional unusual charges of (i) $5.4
million in transaction bonus payments in connection with the Recapitalization
and (ii) $5.6 million of expenses related to the completion of the Etonic
Acquisition and consolidating the operations of Etonic with those of Spalding.
ROYALTY INCOME. Royalty income increased to $14.3 million in fiscal 1996
from $13.5 million in fiscal 1995. The $0.8 million increase was principally due
to higher royalty income from Spalding branded footwear and apparel licensees.
Fiscal 1996 royalty income from the new Sara Lee apparel Spalding license
exceeded the royalty income from discontinued fiscal 1995 apparel licenses.
1994 MANAGEMENT STOCK OWNERSHIP PLAN. Expenses related to the Company's
1994 Management Stock Ownership Plan increased to $20.8 million for fiscal 1996
from $1.1 million for fiscal 1995, an increase of $19.7 million. 1994 Management
Stock Ownership Plan expense represents compensation expense related to the
increase in the fair value of common stock of Spalding & Evenflo Companies, Inc.
held by certain members of senior management which were purchased by the Company
in connection with its September 30, 1996 Recapitalization.
RECAPITALIZATION COSTS. In fiscal 1996, the Company incurred $7.7 million
in non-capitalized expenses such as legal, printing costs and other professional
fees and costs incurred in connection with the Recapitalization.
INTEREST EXPENSE. Interest expense decreased to $37.7 million for fiscal
1996 from $38.1 million for fiscal 1995, a decrease of $0.4 million or 1.0%. The
decrease was a result of $3.3 million in lower interest attributable
principally to a decrease in the Company's average U.S. borrowing rate from
10.1% for fiscal 1995 to 9.1% for fiscal 1996, partially offset by $2.0 million
in interest on higher average worldwide borrowings and $0.9 million in interest
on the promissory notes issued in the Etonic Acquisition.
CURRENCY LOSS. Currency loss of $0.8 million was $0.4 million higher in
fiscal 1996 than fiscal 1995. See "Liquidity and Capital Resources."
EXTRAORDINARY LOSS. The extraordinary loss on early extinguishment of debt
relates to a $9.2 million pretax ($6.0 million after-tax) write-off of deferred
financing costs relating to the Company's previous U.S. secured credit agreement
which was repaid and canceled in connection with the Recapitalization.
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<PAGE> 30
NET EARNINGS. The Company recorded a net loss of $27.7 million for fiscal
1996 compared to $11.0 million in net earnings for fiscal 1995. The decrease in
earnings from fiscal 1995 was a result of (i) $19.7 million increase in 1994
Management Stock Ownership Plan expenses relating to the purchase of management
shares as a result of the Recapitalization, (ii) $5.4 million in transaction
bonus payments, (iii) $7.2 million of expenses related to the Etonic
Acquisition, (iv) $7.7 million of Recapitalization expenses, (v) $0.4 million
in higher currency losses, (vi) $0.6 million in higher taxes, and (vii) $6.0
million extraordinary loss on early extinguishment of debt in fiscal 1996,
reduced by (i) $4.8 million increase in earnings from operations, (ii) $0.4
million in lower interest expense, and (iii) $2.4 million litigation expense
which occurred in fiscal 1995 only.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL. Historically, the Company's primary sources of liquidity have
been cash from operations, borrowings under various credit facilities, and
proceeds from issuance of common stock. The Company's business is seasonal. For
fiscal 1997, quarterly net sales as a percentage of total sales were
approximately 15%, 25%, 30%, and 30%, respectively, for the first through the
fourth quarters of the fiscal year. In addition, for fiscal 1997 quarterly
income from operations as a percentage of total income from operations was
approximately (13)%, 29%, 40%, and 44%, respectively, for the first through
fourth quarters of such fiscal year. Many sporting goods marketed by Spalding,
especially golf products, experience higher levels of sales in the spring and
summer months. The Company's need for cash historically has been greater in its
first and second quarters when cash generated from operating activities coupled
with drawdowns from bank lines have been invested in receivables and
inventories.
In 1997, operating activities used $31.5 million of net cash while 1996 and
1995 generated cash flow from operating activities of $32.0 million and $16.6
million, respectively. The reduction in cash flow from operating activities in
the 1997 fiscal year compared to the 1996 fiscal year was $30.2 million
excluding $33.3 million in unusual one-time fiscal 1996 non-cash items ($20.8
million 1994 Management Stock Ownership Plan expense, $3.3 million write-off of
Etonic assets, and $9.2 million extraordinary loss on early extinguishment of
debt). The $30.2 million decrease was due to $6.5 million in lower net earnings
(as adjusted for depreciation and other non-cash items exclusive of the $33.3
million in unusual fiscal 1996 one-time non-cash items) and a $23.7 million
increase in working capital attributable principally to (i) higher receivables
from increased sales of golf products in the fourth quarter of 1997 and a U.S.
federal income tax receivable from a net operating loss carryback, and (ii)
higher golf product inventory levels at Spalding and component product inventory
at Evenflo; the increase was reduced by higher trade payables and banker
acceptances from increased imported inventory levels as well as increased
accruals from restructuring costs.
The $15.4 million increase in cash flow from operating activities in fiscal
1996 compared to fiscal 1995 was due to a $19.5 million decrease in working
capital offset by $4.1 million in lower net earnings (as adjusted for
depreciation and other non-cash expenses.)
Capital expenditures for fiscal 1997 were $35.1 million compared with $19.5
million in fiscal 1996 and $15.4 million in fiscal 1995. Capital expenditures
were used primarily for new product introductions and to upgrade existing
production equipment. Capital expenditures for fiscal 1996 included a program to
expand golf ball production. Capital expenditures for fiscal 1997 included major
projects at Spalding and Evenflo. Spalding began a multiphase expansion of its
warehouse and golf ball facilities at its Chicopee, Massachusetts operations in
May 1997. Management estimates the
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<PAGE> 31
multiphase project could amount to approximately $23 million in total capital
expenditures over two fiscal years with $8.5 million expended in fiscal 1997.
Evenflo's fiscal 1997 capital expenditures of $20.9 million included $12.6
million to expand and upgrade its warehousing and shipping facilities, modernize
distribution systems, and re-engineer assembly operations at its Piqua, Ohio
operations. Capital expenditures in fiscal 1998 may exceed the average of the
previous two fiscal years principally as a result of the continuation of the
Spalding project described above and approximately $7.0 million in land,
building, and equipment at Evenflo's Piqua, Ohio, and Canton, Georgia,
facilities to accommodate the closing of Gerry's Thornton, Colorado facility.
On April 21, 1997, Evenflo acquired the net assets of Gerry for a purchase
price of $68.7 million. The purchased net assets consisted of the following
(dollars in millions):
<TABLE>
<S> <C>
Receivables $ 21.1
Inventories 20.0
Property, plant and equipment 14.3
Intangible assets 26.8
Other assets 0.1
------
Total 82.3
Accounts payable (10.2)
Accrued expenses (3.4)
------
Net assets purchased $ 68.7
======
</TABLE>
The Company's principal sources of liquidity will come from cash flow
generated from operations, borrowings under the $250 million revolving credit
facility and non-U.S. subsidiaries (the majority of which are guaranteed by the
Company). The Company's principal uses of liquidity will be to provide working
capital, meet debt service requirements and finance the Company's strategic
plans. At September 30, 1997, the Company had an available borrowing capacity of
$101.5 million (net of $121.1 million of outstanding letters of credit and
bankers' acceptances) under the revolving credit facility. The Company has $17.5
million required amortization of Term Loans on September 30, 1998 ($15.0
million Term Loan A, $1.0 million Term Loan B, $1.0 million Term Loan C and
$0.5 million Term Loan D).
EBITDA (earnings before interest, taxes, depreciation and amortization) is
included as a basis upon which the Company assesses its financial performance,
and certain covenants in the Company's borrowing arrangements are tied to
similar measures. The following sets forth certain information regarding the
Company's EBITDA and other net cash flow items for fiscal 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
Historical Cash Flow
net cash provided by(used in)
------------------------------------------------
Other items
Historical affecting historical Operating Investing Financing
EBITDA EBITDA activities activities activities
------ ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Spalding $53,572 4,545 32,687 (14,143) (36,152)
Evenflo 8,261 19,349 4,577 (89,579) 81,794
Corporate (7,273) 1,218 (68,737) -- 19,423
------- ------- -------- --------- -------
Consolidated $54,560 25,112 (31,473) (103,722) 65,065
======= ======= ======== ========= =======
</TABLE>
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<PAGE> 32
Spalding. Spalding's historical EBITDA included $4.5 million of unusual
costs consisting of (i) $2.4 million to restructure its international
operations, (ii) $1.7 million write-down of discontinued international inventory
and related accounts receivables, (iii) $0.8 million to purchase its Etonic
Canadian distributor rights, and (iv) an offsetting recovery of $0.4 million
from settlement of a 1996 Etonic computer software dispute. The Company
estimates it will incur approximately $1.3 million of additional unusual
expenses in 1998 to complete its international restructuring program.
Evenflo. Evenflo's historical EBITDA was adversely affected by $19.4
million of unusual costs consisting of (i) $9.6 million costs to relocate the
Gerry Colorado administrative and manufacturing operations to Evenflo's Ohio and
Georgia locations, (ii) $3.1 million write-down of Gerry inventory related to
products that have been discontinued, (iii) $1.3 million due to purchase
accounting effect attributable to Gerry's inventory turnover, (iv) $2.6 million
costs to consolidate certain of its operations that were previously managed
separately, and (v) $2.8 million attributable to the manufacturing and warehouse
reconfiguration. The Company estimates it will incur approximately $1.8 million
of additional unusual expenses in 1998 to complete its Gerry integration.
Corporate. Corporate incurred $1.2 million of unusual costs adversely
affecting historical EBITDA consisting of $1.0 million Gerry and other
acquisition costs and $0.2 million of costs related to new equity investments in
the Company.
The Company does not believe that its historic net loss in fiscal 1997 and
fiscal 1996 is indicative of a current or a future inability to service its
debt. The Company expects cash flows from operations to improve in future
periods through the implementation of its business strategies, although there
can be no assurance as to the success of such strategies.
FINANCINGS. The September 30, 1996, Financings include (i) $650 million
under the credit facilities comprised of a $400 million term loan facility and a
$250 million revolving credit facility (the "Credit Facilities"), (ii) $200
million of notes, (iii) $150 million of preferred stock which was exchanged for
common shares on June 25, 1997, and (iv) a $221 million equity investment. The
proceeds from the credit facilities, notes, preferred stock and equity
investment were used to effect the Recapitalization and pay fees and expenses in
connection therewith.
On June 25, 1997, Strata exchanged all the Company's outstanding preferred
stock (liquidation value of $164.2 million) for 32,834,840 additional shares of
the Company's common stock at an exchange price of $5.00 per common share.
The Stock Purchase and Option Plan for key employees of Evenflo & Spalding
Holdings Corporation and subsidiaries ("1996 Employee Stock Ownership Plan")
consists of an aggregate of 9,800,000 shares of common stock, which may be sold
or granted as options to key employees of the Company. In 1997 the Company sold
2,020,238 shares for proceeds of $10.1 million and granted 6,431,146 common
share options at the $5.00 per share fair market value. As of September 30, 1997
there are 1,348,616 aggregate unissued shares and options and no options were
exercisable; however, options for 1,023,729 common shares became exercisable on
October 1, 1997.
On July 15, 1997, a Strata affiliate invested $45.6 million and Abarco
invested $3.4 million for 9,800,000 additional shares of the Company's common
stock at a price of $5.00 per common share. The additional equity investment was
made to partially fund the April 21, 1997, Gerry Acquisition, and the proceeds
were used to pay down revolver borrowings incurred in the acquisition.
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<PAGE> 33
CURRENCY HEDGING. In fiscal 1997, approximately 19% of the total Company
net sales were generated in non-U.S. currencies. Fluctuations in the value of
these currencies relative to the U.S. dollar could have a material effect on the
Company's results of operations. The Company, in its discretion, uses forward
exchange contracts to hedge up to six month transaction exposures from U.S.
dollar purchases made by its non-U.S. operations. As of September 30, 1997,
forward exchange contracts outstanding totaled $9.4 million.
INFLATION. Inflation has not been material to the Company's operations
within the periods presented.
33
<PAGE> 34
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................................................ 35
Statements of Consolidated Earnings (Loss) and Comprehensive Earnings (Loss)
for the years ended September 30, 1997, 1996, and 1995............................................... 36
Consolidated Balance Sheets as of September 30, 1997 and 1996........................................... 37
Statements of Consolidated Cash Flows for the years ended September 30,
1997, 1996, and 1995................................................................................. 38
Statements of Consolidated Shareholders' Equity (Deficiency) for the years ended
September 30, 1997, 1996, and 1995................................................................... 39
Notes to Consolidated Financial Statements.............................................................. 40
</TABLE>
34
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Evenflo & Spalding Holdings Corporation:
We have audited the accompanying consolidated balance sheets of Evenflo &
Spalding Holdings Corporation (formerly E&S Holdings Corporation) and
subsidiaries (the "Company") as of September 30, 1997 and 1996, and the related
statements of consolidated earnings (loss) and comprehensive earnings (loss), of
cash flows and of shareholders' equity (deficiency) for each of the three fiscal
years in the period ended September 30, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
1997 and 1996, and the results of its operations and its cash flows for each of
the three fiscal years in the period ended September 30, 1997 in conformity
with generally accepted accounting principles.
As discussed in Note B to the consolidated financial statements, the Company has
adopted Statement of Financial Accounting Standards No. 130 by presenting the
Company's comprehensive earnings (loss) for each of the three fiscal years in
the period ended September 30, 1997.
DELOITTE & TOUCHE LLP
Tampa, Florida
November 7, 1997
35
<PAGE> 36
EVENFLO & SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS (LOSS) AND COMPREHENSIVE EARNINGS (LOSS)
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
NET SALES $ 827,191 689,080 634,157
Cost of sales 565,959 452,037 407,334
--------- -------- --------
GROSS PROFIT 261,232 237,043 226,823
Selling, general and administrative expenses 229,313 196,741 178,637
Royalty income, net (14,109) (14,339) (13,514)
Restructuring costs 12,001 0 0
1994 Management Stock Ownership Plan expense 0 20,828 1,130
Recapitalization costs 0 7,700 0
Litigation settlement expense 0 0 2,400
--------- -------- --------
INCOME FROM OPERATIONS 34,027 26,113 58,170
Interest expense, net 71,326 37,718 38,108
Currency loss, net 1,236 775 381
--------- -------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS (38,535) (12,380) 19,681
Income taxes (benefit) (8,500) 9,300 8,683
--------- -------- --------
EARNINGS (LOSS) BEFORE EXTRAORDINARY LOSS (30,035) (21,680) 10,998
Extraordinary loss on early extinguishment of debt,
net of $3,200 tax benefit 0 (5,987) 0
--------- -------- --------
NET EARNINGS (LOSS) (30,035) (27,667) 10,998
Other comprehensive earnings (loss) - currency
translation adjustments net of tax benefits of
$(285), $(239) and $(662) (819) (43) (1,269)
--------- -------- --------
COMPREHENSIVE EARNINGS (LOSS) $ (30,854) (27,710) 9,729
========= ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
36
<PAGE> 37
EVENFLO & SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ------ ---- ----
<S> <C> <C>
CURRENT ASSETS
Cash $ 5,168 75,298
Receivables, less allowance of $3,941 and $4,373 243,571 192,999
Inventories 157,512 109,171
Deferred income taxes 13,860 11,952
Other 8,955 4,704
--------- --------
TOTAL CURRENT ASSETS 429,066 394,124
Property, plant and equipment, net 110,195 78,334
Intangible assets, net 154,123 131,708
Deferred income taxes on acquired non-U.S. trademarks 45,518 49,432
Deferred financing costs 29,594 34,231
Other 3,349 2,932
--------- --------
TOTAL ASSETS $ 771,845 690,761
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
- -------------------------------------------------
CURRENT LIABILITIES
Non-U.S. bank loans $ 17,674 13,028
Current maturities of long-term debt 17,500 0
Accounts payable 183,657 141,708
Accrued expenses 79,348 69,131
Income taxes 811 706
--------- --------
TOTAL CURRENT LIABILITIES 298,990 224,573
Long-term debt 609,900 625,800
Deferred income taxes 10,614 16,339
Pension 12,327 11,753
Postretirement benefits 8,910 8,750
Other 1,735 2,142
--------- --------
TOTAL LIABILITIES 942,476 889,357
COMMITMENTS AND CONTINGENCIES (NOTES N, O, P, AND Q)
PREFERRED STOCK - AT LIQUIDATION VALUE 0 150,000
SHAREHOLDERS' EQUITY (DEFICIENCY)
Common stock, $.01 par value, 150,000,000 and 100,000,000 shares authorized
and 94,655,078 and 50,000,000 shares outstanding 947 500
Paid-in capital 431,780 223,125
Retained earnings (deficit) (599,067) (568,749)
Accumulated other comprehensive earnings (loss) - currency
translation adjustments (4,291) (3,472)
--------- --------
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) (170,631) (348,596)
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) $ 771,845 690,761
========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
37
<PAGE> 38
EVENFLO & SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH 1997 1996 1995
- --------------------------- ---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (30,035) (27,667) 10,998
Adjustments to reconcile net earnings to net cash provided (used)
by operating activities:
Depreciation 16,884 13,904 11,846
Intangibles amortization 4,885 6,423 6,441
Deferred income taxes (3,719) 4,550 3,037
Deferred financing cost amortization 4,637 2,266 2,225
1994 Management Stock Ownership Plan expense 0 20,828 1,130
Write-off of Etonic assets 0 3,300 0
Extraordinary loss on early extinguishment of debt 0 9,187 0
Other 734 443 1,651
--------- -------- --------
Subtotal (6,614) 33,234 37,328
Receivables (29,455) (24,793) (11,393)
Inventories (28,338) (4,747) (9,789)
Current liabilities, excluding bank loans 38,592 30,818 2,761
Other (5,658) (2,488) (2,297)
--------- -------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (31,473) 32,024 16,610
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (35,070) (19,546) (15,381)
Payment to purchase net assets of Gerry (68,652) 0 0
Acquisition of non-U.S. trademarks from affiliate 0 (5,135) 0
--------- -------- --------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (103,722) (24,681) (15,381)
--------- -------- --------
NET CASH PROVIDED (USED) BEFORE FINANCING ACTIVITIES (135,195) 7,343 1,229
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under credit agreements 0 600,000 320,000
Net borrowings under revolving credit loan 1,600 25,800 0
Repayments under prior credit agreements 0 (320,000) (274,645)
Net borrowings (repayments) of other indebtedness 4,646 (2,414) 1,769
Repayment of Etonic notes 0 (54,043) 0
Payment of new credit agreement financing costs 0 (34,231) (13,500)
Proceeds from issuance of preferred stock 0 150,000 0
Proceeds from issuance of common stock 59,102 221,000 0
Repurchase of common stock (283) (524,150) 0
1994 Management Stock Ownership Plan:
Repurchase of shares outstanding 0 (28,219) 0
Collection of management notes receivable 0 6,889 0
Additional capital contribution 0 1,219 0
Affiliate payable 0 0 (17,707)
--------- -------- --------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 65,065 41,851 15,917
--------- -------- --------
CASH - net change (70,130) 49,194 17,146
beginning of period 75,298 26,104 8,958
--------- -------- --------
end of period $ 5,168 75,298 26,104
========= ======== ========
SUPPLEMENTAL CASH FLOW DATA
Interest paid $ 53,163 35,677 35,535
Income taxes paid 2,332 3,385 6,072
Non-cash exchange of preferred stock for common stock 164,174 0 0
Non-cash preferred stock dividend 14,174 0 0
Non-cash acquisition of Etonic net assets 0 54,043 0
Non-cash acquisition of non-U.S. trademarks 0 0 14,293
Non-cash accrual of 1994 Management Stock Ownership Plan expense 0 0 1,130
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-38-
<PAGE> 39
EVENFLO & SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
other
Retained comprehensive
Common Paid-in earnings earnings
stock capital (deficit) (loss) Total
----- ------- --------- ------ -----
<S> <C> <C> <C> <C> <C>
September 30, 1994 $ 2 53,898 (74,470) (2,160) (22,730)
Net earnings for the year 0 0 10,998 0 10,998
Currency translation adjustments 0 0 0 (1,269) (1,269)
Other 0 0 407 234 641
----- -------- -------- ------ --------
September 30, 1995 2 53,898 (63,065) (3,195) (12,360)
Net earnings (loss) for the year 0 0 (27,667) 0 (27,667)
Issuance of common stock 1 220,999 0 0 221,000
Repurchase of common stock:
Cash and initial purchase price adjustment (2) (52,492) (471,656) 0 (524,150)
Realco promissory note carrying value 0 0 (8,388) 0 (8,388)
Realco common stock carrying value 0 0 1,711 0 1,711
Common stock split 499 (499) 0 0 0
Additional capital contribution 0 1,219 0 0 1,219
Currency translation adjustments 0 0 0 (43) (43)
Other 0 0 316 (234) 82
----- -------- -------- ------ --------
September 30, 1996 500 223,125 (568,749) (3,472) (348,596)
Net earnings (loss) for the year 0 0 (30,035) 0 (30,035)
Cash proceeds from issuance of
common stock 118 58,984 0 0 59,102
Exchange of common stock for
preferred stock 329 163,845 0 0 164,174
Preferred stock dividend 0 (14,174) 0 0 (14,174)
Currency translation adjustments 0 0 0 (819) (819)
Repurchase of common stock - final
purchase price adjustment 0 0 (283) 0 (283)
----- -------- -------- ------ --------
September 30, 1997 $ 947 431,780 (599,067) (4,291) (170,631)
===== ======== ======== ====== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
39
<PAGE> 40
EVENFLO & SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE A - ORGANIZATION
BUSINESS. Evenflo & Spalding Holdings Corporation (formerly E&S Holdings
Corporation) and subsidiaries (the "Company") is a diversified, global
manufacturer and marketer of branded consumer products serving the sporting
goods and juvenile products markets under the primary trade names Spalding,
Top-Flite, Etonic, Dudley, Evenflo, Gerry and Snugli. The primary subsidiaries
of the Company are Spalding & Evenflo Companies, Inc. ("S&E") and subsidiaries,
of which Spalding Sports Worldwide ("Spalding") is a division, Etonic Worldwide
Corporation ("Etonic") and Evenflo Company, Inc. ("Evenflo"), of which Gerry
Baby Products Company ("Gerry") is a division.
Spalding markets and licenses under the Spalding, Top-Flite, Etonic and Dudley
trade names, a wide variety of recreational and athletic products such as golf
balls, golf clubs, golf shoes, golf bags and accessories, basketballs,
volleyballs, footballs, soccer balls, softball and baseball bats, balls and
gloves, handballs, rackets and balls for tennis and racquetball and clothing,
shoes and equipment for many other sports. Evenflo markets under the Evenflo,
Gerry and Snugli trade names specialty juvenile products including reusable and
disposable baby bottle feeding systems, breast-feeding aids, pacifiers and oral
development items, baby bath, health and safety items, monitors and other baby
care products and accessories, as well as juvenile car seats, stationary
activity products, strollers, high chairs, portable play yards, cribs, dressers
and changing tables, gates, soft carriers and frame carriers, child carriers and
mattresses.
RECAPITALIZATION AND STOCK PURCHASE AGREEMENT. Prior to September 30, 1996, the
Company was a wholly-owned subsidiary of Abarco N.V. ("Abarco"). On August 15,
1996, Abarco and Strata Associates L.P. ("Strata"), an affiliate of Kohlberg
Kravis Roberts & Co., L.P. ("KKR"), entered into a Recapitalization and Stock
Purchase Agreement (the "Recapitalization Agreement") pursuant to which Strata
acquired control of the Company (the "Recapitalization"). The closing of the
Recapitalization took place on September 30, 1996 (the "Closing"). In connection
with the Recapitalization a portion of the common stock owned by Abarco was
redeemed for total consideration of $581,933 in 1996 (see details below) and an
adjustment to the redemption price of $283 in 1997.
The Recapitalization was financed with $221,000 cash proceeds of newly issued
common stock to Strata, $150,000 proceeds of non-voting redeemable preferred
stock issued to Strata (of which $50,000 was issued immediately after the
Closing), proceeds of $625,800 from certain borrowings (see Note H) and $2,209
of the Company's cash balances. These funds were used to (i) redeem a portion of
the common stock held by Abarco for $524,150 in cash plus the fair value of the
Company's investments in an affiliate promissory note of $49,395 and in the E&S
Realco, Inc. ("Realco") common stock and note receivable of $8,388; (ii) repay
principal and interest of $367,894 for existing indebtedness, including the
promissory notes issued to acquire Etonic; (iii) redeem, for a net payment of
$21,330 all of the remaining subsidiary shares issued under the 1994 Management
Stock Ownership Plan (see Note L); (iv) pay $31,471 in transaction fees and
expenses; (v) purchase certain non-U.S. trademarks and assignment rights from an
affiliate of Abarco for $5,135; (vi) pay a transaction bonus of $5,375 to
certain members of management of S&E; and (vii) provide working
40
<PAGE> 41
capital of $45,654 (of this amount $25,800 was used to repay borrowings under
the revolving credit loan on October 1, 1996).
Immediately after the Recapitalization, the Company declared a stock split in
the form of a stock dividend of approximately 60,892 shares for each common
share then outstanding.
ACQUISITION OF GERRY. On April 21, 1997, Evenflo acquired the net assets of
Gerry Baby Products Company for a purchase price of $68,652. Gerry has
manufacturing operations in Colorado and in Wisconsin and maintains its
administrative operations in Colorado. Gerry manufactures and/or markets
specialty juvenile products including baby bath, health and safety items,
monitors and other baby care products and accessories, as well as juvenile car
seats, strollers, high chairs, cribs, dressers and changing tables, gates and
soft carriers and frame carriers marketed under the Gerry and Snugli brand
names. The purchased net assets consisted of the following:
<TABLE>
<S> <C>
Receivables $ 21,117
Inventories 20,003
Other current assets 11
Property, plant and equipment 14,324
Intangible assets 26,823
Other assets 53
--------
Total 82,331
Accounts payable (10,230)
Accrued expenses (3,449)
--------
Net assets purchased $ 68,652
========
</TABLE>
The Gerry acquisition was accounted for using the purchase method.
The operating results of Gerry have been included in the statements of
consolidated earnings (loss) from the date of acquisition, which in 1997 have
been reduced by a $1,268 increase in cost of sales resulting from the sale, in
the ordinary course of business, of inventory acquired which was written up to
fair value at date of acquisition in accordance with purchase accounting. If the
acquisition had taken place at October 1, 1995 rather than in April 1997,
Gerry's unaudited results of operations would have changed pro forma
consolidated net sales and net earnings (loss) by $61,362 and $(1,735) for the
year ended September 30, 1997 and $124,027 and $(110) for the year ended
September 30, 1996.
41
<PAGE> 42
ACQUISITION OF ETONIC. In July 1996, the Company acquired the net assets of
Etonic, which manufactures and/or markets golf shoes, gloves and other golf
accessories, as well as an established line of running and walking shoes. To
effect the acquisition of Etonic, the Company issued promissory notes of $54,043
to the seller in exchange for the following:
<TABLE>
<S> <C>
Receivables $ 22,556
Inventories 15,642
Other current assets 3,388
Property, plant and equipment 4,129
Intangible assets 13,905
--------
Total 59,620
Accounts payable (4,115)
Accrued expenses (1,462)
--------
Promissory notes payable $ 54,043
========
</TABLE>
The Etonic acquisition was accounted for using the purchase method.
The operating results of Etonic have been included in the statements of
consolidated earnings (loss) from the date of acquisition, which in 1996 have
been reduced by a $1,600 increase in cost of sales resulting from the sale, in
the ordinary course of business, of inventory acquired which was written up to
fair value at date of acquisition in accordance with purchase accounting. If the
acquisition had taken place at October 1, 1994 rather than in July 1996,
Etonic's unaudited results of operations would have changed pro forma
consolidated net sales by $42,942 for the year ended September 30, 1996 and
$60,230 for the year ended September 30, 1995. Consolidated pro forma net
earnings (loss) would not have been materially different from the Company's
reported amounts for 1996 and 1995.
The promissory notes payable above plus accrued interest totaling $54,935 were
paid as part of the Recapitalization described above. Subsequent to the Etonic
acquisition and prior to September 30, 1996, Company management decided to
relocate the Etonic administrative operations to one of the Company's other
administrative locations. As a result, the Company charged $5,600 to expense in
the year ended September 30, 1996 for (i) a $1,400 write-off of prepaid rent as
a result of the subsequent decision to consolidate the Etonic administrative
function with an existing Company facility; (ii) a $1,900 write-off of computer
software costs which had a reduced future value as a result of the subsequent
decision to discontinue the use of Etonic's computer system; and (iii) a charge
of $2,300 for moving and other costs related to Etonic and its acquisition.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Evenflo & Spalding Holdings Corporation and its subsidiaries, all of
which are wholly-owned. All significant intercompany accounts and transactions
have been eliminated in consolidation.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The estimated fair value of amounts
reported in the consolidated financial statements have been determined by using
available market information and appropriate valuation methodologies. The
carrying value of all current assets and current liabilities approximates fair
value because of their short-term nature. The fair value of long-term debt
approximates the carrying value, based on market prices.
42
<PAGE> 43
INVENTORIES. Inventories are valued at the lower of cost or market (net
realizable value). Costs for the majority of United States inventories and
certain non-U.S. inventories has been determined by use of the last-in,
first-out method. Cost for the majority of non-U.S. inventories has been
determined by use of the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT. These assets are stated at cost and are
depreciated principally using the straight-line method over estimated useful
lives which range from 3 to 20 years. Certain assets are depreciated for income
tax purposes using accelerated methods. Assets that become fully depreciated are
removed from the asset and related accumulated depreciation accounts.
INTANGIBLE ASSETS. Intangible assets are amortized on the straight-line basis
using a 40 year life.
IMPAIRMENT OF LONG-LIVED ASSETS. Periodically, the Company evaluates the
recoverability of the net carrying value of its property, plant and equipment
and its intangible assets by comparing the carrying values to the estimated
future undiscounted cash flows. A deficiency in these cash flows relative to the
carrying amounts is an indication of the need for a write-down due to
impairment. The impairment write-down would be the difference between the
carrying amounts and the fair value of these assets. A loss on impairment will
be recognized by a charge to earnings.
DEFERRED FINANCING COSTS. The costs incurred to obtain financing under the
various financing agreements have been capitalized and are amortized to interest
expense over the lives of the agreements, using the interest method for term
facilities and the straight-line method for revolving credit facilities.
INCOME TAXES. Income tax expense is based on reported earnings before income
taxes. Deferred income taxes reflect the impact of temporary differences between
the amounts of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. In accordance with
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), these
deferred taxes are measured by applying currently enacted tax laws.
RETIREMENT PLANS AND POSTRETIREMENT BENEFITS. Current service costs of
retirement plans and postretirement healthcare and life insurance benefits are
accrued annually. Prior service costs resulting from amendments to the plans are
amortized over the average remaining service period of employees expected to
receive benefits.
EMPLOYEE STOCK OWNERSHIP PLANS. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), encourages, but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), and related interpretations. Accordingly,
compensation cost for the stock options included under the Company's 1996 Stock
Purchase and Option Plan for Key Employees of Evenflo & Spalding Holdings
Corporation and Subsidiaries (the "1996 Employee Stock Ownership Plan") is
measured as the excess, if any, of the fair value of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock.
43
<PAGE> 44
Prior to September 30, 1996 compensation cost for the shares covered under the
Company's 1994 Management Stock Ownership Plan was recorded in the amount of any
increase in value as determined by a formula. The per share valuation was
determined once a year by the executive committee, using a specified multiple of
EBITDA (earnings before interest, income taxes, depreciation and amortization)
less outstanding Company debt.
ADVERTISING. Advertising costs are expensed as incurred and included in selling,
general and administrative expenses. Advertising expenses amounted to $91,982,
$66,079 and $62,304 in 1997, 1996 and 1995.
CURRENCY TRANSLATION. Non-U.S. currency-denominated assets and liabilities are
translated into U.S. dollars at the exchange rates existing at the balance sheet
dates. Translation adjustments resulting from fluctuations in the exchange rates
are recorded as a separate component of common shareholders' equity
(deficiency). Income and expense items are translated at the average exchange
rates during the respective periods.
CURRENCY EXCHANGE CONTRACTS. Open forward currency exchange contracts are
marked-to-market using the spot rates at each balance sheet date and the change
in market value is recorded by the Company as a currency gain or loss.
USE OF ESTIMATES. The preparation of the accompanying consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosures of contingencies at the date of the
consolidated financial statements and of sales and expenses recognized during
the reporting period. Actual results could differ from these estimates.
CASH FLOWS. For purposes of the statements of consolidated cash flows, the
Company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Comprehensive income is defined as the
change in equity of a business during a period from transactions and
circumstances related to non-owner sources, and includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. The Company has adopted SFAS No. 130 in these financial
statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires
public entities to report certain information about operating segments, their
products and services, the geographic areas in which they operate, and their
major customers, in complete financial statements and in condensed interim
financial statements issued to shareholders. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The adoption of SFAS No. 131 is
not expected to have a material effect on the Company's financial statements.
44
<PAGE> 45
RECLASSIFICATIONS. Certain reclassifications have been made to prior year
amounts to conform with current year presentations.
NOTE C - INVENTORIES
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Finished goods $ 99,733 74,890
Work in process 28,031 17,088
Raw materials 29,748 17,193
---------- --------
Total inventories $ 157,512 109,171
========== ========
</TABLE>
The cost of 87% of 1997 and 71% of 1996 inventories was computed using the
last-in, first-out (LIFO) method of inventory valuation. Use of the LIFO method
increased the 1997 and 1996 year end inventories by $1,050 and $390.
NOTE D - PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 3,390 2,917
Buildings and building improvements 55,192 46,365
Machinery and equipment 131,821 102,175
--------- --------
190,403 151,457
Accumulated depreciation (80,208) (73,123)
--------- --------
Property, plant and equipment, net $ 110,195 78,334
========= ========
</TABLE>
NOTE E - INTANGIBLE ASSETS, NET
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
United States trademarks $ 102,203 85,303
Non-U.S. trademarks 15,052 13,385
Goodwill 100,040 91,374
--------- --------
217,295 190,062
Accumulated amortization (63,172) (58,354)
--------- --------
Intangible assets, net $ 154,123 131,708
========= ========
</TABLE>
45
<PAGE> 46
NOTE F - ACCRUED EXPENSES
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Compensation and other employee benefits $13,281 16,983
Liability for self insurance 12,276 12,428
Liability for restructuring costs 9,335 0
Other, principally operating expenses 44,456 39,720
------- ------
Total accrued expenses $79,348 69,131
======= ======
</TABLE>
The Company has both insured and self insured group health plans. Approximately
51% of the Company's employees are covered under an insured medical program and
approximately 74% are covered by insured workers' compensation programs. The
self-insured workers' compensation programs are covered by a $300 per occurrence
stop loss insurance policy.
Commercial and product liability insurance coverages are high deductible insured
programs. Commercial liability deductibles are $250 per occurrence. Product
liability deductibles are $500 per occurrence and $3,000 in aggregate. As a
supplement to these programs, the Company carries $75,000 in umbrella coverage.
The liability for self insurance claims shown in the table above covers the
deductibles and self insurance programs and is based upon an annual review by
the Company and its independent actuary of claims filed and claims incurred but
not yet reported.
In July 1997, Company management adopted a plan to relocate the Gerry Colorado
administrative and manufacturing operations to Evenflo's Ohio and Georgia
locations. As a result, the Company accrued $9,591 of restructuring costs in the
year ended September 30, 1997 consisting of (i) $4,105 of severance costs for
the Colorado employees; (ii) $2,630 of shut-down costs of the Colorado facility;
(iii) $1,237 of computer conversion costs to preserve prior manufacturing
information for future purposes; and (iv) $1,619 of other costs. The Company has
funded $1,344 of these restructuring costs leaving an accrual of $8,247 as of
September 30, 1997. In addition, the Company incurred $8,490 of unusual
expenses, which have been charged to cost of sales and selling, general and
administrative expenses, related to (i) $3,100 inventory write-down resulting
from a decision to discontinue the sale of certain Gerry products, (ii) $2,629
unusual costs to consolidate certain of its operations that were previously
managed separately and (iii) $2,761 attributable to the manufacturing and
warehouse reconfiguration. The Company estimates it will incur approximately
$1,800 of additional unusual expenses in 1998 to complete its Gerry integration.
Also in 1997, the Company implemented a plan to restructure the Spalding
international operations. As a result, the Company accrued $2,410 of
restructuring costs consisting of (i) $758 of warehouse studies, consolidations,
and lease terminations; (ii) $923 of severance costs; and (iii) $729 of other
costs. The Company has funded $1,322 of these restructuring costs leaving an
accrual of $1,088 as of September 30, 1997. In addition, the Company incurred
$2,135 of unusual expenses, which have been charged to cost of sales and
selling, general and administrative expenses, related to (i) $1,602 inventory
write-down and $100 receivable write-off resulting from a decision to
discontinue the sale of certain products by certain of their non-U.S.
affiliates, (ii) $833 to purchase its Etonic Canadian distribution rights and
(iii) a $400 offsetting recovery from settlement of a 1996 Etonic computer
software dispute. The Company estimates it will incur approximately $1,300 of
additional unusual expenses in 1998 to complete this restructuring program.
46
<PAGE> 47
NOTE G - NON-U.S. DEBT
The Company's non-U.S. subsidiaries have short-term bank financing arrangements
to support international working capital requirements. The subsidiaries utilized
these arrangements by use of direct bank borrowings, discounting receivables,
and letters of credit as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
As of September 30:
Available lines of credit $42,800 46,800
======= ======
Amounts outstanding:
Direct bank borrowings $17,674 13,028
Discounted receivables (netted
against accounts receivable) 5,850 8,880
Letters of credit 3,376 2,192
------- -------
$26,900 24,100
======= ======
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
For the years ended:
Maximum borrowings $27,900 31,800 30,100
Weighted average outstanding balances 25,800 25,700 24,700
Weighted average interest rates 4.74% 4.60% 6.32%
</TABLE>
At September 30, 1997, the borrowings are mainly comprised of $13,900 in
Japanese yen, $9,100 in Australian dollars, $1,700 in Canadian dollars and
$1,300 in British pound sterling.
NOTE H - UNITED STATES DEBT
The Company's U.S. operations have long-term bank financing arrangements to
support working capital needs and other general corporate requirements. The
operations utilized these arrangements primarily by use of direct bank
borrowings, acceptances and letters of credit. The Company's borrowing
activities are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
As of September 30:
Available lines of credit $850,000 850,000
======== =======
Amounts outstanding:
Direct borrowings $627,400 625,800
Acceptances (included in accounts payable) 92,500 57,200
Letters of credit 28,600 23,800
Non-U.S. bank loan guarantees 0 800
-------- --------
$748,500 707,600
======== =======
Direct borrowings consist of:
Secured Credit Facility
Revolving credit loan $ 27,400 25,800
Term Loans 400,000 400,000
Senior Subordinated Notes 200,000 200,000
-------- --------
Total debt 627,400 625,800
Current maturities of debt 17,500 0
-------- --------
Long-term debt $609,900 625,800
======== =======
</TABLE>
47
<PAGE> 48
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
For the years ended:
Maximum borrowings (1996 and 1995
prior to the Recapitalization) $735,800 366,700 377,600
Weighted average outstanding balances 653,200 338,000 326,900
Weighted average interest rates 9.82% 9.14% 10.13%
</TABLE>
SECURED CREDIT FACILITY. On September 30, 1996, the Company entered into a
secured Credit Facility (the "Credit Facility") with a syndicate of banks and
other financial institutions. The Credit Facility provides for a $650,000
maximum credit commitment, consisting of a seven year $250,000 revolving credit
loan ("Revolving Credit Loan") and $400,000 in term loans ("Term Loans"). Term
Loans consist of (i) $175,000 seven year Term Loan A, (ii) $87,500 eight year
Term Loan B, (iii) $87,500 nine year Term Loan C and (iv) $50,000 nine and one
half year Term Loan D. Each of the Term Loans require annual amortization
beginning September 30, 1998 and each subsequent September 30 thereafter until
maturity. Revolving Credit Loans may be used for working capital needs, special
facility obligations (letters of credit and acceptances), general corporate
purposes and for borrowings on same-day notice ("Swingline Loans"). Special
facility obligations are limited to a maximum of $180,000 and Swingline Loans
are limited to a maximum of $30,000.
All Term Loans and Revolving Credit Loans will bear interest, at the Company's
option, at either: (A) a "base rate" equal to the higher of (i) the federal
funds rate plus 0.50% per annum or (ii) the administrative agent's prime rate,
plus (a) in the case of Term Loan A, a debt to EBITDA-dependent rate ranging
from 0.00% to 1.25% per annum, (b) in the case of Term Loan B, 1.75% per annum,
(c) in the case of Term Loan C, 2.25% per annum, (d) in the case of Term Loan D,
2.75% per annum, (e) in the case of a Revolving Credit Loan and Swingline Loans,
a debt to EBITDA-dependent rate ranging from 0.00% to 1.25% per annum or (B) a
"eurodollar rate" plus (i) in the case of Term Loan A, a debt to
EBITDA-dependent rate ranging from 0.625% to 2.25% per annum, (ii) in the case
of Term Loan B, 2.75% per annum, (iii) in the case of Term Loan C, 3.25% per
annum, (iv) in the case of Term Loan D, 3.75% per annum or (v) in the case of
Revolving Credit Loans, a debt to EBITDA-dependent rate ranging from 0.625% to
2.25% per annum. Swingline Loans may only be "base rate" loans.
The Company pays a commitment fee calculated at a debt to EBITDA-dependent rate
ranging from 0.20% to 0.50% per annum of the available unused commitment under
the Revolving Credit Loan in effect on each day. Such fee is payable quarterly
in arrears and upon termination of the Revolving Credit Loan. In addition, the
Company pays a fee to the administrative agent of $100 per annum, payable
quarterly in arrears.
The Company pays a letter of credit fee calculated at a debt to EBITDA-dependent
rate ranging from 0.50% to 2.125% per annum of the face amount of each letter of
credit and a fronting fee calculated at a rate equal to 0.125% per annum of the
face amount of each letter of credit. Such fees, except fronting fee, are
payable quarterly in arrears and upon the termination of the Revolving Credit
Loan. In addition, the Company pays customary transaction charges in connection
with any letters of credit.
The Term Loans will be subject to mandatory prepayments (i) with the proceeds of
certain asset sales and certain debt offerings (excluding the Senior
Subordinated Notes) and (ii) on an annual basis with 50% of the Company's excess
cash flow (as defined in the Credit Facility) for so long as the ratio of the
Company's total debt (as defined in the Credit Facility) to EBITDA (as defined
in the Credit
48
<PAGE> 49
Facility) is greater than 4.0 to 1.0. The Credit Facility prohibits the Company
from repurchasing any Senior Subordinated Notes subject to limited exceptions.
The Company's obligations under the Credit Facility are secured by a pledge of
the stock of certain of its subsidiaries. In addition, indebtedness under the
Credit Facility is guaranteed by the principal subsidiaries of the Company.
The Credit Facility contains customary covenants and restrictions on the
Company's ability to engage in certain activities including (i) limitations on
liens, (ii) limitations on consolidations and mergers of the Company and sales
of the assets of the Company, (iii) restrictions on the purchase, redemption or
acquisition of any capital stock, equity interest or any other obligations or
other securities and restrictions on the advances, loans, extension of credit or
capital contributions to, or investments in, other entities, (iv) restrictions
on additional indebtedness to be incurred by the Company, (v) restrictions on
payments of dividends or other distribution of assets, and (vi) compliance with
certain financial covenants relating to certain interest coverage, fixed charge
ratios, and a leverage ratio.
The Credit Facility includes customary events of default.
Scheduled maturities of the Term Loans are as follows:
<TABLE>
<CAPTION>
Year Ending Term Term Term Term
September 30 Loan A Loan B Loan C Loan D
- ------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
1998 $ 15,000 1,000 1,000 500
1999 25,000 1,000 1,000 500
2000 25,000 1,000 1,000 500
2001 30,000 1,000 1,000 500
2002 30,000 1,000 1,000 500
2003 50,000 1,000 1,000 500
2004 0 81,500 1,000 500
2005 0 0 80,500 500
2006 (March 31, 2006) 0 0 0 46,000
-------- ------ ------ ------
Total $175,000 87,500 87,500 50,000
======== ====== ====== ======
</TABLE>
SENIOR SUBORDINATED NOTES. In conjunction with the closing of the
Recapitalization of September 30, 1996 (see Note A), the Company issued $200
million aggregate principal amount of 10 3/8% Senior Subordinated Notes. In
January 1997, the Company completed a public debt offering which resulted in the
Company exchanging its 10 3/8% Senior Subordinated Notes for new 10 3/8% Series
B Senior Subordinated Notes (the "Senior Subordinated Notes"). The Senior
Subordinated Notes will mature on October 1, 2006 and are unsecured senior
subordinated obligations of the Company. Interest on the Senior Subordinated
Notes is payable semiannually April 1 and October 1 of each year.
The Senior Subordinated Notes will be redeemable at the option of the Company,
in whole or in part, at any time on or after October 1, 2001. In addition, at
any time prior to October 1, 1999, the Company may, at its option, redeem up to
40% of the aggregate principal amount of the Senior Subordinated Notes at a
redemption price equal to 110% of the aggregate principal amount thereof, plus
accrued interest thereon, with the proceeds of equity offerings.
The Company will not be required to make mandatory redemptions or sinking fund
payments prior to maturity of the Senior Subordinated Notes, except if holders
request that the Company repurchase the
49
<PAGE> 50
Senior Subordinated Notes in the event of a change of control (as defined in the
indenture relating to the Senior Subordinated Notes) or upon the Company's
receipt of the proceeds of certain asset sales that are not reinvested or
applied to reduce indebtedness within a certain time period.
The Senior Subordinated Notes contain customary covenants and restrictions on
the Company's ability to engage in certain activities, which include (i)
limitations on restricted payments for the payment of dividends, (ii)
limitations on incurrence of additional indebtedness and issuance of
disqualified stock, (iii) restrictions on the merger, consolidation, or sale of
substantially all assets of the Company, (iv) limitations on transactions with
affiliates relating to the sale, lease, transfer or disposition of any of its
properties or assets in excess of certain amounts, (v) limitations on guarantees
of indebtedness by the Company, (vi) limitations on incurrence of other
subordinated indebtedness by the Company and (vii) certain reporting
requirements in accordance with Securities and Exchange Commission rules.
The Senior Subordinated Notes include customary events of default.
SECURED CREDIT AGREEMENT. Prior to September 30, 1996 the Company operated under
a $450,000 secured credit agreement (the "Secured Credit Agreement") which was
used for working capital needs and special facility obligations (letters of
credit, acceptances, non-U.S. bank loan guarantees and currency exchange
contracts). At the Company's option, interest was based on either an "Alternate
Base Rate" or a "Eurodollar Rate", as defined.
The Secured Credit Agreement was collateralized by domestic receivables and
inventories, all the stock of its domestic subsidiaries, 65% of the stock of the
Company's non-U.S. subsidiaries and certain investments held by Abarco. This
debt was paid in full from initial proceeds under the Credit Facility in
connection with the closing of the Recapitalization.
SECURED INTERIM LOAN AGREEMENT. On April 17, 1996 the Company entered into a one
year $40,000 secured interim loan agreement for the benefit of two Abarco
affiliated companies. The Company borrowed $21,000 and advanced this amount to
the two Abarco affiliated companies in exchange for promissory notes which
carried interest rates equal to the credit agreement interest rates. The
borrowings were secured by assets of the two affiliates. On September 30, 1996,
the affiliated promissory notes were repaid and this loan agreement was paid in
full and canceled.
OTHER INDEBTEDNESS. The other indebtedness consists primarily of financing
agreements with various government agencies to finance the cost of a
manufacturing facility and equipment. This debt was paid in full from initial
proceeds under the Credit Facility in connection with the closing of the
Recapitalization.
50
<PAGE> 51
NOTE I - INCOME TAXES
Earnings (loss) before income taxes and extraordinary loss in the United States
and outside the United States, along with the components of the income tax
provision, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Earnings (loss) before income taxes
and extraordinary loss:
United States $(32,957) (9,331) 16,005
Other nations (5,578) (3,049) 3,676
-------- -------- --------
Total $(38,535) (12,380) 19,681
======== ======== ========
Income tax provision:
Current taxes:
Federal taxes $ (7,136) 3,145 3,200
State taxes 565 400 88
Other nations' taxes 1,790 1,205 2,358
-------- -------- --------
Total (4,781) 4,750 5,646
Deferred taxes:
Federal taxes (3,712) 1,471 2,122
Other nations' taxes (7) 3,079 915
-------- -------- --------
Total (3,719) 4,550 3,037
-------- -------- --------
Total income taxes (benefit) $ (8,500) 9,300 8,683
======== ======== ========
</TABLE>
The differences between the effective income tax rate and the U.S. statutory
rate are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
U.S. statutory rate (35%) (35%) 35%
State income taxes, net of federal benefit 1 6 (3)
Non-U.S. tax rate differences 2 5 7
Non-U.S. losses (earnings) for which
no taxes were recorded 7 15 (1)
Increase in valuation allowances on
non-U.S. net operating loss carryforwards 0 20 2
1994 Management Stock Ownership Plan expense 0 59 2
Recapitalization costs 0 18 0
Other 3 (13) 2
--- --- ---
Effective tax rate (22%) 75% 44%
=== === ===
</TABLE>
51
<PAGE> 52
Under the asset and liability method prescribed by SFAS 109, deferred income
taxes, net of appropriate valuation allowances, are provided for the temporary
differences between the financial reporting and tax basis of assets and
liabilities at currently enacted tax rates. Temporary differences and
carryforwards, excluding the effects of certain non-U.S. trademarks (the
"Acquired Trademarks"), are as follows:
<TABLE>
<CAPTION>
Current Noncurrent
net deferred tax asset net deferred tax liability
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Intangibles amortization $ 0 0 24,756 25,367
Depreciation 0 0 491 (271)
Accrued liabilities 11,925 9,671 0 0
Pension 0 0 (4,458) (4,001)
Postretirement benefits 0 0 (3,475) (3,412)
Net operating loss carryforwards 0 0 (20,290) (11,164)
Capital loss carryforward 0 0 (8,198) (8,614)
Other 1,935 2,281 (418) (1,344)
------- ------- ------- -------
Total deferred income taxes 13,860 11,952 (11,592) (3,439)
Valuation allowance on net
operating losses and capital loss 0 0 22,206 19,778
------- ------- ------- -------
Net deferred income taxes $13,860 11,952 10,614 16,339
======= ======= ======= =======
</TABLE>
On September 30, 1997, the Company had net operating loss carryforwards of
$47,431 consisting of $20,321 from U.S. operations and $27,110 in non-U.S.
subsidiaries. Deferred tax benefits of $20,290 have been established on these
losses and a valuation allowance in the amount of $14,008 has been provided on
the entire state and non-U.S. portions of the deferred tax benefits. On
September 30, 1997, the Company had capital loss carryforwards of $21,020 for
which a valuation allowance in the amount of $8,198 has been provided on the
entire deferred tax benefits. Subsequent recognition of the tax benefits, if
any, relating to the capital loss carryforward will be credited to retained
earnings.
Under generally accepted accounting principles the 1994 acquisition of the
Acquired Trademarks from an affiliate of Abarco for $176,000 was not revalued to
fair market value but was recorded at the affiliate's net book value. The $8,250
carrying value of the Acquired Trademarks is being amortized over 40 years for
book purposes while the $176,000 fair market value is being amortized over 15
years for income tax purposes. The $58,712 deferred income tax effect at the
date the trademarks were acquired is reduced as the Company recognizes the tax
benefit of the difference between the carrying value of $8,250 and the tax basis
of $176,000. The carrying value of the deferred tax asset at September 30, 1997
and 1996 was $45,518 and $49,432.
On September 30, 1997, 1996 and 1995 undistributed earnings of non-U.S.
subsidiaries included in consolidated retained earnings amounted to $6,500,
$8,100 and $8,800. The Company intends to continue to indefinitely reinvest
these earnings, which reflect full provision for non-U.S. income taxes, to
expand its international operations. Accordingly, no provision has been made for
U.S. income taxes that might be payable upon repatriation of such earnings.
As part of the Recapitalization Agreement Abarco has indemnified the Company for
any potential income tax obligations through September 30, 1996. The Company's
federal income tax returns through September 30, 1993 have been examined by, and
settled with, the Internal Revenue Service.
52
<PAGE> 53
NOTE J - PENSION PLANS
The Company's United States operations have noncontributory, defined benefit
pension plans covering substantially all employees. These plans provide
employees with pension benefits that either are based on age and compensation or
are based on stated amounts for each year of service. The Company's funding
policy is to contribute annually the minimum amounts permitted by the Internal
Revenue Code. Plan assets are invested in a broadly diversified portfolio
consisting primarily of common stock and fixed income securities.
The September 30, 1997 and 1996 funded status of the Company's United States
defined benefit pension plans consists of the following:
<TABLE>
<CAPTION>
Assets exceed Accumulated benefits
accumulated benefits exceed assets
-------------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Actuarial present value of benefits
based on service to date and
present pay levels:
Vested $ 57,316 2,158 44 49,717
Nonvested 3,861 149 80 3,193
-------- -------- -------- --------
Accumulated benefit obligation 61,177 2,307 124 52,910
Additional amounts related to
projected pay increases 550 15 0 198
-------- -------- -------- --------
Total projected benefit obligation
based on service to date 61,727 2,322 124 53,108
Plan assets at fair value 66,572 2,749 42 49,871
-------- -------- -------- --------
Projected benefit obligation in excess
of (less than) plan assets (4,845) (427) 82 3,237
Unamortized net amount resulting from
changes in plan experience and
actuarial assumptions 13,471 446 (13) 3,947
Unrecognized net transition obligation 666 28 0 778
Unamortized prior service cost 3,168 (57) (8) 3,625
-------- -------- -------- --------
Pension liability (asset) $ 12,460 (10) 61 11,587
======== ======== ======== ========
</TABLE>
On September 30, 1997 and 1996 the Company's United States pension liability due
currently was $1,191 and $1,317 and the long-term portion was $11,330 and
$10,260.
53
<PAGE> 54
The 1997, 1996 and 1995 pension expense of the Company's United States defined
benefit plans includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Benefits earned during the period $ 2,814 2,236 2,225
Interest accrued on benefits earned in prior years 3,942 4,005 3,865
Return on plan assets (4,243) (3,775) (3,510)
Net amortization (445) (534) (331)
----- ------ -----
Pension expense of domestic defined
benefit pension plans $ 2,068 1,932 2,249
======= ===== =====
</TABLE>
Assumptions used in the accounting for United States defined benefit pension
plans as of September 30, 1997, 1996 and 1995 were:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.0% 7.5% 7.5%
Rate of increase in compensation levels 4.5% 4.5% 4.5%
Expected long-term rate of return on assets 8.5% 8.5% 8.5%
</TABLE>
The Company's United States operations and most non-U.S. subsidiaries have
separate defined contribution plans. The purpose of these defined contribution
plans is generally to provide additional financial security during retirement by
providing employees with an incentive to make regular savings. Company
contributions to the plans are based on employee contributions or compensation.
The non-U.S. plans are integrated with the benefits required by the laws of the
various countries. The Company's defined contribution plans' expenses totaled
$2,210 in 1997, $1,739 in 1996 and $1,880 in 1995.
NOTE K - POSTRETIREMENT BENEFITS
The Company provides certain postretirement health care and life insurance
benefits for its domestic retired employees and their dependents. Substantially
all of the Company's United States employees may become eligible for those
benefits if they reach normal retirement age while working for the Company. Most
international employees are covered by government sponsored programs and the
cost to the Company is not significant. The Company does not fund retiree health
care benefits in advance and has the right to modify these plans in the future.
The September 30, 1997 and 1996 status of the postretirement benefit plans
consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Actuarial present value of benefit obligation
based on service to date:
Retirees $ 4,947 4,934
Fully eligible active participants 1,403 1,215
Other active participants 2,707 2,092
------- -------
Accumulated postretirement benefit obligation 9,057 8,241
Unamortized net amount resulting from changes in plan
experience and actuarial assumptions (9) 664
------- -------
Postretirement benefit liability $ 9,048 8,905
======= =======
</TABLE>
On September 30, 1997 and 1996 the postretirement benefit liability due
currently was $138 and $155 and the long-term portion was $8,910 and $8,750.
54
<PAGE> 55
The 1997, 1996 and 1995 postretirement benefit expense includes the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Benefits earned during the period $ 147 136 122
Interest accrued on benefits earned in prior years 608 595 583
Net amortization (41) (17) (20)
----- ----- -----
Postretirement benefit expense $ 714 714 685
===== ===== =====
</TABLE>
Assumptions used in the accounting for postretirement benefit plans as of
September 30, 1997, 1996 and 1995 were:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.0% 7.5% 7.5%
Rate of increase in compensation levels 4.5% 4.5% 4.5%
Assumed current year health care cost trend rate
Retirees under 65 6.8% 7.8% 8.8%
Medicare eligible retirees 5.9% 6.5% 7.2%
Assumed ultimate trend rate 2.8% 2.8% 2.8%
Year ultimate health care cost rate will be achieved 2002 2002 2002
Effect of 1% increase in health care cost trend rates
Accumulated postretirement benefit obligation $ 680 570 550
Annual aggregate benefit and interest costs $ 60 50 50
</TABLE>
NOTE L - SHAREHOLDERS' EQUITY
PREFERRED STOCK AND COMMON STOCK. On September 27, 1996 the Company's
certificate of incorporation was amended to establish and authorize 50,000,000
shares of preferred stock, $.01 par value, with other preferences and attributes
to be determined by the Board of Directors at the time of each issuance of
preferred stock. On September 30, 1996 in connection with the Recapitalization
(see Note A), the Company authorized the issuance of 1,500,000 shares of 12
1/2%, nonvoting, redeemable preferred stock, $.01 par value, with a liquidation
value of $100 a share ("Preferred Stock"). These shares were acquired by Strata.
In addition, the Company authorized additional shares of preferred stock which
may be used to pay dividends on the preferred stock.
On June 25, 1997, Strata exchanged all the Company's outstanding Preferred Stock
(liquidation value of $164,174) for 32,834,840 additional shares of the
Company's common stock at an exchange price of $5.00 per common share. After
this exchange, the Company's unissued and authorized preferred stock is
50,000,000 shares, $.01 par value.
On July 15, 1997, a Strata affiliate invested $45,600 and Abarco invested $3,400
for 9,800,000 additional shares of the Company's common stock at a price of
$5.00 per common share.
See below for employee stock purchases.
55
<PAGE> 56
1996 EMPLOYEE STOCK OWNERSHIP PLAN. The 1996 Employee Stock Ownership Plan
consists of an aggregate of 9,800,000 shares of common stock, which may be sold
or granted as options to key employees of the Company. The share issuance price
and the option price must be at least 50% of the fair market value of the common
shares on the date of the sale or grant and an option's maximum term is ten
years. The options vest ratably over a five-year period. Any outstanding options
will become immediately exercisable upon a change in control of the Company. If
an employee retires any shares owned may be put to the Company or the Company
can call the shares based on a fair market value formula, as defined. If an
employee dies, becomes permanently disabled or terminates employment the Company
can call the shares based on a fair market value formula, as defined.
In 1997 the Company sold 2,020,238 shares for proceeds of $10,102 and granted
6,431,146 common share options at the $5.00 per share fair market value. As of
September 30, 1997 there are 1,348,616 aggregate unissued shares and options and
no options were exercisable; however, options for 1,023,729 common shares became
exercisable on October 1, 1997.
The Company has elected the disclosure-only basis provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the options. Had
compensation cost been determined based on the fair market value at the grant
date consistent with the method provided by SFAS No. 123, the Company's net
earnings (loss) for the year ended September 30, 1997 on a pro forma basis would
have been $(30,947) as compared to the reported amount of $(30,035).
The estimated fair value was determined using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants in 1997:
<TABLE>
<S> <C>
Dividend yield 0%
Expected volatility 0%
Risk-free interest rate 6.38%
Option term 5 years
Estimated fair value of granted options $ 1.37
</TABLE>
1994 MANAGEMENT STOCK OWNERSHIP PLAN. On September 30, 1996 the 1994 Management
Stock Ownership Plan was canceled and all shares were purchased by the Company
pursuant to the Recapitalization Agreement (see Note A). The 1994 Management
Stock Ownership Plan authorized 19,000 shares of S&E Class A common stock to be
available for issuance to a select number of the most senior officers of the
Company at a per share value as determined by a Company formula based on
earnings, as defined.
Compensation expense and an accrued liability to be paid upon termination of the
officers were recorded in the amount of any increase in value as determined by
the formula. As a result of the Recapitalization (see Note A), the redemption
price of the remaining shares covered by this plan totaled $28,219. The
outstanding balance of the Management Notes used to finance the acquisition of
the shares by the officers plus the accrued interest totaled $6,889 at September
30, 1996. Compensation expense related to this plan was $20,828 in 1996 and
$1,130 in 1995.
56
<PAGE> 57
NOTE M - DEFERRED COMPENSATION
In connection with the 1996 Employee Stock Ownership Plan (see Note L) the
Company canceled the long-term incentive compensation plans and paid the $7,056
total outstanding awards in the 1997 fiscal year.
The Company's long-term incentive compensation plans granted performance awards
to certain key employees which vested upon the attainment of pre-established
multi-year performance standards. The employees made an election at the
beginning of each plan to be paid fully upon vesting or to defer partial or
total payment up to seven years. The performance awards were payable in cash
based upon a net earnings formula, as defined, as of the September 30 preceding
the payment. Compensation was recorded each year for the effect of changes based
on the net earnings formula, as defined, for the vested awards of prior plans
and the estimated awards that would be vested in future periods. Compensation
expense under these plans was $1,092 in 1996 and $2,556 in 1995.
NOTE N - LEASE COMMITMENTS
The Company leases certain manufacturing, warehousing and office facilities, and
equipment under various operating lease arrangements expiring periodically
through 2014. The Company has no material capital leases.
The following is a schedule by year of future minimum rental payments required
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year at September 30, 1997:
<TABLE>
<CAPTION>
Year Ending
September 30
------------
<S> <C>
1998 $ 5,053
1999 2,083
2000 1,073
2001 931
2002 653
Thereafter 4,440
-------
Total minimum lease payments $14,233
=======
</TABLE>
Rental expense under operating leases was $5,185 in 1997, $3,455 in 1996 and
$3,027 in 1995.
NOTE O - CURRENCY EXCHANGE CONTRACTS
The Company may from time to time enter into forward currency exchange contracts
to protect inventory purchases and affiliated note activities against changes in
future currency exchange rates. A forward currency exchange contract is an
agreement between two parties to buy or sell currency at a set price on a future
date. The market value of the contract will fluctuate with changes in currency
exchange rates. The contract is marked-to-market using the spot rate at the end
of each accounting period and the change in market value is recorded by the
Company as currency gain or loss. Risk may arise upon entering into these
contracts from unanticipated movements in the value of a foreign currency
relative to the U.S. dollar. As of September 30, 1997 and 1996, the Company had
57
<PAGE> 58
approximately $9,367 and $7,185 of currency contracts outstanding, with
unrealized currency losses of approximately $2 in 1997 and unrealized currency
gains of approximately $53 in 1996. These contracts mature within twelve months.
NOTE P - CONCENTRATION OF CREDIT RISK
The Company sells a broad range of consumer products in North and South America,
Europe and the Pacific Rim. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base. Ongoing credit evaluations of customers' financial
condition are performed and, generally no collateral is required. The Company
maintains reserves for potential credit losses and such losses, in the
aggregate, have not exceeded management's expectations. During 1997, 1996 and
1995 the Company's sales to one U.S. customer amounted to 12%, 11% and 11% of
net sales. No other customer exceeded 10% in the years ended September 30, 1997,
1996 and 1995.
NOTE Q - CONTINGENCIES
The Company is both a plaintiff and defendant in numerous lawsuits incidental to
its current and former operations, some alleging substantial claims. In
addition, the Company's operations are subject to federal, state and local
environmental laws and regulations. The Company has entered into settlement
agreements with the U.S. Environmental Protection Agency and other parties on
several sites and is still negotiating on other sites. The settlement amounts
and estimated liabilities are not significant.
Management is of the opinion that, after taking into account the merits of
defenses, insurance coverage and established reserves, the ultimate resolution
of these matters will not have a material adverse effect in relation to the
Company's consolidated financial statements.
NOTE R - RELATED PARTY TRANSACTIONS
See Note A for a description of the Recapitalization Agreement, which resulted
in the redemption of a portion of the common stock owned by Abarco.
See Note L for a description of the Company's 1996 Employee Stock Ownership Plan
and the Company's 1994 Management Stock Ownership Plan.
Effective October 1, 1996, the Company and KKR, an affiliate of the Company,
entered into a management agreement providing for the performance by KKR of
certain management services for the Company. The Company expensed $1,000 in 1997
pursuant to such management agreement with KKR.
58
<PAGE> 59
NOTE S - SEGMENT REPORTING
The following schedule presents information about the Company's continuing
operations in different industry segments and geographic locations:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INDUSTRY SEGMENT
Net Sales
Spalding $ 530,448 451,915 424,118
Evenflo 296,743 237,165 210,039
--------- --------- ---------
Total net sales $ 827,191 689,080 634,157
========= ========= =========
Earnings (loss) before income taxes
and extraordinary loss:
Spalding $ 41,133 50,274 58,595
Evenflo (1,052) 17,023 11,652
General Corporate expenses (7,290) (41,959) (10,058)
Interest expense, net (71,326) (37,718) (38,108)
Litigation settlement expense 0 0 (2,400)
--------- --------- ---------
Earnings (loss) before income taxes
and extraordinary loss $ (38,535) (12,380) 19,681
========= ========= =========
Identifiable Assets
Spalding $ 445,011 404,800 325,777
Evenflo 245,132 145,965 135,658
General Corporate 81,702 139,996 74,826
--------- --------- ---------
Total assets $ 771,845 690,761 536,261
========= ========= =========
Capital Expenditures
Spalding $ 14,143 10,169 8,850
Evenflo 20,927 9,377 6,531
--------- --------- ---------
Total capital expenditures $ 35,070 19,546 15,381
========= ========= =========
Depreciation and Amortization
Spalding $ 12,439 13,418 12,362
Evenflo 9,313 6,502 5,518
General Corporate 17 407 407
--------- --------- ---------
Total depreciation and amortization $ 21,769 20,327 18,287
========= ========= =========
</TABLE>
59
<PAGE> 60
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
GEOGRAPHIC LOCATION
Net Sales
United States $ 672,703 530,882 465,515
Other nations 154,488 158,198 168,642
--------- ------- -------
Total net sales $ 827,191 689,080 634,157
========= ======= =======
Earnings (loss) before income
taxes and extraordinary loss:
United States $ 43,751 68,622 64,683
Other nations (3,670) (1,325) 5,564
General Corporate expenses (7,290) (41,959) (10,058)
Interest expense, net (71,326) (37,718) (38,108)
Litigation settlement expense 0 0 (2,400)
--------- ------- -------
Earnings (loss) before income taxes
and extraordinary loss $ (38,535) (12,380) 19,681
========= ======= ======
Identifiable Assets
United States $ 609,169 473,801 382,699
Other nations 80,974 76,964 78,736
General Corporate 81,702 139,996 74,826
--------- ------- -------
Total assets $ 771,845 690,761 536,261
========= ======= =======
</TABLE>
NOTE T - EXTRAORDINARY LOSS
The extraordinary loss on early extinguishment of debt in 1996 related to a
$9,187 pretax ($5,987 after-tax) write-off of the deferred financing costs
remaining at September 30, 1996, on which date the Secured Credit Agreement was
paid off.
NOTE U - SUBSEQUENT EVENT
On November 3, 1997, the Company announced that it had executed a letter of
intent dated October 31, 1997 to purchase certain assets of Ben Hogan Co. for
approximately $13,000. The purchase price will be payable in common stock valued
at $9,000 (1,800,000 shares at $5 per share) and an unsecured senior note for
$4,000 that will bear an annual pay-in-kind interest rate of 10 1/2% with a term
of three years, prepayable without penalty.
60
<PAGE> 61
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
61
<PAGE> 62
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are names, ages and positions with the Company of the
persons who will serve as directors and executive officers of the Company,
together with certain other key personnel. The terms of the directors and
executive officers of the Company expire annually upon the election and
qualification of successors at the annual meetings of shareholders.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Paul L. Whiting 54 Chairman of the Board of Directors and Chief
Executive Officer
Kevin T. Martin 42 Director, President and Chief Operating
Officer of Evenflo & Spalding Holdings
Corporation, and President of Spalding
Sports Worldwide Division
Robert K. Adikes 58 Vice President, Secretary and General Counsel
Stephen J. Dryer 55 Vice President and Controller
W. Michael Kipphut 44 Vice President and Treasurer
George A. Dickerman 58 Chairman of Spalding Sports Worldwide Division
George A. Harris 50 President of Evenflo Company, Inc.
Henry R. Kravis 53 Director
George R. Roberts 53 Director
Michael T. Tokarz 47 Director
Marc S. Lipschultz 28 Director
Gustavo A. Cisneros 52 Director
Edwin L. Artzt 67 Director
</TABLE>
Paul L. Whiting has been a director of the Company since 1984, its
Chairman of the Board since October 1996, its Chief Executive Officer since
February 1996. From March 1994 to September 1997 he served as President and
Chief Operating Officer. From January 1991 through February 1994, he served as
the Senior Vice President, Chief Financial Officer and Treasurer of the Company
and from 1981 through 1990 he served as Vice President, Finance and Treasurer.
Mr. Whiting joined the Company in 1976.
Kevin T. Martin joined the Company in September 1997, as President and
Chief Operating Officer and has served a President of the Spalding Sports
Worldwide Division of the Company since November 1997. From 1993 to September
1997, he served as President and Chief Executive Officer of Brach & Brock
Confections. From 1990 to 1993, he served as President of Grand
Metropolitan/Pillsbury's Alpo Pet Foods. Prior to 1990, Mr. Martin held senior
level marketing positions at Mars, Inc. and at H.J. Heinz.
Robert K. Adikes has been a Vice President of the Company since January
1990 and its Secretary since January 1986. He has been General Counsel since he
joined the Company in 1985.
Stephen J. Dryer has been a Vice President of the Company since January
1990 and its Controller since 1981. Mr. Dryer joined the Company in 1975.
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<PAGE> 63
W. Michael Kipphut joined the Company in September 1994 as Vice President
and Treasurer. From 1977 to September 1994, he served in various financial
capacities at Tyler Corporation (a public diversified holding company), and from
February 1990 through September 1994 as Vice President and Treasurer thereof.
George A. Dickerman has been Chairman of the Spalding Sports Worldwide
Division of the Company since November 1997 and President from 1981 to November
1997. Mr. Dickerman joined the Company in 1976. He is the current Chairman of
the Board of Trustees of The Basketball Hall of Fame, past Chairman of The
Sporting Goods Manufacturers Association and past Director of the National Golf
Foundation. He also serves on the Board of Trustees of Northwestern Mutual Life
Insurance Company.
George A. Harris has been the President of Evenflo Company, Inc. since
October 1995. He joined Evenflo Juvenile Furniture Company, Inc. a subsidiary of
the Company, as President in November 1990 and was named President of Evenflo
companies in May 1995. He was Vice President, Sales and Marketing, of the
Coleman Company, Inc., Outdoor Products Division, prior to October 1990.
Henry R. Kravis is a managing member and member of the Executive
Committee of the limited liability company which serves as the general partner
of KKR. He is also a director of Amphenol Corporation, AutoZone, Inc., Borden,
Inc., Bruno's, Inc., The Gillette Company, IDEX Corporation, KinderCare Leaning
Centers, Inc., Merit Behavioral Care Corporation, Owens-Illinois, Inc.,
PRIMEDIA, INC., Safeway, Inc., Union Texas Petroleum Holdings, Inc., and World
Color Press, Inc.
George R. Roberts is a managing member and member of the Executive
Committee of the limited liability company which serves as the general partner
of KKR. He is also a director of Amphenol Corporation, Borden, Inc., IDEX
Corporation, KSL Recreation Corporation, Owens-Illinois, Inc., PRIMEDIA, INC.,
Randalls Food Markets, Inc., Safeway, Inc., Union Texas Petroleum Holdings,
Inc., and World Color Press, Inc.
Michael T. Tokarz was a General Partner of KKR from January 1993 until
January 1996 when he became a member of the limited liability company which
serves as the general partner of KKR. Prior to 1993, Mr. Tokarz was an Executive
at KKR. He is also a director of IDEX Corporation, KSL Recreation Corporation,
PRIMEDIA, INC., Safeway, Inc., and Walter Industries, Inc.
Marc S. Lipschultz has been an Executive of KKR since 1995. Prior
thereto, he was an investment banker with Goldman, Sachs & Co. for two years. He
is also a director of Amphenol Corporation.
Gustavo A. Cisneros has been a director of the Company since 1984. Since
prior to 1990 he has been a direct or indirect investor in and a director of
certain companies forming part of a group with indirect beneficial ownership
interests in a number of diverse commercial enterprises in Venezuela and
elsewhere. Mr. Cisneros is also a director of Pueblo Xtra International, Inc.,
Univision Communications, Inc. and RSL Communications, Ltd.
Edwin L. Artzt has been a director of the Company since September 1997.
Mr. Artzt is the former Chairman and Chief Executive Officer of The Procter &
Gamble Company (P&G), and is currently a
63
<PAGE> 64
Director and Chairman of the Executive Committee of the board of Directors of
P&G. In addition to P&G, Mr. Artzt is a director of American Express Company,
GTE Corporation, Delta Airlines, and the Barilla Company of Parma, Italy. He is
also a member of the boards of University of Pennsylvania's Wharton School of
Business, UCLA's Anderson School of Business, and Emory Graduate School of
Business. He has also served on President Clinton's Advisory Committee on Trade
Policy and Negotiations, the Committee for Economic Development, and the
Business Roundtable.
Messrs. Kravis and Roberts are first cousins.
The business address of Messrs. Kravis, Tokarz and Lipschultz is 9 West
57th Street, New York, New York 10019 and of Mr. Roberts is 2800 Sand Hill Road,
Suite 200, Menlo Park, California 94025. The business address of Mr. Cisneros is
Final Av. La Salle, EdF. Venevision 5to. Piso, Colina Los Caobos, Caracas,
Venezuela. The business address of Mr. Artzt is 1 Proctor & Gamble Plaza,
Cincinnati, Ohio 45202.
COMPENSATION OF DIRECTORS
All directors are reimbursed for their usual and customary expenses
incurred in attending all board and committee meetings. Each director who is not
an employee of the Company receives an aggregate annual fee of $35,000, payable
in quarterly installments. Directors who are also employees of the Company
receive no remuneration for serving as directors.
64
<PAGE> 65
ITEM 11: EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid, accrued or awarded
by the Company for the account of each of the chief executive officer and the
four most highly compensated executive officers (the "Named Executive Officers")
for their services in all capacities to the Company during the fiscal year ended
September 30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Long-term Compensation
----------------------------
Annual Compensation Awards Payouts
------------------------------------------- ------ -------
Other Annual Securities All Other
Name and Bonuses Compensation Underlying LTIP Compensation
Principal Position Year Salary (1) (2) Options # Payouts (3)
------------------ ---- ------- --------- ------------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Paul L. Whiting 1997 $450,000 $0 $0 1,465,240 $1,324,240 $4,750
Chairman and 1996 350,000 1,100,430 119,850 0 0 4,750
Chief Executive Officer 1995 330,000 228,700 64,060 0 0 4,620
George A. Dickerman 1997 350,000 0 0 1,141,365 1,655,550 4,750
President of Spalding 1996 317,200 592,020 149,840 0 0 4,750
Sports Worldwide 1995 305,000 160,200 80,080 0 0 4,620
Division
George A. Harris 1997 288,110 0 0 855,414 134,150 4,940
President of Evenflo 1996 207,850 486,230 12,140 0 21,330 5,010
Company, Inc. 1995 187,600 150,000 7,720 0 54,500 5,260
Stephen J. Dryer 1997 139,010 10,000 0 98,722 408,550 4,170
Vice President and 1996 132,880 203,140 29,710 0 0 3,990
Controller 1995 129,000 50,300 15,880 0 0 3,870
Robert K. Adikes 1997 132,400 0 0 65,058 155,500 3,970
Vice President, 1996 127,300 199,220 7,170 0 57,170 3,820
Secretary and General 1995 122,400 44,500 7,130 0 50,080 3,670
Counsel
</TABLE>
(1) Includes the following 1996 transaction bonuses received in connection
with the Recapitalization: Mr. Whiting ($671,860), Mr. Dickerman
($527,850), Mr. Harris ($334,500), Mr. Dryer ($130,440), and Mr. Adikes
($126,740). The remainder of the bonus for the Named Executive Officers
was awarded under the Management Incentive Bonus Plan.
(2) Amounts represent above market return paid on deferred cash awards under
the Company's Long-Term Incentive Plan. See "Long-Term Incentive Plan."
(3) Company matching contributions to the Savings Plus Plan.
(4) Kevin T. Martin was hired September 1, 1997 as President and Chief
Operating Officer. Mr. Martin's employment agreement is currently being
negotiated. On November 6, 1997 Mr. Dickerman assumed the position of
Chairman of Spalding Sports Worldwide Division and Mr. Martin assumed the
added responsibility of President of Spalding Sports Worldwide Division.
65
<PAGE> 66
STOCK OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Individual Grants Term (2)
----------------------------------------------------------------- --------------------------------
Number of Percent of
securities total options
underlying granted to Exercise or If Stock at If Stock at
options employees in base price Expiration $8.14 $12.97
Name granted (1) 1997 ($/share) date 5% 10%
---- ---------- ------------- ------------ ----------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Paul L. Whiting 1,400,000 21.8% $5.00 2/11/07 $11,396,000 $18,158,000
65,240 1.0% 5.00 2/11/07 531,054 846,163
Kevin T. Martin 1,312,500 20.4% 5.00 9/29/07 10,683,750 17,023,125
George A. Dickerman 1,091,603 17.0% 5.00 2/11/07 8,885,648 14,158,091
49,762 0.8% 5.00 2/11/07 405,063 645,413
George A. Harris 818,119 12.7% 5.00 2/11/07 6,659,489 10,611,003
37,295 0.6% 5.00 2/11/07 303,581 483,716
Stephen J. Dryer 93,333 1.5% 5.00 2/11/07 759,731 1,210,529
5,389 0.1% 5.00 2/11/07 43,866 69,895
Robert K. Adikes 62,222 1.0% 5.00 2/11/07 506,487 807,019
2,836 0.0% 5.00 2/11/07 23,085 36,783
</TABLE>
(1) All of these options, which were granted pursuant to the 1996 Employee
Stock Ownership Plan were non-qualified, were granted at fair market
value on the date of grant, vest ratably over a five-year period, and
have a term of ten years. Any outstanding options will become immediately
exercisable upon certain transactions that have the effect of a change in
control of the Company. If an employee retires under certain
circumstances shares owned by such employee may be put to the Company or
the Company can call the shares based on a formula, as defined. If an
employee dies, becomes permanently disabled or terminates employment the
Company can call the shares based on a formula, as defined.
(2) We recommend caution in interpreting the financial significance of these
figures. They are calculated by multiplying the number of options granted
by the difference between a future hypothetical stock price and the
option exercise price and are shown pursuant to rules of the Securities
and Exchange Commission. They assume the value of Company stock
appreciates 5% or 10% each year, compounded annually, for ten years (the
life of each option). They are not intended to forecast possible future
appreciation, if any, of such stock price or to establish a present value
of options. Also, if appreciation does occur at the 5% or 10% per year
rate, the amounts shown would not be realized by the recipients until the
year 2007. Depending on inflation rates, these amounts may be worth
significantly less in 2007, in real terms, than their value today.
MANAGEMENT INCENTIVE BONUS PLAN
The Company maintains a Management Incentive Bonus Plan ("MIBP") for
certain identified key executives of the Company, including department managers
and executives senior thereto, including the Named Executive Officers, pursuant
to which eligible employees are awarded bonuses based on the Company's annual
operating profit (as determined in accordance with general accepted accounting
principles) as compared with a target established prior to the beginning of the
year. Awards under the MIBP range within a guideline of 15% to 80% of annual
salary payments, depending upon a participant's position and commensurate
responsibility. Spalding and Evenflo MIBP objectives are set specifically for
their operations, and the objectives of the corporate staff
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<PAGE> 67
relate to consolidated operations. If the annual results do not meet the
pre-established objectives, no bonus is earned. If annual results exceed the
pre-established objectives, the bonus paid is increased proportionally, up to an
additional bonus of no more than 100% of the employee's guideline bonus
percentage.
1996 EMPLOYEE STOCK OWNERSHIP PLAN
The 1996 Stock Purchase and Option Plan for Key Employees of Evenflo &
Spalding Holdings Corporation and Subsidiaries (the "1996 Employee Stock
Ownership Plan") provides for the issuance of shares of authorized but unissued
or reacquired shares of common stock, subject to adjustment to reflect certain
events such as stock dividends, stock splits, recapitalizations, mergers or
reorganizations of or by the Company. The 1996 Employee Stock Ownership Plan is
intended to assist the Company in attracting and retaining employees of
outstanding ability and to promote the identification of their interests with
those of the stockholders of the Company. The 1996 Employee Stock Ownership Plan
permits the issuance of common stock (the "Purchase Stock") and the grant of
non-qualified stock options and incentive stock options (the "Options") to
purchase shares of common stock and other stock-based awards (the issuance of
Purchase Stock and the grant of Options and other stock-based awards pursuant to
the 1996 Employee Stock Ownership Plan being a "Grant"). Unless sooner
terminated by the Company's Board of Directors, the 1996 Employee Stock
Ownership Plan will expire in ten years. Such termination will not affect the
validity of any Grant outstanding on the date of termination.
The Compensation Committee of the Board of Directors administers the 1996
Employee Stock Ownership Plan, including, without limitation, the determination
of the employees to whom Grants will be made, the number of shares of common
stock subject to each Grant, and the various terms of such Grants. The
Compensation Committee of the Board of Directors may from time to time amend the
terms of any Grant, but, except for adjustments made upon a change in the common
stock of the Company by reason of a stock split, spin-off, stock dividend, stock
combination or reclassification, recapitalization, reorganization,
consolidation, change of control, or similar event, such action shall not
adversely affect the rights of any participant under the 1996 Employee Stock
Ownership Plan with respect to the Purchase Stock and the Options without such
participant's consent. The Board of Directors retains the right to amend,
suspend or terminate the 1996 Employee Stock Ownership Plan.
LONG-TERM INCENTIVE PLAN
In connection with the 1996 Employee Stock Ownership Plan, the Company
canceled the Long-Term Incentive Plan ("LTIP") and paid the total outstanding
awards in the 1997 fiscal year.
The LTIP's provided certain key employees with cash awards based upon the
attainment of established financial goals for a predefined period, generally
three years. Each participant made an election at the beginning of each program
period to receive full payments upon vesting or to defer partial or total
payment up to seven years. This cash payout was based upon the value of a unit,
which was determined by a net earnings formula set forth in the LTIP and
calculated as of the September 30 preceding the payment. The LTIP had been in
effect since 1985. Most participants elected to defer all or a portion of their
cash award at the end of each cycle. The value of units for which payment was
deferred was based on the net earnings formula set forth in the LTIP.
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<PAGE> 68
RETIREMENT PLANS
Spalding & Evenflo Retirement Account Plan ("SERA"). The Company sponsors
SERA, a cash balance defined benefit pension plan qualified under Section 401(a)
of the Internal Revenue Code of 1986, as amended (the "Code"), for substantially
all U.S. salaried employees and the non-union Piqua, Ohio hourly employees. SERA
covers all eligible full-time employees who are over age 20 and have at least
one year of service. Annually, an addition is made to each participant's account
based on a percentage of the participant's salary for that year up to a maximum
salary of $160,000. The percentage ranges from 2% of pay for employees under age
25 to 9% of pay for employees 60 and over. The accounts are credited with
interest at a rate determined annually based on an average of 30 year Treasury
Bonds.
Supplemental Retirement Plan ("SRP"). As a supplement to the SERA, the
Company sponsors the non-qualified SRP which covers highly compensated employees
whose benefits are limited by compensation and benefit limitations under the
Code. For employees with a salary in excess of $160,000, an addition is made to
each participant's account based on a percentage of the participant's salary for
that year. The percentage ranges from 2% of pay for employees under age 25 to 9%
of pay for employees 60 and over. The accounts are credited with interest at a
rate determined annually based on an average of 30 year Treasury Bonds.
The estimated annual benefits payable under SERA and SRP upon retirement
at normal retirement age for each of the Named Executive Officers are as
follows:
<TABLE>
<CAPTION>
Estimated Annual
Year Attains Benefit If Retires at
Age 65 Normal Retirement Age (1)
-------------- -------------------------
<S> <C> <C>
Paul L. Whiting 2008 $ 78,680
Kevin T. Martin 2020 138,070
George A. Dickerman 2004 79,550
George A. Harris 2012 60,830
Stephen J. Dryer 2007 24,420
Robert K. Adikes 2004 19,800
</TABLE>
- -----------------
(1) Under SERA and SRP the normal retirement age is 65. The plans allow
benefits to be paid as a lump sum payment. The estimated annual benefits
shown above are in the form of a single life annuity which is the
equivalent of the individual's projected cash balance account. Benefits
have been determined assuming no increase in 1997 compensation levels and
an annual interest credit of 6.5%, which is the 1998 rate for the
interest credit. Benefits are computed without reference to limitations
on compensation and benefits to which the SERA is subject under the Code
because any benefits for the Named Executive Officers that are affected
by such limitations are made up under the Company's SRP.
Savings Plus Plan. The Company sponsors a defined contribution plan
qualified under the Code, commonly referred to as a 401(k) plan, for
substantially all U.S. salaried employees and the non-union Canton, Georgia and
Gloversville, New York hourly employees (the "Savings Plus Plan"). Participants
may make pre-tax contributions up to 15% of their aggregate annual salaries. The
Company makes a 50% matching contribution on the first 6% of participant
contributions. The Company does not match participant contributions in excess of
6%.
68
<PAGE> 69
CHANGE IN CONTROL SEVERANCE AGREEMENTS
S&E maintains Change In Control Severance Agreements (the "Severance
Contracts") for certain executives of S&E pursuant to which these employees
could be compensated and could receive severance payments when a change in
control or potential change in control of S&E occurs.
The September 30, 1996 Recapitalization was a change in control under the
provisions of the Severance Contracts and severance payments will be made if a
covered employee terminates with cause or is terminated by the Company without
cause.
The Severance Contracts generally permit an eligible employee to receive
severance payments for a period of 12, 24 or 35 months, as the case may be, or
until the employee reaches the age of 65 whichever comes first consisting of (a)
monthly payments of a combination of 1/12 of such person's highest annual base
salary and bonus, and (b) continued life, disability, accident and health
insurance benefits offset by such person's COBRA benefits. In addition, selected
senior and top management will receive an additional lump-sum payment of 50% and
100%, respectively, of the amount by which the employee's benefit under their
tax-qualified retirement plans maintained by S&E or one of its subsidiaries
would have been increased if contributions and/or benefit accruals under such
plans had continued during the period of continued benefits. The Severance
Contracts will expire in 24 or 36 months following September 30, 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors (the "Committee")
consists entirely of non-employee Directors. The Committee establishes and
regularly reviews executive compensation levels and policies, and authorizes
short- and long-term awards in the form of cash or stock.
Compensation for executives is based on the principles that compensation
must (a) be competitive with other quality companies in order to help attract,
motivate and retain the talent needed to lead and grow the company's business,
(b) provide a strong incentive for key managers to achieve the Company's goals,
and (c) make prudent use of the Company's resources.
No person who served during fiscal 1997 as an executive officer of the
Company serves or has served on the Committee or as a director of another
company, one of whose executive officers serves as a director of the Company.
69
<PAGE> 70
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table, as of December 15, 1997, sets forth certain
information regarding the beneficial owners of the Company's Common Stock by (i)
all persons known to the Company to own beneficially more than 5% of the Common
Stock, (ii) each Director, (iii) the Chief Executive Officer and each of the
Named Executive Officers (as defined), and (iv) all directors and Named
Executive Officers as a group.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES OWNED (1) PERCENTAGE
- ---- ---------------- ----------
<S> <C> <C>
Strata L.L.C.(1) ......................... 86,154,840 88.8
9 West 57th Street
New York, NY 10019
Abarco N.V.(2) ........................... 6,480,000 6.6
c/o ABN Trust Company
(Curacao N.V.)
P.O. Box 224, 15 Pietermaai
Curacao, Netherlands Antilles
Henry R. Kravis(1) ....................... -- *
George R. Roberts(1) ..................... -- *
Michael T. Tokarz(1) ..................... -- *
Marc S. Lipschultz(1) .................... -- *
Gustavo A. Cisneros(2) ................... -- *
Edwin L. Artzt ........................... 200,000 *
Paul L. Whiting(3) ....................... 720,000 *
Kevin T. Martin(3) ....................... 375,000 *
Robert K. Adikes(3) ...................... 30,222 *
Stephen J. Dryer(3) ...................... 77,334 *
W. Michael Kipphut(3) .................... 55,334 *
George A. Dickerman(3) ................... 530,207 *
George A. Harris(3) ...................... 397,372 *
All named officers and
directors as a group(3) ............... 2,385,469 2.4
</TABLE>
- ----------------------
* Beneficial ownership does not exceed 1.0% of the respective class of
securities.
(1) Shares of Common Stock shown as beneficially owned by Strata L.L.C. are
held by Strata. Strata L.L.C. is the sole general partner of KKR
Associates (Strata). KKR Associates (Strata), a limited partnership, is
the sole general partner of Strata Associates L.P. and possesses sole
voting and investment power with respect to such shares. Strata L.L.C. is
a limited liability company the members of which are Messrs. Henry R.
Kravis, George R. Roberts, Robert I. MacDonnell, Paul E. Raether, Michael
W. Michelson, Michael T. Tokarz, James H. Greene, Jr., Perry Golkin,
Clifton S. Robbins, Scott M. Stuart and Edward A. Gilhuly. Messrs. Kravis
and Roberts are members of the Executive Committee of Strata L.L.C.
Messrs. Kravis, Roberts and Tokarz are also directors of the Company. Mr.
Marc S. Lipschultz is a limited partner of KKR Associates (Strata) and is
also a director of the Company. Each of such individuals may be
70
<PAGE> 71
deemed to share beneficial ownership of the shares shown as beneficially
owned by Strata L.L.C. Each of such individuals disclaim beneficial
ownership of such shares.
(2) A trust for the benefit of relatives of Gustavo A. Cisneros and a trust
for the benefit of Ricardo J. Cisneros and relatives of Ricardo J.
Cisneros each owns a 50% indirect beneficial ownership interest in the
equity of Abarco. The trustees of both trusts are Dr. Peter Marxer and
Protec Trust Management Establishment, each with the address Postfach
484, Heiligkreuz 6, F1 9490 Vaduz, Liechtenstein. Mr. Gustavo A. Cisneros
is also a director of the Company. Mr. Gustavo A. Cisneros may be deemed
to have beneficial ownership of the shares beneficially owned by the
trusts created by him. Mr. Gustavo A. Cisneros disclaims beneficial
ownership of such shares.
(3) Pursuant to Rule 13d-3, stock options that are presently exercisable or
exercisable within 60 days after December 15, 1997, which are owned by
each individual are deemed to be outstanding for purposes of computing
the percentage of shares owned by that individual. Therefore, each
percentage is computed based on the sum of (i) the shares actually
outstanding as of December 15, 1997, and (ii) the number of stock options
exercisable within 60 days of December 15, 1997, owned by that individual
or entity whose percentage of share ownership is being computed, but not
taking account of the exercise of stock options by any other person or
entity.
71
<PAGE> 72
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note A of the Notes to the Consolidated Financial Statements
appearing elsewhere on this Form 10-K for a description of the Recapitalization
Agreement, which resulted in the redemption of a portion of the common stock
owned by Abarco.
See Note L of the Notes to the Consolidated Financial Statements
appearing elsewhere on this Form 10-K for a description of the Company's 1996
Employee Stock Ownership Plan and the Company's 1994 Management Stock Ownership
Plan.
Effective October 1, 1996, the Company and KKR, an affiliate of the
Company, entered into a management agreement providing for the performance by
KKR of certain management services for the Company. The Company expensed $1.0
million in fiscal 1997 pursuant to such management agreement with KKR.
72
<PAGE> 73
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
<TABLE>
<CAPTION>
(a) 1. Financial Statements Page
----
<S> <C>
Independent Auditors' Report ...................................... 35
Statements of Consolidated Earnings (Loss)
and Comprehensive Earnings (Loss)
for the years ended September 30, 1997,
1996, and 1995 .................................................. 36
Consolidated Balance Sheets as of
September 30, 1997 and 1996 ..................................... 37
Statements of Consolidated Cash Flows for
the years ended September 30,
1997, 1996, and 1995 ............................................ 38
Statements of Consolidated Shareholders' Equity
(Deficiency) for the years ended
September 30, 1997, 1996, and 1995 .............................. 39
Notes to Consolidated Financial Statements ........................ 40
</TABLE>
2. Financial Statement Schedule
<TABLE>
<CAPTION>
Schedule Page
-------- ----
<S> <C>
Independent Auditors' Report on Schedule ...................... 79
II - Valuation and Qualifying Accounts ....................... 80
</TABLE>
Schedules other than the above have been omitted because they are either
not applicable or the required information has been disclosed in the
consolidated financial statements or notes thereto.
3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
2.1 Recapitalization and Stock Purchase Agreement, dated August 15,
1996, by and among Strata Holdings L. P., E&S Holdings Corporation
and Abarco N.V. (incorporated by reference from Exhibit 2.1 to
Registration Statement No. 333-14569 filed by the Company on
January 9, 1997).
2.2 Amendment No. 1 to the Recapitalization and Stock Purchase
Agreement, dated September 30, 1996, by and among Strata Holdings
L.P., E&S Holdings Corporation and Abarco N.V. (incorporated by
reference from Exhibit 2.2 to Registration Statement No. 333-14569
filed by the Company on January 9, 1997).
3.1 Restated Certificate of Incorporation of E&S Holdings Corporation
(incorporated by reference from Exhibit 3.1 to Registration
Statement No. 333-14569 filed by the Company on January 9, 1997).
3.2 Bylaws of E&S Holdings Corporation (incorporated by reference from
Exhibit 3.2 to Registration Statement No. 333-14569 filed by the
Company on January 9, 1997).
4.1 Indenture between E&S Holdings Corporation and Marine Midland
Bank, as Trustee (incorporated by reference from Exhibit 4.1 to
Registration Statement No. 333-14569 filed by the Company on
January 9, 1997).
4.2 Form of 10 3/8 % Senior Subordinated Notes due 2006 (incorporated
by reference from Exhibit 4.2 to Registration Statement No.
333-14569 filed by the Company on January 9, 1997).
</TABLE>
73
<PAGE> 74
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
4.3 Form of 10 3/8 % Series B Senior Subordinated Notes due 2006
(incorporated by reference from Exhibit 4.3 to Registration
Statement No. 333-14569 filed by the Company on January 9, 1997).
4.4 Registration Rights Agreement dated September 30, 1996, among E&S
Holdings Corporation, Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, NationsBanc Capital Markets, Inc., BA
Securities, Inc. and BT Securities Corporation (incorporated by
reference from Exhibit 4.4 to Registration Statement No. 333-14569
filed by the Company on January 9, 1997).
4.5 1996 Employee Stock Ownership Plan (incorporated by reference from
Exhibit 4.7 to Registration Statement No. 333-20463 filed by the
Company on January 27, 1997).
10.1 $650,000,000 Credit Agreement dated as of September 30, 1996,
among E&S Holdings Corporation, as the Borrower, Bank of America
National Trust and Savings Association, as Swing Line Lender, as
Fronting Lender and as Administrative Agent, Merrill Lynch Capital
Corporation, as Documentation Agent, NationsBank, N.A. (South), as
Syndication Agent, and lenders (incorporated by reference from
Exhibit 10.1 to Registration Statement No. 333-14569 filed by the
Company on January 9, 1997).
10.2 Guaranty dated as of September 30, 1996, made by Spalding &
Evenflo Companies, Inc., Evenflo Company, Inc., Etonic Worldwide
Corporation, S&E Finance Co., Inc., Lisco, Inc., Lisco Sports,
Inc., Lisco Feeding, Inc., Lisco Furniture, Inc., and EWW Lisco,
Inc. in favor of Bank of America National Trust and Savings
Association (incorporated by reference from Exhibit 10.2 to
Registration Statement No. 333-14569 filed by the Company on
January 9, 1997).
10.3 Pledge Agreement dated as of September 30, 1996, made by E&S
Holdings Corporation in favor of Bank of America National Trust
and Savings Association (incorporated by reference from Exhibit
10.3 to Registration Statement No. 333-14569 filed by the Company
on January 9, 1997).
10.4 Registration Rights Agreement dated as of September 30, 1996 by
and among E&S Holdings Corporation, Strata Associates, L. P., and
KKR Partners II, L.P. (incorporated by reference from Exhibit 10.4
to Registration Statement No. 333-14569 filed by the Company on
January 9, 1997).
10.5 Agreement dated as of February 1, 1992, by and between NBA
Properties, Inc. and Spalding & Evenflo Companies, Inc.
(incorporated by reference from Exhibit 10.5 to Registration
Statement No. 333-14569 filed by the Company on January 9, 1997).
10.6 Termination Bonus Agreement (Senior and Other Managers)
(incorporated by reference from Exhibit 10.6 to Registration
Statement No. 333-14569 filed by the Company on January 9, 1997).
10.7 Termination Bonus Agreement (Top Managers) (incorporated by
reference from Exhibit 10.7 to Registration Statement No.
333-14569 filed by the Company on January 9, 1997).
10.8 Form of Change of Control Agreement (Senior Managers)
(incorporated by reference from Exhibit 10.8 to Registration
Statement No. 333-14569 filed by the Company on January 9, 1997).
10.9 Form of Change of Control Agreement (Top Managers) (incorporated
by reference from Exhibit 10.9 to Registration Statement No.
333-14569 filed by the Company on January 9, 1997).
10.10 Form of Change of Control Agreement (Other Managers) (incorporated
by reference from Exhibit 10.10 to Registration Statement No.
333-14569 filed by the Company on January 9, 1997).
</TABLE>
74
<PAGE> 75
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
10.11 Form of Letter of Agreement between the Company and Kohlberg
Kravis Roberts & Co., L.P. (incorporated by reference from Exhibit
10.11 to Registration Statement No. 333-14569 filed by the Company
on January 9, 1997).
10.12 Agreement dated as of February 3, 1997, by and between NBA
Properties, Inc. and Spalding & Evenflo Companies, Inc.
(incorporated by reference from Exhibit 10 to the Company's
Quarterly Report 10-Q for the fiscal quarter ended December 31,
1996, filed by the Company on February 14, 1997).
10.13 Asset Purchase Agreement dated as of March 7, 1997, by and among
Gerry Baby Products Company, Gerry Wood Products Company, as
sellers, Huffy Corporation, and Evenflo Company, Inc. as purchaser
(incorporated by reference from Exhibit 10.1 to the Company's
Quarterly Report 10-Q for the fiscal quarter ended June 30, 1997,
filed by the Company on August 7, 1997).
10.14 Asset Purchase Agreement among Ben Hogan Co., the Trusts for the
Benefit of William Goodwin's Children, and Evenflo & Spalding
Holdings Corporation dated as of November 26, 1997.
12 Computation of Ratio of Earnings to Fixed Charges.
21 List of Subsidiaries (incorporated by reference from Exhibit 21 to
Registration Statement No. 333-14569 filed by the Company on
January 9, 1997).
23.1 Consent of Simpson Thacher & Bartlett (included as part of its
opinion filed as Exhibit 5) (incorporated by reference from
Exhibit 23.1 to Registration Statement No. 333-14569 filed by the
Company on January 9, 1997).
23.2 Consent of Simpson Thacher & Bartlett (included as part of its
opinion filed as Exhibit 8) (incorporated by reference from
Exhibit 23.2 to Registration Statement No. 333-14569 filed by the
Company on January 9, 1997).
23.3 Consent of Deloitte & Touche LLP, independent certified public
accountants (incorporated by reference from Exhibit 23.4 to
Registration Statement No. 333-14569 filed by the Company on
January 9, 1997).
23.4 Consent of Deloitte & Touche LLP, independent certified public
accountants.
24 Powers of Attorney (included on page II-4) (incorporated by
reference from Exhibit 24 to Registration Statement No. 333-14569
filed by the Company on January 9, 1997).
27 Financial Data Schedule
99.1 Form of Letter of Transmittal (incorporated by reference from
Exhibit 99.1 to Registration Statement No. 333-14569 filed by the
Company on January 9, 1997).
99.2 Form of Notice of Guaranteed Delivery (incorporated by reference
from Exhibit 99.2 to Registration Statement No. 333-14569 filed by
the Company on January 9, 1997).
99.3 Evenflo & Spalding Holdings Corporation Management Incentive Bonus
Plan dated January 15, 1997 (incorporated by reference from
Exhibit 99 to the Company's Quarterly Report 10-Q for the fiscal
quarter ended December 31, 1996, filed by the Company on February
14, 1997).
</TABLE>
75
<PAGE> 76
(b) Reports on Form 8-K
The Company filed one report on Form 8-K with the Securities and Exchange
Commission subsequent to the last quarter of the period covered by this
report. The Report was filed on November 17, 1997 to report (i) the
Company signed a letter of intent to acquire certain assets of the Ben
Hogan Co. primarily in exchange for common stock in Evenflo & Spalding
Holdings Corporation, and (ii) the Company announced that George A.
Dickerman has been named Chairman of the Board of Spalding Sports
Worldwide. Kevin T. Martin, President and Chief Operating Officer of
Evenflo & Spalding Holdings Corporation, will become President of
Spalding, succeeding Mr. Dickerman in that position. In addition to his
new post at Spalding, Mr. Martin will continue to serve as President and
Chief Operating Officer at Evenflo & Spalding Holdings Corporation.
76
<PAGE> 77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
EVENFLO & SPALDING HOLDINGS CORPORATION
By: /s/ Paul L. Whiting
------------------------------------
Paul L. Whiting
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
on Form 10-K has been duly signed by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Paul L. Whiting Chairman of the Board of Directors and December 19, 1997
- ------------------------------- Chief Executive Officer
Paul L. Whiting
/s/ Kevin T. Martin Director, President and Chief Operating December 19, 1997
- ------------------------------- Officer and President of Spalding Sports
Kevin T. Martin Worldwide Division
/s/ Robert K. Adikes Vice President, Secretary and December 19, 1997
- ------------------------------- General Counsel
Robert K. Adikes
/s/ Stephen J. Dryer Vice President and Controller December 19, 1997
- ------------------------------- (a Principal Accounting Officer)
Stephen J. Dryer
/s/ W. Michael Kipphut Vice President and Treasurer December 19, 1997
- ------------------------------- (a Principal Financial Officer)
W. Michael Kipphut
</TABLE>
77
<PAGE> 78
<TABLE>
<S> <C> <C>
/s/ Henry R. Kravis Director December 19, 1997
- ----------------------------
Henry R. Kravis
/s/ George R. Roberts Director December 19, 1997
- ----------------------------
George R. Roberts
/s/ Michael T. Tokarz Director December 19, 1997
- ----------------------------
Michael T. Tokarz
/s/ Marc S. Lipschultz Director December 19, 1997
- ----------------------------
Marc S. Lipschultz
/s/ Gustavo A. Cisneros Director December 19, 1997
- ----------------------------
Gustavo A. Cisneros
/s/ Edwin L. Artzt Director December 19, 1997
- ----------------------------
Edwin L. Artzt
</TABLE>
78
<PAGE> 79
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Evenflo & Spalding Holdings Corporation
We have audited the consolidated financial statements of Evenflo & Spalding
Holdings Corporation (formerly E&S Holdings Corporation) and subsidiaries (the
"Company") as of September 30, 1997 and 1996, and for each of the three fiscal
years in the period ended September 30, 1997, and have issued our report thereon
dated November 7, 1997 (included elsewhere in this Annual Report on Form 10-K.
Our audits also included the financial statement schedule listed in Item 14 of
this Annual Report on Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Tampa, Florida
November 7, 1997
79
<PAGE> 80
SCHEDULE II
EVENFLO & SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended September 30, 1997, 1996, and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Charged
Balance at Charged to costs to other Balance at
Description beginning of year and expenses accounts(A) Deductions(B) end of year
- ----------- ----------------- ---------------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1997-Allowance for doubtful accounts $4,373 4,284 646 (5,362) 3,941
1996-Allowance for doubtful accounts 3,247 6,527 1,158 (6,559) 4,373
1995-Allowance for doubtful accounts 3,039 2,921 408 (3,121) 3,247
</TABLE>
Notes:
(A) Recoveries on accounts previously charged off. The amount for 1997
includes $386 for the beginning allowance from the Gerry Acquisition. The
amount for 1996 includes $824 for the beginning allowance from the Etonic
Acquisition.
(B) Uncollectible accounts written off.
80
<PAGE> 1
EXHIBIT 10.14
================================================================================
ASSET PURCHASE AGREEMENT
among
BEN HOGAN CO.,
THE TRUSTS FOR THE BENEFIT OF
WILLIAM GOODWIN'S CHILDREN SET FORTH
ON THE SIGNATURE PAGE HERETO,
and
EVENFLO & SPALDING HOLDINGS CORPORATION
Dated as of November 26, 1997
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. Purchase and Sale of Assets; Assumption of Certain
Liabilities............................................................................................... 1
1.1. Transfer of Assets.................................................................................. 1
1.2. Excluded Assets..................................................................................... 3
1.3. Instruments of Conveyance and Transfer.............................................................. 3
1.4. Further Assurances.................................................................................. 3
1.5. Assumed Liabilities................................................................................. 4
2. Closing; Payment of Purchase Price at Closing............................................................. 4
2.1. Closing Date........................................................................................ 4
2.2. Purchase Price and Payment.......................................................................... 5
3. Representations and Warranties............................................................................ 6
3.1. Representations and Warranties of Seller and
Stockholder....................................................................................... 6
(a) Due Organization; Power; Capacity; Good
Standing.......................................................................................... 6
(b) Authorization and Validity........................................................... 6
(c) No Governmental Approvals or Notices
Required; No Conflict............................................................................. 7
(d) Absence of Liens; Condition of Assets................................................ 8
(e) Contracts, Permits and other Data.................................................... 8
(f) Legal Proceedings.................................................................... 8
(g) Intellectual Property................................................................ 9
(h) Compliance with Law and Requirements................................................. 9
(i) Broker's Fees........................................................................ 9
(j) Purchase for Investment; Investor
Sophistication.................................................................................... 9
3.2. Representations and Warranties of Buyer.............................................................. 10
(a) Due Organization; Good Standing and
Power............................................................................................. 10
(b) Authorization and Validity................................................................... 11
(c) Governmental Approvals; No Conflict.......................................................... 11
(d) Brokers' Fees................................................................................ 12
(e) Buyer Common Stock........................................................................... 12
3.3. Survival of Representations.......................................................................... 12
4. Agreements................................................................................................ 12
4.1. Access to Information............................................................................ 12
4.2. Asset Liquidation Plan........................................................................... 12
4.3. Customer Service and Returns..................................................................... 13
4.4. Rights Under Stockholders' Agreement............................................................. 13
5. Employees and Employee Benefits........................................................................ 13
5.1. WARN Act......................................................................................... 13
.............................................................................................. 14
.............................................................................................. 14
5.2. Employee Related Indemnification................................................................. 14
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Page
<S> <C> <C>
....................................................................................................... 14
6. Indemnification........................................................................................ 14
6.1. Seller and Stockholder Indemnity................................................................. 14
6.2. Buyer Indemnity.................................................................................. 15
6.3. Procedures for Indemnification................................................................... 16
6.4. Additional Agreements............................................................................ 17
7. Miscellaneous.......................................................................................... 19
7.1. Public Announcements............................................................................. 19
7.2. Expenses......................................................................................... 19
7.3. Transfer Taxes and Recording Expenses............................................................ 19
7.4. Notices.......................................................................................... 19
7.5. Entire Agreement................................................................................. 20
7.6. Binding Effect; Benefit.......................................................................... 21
7.7. Bulk Sales Law................................................................................... 21
7.8. Assignability.................................................................................... 21
7.9. No Third Party Beneficiaries..................................................................... 21
7.10. Amendment; Waiver............................................................................... 21
7.11. No Use of Hogan Name............................................................................ 22
7.12. Section Headings; Table of Contents............................................................. 22
7.13. Severability.................................................................................... 22
7.14. Counterparts.................................................................................... 22
7.15. APPLICABLE LAW.................................................................................. 22
7.16. Binding Arbitration............................................................................. 22
7.17. Customer Records................................................................................ 22
</TABLE>
-ii-
<PAGE> 4
ASSET PURCHASE AGREEMENT, dated as of November 26, 1997, (the
"Agreement") among BEN HOGAN CO., a Virginia corporation ("Seller"), the trusts
set forth on the signature page hereto (individually and collectively, the
"Stockholder") and EVENFLO & SPALDING HOLDINGS CORPORATION, a Delaware
corporation ("Buyer").
WITNESSETH
WHEREAS, Seller is engaged in the manufacture, distribution
and sale of premium golf products, apparel and equipment;
WHEREAS, Stockholder is the sole stockholder of Seller; and
WHEREAS, upon and subject to the terms and conditions set
forth herein, Buyer desires to buy and Seller desires to sell certain assets in
connection therewith, and Buyer is willing to assume only those liabilities and
obligations of Seller specifically assumed by Buyer, all as hereinafter set
forth.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants of the parties hereto, it is hereby agreed as follows:
1. Purchase and Sale of Assets; Assumption of Certain
Liabilities
1.1. Transfer of Assets. On the basis of the representations,
warranties, covenants and agreements and subject to the satisfaction (or waiver
by the party whose obligations hereunder are subject to such satisfaction) of
the conditions set forth in this Agreement, on the Closing Date (as defined in
Section 2.1), Seller shall sell, convey, assign, transfer and deliver to Buyer
and/or Buyer's assignees, and Buyer shall purchase and acquire from Seller, the
assets, rights, properties, claims, contracts and business of Seller as set
forth below:
(a) the contracts and agreements listed on
Schedule 1.1(a);
(b) all Seller's right, title and interest in and to the "Ben
Hogan" or "Hogan" name, (including on product lines retained by the Seller) and
the following property (including all rights to sue for past infringement
thereof) (collectively, the "Intellectual Property"):
(i) all United States and foreign registered
and unregistered trademarks and service marks,
<PAGE> 5
2
trademark and service mark registrations, trademark and service mark
applications for registration, trade names and the like (including
product names and corporate names), as set forth on Schedule 1.1(b)(i)
together with the goodwill connected with the use of and symbolized by
such marks, names, registrations and applications for registration;
(ii) all United States and foreign patents, patent
applications, and all other patent rights, copyrights, copyright
registrations and copyright applications as set forth on Schedule
1.1(b)(ii);
(iii) all information, recorded knowledge, surveys,
copies of customer records adequate to determine past sales and payment
history, engineering reports, product drawings and designs, molds,
prototypes, quality control data, manuals, catalogues, research data,
proprietary information, know-how, trade and business secrets, photos,
art work, editorial materials, formats, syndicated market research
data, sales data and other similar information and all other
intellectual property;
(iv) all non-governmental licenses, sublicenses,
covenants or agreements to which Seller is a party, which relate in
whole or in part to any items of the categories mentioned above in
clauses (i) - (iii), including all trademark licenses as set forth on
Schedule 1.1(b)(iv);
(v) all rights and privileges related to the use of
phone numbers currently used by Seller;
(c) Seller's inventory (finished and unfinished) of "Apex"
and "Medallion" golf club lines, in each case as detailed on Schedule 1.1(c);
(d) Seller's equipment and other tangible personal property of
Seller set forth on Schedule 1.1(d) (collectively, the "Equipment") and all
warranties and guarantees, if any, express or implied, existing for the benefit
of Seller with respect to the Equipment as set forth in Schedule 1.1(d);
(e) all supplies on hand, in transit or on order as of the
opening of business on the Closing Date, including, without limitation,
stationery, forms, labels, directories and promotional materials used in the
marketing of the Ben Hogan or Hogan names or the other Assets;
(f) all sales promotion and selling literature and promotional
and advertising materials used in the marketing of the Ben Hogan or Hogan names
or the other Assets; and
<PAGE> 6
3
(g) the licenses, permits or franchises listed on Schedule
1.1(g).
The assets being sold, conveyed, assigned, transferred and delivered to Buyer by
Seller hereunder are sometimes hereinafter referred to as the "Assets."
1.2. Excluded Assets. It is expressly understood and agreed
that the Assets shall only include those items set forth in Section 1.1 of this
Agreement and shall not include any of the shares of capital stock or real
property of the Seller.
1.3. Instruments of Conveyance and Transfer. On the Closing
Date, Seller shall (a) deliver or cause to be delivered to Buyer such bills of
sale, endorsements, consents, assignments, and other good and sufficient
instruments of conveyance and assignment, all in recordable form, where
applicable, as shall be effective to vest in Buyer all right, title and
interest of Seller in and to the Assets, and (b) transfer to Buyer originals of
all contracts, agreements, commitments, books, records, files, certificates,
licenses, permits, plans and specifications and other data of Seller that
relate to the Assets, including, without limitation, computer tapes and
computer-generated records. All materials referred to in subsection (b) shall
be delivered to Buyer in the form and order in which they are maintained by
Seller.
1.4. Further Assurances. From time to time after the Closing
Date, Seller, Stockholder and any person that directly, or indirectly through
one or more intermediaries, controls or is controlled by or is under common
control with Seller or Stockholder (an "Affiliate") shall execute, acknowledge
and deliver, or cause to be executed, acknowledged and delivered, such other
documents and instruments, including but not limited to instruments of
conveyance and assignments, and will take or cause to be taken such other
actions as Buyer may reasonably request in order more effectively to sell,
convey, assign, transfer, and deliver to Buyer any of the Assets, or to enable
Buyer to protect, exercise and enjoy all rights and benefits of Seller with
respect thereto, and as otherwise may be appropriate to fulfill the obligations
and transactions herein contemplated. Notwithstanding anything to the contrary
set forth in this Agreement, to the extent that any consent or approval is not
obtained with respect to any contract, lease, license or agreement as
contemplated above, this Agreement shall not constitute an assignment or an
attempted assignment thereof. In each such case, Seller agrees to cooperate with
Buyer in any reasonable arrangement designed to (i) provide for Buyer the
benefits
<PAGE> 7
4
under any such contract, lease, license or agreement, including enforcement at
the cost and for the account of Buyer of any and all rights of Seller against
the other party or otherwise and (ii) insure performance by Buyer of Seller's
obligations thereunder to the extent Buyer receives such benefits. If and to the
extent that such arrangement cannot be made, Buyer shall not have any obligation
with respect to any such contract, lease, license or agreement.
1.5. Assumed Liabilities. On the basis of the representations,
warranties, covenants and agreements and subject to the satisfaction of the
conditions set forth in this Agreement, on the Closing Date, Buyer shall assume
and agree to pay, perform and discharge when due, the following liabilities and
obligations of Seller: (a) Seller's obligations under the contracts listed on
Schedule 1.1 which are assigned by Seller to Buyer and as to which Buyer
succeeds to the rights of Seller, but only to the extent of liabilities and
obligations that occur thereunder after the opening of business on the Closing
Date; (b) Seller's obligations under the licenses, permits and franchises listed
in Schedule 1.1(g), but only to the extent of liabilities and obligations that
arise thereunder after the close of business on the Closing Date; (c)
liabilities and obligations specifically listed on Schedule 1.5 and (d) those
liabilities expressly assumed by Buyer pursuant to the terms of this Agreement.
Buyer is not assuming, nor shall it be deemed to have assumed, (i) any liability
or obligation of any kind or nature, except as provided in this Section 1.5,
(ii) any liability or obligation relating to the excluded assets described in
Section 1.2. or (iii) any liability or obligation relating to the operations of
Seller's business prior to the Closing Date (including any environmental,
employee-related or product liability related liabilities or obligations
(whether or not relating to any of the Assets purchased, including any
liabilities relating to design or manufacturing defects which defects occurred
prior to the Closing Date) whether or not the claim resulting in the liability
arises prior to or after the Closing Date. The liabilities and obligations
assumed by Buyer in accordance with this Section 1.5 are sometimes hereinafter
referred to as the "Assumed Liabilities."
2. Closing; Payment of Purchase Price at Closing
2.1. Closing Date. On and subject to the conditions herein
set forth, the closing with respect to the transactions provided for in this
Agreement (the "Closing") shall take place as of November 26, 1997 at 10:00
a.m. (Eastern Time) at the offices of Williams, Mullen, Christian & Dobbins,
1021 East Cary Street,
<PAGE> 8
5
Richmond, Virginia, 23219, or at such other time and place as shall be agreed
upon by the parties hereto. The actual time and date of the Closing are herein
referred to as the "Closing Date".
2.2. Purchase Price and Payment. (a) In consideration for the
Assets, and subject to the terms and conditions of this Agreement, Buyer shall
on the Closing Date (i) assume the Assumed Liabilities as provided in Section
1.5, (ii) deliver to the escrow agent pursuant to Section 6.4(d), pursuant to
the trust allocation set forth in Schedule 2.2, 1,800,000 shares of Buyer's
common stock, par value $.01 per share ("Buyer Common Stock"), and (iii) deliver
to the escrow agent pursuant to Section 6.4(d), an unsecured $4,024,925 10.5%
PIK note (the "PIK Note") in the form attached hereto as Exhibit A
(collectively, the "Purchase Price"). Buyer, in its sole discretion, may, at any
time within 60 days of the Closing Date, reduce the principal amount of the PIK
Note held by the escrow agent by up to $1 million and increase the number of
shares of Buyer Common Stock held by the escrow agent by up to 200,000 shares.
In the event Buyer takes such action, no interest shall be deemed to have
accrued on the $1 million principal amount of the PIK Note that is reduced.
(b) In addition to the Purchase Price, Buyer agrees to (i)
purchase the inventory and certain equipment and tangible personal property of
Seller set forth on Schedule 2.2(b)-1 for cash, payable within 21 days of the
Closing Date, in accordance with the purchase price formula set forth on said
schedule for the actual inventory counted as the inventory is shipped; provided,
that in no event will the amount paid for additional inventory pursuant to this
Section 2.2(b) exceed $1,727,726, (ii) Buyer agrees to pay to Seller in cash on
the Closing Date $34,651 as consideration for the additional week of
compensation paid by Seller to Seller's sales representatives at Buyer's
request, (iii) Buyer agrees to pay to Seller in cash on the Closing Date $37,074
as consideration for the additional fixed assets set forth on Schedule 2.2(b)-2
and (iv) Buyer agrees to pay to Seller in cash on the Closing Date $24,687 as
consideration for the down payment on the Orlando trade show booth.
(c) Notwithstanding the foregoing, (i) in the event that the
final amount of the inventory set forth in Schedule 1.1(c) is less than
$1,400,274 Seller shall provide to Buyer a number of golf ball cartons (dozen
count) equal to the amount of such deficiency divided by 7.75 and (ii) in the
event that the final amount of the inventory set forth in Schedule 1.1(b) is
more than $1,400,274 Buyer shall purchase from Seller a number of
<PAGE> 9
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golf ball cartons (dozen count) equal to the amount of such excess divided by
7.75 at $7.75 per carton.
(d) The Buyer will decide the allocation of the Purchase
Price among the individual Assets and the Intellectual Property, and Seller and
the Stockholders agree to comply with the allocation.
3. Representations and Warranties
3.1. Representations and Warranties of Seller and Stockholder.
Seller (and Stockholder with respect to 3.1(b), (c) and (j)) represent and
warrant to Buyer as follows (provided that, with respect to Seller, if any
representation or warranty is made hereunder to the "best knowledge" of Seller,
such knowledge shall be limited to information obtained by an examination of
Seller's managerial and supervisory employees and records:
(a) Due Organization; Power; Capacity; Good Standing. Seller
is a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization and has the requisite corporate power
and authority to own, lease and operate its properties and assets and to conduct
its business as now conducted by it. Seller has all requisite corporate and
other power and authority to enter into this Agreement and any other agreement
contemplated hereby and to perform its obligations hereunder and thereunder.
Stockholder has the capacity and legal authority to enter into this Agreement
and perform its obligations hereunder. Seller is duly authorized, qualified or
licensed to do business as a foreign corporation, and is in good standing, in
each of the jurisdictions in which its right, title or interest in or to any of
the assets held by it, or the conduct of its business, requires such
authorization, qualification or licensing, except where the failure to so
qualify or to be in good standing could not have a material adverse effect on
the condition (financial or other), of the Assets, the amount of the Assumed
Liabilities, or have an adverse effect on Seller's ability to perform its
obligations hereunder or under any other agreement contemplated hereby (each of
such effects is herein called a "Material Adverse Effect").
(b) Authorization and Validity. The execution, delivery and
performance by Seller of this Agreement and any other agreements contemplated
hereby and the consummation by it of the transactions contemplated hereby and
thereby have been duly authorized by the Stockholder and by the Board of
Directors of Seller. No other corporate or stockholder action is necessary for
the
<PAGE> 10
7
authorization, execution, delivery and performance by Seller of this Agreement
and any other agreements contemplated hereby and the consummation by Seller of
the transactions contemplated hereby or thereby. This Agreement has been duly
executed and delivered by each of Seller and Stockholder and constitutes a valid
and legally binding obligation of each of Seller and Stockholder, enforceable
against them in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium and other similar
laws relating to or affecting creditors' rights generally, by general equitable
principles (regardless of whether such enforceability is considered in a
proceeding in equity or at law) or by an implied covenant of good faith and fair
dealing.
(c) No Governmental Approvals or Notices Required; No
Conflict. The execution, delivery and performance of this Agreement and any
other agreements contemplated hereby by Seller or Stockholder and the
consummation by Seller and Stockholder of the transactions contemplated hereby
and thereby (i) will not violate (with or without the giving of notice or the
lapse of time or both), or require any consent, approval, filing or notice
under, any provision of any law, rule or regulation, court or administrative
order, writ, judgment or decree applicable to Seller or any of the Assets or any
of its assets or properties, except for such violations the occurrence of which,
and such consents, approvals, filings or notices the failure of which to obtain
or make, could not, either individually or in the aggregate, have a Material
Adverse Effect, and (ii) will not (with or without the giving of notice or the
lapse of time or both) (x) violate or conflict with, or result in the breach,
suspension or termination of any provision of, or constitute a default under, or
result in the acceleration of the performance of the obligations of Seller
under, or (y) result in the creation of any lien, mortgage, pledge, security
interest, claim, charge or encumbrance or other restriction of any kind or
nature (collectively, "Liens") upon all or any portion of the Assets pursuant
to, the charter or by-laws of Seller, or any indenture, mortgage, deed of trust,
lease, agreement, contract or instrument to which Seller is a party or by which
Seller or any of the Assets are bound, except for such violations, conflicts,
breaches, suspensions, terminations, defaults, accelerations or Liens which,
either individually or in the aggregate, could not have a Material Adverse
Effect.
(d) Absence of Liens; Condition of Assets.
<PAGE> 11
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(i) Seller has, and Buyer on the Closing Date will receive,
good and marketable title to all the Assets (except that Seller makes
no representation as to the merchantability of the inventory being
purchased), free and clear of all Liens other than as expressly assumed
in the Assumed Liabilities.
(ii) Seller has no knowledge of any material defect in the
normal operating condition and repair of the fixed assets being sold to
Buyer.
(e) Contracts, Permits and other Data.
Schedule 1.1(a) sets forth a true and complete list of all of the contracts
relating to the Assets that buyer is purchasing. True and complete copies of
all documents (including all amendments thereto and waivers in respect thereof)
referred to in the foregoing Schedules have been delivered or made available to
Buyer. To the best knowledge of Seller, all rights, licenses, permits, leases,
registrations, applications, contracts, agreements, commitments and other
arrangements referred to in such Schedules are in full force and effect and
are valid and enforceable in accordance with their respective terms, except
where the failure to be in full force and effect and valid and enforceable
could not, either individually or in the aggregate, have a Material Adverse
Effect. Seller is not (and to the best knowledge of Seller, each other party
thereto is not) in breach or default in the performance of any obligation
thereunder, and, to the best knowledge of Seller, no event has occurred or has
failed to occur whereby, with or without the giving of notice or the lapse of
time or both, a default or breach will be deemed to have occurred thereunder or
any of the other parties thereto have been or will be released therefrom or
will be entitled to refuse to perform thereunder, except for such breaches,
defaults and events which, either individually or in the aggregate, could not
have a Material Adverse Effect.
(f) Legal Proceedings. Except as set forth in Schedule
3.1(f), there is no litigation, proceeding or governmental investigation to
which Seller is a party pending or, to the best knowledge of Seller, threatened
in writing against it or relating to the Assets or the business of Seller or
the transactions contemplated by this Agreement which could, either
individually or in the aggregate, result in any Material Adverse Effect or
which seeks to restrain or enjoin the consummation of any of the transactions
contemplated hereby. To the best knowledge of Seller, neither Seller nor
Stockholder is in violation of any term of any judgment, writ, decree,
injunction or order entered by any court or governmental authority (domestic or
foreign) and outstanding against Seller or with respect to
<PAGE> 12
9
any of its assets or properties which violation could have a Material Adverse
Effect. To the best knowledge of Seller, there are no facts which could provide
a basis for any successful prosecution of any such litigation, proceeding or
investigation.
(g) Intellectual Property. Except as set forth in Schedule
3.1(g), the Seller will transfer the Intellectual Property free and clear of all
Liens and Seller will transfer all its right, title and interest in and to the
Intellectual Property to Buyer, including all of its rights under any valid and
binding contracts to use the Intellectual Property. No claims have been asserted
in writing within the past five years or are currently in dispute or pending to
the effect that the use of the Intellectual Property by Seller infringes on any
intellectual property of any other person in any material respect. To the best
knowledge of Seller, the use of all Intellectual Property in the United States
by Seller does not infringe on the rights of any person. To the best knowledge
of Seller, the use of all material Intellectual Property outside the United
States by Seller does not infringe on the rights of any person. Seller owns all
material Intellectual Property used in Seller's business as presently conducted.
Seller and Buyer will share any fees or expenses related to the transfer of the
Intellectual Property to Buyer.
(h) Compliance with Law and Requirements. Seller has conducted
its business in compliance in all material respects with all applicable laws,
ordinances, regulations, rights of concession, licenses, know-how or other
proprietary rights of others, the failure to comply with which could
individually or in the aggregate have a Material Adverse Effect.
(i) Broker's Fees. Neither Seller nor any of its officers,
directors or employees or Affiliates has employed any broker or finder or
incurred any other liability for any brokerage fees, commissions or finders'
fees in connection with the transactions contemplated hereby.
(j) Purchase for Investment; Investor Sophistication.
(1) Each Stockholder is an "accredited investor" as
such term is defined under Rule 501 of the rules promulgated
under the Securities Act of 1933, as amended (the "Securities
Act") and has sufficient knowledge and experience in
financial and business matters to enable it to
<PAGE> 13
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evaluate the merits and risks of the transactions
contemplated by the terms and conditions of this Agreement.
(2) Each Stockholder has been given access to
information regarding Buyer, including the opportunity to ask
questions of Buyer and receive answers from the officer and
employees of Buyer concerning the present and proposed
activities of Buyer, and to obtain information which
Stockholder deems necessary in order to evaluate the merits of
the transactions contemplated by this Agreement.
(3) Each Stockholder is receiving the Buyer Common
Stock solely for its own account, for investment purposes,
and not with a view to resale or distribution of all or any
part of the stock of Buyer. Each Stockholder understands that
the Buyer Common Stock has not been registered under the
Securities Act, or applicable state securities laws, on the
grounds that such shares will be issued in a transaction not
involving any public offering to a knowledgeable investor
that is familiar with the affairs and proposed operations of
the Buyer and that consequently such transaction is exempt
from registration under the Securities Act and applicable
state laws.
3.2. Representations and Warranties of Buyer.
Buyer represents and warrants to Seller and Stockholder as follows:
(a) Due Organization; Good Standing and Power. Buyer is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. Buyer has all requisite corporate and other power and
authority to enter into this Agreement and any other agreement contemplated
hereby and to perform its obligations hereunder and thereunder. Buyer is duly
authorized, qualified or licensed to do business as a foreign corporation, and
is in good standing, in each of the jurisdictions in which its right, title or
interest in or to any asset, or the conduct of its business, requires such
authorization, qualification or licensing, except where the failure to so
qualify or to be in good standing could not have an adverse effect on the
ability of Buyer to perform its obligations hereunder or under any other
agreement contemplated hereby.
<PAGE> 14
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(b) Authorization and Validity. The execution, delivery and
performance by Buyer of this Agreement and any other agreements contemplated
hereby and the consummation by Buyer of the transactions contemplated hereby and
thereby have been duly authorized by its Board of Directors. No other corporate
or stockholder action is necessary for the authorization, execution, delivery
and performance by Buyer of this Agreement and any other agreement contemplated
hereby and the consummation by Buyer of the transactions contemplated hereby or
thereby. This Agreement has been duly executed and delivered by Buyer and
constitutes a valid and legally binding obligation of Buyer, enforceable against
Buyer in accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, by general equitable
principles (regardless of whether such enforceability is considered in a
proceeding in equity or at law) or by an implied covenant of good faith and fair
dealing.
(c) Governmental Approvals; No Conflict. The execution,
delivery and performance of this Agreement and any other agreements
contemplated hereby by Buyer and the consummation by it of the transactions
contemplated hereby and thereby (i) will not violate (with or without the
giving of notice or the lapse of time or both), or require any consent,
approval, filing or notice under any provision of any law, rule or regulation,
court or administrative order, writ, judgment or decree applicable to Buyer or
its assets or properties, except for such violations the occurrence of which,
and such consents, approvals, filings or notices the failure of which to obtain
or make, could not, either individually or in the aggregate, have an adverse
effect on Buyer's ability to perform its obligations hereunder, and (ii) will
not (with or without the giving of notice or the lapse of time or both) (x)
violate or conflict with, or result in the breach, suspension or termination of
any provision of, or constitute a default under, or result in the acceleration
of the performance of the obligations of Buyer, under, or in the creation of
any Liens pursuant to the charter or by-laws of Buyer or any indenture,
mortgage, deed of trust, lease, agreement, contract or instrument to which
Buyer is a party or by which Buyer is bound, except for such violations,
conflicts, breaches, suspensions, terminations, defaults, accelerations or
Liens which could not have an adverse effect on Buyer's ability to perform its
obligations hereunder.
(d) Brokers' Fees. Neither Buyer nor any of its officers,
directors or employees, on behalf of Buyer, has
<PAGE> 15
12
employed any broker or finder or incurred any other liability for any brokerage
fees, commissions or finders' fees in connection with the transactions
contemplated hereby.
(e) Buyer Common Stock. The book value of the Buyer Common
Stock upon the closing of the recapitalization of Buyer on September 30, 1996
was $5 per share. A true and complete schedule of the ownership of the shares of
Buyer Common Stock as of November 26, 1997 is attached hereto as Exhibit 3.2(e),
except for immaterial issuances to employees pursuant to Buyer's employee stock
purchase plan.
3.3. Survival of Representations. The representations,
warranties, covenants and agreements contained in this Agreement, and in any
agreements, certificates or other instruments delivered pursuant to this
Agreement, shall survive the Closing and shall remain in full force and effect
for the applicable periods of time specified in subsection 6.4(a), regardless of
any investigations made by or on behalf of any party, but subject to all express
limitations and other provisions contained in this Agreement.
4. Agreements
4.1. Access to Information. After Closing, Buyer agrees to
provide Seller with reasonable access to information contained in the files and
records of Seller transferred to Buyer at Closing to the extent necessary for
Seller to prepare tax returns and other government mandated filings.
4.2. Asset Liquidation Plan. Seller shall have the right to
sell to third parties all inventory of the Company not being purchased by Buyer;
provided, that prior to making any sale in an amount exceeding $15,000 in a
single order, Seller shall provide Buyer with a written notice (the "Terms
Notice") setting forth the terms of such sale and Buyer shall have three days to
determine whether it desires to exercise its right to purchase such inventory on
the same terms set forth in the Terms Notice. In the event Buyer does not
exercise its right to purchase the inventory, Seller may sell the inventory to
such third party so long as the terms do not materially change from the terms
set forth in the Terms Notice. If Buyer exercises its rights pursuant to this
Section 4.2, it shall pay the amount set forth in the Terms Notice in cash to
Seller within 21 days of the date on which it notifies Seller of its intention
to make the purchase. Seller shall have 120 days to sell all of the Company's
inventory
<PAGE> 16
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pursuant to this Section 4.2 or such inventory shall be destroyed or delivered
to Buyer. Seller may not purchase or manufacture any new inventory after the
Closing Date; provided, that Seller may finish any raw or work-in-process
inventory held as of the Closing Date within 60 days of the Closing Date.
4.3. Customer Service and Returns. Commencing on the Closing
Date, Buyer shall administer on behalf of Seller all warranty claims associated
with products listed on Schedule 4.3 that were sold by Seller prior to the
Closing Date, in accordance with the terms of the express warranties
accompanying such products or made by Seller or otherwise consistent with
Seller's past practice in connection with sales of such products. On the Closing
Date, Seller shall provide Buyer at no charge with additional inventory
estimated to be sufficient to satisfy all warranty claims and in no event less
than $25,000 worth of golf club inventory (at standard manufacturing cost).
Seller's liability for such warranty claims shall be limited to the provision of
such inventory at Closing.
4.4. Rights Under Stockholders' Agreement. Commencing on the
Closing Date, and until the termination of the Stockholders' Agreement (as
defined below), each Stockholder hereby agrees, and will cause any of their
transferees to agree, to be bound by all of the terms, conditions and
obligations and shall be entitled to all of the rights and privileges, in each
case as are applicable to the "Abarco Holders" as such term is referred to in
the Stockholders' Agreement, in each case as if such Stockholder was an original
party thereto; provided, that Stockholder shall not have any demand registration
rights pursuant to Section 6 of the Stockholders' Agreement. As used in this
Section 4.4, Stockholders' Agreement shall refer to the Stockholders' Agreement
dated as of September 30, 1996 by and among Buyer, Strata Associates, L.P., KKR
Partners II and Abarco NV.
5. Employees and Employee Benefits
5.1. WARN Act. Buyer and Seller agree that for purposes of the
Worker Adjustment and Retraining Notification Act (the "WARN Act"), the Closing
Date shall be the "effective date" as such term is used in the WARN Act. Seller
agrees that it shall be responsible for any notification required under the WARN
Act with respect to Seller's employees and shall indemnify and hold harmless
Buyer and its Affiliates from and against all fines and other payments which may
become due under the WARN Act with respect to Seller's employees.
<PAGE> 17
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5.2. Employee Related Indemnification. The parties acknowledge
and agree that pursuant to Section 1.5 of this Agreement Buyer is not assuming
any liabilities with respect to any of Seller's employees except for those
employees that Buyer, in its sole discretion, determines to employ. With respect
to employees hired by Buyer and any former employee of Seller employed by Buyer
within 180 days of the Closing Date, Buyer shall be liable for any obligations
(including severance obligations) to such employees that relate to Seller's or
Buyer's employment of such persons after the date of hire by Buyer (other than
any obligations under any pension plan or any other employee benefit plan (as
such term is defined in Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended) maintained or otherwise contributed to by Seller or any
Affiliate). The Sellers shall hold harmless, indemnify and defend Buyer and its
Affiliates from and against any and all actions, suits, proceedings, demands,
assessments, judgments, claims, liabilities, losses, costs, damages or expenses
(including interest, penalties and reasonable attorneys' fees, expenses and
disbursements in connection with any action, suit or proceeding against such
Person) resulting from, caused by or arising out of any employee benefit plan,
policy, program or arrangement maintained by the Seller for its employees,
except as otherwise stated above. Notwithstanding the foregoing, Seller shall be
responsible for any liabilities or obligations to any employees hired by Buyer
that are due or payable as a result of the consummation of the transactions
contemplated by this Agreement, including the termination of their employment
with Seller, regardless of their employment with Buyer.
6. Indemnification
6.1. Seller and Stockholder Indemnity. Seller and Stockholder
jointly and severally agree to indemnify and hold Buyer and its Affiliates
harmless against and in respect of (i) all obligations and liabilities of Seller
or any of its Affiliates, whether accrued, absolute, fixed, contingent or
otherwise, not assumed by Buyer pursuant to this Agreement or under any other
agreement executed and delivered by the parties in furtherance of the
transactions described herein; (ii) any claim, cost, loss, liability or damage
incurred or sustained by Buyer or its Affiliates as a result of any breach of a
representation or warranty by Seller or Stockholder; (iii) any claim, cost,
loss, liability or damage incurred or sustained by Buyer or its Affiliates as a
result of any breach by Seller or
<PAGE> 18
15
Stockholder of any covenant or other agreement contained herein or under any
other agreement executed and delivered by the parties in furtherance of the
transactions described herein; (iv) liabilities for sales, use, income and other
taxes arising at any time out of the operation of the business of Seller and its
Affiliates prior to the opening of business on the Closing Date (including any
taxes described in Section 7.3 to the extent Seller is responsible therefor);
(v) any claim, cost, loss, liability or damage incurred or sustained by Buyer or
its Affiliates as a result of the operation of the business of Seller and its
Affiliates prior to the opening of business on the Closing Date (including but
not limited to, employee wages, salaries, bonuses, benefits or other employee
compensation (except as set forth in Section 5.2), workers' compensation,
litigation, governmental investigation or action or environmental-related
liability); (vi) all reasonable costs and expenses (including reasonable
attorneys' fees and disbursements) incurred by Buyer or its Affiliates in
connection with any action, suit, proceeding, demand, assessment or judgment
incident to any of the matters indemnified against in this Section 6.1; and
(vii) any claim, cost, loss, liability or damage incurred or sustained by Buyer
or its Affiliates as a result of the operation of any of the Assets by Seller or
its employees after the Closing Date.
6.2. Buyer Indemnity. Buyer agrees to indemnify and hold
Seller and Stockholder and their respective Affiliates harmless against and in
respect of (i) any claim, cost, loss, liability or damage incurred or sustained
by Seller or Stockholder or their respective Affiliates as a result of any
breach of a representation or warranty by Buyer; (ii) any claim, cost, loss,
liability or damage incurred or sustained by Seller or Stockholder or their
respective Affiliates as a result of any breach by Buyer of any covenant or
other agreement contained herein or under any other agreement executed and
delivered by the parties in furtherance of the transactions described herein;
(iii) any claim, cost, loss, liability or damage incurred or sustained by Seller
or any Affiliate of Seller relating to an Assumed Liability; (iv) any claim,
cost, loss, liability or damage incurred or sustained by Seller or Stockholder
or their Affiliates as a result of the use of the Assets by Buyer or its
Affiliates subsequent to the opening of business on the Closing Date (except to
the extent Buyer is indemnified for any such claim, cost, loss, liability or
damage pursuant to Section 6.1) and (v) all reasonable costs and expenses
(including reasonable attorneys' fees and disbursements) incurred by Seller or
its Affiliates in connection with any action, suit,
<PAGE> 19
16
proceeding, demand, assessment or judgment incident to any of the matters
indemnified against in this Section 6.2.
6.3. Procedures for Indemnification. Promptly after receipt by an
indemnified party under this Section 6 of notice of any claim, the commencement
of any action, or the discovery of any facts or circumstances which could
reasonably result in, if not attended to, a claim or commencement of any action,
the indemnified party shall, if a claim in respect thereof is to be or may be
made against the indemnifying party under this Section 6, notify the
indemnifying party in writing of the claim, the commencement of that action or
state of facts or circumstances; provided that the failure to notify the
indemnifying party shall not relieve it from any liability which it may have to
the indemnified party. If any such claim shall be brought against an indemnified
party, and it shall notify the indemnifying party thereof, the indemnifying
party shall be entitled to participate jointly with the indemnified party in the
indemnified party's defense, settlement or other disposition of any such claim.
With respect to any such claim relating solely to the payment of money damages
and which will not result in the indemnified party's becoming subject to
injunctive or other relief or otherwise adversely affect the business of the
indemnified party in any manner, and as to which the indemnifying party shall
have acknowledged in writing the obligation to indemnify the indemnified party
hereunder, the indemnifying party shall have the sole right to defend, settle or
otherwise dispose of such claim, on such terms as the indemnifying party, in its
sole discretion, shall deem appropriate; provided, however, that the
indemnifying party shall obtain the written consent of the indemnified party,
which shall not be unreasonably withheld, prior to ceasing to defend, settling
or otherwise disposing of any such claim if as a result thereof the indemnified
party would become subject to injunctive or other equitable relief or the
business of the indemnified party would be adversely affected in any manner; and
provided, further, that if the indemnified party has elected to be represented
by separate counsel pursuant to the proviso to the following sentence, such
settlement or compromise shall be effected only with the consent of the
indemnified party, which consent shall not be unreasonably withheld. After
notice from the indemnifying party to the indemnified party of its election to
assume the defense of such claim or action, the indemnifying party shall not be
liable to the indemnified party under this Section 6 for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof other than reasonable costs of investigation; provided, however,
that the indemnified party shall have the right to employ counsel to
<PAGE> 20
17
represent it if, in the indemnified party's reasonable judgment, it is advisable
for the indemnified party to be represented by separate counsel, and in that
event the fees and expenses of such separate counsel shall be paid by the
indemnifying party. The parties each agree to render to the other parties such
assistance as may reasonably be requested in order to insure the proper and
adequate defense of any such claim or proceeding. Notwithstanding the preceding,
(i) Buyer shall not make a claim for indemnity against Seller or Stockholder
under Section 6.1(ii) unless and until the aggregate amount of such claims
exceeds $50,000, whereupon Buyer may claim indemnification for the amounts of
such claims or any portion thereof exceeding $25,000 and (ii) Seller or
Stockholder shall not make a claim for indemnity against Buyer under Section
6.2(i) unless and until the aggregate amount of such claims exceeds $50,000,
whereupon Seller or Stockholder may claim indemnification for the amounts of
such claims or any portion thereof exceeding $25,000.
6.4. Additional Agreements. (a) The indemnities, covenants and
agreements provided in this Agreement shall survive the Closing, except that:
(i) Seller and Stockholder shall not be liable for any indemnification claim
hereunder with respect to a breach of a representation or warranty contained in
Section 3.1 pursuant to Section 6.1(ii) unless notice of such claim shall have
been delivered in accordance with this Section 6 on or before the eighteen month
anniversary of the Closing Date and (ii) Buyer shall not be liable for any
indemnification claim hereunder with respect to a breach of any representation
or warranty contained in Section 3.2, unless notice of such claim shall have
been delivered in accordance with this Section 6 on or before the eighteen month
anniversary of the Closing Date.
(b) If the payment of the amount with respect to which any claim
is made under this Section 6 ("Indemnity Claim"), gives rise to a currently
realizable Tax Benefit (as defined below) to the party making the claim, the
indemnity payment shall be reduced by the amount of the Tax Benefit available
to the party making the claim. To the extent such Indemnity Claim does not give
rise to a currently realizable Tax Benefit, if the amount with respect to which
any Indemnity Claim is made gives rise to a subsequently realized Tax Benefit
to the party that made the claim, such party shall refund to the indemnifying
party the amount of such Tax Benefit when, as and if realized. For the purposes
of this Agreement, any subsequently realized Tax Benefit shall be treated as
though it were a reduction in the amount of the initial Indemnity Claim, and
the liabilities of the parties shall
<PAGE> 21
18
be redetermined as though both occurred at or prior to the time of the indemnity
payment. For purposes of this subsection 6.4(b), a "Tax Benefit" means an amount
by which the tax liability of the party (or group of corporations including the
party) is reduced (including, without limitation, by deduction, reduction of
income by virtue of increased tax basis or otherwise, entitlement to refund,
credit or otherwise) plus any related interest received from the relevant taxing
authority. Where a party has other losses, deductions, credits or items
available to it, the Tax Benefit from any losses, deductions, credits or items
relating to the Indemnity Claim shall be deemed to be realized last after any
other losses, deductions, credits or items are realized. For the purposes of
this subsection 6.4(b), a Tax Benefit is "currently realizable" to the extent it
can be reasonably anticipated that such Tax Benefit will be realized in the
current taxable period or year or in any tax return with respect thereto
(including through a carryback to a prior taxable period) or in any taxable
period or year prior to the date of the Indemnity Claim. In the event that there
should be a determination disallowing the Tax Benefit, the indemnifying party
shall be liable to refund to the indemnified party the amount of any related
reduction previously allowed or payments previously made to the indemnifying
party pursuant to this subsection 6.4(b). The amount of the refunded reduction
or payment shall be deemed a payment under Section 6 of this Agreement and thus
shall be paid subject to any applicable reductions under this subsection 6.4(b).
(c) The aggregate indemnification obligations of Seller and
Stockholder hereunder under Section 6.1(ii) shall not exceed the Purchase Price.
The indemnification obligations of Buyer hereunder under Section 6.2(i) shall
not exceed the Purchase Price.
(d) The parties agree that the PIK Note and the shares of
Buyer Common Stock will be held in escrow pursuant to the terms of the Escrow
Agreement entered into as of the Closing Date and attached hereto as Exhibit B.
(e) The parties agree that any indemnification payments made
pursuant to this Agreement shall be treated for tax purposes as an adjustment to
the Purchase Price, unless otherwise required by applicable law. To the extent
that any Indemnity Claim is required by any taxing authority or by applicable
law to be treated as taxable income to the party making the claim and is not
under applicable law permitted to be treated as an adjustment to the Purchase
Price, the amount of any indemnity payment shall be determined on an after-tax
basis (assuming a tax rate equal to the maximum marginal federal corporate
income
<PAGE> 22
19
tax rate for the taxable year in which the indemnity is determined to be
taxable).
(f) Any party receiving notice of any claim by any taxing
authority that such party owes or may in the future owe Taxes shall, if the
claim to which such notice relates could, if resolved against such party,
reasonably be expected to have adverse consequences for other parties to this
Agreement, notify all other parties of such notice. Any party may, at its own
expense, be entitled to participate as an observer in the proceedings with
respect to any such claim.
7. Miscellaneous
7.1. Public Announcements. No news release or other public
announcement pertaining in any way to the transactions contemplated by this
Agreement will be made by any party without the prior written consent of the
other parties, unless in the opinion of counsel to such party such release or
announcement is required by law.
7.2. Expenses. Subject to Section 7.3, whether or not the
transactions contemplated by this Agreement are completed, each of the parties
hereto shall pay the fees and expenses incurred by it in connection with the
negotiation, preparation, execution and performance of this Agreement,
including, without limitation, attorneys' and accountants' fees. The foregoing
shall not affect the legal right, if any, that any party hereto may have to
recover expenses from any other party that breaches its obligations hereunder.
7.3. Transfer Taxes and Recording Expenses. Seller and Buyer
shall equally share the obligation to pay all sales, transfer taxes and
recording expenses, if any, required to be paid in connection with the transfer
of the Assets (including any interest charge or penalty with respect thereto).
7.4. Notices. All notices, requests, demands and other
communications which are required or may be given under this Agreement shall be
in writing and shall be deemed to have been duly given if delivered personally
or mailed, first class mail, postage prepaid, return receipt requested, as
follows:
<PAGE> 23
20
(a) if to Stockholder or Seller:
Mr. Beverley W. Armstrong
CCA Industries, Inc.
901 E. Cary Street
One James Center
Richmond, Virginia 23219
Telephone: 804-643-4200
Telecopy: 804-643-4208
with a copy to:
Theodore L. Chandler, Jr., Esquire
Williams, Mullen, Christian and Dobbins
1021 E. Cary Street
Richmond, Virginia 23219
Telephone: (804) 783-6420
Telecopy: (804) 783-6507
(b) If to Buyer:
Evenflo & Spalding Holdings Corporation
601 S. Harbour Island Boulevard
Suite 200
Tampa, Florida 33630
Telephone No. (813) 204-5232
Telecopy No. (212) 204-5219
Attention: Robert K. Adikes, Esquire
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Telephone No. (212) 455-2000
Telecopy No. (212) 455-2502
Attention: Alan G. Schwartz, Esquire
or to such other address or to the attention of such other person as any party
shall have specified by notice in writing to the other parties. All such
notices, requests, demands and communications shall be deemed to have been
received on the date of personal delivery or on the third business day after the
mailing thereof.
7.5. Entire Agreement. This Agreement (including the
Exhibits and Schedules hereto) constitutes the entire agreement between the
parties hereto and supersedes all prior agreements and understandings, oral
<PAGE> 24
21
and written, between the parties hereto with respect to the subject matter
hereof.
7.6. Binding Effect; Benefit. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
successors and assigns. Nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto or their
respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
7.7. Bulk Sales Law. The parties agree to waive compliance
with the provisions of the bulk sales law of any jurisdiction. Seller agrees to
indemnify and hold harmless Buyer from and against any and all liabilities which
may be asserted by third parties against Buyer as a result of such
noncompliance, except for such liabilities assumed pursuant to the Assumption
Agreement.
7.8. Assignability. This Agreement shall not be assignable,
in whole or in part, by any party hereto without the prior written consent of
the other parties hereto (except that Buyer may assign its rights hereunder to
an Affiliate and in connection with obtaining financing to fund all or any
portion of the Purchase Price).
7.9. No Third Party Beneficiaries. Nothing herein expressed
or implied shall confer upon any of the employees of Seller, Buyer, or any of
their Affiliates, any rights or remedies, including, without limitation, any
right to employment, or continued employment for any specified period, of any
nature or kind under or by reason of the Agreement.
7.10. Amendment; Waiver. This Agreement may be amended,
supplemented or otherwise modified only by a written instrument executed by the
parties hereto. No waiver by any party of any of the provisions hereof shall be
effective unless explicitly set forth in writing and executed by the party so
waiving. Except as provided in the preceding sentence, no action taken pursuant
to this Agreement, including without limitation, any investigation by or on
behalf of any party, shall be deemed to constitute a waiver by the party taking
such action of compliance with any representations, warranties, covenants, or
agreements contained herein, or in any documents delivered or to be delivered
pursuant to this Agreement or in connection with the Closing hereunder. The
waiver by any party hereto of a breach of any provision of this Agreement shall
not operate or be construed as a waiver of any subsequent breach.
<PAGE> 25
22
7.11. No Use of Hogan Name. Except as required to comply with
the provisions of Section 4.2 and except as necessary to collect the receivables
of Seller, Seller and Stockholder agree that after the Closing Date they will
not use the "Hogan" name nor any derivative thereof for any commercial purpose
without the prior written consent of Buyer. Seller and Stockholder further agree
that no later than six months after the Closing Date (unless Seller no longer
exists as an entity) they will change the name of the Seller (including, as
necessary, any affiliate, subsidiary or division of Seller) so that it no longer
contains the word "Hogan" or any derivative thereof.
7.12. Section Headings; Table of Contents. The section
headings contained in this Agreement and the Table of Contents to this
Agreement are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
7.13. Severability. If any provision of this Agreement
shall be declared by any court of competent jurisdiction to be illegal, void or
unenforceable, all other provisions of this Agreement shall not be affected and
shall remain in full force and effect.
7.14. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original and all
of which together shall be deemed to be one and the same instrument.
7.15. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
7.16. Binding Arbitration. Any controversy, dispute or claim
arising out of, in connection with, or in relation to, the construction,
performance, or breach of this Agreement shall be adjudicated by arbitration
conducted in accordance with the existing rules for commercial arbitration of
the American Arbitration Association, or any successor organization in New York
or Virginia as determined by the party initiating the arbitration. The demand
for arbitration shall be delivered in accordance with the notice provisions of
this Agreement.
7.17. Customer Records. The Seller agrees that it shall (i)
not share its customer records with any third party and (i) deliver all
customer records (including all originals and copies) to Buyer within 12 months
of the Closing Date.
<PAGE> 26
23
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
EVENFLO & SPALDING HOLDINGS
CORPORATION
By /s/
-------------------------------
Name:
Title:
BEN HOGAN CO.
By /s/ Beverly W. Armstrong
-------------------------------
Name: Beverly W. Armstrong
Title: Vice President
L.F. LOREE, III AND NORWOOD H.
DAVIS, JR. SUCCESSOR CO-TRUSTEES
U/A DATED NOVEMBER 12, 1986 FBO
WILLIAM HUNTER GOODWIN, III
By /s/ L.F. Loree
-------------------------------
Name: L.F. Loree
Title: Trustee
By /s/ Norwood H. Davis
-------------------------------
Name: Norwood H. Davis
Title: Trustee
L.F. LOREE, III AND NORWOOD H.
DAVIS, JR. SUCCESSOR CO-TRUSTEES
U/A DATED NOVEMBER 12, 1986 FBO
MOLLY SHEPHERD GOODWIN
By /s/ L.F. Loree
-------------------------------
Name: L.F. Loree
Title: Trustee
By /s/ Norwood H. Davis
-------------------------------
Name: Norwood H. Davis
Title: Trustee
<PAGE> 27
24
L.F. LOREE, III AND NORWOOD H.
DAVIS, JR. SUCCESSOR CO-TRUSTEES
U/A DATED NOVEMBER 12, 1986 FBO
MATTHEW TOLLEY GOODWIN
By /s/ L.F. Loree
-------------------------------
Name: L.F. Loree
Title: Trustee
By /s/ Norwood H. Davis
-------------------------------
Name: Norwood H. Davis
Title: Trustee
L.F. LOREE, III AND NORWOOD H.
DAVIS, JR. SUCCESSOR CO-TRUSTEES
U/A DATED NOVEMBER 12, 1986 FBO
SARAH CAMP GOODWIN
By /s/ L.F. Loree
-------------------------------
Name: L.F. Loree
Title: Trustee
By /s/ Norwood H. Davis
-------------------------------
Name: Norwood H. Davis
Title: Trustee
L.F. LOREE, III AND NORWOOD H.
DAVIS, JR. SUCCESSOR CO-TRUSTEES
U/A DATED NOVEMBER 12, 1986 FBO
PETER OVERTON GOODWIN
By /s/ L.F. Loree
-------------------------------
Name: L.F. Loree
Title: Trustee
By /s/ Norwood H. Davis
-------------------------------
Name: Norwood H. Davis
Title: Trustee
<PAGE> 1
EXHIBIT 12
Evenflo & Spalding Holdings Corporation and Subsidiaries
Ratio of Earnings to Fixed Charges
Years Ended September 30, 1997, 1996, 1995, 1994, and 1993
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings:
Earnings (loss) before income taxes $(38,535) (12,380) 19,681 29,961 42,039
Interest expense 71,326 37,718 38,108 17,073 8,913
Rent expense 2,912 1,994 1,692 1,591 1,387
------- ------- ------ ------ ------
$35,703 27,332 59,481 48,625 52,339
======= ======= ====== ====== ======
Fixed Charges:
Interest expense $71,326 37,718 38,108 17,073 8,913
Rent expense 2,912 1,994 1,692 1,591 1,387
------- ------- ------ ------ ------
$74,238 39,712 39,800 18,664 10,300
======= ======= ====== ====== ======
Ratio of earnings to fixed charges - - 1.49 2.61 5.08
======= ======= ====== ====== ======
Deficiency of earnings to fixed charges $38,535 12,380
======= =======
</TABLE>
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Evenflo & Spalding Holdings Corporation
We consent to the incorporation by reference in the Registration Statement No.
333-14569 of Evenflo & Spalding Holdings Corporation on Form S-8 of our reports
dated November 7, 1997, appearing in the Annual Report on Form 10-K of Evenflo &
Spalding Holdings Corporation for the year ended September 30, 1997.
DELOITTE & TOUCHE LLP
Tampa, Florida
December 19, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EVENFLO & SPALDING HOLDINGS CORPORATION FOR THE PERIOD
ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,168
<SECURITIES> 0
<RECEIVABLES> 247,512
<ALLOWANCES> 3,941
<INVENTORY> 157,512
<CURRENT-ASSETS> 429,066
<PP&E> 190,403
<DEPRECIATION> 80,208
<TOTAL-ASSETS> 771,845
<CURRENT-LIABILITIES> 298,990
<BONDS> 0
0
0
<COMMON> 947
<OTHER-SE> (171,578)
<TOTAL-LIABILITY-AND-EQUITY> 771,845
<SALES> 827,191
<TOTAL-REVENUES> 827,191
<CGS> 565,959
<TOTAL-COSTS> 565,959
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,326
<INCOME-PRETAX> (38,535)
<INCOME-TAX> (8,500)
<INCOME-CONTINUING> (30,035)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,035)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
