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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, 1998
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
SPALDING HOLDINGS CORPORATION
(FORMERLY EVENFLO & SPALDING HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 59-2439656
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
425 MEADOW STREET, CHICOPEE, MASSACHUSETTS 01013
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (413) 536-1200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes. [X] [ ] No.
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 21, 1998, was 96,933,963 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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SPALDING HOLDINGS CORPORATION
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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Part I
Item Business.................................................... 2
1
Item Properties.................................................. 12
2
Item Legal Proceedings........................................... 13
3
Item Submission of Matters to a Vote of Security Holders......... 14
4
Part II
Item Market for Registrant's Common Equity and Related
5 Stockholder Matters......................................... 14
Item Selected Financial Data..................................... 14
6
Item Management's Discussion and Analysis of Financial Condition
7 and Results of Operations................................... 18
Item Quantitative and Qualitative Disclosures About Market
7A Risk........................................................ 30
Item Financial Statements and Supplementary Data................. 30
8
Item Changes in and Disagreements with Accountants on Accounting
9 and Financial Disclosure.................................... 60
Part
III
Item Directors and Executive Officers of the Company............. 60
10
Item Executive Compensation...................................... 62
11
Item Security Ownership of Certain Beneficial Owners and
12 Management.................................................. 66
Item Certain Relationships and Related Transactions.............. 67
13
Part IV
Item Exhibits, Financial Statement Schedules and Reports on Form
14 8-K......................................................... 70
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PART I
ITEM 1: BUSINESS
Spalding Holdings Corporation (formerly Evenflo & Spalding Holdings
Corporation) and subsidiaries (the "Company") is a global manufacturer and
marketer of branded consumer products serving the sporting goods markets under
the primary trade names Spalding(R), Top-Flite(R), Etonic(R), Strata(R), Ben
Hogan(R) and Dudley(R). The primary subsidiary of the Company is Spalding Sports
Worldwide, Inc. (formerly Spalding & Evenflo Companies, Inc.), ("Spalding"). The
Company markets and licenses a 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.
Prior to August 20, 1998, Evenflo Company, Inc. ("Evenflo") was also a
subsidiary of the Company. Evenflo markets under the Evenflo(R), Gerry(R) and
Snugli(R) 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.
On August 20, 1998, the Company separated its two businesses, Spalding and
Evenflo, into two stand-alone companies (the "Reorganization"). Following
completion of the Reorganization, the Company's headquarters in Tampa, Florida
was closed and its functions transferred to the separate Spalding and Evenflo
operations. After giving effect to the Reorganization, Spalding continues to own
42.4% of the common stock of Evenflo.
All references to fiscal year in this Form 10-K refer to the fiscal year
ending on September 30th of each year. All references to market share and
demographic data in this Form 10-K are based on industry publications and
Company data. For periods prior to the date of the Reorganization, references to
the Company include Spalding and Evenflo on a consolidated basis. After August
20, 1998, references to the Company means the operations of Spalding and its
equity investment in Evenflo. References to fiscal 1998 include the operations
of Spalding for the entire fiscal year, the operations of Evenflo for the period
from October 1, 1997 to August 20, 1998 and Spalding's 42.4% equity in Evenflo
from August 21, 1998 to September 30, 1998.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 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 1997, 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 1997
(based on pro forma net sales for the acquisition of Gerry Baby Products
("Gerry")), 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 $803 million in fiscal 1998.
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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
core 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 that were stretched
over the bottle top. Evenflo has since developed a large 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 certain 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.
In August 1998, the Company separated its two businesses Evenflo and
Spalding, into two stand-alone companies. As part of the Reorganization, KKR
1996 Fund L.P., an affiliate of the Company, acquired 51% of the outstanding
shares of common stock of Evenflo from Spalding for a purchase price of $25.5
million and preferred stock of Evenflo from Spalding for a purchase price of
$40.0 million. In addition, Great Star Corporation, an affiliate of Abarco N.V.
and a shareholder of the Company, acquired 6.6% of the outstanding shares of
Evenflo from Spalding for a purchase price $3.3 million. Following completion of
the Reorganization, the Company's headquarters in Tampa, Florida was closed and
its functions transferred to the separate Spalding and Evenflo operations.
SPALDING
Spalding, with net sales of $512.5 million in fiscal 1998, is a leader in
the $2.8 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),
Strata(R), Dudley(R) and Ben Hogan(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.
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For information on sales by industry segment and foreign and domestic
operations and export sales, see Note R 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 $394 million in fiscal 1998, or approximately 77% 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 Hogan(R),
Top-Flite(R) and Strata(R) brand names, 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
Stewart, Justin Leonard, Craig Stadler, Mark O'Meara, Jim Furyk, Brandi Burton,
and Chris Johnson. Spalding golf products are played worldwide by over 250
touring golf professionals and many PGA club professionals.
GOLF BALLS. Spalding was the leading manufacturer of golf balls in the
$669 million U.S. wholesale market, with worldwide net sales of $210 million,
$218 million and $218 million in fiscal 1998, 1997 and 1996, respectively.
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), and Top-Flite XL(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. Sales of Spalding golf clubs generated $108 million, $96
million and $71 million in worldwide net sales for the fiscal years 1998, 1997
and 1996, respectively. In 1997, U.S. wholesale sales of golf clubs were
estimated at $1.5 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 Hogan(R), Top-Flite(R) and Spalding(R)
brand names to satisfy the high performance and recreational/value segments of
the market (Hogan was purchased during fiscal 1998). 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.
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. In 1997, Spalding announced the addition to
its club line of the Top-Flite(R) Intimidator 400(R) 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 and Etonic golf gloves. Spalding had
fiscal 1998 net sales of $76 million of golf shoes and accessories. In 1997, the
U.S. wholesale market for golf shoes and accessories was approximately $550
million.
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 $98 million, or 19% of total Spalding's fiscal 1998 net
sales.
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BASKETBALLS. Spalding produced the first basketball in 1894 and is the
market share leader in the estimated $154 million (1997) U.S. market for
basketballs and basketball accessories with $36 million of U.S. net sales of
basketballs in fiscal 1998. Spalding's worldwide net sales of basketballs in
fiscal 1998 were $48 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. There can be no assurances that the current
labor dispute in the NBA will not have a material adverse effect on the
Company's sales of basketballs.
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 $50 million in fiscal 1998, although 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 and the American Volleyball Association (AVA). 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), Top-Flite(R) Etonic(R) and Ben Hogan(R) brand names are licensed in
over 259 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, Sara Lee Corporation and
others in the U.S. Other Spalding licensed products include sport bags and other
accessories. Sales of licensed Spalding products totaled approximately $259
million in fiscal 1998, $113 million of which was in international markets.
Spalding maintains quality control by inspecting licensed products to
maintain compliance with Spalding's quality standards. Spalding believes that
selectively licensing its brand names for use on 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 6 wholly-owned
foreign subsidiaries in Australia, Canada, Japan, New Zealand, Sweden and the
United Kingdom. Spalding's international sales were $120.1 million, or 23% of
Spalding's net sales in fiscal 1998, due in large part to the popularity of golf
and basketball outside the United States.
RESTRUCTURING. In fiscal 1997, the Company implemented a plan to
restructure the Spalding domestic and international operations to focus on core
line golf and sporting goods products. In 1998, this plan was expanded to reduce
the infrastructure needed to support international operations, by closing the
Mexico operation, consolidating European operations with the closure of Germany,
France, Italy and Spain operations, and significantly downsizing the Company's
operations in Japan. As a result, sales activities in Mexico, the closed
European operations and Japan will be channeled through distributors. The U.S.
operations recognized
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certain management severance costs and closed the headquarters in Tampa,
Florida. See Note F of the Notes to the Consolidated Financial Statements
appearing elsewhere in this Form 10-K.
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. In fiscal 1998, one U.S. customer (Wal-Mart)
amounted to 13% of net sales. During fiscal 1997 and 1996, 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 Strata(R) and Top-Flite(R) as global "megabrands" for
performance grade golf products. In 1998 Spalding expanded its advertising
campaign for premium golf products including the Top-Flite(R) Strata Tour(TM)
golf ball, the Hogan(R) club line and the Top-Flite(R) club line. Advertising,
promotion and endorsement expenditures amounted to 16%, 14%, and 12% of
Spalding's net sales in fiscal 1998, 1997 and 1996, 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 830,000 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 58%
of Spalding's net sales in fiscal 1998 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 specification. 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
improve quality. Certain of Spalding's third-party manufacturers produce only
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 that are important to its business, including Spalding(R),
Top-Flite(R), Etonic(R), Strata(R), Dudley(R) and Ben Hogan(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, 1998, Spalding
owned 200 patents and had 171 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
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business, the loss of any one patent would not have a material adverse effect on
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 1998, Spalding's quarterly net
sales as a percentage of its total net sales were approximately 20%, 29%, 30%
and 21%, respectively, for the first through the fourth quarters of the 1998
fiscal year. In addition, for fiscal 1998, Spalding's quarterly income from
operations as a percentage of its total income from operations was approximately
(23%), 3%, (23%) and (57%), respectively, for the first through fourth quarters
of such fiscal year. Unusual and restructuring costs in the fourth quarter for
fiscal 1998 totalled $26.4 million principally consisting of: (a) $7.2 million
increase in bad debt allowance because of concerns about the collectibility of a
receivable from one customer, (b) $5.3 to close the corporate office in Tampa,
(c) $4.0 of expenses related to the Reorganization transaction and (d) $2.8
write off related to accumulated foreign currency translation adjustments.
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
that 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.). Additionally, Spalding
anticipates that certain manufacturers (Nike, Inc., Callaway Golf Co. and Taylor
Made) will soon enter the premium golf ball market.
EVENFLO
Evenflo, with net sales of $291 million through the date of the
Reorganization (August 20, 1998), is a leader in the $2.0 billion U.S. market
for juvenile and infant hardgood products, as well as a market leader in such
products in several international markets. Evenflo is one of the largest
manufactures and marketers of juvenile products in the United States as well as
a leader in several international markets based on net sales in 1997.
Established in 1920, Evenflo is one of the oldest and most recognized names in
the juvenile products industry, with a 97% brand awareness for infant feeding
products among new mothers in the United States. Evenflo believes it is a
leading supplier of juvenile products to such key national retailers as Toys "R"
Us, Inc., Wal-Mart Stores, Inc., Sears, Roebuck & Co., Kmart Corporation and
Target (a division of Dayton Hudson Corporation).
Evenflo distinguishes itself from its competitors by developing innovative,
high quality products which have sometimes redefined their product categories.
For example, the 1994 introduction of the Exersaucer(R) redefined the activity
product category. Evenflo followed this success with the introduction of the On
My Way Travel System(R) in 1996, which was, according to NPD Group, Inc., the
single largest selling product in the juvenile products industry by dollar
volume in 1997. Evenflo further distinguishes itself from its competitors
through it co-branded products offerings with other national brands such as
OshKosh B'Gosh(R) and Serta(R).
Evenflo products fall into four principal categories, representing the
daily activities in which the products are used: (i) "On The Go" products,
including car seats, strollers, travel systems and carriers, (ii) "Play Time"
products, including stationary activity products, swings gates and doorway
jumpers, (iii) "Bed and Bath" products including cribs, portable play yards,
monitors, mattresses, bath items and toilet trainers and (iv) "Feeding Time"
products, including reusable and disposable nurser systems, breastfeeding aids,
high chairs, oral development items such as teethers and pacifiers, bibs and
other feeding accessories.
INTERNATIONAL. Evenflo believes that higher birth rates, the adoption of
mandatory automobile child restraint laws, increasing income levels, the
lowering of trade barriers and the standardization of regulation in certain
world markets present significant growth opportunities. Evenflo has had an
international presence for
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over 50 years, selling its products in 63 foreign countries, with established
operations in Canada, Mexico and the Philippines. International sales
represented $37.0 million, or approximately 13% of Evenflo's net sales through
the date of the Reorganization.
SALES, MARKETING AND DISTRIBUTION. For fiscal 1998, the five largest
customers of Evenflo represented approximately 65% of Evenflo's net sales with
Toys "R" Us, Wal-Mart, Target and Sears representing 25%, 17%, 8% and 8%,
respectively, of net sales. No other customer accounts for more than 10% of
Evenflo's worldwide net sales. As is customary in the industry, the Company's
products are generally purchased by means of purchase orders. Evenflo's sales
organization in the United States is divided into national accounts,
non-national accounts and food and drug accounts.
MARKETING. Evenflo's marketing efforts are focused on building brand
identity through broad advertising and packaging programs as well as emphasizing
product innovation and customer service. Evenflo conducts extensive research on
juvenile product industry trends, including consumer buying trends and
focus-group research with parents and children. Evenflo uses this data in making
determinations with respect to product offerings and new product introductions
to respond to consumer demands.
Marketing programs are national in scope and primarily consist of print
advertising, trade and consumer promotions and targeted sampling. Evenflo
collaborates with significant accounts to develop shelf space allocations for
their products in upcoming selling seasons. For key accounts, Evenflo also
designs and sets up in-store promotional displays for products, including new
product introductions. Advertising and promotion expenditures amounted to
approximately 5% of Evenflo's net sales in fiscal 1998, 1997, and 1996.
RESEARCH AND DEVELOPMENT. Evenflo dedicates substantial resources to its
product development efforts, including 22 professionals in research and
development. Evenflo's research and development group has in effect over 231
U.S. patents and 121 foreign patents. Evenflo has developed a number of
innovative infant and juvenile products, including the first fully transparent
baby bottle, the first decorated nurser, the first convertible (infant to
toddler) car seat to pass applicable federal testing standards and the first
juvenile stationary activity product. Evenflo has approximately 52 patents
pending at the U.S. Patent and Trademark Office.
MANUFACTURING, PROCUREMENT AND RAW MATERIALS. Evenflo maintains six
manufacturing and assembly plants located in Ohio, Georgia, Alabama, Wisconsin
and two in Mexico. Evenflo also operates distribution centers in Canada and the
Philippines and has entered into a joint manufacturing arrangement with a French
corporation for the manufacture and distribution of On My Way(R) car seats and
the Exersaucer(R) in European markets. 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 stationary 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, while wood products (primarily
gates) are produced at its plant in Suring, Wisconsin. Evenflo recently
completed the elimination of Gerry's manufacturing and distribution operations
at Thornton, Colorado and the integration of those operations into the Piqua,
Ohio and Canton, Georgia facilities and closed the Thornton facility. In
addition to the integration of Gerry into Evenflo's operations, Evenflo recently
completed the reengineering of the Piqua assembly lines to improve productivity
and capacity, including the installation of injection molding equipment. Evenflo
also redesigned the Piqua and Canton warehouses, installed computer-controlled
fabric cutting systems in Jasper and during fiscal 1998, the Company made
additional investments to expand warehousing and distribution in Piquoa and
Canton and to move administrative offices to Vandalia, Ohio. Evenflo is the only
major U.S. juvenile product manufacturer with ISO 9000 registration status.
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 approximately 27% of Evenflo's net sales in fiscal 1998 were
produced by such third party manufacturers and only one supplier accounted for
products representing more than 10% of Evenflo's fiscal 1998 net sales (Lordship
Industrial Co. accounted for products representing approximately 14% of
Evenflo's fiscal 1998 net sales). Evenflo continually monitors its sourced
products with a staff
8
<PAGE> 10
headquartered in Hong Kong to improve the quality of its sourced products.
Evenflo believes it has alternative sources of supply for nearly all of the
products currently produced by third party manufacturers; however, any
interruption in the supply of such goods or increase in price or decline in
quality could have a material adverse effect on Evenflo's results of operations.
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.
Plastic resins prices may fluctuate as a result of changes in natural gas and
crude oil prices and the capacity, supply and demand for resins and the
petrochemical intermediates from which they are produced.
COMPETITION. The juvenile product industry is highly competitive and is
characterized by frequent introductions of new products, often accompanied by
advertising and promotional programs. Evenflo competes with numerous national
and international companies which manufacture and distribute infant and juvenile
products, a number of which have greater financial and other resources at their
disposal. Evenflo's principal competitors include Century Products Company, Inc.
(a subsidiary of Rubbermaid, Inc.) ("Century"), Graco Children's Products, Inc.
(a subsidiary of Rubbermaid, Inc.) ("Graco"), 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 Sandaz, Ltd.), Johnson &
Johnson, Kolcraft Enterprises, Inc., Playtex Products, Inc. and Safety 1st, Inc.
Newell Co. recently acquired Rubbermaid, Inc.
A number of factors affect competition in the juvenile products
manufactured and/or sold by the Company, including quality, price competition
from competitors and price points parameters established by the Company's
customers. Shelf space is a key factor in determining retail sales of juvenile
care products. A competitor that is able to maintain or increase the amount of
retail space allocated to its product may gain a competitive advantage for that
product. The allocation of retail space is influenced by many factors, including
brand name recognition, quality and price of the product, level of service by
the manufacturer and promotions.
In addition, new product introductions are an important factor in the
categories in which the Company's products compete. Other important competitive
factors are brand identification, style, design, packaging and the level of
service provided to customers. The importance of these competitive factors
varies from customer to customer and from product to product. There can be no
assurance that the Company will be able to compete successfully against current
and future sources of competition or that the current and future competitive
pressures faced by the Company will not adversely affect its profitability or
financial performance.
In the On The Go product category, Graco has recently entered the monitor
and travel system markets, which has resulted in an increase in competition in
these markets.
TRADEMARKS AND PATENTS. Evenflo has proprietary rights to a number of
trademarks that are important to its business including Evenflo(R), Gerry(R) and
Snugli(R). Evenflo's policy is to protect proprietary products by obtain patents
for such products when practicable. Evenflo owns approximately 231 patents and
196 trademarks and had approximately 52 patent applications and approximately 86
trademarks pending at the U.S. Patent and Trademark Office. In addition, Evenflo
also maintains patent protection for certain of its products in other countries
and has a number of patent applications pending in foreign countries. In
addition to its patent portfolio, Evenflo possesses a wide array of unpatented
proprietary technology and know-how. Evenflo believes that its patents,
trademarks, trade names, service marks and other proprietary rights are
important to the development and conduct of its business and the marketing of
its products. As such, Evenflo vigorously protects its intellectual property
rights. In some cases, litigation or other proceedings may be necessary to
defend against or assert claims of infringement, to enforce patents issued to
Evenflo or its licensors, to protect trade secrets, know-how or other
intellectual property rights owned, or to determine the scope and validity of
the proprietary rights of Evenflo or of third parties. On April 22, 1998,
Evenflo sued Graco for patent infringement relating to Evenflo's Carry Right(R)
patent. Graco has filed an answer and a counterclaim alleging infringement by
Evenflo of three different patents relating to stroller technology. In addition,
on August 7, 1998, Century filed suit against both Evenflo and Spalding alleging
the infringement of
9
<PAGE> 11
two patents relating to the design of the storage compartment and base of
certain of Evenflo's car seats. Evenflo and Spalding intend to vigorously defend
this action and believe that an adverse outcome would not materially adversely
affect them. There can be no assurance that Evenflo and Spalding will prevail in
either of these suits or in similar litigation. See "-- Legal Proceedings."
Although Evenflo believes that, collectively, its patents are important to its
business, the loss of any one patent would not have a material adverse effect on
Evenflo's business and results of operations.
PRODUCT REGULATION. Evenflo's products are subject to the provisions of
the Federal Consumer Product Safety Act and the Federal Hazardous Substances
Act, the Highway Safety Act of 1970 (collectively, the "Safety Acts") and the
regulations promulgated thereunder. The Safety Acts authorized the Consumer
Products Safety Commission ("CPSC") to protect the public from products that
present a substantial risk of injury. The Highway Safety Act of 1970 authorizes
the National Highway Traffic Safety Administration ("NHTSA") to protect the
public from risk of injury from motor vehicles and motor vehicle equipment. The
CPSC, the NHTSA and the Federal Trade Commission (the "FTC") can initiate
litigation requesting that a manufacturer be required to remedy, repurchase or
recall articles which fail to comply with federal regulations, which contain a
safety related defect or which represent a substantial risk or injury to users.
They may also impose fines or penalties on the manufacturer. Similar laws exist
in some states and in other countries in which Evenflo markets its products. Any
recall of its products could have a material adverse effect on Evenflo.
In the past five years, Evenflo had three product recalls and took ten
corrective actions with respect to recalled and other products. Corrective
actions are steps taken by Evenflo short of a recall which involve delivering
instructions or repair kits to consumers in order to assure proper usage and
performance of a product. Within the last two calendar years, Evenflo has
executed three recalls and five corrective actions, including: the offer of a
repair kit for the On My Way(R) car seat in March 1998 affecting approximately
800,000 units due to the potential for slippage of the handle lock when used as
a carrier; and the provision of a retrofit plastic reinforcing sleeve for the
Happy Camper(R) play yard in June 1997 affecting approximately 1.2 million units
to encourage full rotation of the locking hinge and to prevent breaking or
cracking of the plastic hinges. These two corrective actions accounted for 59%
of Evenflo's expenditures for recalls and corrective actions in fiscal 1997 and
fiscal 1998. In fiscal 1997 and fiscal 1998 (through 10 1/2 months), the
aggregate cost of recalls and other corrective actions was $4.4 million and $4.9
million through August 20, 1998 (with an additional $0.2 million through
September 30, 1998), respectively (including costs related to the 1998 recall of
the Two-In-One(R) booster car seat affecting approximately 32,000 units due to
cracking and breakage during testing). In addition, Evenflo has instituted a
voluntary recall of its Houdini(R) play yards affecting approximately 200,000
units as part of an industry-wide recall of play yards with protruding rivets.
Evenflo anticipates that this recall will cost approximately $0.1 million in the
aggregate. Evenflo believes that it is indemnified by Spalding for the costs of
the recall of the Houdini(R) play yards under the terms of the Indemnification
Agreement entered into on the date of the Reorganization. See "Certain
Relationships and Related Transaction". Evenflo believes that recalls had an
effect on fiscal 1998 net sales and will continue to have such an effect in
fiscal 1999. See "Management's Discussion and Analysis of financial Condition
and Results of Operations." In addition to product recalls and corrective
actions required by the CPSC or the NHTSA, Consumer Union, the publisher of
Consumer Reports, and other product evaluation groups conduct product safety
testing and publish the results of such evaluations. The results of these
reports are widely disseminated and may spur investigations by governmental
agencies or result in negative publicity.
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, and developed and
patented the blended Surlyn cut-resistant golf ball cover. 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%, 1.6% and 1.3% of Spalding's net sales in fiscal 1998, 1997 and 1996,
respectively.
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<PAGE> 12
Evenflo dedicates substantial resources to its product development efforts,
including over 22 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 improve quality. Research and development
expenditures amounted to approximately 1% of Evenflo's net sales in each of
fiscal 1998, 1997 and 1996.
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 are less than $1 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 1,900
employees (Spalding) as of September 30, 1998.
At the Company's facilities, approximately 500 of the Company's employees
are represented under collective bargaining agreements, which agreement expires
2001. The Company does not anticipate any difficulty in extending or negotiating
this agreement when it expires. The Company believes that its labor
11
<PAGE> 13
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 one to ten
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, 1998 with
respect to the manufacturing, warehousing and office facilities used by the
Company in its businesses:
<TABLE>
<CAPTION>
OWNED/ SQUARE
LOCATION DESCRIPTION LEASED FOOTAGE
- -------- -------------------------------- ------ -------
<S> <C> <C> <C>
Spalding
Chicopee, MA......................... Manufacturing/Warehousing/Office Owned 560,500
Chicopee, MA......................... Warehousing/Office Owned 166,650
Chicopee, MA......................... Manufacturing/Warehousing/Office Owned 110,725
Gloversville, NY..................... Manufacturing/Warehousing/Office Leased 80,000
Gloversville, NY..................... Manufacturing/Warehousing/Office Owned 65,225
Gloversville, NY..................... Manufacturing/Warehousing/Office Leased 40,000
Reno, NV............................. Warehousing/Office Leased 157,000
Reno, NV............................. Warehousing/Office Leased 100,000
Reno, NV............................. Warehousing/Office Leased 48,000
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 93,649
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
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
</TABLE>
Substantially all of the assets of Spalding are encumbered by liens securing the
Company's senior credit facilities. The Company's corporate headquarters located
in Tampa Florida was shut down effective
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<PAGE> 14
September 30, 1998. In addition, on August 20, 1998, the Company sold a
controlling interest in Evenflo, which has been omitted from the above listing.
ITEM 3: LEGAL PROCEEDINGS
In February 1998, Callaway Golf Company and Callaway Golf Ball Company,
Inc. sued the Company for false advertising and trademark infringement arising
from the introduction of the Company's System C golf ball which was designed to
maximize performance when used with the Callaway Great Big Bertha(R) Driver. The
U.S. District Court in Santa Ana, California refused to grant the plaintiff's
motion for a temporary restraining order as well as its motion for expedited
discovery. The case is in pre-trial discovery with a trial expected in 1999. The
Company believes any decision against it would not have a material adverse
effect on its consolidated financial position, results of operations or cash
flows.
Due to the nature of Evenflo's products, the Company has been engaged in
the defense of product liability claims related to its products, particularly
with respect to juvenile car seats and play yards. Such claims have caused the
Company to incur material litigation and insurance expenses. Since 1988,
approximately 280 product liability claims have been brought against Evenflo,
188 of which related to juvenile car seats. Evenflo had a reserve for product
liability claims at September 30, 1997 of $8.9 million and at the date of the
Reorganization, August 20, 1998, of $ 10.1 million. Spalding's reserve for
product liability claims at September 30, 1998 was $0.6 million.
In addition to the defense of product liability claims, Evenflo has
recalled certain of its products, in response to consumer complaints and
following internal company testing and identified product safety problems or
manufacturing defects. Product recalls have been primarily in the juvenile car
seat and play yard categories. Remedial measures have included increasing
notices to consumers on the product itself and improving design. See
"Evenflo -- Product Regulation." As part of the Reorganization, the Company
retained the liability for recalls of all Evenflo products manufactured prior to
August 20, 1998. See "Certain Relationships and Related Transactions." Within
the last two calendar years, Evenflo has executed three product recalls and five
corrective actions. Over their life, these claims have resulted in $6.8 million
in liabilities of which $0.2 million was incurred subsequent to August 20, 1998
but prior to the 1998 fiscal year end. The Company estimates the Company's
accrued liability, including the $0.2 million mentioned above, related to these
open cases is $1.1 million and has recorded this amount at September 30, 1998.
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 actions, the outcome of which would have a material
adverse effect on its consolidated financial position, results of operations or
cash flows. Evenflo filed a patent infringement action on April 22, 1998 in the
U.S. District Court of the Northern District of Ohio against Graco relating to
Evenflo's Carry Right handle used on Evenflo's line of car seats. On May 6,
1998, Graco filed an answer and counterclaim alleging infringement by Evenflo of
three different patents relating to stroller technology. In addition, on August
7, 1998, Century filed suit in U.S. District Court for the Northern District of
Ohio against both Evenflo and Spalding alleging the infringement of two patents
relating to the design of the storage compartment and base of certain Evenflo
car seats. There can be no assurance as to the outcome of either of such
litigations.
In 1989, Evenflo entered into a license agreement for the design of the
Happy Camper(R) play yard. The license agreement was cancelled in April 1997 by
the licensor, and on July 18, 1997 Evenflo filed suit for breach of contract.
The licensor has filed a claim charging Evenflo with patent infringement and
breach of contract. It is anticipated that the consolidated case will go to
trial in early 1999. There can be no assurances as to the outcome of such
litigation. The loss of the license required Evenflo to design a new play yard,
which interrupted shipments to customers for a nine-month period. However,
Evenflo has recently re-entered the play yard product category with the Play
Crib(R).
In addition to the foregoing matters, the Company is a party to various
lawsuits arising in the ordinary course of business. None of those other
lawsuits are believed to be material with respect to the business assets and
continuing operations of the Company
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<PAGE> 15
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, 1998.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is not registered under the Securities Exchange
Act of 1934, as amended, and no trading market exists for such common stock. No
dividends were paid on the Company's common stock in fiscal 1998. As of December
21, 1998, there were 82 holders of the Company's common stock.
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, 1998 have been
audited. The historical consolidated financial data for the three fiscal years
ended September 30, 1998 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. The operating results of
Evenflo Company, Inc. are included for the entire year in all years below except
for 1998, in which the Company sold a controlling interest in Evenflo on August
20, 1998.
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<PAGE> 16
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA
Spalding net sales(1).............. $ 512,521 530,448 451,915 424,118 411,574
Evenflo net sales.................. 290,791 296,743 237,165 210,039 171,533
--------- --------- -------- ------- --------
Total net sales.................... 803,312 827,191 689,080 634,157 583,107
Cost of sales(2)................... 564,645 565,959 452,037 407,334 370,328
--------- --------- -------- ------- --------
Gross profit....................... 238,667 261,232 237,043 226,823 212,779
Selling, general and administrative
expenses(3)...................... 263,271 229,313 196,741 178,637 178,678
Royalty income, net................ (13,509) (14,109) (14,339) (13,514) (12,789)
Restructuring costs(4)............. 21,563 12,001 0 0 0
1994 Management Stock Ownership
Plan expense(5).................. 0 0 20,828 1,130 0
Recapitalization costs(6).......... 0 0 7,700 0 0
Litigation settlement expense(7)... 0 0 0 2,400 0
--------- --------- -------- ------- --------
Income (loss) from operations...... (32,658) 34,027 26,113 58,170 46,890
Interest expense, net.............. 78,041 71,326 37,718 38,108 17,073
Currency loss (gain), net.......... 2,936 1,236 775 381 (144)
Equity in net earnings of Evenflo
Company, Inc.(8)................. (1,476) 0 0 0 0
--------- --------- -------- ------- --------
Earnings (loss) before income
taxes............................ (112,159) (38,535) (12,380) 19,681 29,961
Income taxes (benefit)............. (33,196) (8,500) 9,300 8,683 11,938
--------- --------- -------- ------- --------
Earnings (loss) before
extraordinary loss............... (78,963) (30,035) (21,680) 10,998 18,023
Extraordinary loss on early
extinguishment of debt, net of
income tax benefit of $3,182, $0,
$3,200, $0 and $0................ (5,909) 0 (5,987) 0 0
--------- --------- -------- ------- --------
Net earnings (loss)................ (84,872) (30,035) (27,667) 10,998 18,023
Other comprehensive earnings
(loss) -- currency translation
adjustments net of income tax
(expense) benefits of $(400),
$285, $239, $662, and ($59)...... 2,405 (819) (43) (1,269) 587
--------- --------- -------- ------- --------
Comprehensive earnings (loss)...... $ (82,467) (30,854) (27,710) 9,729 18,610
========= ========= ======== ======= ========
Ratio of earnings to fixed
charges(9)(10)................... -- -- -- 1.49x 2.61x
BALANCE SHEET DATA
Working capital (deficiency)....... $ 129,059 130,076 169,551 88,124 (110,193)
Total assets....................... 535,964 761,231 690,761 536,261 508,022
Long-term debt (net of current
portion)......................... 503,074 609,900 625,800 313,073 129,788
Shareholders' equity
(deficiency)(11)................. (137,149) (170,631) (348,596) (12,360) (22,730)
Redeemable Preferred stock......... 0 0 150,000 0 0
</TABLE>
- ---------------
(1) Included in net sales for fiscal 1998 are $0.4 million of unusual cash
discount expenses resulting from a decision to close certain non-U.S.
affiliates.
(2) Included in cost of sales are unusual charges of (i) $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 (ii) $8.7 million
in 1997 for the following items: (a) $2.7 million attributable to Evenflo
manufacturing and
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<PAGE> 17
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 and (iii) $4.2
million in 1998 for the following items (a) $0.9 million to write down of
inventory from a Spalding decision to discontinue the sale of certain
products by U.S. operations, (b) $2.9 million to write down inventory and
other costs resulting from a Spalding decision to close certain non-U.S.
affiliates, (c) $0.2 million from Evenflo related manufacturing/warehouse
reconfiguration and (d) $0.2 million to relocate Gerry Colorado operations
to Evenflo's Ohio and Georgia facilities.
(3) In fiscal 1996, SG&A 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, SG&A expenses included $3.2 million of the
following unusual items: (i) $2.6 million of costs to consolidate Evenflo's
feeding and furniture operations, (ii) $0.8 million to purchase the Etonic
Canadian distribution rights, (iii) $0.1 million accounts receivable
write-offs, and (iv) a partially offsetting $0.4 million from settlement of
a 1996 Etonic computer software dispute. In fiscal 1998, SG&A expenses
included $21.1 million of the following unusual items: (a) $5.7 million to
write-off of funds advanced to Spalding's freight bill processor, (b) $1.3
million of receivables write-off resulting from a decision to close certain
non-U.S. Spalding affiliates, (c) $7.2 million increase in bad debt
allowance because of concerns about the collectibility of a receivable from
one customer, (d) $2.9 million in other costs and (e) $4.0 million of
expenses related to the Reorganization transaction.
(4) 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. In fiscal 1998,
the Company had restructuring costs associated with Spalding totaling $20.1
million and with Evenflo totaling $1.4 million. The Spalding costs
included: (i) $5.3 million of expenses related to the closure of the Tampa
headquarters, (ii) $8.1 million of severance and related expenses at
Spalding, (iii) $3.5 million of expense related to the termination of
service contracts and other expenses associated with the closing of the
Spalding affiliates in Japan, Mexico, Spain, France, Germany, and Italy,
(iv) $2.8 million of write-offs related to accumulated foreign currency
translation adjustments and (v) $0.4 million in consolidations of expenses
related primarily to lease terminations. The costs related to Evenflo are
comprised of expenses related to the integration of Gerry into the Evenflo
facilities. See Note F of the Notes to the Consolidated Financial
Statements appearing elsewhere in this Form 10-K.
(5) 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.
(6) Represents non-capitalized expenses, such as legal, printing costs, and
other professional fees and costs incurred in connection with the
Recapitalization.
(7) In 1995 the Company settled an indemnification dispute involving an
environmental matter of a former operation for $2.4 million.
(8) Represents the Company's share (42.4%) of the net earnings of Evenflo
Company, Inc. for the period from August 20, 1998 (date of Reorganization)
to September 30,1998.
(9) 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
16
<PAGE> 18
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.
(10) The deficiency of earnings to "fixed charges" for fiscal 1998, 1997 and
1996 was approximately $112.2 million, $38.5 million and $12.4 million,
respectively.
(11) Shareholders' equity (deficiency) as of September 30, 1994 reflects the
acquisition of the Acquired Trademarks in May 1994 . Shareholders' equity
(deficiency) as of September 30, 1996 reflects the Recapitalization of the
Company as of that date. 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). Shareholder's equity (deficiency)
as of September 30, 1998 includes $100 million of Preferred Stock.
17
<PAGE> 19
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)
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Spalding net sales.......................................... $512,521 530,448 451,915
Evenflo net sales........................................... 290,791 296,743 237,165
-------- ------- -------
Total net sales........................................ 803,312 827,191 689,080
Cost of sales............................................... 564,645 565,959 452,037
-------- ------- -------
Gross profit................................................ 238,667 261,232 237,043
Selling, general and administrative expenses................ 263,271 229,313 196,741
Royalty income, net......................................... (13,509) (14,109) (14,339)
Restructuring costs......................................... 21,563 12,001 0
1994 Management Stock Ownership Plan expense................ 0 0 20,828
Recapitalization costs...................................... 0 0 7,700
-------- ------- -------
Income (loss) from operations............................... (32,658) 34,027 26,113
Interest expense, net....................................... 78,041 71,326 37,718
Currency loss, net.......................................... 2,936 1,236 775
Equity in net earnings of Evenflo Company, Inc.............. (1,476) 0 0
-------- ------- -------
Earnings (loss) before income taxes and extraordinary
loss...................................................... (112,159) (38,535) (12,380)
Income taxes (benefit)...................................... (33,196) (8,500) 9,300
-------- ------- -------
Earnings (loss) before extraordinary loss................... (78,963) (30,035) (21,680)
Extraordinary loss on early extinguishment of debt, net of
income tax benefit of $3,182, $0 and $3,200,
respectively.............................................. (5,909) 0 (5,987)
-------- ------- -------
Net earnings (loss)......................................... (84,872) (30,035) (27,667)
Other comprehensive earnings (loss) -- currency translation
adjustment net of income tax (expense) benefits of $(400),
$285, and $239............................................ 2,405 (819) (43)
-------- ------- -------
Comprehensive earnings (loss)............................... $(82,467) (30,854) (27,710)
======== ======= =======
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
(PERCENTAGE OF TOTAL NET SALES)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Spalding net sales.......................................... 63.8% 64.1% 65.6%
Evenflo net sales........................................... 36.2 35.9 34.4
----- ----- -----
Total net sales........................................ 100.0% 100.0% 100.0%
Cost of sales............................................... 70.3 68.4 65.6
----- ----- -----
Gross profit................................................ 29.7 31.6 34.4
Selling, general and administrative expenses................ 32.8 27.7 28.6
Royalty income, net......................................... (1.7) (1.7) (2.1)
Restructuring costs......................................... 2.7 1.5 0.0
1994 Management Stock Ownership Plan expense................ 0.0 0.0 3.0
Recapitalization costs...................................... 0.0 0.0 1.1
----- ----- -----
Income (loss) from operations............................... (4.1) 4.1 3.8
Interest expense, net....................................... 9.7 8.6 5.5
Currency loss, net.......................................... 0.4 0.2 0.1
Equity in net earnings of Evenflo Company, Inc.............. (0.2) 0.0 0.0
----- ----- -----
Earnings (loss) before income taxes and extraordinary
loss...................................................... (14.0) (4.7) (1.8)
Income taxes (benefits)..................................... (4.1) (1.1) 1.3
----- ----- -----
Earnings (loss) before extraordinary loss................... (9.9) (3.6) (3.1)
Extraordinary loss on early extinguishment of debt.......... (0.7) 0.0 (0.9)
----- ----- -----
Net earnings (loss)......................................... (10.6) (3.6) (4.0)
Other comprehensive earnings (loss) -- currency translation
adjustment net of income (tax) benefits................... 0.3 (0.1) 0.0
----- ----- -----
Comprehensive earnings (loss)............................... (10.3)% (3.7)% (4.0)%
===== ===== =====
</TABLE>
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 ("MD&A") 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
MD&A and elsewhere in the Current Report on Form 8-K dated July 31, 1998 and
related filings with the Securities and Exchange Commission. The Company assumes
no obligation to update any such forward looking statements.
For all periods presented, the amounts included in the MD&A include the
effects of "Push-down" accounting that resulted from the separation of the
Spalding and Evenflo segments.
YEAR ENDED SEPTEMBER 30, 1998 ("FISCAL 1998")
COMPARED TO YEAR ENDED SEPTEMBER 30, 1997 ("FISCAL 1997")
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 decreased to $803.3
million in fiscal 1998 from $827.2 million in fiscal 1997, a decrease of $23.9
million or 2.9%.
Spalding's net sales decreased to $512.5 million for fiscal 1998 from
$530.4 million for fiscal 1997, a decrease of $17.9 million or 3.4%.
International affiliate operations in Japan, Mexico, Spain, France, Germany, and
Italy underwent restructuring activities (see "Restructuring Costs") and
accounted for $20.9
19
<PAGE> 21
million of the net sales reduction. Sales in these countries are now being
handled through independent distributors. Additional declines in Australia and
Southeast Asia are attributable to weaker currencies compared to the U.S.
dollar, the elimination of certain unprofitable product lines in Australia, and
economic conditions in Southeast Asia. These net sales declines were partially
offset by record sales in Canada. Total international net sales declined $24.6
million in fiscal 1998.
Net sales in the U.S. operations increased by $7.0 million due to an
increase in sales of golf products compared to fiscal 1997 of $25.7 million, or
9.3%. The growth in U.S. sales of golf products was led by a strong demand for
Spalding(R) branded golf clubs, such as the Spalding Executive(R) model, which
achieved sales increases of 32.2% compared to fiscal 1997, as well as a 48%
increase in premium golf ball products, such as Strata(R), to the on and off
course channels. Mark O'Meara's two wins in 1998, the Masters and the British
Open, and his being named Golfer of the Year, contributed to the ongoing Strata
success. The market for premium golf clubs is currently saturated with inventory
as manufacturers, including Spalding, built product in anticipation of demand
that did not materialize. As a result, the aggregate net sales of premium grade
Top-Flite(R) Tour irons and Intimidator(TM) metal woods were flat compared to
fiscal 1997 levels. Net sales of Etonic golf shoes and golf accessories grew by
9% to $57.2 million on the continuing success of The Difference(R) spikeless
golf shoe, now the number one selling model in the off-course channel of
distribution, as well as improved sales of golf gloves and golf bags. Increases
in golf products were partially offset by declines in sporting goods and
athletic shoes totaling $18.7 million, or 17%, when compared to fiscal 1997 net
sales. The declines in sales of sporting goods were primarily attributable to
declines in sales of basketballs, athletic shoes and product lines that are
being discontinued.
Net sales for Evenflo that are included in the consolidation were $290.8
million for the ten and one-half month period ended August 20, 1998, a decrease
of $5.9 million, or 2%, from the fiscal 1997 twelve month period amount of
$296.7 million. Subsequent to August 20, 1998, Evenflo's results of operations
are being accounted for under the equity method of accounting. The net sales
decrease was due to (i) the difference in the length of the periods (10 1/2
months for fiscal 1998 versus 12 months for fiscal 1997) that Evenflo's
operations were consolidated into the Company's financial statements (ii)
discontinue certain Gerry products that did not fit with Evenflo's product line
strategies and (iii) the withdrawal of certain Gerry products from the market
place in order to re-engineer such products to meet Evenflo's standards. Net
sales were also negatively impacted by (a) an increased level of returns of
breast pumps, monitors and strollers, (b) lower net sales of play yards, due to
the expiration of a patent license for the manufacture of play yards and a nine-
month delay in introducing the Play Crib, Evenflo's newest entrant in the play
yard category, which began to be shipped to retailers in February 1998, and (c)
the effects of certain product safety campaigns. Evenflo's fiscal 1998
international net sales were down $6.0 million compared to the fiscal 1997
levels due primarily to 10 1/2 month period versus the full 12 month fiscal
year.
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
decreased to $238.7 million in fiscal 1998 from $261.2 million for fiscal 1997,
a decrease of $22.5 million or 8.6%. Gross profit as a percentage of net sales
declined to 29.7% in fiscal 1998 from 31.6% in fiscal 1997. Spalding's gross
profit decreased to $182.5 million in fiscal 1998 from $200.4 million in fiscal
1997, a decrease of $17.9 million or 8.9%. Spalding's gross margin declined to
35.6% in fiscal 1998 from 37.8% in fiscal 1997. Evenflo's gross profit decreased
to $56.2 million in fiscal 1998 (ten and one-half months) from $60.8 million in
fiscal 1997 (twelve months), a decrease of $4.6 million or 7.6% and is primarily
attributable to the sale of 57.6% of the Company's investment in Evenflo on
August 20, 1998 and the accounting for Evenflo's results of operations
subsequent to August 20, 1998 under the equity method of accounting.
The decline in Spalding's gross profit is principally due to (i) increased
sales of products with lower margins, such as Spalding Executive(R) clubs, (ii)
close-out sales activity of spiked golf shoes as the market transitioned to
spikeless shoes, (iii) $3.5 million in inventory write-downs resulting from a
decision to close certain international affiliates and to discontinue certain
U.S. product lines, (iv) close out activity on certain U.S. sporting goods
products, (v) price competition in the premium golf club market, (vi) declines
in
20
<PAGE> 22
international sales, and (vii) declines in sales of sporting goods. Spalding's
gross margin declined due to price compression on golf clubs resulting from
excessive inventory in the retail channels and from price compression on golf
shoes, the result of the transitions from spiked shoes to spikeless shoes. Gross
margin on sporting goods also decreased as a result of lost product placements
in key accounts.
Evenflo's gross profit dollars that are included in the consolidation are
$56.2 million for the ten and one-half month period ended August 20, 1998, a
decrease of $4.6 million from the fiscal 1997 twelve month period amount of
$60.8 million, or a 7.6% decline. Evenflo's gross margins decreased to 19.3% of
net sales in fiscal 1998 from 20.5% of net sales in fiscal 1997 principally due
to (i) the addition of lower margin products such as gates, booster car seats,
bath products, monitors and toilet trainers acquired in the Gerry Acquisition,
(ii) the higher costs associated with the process of integrating Gerry's
operations with those of Evenflo, (iii) an increased level of returns of breast
pumps, monitors and strollers, (iv) an increase in distribution costs, (v) a
less favorable international sales mix due to the strength of the U.S. dollar
versus certain international currencies and (vi) a less favorable margin in
international markets due to increased costs without a compensating increase in
selling price. The dollar decline is principally due to the difference in the
length of the periods (10 1/2 months for fiscal 1998 versus 12 months for fiscal
1997).
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 $263.3 million for fiscal 1998 from $229.3 million
for fiscal 1997, an increase of $34.0 million or 14.8%.
Spalding's SG&A expenses increased $26.5 million during fiscal 1998 as
compared with fiscal 1997. As a percentage of net sales, SG&A expenses increased
to 37.9% for fiscal 1998 from 31.9% for fiscal 1997. The increase in fiscal 1998
is principally due to (i) $8.2 million in higher domestic advertising,
promotion, and endorsement costs (including the NBA contractual increases), (ii)
$5.7 million in a write-off of funds advanced to a freight bill processor, (iii)
$3.5 million in unusual costs primarily associated with closing affiliate
operations in Japan, Mexico, Spain, France, Germany, and Italy, (iv) $2.9
million in higher U.S. selling expenses principally for salaries and related
benefits, (v) $2.0 million increase in legal expenses to protect the Company's
intellectual property, (vi) $7.2 million increase in bad debt allowance because
of concerns about the collectibility of a receivable from one customer and (vii)
$0.4 million in recovery from the settlement of a 1996 Etonic computer software
dispute that occurred in fiscal 1997 and did not repeat itself in fiscal 1998,
which increase in SG&A is partially offset by a $3.4 million aggregate decrease
in spending by the Company's international affiliate operations that were
transitioned to independent distributors.
SG&A for Evenflo that are included in the consolidation is $61.9 million
for the ten and one-half month period ended August 20, 1998, an increase of $5.8
million from the fiscal 1997 twelve month period. As a percentage of net sales,
SG&A expenses increased to 21.3% in fiscal 1998 from 18.9% in fiscal 1997.
Evenflo's $6.0 million increase in SG&A expenses was principally due to (i) an
increase in the number of selling and administrative personnel during the Gerry
integration, (ii) increased product development and engineering efforts related
to a number of the product lines, (iii) higher advertising and promotional
costs, and (iv) $4.0 million in expenses related to the Reorganization
transaction, partially offset by (a) lower product liability expenses compared
to fiscal 1997, and (b) lower costs from the elimination of certain redundant
functions as part of the Gerry integration.
The corporate office SG&A expenses decreased $0.1 million to $5.3 million
during fiscal 1998 as compared with a fiscal 1997 amount of $5.4 million. The
decrease is attributable to closing the Tampa office and fiscal 1997 transaction
costs that did not recur in fiscal 1998.
ROYALTY INCOME. Royalty income is primarily from licensing Spalding's
worldwide trademarks. Royalty income decreased to $13.5 million in fiscal 1998
from $14.1 million in fiscal 1997. The $0.6 million decrease was principally due
to (i) the weaker Japanese yen compared to the U.S. dollar and (ii) elimination
of licensees that were inconsistent with the strategic direction of the Company.
21
<PAGE> 23
RESTRUCTURING COSTS. In fiscal 1998, the Company had $21.5 million of
restructuring costs comprised of (i) $5.3 million of expenses related to the
closure of the Tampa headquarters, (ii) $8.1 million of severance and related
expenses at Spalding, (iii) $3.5 million of other expenses associated with the
closing of the Spalding affiliates in Japan, Mexico, Spain, France, Germany, and
Italy, (iv) $2.8 million of write-offs related to accumulated foreign currency
translation adjustments, (v) $0.4 million in consolidations of expenses related
primarily to lease terminations, and (vi) $1.4 million in expenses related to
Evenflo integrating Gerry operations into its facilities.
INTEREST EXPENSE. Interest expense increased $6.7 million to $78.0 million
in fiscal 1998 from $71.3 million for fiscal 1997. The increase is principally
due to the Company's weighted average outstanding balances for fiscal 1998 of
$704.8 million compared to $679.0 million under the Company's borrowing
arrangements then in effect for fiscal 1997. The increase in the Company's
weighted average outstanding balances for fiscal 1998 were partially offset by
lower interest rates as the Company's average U.S. borrowing rate decreased to
9.1% from 9.8% in fiscal 1997.
CURRENCY LOSS. For fiscal 1998, the Company's currency loss of $2.9
million was $1.7 million higher than the currency loss for fiscal 1997. See
"Liquidity and Capital Resources."
INCOME TAXES. In fiscal 1998, the Company recorded a $33.2 million tax
benefit which represents an effective income tax rate of 30% in relation to a
loss before income taxes and extraordinary item of $112.2 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 $84.9 million for fiscal 1998
compared to a $30.0 million net loss for fiscal 1997. The primary variances
included in the decreases to earnings were: (i) $22.6 million decrease in gross
profit of which $4.3 million relates to unusual costs (see Restructuring and
Unusual Costs) and the remainder relates to volume, mix and close-out activity
(ii) $6.7 million relates to increased interest on higher debt levels, (iii)
$8.2 million in higher domestic advertising, promotion, and endorsement costs,
(iv) $5.7 million in a write-off of funds advanced to freight bill processor,
(v) $3.5 million in unusual costs primarily associated with closing affiliate
operations in Japan, Mexico, Spain, France, Germany, and Italy, (vi) $2.9
million in higher U.S. selling expenses, (vii) $2.0 million increase in legal
expenses (viii) $0.4 million in recovery from settlement of 1996 Etonic computer
software dispute that occurred in fiscal 1997 and did not repeat itself in
fiscal 1998, (ix) $4.0 million in expenses related to the Reorganization
transaction, (x) $5.9 million in extraordinary losses related to the write-off
of deferred financing expense on the early extinguishment of debt, (xi) $0.6
million of lower royalty income, (xii) $9.6 million increase in restructuring
costs and (xiii) $1.7 million in higher currency losses, (xiv) $7.2 million
increase in bad debt allowance because of concerns about the collectibility of a
receivable from one customer, offset by (i) $3.2 million aggregate decrease of
spending in affiliate operations that were transitioned to independent
distributors (ii) the Company's equity in net earnings of Evenflo (August 21,
1998 through September 30, 1998) totaling $1.5 million and (iii) income tax
benefit of $24.7 million.
RESTRUCTURING AND UNUSUAL COSTS. The Company's fiscal 1998 net loss
includes $46.8 million of restructuring and unusual costs compared to $23.9
million of restructuring and unusual costs in fiscal 1997. The $46.8 million of
restructuring and unusual costs in fiscal 1998 consists of (i) $21.5 million of
restructuring costs, (ii) $4.2 million of unusual expenses in gross profit
(primarily in cost of sales due to write-downs of inventory), and (iii) $21.1
million of unusual expenses in SG&A expenses due to (a) $5.7 million write off
of funds advanced to freight bill processor, (b) $7.2 million increase in bad
debt allowance for customer attempting to re-organize, (c) $1.3 million
receivable write-off in non-U.S. affiliate operations, (d) $4.0 million in
expenses related to the Reorganization transaction and (e) $2.9 million of other
closing expenses. See other items affecting historical EBITDA in "Liquidity and
Capital Resources". The Company's fiscal 1997 restructuring and unusual costs of
$23.9 million included (i) $12.0 million of restructuring costs, (ii) $8.7
million of unusual expenses in cost of sales and (iii) $3.2 million of unusual
expenses in SG&A. See Note F to the Consolidated Financial Statements.
22
<PAGE> 24
YEAR ENDED SEPTEMBER 30, 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 that contributed $60.3 million in net sales for the five months of
fiscal 1997. Evenflo's net sales of car seats, play yards, and activity products
decreased from fiscal 1996 levels, principally from supplier product shortages,
the expiration of a patent license, 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 net sales in Canada, Mexico and certain other export
markets.
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 profit grew to $60.8 million in fiscal 1997 from $58.4
million in fiscal 1996. Evenflo's gross margin declined to 20.5% in fiscal 1997
from 24.6% in fiscal 1996 principally due to (i) the addition of lower margin
Gerry products, such as gates, booster car seats, bath products, monitors and
toilet trainers (as compared to car seats), (ii) $2.8 million in unusual costs
associated with the manufacturing and warehouse
23
<PAGE> 25
reconfiguration at Piqua, Ohio operations, (iii) $3.1 million in inventory
write-downs resulting from a decision to discontinue the sale of certain Gerry
products as a result of the integration of Gerry into Evenflo, 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.
Evenflo's SG&A expenses increased $9.4 million during fiscal 1997 as
compared with fiscal 1996. However, as a percentage of net sales, SG&A expenses
decreased to 17.6% for fiscal 1997 from 18.0% 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) $1.3 million in higher 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) $1.6 million in
transaction bonuses from the 1996 Recapitalization and (iii) $0.6 million in
other costs.
The corporate office had $4.8 million lower general, administrative and
unusual costs from (i) $3.9 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 and (iv) $1.6 million of other costs. The Company
funded $1.3 million of the restructuring costs, leaving an accrual of $8.3
million as of September 30, 1997. The Company estimated that it would 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
24
<PAGE> 26
studies, consolidations and lease terminations, (ii) $0.9 million of severance
costs, and (iii) $0.7 million of other costs. The Company funded $1.3 million of
the restructuring costs, leaving an accrual of $1.1 million as of September 30,
1997.
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 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 $23.9 million
of restructuring and unusual costs compared to $45.5 million of unusual costs in
fiscal 1996. The $23.9 million unusual costs in fiscal 1997 consist of (i) $12.0
million of restructuring costs, (ii) $8.7 million of unusual expenses in cost of
sales and (iii) $3.2 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.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL. Historically, the Company's primary sources of liquidity have
been cash from operations, borrowings under various credit facilities, and
periodically, proceeds from the issuance of common stock and proceeds from the
issuance of preferred stock. For fiscal 1998, quarterly net sales as a
percentage of total sales were approximately 20%, 29%, 30%, and 21%,
respectively, for the first through the fourth quarters of the fiscal year. In
addition, for fiscal 1998 quarterly income from operations as a percentage of
total (loss) from operations was approximately (23)%, 3%,(23)%, and (57)%,
respectively for the first through the fourth quarters of the 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 fiscal 1998, operating activities used $96.2 million of net cash,
compared to usage of $31.5 million in fiscal 1997. In fiscal 1996, the Company's
operating activities generated $32.0 million of cash flow. The 1998
25
<PAGE> 27
decrease is principally attributable to a $54.9 million increase in net loss.
Other factors affecting cash flow were changes in working capital due to: (i) a
decline in receivables on lower fourth quarter sales, (ii) higher golf inventory
resulting from slower sales in the golf club market as well as the purchase of
the assets of Hogan and (iii) lower payables (primarily associated with lower
bankers acceptances). The 1998 cash flows include $25.2 million of unusual
one-time costs. Unusual and restructuring costs in the fourth quarter for fiscal
1998 totalled $26.4 million principally consisting of: (a) $7.2 million increase
in bad debt allowance because of concerns about the collectibility of a
receivable from one customer, (b) $5.3 to close the corporate office in Tampa,
(c) $4.0 of expenses related to the Reorganization transaction and (d) $2.8
write off related to accumulated foreign currency translation adjustments.
In fiscal 1997, the Company's operating activities used $31.5 million of
net cash compared to cash flow from operating activities of $32.0 million in
fiscal 1996. 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 relating
to 1994 Management Stock Ownership Plan expense, a $3.3 million write-off of
Etonic assets and $9.2 million of 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) 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.
Capital expenditures for fiscal 1998 were $26.6 million compared with $35.1
million in fiscal 1997 and $19.5 million in 1996. Capital expenditures were used
primarily for new product introductions and new distribution facilities. Capital
expenditure for fiscal 1999 is estimated to be $15.0 million and will be
primarily used to upgrade the Company's computer system and maintenance of
factory equipment.
On November 26, 1997, the Company acquired certain assets and assumed
certain liabilities of Hogan for a purchase price of $14.7 million, consisting
of $10.0 million in Company common stock (2 million shares), $3.0 million in a
10 1/2% note due November 25, 2000, and $1.6 million in cash. Hogan manufactures
and/or markets gold clubs, golf balls and golf accessories under the Hogan brand
name.
On April 21, 1997, Evenflo acquired the net assets of Gerry for a purchase
price of $68.7 million.
The Company's principal sources of liquidity will come from cash flow
generated from operations, borrowings under the Company's $250 million revolving
credit facility and by non-U.S. subsidiaries (the majority of which non-U.S.
borrowings 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, 1998, the Company had an
available borrowing capacity of $58.2 million (net of $69.6 million of
outstanding letters of credit and bankers' acceptances) under the revolving
credit facility. The Company does not have any required amortization of Term
Loans in fiscal 1999.
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 table sets forth certain information regarding
the Company's EBITDA (excluding earnings from equity investment in Evenflo) and
other net cash flow items for fiscal 1998 (dollars in thousands):
<TABLE>
<CAPTION>
OTHER ITEMS
HISTORICAL AFFECTING HISTORICAL ADJUSTED
EBITDA EBITDA EBITDA
---------- -------------------- --------
<S> <C> <C> <C>
Spalding............................... $(10,162) 40,276 30,114
Evenflo................................ 6,809 6,525 13,334
Corporate.............................. (5,993) 0 (5,993)
-------- ------ ------
Consolidated........................... $ (9,346) 46,801 37,455
======== ====== ======
</TABLE>
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<PAGE> 28
SPALDING. Spalding's historical EBITDA for fiscal 1998 includes $40.3
million of restructuring ($20.1 million) and unusual costs ($20.2 million).
Restructuring costs are comprised of (i) $5.3 million of expenses related to the
closure of the Tampa headquarters, (ii) $8.1 million of severance and related
expenses at Spalding, (iii) $3.5 million of collection and other expenses
associated with the closing of the Spalding affiliates in Japan, Mexico, Spain,
France, Germany, and Italy, (iv) $2.8 million of write-offs related to
accumulated foreign currency translation adjustments, (v) $0.4 million in
consolidation of expenses related primarily to lease terminations. The $20.2
million of unusual costs are comprised of (i) $5.7 million write-off of funds
advanced to a freight bill processor (ii) $3.8 million in unusual costs
primarily associated with closing affiliate operations in Japan, Mexico, Spain,
France, Germany, and Italy, (iii) $3.5 million in inventory write-downs
resulting from a decision to close certain international affiliates and to
discontinue certain U.S. product lines and (iv) $7.2 million of expense
associated with an increased bad debt allowance because of concerns about the
collectability of a receivable from one customer. The Company estimates it will
incur approximately $11.0 million of additional unusual expenses in fiscal 1999
to complete the restructuring programs and to upgrade computer systems.
EVENFLO. Evenflo's historical EBITDA was adversely affected by $1.4
million of restructuring costs and $5.1 million of unusual costs (including $4.0
million of expenses related to the Reorganization transaction). Evenflo also
incurred $1.3 million of extraordinary losses related to the early
extinguishment of debt.
CORPORATE. Corporate incurred $4.6 million of extraordinary losses related
to the early extinguishment of debt.
The Company's ability to fund its operations, make capital expenditures and
make scheduled payments or to refinance its indebtedness will depend upon its
future financial and operating performance, which will be affected by prevailing
economic conditions and financial, business and other factors, some of which are
beyond its control. There can be no assurance that the Company's results of
operations, cash flow and capital resources will be sufficient to fund its
operations, capital expenditures, or its debt service obligations. In the
absence of improved operating results, the Company may face liquidity problems
and might be required to dispose of material assets or operations to fund its
operations and capital expenditures and to meet its debt service and other
obligations, and there can be no assurances as to the timing of such sales or
the proceeds that the Company could realize therefrom.
FINANCING. The financing entered into in connection with the 1996
Recapitalization included, (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 10 3/8% senior
subordinated notes due 2006, (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, senior subordinated 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")
provides for the issuance of up to 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 fiscal 1998 the Company sold 278,885 shares for proceeds of $1.4 million and
granted 295,559 common share options at $5.00 per share. As of September 30,
1998 there were 1,906,676 aggregate unissued shares and options and 1,023,729
options were exercisable; additionally, options for 3,252,558 common share
became exercisable on October 1, 1998. In fiscal 1997 the Company sold 2,020,238
shares for proceeds of $10.1 million and granted 6,431,146 common share options
at $5.00 per share.
On July 15, 1997, an affiliate of Strata L.L.C. invested $45.6 million and
Abarco N.V. 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.
27
<PAGE> 29
This additional equity investment was made to partially fund the acquisition of
Gerry on April 21, 1997, and the proceeds were used to pay down revolver
borrowings incurred in connection with such acquisition.
On August 20, 1998, the Company effectively completed the separation of
Spalding and Evenflo into two stand-alone companies. The Company initiated the
Reorganization by contributing the Spalding Sports Worldwide investments in the
common stocks of the Company's Evenflo subsidiaries to Evenflo Company, Inc. and
simultaneously received cumulative preferred stock of Evenflo Company, Inc. (the
"Evenflo Preferred Stock") with an aggregate liquidation preference of $40.0
million and a cumulative dividend rate of 14%. As a result of these
transactions, Evenflo Company, Inc. became the parent company of the other
subsidiaries and divisions of subsidiaries included in the Evenflo segment of
the Company. The realignment of the Company's two businesses was accounted for
as a reorganization of these companies under common control in a manner similar
to a pooling of interests.
To complete the Reorganization on August 20, 1998, KKR 1996 Fund L.P. ("KKR
1996 Fund"), a limited partnership affiliated with Kohlberg Kravis Roberts &
Co., L.P. ("KKR"), acquired from the Company 51% (5,100,000 shares) of the
outstanding common shares of Evenflo Company, Inc. for a purchase price of $25.5
million and the Evenflo Preferred Stock (400,000 shares) for a purchase price of
$40.0 million. Great Star Corporation, an affiliate of Abarco N.V. ("Abarco"),
acquired from the Company 6.6% (660,000 shares) of the outstanding common shares
of Evenflo Company, Inc. for a purchase price of $3.3 million. Strata LLC, an
affiliate of KKR 1996 Fund, KKR 1996 Fund and Abarco are currently shareholders
of the Company. After these sales of common stock, the Company retained
ownership of 42.4% (4,240,000 shares) of the outstanding shares of common stock
of Evenflo Company, Inc. Also on August 20, 1998 Evenflo (i) issued and sold
$110.0 million aggregate principal amount of 11 3/4% Senior Notes due 2006 in a
private offering, and (ii) entered into a $100.0 million revolving credit
facility with a syndicate of banks and other financial institutions and borrowed
$10.0 million under such credit facility. Evenflo Company, Inc. paid the net
proceeds of these two financing transactions, $110.0 million, to the Company as
a partial payment of intercompany indebtedness. The remainder of the
intercompany indebtedness due to the Company by Evenflo Company, Inc. was
treated as a contribution of capital by the Company to Evenflo Company, Inc.
CURRENCY HEDGING. In fiscal 1998, approximately 16.6% 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, 1998,
outstanding forward exchange contracts totaled $3.5 million.
INFLATION. Inflation has not been material to the Company's operations
within the periods presented.
YEAR 2000. The Company has been conducting a comprehensive review of its
computer systems to identify those that could be adversely affected by the "Year
2000 issue" (which refers to the inability of many computer systems to process
accurately dates later than December 31, 1999), and has been executing a plan to
remediate or replace affected systems that use microchips or other embedded
technology. (For example, robotic systems at the Company's manufacturing
center.)
The Company's Year 2000 compliance project includes four phases: (1)
evaluation of the Company's owned or leased systems and equipment to identify
potential Year 2000 compliance issues; (2) remediation or replacement of Company
systems and equipment determined to be non-compliant (and testing of remediated
systems before returning them to production); (3) inquiry regarding Year 2000
readiness of material business partners and other third parties on whom the
Company's business is dependent; and (4) development of contingency plans, where
feasible, to address potential third party non-compliance or failure of material
Company systems.
The initial phase of the Company's Year 2000 compliance project was the
evaluation of all software, hardware and equipment owned or licensed by the
Company, and identification of those systems and equipment requiring Year 2000
remediation. Analysis of all material software and hardware has been completed.
Of those software systems requiring remediation or replacement, approximately
75% of all material systems have already been remediated or replaced by Year
2000 compliant software. The Company
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<PAGE> 30
anticipates that approximately 90% of all material systems will have been
remediated or replaced by December 31, 1998, and that all remaining material
systems will be remediated or replaced by March 31, 1999. In addition, all
computer hardware in the Company's home offices, manufacturing center and
distribution center that was not Year 2000 compliant has been remediated or
scheduled to be remediated or replaced by the end of March 31, 1999; and
hardware and software unique to the Company's offices located outside the United
States are scheduled to be evaluated and remediated or replaced by June 30,
1999.
The Company has engaged a consultant to assist in the evaluation of the
equipment used in the Company's manufacturing center (other than computer
software and hardware, which were included in the analysis and remediation
efforts described in the preceding paragraph). The equipment evaluation is
expected to be completed by the end of December 1998, and remediation or
replacement of manufacturing center equipment found not be Year 2000 compliant
is scheduled to be completed by the end of the first quarter of fiscal 1999.
The costs and timing for replacement of certain of the Company's systems
that were not Year 2000 compliant have been anticipated as part of the Company's
planned information systems spending. The total cost to the Company specifically
associated with addressing the Year 2000 issue with respect to its systems and
equipment has not been, and is not anticipated to be, material to the Company's
financial position or results of operations in any given year. The Company
estimates that the total additional cost of managing its Year 2000 project,
remediating existing systems and replacing non-compliant systems, is
approximately $1.3 million of which approximately $0.6 million has been or will
be expensed as incurred, and $0.7 million has been or will be capitalized. Of
these amounts $0.15 million was expensed and $0 was capitalized in fiscal 1997,
and $0.45 million was expensed and $0.7 million was capitalized through
September 30, 1998. Although the Company believes its Year 2000 compliance
efforts with respect to its systems will be successful, any failure or delay
could result in actual costs and timing differing materially from that presently
contemplated, and in a disruption of business. The Company intends to develop a
contingency plan to permit its primary operations to continue if the Company's
modifications and conversions of its systems are not successfully completed on a
timely basis, but the foregoing cost estimates do not take into account any
expenditures associated with such contingencies. The Company's cost estimates
also do not include time or costs that may be incurred as a result of third
parties' becoming Year 2000 compliant on a timely basis.
The Company is communicating with its business partners, including key
manufacturers, vendors, banks and other third parties with whom it does
business, to obtain information regarding their state of readiness with respect
to the Year 2000 issue. Failure of third parties to remediate Year 2000 issues
affecting their respective businesses on a timely basis, or to implement
contingency plans sufficient to permit uninterrupted continuation of their
businesses in the event of a failure of their systems, could have a material
adverse effect on the Company's business and results of operations. Assessment
of third party Year 2000 readiness is expected to be substantially completed by
the end of June 1999. The Company will not be able to determine its most
reasonably likely worst case scenarios until the assessment of third parties'
Year 2000 compliance is completed.
The Company's Year 2000 compliance project included development of a
contingency plan designed to support critical business operations in the event
of the occurrence of systems failures or the occurrence of reasonably likely
worst case scenarios. The Company anticipates that contingency plans will be
substantially developed by March 31, 1999.
The Company may not be able to compensate adequately for business
interruption caused by certain third parties. Potential risks include suspension
or significant curtailment of service or significant delays by banks, utilities
or common carriers, or at U.S. ports of entry. The Company's business also could
be materially adversely affected by the failure of governmental agencies to
address Year 2000 issues affecting the Company's operations. For example, a
significant amount of the Company's merchandise is manufactured outside the
United States, and the Company is dependent upon the issuance by foreign
governmental agencies of export visas for, and upon the U.S. Customs Service to
process and permit entry into the United States of, such merchandise. If
failures in government systems result in the suspension or delay of these
agencies' services, the Company could experience significant interruption or
delays in its inventory flow.
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<PAGE> 31
The costs and the timing for management's completion of Year 2000
compliance, modification and testing processes are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, the success of third
parties' Year 2000 compliance efforts and other factors. There can be no
assurance that these assumptions will be realized or that actual results will
not vary materially.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURE ABOUT FOREIGN CURRENCY RISK
Although the majority of the Company's transactions are in U.S. Dollars,
affiliates operate in their local currency with certain transactions for
inventory and royalties being denominated in U.S. Dollars. The Company may
purchase short-term forward exchange contracts to hedge payments that require
conversion to U.S. Dollars. The purpose of entering these hedge contracts is to
minimize the impact of foreign currency fluctuation on the results of
operations. Certain increases or decreases in the affiliate U.S. dollar payments
are offset by gains and losses on the hedges. The contracts have maturity dates
that do not exceed twelve months. The Company does not purchase short-term
forward exchange contracts for trading purposes.
As of September 30, 1998, the Company had outstanding the following
purchased foreign exchange forward contracts (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
WEIGHTED
CONTRACT AVERAGE UNREALIZED
AMOUNT CONTRACT RATE GAIN (LOSS)
-------- ------------- -----------
<S> <C> <C> <C>
Foreign Currency Forward Contracts:
Australian dollar...................................... $ 975 .6164 $ 36
Canadian dollar........................................ 2,550 .7008 175
------ ----
Total.................................................... $3,525 $211
====== ====
</TABLE>
DISCLOSURE ABOUT INTEREST RATE RISK
The Company is subject to market risk from exposure to changes in interest
rates based on its financing, investing, and cash management activities. The
Company utilizes a balanced mix of debt maturities along with both fixed-rate
and variable-rate debt to manage its exposures to changes in interest rates.
(See Notes G and H to the Consolidated Financial Statements appearing elsewhere
in this Form 10-K.) The Company does not expect changes in interest rates to
have a material effect on income or cash flows in fiscal 1999, although there
can be no assurances that interest rates will not significantly change.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 31
Statements of Consolidated Earnings (Loss) and Comprehensive
Earnings (Loss) for the years ended September 30, 1998,
1997, and 1996............................................ 32
Consolidated Balance Sheets as of September 30, 1998 and
1997...................................................... 33
Statements of Consolidated Cash Flows for the years ended
September 30, 1998, 1997, and 1996........................ 34
Statements of Consolidated Shareholders' Equity (Deficiency)
for the years ended September 30, 1998, 1997, and 1996.... 36
Notes to Consolidated Financial Statements.................. 37
</TABLE>
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<PAGE> 32
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Spalding Holdings Corporation:
We have audited the accompanying consolidated balance sheets of Spalding
Holdings Corporation (formerly Evenflo & Spalding Holdings Corporation) and
subsidiaries (the "Company") as of September 30, 1998 and 1997, 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, 1998. 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,
1998 and 1997, and the results of its operations and its cash flows for each of
the three fiscal years in the period ended September 30, 1998 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Tampa, Florida
November 12, 1998
31
<PAGE> 33
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS (LOSS)
AND COMPREHENSIVE EARNINGS (LOSS)
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- ------- -------
<S> <C> <C> <C>
NET SALES................................................... $ 803,312 827,191 689,080
Cost of sales............................................. 564,645 565,959 452,037
--------- ------- -------
GROSS PROFIT................................................ 238,667 261,232 237,043
Selling, general and administrative expenses.............. 263,271 229,313 196,741
Royalty income, net....................................... (13,509) (14,109) (14,339)
Restructuring costs....................................... 21,563 12,001 0
1994 Management Stock Ownership Plan expense.............. 0 0 20,828
Recapitalization costs.................................... 0 0 7,700
--------- ------- -------
INCOME (LOSS) FROM OPERATIONS............................... (32,658) 34,027 26,113
Interest expense, net..................................... 78,041 71,326 37,718
Currency loss, net........................................ 2,936 1,236 775
Equity in net earnings of Evenflo Company, Inc............ (1,476) 0 0
--------- ------- -------
EARNINGS (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY
LOSS...................................................... (112,159) (38,535) (12,380)
Income taxes (benefit).................................... (33,196) (8,500) 9,300
--------- ------- -------
EARNINGS (LOSS) BEFORE EXTRAORDINARY LOSS................... (78,963) (30,035) (21,680)
Extraordinary loss on early extinguishment of debt, net of
income tax benefit of $3,182, $0 and $3,200,
respectively........................................... (5,909) 0 (5,987)
--------- ------- -------
NET EARNINGS (LOSS)......................................... (84,872) (30,035) (27,667)
Other comprehensive earnings (loss) -- currency
translation adjustments net of income (tax) benefits of
$(400), $285 and $239, respectively.................... 2,405 (819) (43)
--------- ------- -------
COMPREHENSIVE EARNINGS (LOSS)............................... $ (82,467) (30,854) (27,710)
========= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
32
<PAGE> 34
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash........................................................ $ 10,695 5,168
Receivables, less allowance of $10,539 and $3,941,
respectively.............................................. 135,524 243,571
Inventories................................................. 118,826 157,512
Deferred income taxes....................................... 13,309 13,860
Other....................................................... 4,225 8,955
--------- --------
TOTAL CURRENT ASSETS.............................. 282,579 429,066
Property, plant and equipment, net.......................... 51,891 110,195
Intangible assets, net...................................... 113,748 154,123
Deferred income taxes....................................... 51,899 34,904
Deferred financing costs.................................... 20,213 29,594
Investment in Evenflo Company, Inc.......................... 14,606 0
Other....................................................... 1,028 3,349
--------- --------
TOTAL ASSETS...................................... $ 535,964 761,231
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Non-U.S. bank loans......................................... $ 6,744 17,674
Current maturities of long-term debt........................ 0 17,500
Accounts payable............................................ 85,902 183,657
Accrued expenses............................................ 60,432 79,348
Income taxes................................................ 442 811
--------- --------
TOTAL CURRENT LIABILITIES......................... 153,520 298,990
Long-term debt.............................................. 503,074 609,900
Pension..................................................... 7,820 12,327
Postretirement benefits..................................... 7,420 8,910
Other....................................................... 1,279 1,735
--------- --------
TOTAL LIABILITIES................................. 673,113 931,862
COMMITMENTS AND CONTINGENCIES (NOTES M, N, O, P, AND Q)
SHAREHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock, $.01 par value, 50,000,000 shares
authorized; 1,000,000 outstanding (liquidation value $100
million and related Common Stock Warrants)................ 100,000 0
Common stock, $.01 par value, 150,000,000 shares authorized
96,933,963 and 94,655,078 shares issued, respectively..... 969 947
Paid-in capital............................................. 452,434 431,780
Retained earnings (deficit)................................. (690,209) (599,067)
Treasury stock 17,222 and 0 shares, respectively, at cost... (77) 0
Accumulated other comprehensive earnings (loss) -- currency
translation adjustments................................... (266) (4,291)
--------- --------
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY)........... (137,149) (170,631)
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY).................................... $ 535,964 761,231
========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
33
<PAGE> 35
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)........................................ $(84,872) (30,035) (27,667)
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Depreciation............................................. 20,471 16,884 13,904
Equity in earnings of Evenflo Company, Inc. ............. (1,476) 0 0
Intangibles amortization................................. 5,776 4,885 6,423
Bad debt expense......................................... 12,591 4,284 6,527
Deferred income taxes.................................... (33,196) (3,719) 4,550
Deferred financing cost amortization..................... 5,206 4,637 2,266
1994 Management Stock Ownership Plan expense............. 0 0 20,828
Write-off of Etonic assets............................... 0 0 3,300
Extraordinary loss on early extinguishment of debt....... 9,091 0 9,187
Other.................................................... 2,159 734 443
-------- -------- --------
Subtotal......................................... (64,250) (2,330) 39,761
Changes in assets and liabilities -- net of effects of the
sale of Evenflo
Receivables.............................................. 16,534 (33,739) (31,320)
Inventories.............................................. (23,882) (28,338) (4,747)
Other assets............................................. 3,467 0 0
Current liabilities, excluding bank loans................ (27,071) 38,592 30,818
Other.................................................... (1,042) (5,658) (2,488)
-------- -------- --------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES..................................... (96,244) (31,473) 32,024
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................... (26,649) (35,070) (19,546)
Payment to purchase net assets of Gerry.................... 0 (68,652) 0
Acquisition of non-U.S. trademarks from affiliate.......... 0 0 (5,135)
Acquisition of Hogan....................................... (1,641) 0 0
Sale of Evenflo and settlement of intercompany balances:
Sale of 57.6% of Evenflo Common Stock.................... 28,800 0 0
Sale of Evenflo Preferred Stock.......................... 40,000 0 0
Repayment of intercompany debt by Evenflo................ 110,000 0 0
Effect of cash on sale of Evenflo........................ (6,739) 0 0
-------- -------- --------
NET CASH FLOWS PROVIDED (USED) IN INVESTING
ACTIVITIES..................................... 143,771 (103,722) (24,681)
-------- -------- --------
Net cash provided (used) before financing
activities..................................... 47,527 (135,195) 7,343
-------- -------- --------
</TABLE>
34
<PAGE> 36
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit agreements......................... $ 0 0 600,000
Repayment under credit agreement........................... (228,800) 0 0
Net borrowings under revolving credit loan................. 94,800 1,600 25,800
Repayments under prior credit agreements................... 0 0 (320,000)
Net borrowings (repayments) of other indebtedness.......... (4,430) 4,646 (2,414)
Repayment of Etonic notes.................................. 0 0 (54,043)
Payment of new credit agreement financing costs............ 0 0 (34,231)
Proceeds from issuance of preferred stock and in 1998,
warrants................................................. 100,000 0 150,000
Proceeds from issuance of common stock..................... 1,422 59,102 221,000
Repurchase of common stock................................. (77) (283) (524,150)
Payments of deferred financing costs....................... (4,915) 0 0
1994 Management Stock Ownership Plan:
Repurchase of shares outstanding......................... 0 0 (28,219)
Collection of management notes receivable................ 0 0 6,889
Additional capital contribution............................ 0 0 1,219
-------- -------- --------
NET CASH FLOWS PROVIDED (USED) BY FINANCING
ACTIVITIES..................................... (42,000) 65,065 41,851
-------- -------- --------
Net increase (decrease) in cash.................. 5,527 (70,130) 49,194
Cash balance, beginning of period................ 5,168 75,298 26,104
-------- -------- --------
Cash balance, end of period...................... $ 10,695 5,168 75,298
======== ======== ========
SUPPLEMENTAL CASH FLOW DATA:
Interest paid.............................................. $ 80,667 53,163 35,677
Income taxes paid.......................................... 170 2,332 3,385
Non-cash exchange of preferred stock for common stock...... 0 164,174 0
Non-cash preferred stock dividend.......................... 0 14,174 0
Issuance of $10,000 of common stock and a $3,025 note in
the acquisition of Hogan................................. 13,025 0 0
Non-cash acquisition of Etonic net assets.................. 0 0 54,043
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
35
<PAGE> 37
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
PREFERRED COMMON PAID-IN EARNINGS TREASURY EARNINGS
STOCK STOCK CAPITAL (DEFICIT) STOCK (LOSS) TOTAL
--------- ------ ------- --------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
September 30, 1995............ $ 0 2 53,898 (63,065) 0 (3,195) (12,360)
Net earnings (loss) from the
year........................ 0 0 0 (27,667) 0 0 (27,667)
Issuance of common stock...... 0 1 220,999 0 0 0 221,000
Repurchase of common stock:
Cash and initial purchase
price adjustment......... 0 (2) (52,492) (471,656) 0 0 (524,150)
Realco promissory note
carrying value........... 0 0 0 (8,388) 0 0 (8,388)
Realco common stock carrying
value.................... 0 0 0 1,711 0 0 1,711
Common stock split............ 0 499 (499) 0 0 0 0
Additional capital
contribution................ 0 0 1,219 0 0 0 1,219
Currency translation
adjustments................. 0 0 0 0 0 (43) (43)
Other......................... 0 0 0 316 0 (234) 82
-------- ---- ------- -------- --- ------ --------
September 30, 1996............ 0 500 223,125 (568,749) 0 (3,472) (348,596)
Net earnings (loss) for the
year........................ 0 0 0 (30,035) 0 0 (30,035)
Cash proceeds from issuance of
common stock................ 0 118 58,984 0 0 0 59,102
Exchange of common stock for
preferred stock............. 0 329 163,845 0 0 0 164,174
Preferred stock dividend...... 0 0 (14,174) 0 0 0 (14,174)
Currency translation
adjustments................. 0 0 0 0 0 (819) (819)
Repurchase of common stock --
final purchase price
adjustment.................. 0 0 0 (283) 0 0 (283)
-------- ---- ------- -------- --- ------ --------
September 30, 1997............ 0 947 431,780 (599,067) 0 (4,291) (170,631)
Net earnings (loss) for the
year........................ 0 0 0 (84,872) 0 0 (84,872)
Cash proceeds from issuance of
common stock................ 0 2 1,420 0 0 0 1,422
Stock issued in Hogan
acquisition................. 0 20 9,980 0 0 0 10,000
Repurchase of treasury
stock....................... 0 0 0 0 (77) 0 (77)
Issuance of preferred stock
and warrants................ 100,000 0 0 0 0 0 100,000
Sale price of 57.6% of Evenflo
in excess of related net
book value.................. 0 0 9,254 0 0 1,620 10,874
Deferred tax adjustment on
acquired trademarks......... 0 0 0 (6,270) 0 0 (6,270)
Currency translation
adjustments................. 0 0 0 0 0 2,405 2,405
-------- ---- ------- -------- --- ------ --------
September 30, 1998............ $100,000 969 452,434 (690,209) (77) (266) (137,149)
======== ==== ======= ======== === ====== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
36
<PAGE> 38
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE A -- ORGANIZATION
BUSINESS AND REORGANIZATION. Spalding Holdings Corporation (formerly
Evenflo & Spalding Holdings Corporation) and subsidiaries (the "Company") is a
global manufacturer and marketer of branded consumer products serving the
sporting goods markets under the primary trade names Spalding, Top-Flite,
Etonic, Strata, Ben Hogan and Dudley. The primary subsidiary of the Company is
Spalding Sports Worldwide, Inc. ("SSW"), formerly named Spalding & Evenflo
Companies, Inc. The Company markets and licenses a 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. In the
Company's 1997 consolidated financial statements, this business segment was
identified as Spalding.
Prior to August 20, 1998, the Company operated in a second business segment
known as Evenflo ("Evenflo Segment"), which serves the infant and juvenile
product market. The Evenflo Segment consisted of Evenflo Company, Inc., a SSW
wholly-owned subsidiary, and certain other wholly-owned SSW subsidiaries and
divisions of subsidiaries that sell infant and juvenile products in other
countries and that hold the Evenflo Segment patents and trademarks. The Evenflo
Segment manufactures and 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.
On August 20, 1998, the Company effectively completed the separation of
these two businesses, the Spalding and the Evenflo Segments, into two
stand-alone companies (the "Reorganization"). The Company initiated the
Reorganization on May 20, 1998 by contributing the SSW investments in its other
subsidiaries included in the Evenflo Segment to Evenflo Company, Inc. and
receiving newly issued cumulative, variable rate, preferred stock (400,000
shares) of Evenflo Company, Inc. (the "Evenflo Preferred Stock") with a face
value of $40,000 and an initial dividend rate of 14%. As a result of these
transactions, Evenflo Company, Inc. became the parent company of all the other
subsidiaries and divisions of subsidiaries formerly included in the Evenflo
Segment. The realignment of the Company's two businesses was accounted for as a
reorganization of companies under common control in a manner similar to a
pooling of interests.
On August 20, 1998, KKR 1996 Fund L.P. ("KKR 1996 Fund"), a limited
partnership affiliated with Kohlberg Kravis Roberts & Co., L.P. ("KKR"),
acquired from the Company (i) 51% (5,100,000 shares) of the outstanding common
shares of Evenflo Company, Inc. for a purchase price of $25,500 and (ii) the
Evenflo Preferred Stock for a purchase price of $40,000. Prior to such KKR 1996
Fund stock purchases, Great Star Corporation, an affiliate of Abarco N.V.
("Abarco"), acquired from the Company 6.6% (660,000 shares) of the outstanding
common shares of Evenflo Company, Inc. for a purchase price of $3,300. An
affiliate of KKR 1996 Fund and Abarco are currently shareholders of the Company;
both Abarco and Great Star are owned by the same entity (see "Recapitalization
and Stock Purchase Agreement below)." After these sales of common stock, the
Company retained ownership of 42.4% (4,240,000 shares) of the outstanding common
stock of Evenflo Company, Inc. Also on August 20, 1998 Evenflo Company, Inc. (i)
issued and sold $110,000 aggregate principal amount of senior notes in a private
offering, and (ii) entered into a $100,000 revolving credit facility with a
syndicate of banks and other financial institutions and borrowed $10,000 under
the credit facility. Evenflo Company, Inc. paid the net proceeds of these two
borrowing transactions, $110,000, to the Company as a partial payment of
intercompany indebtedness. The remainder of the intercompany indebtedness of
Evenflo Company, Inc. was treated as a contribution of capital by the Company to
Evenflo Company,
37
<PAGE> 39
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inc. The Company has no guaranty or other obligations with respect to the debt
of Evenflo Company, Inc., and Evenflo Company, Inc. has no such obligations with
respect to the Company's debt.
Also on August 20, 1998, KKR 1996 Fund invested $100,000 in the Company to
acquire cumulative, variable rate, preferred stock of the Company together with
44,100,000 Warrants to purchase common stock of the Company. (see Note L). The
Company used the proceeds from the issuance of its preferred stock, from the
Evenflo Company, Inc. stock sales, and from the repayment of intercompany
indebtedness by Evenflo Company, Inc. to repay $278,800 of the Company's senior
credit facilities and Revolver. (see Note H)
ACQUISITION OF BEN HOGAN. On November 26, 1997, the Company acquired
certain assets and assumed certain liabilities of the Ben Hogan Co. ("Hogan")
for a purchase price of $14,666, consisting of $10,000 in Company common stock
(2 million shares), $3,025 in a 10 1/2% note due November 25, 2000, and $1,641
in cash. Hogan manufactures and/or markets golf clubs, golf balls, and golf
accessories under the Hogan brand name. The purchased assets and assumed
liabilities consist of the following:
<TABLE>
<S> <C>
Inventories................................................. $ 3,383
Fixed assets................................................ 162
Intangibles (primarily trademarks).......................... 12,221
-------
Total....................................................... 15,766
Accrued liabilities......................................... (1,100)
-------
Net assets purchased...................................... $14,666
=======
</TABLE>
The Hogan acquisition was accounted for using the purchase method;
accordingly, the operating results of Hogan have been included in the statement
of consolidated earnings (loss) and comprehensive earnings (loss) from the date
of acquisition. If the acquisition had taken place on October 1, 1996 rather
than on November 26, 1997, consolidated pro forma net sales and net loss would
not have been materially different from the Company's reported amounts for 1998
and 1997.
ACQUISITION OF GERRY. On April 21, 1997, the Company, through its
wholly-owned subsidiary, Evenflo Company, Inc., acquired the net assets of Gerry
Baby Products Company ("Gerry") for a purchase price of $68,652. Gerry had
manufacturing operations in Colorado and in Wisconsin and maintained its
administrative operations in Colorado. Gerry manufactured and/or marketed
specialty juvenile products 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 (primarily trademarks and goodwill)....... 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 of
accounting; accordingly, the operating results of Gerry have been included in
the statements of consolidated earnings (loss) and comprehensive earnings (loss)
from the date of acquisition. In applying purchase accounting, inventories were
increased by $1,268, which is the amount of acquired profit related to the
expected future sale of the Gerry
38
<PAGE> 40
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
finished goods acquired. Accordingly, the Company's loss for 1997 was increased
by $1,268 from selling, in the ordinary course of business, inventory which was
written up to fair value at date of acquisition. 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.
RECAPITALIZATION AND STOCK PURCHASE AGREEMENT. Prior to September 30,
1996, the Company was a wholly-owned subsidiary of Abarco. On August 15, 1996,
Abarco and Strata Associates L.P. ("Strata"), an affiliate of 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) plus an adjustment to the redemption price
of $283 in 1997. After the Recapitalization Strata and its affiliate owned
approximately 88% of the Company's common stock and Abarco retained
approximately 12% of the Company's common stock.
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 SSW; and (vii) provide working
capital of $45,654 (of this amount $25,800 was used to repay borrowings under
the revolving credit loan on October 1, 1996).
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 (primarily trademarks and goodwill)....... 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) and comprehensive earnings (loss) from the date of
acquisition. If the acquisition had taken place at October 1,
39
<PAGE> 41
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995 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. Consolidated pro forma net earnings (loss) would not have
been materially different from the Company's reported amounts for 1996.
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 Spalding Holdings Corporation and its subsidiaries, all of
which, including Evenflo Company, Inc. and subsidiaries until August 20, 1998,
are wholly-owned. All significant intercompany accounts and transactions have
been eliminated in consolidation.
INVESTMENT IN AFFILIATED COMPANY. The Company's continuing investment in
Evenflo Company, Inc., subsequent to the August 20, 1998 sale described in Note
A (a 42.4% common stock ownership interest), is accounted for using the equity
method of accounting.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The estimated fair value of amounts
reported in the consolidated financial statements has 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.
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 have been determined by use of the last-in,
first-out method. Cost for the majority of non-U.S. inventories have 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. All material 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 as determined by using
estimated future undiscounted cash flows. A loss on impairment would 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.
40
<PAGE> 42
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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"), deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years the temporary differences are expected to reverse.
The effect on deferred taxes of a change in tax rates is recognized in income in
the period that the change in rate is enacted.
The Company and its United States subsidiaries, including Evenflo Company,
Inc. and subsidiaries through August 20, 1998 (see Note A), are parties to a tax
sharing agreement which provides that each member of the consolidated return
group shall pay its share of the consolidated tax liability based on the ratio
of its separate liability to the aggregate separate liabilities of all group
members. A member shall make or receive compensatory payments to the extent its
separate liability differs from its share of the group's liability.
PRODUCT RECALLS AND SAFETY CAMPAIGNS. At the time a product recall or
Safety Campaign becomes probable, the Company accrues the estimated recall costs
using the guidance of Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies" and charges those costs to operating income
(loss) (see Note Q).
RETIREMENT PLANS AND POSTRETIREMENT BENEFITS. Current service costs of
retirement plans and post-retirement 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 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.
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
$99,013, $91,982 and $66,079 in 1998, 1997 and 1996, respectively.
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. Income and expense items are translated at the average exchange
rates during the respective periods. Translation adjustments resulting from
fluctuations in the exchange rates are recorded as a separate component of
common shareholders' equity (deficiency).
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.
41
<PAGE> 43
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of sales and expenses during the reported 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. 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. This standard
addresses disclosure issues and therefore will not affect the Company's
financial position or results of operations.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132
revises employers' disclosures about pension and other post-retirement benefit
plans. SFAS No. 132 is effective for fiscal years beginning after December 15,
1997. This standard addresses disclosure issues and therefore will not affect
the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative (that is, gains and losses) depends upon the intended use of the
derivative and resulting designation if used as a hedge. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The adoption of SFAS No. 133 is not expected to have a material effect on the
Company's consolidated financial statements.
RECLASSIFICATIONS. Certain reclassifications have been made to prior year
amounts to conform with current year presentations.
NOTE C -- INVENTORIES
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Finished goods.............................................. $ 94,142 99,733
Work in process............................................. 18,706 28,031
Raw materials............................................... 5,978 29,748
-------- -------
Total inventories......................................... $118,826 157,512
======== =======
</TABLE>
The cost of 90% of 1998 and 87% of 1997 inventories was computed using the
last-in, first-out (LIFO) method of inventory valuation. Use of the LIFO method
increased the 1998 and 1997 year end inventories by $5,120 and $1,050,
respectively.
42
<PAGE> 44
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Land........................................................ $ 2,562 3,390
Buildings and building improvements......................... 35,905 55,192
Machinery and equipment..................................... 66,209 131,821
-------- -------
104,676 190,403
Accumulated depreciation.................................... (52,785) (80,208)
-------- -------
Property, plant and equipment, net........................ $ 51,891 110,195
======== =======
</TABLE>
NOTE E -- INTANGIBLE ASSETS, NET
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
United States trademarks.................................... $ 71,703 102,203
Non-U.S. trademarks......................................... 13,378 15,052
Goodwill.................................................... 75,832 100,040
-------- -------
160,913 217,295
Accumulated amortization.................................... (47,165) (63,172)
-------- -------
Intangible assets, net.................................... $113,748 154,123
======== =======
</TABLE>
NOTE F -- ACCRUED EXPENSES
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Compensation and other employee benefits.................... $ 8,367 13,281
Liability for self insurance................................ 1,921 12,276
Liability for restructuring costs:
Corporate headquarters and Spalding....................... 11,367 1,088
Gerry..................................................... 0 8,247
Other, principally operating expenses....................... 38,777 44,456
-------- -------
Total accrued expenses.................................... $ 60,432 79,348
======== =======
</TABLE>
LIABILITY FOR SELF INSURANCE. The Company has both insured and self
insured group health plans. Substantially all employees of the Company are
covered under an insured medical program and all employees are covered by
insured workers' compensation programs.
Commercial and product liability insurance coverages are high deductible
insured programs. Commercial liability deductibles are $250 thousand per
occurrence. Product liability deductibles are $500 thousand per occurrence and
$3.0 million in aggregate. As a supplement to these programs, the Company
carries $75.0 million in umbrella coverage.
The liability for self insurance claims shown in the table above, which in
1997 was primarily related to Evenflo Company, Inc., 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. Evenflo's portion of the liability for self-insurance as of September
30, 1997 consisted of $8,887 for products liability claims and $1,850 for self
insured workers compensation claims.
SPALDING RESTRUCTURING AND OTHER UNUSUAL COSTS. In 1997, the Company
implemented a plan to restructure the Spalding domestic and international
operations to focus on core line golf and sporting goods
43
<PAGE> 45
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
products. In 1998 this plan was expanded to reduce the infrastructure needed to
support the international operations, close the Mexico operations, consolidate
European operations with the closure of France, Germany, Italy and Spain
operations, and to significantly down-size the Japan operation. These facility
closures resulted in the elimination of approximately 116 international
positions at various levels. As a result, sales activities in Mexico, and the
closed European operations will be channeled through distributors. Additionally,
the U.S. operations recognized certain management severance costs associated
with the elimination of approximately 100 domestic positions and closed the
headquarters in Tampa, Florida. As a result, the Company recorded restructuring
costs, as follows:
<TABLE>
<CAPTION>
1998 1997
------- -----
<S> <C> <C>
Tampa headquarters closing costs............................ $ 5,347 0
International severance costs and related expense........... 3,010 923
U.S. severance costs and related expense.................... 5,118 0
Write-off of accumulated foreign currency translation
adjustment................................................ 2,761 0
Lease terminations.......................................... 409 758
Termination of service contracts............................ 1,237 0
Other costs................................................. 2,238 729
------- -----
Total..................................................... $20,120 2,410
======= =====
</TABLE>
The Company aggressively continues its plan to close and consolidate its
operations and sublease space. Additionally, severance and other costs were paid
in connection with the consolidation and downsizing. The Company has paid $7,080
of these restructuring costs in 1998 and $1,322 in 1997 and charged $2,761 in
1998 and $0 in 1997 of non-cash write-offs against the accruals and currently
anticipates that the remaining restructuring actions will be substantially
completed by the end of fiscal 1999.
In addition, the Company incurred other unusual expenses, which have been
charged to net sales, cost of sales, and selling, general and administrative
expenses ("SG&A"), related to:
<TABLE>
<CAPTION>
1998 1997
------- -----
<S> <C> <C>
Write-off of funds advanced to freight bill processor
(SG&A).................................................... $ 5,703 0
Increase in bad debt allowance for customer attempting to
re-organize (SG&A)........................................ 7,200 0
Impairment of fixed assets due to discontinuance of product
line (SG&A)............................................... 309 0
Receivable cash discounts resulting from a decision to close
certain non-U.S. affiliates (net sales)................... 367 0
Inventory write-down resulting from a decision to
discontinue the sale of certain products by U.S.
operations (cost of sales)................................ 870 0
Inventory write-down resulting from a decision to close
certain non-U.S. affiliates (cost of sales)............... 2,601 1,602
Receivable write-off resulting from a decision to close
certain non-U.S. affiliates (SG&A)........................ 1,334 100
Recovery from a 1996 Etonic computer software dispute
(SG&A).................................................... 0 (400)
Shut down costs associated with international operations
(SG&A).................................................... 1,550 0
Other (SG&A)................................................ 217 833
------- -----
Total..................................................... $20,151 2,135
======= =====
</TABLE>
EVENFLO RESTRUCTURING AND OTHER UNUSUAL COSTS. In July 1997, Company
management adopted a plan to relocate the Gerry Colorado administrative and
manufacturing operations to Evenflo's Ohio and Georgia
44
<PAGE> 46
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
locations. As a result, the Company recorded restructuring costs for the period
from October 1, 1997 to August 20, 1998 and for the year ended September 30,
1997, as follows:
<TABLE>
<CAPTION>
1998 1997
------ -----
<S> <C> <C>
Severance costs for the Colorado employees.................. $ 0 4,105
Shut-down costs of the Colorado facility.................... 0 2,630
Computer conversion costs to preserve prior manufacturing
information for future purposes........................... 0 1,237
Other costs................................................. 1,443 1,619
------ -----
Total..................................................... $1,443 9,591
====== =====
</TABLE>
The Company has funded restructuring costs of $9,490 in 1998 and $1,344 in
1997 leaving an accrual of $200 as of September 30, 1998 and of $8,247 as of
September 30, 1997.
In addition, the Company incurred other unusual expenses, which have been
charged to cost of sales and selling, general and administrative expenses
("SG&A"), related to:
<TABLE>
<CAPTION>
1998 1997
------ -----
<S> <C> <C>
Manufacturing and warehouse reconfiguration costs (cost of
sales).................................................... $ 159 2,761
Inventory write-down resulting from a decision to
discontinue the sale of certain Gerry products (cost of
sales).................................................... 235 3,100
Write up of Gerry inventory at date of acquisition for
purchase accounting (cost of sales)....................... 0 1,268
Costs to consolidate certain of its operations that were
previously managed separately (SG&A)...................... 0 2,629
Reorganization transaction expenses (SG&A).................. 4,000 0
Year 2000 conversion costs (SG&A)........................... 685 0
------ -----
Total..................................................... $5,079 9,758
====== =====
</TABLE>
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>
1998 1997
------- ------
<S> <C> <C>
As of September 30:
Available lines of credit................................... $15,375 42,800
======= ======
Amounts outstanding:
Direct bank borrowings.................................... $ 6,744 17,674
Discounted receivables (netted against accounts
receivable)............................................ 1,802 5,850
------- ------
Borrowings................................................ 8,546 23,524
Letters of credit not yet funded.......................... 590 3,376
------- ------
$ 9,136 26,900
======= ======
</TABLE>
45
<PAGE> 47
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
For the years ended September 30:
Maximum borrowings...................................... $14,368 27,900 31,800
Weighted average outstanding balances................... 13,737 25,800 25,700
Weighted average interest rates......................... 4.84% 4.74% 4.60%
</TABLE>
At September 30, 1998, the borrowings are mainly comprised of $5,756 in
Australian dollars, and $958 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>
1998 1997
-------- -------
<S> <C> <C>
As of September 30:
Available lines of credit................................... $630,874 850,000
======== =======
Direct borrowings......................................... $503,074 627,400
Acceptances (included in accounts payable)................ 58,800 92,500
-------- -------
Borrowings................................................ 561,874 719,900
Letters of credit not yet funded.......................... 10,800 28,600
-------- -------
$572,674 748,500
======== =======
Direct borrowings consist of:
Secured Credit Facility
Revolving credit loan..................................... $122,200 27,400
Term Loans................................................ 171,200 400,000
Senior Subordinated Notes................................... 200,000 200,000
Other indebtedness.......................................... 9,674 0
-------- -------
Total debt................................................ 503,074 627,400
Current maturities of debt.................................. 0 17,500
-------- -------
Long-term debt............................................ $503,074 609,900
======== =======
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
For the years ended September 30:
Maximum borrowings (1996 prior to the
Recapitalization)................................ $794,874 $735,800 $366,700
Weighted average outstanding balances.............. 704,800 653,200 338,000
Weighted average interest rates.................... 9.11% 9.82% 9.14%
</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 provided for a $650,000
maximum credit commitment (however, see below for a description of the reduction
of this commitment on August 20, 1998), 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. Revolving Credit Loans may be used
for working capital needs, special
46
<PAGE> 48
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Each of the Term Loans required annual
amortization beginning September 30, 1998 and each subsequent September 30
thereafter until maturity as well as certain mandatory prepayments, among
others, with the proceeds of certain asset sales.
In conjunction with the receipt of the $278,800 in proceeds from the
Reorganization (see Note A), the Company was required to prepay portions of its
Term Loans as follows:
<TABLE>
<CAPTION>
BALANCE PRIOR BALANCE AFTER
TO PREPAYMENTS PREPAYMENTS PREPAYMENTS
-------------- ----------- -------------
<S> <C> <C> <C>
Term Loan A................................. $175,000 $136,208 $ 38,792
Term Loan B................................. 87,500 36,094 51,406
Term Loan C................................. 87,500 36,094 51,406
Term Loan D................................. 50,000 20,404 29,596
-------- -------- --------
Total....................................... $400,000 $228,800 $171,200
======== ======== ========
</TABLE>
The Company also prepaid $25,000 of the Revolving Credit Loan and $25,000 of a
seasonal credit facility that was opened during 1998 (see Note S).
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 1.50% per annum, (b) in the case of Term Loan B, 1.75% to
2.00% per annum, (c) in the case of Term Loan C, 2.25% to 2.50% per annum, (d)
in the case of Term Loan D, 2.75% to 3.00% 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 1.50% 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
2.50% per annum, (ii) in the case of Term Loan B, 2.75% to 3.00% per annum,
(iii) in the case of Term Loan C, 3.25% to 3.50% per annum, (iv) in the case of
Term Loan D, 3.75% to 4.00% per annum or (v) in the case of Revolving Credit
Loans, a debt to EBITDA-dependent rate ranging from 0.625% to 2.50% 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 2.375% 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 are 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 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.
47
<PAGE> 49
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. In connection with the Reorganization (see Note
A), the Company reached agreement with its bank syndicate to amend its Credit
Facility to remove certain financial ratio requirements until December 31, 1999
and to amend other covenants.
The Credit Facility includes customary events of default.
Scheduled maturities of the Term Loans are as follows:
<TABLE>
<CAPTION>
TERM TERM TERM TERM
YEAR ENDING SEPTEMBER 30 LOAN A LOAN B LOAN C LOAN D
------------------------ ------- ------ ------ ------
<S> <C> <C> <C> <C>
2002........................................... $ 7,637 0 0 0
2003........................................... 31,155 623 623 309
2004........................................... 0 50,783 623 312
2005........................................... 0 0 50,160 312
2006 (March 31, 2006).......................... 0 0 0 28,663
------- ------ ------ ------
Total........................................ $38,792 51,406 51,406 29,596
======= ====== ====== ======
</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 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.
48
<PAGE> 50
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Senior Subordinated Notes include customary events of default.
OTHER INDEBTEDNESS. The other indebtedness consists of the 10 1/2% note in
the amount of $3,025 due November 25, 2000 incurred in connection with the
purchase of Ben Hogan (see Note A) and the 5% note in the amount of $6,500,
incurred in 1998 in connection with the construction of a new warehouse located
in Chicopee, MA., due in monthly installments through February 2013. The Company
financed this new 150,000 square foot warehouse with the Massachusetts
Development Finance Agency. The $6,500 twenty-year loan is at 5% annual interest
for the first five years and converts to 300 basis points over one-year U.S.
Treasury for years six through twenty. In order to maintain the 5% interest rate
for the first five years, Spalding is required to maintain a certain number of
new full-time positions. There are no amortization requirements for the first
five years of the loan, the sixth through fifteenth year requires $27 monthly
amortization payments, and the years sixteen through twenty require $54 monthly
amortization payments. Massachusetts Development Finance Agency has been granted
a security interest in the warehouse.
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>
1998 1997 1996
--------- -------- -------
<S> <C> <C> <C>
Earnings (loss) before income taxes and
extraordinary loss:
United States.................................... $(101,356) $(32,957) (9,331)
Other nations.................................... (10,803) (5,578) (3,049)
--------- -------- -------
Total.................................... $(112,159) (38,535) (12,380)
========= ======== =======
Income tax provision:
Current taxes:
Federal taxes................................. 129 (7,136) 3,145
State taxes................................... 489 565 400
Other nations' taxes.......................... 945 1,790 1,205
--------- -------- -------
Total.................................... 1,563 (4,781) 4,750
--------- -------- -------
Deferred taxes:
Federal taxes................................. (34,796) (3,712) 1,471
Other nations' taxes.......................... 37 (7) 3,079
--------- -------- -------
Total.................................... (34,759) (3,719) 4,550
--------- -------- -------
Total income taxes (benefit)............. $ (33,196) (8,500) 9,300
========= ======== =======
</TABLE>
49
<PAGE> 51
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between the effective income tax rate and the U.S.
statutory rate are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. statutory rate......................................... (35)% (35)% (35)%
State income taxes, net of federal benefit.................. 0 1 6
Non-U.S. tax rate differences............................... 0 2 5
Non-U.S. losses (earnings) for which no taxes were
recorded.................................................. 4 7 15
Increase in valuation allowances on non-U.S. net operating
loss carryforwards........................................ 0 0 20
1994 Management Stock Ownership Plan expense................ 0 0 59
Recapitalization costs...................................... 0 0 18
Other....................................................... 1 3 (13)
--- --- ---
Effective tax rate........................................ (30)% (22)% 75%
=== === ===
</TABLE>
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 using enacted tax rates expected to apply to taxable income in
the years the temporary differences are expected to reverse. Temporary
differences and carryforwards, are as follows:
<TABLE>
<CAPTION>
NET DEFERRED TAX ASSET
----------------------------------------
CURRENT NONCURRENT
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Acquired non-U.S. trademarks................ $ 0 0 33,892 45,518
Intangibles amortization.................... 0 0 (22,833) (24,756)
Depreciation................................ 0 0 (1,348) (491)
Accrued liabilities......................... 8,866 $11,925 0 0
Pension..................................... 0 0 3,362 4,458
Post-retirement benefits.................... 0 0 2,902 3,475
Net operating loss carryforwards............ 0 0 57,605 20,290
Capital loss carryforward................... 0 0 8,179 8,198
Other....................................... 4,443 1,935 (875) 418
------- ------- ------- -------
Total deferred income taxes............... 13,309 13,860 80,884 57,110
Valuation allowance on net operating losses
and capital loss.......................... 0 0 (28,985) (22,206)
------- ------- ------- -------
Net deferred income taxes................... $13,309 13,860 51,899 34,904
======= ======= ======= =======
</TABLE>
On September 30, 1998, the Company had net operating loss carryforwards of
$135,645 consisting of $100,588 from U.S. operations and $35,057 in non-U.S.
subsidiaries. Deferred tax benefits of $57,605 have been established on these
losses and a 1998 valuation allowance in the amount of $20,806 has been provided
on the entire state and non-U.S. portions of the deferred tax benefits. On
September 30, 1998, the Company had capital loss carryforward of $20,972 for
which a 1998 valuation allowance in the amount of $8,179 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.
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, 1995 have been
examined by, and settled with, the Internal Revenue Service.
50
<PAGE> 52
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On September 22, 1998, the Company entered into an agreement with the
Internal Revenue Service (IRS) completing the audit of the September 30, 1994
and 1995 consolidated federal income tax returns, and finally determining the
Company's tax liability for those years. The primary issue in that audit was the
tax treatment accorded the 1994 acquisition of the Acquired Trademarks from
Abarco. Under the agreement with the IRS, the trademarks were determined to have
a fair market value of $155,000 on the date of purchase, and the difference
between that value and the $176,000 transferred to Abarco was determined to be a
dividend to shareholders. As a result of that settlement, withholding and income
tax in the amount of $6,856 and interest in the amount of $2,534 were paid to
the IRS. Under the Recapitalization Agreement, Abarco indemnified the Company
for this liability.
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 ($155,000 after the IRS
settlement discussed in the preceding paragraph) 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, 1998
and 1997 was $33,892 (after giving effect to the settlement with the IRS) and
$45,518, respectively.
On September 30, 1998, 1997 and 1996 undistributed earnings of non-U.S.
subsidiaries included in consolidated retained earnings (deficit) amounted to
$1,900, $6,500 and $8,100. The Company intends to continue to indefinitely
reinvest these earnings, which reflect full provision for non-U.S. income taxes,
to expand its continuing international operations. Accordingly, no provision has
been made for U.S. income taxes that might be payable upon repatriation of such
earnings.
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.
Prior to August 20, 1998, the Company maintained certain pension plans that
covered employees in both the Spalding and Evenflo Segments. Consistent with the
Reorganization, pension plans attributable to Evenflo Company, Inc. are no
longer a liability to the Company and have been excluded from the September 30,
1998 balances. The reorganization of the pension plans has been treated as a
"Separation of Funds" rather than a combined curtailment and settlement as
described under Statement of Financial Accounting Standards No. 88 "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits" ("SFAS No. 88"). The net impact of this decision is
that Evenflo Company, Inc. retains the (accrued)/prepaid balance at August 20,
1998 and amortizes any deferrals (gains/losses, prior service cost, transition
obligation, etc.) associated with the plans rather than immediately recognizing
them. Pension plan expenses attributable to Evenflo Company, Inc. are included
in the Company's consolidated financial statements through August 20, 1998.
51
<PAGE> 53
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The September 30, 1998 and 1997 funded status of the Company's United
States defined benefit pension plans consists of the following:
<TABLE>
<CAPTION>
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS
-------------- --------------
1998 1997 1998 1997
---- ------ ------ ----
<S> <C> <C> <C> <C>
Actuarial present value of benefits based on
service to date and present pay levels:
Vested........................................... $ 0 57,316 51,307 44
Nonvested........................................ 0 3,861 820 80
---- ------ ------ ---
Accumulated benefit obligation..................... 0 61,177 52,127 124
Additional amounts related to projected pay
increases........................................ 0 550 761 0
---- ------ ------ ---
Total projected benefit obligation based on service
to
date............................................. 0 61,727 52,888 124
Plan assets at fair value.......................... 0 66,572 47,813 42
---- ------ ------ ---
Projected benefit obligation in excess of (less
than) plan assets................................ 0 (4,845) 5,075 82
Unamortized net amount resulting from changes in
plan experience and actuarial assumptions........ 0 13,471 2,246 (13)
Unrecognized net transition obligation............. 0 666 445 0
Unamortized prior service cost..................... 0 3,168 94 (8)
---- ------ ------ ---
Pension liability (asset).......................... $ 0 12,460 7,860 61
==== ====== ====== ===
</TABLE>
On September 30, 1998 and 1997 the Company's United States pension
liability due currently was $40 and $72 and the long-term portion was $7,820 and
$12,327.
The 1998, 1997 and 1996 pension expense of the Company's United States
defined benefit plans includes the following components:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Benefits earned during the period....................... $ 3,124 2,814 2,236
Interest accrued on benefits earned in prior years...... 3,963 3,942 4,005
Return on plan assets................................... (622) (4,243) (3,775)
Net amortization and deferral........................... (5,526) (445) (534)
------- ------ ------
Pension expense of domestic defined benefit pension
plans................................................. $ 939 2,068 1,932
======= ====== ======
</TABLE>
Assumptions used in the accounting for United States defined benefit
pension plans as of September 30, 1998, 1997 and 1996 were:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate............................................... 6.25% 7.0% 7.5%
Rate of increase in compensation levels..................... 4.50% 4.5% 4.5%
Expected long-term rate of return on assets................. 8.50% 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
52
<PAGE> 54
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
integrated with the benefits required by the laws of the various countries. The
Company's defined contribution plans' expenses totaled $600 in 1998, $2,210 in
1997 and $1,739 in 1996.
NOTE K -- POSTRETIREMENT BENEFITS
The Company provides certain post-retirement 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.
Consistent with the Reorganization, post-retirement benefits attributable
to Evenflo Company, Inc. are no longer a liability to the Company and have been
excluded from the September 30, 1998 balances. The reorganization of the
post-retirement benefits has been treated as a "Separation of Plans" rather than
a combined curtailment and settlement as described under SFAS No. 88. The net
impact of this decision is that Evenflo Company, Inc. retains the
(accrued)/prepaid balance at August 20, 1998 and amortizes any deferrals
(gains/losses, prior service cost, transition obligation, etc.) associated with
the plans rather than immediately recognizing them. Postretirement benefit
expenses attributable to Evenflo Company, Inc. are included in the Company's
consolidated financial statements through August 20, 1998.
The September 30, 1998 and 1997 status of the post-retirement benefit plans
consists of the following:
<TABLE>
<CAPTION>
1998 1997
------ -----
<S> <C> <C>
Actuarial present value of benefit obligation based on
service to date:
Retirees.................................................. $3,402 4,947
Fully eligible active participants........................ 1,731 1,403
Other active participants................................. 3,055 2,707
------ -----
Accumulated post-retirement benefit obligation.............. 8,188 9,057
Unamortized net amount resulting from changes in plan
experience and actuarial assumptions...................... (707) (9)
------ -----
Postretirement benefit liability............................ $7,481 9,048
====== =====
</TABLE>
On September 30, 1998 and 1997, the post-retirement benefit liability due
currently was $61 and $138 and the long-term portion was $7,420 and $8,910.
The 1998, 1997 and 1996 post-retirement benefit expense includes the
following components:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Benefits earned during the period........................... $230 147 136
Interest accrued on benefits earned in prior years.......... 599 608 595
Net amortization............................................ (69) (41) (17)
---- --- ---
Postretirement benefit expense.............................. $760 714 714
==== === ===
</TABLE>
53
<PAGE> 55
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assumptions used in the accounting for post-retirement benefit plans as of
September 30, 1998, 1997 and 1996 were:
<TABLE>
<CAPTION>
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Discount rate............................................... 6.25% 7.0% 7.5%
Rate of increase in compensation levels..................... 4.50% 4.5% 4.5%
Assumed current year health care cost trend rate
Retirees under 65......................................... 6.80% 6.8% 7.8%
Medicare eligible retirees................................ 5.90% 5.9% 6.5%
Assumed ultimate trend rate................................. 5.00% 2.8% 2.8%
Year ultimate health care cost rate will be achieved........ 2003 2002 2002
Effect of 1% increase in health care cost trend rates
Accumulated post-retirement benefit obligation............ $ 727 680 570
Annual aggregate benefit and interest costs............... $ 90 60 50
</TABLE>
NOTE L -- SHAREHOLDERS' EQUITY
PREFERRED 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 August 20, 1998, the Company and KKR 1996 Fund entered into an
investment agreement whereby the Company agreed to sell to KKR 1996 Fund
1,000,000 shares of nonvoting, cumulative, variable rate preferred stock with a
face value and liquidation value of $100 a share (the "Cumulative Preferred
Stock") together with detachable stock purchase warrants (the "Warrants") for
$100,000. The Warrants will allow KKR 1996 Fund to purchase 44,100,000 shares of
the Company's common stock, par value $0.01 at an exercise price of $2.00 per
share. The term of the Warrants is eight years and the expiration date is August
20, 2006. The separate fair value of the Warrants is not significant. If KKR
1996 Fund decides to purchase common shares by exercising the Warrants, KKR 1996
Fund could elect to pay for those shares by exchanging a portion of the
Cumulative Preferred Stock.
The holder of the Cumulative Preferred Stock is entitled to receive, when,
as and if declared by the Board of Directors, dividends on each outstanding
share of the Cumulative Preferred Stock, at a variable rate based on the
ten-year treasury rate, based on the then effective liquidation preference per
share of Cumulative Preferred Stock. Dividends on the Cumulative Preferred Stock
are payable quarterly in arrears on March 31, June 30, September 30 and December
31 of each year. The initial dividend rate with respect to the Cumulative
Preferred Stock is 14% per annum. The right to dividends on the Cumulative
Preferred Stock is cumulative and dividends accrue (whether or not declared),
without interest, from the date of issuance of the Cumulative Preferred Stock.
Since the Board of Directors has not declared any preferred dividends as of
September 30, 1998, the amount of the Cumulative Preferred Stock dividends in
arrears as of that date is $1,572.
The Company at its option may, but shall not be required to, redeem, at any
time, for cash, in whole or in part, any or all of the shares of Cumulative
Preferred Stock at a redemption price equal to 100% of the aggregate liquidation
preference of such shares, together with all accumulated and unpaid dividends to
the redemption date.
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, the holder of the Cumulative Preferred Stock will be entitled to be
paid out of the assets of the Company available for distribution $100 per share,
plus an amount in cash equal to all accumulated and unpaid dividends thereon to
the date fixed for liquidation, dissolution or winding-up of the Company.
54
<PAGE> 56
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 were 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.
COMMON STOCK. The certificate of incorporation of the Company authorizes
150,000,000 shares of common stock with a par value of $.01 a share. Immediately
after the Recapitalization (see Note A), the Company declared a stock split in
the form of a stock dividend of approximately 60,892 shares for each common
share then outstanding. The par value difference between 821 shares and
50,000,000 shares outstanding in the amount of $499 was reclassified from
paid-in capital to common stock.
As disclosed above, Strata exchanged the Company's Preferred Stock for
common shares. In addition, 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 common stock purchases.
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.
Transactions involving common share options are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
OPTION SHARES --------- --------
<S> <C> <C>
Outstanding September 30, 1996.............................. 0
Granted in 1997............................................. 6,431,146 $5.00
Canceled in 1997............................................ 0 $5.00
Exercised in 1997........................................... 0 $5.00
--------- -----
Outstanding September 30, 1997 (none exercisable) (1,023,729
became exercisable October 1, 1997)....................... 6,431,146 $5.00
Granted in 1998............................................. 295,559 $5.00
Canceled in 1998............................................ (935,504) $5.00
Exercised in 1998........................................... 0 $5.00
--------- -----
Outstanding September 30, 1998 (1,023,729 exercisable and
3,252,558 became exercisable October 1, 1998)............. 5,791,201 $5.00
Aggregate unissued shares and options September 30, 1998.... 1,909,676 $5.00
</TABLE>
In 1998 the Company sold 278,885 shares for proceeds of $1,422 (2,020,238
shares for proceeds of $10,102 in 1997).
55
<PAGE> 57
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DISCLOSURES UNDER SFAS NO. 123. 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 pro forma net earnings (loss) would have
been $(85,829) for 1998 and $(30,947) for 1997 as compared to the reported
amounts of $(84,872) and $(30,035), respectively.
The estimated fair value was determined using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Dividend yield.............................................. 0% 0%
Expected volatility......................................... 0% 0%
Risk-free interest rate..................................... 5.62% 6.38%
Weighted average expected life.............................. 5 years 5 years
Weighted average fair value of options granted.............. $1.19 $1.37
</TABLE>
1994 MANAGEMENT STOCK OWNERSHIP PLAN. On September 30, 1996 the 1994
Management Stock Ownership Plan was cancelled 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.
NOTE M -- 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, 1998:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30
- ------------------------
<S> <C>
1999........................................................ $1,453
2000........................................................ 1,040
2001........................................................ 1,035
2002........................................................ 654
2003........................................................ 617
Thereafter.................................................. 833
------
Total minimum lease payments................................ $5,632
======
</TABLE>
Rental expense under operating leases was $5,756 in 1998, $5,185 in 1997
and $3,455 in 1996.
56
<PAGE> 58
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- 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, 1998 and 1997, the Company had
approximately $3,525 and $9,367 of currency contracts outstanding, with
unrealized currency gains of approximately $211 in 1998 and unrealized currency
losses of approximately $2 in 1997. These contracts mature within twelve months.
NOTE O -- 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 1998, 1997 and
1996 the Company's sales to one U.S. customer amounted to 15%, 12% and 11% of
net sales. No other customer exceeded 10% in the years ended September 30, 1998,
1997 and 1996.
NOTE P -- 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 Q -- RELATED PARTY TRANSACTIONS
See Note A for a description of the transactions related to the
Reorganization of the Company.
Effective with the Reorganization on August 20, 1998, the Company and
Evenflo Company, Inc. entered into an Indemnity Agreement whereby the Company
and Evenflo Company, Inc. indemnified the other against liability or obligation
related to their respective operations or business whether arising prior to or
after the Reorganization. Additionally, the Company indemnified Evenflo Company,
Inc. against damages, as defined in the agreement, incurred or sustained as a
result of any recall (voluntary or involuntary), safety advisory or other
corrective action relating to any products manufactured by Evenflo Company, Inc.
prior to the close of business on August 20, 1998. The estimated liability as of
September 30, 1998 recorded by the Company related to these matters is
approximately $1,100.
Effective with the Reorganization on August 20, 1998, the Company and
Evenflo entered into a Transition Services Agreement whereby the Company agreed
to provide insurance, tax and other related financial systems/accounting
services to Evenflo Company, Inc. through February 20, 1999, or as otherwise
agreed upon.
57
<PAGE> 59
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $966 in
1998 and $1,000 in 1997 pursuant to such management agreement with KKR.
NOTE R -- SEGMENT REPORTING
The following schedule presents information about the Company's continuing
operations in different industry segments and geographic locations (Evenflo 1998
operations are included for the period from October 1, 1997 to August 20, 1998):
<TABLE>
<CAPTION>
1998 1997 1996
--------- ------- -------
<S> <C> <C> <C>
INDUSTRY SEGMENT
Net Sales
Spalding.......................................... $ 512,521 530,448 451,915
Evenflo........................................... 290,791 296,743 237,165
--------- ------- -------
Total net sales........................... $ 803,312 827,191 689,080
========= ======= =======
Earnings (loss) before income taxes and
extraordinary loss:
Spalding.......................................... $ (20,278) 41,133 50,274
Evenflo........................................... (6,330) (3,952) 10,306
General Corporate expenses........................ (7,510) (4,390) (35,242)
Interest expense, net............................. (78,041) (71,326) (37,718)
--------- ------- -------
Earnings (loss) before income taxes and
extraordinary loss........................... $(112,159) (38,535) (12,380)
========= ======= =======
Identifiable Assets
Spalding.......................................... $ 460,787 445,011 404,800
Evenflo........................................... 0 255,725 177,391
General Corporate................................. 75,177 60,495 108,570
--------- ------- -------
Total assets.............................. $ 535,964 761,231 690,761
========= ======= =======
Capital Expenditures
Spalding.......................................... $ 11,788 14,143 10,169
Evenflo........................................... 14,861 20,927 9,377
--------- ------- -------
Total capital expenditures................ $ 26,649 35,070 19,546
========= ======= =======
Depreciation and Amortization
Spalding.......................................... $ 13,091 12,439 13,418
Evenflo........................................... 13,139 9,313 6,502
General Corporate................................. 17 17 407
--------- ------- -------
Total depreciation and amortization....... $ 26,247 21,769 20,327
========= ======= =======
</TABLE>
58
<PAGE> 60
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The geographic locations of the Company are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ------- -------
<S> <C> <C> <C>
GEOGRAPHIC LOCATION
Net Sales
United States..................................... $ 669,622 672,703 530,882
Other nations..................................... 133,690 154,488 158,198
--------- ------- -------
Total net sales........................... $ 803,312 827,191 689,080
========= ======= =======
Earnings (loss) before income taxes and
extraordinary loss:
United States..................................... $ (18,157) 33,608 57,777
Other nations..................................... (8,451) 3,573 2,803
General Corporate expenses........................ (7,510) (4,390) (35,242)
Interest expense, net............................. (78,041) (71,326) (37,718)
--------- ------- -------
Earnings (loss) before income taxes and
extraordinary loss........................... $(112,159) (38,535) (12,380)
========= ======= =======
Identifiable Assets
United States..................................... $ 410,046 619,762 505,227
Other nations..................................... 50,741 80,974 76,964
General Corporate................................. 75,177 60,495 108,570
--------- ------- -------
Total assets.............................. $ 535,964 761,231 690,761
========= ======= =======
</TABLE>
NOTE S -- EXTRAORDINARY LOSS
The extraordinary loss on early extinguishment of debt in 1998 relates to a
$9,091 pretax ($5,909 after-tax) write-off of the deferred financing costs made
in conjunction with a mandatory prepayment of $228,800 against the Term Loans
under the Credit Facility (see Note H).
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 a secured credit agreement was
paid off.
59
<PAGE> 61
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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>
Edwin L. Artzt....................................... 68 Chairman of the Board of Directors
James R. Craigie..................................... 45 President and Chief Executive Officer
Scott H. Creelman.................................... 55 Executive Vice President
G. Wade Lewis........................................ 51 Chief Financial Officer
Robert K. Adikes..................................... 59 Vice President, Secretary and General
Counsel
William K. Breaden................................... 39 Corporate Controller, Assistant Secretary
Henry R. Kravis...................................... 54 Director
George R. Roberts.................................... 55 Director
Michael T. Tokarz.................................... 49 Director
Marc S. Lipschultz................................... 29 Director
Gustavo A. Cisneros.................................. 53 Director
David W. Checketts................................... 42 Director
</TABLE>
Kevin T. Martin resigned from his positions as President and Chief
Executive Officer on December 2, 1998.
James R. Craigie joined the Company as President and Chief Executive
Officer on December 7, 1998. Prior to that he had been employed since 1983 by
Kraft, Inc., now a subsidiary of Phillip Morris Companies, Inc. He became
Executive Vice President of Kraft, Inc. in 1994. From 1997 he served as
President of its Beverage and Desserts Division. From 1994 to 1997 he was
General Manager of the Beverage Division after serving as General Manager of the
Dinners and Enhancers Division earlier in 1994. From 1993 to 1994, he served as
Vice President and General Manager of Kraft's Polly-O Dairy Products
Scott H. Creelman became Executive Vice President on September 20, 1998. He
joined the Company in 1973 as Business Manager of the tennis group. Over the
years he has held various positions in the Spalding operation, including
Managing Director, International; Vice President, International from 1985 to
1995. Vice President Golf Products Worldwide from 1995 to 1997 and Executive
Vice President, Spalding division from 1997 to present.
G. Wade Lewis has been Chief Financial Officer since June 1998 when he
joined the Company. From 1987 to 1997, he served as Chief Financial Officer of
Duracell International, Inc.
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.
William K. Breaden became Corporate Controller in July 1998. He joined the
Company in January 1990 as U.S. Controller and has held various positions
including North American Controller and International Controller. From 1981 to
1990 he served on the audit staff of Deloitte & Touche LLP.
60
<PAGE> 62
Henry R. Kravis is a managing member of KKR & Co. L.L.C., the limited
liability company which serves as the general partner of KKR. He is also a
director of Accuride Corporation, Amphenol Corporation, Borden, Inc., The Boyds
Collection, Ltd., Bruno's, Inc., The Gillette Company, Evenflo, IDEX
Corporation, KinderCare Learning Centers, Inc., KSL Recreation Group, Inc.,
Owens-Illinois, Inc., Owens-Illinois Group, Inc., PRIMEDIA, Inc., Randall's Food
Markets, Inc., Regal Cinemas, Inc. Safeway Inc. and Union Texas Petroleum
Holdings, Inc.
George G. Roberts is a managing member of KKR & Co. L.L.C., a limited
liability company which serves as the general partner of KKR. He is also a
director of Accuride Corporation, Amphenol Corporation, Borden, Inc. The Boyds
Collection, Ltd., Bruno's, Inc., Evenflo, IDEX Corporation, KinderCare Learning
Centers, Inc., KSL Recreation Group, Inc., Owens-Illinois, Inc., Owens-Illinois
Group, Inc., PRIMEDIA, Inc., Randall's Food Markets, Inc., Regal Cinemas, Inc.,
Safeway Inc., and Union Texas Petroleum Holdings, Inc.
Michael T. Tokarz is a member of KKR & Co. L.L.C., a limited liability
company which serves as the general partner of KKR. He is also a director of
Evenflo, IDEX Corporation, KSL Recreation Group, Inc., PRIMEDIA, Inc., Safeway
Inc., and Walter Industries, Inc.
Marc S. Lipschultz has been an executive at KKR since 1995. Prior thereto,
he was an investment banker with Goldman, Sachs & Co. He is also a director of
Amphenol Corporation, the Boyds Collection, Ltd. and Evenflo.
Gustavo A. Cisneros has been a director of the Company since 1984. Since
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., Panamerican Beverages, Inc. and RSL Communications, Ltd.
Edwin L. Artzt has been a director of the Company since September 1997 and
Chairman of the Board of Directors since August 1998. Mr. Artzt is the former
Chairman and Chief Executive Officer of The Procter & Gamble Company (P&G), and
is currently a 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.
David W. Checketts has been a Director of the Company since September 1998.
He has been the President and Chief Executive Officer of Madison Square Garden
since 1994. He was President of the New York Knicks Basketball Club from 1991 to
1994. From September 1990 through March 1991 he was Vice President, Development
of the National Basketball Association. From 1984 until 1990 he was President of
the Utah Jazz Basketball Club. Prior to that, he was with Bain and Company, a
management consulting firm. In addition, he is a board member of the Multiple
Sclerosis Society and the Children's Blood Foundation.
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.
On September 20, 1998, Paul L. Whiting, Chairman and Chief Executive
Officer, W. Michael Kipphut, Vice President and Treasurer, and Stephen J. Dryer
(on September 30, 1998), Vice President and Controller, exercised their rights
to resign and receive certain benefits under their Change In Control Agreements
with the Company, all dated May 1, 1996.
61
<PAGE> 63
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 $25,000, payable
in quarterly installments. Directors who are also employees of the Company
receive no remuneration for serving as directors.
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 at the end of
the 1998 fiscal year and the most highly compensated executive officers
receiving compensation on an annualized basis from the Company in excess of
$100,000 compensation (the "Named Executive Officers") for their services in all
capacities to the Company during the fiscal years ended September 30, 1998, 1997
and 1996.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ----------- ---------
--------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUSES(1) COMPENSATION(2) OPTIONS # PAYOUTS COMPENSATION(3)
- --------------------------- ---- -------- ---------- --------------- ----------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott H. Creelman....... 1998 $276,476 0 0 0 0 $5,000
Executive Vice 1997 235,008 0 0 138,250 $176,836 4,750
President 1996 197,600 $314,656 0 0 0 4,750
Kevin T. Martin(4)...... 1998 525,000 0 0 0 0 6,250
President and Chief 1997 70,417 0 0 1,312,500 0 0
Executive Officer 1996 0 0 0 0 0 0
Bruce Riccio(5)......... 1998 82,653 15,000 0 0 0 0
Vice President Sales 1997 0 0 0 0 0 0
1996 0 0 0 0 0 0
Robert K. Adikes........ 1998 139,750 0 0 0 0 0
Vice President, 1997 132,400 0 0 65,058 155,500 3,970
Secretary And 1996 127,300 199,220 $7,170 0 57,170 3,820
General Counsel
William K. Breaden...... 1998 135,799 0 0 0 0 $4,082
Corporate Controller 1997 128,173 0 0 0 0 3,825
And Assistant 1996 116,365 117,250 0 0 0 3,863
Secretary
G. Wade Lewis(6)........ 1998 0 0 0 0 0 0
1997 0 0 0 0 0 0
1996 0 0 0 0 0 0
</TABLE>
- ---------------
(1) Includes the following 1996 transaction bonuses received in connection with
the Recapitalization: Mr. Adikes ($126,740), Mr. Breaden ($40,000) and Mr.
Creelman ($230,856). The remainder of the bonus for the Named Executive
Officers was awarded under the Management Incentive Bonus Plan. Bruce Riccio
began his employment with the Company on May 11, 1998 and received a hiring
bonus.
(2) Amounts represent above market return paid on deferred cash awards under the
Company's Long-Term Incentive Plan. See "Long-Term Incentive Plan" for Mr.
Adikes.
(3) Company matching contributions to the Savings Plus Plan.
(4) Mr. Martin resigned his position with the Company on December 2, 1998. In
conjunction with the terms of his separation from the Company, Mr. Martin
will receive his salary in the amount of $500,000
62
<PAGE> 64
annually for a 24 month period. Additionally, Mr. Martin will continue to
receive other benefits through December 3, 2001. James R. Craigie was hired
December 7, 1998 as President and Chief Executive Officer. Mr. Craigie's
employment arrangements are currently being negotiated.
(5) Under the terms of Mr. Riccio's employment arrangement, he will receive
annual compensation of $210,000 as well as other benefits and allowances.
Mr. Riccio will receive benefits should he be involuntarily terminated prior
to April 2003.
(6) Mr. Lewis' compensation is still being negotiated.
STOCK OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL RATES OF
-------------------------------------------------------- STOCK PRICE APPRECIATION FOR
NUMBER OF PERCENT OF OPTION TERM(2)
SECURITIES TOTAL OPTIONS ------------------------------
UNDERLYING GRANTED TO EXERCISE OR IF STOCK AT IF STOCK AT
OPTIONS EMPLOYEES BASE PRICE EXPIRATION $8.14 $12.97
NAME GRANTED(1) IN 1997 ($/SHARE) DATE 5% 10%
- ---- ---------- ------------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Scott H. Creelman.... 138,250 2.4% 5.00 2/11/07 $1,125,355 $1,793,103
6,028 0.1% 5.00 2/11/07 49,068 78,813
Kevin T. Martin...... 1,312,500 22.7% 5.00 9/29/07 10,683,750 17,023,125
Bruce Riccio(3)...... 0 0.0% 5.00 0 0 0
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
William K. Breaden... 20,330 0.4% 5.00 2/11/07 165,486 263,680
886 0.0% 5.00 2/11/07 7,212 11,491
</TABLE>
- ---------------
(1) All of these options, which were granted pursuant to the 1996 Stock Purchase
and Option Plan for Key Employees of Evenflo & Spalding Holdings Corporation
and Subsidiaries, 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
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 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 2008. Depending on
inflation rates, these amounts may be worth significantly less in 2008, in
real terms, than their value today (Assumes that the market price of shares
of common stock equals the exercise price).
(3) The Company is in the process of determining the size of an option grant and
the opportunity to purchase shares of common stock for Mr. Riccio.
No stock options were exercised in fiscal 1998 and no value can be
presently ascribed to previous grants of stock options.
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
63
<PAGE> 65
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 related 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 ten years after its inception. 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
cancelled 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.
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
64
<PAGE> 66
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 is as follows:
<TABLE>
<CAPTION>
ESTIMATED ANNUAL
BENEFIT IF RETIRES
YEAR ATTAINS AT NORMAL
AGE 65 RETIREMENT AGE(1)
------------ ------------------
<S> <C> <C>
Scott H. Creelman........................................... 2010 $62,767
Bruce Riccio................................................ 2011 25,548
Robert K. Adikes............................................ 2004 20,897
William K. Breaden.......................................... 2024 61,858
</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 1998 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%.
CHANGE IN CONTROL SEVERANCE AGREEMENTS
The Company maintains Change In Control Severance Agreements (the
"Severance Contracts") for certain executives of the Company pursuant to which
these employees could be compensated and could receive severance payments when a
change in control or potential change in control of the Company occurs. The
September 30, 1996 Recapitalization was a change in control under the provisions
of the Severance Contracts.
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 the Company 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. During
fiscal 1998, Messrs. Dickerman, Senecal and Doleva from Spalding (the "Spalding
Severance Contracts") and Messrs. Paul Whiting, Chairman and Chief Executive
Officer, Mr. Kipphut, Vice President and Treasurer, and on September 30, 1998,
Mr. Stephen Dryer, Vice President and Controller from the Tampa corporate office
(the "Tampa Severance Contracts"), exercised their rights to resign. At
September 30, 1998, all remaining Severance Contracts were either exercised or
expired.
65
<PAGE> 67
The compensation under the terms of the Severance Contracts is expected to
be paid subsequent to September 30, 1998 will be funded in the amounts of $0.9
million and $0.8 million, in fiscal 1999 and 2000, respectively. The
compensation under the terms of the Tampa Severance Contracts is expected to be
paid subsequent to September 30, 1998 and will be funded in the amounts of $1.1
million, $0.9 million and $0.3 million in fiscal 1999, 2000 and 2001,
respectively.
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 1998 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.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table, as of December 15, 1998, 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) 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)............................................ 77,034,840 79.5
c/o Kohlberg Kravis Roberts & Co. L.P.
9 West 57th Street
New York, NY 10019
KKR 1996 GP LLC(2).......................................... 9,120,000 9.4
c/o Kohlberg Kravis Roberts & Co. L.P.
9 West 57th Street
New York, NY 10019
Abarco N.V.(3).............................................. 6,480,000 6.7
c/o ABN Trust Company
(Curacao N.V.)
P.O. Box 224, 15 Pietermaai
Curacao, Netherlands Antilles
L.F. Loree, III and Norwood H. Davis, Jr., Trustees (for
various trusts)........................................... 2,000,000 2.1
Henry R. Kravis(1)(2)....................................... -- *
George R. Roberts(1)(2)..................................... -- *
Michael T. Tokarz(1)(2)..................................... -- *
Marc S. Lipschultz(1)(2).................................... -- *
Gustavo A. Cisneros(3)...................................... -- *
Edwin L. Artzt.............................................. 200,000 *
Kevin T. Martin(4).......................................... 637,500 *
Robert K. Adikes(4)......................................... 43,233 *
Scott H. Creelman(4)........................................ 91,872 *
G. Wade Lewis............................................... -- *
David W. Checketts.......................................... -- *
William K. Breaden (4)...................................... 13,511 *
All named officers and directors as a group(4).............. 995,561 1.0
</TABLE>
- ---------------
* Beneficial ownership does not exceed 1.0% of the respective class of
securities.
66
<PAGE> 68
(1) Shares of Common Stock shown as beneficially owned by Strata L.L.C. are held
by Strata Associates L.P. Strata L.L.C. is the sole general partner of KKR
Associates (Strata). KKR Associates (Strata), L.P., 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), a director of the Company and an
executive of KKR. Each of such individuals may be 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) Shares of Common Stock shown as beneficially owned by KKR 1996 GP LLC are
held by KKR 1996 Fund L.P. KKR 1996 GP LLC is the sole general partner of
KKR Associates 1996 L.P., a Delaware limited partnership. KKR Associates
1996 L.P. is the sole general partner of KKR 1996 Fund L.P. KKR 1996 GP LLC
is a Delaware limited liability company, the managing members of which are
Messrs. Henry R. Kravis and George R. Roberts and the other members of which
are Messrs. 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, Roberts and Tokarz
are directors of the Company. Each of Messrs. Kravis, Roberts, MacDonnell,
Raether, Michelson, Tokarz, Greene, Golkin, Robbins, Stuart and Gilhuly may
be deemed to share beneficial ownership of the shares shown as beneficially
owned by KKR 1996 GP LLC. Each of such individuals disclaims beneficial
ownership of such shares. Mr. Marc S. Lipschultz is a director of the
Company and is also an executive of KKR and a limited partner of KKR
Associates 1996 L.P. Mr. Lipschultz disclaims that he is the beneficial
owner of any shares beneficially owned by KKR Associates 1996.
(3) 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.
(4) Pursuant to Rule 13d-3, stock options that are presently exercisable or
exercisable within 60 days after December 15, 1998, 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, 1998 and (ii) the number of stock options exercisable within 60
days of December 15, 1998, 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.
In addition, an affiliate of Strata L.L.C. acquired, on the date of the
Reorganization, 1,000,000 shares of preferred stock, par value $0.01 per share,
and warrants to purchase 44,100,000 shares of Common Stock (exercise price of $2
per share) for a cash purchase price of $100 million.
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.
67
<PAGE> 69
See Notes A and Q of the Notes to the Consolidated Financial Statements
appearing elsewhere on this Form 10-K for a description of the sale of Evenflo
and the related indemnity agreement.
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 $976
thousand in fiscal 1998 pursuant to such management agreement with KKR.
On August 20, 1998 (the "Closing Date"), KKR 1996 Fund L.P., a Delaware
limited partnership affiliated with Kohlberg Kravis Roberts & Co., L.P. ("KKR"),
entered into a stock purchase agreement pursuant to which KKR 1996 Fund L.P.
acquired from Lisco, Inc., a wholly-owned subsidiary of Spalding ("Lisco"), (i)
51% (5,100,000 shares) of the outstanding shares of common stock, par value
$1.00 per share, of Evenflo (the "Evenflo Common Stock"), for a purchase price
of $25.5 million and (ii) 400,000 shares of variable rate cumulative preferred
stock with a liquidation preference of $100.00 per share (the "Cumulative
Preferred Stock") for a purchase price of $40.0 million, representing 100% of
the outstanding shares of Cumulative Preferred Stock. Lisco received the 400,000
shares of newly-authorized Cumulative Preferred Stock as a distribution from
Evenflo (the "Preferred Stock Distribution"). KKR 1996 Fund L.P. also entered
into an agreement on August 18, 1998, with the Company through which KKR 1996
Fund L.P. purchased 1,000,000 shares of preferred stock, par value of $0.01 per
share, and acquired warrants to purchase 44,100,000 shares of common stock, par
value $0.01 per share, for a purchase price of $100.0 million, payable in cash.
In addition, on the Closing Date, Great Star Corporation ("Great Star"), an
affiliate of Abarco N.V., entered into a stock purchase agreement pursuant to
which, prior to the acquisition of Common Stock by KKR 1996 Fund L.P., Great
Star acquired 6.6% (660,000 shares) of the outstanding shares of Common Stock
from Lisco for a purchase price of $3.3 million.
On the Closing Date, Spalding and Evenflo entered into a Transition
Services Agreement (the "Transition Services Agreement"). Pursuant to the
Transition Services Agreement, for a period of up to six months, Spalding will
provide certain financial, accounting and other corporate related services to
Evenflo for the costs associated with providing such services. Evenflo will also
reimburse Spalding for its out-of-pocket expenses incurred in rendering such
services. The Transition Services Agreement terminated with respect to the
majority of such services on September 30, 1998.
On the Closing Date, Evenflo, KKR 1996 Fund L.P. and Lisco entered into a
stockholders agreement (the "KKR Stockholders Agreement"). Pursuant to the KKR
Stockholders Agreement, Lisco has the right to participate pro rata in certain
sales of Common Stock by KKR 1996 Fund L.P. and affiliates (a "Tag Along"), and
KKR 1996 Fund L.P. has the right to require Lisco to participate pro rata in
certain sales of Common Stock by KKR 1996 Fund L.P. and affiliates ( a "Drag
Along"). The KKR Stockholders Agreement provides Lisco with "piggyback"
registration rights and two demand registrations rights and provides for certain
restrictions and rights regarding the transfer of Common Stock by Lisco. The KKR
Stockholders Agreement also grants Lisco the right to appoint one member of
Evenflo's Board of Directors, subject to maintaining specified ownership
thresholds.
On the Closing Date, Spalding and Evenflo entered into an indemnification
agreement (the "Indemnification Agreement") pursuant to which Spalding agreed to
indemnify Evenflo for all losses and liabilities of any kind relating to any
non-Evenflo related matters, and Evenflo agreed to indemnify Spalding for all
losses and liabilities of any kind relating to the Evenflo business. In
addition, Spalding agreed to indemnify Evenflo for the expense of product
recalls and corrective actions relating to products manufactured by Evenflo
prior to the Closing Date.
Spalding and Evenflo entered into an Employee Matters Agreement, dated
August 20, 1998, to allocate assets and liabilities with respect to labor,
employment and employee benefit matters. The Employee Matter Agreement provides
that Evenflo will retain all employment-related responsibility no matter when
incurred for current and former employees of Evenflo. Evenflo will provide, for
at least one year following the Closing Date, employee benefits that are, in the
aggregate, no less favorable than those maintained for the Evenflo employees
immediately prior to the closing of the Reorganization. Furthermore, Evenflo
will establish plans that are substantially similar to the SERA Plan, the
Spalding & Evenflo Savings Plus Plan, the Spalding &
68
<PAGE> 70
Evenflo Supplemental Retirement Plan and Spalding's postretirement health and
life insurance benefits, and assets for the Evenflo employees will be
transferred from the Spalding plans, except in the case of postretirement
benefits for which Spalding will cause to be accrued on the books of Evenflo a
pro-rata portion of the funding contribution due in 1998. Evenflo will also
establish a stock option plan to provide for the issuance of stock-based awards.
Evenflo will continue to honor its obligations under and maintain certain
deferred compensation and change in control agreements with individual
executives, retirement plans, welfare plans and collective bargaining
agreements.
Prior to the Closing Date, Evenflo and its subsidiaries filed a
consolidated United States federal income tax return together with Spalding and
its other subsidiaries (collectively, the Spalding Consolidated Group). As of
the Closing Date, Evenflo and its subsidiaries (collectively, the Evenflo Group)
will no longer be eligible to file United States federal income tax returns on a
consolidated basis with Spalding and its subsidiaries (other than members of the
Evenflo Group) (collectively, the Spalding Group). Consequently, on the Closing
Date, Spalding and Evenflo entered into a tax allocation and indemnity agreement
(the "Tax Allocation Agreement").
See Notes A and Q of the Notes to the Consolidated Financial Statements
appearing elsewhere on this Form 10-K for a description of the sale of Evenflo
and the related indemnity agreement.
Pursuant to the Tax Allocation Agreement, (i) the tax attributes of the
Spalding consolidated group (e.g., net operating losses, net capital losses and
tax credits) will be allocated and apportioned among the members of the Evenflo
Group and the members of the Spalding Group in accordance with the applicable
Treasury regulations, (ii) Spalding will be responsible for (x) preparing and
filing all consolidated United States federal income tax returns (including any
amended returns) for the taxable years during which Evenflo and its subsidiaries
were members of the Spalding consolidated group and (y) paying all taxes shown
as due and owning on such consolidated returns, and (iii) Spalding will have the
sole right to represent Evenflo's and its subsidiaries' interests in any audit
or other administrative or judicial proceeding related to such consolidated
returns.
Under the Tax Allocation Agreement, Evenflo and its subsidiaries are
required to pay to Spalding the amount of United States federal income taxes
that are attributable to Evenflo and its subsidiaries (as determined in
accordance with the provisions of the Consolidated Federal Income Tax Liability
Allocation Agreement among Spalding and its Subsidiaries, dated as of September
30, 1993 (the "Old Tax Sharing Agreement")) for all taxable years during which
Evenflo and its subsidiaries were members of the Spalding consolidated group
(including, without limitation, any such taxes that are imposed as a result of
an audit or other adjustment). Evenflo and its subsidiaries will be entitled to
any refunds of such taxes and Spalding is required to pay Evenflo and its
subsidiaries the amount of any tax refund attributable to such parties. In
addition, under the Tax Allocation Agreement, the members of the Evenflo Group
will be required to reimburse the Spalding Group for any tax attributes of the
Spalding Group that are utilized by the Evenflo Group (or any member thereof) to
reduce its tax liability and Spalding and the other members of the Spalding
Group will have similar obligation to reimburse the Evenflo Group for any tax
attributes of the Evenflo Group that are utilized by the Spalding Group (or any
member thereof).
Spalding and the other members of the Spalding Group will jointly and
severally indemnify and hold harmless Evenflo and its subsidiaries for any taxes
imposed on Spalding or other members of the Spalding Group other than taxes that
are attributable to Evenflo and its subsidiaries.
Pursuant to the terms of the Tax Allocation Agreement, the principles
described herein also will govern the filing of any state, local or foreign tax
returns required to be filed by Spalding or other members of the Spalding Group
on a consolidated, combined or unitary basis with the Company or any of its
subsidiaries and the allocation of the liability for any taxes with respect
thereto.
69
<PAGE> 71
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 31
Statements of Consolidated Earnings (Loss) and Comprehensive
Earnings (Loss) for the years ended September 30, 1998,
1997, and 1996............................................ 32
Consolidated Balance Sheets as of September 30, 1998 and
1997...................................................... 33
Statements of Consolidated Cash Flows for the years ended
September 30, 1998, 1997, and 1996........................ 34
Statements of Consolidated Shareholders' Equity (Deficiency)
for the years ended
September 30, 1998, 1997, and 1996........................ 36
Notes to Consolidated Financial Statements.................. 37
</TABLE>
2. FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
SCHEDULE PAGE
-------- ----
<S> <C>
Independent Auditors' Report on Schedule.................... 73
II -- Valuation and Qualifying Accounts..................... 74
</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
- ------- -----------
<C> <S>
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% 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).
4.3 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).
4.4 Stock Purchase Warrants, dated August 20, 1998, by and among
Evenflo & Spalding Holdings Corporation and KKR 1996 Fund
L.P., relating to the purchase of 44,100,000 shares of
Common Stock of the Company granted to KKR 1996 Fund L.P.
</TABLE>
70
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
4.5 Stockholders' Agreement dated August 20, 1998, by and among
Evenflo Company, Inc. KKR 1996 Fund L.P. and Lisco, Inc.
4.6 Certificate of Designations of Variable Rate Cumulative
Preferred Stock of Evenflo & Spalding Holdings Corporation,
dated August 19, 1998.
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 Credit Agreement Amendment No.1, dated December 11, 1996, by
and among Evenflo & Spalding Holdings Corporation (the
"Borrower") and the financial institutions that are or may
become parties to the Credit Agreement dated as of September
30, 1996.
10.5 Credit Agreement Amendment No. 2, dated March 31, 1998, by
and Among Evenflo & Spalding Holdings Corporation (the
"Borrower") and the financial institutions that are or may
become parties to the Credit Agreement dated as of September
30, 1996.
10.6 Credit Agreement Amendment No. 3, dated July 30, 1998, by
and Among Evenflo & Spalding Holdings Corporation (the
"Borrower") and the financial institutions that are or may
become parties to the Credit Agreement dated as of September
30, 1996.
10.7 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).
10.8 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).
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).
</TABLE>
71
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
10.13 Asset Purchase Agreement dated as of March 7, 1997, by and
among Gerry Baby Products Company, Gerry Wood Products
Company, Huffy Corporation, as sellers 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.
10.15 Tax Allocation and Indemnification Agreement, dated August
20, 1998 by and among Evenflo & Spalding Holdings
Corporation and Evenflo Company, Inc.
10.16 Employee Matters Agreement, dated August 20, 1998, by and
among Evenflo & Spalding Holdings Corporation and Evenflo
Company, Inc.
10.17 Transition Services Agreement, dated August 20, 1998, by and
among Evenflo & Spalding Holdings Corporation and Evenflo
Company, Inc.
10.18 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).
12 Computation of Ratio of Earnings to Fixed Charges.
21 List of Subsidiaries.
23 Consent of DELOITTE & TOUCHE LLP, independent certified
public accountants.
27 Financial Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K with the Securities and
Exchange commission dated July 31, 1998 relating to certain customary statements
in connection with the Private Securities Litigation Reform Act of 1995.
The Company filed a Current Report on Form 8-K dated August 21, 1998
relating to the Reorganization.
The Company filed a report on Form 8-K with the Commission subsequent to
the last quarter of the period covered by this report. The Report was filed on
December 11, 1998 to report that Kevin T. Martin, President and Chief Operating
Officer of Spalding Holdings Corporation had resigned and that the Company had
named James Craigie as his successor.
72
<PAGE> 74
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Spalding Holdings Corporation
We have audited the consolidated financial statements of Spalding Holdings
Corporation (formerly Evenflo & Spalding Holdings Corporation) and subsidiaries
(the "Company") as of September 30, 1998 and 1997, and for each of the three
fiscal years in the period ended September 30, 1998, and have issued our report
thereon dated November 12, 1998 (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 12, 1998
73
<PAGE> 75
SCHEDULE II
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
(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>
1998-Allowance for
doubtful accounts.... $3,941 12,591 -- (5,993) 10,539
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
</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. In 1998, amount includes $1,594 of
Evenflo balance sold in the Reorganization transaction.
74
<PAGE> 76
EXHIBIT 12
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Earnings:
Earnings (loss) before income taxes and
extraordinary item..................... $(112,159) (38,535) (12,380) 19,681 29,961
Interest expense......................... 78,041 71,326 37,718 38,108 17,073
Rent expense............................. 1,918 2,912 1,994 1,692 1,591
--------- ------- ------- ------ ------
$ (32,200) 35,703 27,332 59,481 48,625
========= ======= ======= ====== ======
Fixed charges:
Interest expense......................... $ 78,041 71,326 37,718 38,108 17,073
Rent expense............................. 1,918 2,912 1,994 1,692 1,591
--------- ------- ------- ------ ------
$ 79,959 74,238 39,712 39,800 18,664
========= ======= ======= ====== ======
Ratio of earnings to fixed charges....... -- -- -- 1.49 2.61
========= ======= ======= ====== ======
Deficiency of earnings to fixed
charges................................ 112,159 38,535 12,380
========= ======= =======
</TABLE>
75
<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.
SPALDING HOLDINGS CORPORATION
By: /s/ JAMES R. CRAIGIE
------------------------------------
James R. Craigie
President 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
- --------- ----- ----
<C> <S> <C>
/s/ EDWIN L. ARTZT Chairman of Board of December 24, 1998
- --------------------------------------------------- Directors
Edwin L. Artzt
/s/ JAMES R. CRAIGIE President and Chief December 24, 1998
- --------------------------------------------------- Executive Officer
James R. Craigie
/s/ SCOTT H. CREELMAN Executive Vice President December 24, 1998
- ---------------------------------------------------
Scott H. Creelman
/s/ G. WADE LEWIS Chief Financial Officer December 24, 1998
- --------------------------------------------------- (Principal Financial
G. Wade Lewis Officer)
/s/ WILLIAM K. BREADEN Corporate Controller December 24, 1998
- --------------------------------------------------- (Principal Accounting
William K. Breaden Officer)
/s/ ROBERT K. ADIKAS Vice President, Secretary December 24, 1998
- --------------------------------------------------- and General Counsel
Robert K. Adikas
/s/ HENRY R. KRAVIS Director December 24, 1998
- ---------------------------------------------------
Henry R. Kravis
/s/ GEORGE R. ROBERTS Director December 24, 1998
- ---------------------------------------------------
George R. Roberts
/s/ MICHAEL T. TOKARZ Director December 24, 1998
- ---------------------------------------------------
Michael T. Tokarz
/s/ MARC S. LIPSCHULTZ Director December 24, 1998
- ---------------------------------------------------
Marc S. Lipschultz
/s/ GUSTAVO A. CISNEROS Director December 24, 1998
- ---------------------------------------------------
Gustavo A. Cisneros
/s/ DAVID W. CHECKETTS Director December 24, 1998
- ---------------------------------------------------
David W. Checketts
</TABLE>
<PAGE> 1
Exhibit 4.4
NEITHER THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES ISSUABLE UPON EXERCISE OF THE SECURITIES REPRESENTED HEREBY
HAVE BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW, AND SUCH
SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED
OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR PURSUANT
TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS.
No. W-1 44,100,000 Warrants
STOCK PURCHASE WARRANTS
Exercisable commencing August 20, 1998
Void after Expiration Time (as defined herein)
EVENFLO & SPALDING HOLDINGS CORPORATION., a Delaware
corporation (the "Company"), hereby certifies that, for value received, KKR 1996
FUND, L.P., a Delaware limited partnership (the "KKR Fund"), or registered
assigns (in either case, the "Warrantholder"), is the owner of 44,100,000
Warrants (as defined below), each of which entitles the Warrantholder to
purchase from the Company one fully paid, duly authorized and nonassessable
share of Common Stock, par value $0.01 per share, of the Company (the "Common
Stock"), at any time from and after August 20, 1998 (the "Issue Date") and
continuing up to the Expiration Time (as defined herein) at a per share exercise
price determined according to the terms and subject to the conditions set forth
in this certificate (the "Warrant Certificate"). The number of shares of Common
Stock issuable upon exercise of each such Warrant and the exercise price per
share of Common Stock are subject to adjustment from time to time pursuant to
the provisions of Sections 8 and 9 of this Warrant Certificate. The Warrants
evidenced by this Warrant Certificate (the "Warrants") are being issued pursuant
to an Investment Agreement, dated as of July 30, 1998 (as it may be amended,
supplemented or otherwise modified from time to time, the "Investment
Agreement"), by and between the KKR Fund and the Company, and are entitled to
certain rights and privileges set forth therein.
Section 1. Definitions. As used in this Warrant Certificate,
the following terms shall have the meanings set forth below:
"Board of Directors" means the board of directors of the
Company.
<PAGE> 2
2
"Business Day" means any day, other than a Saturday, Sunday or
a day on which banking institutions in the State of New York are
authorized or obligated by law or executive order to close.
"Certificate of Incorporation" means the Restated Certificate
of Incorporation of the Company, as amended from time to time.
"Closing Price" with respect to a share of Common Stock on any
day means, except as set forth below in the case that the shares of
Common Stock are not publicly held or listed, the average of the
"quoted prices" of the Common Stock for 30 consecutive Trading Days
commencing 45 Trading Days before the date in question. The term
"quoted prices" of the Common Stock shall mean the last reported sale
price on that day or, in case no such reported sale takes place on such
day, the average of the last reported bid and asked prices, regular
way, on that day, in either case, as reported in the consolidated
transaction reporting system with respect to securities quoted on
Nasdaq or, if the shares of Common Stock are not quoted on Nasdaq, as
reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities
exchange on which the shares of Common Stock are listed or admitted to
trading or, if the shares of Common Stock are not quoted on Nasdaq and
not listed or admitted to trading on any national securities exchange,
the last quoted price or, if not so quoted, the average of the high bid
and low asked prices on such other nationally recognized quotation
system then in use, or, if on any such day the shares of Common Stock
are not quoted on any such quotation system, the average of the closing
bid and asked prices as furnished by a professional market maker
selected by the Board of Directors making a market in the shares of
Common Stock. Notwithstanding the foregoing, if the shares of Common
Stock are not publicly held or so listed, quoted or publicly traded,
the "Closing Price" means the fair market value of a share of Common
Stock, as determined in good faith by the Board of Directors provided,
however, that if the Warrantholder shall dispute the fair market value
as determined by the Board, the Warrantholder and the Company may
retain an Independent Expert. The determination of fair market value by
the Independent Expert shall be final, binding and conclusive on the
Company and the Warrantholder. All costs and expenses of the
Independent Expert shall be borne by the Company.
"Common Stock" has the meaning set forth in the preamble
hereto.
"Company" has the meaning set forth in the preamble hereto.
"Equity Securities" of any Person means any and all common
stock, preferred stock, any other class of capital stock and
partnership or limited liability company interests of such Person or
any other similar interests of any Person that is not a corporation,
partnership or limited liability company.
"Exercise Price" has the meaning set forth in Section 8
hereof.
<PAGE> 3
3
"Expiration Date" means August 20, 2006.
"Expiration Time" means 5:00 P.M., New York City time, on the
Expiration Date.
"Fractional Warrant Share" means any fraction of a whole share
of Common Stock issued, or issuable upon, exercise of the Warrants.
"Independent Expert" means an investment banking firm mutually
acceptable to the Company and the Warrantholder.
"Investment Agreement" has the meaning set forth in the
preamble hereto.
"Issue Date" has the meaning set forth in the preamble hereto.
"KKR Fund" has the meaning set forth in the preamble hereto.
"Nasdaq" means The Nasdaq Stock Market's National Market.
"Offer Time" has the meaning set forth in Section 9.1 (e)
hereof.
"Organic Change" means, with respect to any Person, any
transactions (including without limitation any recapitalization,
capital reorganization or reclassification of any class or series of
Equity Securities, any consolidation of such Person with, or merger of
such Person into, any other Person, any merger of another Person into
such Person (other than a merger which does not result in a
reclassification, conversion, exchange or cancellation of outstanding
shares of capital stock of such Person), and any sale or transfer or
lease of all or substantially all of the assets of such Person, but not
including any stock split, combination or subdivision which is the
subject of Section 9.1(b)) pursuant to which any class or series of
Equity Securities of such Person is converted into the right to receive
other securities, cash or other property.
"Person" means any individual, firm, corporation, company,
limited liability company, association, partnership, joint venture,
trust or unincorporated organization, or a government or any agency or
political subdivision thereof.
"Securities Act" means the U.S. Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
"Stated Value" means the stated liquidation value of the
Variable Rate Preferred Stock as set forth in the Certificate of
Incorporation.
"Trading Day" means any day on which Nasdaq is open for
trading, or if the shares of Common Stock are not quoted on Nasdaq, any
day on which the principal national securities exchange or national
quotation system on which the shares of Common Stock are listed,
admitted to trading or quoted is open for trading, or if the shares of
Common Stock are not so listed, admitted to trading or quoted, any
Business Day.
<PAGE> 4
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"Variable Rate Preferred Stock" means the Variable Rate
Cumulative Preferred Stock, par value $1.00 per share, of the Company.
"Warrant" has the meaning set forth in the preamble hereto.
"Warrant Agent" means the Person named or otherwise appointed
as such as set forth in Section 10 hereof.
"Warrant Certificate" has the meaning in the preamble hereto.
"Warrant Market Price" means the average of the Closing Prices
of a share of Common Stock for the ten consecutive Trading Days ending
on the Trading Day, immediately prior to the day on which the Election
to Exercise is delivered.
"Warrant Register" has the meaning set forth in Section 2.2
hereof.
"Warrant Shares" means the shares of Common Stock issued, or
issuable upon, exercise of the Warrants.
"Warrantholder" has the meaning set forth in the preamble
hereto.
Section 2. Transferability.
2.1 Registration. The Warrants shall be issued only in
registered form.
2.2 Transfer. The Warrants evidenced by this Warrant
Certificate may be sold or otherwise transferred at any time (except as such
sale or transfer may be restricted pursuant to the Securities Act or any
applicable state securities laws) and any such sale or transfer shall be
effected on the books of the Company (the "Warrant Register") maintained at its
principal executive offices upon surrender of this Warrant Certificate for
registration of transfer duly endorsed by the Warrantholder or by its duly
authorized attorney or representative, or accompanied by proper evidence of
succession, assignment or authority to transfer. Upon any registration of
transfer, the Company shall execute and deliver a new Warrant Certificate or
Certificates in appropriate denominations to the Person or Persons entitled
thereto.
Section 3. Exchange of Warrant Certificate. Any Warrant
certificate may be exchanged for another certificate or certificates of like
tenor entitling the Warrantholder to purchase a like aggregate number of Warrant
Shares as the certificate or certificates surrendered then entitles such
Warrantholder to purchase. Any Warrantholder desiring to exchange a Warrant
certificate shall make such request in writing delivered to the Company, and
shall surrender, properly endorsed, the certificate evidencing the Warrant to be
so exchanged. Thereupon, the Company shall execute and deliver to the Person
entitled thereto a new Warrant certificate or certificates as so requested.
<PAGE> 5
5
Section 4. Term of Warrants; Exercise of Warrants.
4.1 Duration of Warrant. On the terms and subject to the
conditions set forth in this Warrant Certificate, the Warrantholder may exercise
the Warrants evidenced hereby, in whole or in part, at any time and from time to
time after the Issue Date and before the Expiration Time. If the Warrants
evidenced hereby are not exercised by the Expiration Time, they shall become
void, and all rights hereunder shall thereupon cease.
4.2 Exercise of Warrant.
(a) On the terms and subject to the conditions set forth
in this Warrant Certificate, the Warrantholder may exercise the Warrants
evidenced hereby, in whole or in part, by presentation and surrender to the
Warrant Agent of this Warrant Certificate together with the attached Election to
Exercise duly filled in and signed, and accompanied by payment to the Company of
the Exercise Price for the number of Warrant Shares specified in such Election
to Exercise. Payment of the aggregate Exercise Price shall be made (i) in cash
in an amount equal to the aggregate Exercise Price; (ii) by certified or
official bank check in an amount equal to the aggregate Exercise Price; (iii) by
an exchange (which shall be treated as a recapitalization) with the Company of a
number of shares of Variable Rate Preferred Stock having an aggregate Stated
Value plus accrued and unpaid dividends thereon equal to the aggregate Exercise
Price; (iv) by an exchange (which shall be treated as a recapitalization) with
the Company of a number of securities of the Company (including, only in the
case of the initial Warrantholder, debt securities) having an aggregate value
(as determined by the Board of Directors in its good faith judgment, subject to
the Warrantholders' rights to have the Independent Expert make the
determination) equal to the aggregate Exercise Price of the Warrant Shares being
acquired in exchange thereof; or (v) by any combination of the foregoing. In
lieu of the above, the Warrantholders may deliver an Election to Exercise that
provides for a recapitalization exchange of Warrants for Warrant Shares having
an aggregate value equal to the excess of (x) the aggregate value of the Warrant
Shares to which the Warrants so exercised relate (based on the determination of
the Closing Price of the Common Stock as of such date) over (y) the aggregate
Exercise Price of such Warrants.
(b) On the terms and subject to the conditions set forth
in this Warrant Certificate, upon such presentation and surrender of this
Warrant Certificate and payment of such aggregate Exercise Price as set forth in
paragraph (a) hereof, the Company shall promptly issue and cause to be delivered
to the Warrantholder, or to such Persons as the Warrantholder may designate in
writing, a certificate or certificates (in such name or names as the
Warrantholder may designate in writing) for the specified number of duly
authorized, fully paid and non-assessable Warrant Shares issuable upon exercise,
and shall deliver to the Warrantholder cash, as provided in Section 11 hereof,
with respect to any Fractional Warrant Shares otherwise issuable upon such
surrender. In the event that the Warrants evidenced by this Warrant Certificate
are exercised in part prior to the Expiration Time, the Company shall issue and
cause to be delivered to the Warrantholder, or to such Persons as the
Warrantholder may designate in writing, a certificate or certificates (in such
name or names as the Warrantholder may designate in writing) evidencing any
remaining unexercised Warrants.
<PAGE> 6
6
(c) Each Person in whose name any certificate for Warrant
Shares is issued shall for all purposes be deemed to have become the holder of
record of the Warrant Shares represented thereby on the first date on which both
the Warrant Certificate evidencing the respective Warrants was surrendered and
payment of the Exercise Price and any applicable taxes was made, irrespective of
date of issue or delivery of such certificate.
Section 5. Payment of Taxes. The Company shall pay any and all
documentary, stamp or similar issue or transfer taxes and other governmental
charges that may be imposed under the laws of the United States or any political
subdivision or taxing authority thereof or therein in respect of any issue or
delivery of Warrant Shares or of other securities or property deliverable upon
exercise of the Warrants evidenced by this Warrant Certificate or certificates
representing such shares or securities (other than income taxes imposed on the
Warrantholder).
Section 6. Mutilated or Missing Warrant. If any Warrant
certificate is lost, stolen, mutilated or destroyed, the Company shall issue and
the Warrant Agent shall countersign, in exchange and substitution for and upon
cancellation of the mutilated Warrant certificate, or in lieu of and
substitution for the Warrant certificate lost, stolen or destroyed, upon receipt
of a proper affidavit or other evidence reasonably satisfactory to the Company
and the Warrant Agent (and surrender of any mutilated Warrant certificate) and
bond of indemnity in form and amount and with corporate surety reasonably
satisfactory to the Company and the Warrant Agent in each instance protecting
the Company and the Warrant Agent, a new Warrant certificate of like tenor and
representing an equivalent number of Warrants as the Warrant certificate so
lost, stolen, mutilated or destroyed. Any such new Warrant certificate shall
constitute an original contractual obligation of the Company, whether or not the
allegedly lost, stolen, mutilated or destroyed Warrant certificate shall be at
any time enforceable by anyone. An applicant for such substitute Warrant
certificate shall also comply with such other reasonable regulations and pay
such other reasonable charges as the Company or the Warrant Agent may prescribe.
All Warrant certificates shall be held and owned upon the express condition that
the foregoing provisions are exclusive with respect to the replacement of lost,
stolen, mutilated or destroyed Warrant certificates, and shall preclude any and
all other rights or remedies notwithstanding any law or statute existing or
hereafter enacted to the contrary with respect to the replacement of negotiable
instruments or other securities without their surrender.
Section 7. Reservation of Shares. The Company hereby agrees
that there shall be reserved for issuance and delivery upon exercise of this
Warrant, free from preemptive rights, the number of shares of authorized but
unissued shares of Common Stock as shall be required for issuance or delivery
upon exercise of the Warrants evidenced by this Warrant Certificate. The Company
further agrees that it will not, by amendment of its Certificate of
Incorporation or through reorganization, consolidation, merger, dissolution or
sale or assets, or by any other voluntary act, avoid or seek to avoid the
observance or performance of any of the covenants, stipulations or conditions to
be observed or performed hereunder by the Company. Without limiting the
generality of the foregoing, the Company shall from time to time take all such
action that may be necessary in order that the Company may validly and legally
issue fully paid and nonassessable shares of Common Stock at the Exercise Price
as so adjusted.
<PAGE> 7
7
Section 8. Exercise Price. The price per share (the "Exercise
Price") at which Warrant Shares shall be purchasable upon the exercise of the
Warrants evidenced by this Warrant Certificate shall be $2.00, subject to
adjustment pursuant to Section 9 hereof.
Section 9. Adjustment of Exercise Price and Number of Shares.
The number and kind of securities purchasable upon the exercise of the Warrants
evidenced by this Warrant Certificate and the Exercise Price thereof shall be
subject to adjustment from time to time after the date hereof upon the happening
of certain events, as follows:
9.1 Adjustments to Exercise Price. The Exercise Price shall be
subject to adjustment as follows:
(a) Stock Dividends. In case the Company after the date hereof
shall pay a dividend or make a distribution to all holders of shares of Common
Stock in shares of Common Stock, then in any such case the Exercise Price in
effect at the opening of business on the day following the record date for the
determination of stockholders entitled to receive such dividend or distribution
shall be reduced to a price obtained by multiplying such Exercise Price by a
fraction of which (x) the numerator shall be the number of shares of Common
Stock outstanding at the close of business on such record date and (y) the
denominator shall be the sum of such number of shares of Common Stock
outstanding and the total number of shares of Common Stock constituting such
dividend or distribution, such reduction to become effective immediately after
the opening of business on the day following such record date. For purposes of
this subsection (a), the number of shares of Common Stock at any time
outstanding shall not include shares held in the treasury of the Company but
shall include shares issuable in respect of scrip certificates issued in lieu of
fractions of shares of Common Stock. The Company will not pay any dividend or
make any distribution on shares of Common Stock held in the treasury of the
Company.
(b) Stock Splits and Reverse Splits. In case after the date
hereof outstanding shares of Common Stock shall be subdivided into a greater
number of shares of Common Stock, the Exercise Price in effect at the opening of
business on the day following the day upon which such subdivision becomes
effective shall be proportionately reduced, and, conversely, in case after the
date hereof outstanding shares of Common Stock shall be combined into a smaller
number of shares of Common Stock, the Exercise Price in effect at the opening of
business on the day following the day upon which such combination becomes
effective shall be proportionately increased, such reduction or increase, as the
case may be, to become effective immediately after the opening of business on
the day following the day upon which such subdivision or combination becomes
effective.
(c) Issuances Below Market. In case the Company after the date
hereof shall issue rights, options or warrants to holders of shares of Common
Stock entitling them to subscribe for or purchase shares of Common Stock at a
price per share less than the Closing Price per share on the record date for the
determination of stockholders entitled to receive such rights, options or
warrants, the Exercise Price in effect at the opening of business on the day
following
<PAGE> 8
8
such record date shall be adjusted to a price obtained by multiplying such
Exercise Price by a fraction of which (x) the numerator shall be the sum of (A)
the number of shares of Common Stock outstanding at the close of business on
such record date and (B) the quotient of (1) the number of additional shares of
Common Stock issuable upon exercise of the rights, options or warrants offered
multiplied by the exercise price per share of the additional shares of Common
Stock issuable upon exercise of such rights, options or warrants and (2) the
Closing Price per share of Common Stock as of such record date, and (y) the
denominator of which is the number of shares of Common Stock outstanding at the
close of business on such record date plus the number of additional shares of
Common Stock issuable upon exercise of the rights, options or warrants so
offered, such adjustment to become effective immediately after the opening of
business on the day following such record date; provided, however, that no
adjustment shall be made if the Company issues or distributes to each
Warrantholder the rights or warrants that each Warrantholder would have been
entitled to receive had the Warrants held by such Warrantholder been exercised
prior to such record date. For purposes of this subsection (c), the number of
shares of Common Stock at any time outstanding shall not include shares held in
the treasury of the Company but shall include shares issuable in respect of
scrip certificates issued in lieu of fractions of shares of Common Stock. The
Company shall not issue any rights or warrants in respect of shares of Common
Stock held in the treasury of the Company. Rights or warrants issued by the
Company to all holders of Common Stock entitling the holders thereof to
subscribe for or purchase Equity Securities, which rights or warrants (i) are
deemed to be transferred with such shares of Common Stock, (ii) are not
exercisable and (iii) are also issued in respect of future issuances of Common
Stock, including shares of Common Stock issued upon exercise of the Warrants
evidenced by this Warrant Certificate, in each case in clauses (i) through (iii)
until the occurrence of a specified event or events (a "Trigger Event"), shall
for purposes of this subsection (c) not be deemed issued until the occurrence of
the earliest Trigger Event. In the event that the Company shall otherwise issue
shares of Common Stock for a consideration per share less than the Closing Price
per share on such date of issuance, the Exercise Price in effect at the opening
of business on the day following such issuance shall be reduced to a price
obtained by multiplying such Exercise Price by a fraction of which (x) the
numerator shall be (A) the number of shares of Common Stock outstanding
immediately prior to the issuance of such shares plus (B) the quotient of (a)
the aggregate consideration received for the additional shares of Common Stock
divided by (b) the Closing Price as of the date of determination of the
adjustment and (y) the denominator shall be the number of shares of Common Stock
outstanding immediately after the issuance of such additional shares.
(d) Special Dividends. In case the Company after the date
hereof shall distribute to all holders of shares of Common Stock evidences of
its indebtedness or assets (excluding any regular periodic cash dividend),
Equity Securities (other than Common Stock) or rights to subscribe (excluding
those referred to in subsection (c) above) for Equity Securities other than
Common Stock (including by way of share repurchases to the extent in excess of
the Closing Price per share), in each such case the Exercise Price in effect
immediately prior to the close of business on the record date for the
determination of stockholders entitled to receive such distribution shall be
adjusted to a price obtained by multiplying such Exercise Price by a fraction of
which (x) the numerator shall be the Closing Price per share of Common Stock on
such record date, less the then-current fair market value as of such record date
(as determined by the Board of
<PAGE> 9
9
Directors in its good faith judgment) of the portion of assets or evidences of
indebtedness or Equity Securities or subscription rights so distributed
applicable to one share of Common Stock, and (y) the denominator shall be such
Closing Price, such adjustment to become effective immediately prior to the
opening of business on the day following such record date; provided, however,
that no adjustment shall be made (1) if the Company issues or distributes to
each Warrantholder the subscription rights referred to above that each
Warrantholder would have been entitled to receive had the Warrants held by such
Warrantholder been exercised prior to such record date or (2) if the Company
grants to each Warrantholder the right to receive, upon the exercise of the
Warrants held by such Warrantholder at any time after the distribution of the
evidences of indebtedness or assets or Equity Securities referred to above, the
evidences of indebtedness or assets or Equity Securities that such Warrantholder
would have been entitled to receive had such Warrants been exercised prior to
such record date. The Company shall provide any Warrantholder, upon receipt of a
written request therefor, with any indenture or other instrument defining the
rights of the holders of any indebtedness, assets, subscription rights or Equity
securities referred to in this subsection (d). Rights or warrants issued by the
Company to all holders of Common Stock entitling the holders thereof to
subscribe for or purchase Equity Securities, which rights or warrants (i) are
deemed to be transferred with such shares of Common Stock, (ii) are not
exercisable and (iii) are also issued in respect of future issuances of Common
Stock, including shares of Common Stock issued upon exercise of the Warrants
evidenced by this Warrant Certificate, in each case in clauses (i) through (iii)
until the occurrence of a Trigger Event, shall for the purposes of this
subsection (d) not be deemed issued until the occurrence of the earliest Trigger
Event.
(e) Tender or Exchange Offer. In case a tender or exchange
offer made by the Company or any subsidiary of the Company for all or any
portion of the Common Stock shall be consummated and such tender offer shall
involve an aggregate consideration having a fair market value (as determined by
the Board of Directors in its good faith judgment, subject to the
Warrantholders' rights to have the Independent Expert make the determination) at
the last time (the "Offer Time") tenders may be made pursuant to such tender or
exchange offer (as it may be amended) that, together with the aggregate of the
cash plus the fair market value (as determined by the Board of Directors in its
good faith judgment, subject to the Warrantholders' rights to have the
Independent Expert make the determination), as of the Offer Time, of
consideration payable in respect of any tender or exchange offer by the Company
or any such subsidiary for all or any portion of the Common Stock consummated
preceding the Offer Time and in respect of which no Exercise Price adjustment
pursuant to this subsection (e) has been made, exceeds 5% of the product of the
Closing Price of the Common Stock at the Offer Time multiplied by the number of
shares of Common Stock outstanding (including any tendered shares) at the Offer
Time, the Exercise Price shall be reduced so that the same shall equal the price
determined by multiplying the Exercise Price in effect immediately prior to the
Offer Time by a fraction of which (x) the numerator shall be (i) the product of
the Closing Price of the Common Stock at the Offer Time multiplied by the number
of shares of Common Stock outstanding (including any tendered shares) at the
Offer Time minus (ii) the fair market value (determined as aforesaid) of the
aggregate consideration payable to stockholders based on the acceptance (up to a
maximum specified in the terms of the tender or exchange offer) of all shares
validly tendered and not withdrawn as of the Offer Time (the shares deemed so
accepted, up to any such maximum, being referred to as the
<PAGE> 10
10
"Purchased Shares") and (y) the denominator shall be the product of (i) such
Closing Price at the Offer Time multiplied by (ii) such number of outstanding
shares at the Offer Time minus the number of Purchased Shares, such reduction to
become effective immediately prior to the opening of business on the day
following the Offer Time. For purposes of this subsection (e), the number of
shares of Common Stock at any time outstanding shall not include shares held in
the treasury of the Company but shall include shares issuable in respect of
scrip certificates issued in lieu of fractions of shares of Common Stock.
(f) Convertible Securities. In the event the Company issues
any securities convertible into or exchangeable for Common Stock (other than
securities issued in transactions described in subsections (c) or (d) of this
Section 9.1) for a consideration per share of Common Stock initially deliverable
upon conversion or exchange of such securities less than the current Closing
Price on the date of issuance of such securities, the Exercise Price in effect
at the opening of business on the day following such issuance shall be reduced
to a price obtained by multiplying such Exercise Price by a fraction of which
(x) the numerator shall be (A) the number of shares of Common Stock outstanding
immediately prior to the issuance of such securities plus (B) (a) the aggregate
consideration received for the issuance of such securities divided by (b) the
Closing Price as of the date of determination of the adjustment and (y) the
denominator shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such securities plus the maximum number of
shares of Common Stock deliverable upon conversion or in exchange for such
securities at the initial conversion or exchange rate. If (i) all of the Common
Stock deliverable upon conversion or exchange of such securities have not been
issued when such securities are no longer outstanding, or (ii) the exercise
price per share for which shares of Common Stock are issuable pursuant to such
securities shall be increased or decreased solely by virtue of provisions
therein contained for an automatic increase or decrease in such exercise price
per share upon the occurrence of a specified date or event, then the Exercise
Price shall promptly be readjusted to the Exercise Price which would then be in
effect had the adjustment upon the issuance of such securities been made on the
basis of, in the case of clause (i) above, the actual number of shares of Common
Stock issued upon conversion or exchange of such securities or, in the case of
clause (ii) above, the exercise price per share, as so increased or decreased,
as the case may be.
(g) Minimum Adjustment Requirement. No adjustment shall be
required unless such adjustment would result in an increase or decrease of at
least $0.01 in the Exercise Price then subject to adjustment; provided, however,
that any adjustments that are not made by reason of this subsection (g) shall be
carried forward and taken into account in any subsequent adjustment. In case the
Company shall at any time issue shares of Common Stock by way of dividend on any
stock of the Company or subdivide or combine the outstanding shares of Common
Stock, said amount of $0.01 specified in the preceding sentence (as theretofore
increased or decreased, if said amount shall have been adjusted in accordance
with the provisions of this subsection (g)) shall forthwith be proportionately
increased in the case of such a combination or decreased in the case of such a
subdivision or stock dividend so as appropriately to reflect the same.
<PAGE> 11
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(h) Calculations. All calculations under this Section 9.1
shall be made to the nearest $0.01.
(i) Certificate. Whenever an adjustment in the Exercise Price
is made as required or permitted by the provisions of this Section 9.1, the
Company shall promptly file with the Warrant Agent a certificate of its chief
financial officer setting forth (A) the adjusted Exercise Price as provided in
this Section 9.1 and a brief statement of the facts requiring such adjustment
and the computation thereof and (B) the number of shares of Common Stock (or
portions thereof) purchasable upon exercise of a Warrant after such adjustment
in the Exercise Price in accordance with Section 9.2 hereof and the record date
therefor, and promptly after such filing shall mail or cause to be mailed a
notice of such adjustment to each Warrantholder at his or her last address as
the same appears on the Warrant Register. Such certificate, in the absence of
manifest error, shall be conclusive and final evidence of the correctness of
such adjustment. The Warrant Agent shall be entitled to rely upon such
certificate, and shall be under no duty or responsibility with respect to any
such certificate except to exhibit the same to any Warrantholder desiring
inspection thereof.
(j) Notice. In case:
(i) the Company shall declare any dividend or any
distribution of any kind or character (whether in cash, securities or
other property) on or in respect of shares of Common Stock or to the
stockholders of the Company (in their capacity as such), excluding any
regular periodic cash dividend paid out of current or retained earnings
(as such terms are used in generally accepted accounting principles);
or
(ii) the Company shall authorize the granting to the
holders of shares of Common Stock of rights to subscribe for or
purchase any shares of capital stock or of any other right; or
(iii) of any reclassification of shares of Common Stock
(other than a subdivision or combination of outstanding shares of
Common Stock), or of any consolidation or merger to which the Company
is a party and for which approval of any stockholders of the Company is
required, or of the sale or transfer of all or substantially all of the
assets of the Company; or
(iv) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company; then the Company shall cause
to be filed with the Warrant Agent and shall cause to be mailed to the
Warrantholders, at their last addresses as they shall appear upon the
Warrant Register, at least 30 days prior to the applicable record date
hereinafter specified, a notice stating (x) the date on which a record
is to be taken for the purpose of such dividend, distribution or rights
or, if a record is not to be taken, the date as of which the holders of
shares of Common Stock of record to be entitled to such dividend,
distribution or rights are to be determined or (y) the date on which
such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up is expected to become effective,
and, if applicable, the date as of which it is expected that holders of
<PAGE> 12
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shares of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities or other property (including
cash) deliverable upon such reclassification, consolidation, merger,
sale, transfer, dissolution, liquidation or winding up. Failure to give
any such notice, or any defect therein, shall not affect the validity
of the proceedings referred to in clauses (i), (ii), (iii) and (iv)
above.
(k) Section 305. Anything in this Section 9.1 to the contrary
notwithstanding, the Company shall be entitled, but not required, to make such
reductions in the Exercise Price, in addition to those required by this Section
9.1, as it in its discretion shall determine to be advisable, including, without
limitation, in order that any dividend in or distribution of shares of Common
Stock or shares of capital stock of any class other than Common Stock,
subdivision, reclassification or combination of shares of Common Stock, issuance
of rights or warrants, or any other transaction having a similar effect, shall
not be treated as a distribution of property by the Company to its stockholders
under Section 305 of the Internal Revenue Code of 1986, as amended, or any
successor provision and shall not be taxable to them.
(l) No Adjustment. Anything to the contrary herein
notwithstanding, no adjustment to the Exercise Price or the number of shares of
Common Stock purchasable upon exercise of a Warrant shall be made pursuant to
this Section 9.1 or Section 9.2 as a result of, or in connection with, the
issuance of options or rights to purchase Common Stock issued to employees of
the Company or its Subsidiaries pursuant to a stock option or other similar plan
adopted by the Board of Directors or an employment agreement approved by the
Board of Directors or the modification, renewal or extension of any such plan or
agreement if approved by the Board of Directors.
(m) When Adjustment Not Required. If the Company shall take a
record of the holders of its Common Stock for purposes of taking any action that
requires an adjustment of the Exercise Price under this Section 9, and shall,
thereafter and before the effective date of such action, legally abandon its
plan to take such action, then thereafter no adjustment shall be required by
reason of the taking of such record and any such adjustment previously made in
respect thereof shall be rescinded and annulled.
9.2 Adjustment to Number of Warrant Shares. Upon each
adjustment of the Exercise Price pursuant to Section 9.1 hereof, the number of
Warrant Shares purchasable upon exercise of a Warrant outstanding prior to the
effectiveness of such adjustment shall be adjusted to the number, calculated to
the nearest one-hundredth of a share, obtained by (x) multiplying the number of
Warrant Shares purchasable immediately prior to such adjustment upon the
exercise of a Warrant by the Exercise Price in effect prior to such adjustment
and (y) dividing the product so obtained by the Exercise Price in effect after
such adjustment of the Exercise Price.
9.3 Organic Change.
(a) Company Survives. Upon the consummation of an Organic
Change (other than a transaction in which the Company is not the surviving
entity), lawful provision shall be made as part of the terms of such transaction
whereby the terms of the Warrant Certificates shall
<PAGE> 13
13
be modified, without payment of any additional consideration therefor, so as to
provide that upon exercise of Warrants following the consummation of such
Organic Change, the Warrantholders of such Warrants shall have the right to
purchase the kind and amount of securities, cash and other property receivable
upon such Organic Change by a holder of the number of Warrant Shares into which
such Warrants might have been exercised immediately prior to such Organic
Change. Lawful provision also shall be made as part of the terms of the Organic
Change so that all other terms of the Warrant Certificates shall remain in full
force and effect following such an Organic Change. The provisions of this
Section 9.3(a) shall similarly apply to successive Organic Changes.
(b) Company Does Not Survive. The Company shall not enter into
an Organic Change that is a transaction in which the Company is not the
surviving entity unless lawful provision shall be made as part of the terms of
such transaction whereby the surviving entity shall issue new securities to each
Warrantholder, without payment of any additional consideration therefor, with
terms that provide that upon the exercise of the Warrants, the Warrantholders of
such Warrants shall have the right to purchase the kind and amount of
securities, cash and other property receivable upon such Organic Change by a
holder of the number of Warrant Shares into which such Warrants might have been
exercised immediately prior to such Organic Change. The certificate or articles
of incorporation or other constituent document of the surviving entity shall
provide for such adjustments which, for events subsequent to the effective date
of such certificate or articles of incorporation or other constituent document,
shall be equivalent to the adjustments provided for in Section 9.1 hereof.
9.4 Statement on Warrants. The form of Warrant Certificate
need not be changed because of any adjustment made pursuant to Section 8,
Section 9.1 or Section 9.2 hereof, and Warrants issued after such adjustment may
state the same Exercise Price and the same number of Warrant Shares as are
stated in this Warrant Certificate.
Section 10. Warrant Agent. On the date of issuance of the
Warrants, the Company shall cause to be appointed a Warrant Agent, which Warrant
Agent shall be reasonably acceptable to the Warrantholders. The Company may act
as Warrant Agent for such time as the Warrantholders accept the appointment of
the Company as such Warrant Agent. The Company shall appoint an independent
Warrant Agent within 10 business days of its receipt from the Warrantholders of
a request to appoint such an independent Warrant Agent.
Section 11. Fractional Interests. The Company shall not be
required to issue Fractional Warrant Shares on the exercise of the Warrants
evidenced by this Warrant Certificate. If any Fractional Warrant Share would but
for the provisions of this Section 11, be issuable on the exercise of the
Warrants evidenced by this Warrant Certificate (or specified portions thereof),
the Company shall pay an amount in cash equal to the fraction of a Warrant Share
represented by such Fractional Warrant Share multiplied by the Closing Price on
the day of such exercise.
Section 12. No Rights as Shareholder. Nothing in this Warrant
Certificate shall be construed as conferring upon the Warrantholder or its
transferees any rights as a shareholder of the Company, including the right to
vote, receive dividends, consent or receive notices as a
<PAGE> 14
14
shareholder with respect to any meeting of shareholders for the election of
directors of the Company or any other matter.
Section 13. Successors. All the covenants and provisions of
this Warrant Certificate by or for the benefit of the Company or the
Warrantholder shall bind and inure to the benefit of their respective successors
and permitted assigns hereunder.
Section 14. Governing Law; Choice of Forum, Etc. The validity,
construction and performance of this Warrant Certificate shall be governed by
and interpreted in accordance with, the laws of New York. The parties hereto
agree that the appropriate and exclusive forum for any disputes arising out of
this Warrant Certificate solely between or among any or all of the Company, on
the one hand, and the KKR Fund and/or any Person who has become a Warrantholder,
on the other, shall be the United States District Court for the Southern
District of New York, and, if such court will not hear any such suit, the courts
of the state of the Company's incorporation, and the parties hereto irrevocably
consent to the exclusive jurisdiction of such courts, and agree to comply with
all requirements necessary to give such courts jurisdiction. The parties hereto
further agree that the parties will not bring suit with respect to any disputes,
except as expressly set forth below, arising out of this Warrant Certificate for
the execution or enforcement of judgment, in any jurisdiction other than the
above specified courts. Each of the parties hereto irrevocably consents to the
service of process in any action or proceeding hereunder by the mailing of
copies thereof by registered or certified airmail, postage prepaid, if to (i)
the Company, at 425 Meadow Street, Chicopee, Massachusetts 01021-0901 or at such
other address specified by the Company in writing to the Warrant Agent, and (ii)
any Warrantholder, at the address of such Warrantholder specified in the Warrant
Register. The foregoing shall not limit the rights of any party hereto to serve
process in an other manner permitted by the law or to obtain execution of
judgment in any other jurisdiction. The parties further agree, to the extent
permitted by law, that final and unappealable judgment against any of them in
any action or proceeding contemplated above shall be conclusive and may be
enforced in any other jurisdiction within or outside the United States by suit
on the judgment, a certified or exemplified copy of which shall be conclusive
evidence of the fact and the amount of indebtedness. The parties agree to waive
any and all rights that they may have to a jury trial with respect to disputes
arising out of this Agreement.
Section 15. Benefits of this Agreement. Nothing in this
Warrant Certificate shall be construed to give to any Person other than the
Company and the Warrantholder any legal or equitable right, remedy or claim
under this Warrant Certificate, and this Warrant Certificate shall be for the
sole and exclusive benefit of the Company and the Warrantholder.
<PAGE> 15
15
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed, as of this ___ day of ___________, 1998.
EVENFLO & SPALDING HOLDINGS CORPORATION
By: _________________________
Name:
Title:
Countersigned:
______________________, as Warrant Agent
By: _________________________
Name:
Title:
<PAGE> 16
16
ELECTION TO EXERCISE
(To be executed upon exercise of Warrants)
To EVENFLO & SPALDING HOLDINGS CORPORATION:
The undersigned hereby irrevocably elects to exercise the
right represented by the within Warrant Certificate for, and to acquire
thereunder, _____ Warrant Shares, as provided for therein, and tenders herewith
[payment of] [pursuant to a recapitalization exchange, of securities with a
value equal to] the $________ Exercise Price in full in the form of [COMPLETE
WHERE APPLICABLE]:
[ ] cash or a certified or official bank check in the
amount of $_______ ; and/or
[ ] $____ Stated Value of Variable Rate Preferred Stock
(as to which $____ of accrued dividends are unpaid),
of which $____ Stated Value and the $___ of accrued
and unpaid dividends should be applied toward the
payment of such Warrant Shares; and/or
[ ] securities of the Company having an aggregate value
equal to $________ (which may be the aggregate fair
market value of Warrants determined by comparing the
Exercise Price for such Warrant to the value of the
Common Stock issuable upon such exercise); and/or
[ ] exchange of _____ Warrants for ____ Warrant Shares
(such Warrant Shares have an aggregate value equal to
the excess of (x) the aggregate value of the ____
Warrant Shares to which the Warrants hereby exercised
relate (based on the determination of the Closing
Price pursuant to the Warrant Certificate) over (y)
the aggregate Exercise Price of the ___ Warrants
exercised hereby);
For a total Exercise Price of $_________.
If the value of the shares of the Company securities exchanged herewith
exceeds the value of the Exercise Price applied to such delivery, then the
Company shall reissue certificates representing such securities in the amounts
necessary to preserve the value of such securities not applied to the exercise
of the Warrants pursuant to this Election to Exercise.
<PAGE> 17
17
Please issue a certificate or certificates for such Warrant Shares in the name
of, and pay any cash for any Fractional Warrant Shares to (please print name,
address and social security or other identifying number)*:
Name:
--------------------------
Address:
-----------------------------------------------------------------------
- --------------------------------------------------------------------------------
Soc. Sec. #:
----------------------
AND, if said number of Warrant Shares shall not be all the shares purchasable
under the within Warrant Certificate, a new Warrant Certificate is to be issued
in the name of the undersigned for the balance remaining of the Warrant Shares
purchasable thereunder rounded up to the next higher whole number of Warrant
Shares.
Signature:**
------------------------------------
- -----------
* The Warrant Certificate contains restrictions on the sale and other
transfer of the Warrants evidenced by such Warrant Certificate.
** The above signature should correspond exactly with the name on the face
of this Warrant Certificate or with the name of the assignee appearing
in the assignment form below.
<PAGE> 18
18
ASSIGNMENT FORM
(To be signed only upon assignment of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Name and Address of Assignee must be Printed or Typewritten)
Warrants to purchase ____ Warrant Shares of the Company, evidenced by the within
Warrant Certificate hereby irrevocably constituting and appointing
________________ Attorney to transfer said Warrants on the books of the Company,
with full power of substitution in the premises.
Dated: _____________, ____
------------------------------------
Signature of Registered Holder*
------------------------------------
Signature Guaranteed: Signature of Guarantor
*The above signature should correspond exactly with the name on the face of this
Warrant Certificate.
<PAGE> 1
EXHIBIT 4.5
STOCKHOLDERS' AGREEMENT
STOCKHOLDERS' AGREEMENT dated as of August 20, 1998 among
Evenflo Company, Inc., a Delaware corporation (the "Company"), KKR 1996 Fund
L.P., a Delaware limited partnership (the "KKR Fund") and Lisco, Inc. ("Lisco")
RECITALS
WHEREAS, pursuant to a Stock Purchase Agreement dated as of
July 30, 1998 between the KKR Fund and Lisco (the "Stock Purchase Agreement"),
the KKR Fund will purchase shares of Common Stock (as defined herein);
WHEREAS, immediately following the consummation of the
transactions contemplated by the Stock Purchase Agreement, the KKR Fund and
Lisco will own approximately 51% and 49% of the issued and outstanding Common
Stock, respectively; and
WHEREAS, the Company, the KKR Fund and Lisco wish to provide
for certain matters relating to the respective holdings by KKR Fund and Lisco of
Common Stock;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties hereto agree as follows:
ARTICLE I. INTRODUCTORY MATTERS
I.1. Defined Terms. In addition to the terms defined elsewhere
herein, the following terms have the following meanings when used herein with
initial capital letters:
"Affiliate" shall have the meaning given to that term in Rule
405 promulgated under the Securities Act and shall include members of a
Person's immediate family or trusts for the benefit of members of the
immediate family of such Person; provided that officers, directors and
employees of the Company will not be deemed to be Affiliates of a
stockholder of the Company for purposes hereof solely by reason of
being officers, directors or employees of the Company.
"Agreement" means this Agreement, as the same may be amended,
supplemented or otherwise modified from time to time in accordance with
the terms hereof.
"Assumption Agreement" means a writing reasonably satisfactory
in form and substance to the KKR Fund whereby a Permitted Transferee of
shares of Common Stock becomes a party to, and agrees to be bound to
the same extent as its transferor, by the terms of this Agreement.
"Board" means the Board of Directors of the Company.
"Business Day" means a day other than a Saturday, Sunday,
federal or New York State holiday or other day on which commercial
banks in New York City are authorized or required by law to close.
<PAGE> 2
2
"Common Stock" means the shares of Class A Common Stock, $1.00
par value per share, of the Company and any stock into which such
common stock may thereafter be converted or exchanged.
"New Common Stock" means any Common Stock issued by the
Company for cash. New Common Stock shall not include (i) Common Stock
issuable upon exercise or conversion of securities convertible or
exchangeable for Common Stock; (ii) Common Stock or any options,
warrants or rights offered to the public generally pursuant to a
registration statement under the Securities Act; (iii) Common Stock
issuable upon the exercise of any options, warrants or rights or
exchanged for any other equity securities of the Company; (iv) any
shares of the Company's Common Stock issued to the officers, directors
or employees of the Company; (v) Common Stock, or Common Stock issuable
upon options, rights or warrants or securities convertible or
exchangeable for Common Stock, which are issued in connection with any
acquisition, merger, purchase of assets; or (vi) shares of the
Company's Common Stock issued in connection with any stock split, stock
dividend or recapitalization of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder, as the
same may be amended from time to time.
"Other Registration Rights Agreement" means any written
agreement to which the Company and any holder of shares of Common Stock
are parties that provides for the registration of shares of Common
Stock of such holder by the Company.
"Permitted Transferee" means any Person to whom shares of
Common Stock are Transferred in a Transfer in accordance with Section
2.2 or otherwise not in violation of this Agreement and who is required
to, and does, enter into an Assumption Agreement, and includes any
Person to whom a Permitted Transferee (or a Permitted Transferee of a
Permitted Transferee) so further Transfers shares of Common Stock and
who is required to, and does, become bound by the terms of this
Agreement.
"Person" means any individual, corporation, limited liability
company, partnership, trust, joint stock company, business trust,
unincorporated association, joint venture, governmental authority or
other legal entity of any nature whatsoever.
"Public Offering" means the sale of shares of Common Stock to
the public pursuant to an effective registration statement (other than
a registration statement on Form S-4 or S-8 or any similar or successor
form) filed under the Securities Act.
"Registrable Securities" means (i) Common Stock held by Lisco
on the date hereof and (ii) Common Stock acquired by the KKR Fund from
the Company or any affiliate of the Company (including, without
limitation, Lisco) whether by purchase or otherwise and (iii), in the
case of (i) and (ii) above, any Common Stock which may be issued or
distributed in respect thereof by way of stock dividend or stock split
or other distribution, recapitalization or reclassification. As to any
particular Registrable Securities, once issued, such Registrable
Securities shall cease to be Registrable Securities when (a) a
<PAGE> 3
3
registration statement with respect to the sale by the holder of such
securities shall have become effective under the Securities Act and
such securities shall have been disposed of in accordance with such
registration statement, (b) such securities shall have been distributed
to the public pursuant to Rule 144 (or any successor provision) under
the Securities Act, (c) such securities shall have been otherwise
transferred, new certificates for such securities not bearing a legend
restricting further transfer shall have been delivered by the Company
and subsequent disposition of such securities shall not require
registration or qualification of such securities under the Securities
Act or any state securities or blue sky law then in force, or (d) such
securities shall have ceased to be outstanding.
"Registration Expenses" means any and all expenses incident to
the performance by the Company of its obligations under Sections 3.1
and 3.2, including without limitation (i) all SEC, stock exchange, or
National Association of Securities Dealers, Inc. (the "NASD")
registration and filing fees (including, if applicable, the fees and
expenses of any "qualified independent underwriter," as such term is
defined in Rule 2720 of the NASD, and of its counsel), (ii) all fees
and expenses of complying with securities or blue sky laws (including
fees and disbursements of counsel for the underwriters in connection
with blue sky qualifications of the Registrable Securities), (iii) all
printing, messenger and delivery expenses, (iv) all fees and expenses
incurred in connection with the listing of the Registrable Securities
on any securities exchange and all rating agency fees, (v) the fees and
disbursements of counsel for the Company and of its independent public
accountants, including the expenses of any special audits and/or "cold
comfort" letters required by or incident to such performance and
compliance, (vi) any fees and disbursements of underwriters customarily
paid by the issuers or sellers of securities, including liability
insurance if the Company so desires or if the underwriters so require,
and the reasonable fees and expenses of any special experts retained in
connection with the requested registration, but excluding underwriting
discounts and commissions and transfer taxes, if any, (vii) the
reasonable out-of-pocket expenses of not more than one law firm
incurred by Lisco and Lisco's Permitted Transferees in connection with
the registration, and (viii) the costs and expenses of the Company
relating to analyst and investor presentations or any "road show"
undertaken in connection with the registration and/or marketing of the
Registrable Securities; provided that nothing in this clause (viii)
shall obligate the Company to engage or participate in any such
presentations or road show.
"Registration Rights Holders" means, collectively, Lisco and
Lisco's Permitted Transferees.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder, as the same may
be amended from time to time.
"Transfer" means a transfer, sale, assignment, pledge,
hypothecation or other disposition, whether directly or indirectly
pursuant to the creation of a derivative security, the grant of an
option or other right, the imposition of a restriction on disposition
or voting or transfer by operation of law.
<PAGE> 4
4
I.2. Construction. (a) The language used in this Agreement
will be deemed to be the language chosen by the parties to express their mutual
intent, and no rule of strict construction will be applied against any party.
Unless the context otherwise requires: (i) "or" is disjunctive but not
exclusive, (ii) words in the singular include the plural, and in the plural
include the singular, and (iii) the words "hereof", "herein", and "hereunder"
and words of similar import when used in this Agreement refer to this Agreement
as a whole and not to any particular provision of this Agreement, and Section
references are to this Agreement unless otherwise specified.
ARTICLE II. TRANSFERS
II.1. Limitations on Transfer by Lisco. (a) Neither Lisco nor
any Permitted Transferee may Transfer any shares of Common Stock other than (i)
in connection with a Public Offering effected in accordance with Section 3.1 or
3.2, (ii) after a Public Offering, in a bona fide sale to the public pursuant to
Rule 144 (or any successor provision) under the Securities Act or (iii) in
accordance with Sections 2.2, 2.3 or 2.4.
(b) In the event of any purported Transfer by Lisco or a
Permitted Transferee of any shares of Common Stock in violation of the
provisions of this Agreement, such purported Transfer will be void and of no
effect and the Company will not give effect to such Transfer.
(c) Each certificate representing shares of Common Stock held
by Lisco or any Permitted Transferee will bear a legend substantially to the
following effect (with such additions thereto or changes therein as the Company
may be advised by counsel are required by law or necessary to give full effect
to this Agreement, the "Legend"):
"THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO A STOCKHOLDERS' AGREEMENT AMONG EVENFLO COMPANY, INC., KKR 1996 FUND
L.P. AND LISCO, INC., A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF
THE COMPANY. NO TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR
OTHER DISPOSITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY
BE MADE EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF SUCH STOCKHOLDERS'
AGREEMENT. THE HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE OF THIS
CERTIFICATE, AGREES TO BE BOUND BY ALL OF THE PROVISIONS OF SUCH
STOCKHOLDERS' AGREEMENT."
"THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED
UNDER THAT ACT OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE."
The Legend will be removed by the Company by the delivery of substitute
certificates without such Legend in the event of (i) a Transfer permitted by
this Agreement and in which the Transferee is not required to enter into an
Assumption Agreement or (ii) the termination of Article II pursuant to the terms
hereof, provided, however, that the second paragraph of the Legend will only be
removed if at such time it is no longer required for purposes of applicable
<PAGE> 5
5
securities laws. If any shares of Common Stock cease to be Registrable
Securities under clause (a) or (b) of the second sentence of the definition
thereof, the Company shall, upon the written request of the holder thereof,
issue to such holder a new certificate or certificates evidencing such shares,
without the second paragraph of the Legend.
II.2. Transfers to Permitted Transferees. Lisco may Transfer
any or all of the shares of Common Stock held by it to any Person who duly
executes and delivers an Assumption Agreement; provided that in connection
therewith the Company, if it so requests promptly following its receipt of such
Assumption Agreement (and, in such event, such Assumption Agreement shall not be
effective unless and until this proviso has been satisfied), has been furnished
with an opinion in form and substance reasonably satisfactory to the Company of
counsel reasonably satisfactory to the Company that such Transfer is exempt from
or not subject to the provisions of Section 5 of the Securities Act and any
other applicable securities laws; and, provided, further, that no Transfer under
this Section 2.2 shall be permitted if such Transfer would require the Company
to register a class of equity securities under Section 12 of the Exchange Act
under circumstances where the Company does not then have securities of any class
registered under Section 12 of the Exchange Act and such transfer would cause
such registration to be required.
II.3. Tag-Along Rights. (a) So long as this Agreement remains
in effect, with respect to any proposed Transfer by the KKR Fund or any of its
Affiliates (collectively, the "Selling Partnership") of shares of Common Stock
to any Person not an Affiliate of the KKR Fund, other than (i) in a Public
Offering, (ii) pursuant to a bona fide sale to the public pursuant to Rule 144
under the Securities Act, (iii) pursuant to a distribution to the limited
partners of the KKR Fund or (iv) pursuant to any agreement or plan of merger or
combination, including any tender or exchange offer in respect thereof, that is
approved by the Board and that provides for equal treatment of all outstanding
shares of Common Stock (any such transaction, a "Proposed Sale"), Lisco and each
Permitted Transferee will have the right to require the proposed Transferee or
acquiring Person to purchase from Lisco and each Permitted Transferee who
exercises its rights under this Section 2.3(a) in accordance with this Section
2.3 (collectively, the "Tagging Stockholders") a number of shares of Common
Stock up to the product (rounded up to the nearest whole number) of (i) the
quotient determined by dividing (A) the aggregate number of shares of Common
Stock owned by the Tagging Stockholders by (B) the aggregate number of shares of
Common Stock owned by the KKR Fund and its Affiliates and the Tagging
Stockholders and (ii) the total number of shares of Common Stock proposed to be
directly or indirectly Transferred to the transferee or acquiring Person in the
Proposed Sale (a "Proposed Transferee"), at the same price per share of Common
Stock and upon the same terms and conditions (including, without limitation,
time of payment, form of consideration and adjustments to purchase price) as the
Selling Partnership; provided that in order to be entitled to exercise its right
to sell shares of Common Stock to the Proposed Transferee pursuant to this
Section 2.3, each Tagging Stockholder (x) shall agree to the same covenants as
the Selling Partnership agrees to in connection with the Proposed Sale and (y)
shall make such representations and warranties as the Selling Partnership makes.
Each Tagging Stockholder will be responsible for funding its proportionate share
of any escrow arrangements in connection with the Proposed Sale and for its
proportionate share of any withdrawals therefrom, including without limitation
any such withdrawals that are made with respect to claims arising out of
agreements, covenants, representations, warranties or other provisions relating
the Proposed Sale that were not made by the Tagging Stockholder. Each Tagging
Stockholder will be responsible for its proportionate
<PAGE> 6
6
share of the fees, commissions and other out-of-pocket expenses (collectively,
"Costs") of the Proposed Sale to the extent not paid or reimbursed by the
Company, the Proposed Transferee or another Person (other than the Selling
Partnership). The Selling Partnership shall be entitled to estimate the Tagging
Stockholders' proportionate share of such Costs and to withhold such amounts
from payments to be made to the Tagging Stockholder at the time of closing of
such Proposed Sale; provided that (i) such estimate shall not preclude the
Selling Partnership from recovering additional amounts from the Tagging
Stockholder in respect of such Tagging Stockholder's proportionate share of such
Costs and (ii) the Selling Partnership shall reimburse the Tagging Stockholder
to the extent actual amounts are ultimately less than the estimated amounts or
any such amounts are paid by the Company, the Proposed Transferee or another
Person (other than the Selling Partnership).
(b) The Selling Partnership will give notice to Lisco of each
Proposed Sale not more than ten days after the execution of the definitive
agreement relating to the Proposed Sale, setting forth the number of shares of
Common Stock proposed to be so Transferred, the name and address of the Proposed
Transferee, the proposed amount and form of consideration (and if such
consideration consists in part or in whole of property other than cash, the
Selling Partnership will provide such information, to the extent reasonably
available to the Selling Partnership, relating to such non-cash consideration as
Lisco may reasonably request in order to evaluate such non-cash consideration)
and other terms and conditions of payment offered by the Proposed Transferee.
The Selling Partnership will deliver or cause to be delivered to each Tagging
Stockholder copies of all transaction documents relating to the Proposed Sale
promptly as the same become available. The tag-along rights provided by this
Section 2.3 must be exercised by Lisco within seven days following receipt of
the notice required by the preceding sentence by delivery of a written notice to
the Selling Partnership indicating its desire to exercise its rights and
specifying the number of shares of Common Stock it desires to sell (the
"Tag-Along Notice"). The Tagging Stockholders will be entitled under this
Section 2.3 to Transfer to the Proposed Transferee the number of shares of
Common Stock calculated in accordance with Section 2.3(a).
(c) If any Tagging Stockholder exercises its rights under
Section 2.3(a), the closing of the purchase of the Common Stock with respect to
which such rights have been exercised will take place concurrently with the
closing of the sale of the Selling Partnership's Common Stock to the Proposed
Transferee.
II.4. Drag-Along Rights. (a) So long as this Agreement remains
in effect, if the KKR Fund or any of its Affiliates (collectively, the "Dragging
Partnership") receive an offer from a Person other than an Affiliate of the KKR
Fund (a "Third Party") to purchase (in a transaction of a type referred to in
the first sentence of Section 2.3(a)) at least a majority of the shares of
Common Stock then outstanding and such offer is accepted by the Dragging
Partnership, then Lisco and each Permitted Transferee (collectively, the
"Drag-Along Stockholders") hereby agrees that, if requested by the Dragging
Partnership, it will Transfer to such Third Party, subject to Section 2.4(b), on
the terms of the offer so accepted by the Dragging Partnership, including,
without limitation, time of payment, form of consideration and adjustments to
purchase price, the number of shares of Common Stock equal to the number of
shares of Common Stock owned by it multiplied by the percentage of the then
outstanding shares of Common Stock to which the Third Party offer is applicable.
(b) The Dragging Partnership will give notice (the "Drag-Along
Notice") to the
<PAGE> 7
7
Drag-Along Stockholders of any proposed Transfer giving rise to the rights of
the Dragging Partnership set forth in Section 2.4(a) (a "Section 2.4 Transfer")
within 10 days following the Dragging Partnership's acceptance of the offer
referred to in Section 2.4(a) and, in any event, no later than 10 days prior to
the proposed closing date for such Section 2.4 Transfer. The Drag-Along Notice
will set forth the number of shares of Common Stock proposed to be so
Transferred, the name of the proposed Transferee or acquiring Person, the
proposed amount and form of consideration (and if such consideration consists in
part or in whole of property other than cash, the Dragging Partnership will
provide such information, to the extent reasonably available to the Dragging
Partnership, relating to such non-cash consideration as the Drag-Along
Stockholders together may reasonably request in order to evaluate such non-cash
consideration), the number of shares of Common Stock sought and the other terms
and conditions of the offer. Each Drag-Along Stockholder (x) shall agree to the
same covenants as the Dragging Partnership agrees to in connection with the
Section 2.4 Transfer and (y) shall make such representations and warranties
concerning its title to the shares of Common Stock to be sold in connection with
the Section 2.4 Transfer and its authority to enter into and consummate the
Section 2.4 Transfer as the Dragging Partnership makes, but shall not be
required to make any other representations and warranties. Each Drag-Along
Stockholder will be responsible for funding its proportionate share of any
escrow arrangements in connection with the Section 2.4 Transfer and for its
proportionate share of any withdrawals therefrom, including without limitation
any such withdrawals that are made with respect to claims arising out of
agreements, covenants, representations, warranties or other provisions relating
the Section 2.4 Transfer that were not made by the Drag-Along Stockholder. Each
Drag-Along Stockholder will be responsible for its proportionate share of the
Costs of the Section 2.4 Transfer to the extent not paid or reimbursed by the
Company, the Third Party or another Person (other than the Dragging Partnership.
The Dragging Partnership shall be entitled to estimate the Drag-Along
Stockholders' proportionate share of such Costs and to withhold such amounts
from payments to be made to the Drag-Along Stockholder at the time of closing of
the Section 2.4 Transfer; provided that (i) such estimate shall not preclude the
Dragging Partnership from recovering additional amounts from the Drag-Along
Stockholder in respect of such Drag-Along Stockholder's proportionate share of
such Costs and (ii) the Dragging Partnership shall reimburse the Drag-Along
Stockholder to the extent actual amounts are ultimately less than the estimated
amounts or any such amounts are paid by the Company, the Third Party or another
Person (other than the Dragging Partnership). If the Section 2.4 Transfer is not
consummated within 180 days from the date of the Drag-Along Notice, the Dragging
Partnership must deliver another Drag-Along Notice in order to exercise its
rights under this Section 2.4 with respect to such Section 2.4 Transfer.
II.5. Custody Agreement and Power of Attorney. Upon delivering
a Tag Along Notice or receiving a Drag-Along Notice, Lisco and each Permitted
Transferee will, if requested by the Selling Partnership or the Dragging
Partnership, as the case may be, execute and deliver a custody agreement and
power of attorney in form and substance satisfactory to the Selling Partnership
or the Dragging Partnership, as the case may be, with respect to the shares of
Common Stock which are to be sold by Lisco and Permitted Transferees pursuant
hereto (a "Custody Agreement and Power of Attorney"). The Custody Agreement and
Power of Attorney will provide, among other things, that Lisco and each
Permitted Transferee will deliver to and deposit in custody with the custodian
and attorney-in-fact named therein a certificate or certificates representing
such shares of Common Stock (duly endorsed in blank by the registered owner or
owners thereof) and irrevocably appoint said custodian and attorney-in-fact as
its agent and attorney-in-fact with full power and authority to act under the
Custody Agreement and Power
<PAGE> 8
8
of Attorney on its behalf with respect to the matters specified in Section 2.3
or Section 2.4, as the case may be.
ARTICLE III. REGISTRATION RIGHTS
III.1. Piggyback Rights. (a) Piggyback Rights. If the Company
at any time after the date hereof proposes to register Common Stock under the
Securities Act (other than a registration on Form S-4 or S-8, or any successor
or similar forms), whether or not for sale for its own account, it will, at each
such time, give prompt written notice to the Registration Rights Holders of its
intention to do so and of the Registration Rights Holders' rights under this
Section 3.1. Upon the written request of any Registration Rights Holder made
within 14 days after the receipt of any such notice (which request shall specify
the number of Registrable Securities intended to be disposed of by such
Registration Rights Holder), the Company will use its reasonable efforts to
effect the registration under the Securities Act of all Registrable Securities
which the Company has been so requested to register by the Registration Rights
Holders; provided that (i) if, at any time after giving written notice of its
intention to register any securities and prior to the effective date of the
registration statement filed in connection with such registration, the Company
or any other holder of securities that initiated such registration (an
"Initiating Holder") shall determine for any reason not to proceed with the
proposed registration of the securities to be sold by it, the Company or such
Initiating Holder may, at its election, give written notice of such
determination to the Registration Rights Holders and, thereupon, the Company
shall be relieved of its obligation to register any Registrable Securities in
connection with such registration (but not from its obligation to pay the
Registration Expenses incurred in connection therewith), and (ii) if such
registration involves an underwritten offering, the Registration Rights Holders
requesting to be included in the registration must sell their Registrable
Securities to the underwriters selected by the Company or the Initiating
Holders, as the case may be, on the same terms and conditions as apply to the
Company or the Initiating Holders, as the case may be, with, in the case of a
combined primary and secondary offering, such differences, including any with
respect to indemnification and liability insurance, as may be customary or
appropriate in combined primary and secondary offerings. If a registration
requested pursuant to this Section 3.1(a) involves an underwritten public
offering, any Registration Rights Holder requesting to be included in such
registration may elect, in writing prior to the effective date of the
registration statement filed in connection with such registration, not to
register all or any portion of such securities in connection with such
registration.
(b) Expenses. The Company will pay all Registration Expenses
in connection with each registration of Registrable Securities requested
pursuant to this Section 3.1.
(c) Priority in Piggyback Registrations. If a registration
pursuant to this Section 3.1 involves an underwritten offering and the managing
underwriter advises the Company in writing that, in its opinion, the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering, so as to be reasonably likely to have an
adverse effect on the price, timing or distribution of the securities offered in
such offering, then the Company will include in such registration (i) first,
100% of the securities proposed to be sold by the Company and (ii) second, to
the extent of the number of securities requested to be included in such
registration which, in the opinion of such managing underwriter, can be sold
without having the adverse effect referred to above, which number of securities
shall be allocated pro rata
<PAGE> 9
9
among all such requesting holders of Common Stock on the basis of the relative
number of shares of Common Stock then held by each such holder of Common Stock.
In the event that (i) the Company did not initiate the registration of
securities intended to be registered for sale for its own account and (ii) the
number of Registrable Securities and shares of Common Stock of other holders
entitled to registration rights with respect to such Common Stock, in each case
requested to be included in such registration, is less than the number which, in
the opinion of the managing underwriter, can be sold, the Company may include in
such registration the securities it proposes to sell up to the number of
securities that, in the opinion of the underwriter, can be sold.
III.2. Demand Registration. (a) Demand Registration. At any
time after the 180th day following the initial Public Offering, upon the written
request of Lisco or its Affiliates (in such capacity, a "Demand Party")
requesting that the Company effect the registration under the Securities Act of
all or part of such Demand Party's Registrable Securities and specifying the
amount and intended method of disposition thereof, the Company will promptly
give written notice of such requested registration to the other holders of
Registrable Securities and other holders of securities entitled to notice of
such registration and thereupon will, as expeditiously as possible, file a
registration statement to effect the registration under the Securities Act of:
(i) such Registrable Securities which the Company has been so
requested to register by the Registration Rights Holders; and
(ii) the securities of other holders entitled to registration
rights pursuant to an Other Registration Rights Agreement which the
Company has been requested to register by written request given to the
Company within 15 days after the giving of such written notice by the
Company (which request shall specify the amount and intended method of
disposition of such securities);
all to the extent necessary to permit the disposition (in accordance with the
intended method thereof as aforesaid) of the Registrable Securities and such
other securities to be so registered; provided that the Company shall not be
required to effect the registration of Registrable Securities at the request of
a Demand Party under this Section 3.2(a) on more than two occasions, and
provided further, that the Company shall not be obligated to file a registration
statement relating to any registration request under this Section 3.2(a):
(x) within a period of 180 days (or such lesser period as the
managing underwriters in an underwritten offering may permit) after the
effective date of any other registration statement relating to any
registration request under this Section 3.2(a) or relating to any
registration effected under Section 3.1;
(y) if with respect thereto the managing underwriter, the SEC,
the Securities Act or the rules and regulations thereunder, or the form
on which the registration statement is to be filed, would require the
conduct of an audit other than the regular audit conducted by the
Company at the end of its fiscal year, in which case the filing may be
delayed until the completion of such audit (and the Company shall, upon
request of the Demand Parties, use its reasonable efforts to cause such
audit to be completed expeditiously and without unreasonable delay); or
(z) if the Company is in possession of material non-public
information and the
<PAGE> 10
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Board determines in good faith that disclosure of such information
would not be in the best interests of the Company and its stockholders,
in which case the filing of the registration statement may be delayed
until the earlier of the second business day after such conditions
shall have ceased to exist and the 180th day after receipt by the
Company of the written request from a Demand Party to register
Registrable Securities under this Section 3.2(a).
(b) Expenses. The Company will pay all Registration Expenses
in connection with each registration of Registrable Securities requested
pursuant to this Section 3.2.
(c) Effective Registration Statement. A registration requested
pursuant to this Article III will not be deemed to have been effected unless it
has become effective; provided that, if, within 180 days after it has become
effective, the offering of Registrable Securities pursuant to such registration
is interfered with by any stop order, injunction or other order or requirement
of the SEC or other governmental agency or court, then such registration will be
deemed not to have been effected.
(d) Selection of Underwriters. If a requested registration
pursuant to this Section 3.2 involves an underwritten offering, the Company
shall have the right to select the investment banker or bankers and managers to
administer the offering, including the lead managing underwriter.
(e) Priority in Demand Registrations. If a requested
registration pursuant to this Section 3.2 involves an underwritten offering and
the managing underwriter advises the Company in writing that, in its opinion,
the number of securities requested to be included in such registration exceeds
the number which can be sold in such offering, so as to be reasonably likely to
have an adverse effect on the price, timing or distribution of the securities
offered in such offering, then the Company will include in such registration the
number of shares of Common Stock requested to be included in such registration
which, in the opinion of such managing underwriter, can be sold without having
the adverse effect referred to above, which number shall be allocated pro rata
among all such requesting holders of Registrable Securities and holders of
Common Stock who have piggyback registration rights pursuant to an Other
Registration Rights Agreement on the basis of the relative number of shares of
Common Stock then held by each such holder. In the event that the number of
Registrable Securities and shares of Common Stock of other holders, in each case
entitled to registration rights with respect to such Common Stock requested to
be included in such registration is less than the number which, in the opinion
of the managing underwriter, can be sold, the Company may include in such
registration securities it proposes to sell for its own account up to the number
of securities that, in the opinion of the underwriter, can be sold.
III.3. Registration Procedures. If and whenever the Company is
required to file a registration statement with respect to, or to use its
reasonable efforts to effect or cause the registration of, any Registrable
Securities under the Securities Act as provided in this Agreement the Company
will as expeditiously as possible:
(a) prepare and, in any event within 120 days after the end of
the period within which a request for registration may be given to the Company
pursuant to Section 3.2, file with the SEC a registration statement on an
appropriate form with respect to such
<PAGE> 11
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Registrable Securities and use its reasonable efforts to cause such registration
statement to become effective; provided, however, that the Company may
discontinue any registration of securities as to which it is the Initiating
Party at any time prior to the effective date of the registration statement
relating thereto (and, in such event, the Company shall pay the Registration
Expenses incurred in connection therewith); provided, further, that before
filing a registration statement or prospectus, or any amendments or supplements
thereto, the Company will furnish to counsel for the sellers of Registrable
Securities covered by such registration statement copies of all documents
proposed to be filed, which documents will be subject to the review of such
counsel;
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
a period not in excess of 270 days and to comply with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the seller or sellers
thereof set forth in such registration statement; provided that before filing a
registration statement or prospectus, or any amendments or supplements thereto,
the Company will furnish to counsel for the sellers of Registrable Securities
covered by such registration statement copies of all documents proposed to be
filed, which documents will be subject to the review of such counsel;
(c) furnish to each seller of such Registrable Securities such
number of copies of such registration statement and of each amendment and
supplement thereto (in each case including all exhibits filed therewith,
including any documents incorporated by reference), such number of copies of the
prospectus included in such registration statement (including each preliminary
prospectus and summary prospectus), in conformity with the requirements of the
Securities Act, and such other documents as such seller may reasonably request
in order to facilitate the disposition of the Registrable Securities by such
seller;
(d) use its reasonable efforts to register or qualify such
Registrable Securities covered by such registration in such jurisdictions as
each seller shall reasonably request, and do any and all other acts and things
which may be reasonably necessary or advisable to enable such seller to
consummate the disposition in such jurisdictions of the Registrable Securities
owned by such seller, except that the Company shall not for any such purpose be
required to qualify generally to do business as a foreign corporation in any
jurisdiction where, but for the requirements of this subsection (d), it would
not be obligated to be so qualified, to subject itself to taxation in any such
jurisdiction or to consent to general service of process in any such
jurisdiction;
(e) use its reasonable efforts to cause such Registrable
Securities covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
to enable the seller or sellers thereof to consummate the disposition of such
Registrable Securities;
(f) notify each seller of any such Registrable Securities
covered by such registration statement, at any time when a prospectus relating
thereto is required to be delivered under the Securities Act within the
appropriate period mentioned in Section 3.3(b), of the Company's becoming aware
that the prospectus included in such registration statement, as
<PAGE> 12
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then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing, and at the request of any such seller, prepare and furnish to such
seller a reasonable number of copies of an amended or supplemental prospectus as
may be necessary so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus shall not include an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in the light of the
circumstances then existing;
(g) otherwise use its reasonable efforts to comply with all
applicable rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable (but not more than 18 months) after
the effective date of the registration statement, an earnings statement which
shall satisfy the provisions of Section 11(a) of the Securities Act;
(h) use its reasonable efforts to list such Registrable
Securities on any securities exchange on which the Common Stock is then listed
if such Registrable Securities are not already so listed and if such listing is
then permitted under the rules of such exchange and use its reasonable efforts
to provide a transfer agent and registrar for such Registrable Securities
covered by such registration statement not later than the effective date of such
registration statement;
(i) enter into such customary agreements (including an
underwriting agreement in customary form), which may include indemnification
provisions in favor of underwriters and other Persons in addition to, or in
substitution for the indemnification provisions hereof, and take such other
actions as sellers of a majority of shares of such Registrable Securities or the
underwriters, if any, reasonably request in order to expedite or facilitate the
disposition of such Registrable Securities;
(j) obtain a "cold comfort" letter or letters from the
Company's independent public accounts in customary form and covering matters of
the type customarily covered by "cold comfort" letters as the seller or sellers
of a majority of shares of such Registrable Securities shall reasonably request;
(k) make available for inspection by any seller of such
Registrable Securities covered by such registration statement, by any
underwriter participating in any disposition to be effected pursuant to such
registration statement and by any attorney, accountant or other agent retained
by any such seller or any such underwriter, all pertinent financial and other
records, pertinent corporate documents and properties of the Company, and cause
all of the Company's officers, directors and employees to supply all information
reasonably requested by any such seller, underwriter, attorney, accountant or
agent in connection with such registration statement;
(l) notify counsel for the holders of Registrable Securities
included in such registration statement and the managing underwriter or agent,
immediately, and confirm the notice in writing (i) when the registration
statement, or any post-effective amendment to the registration statement, shall
have become effective, or any supplement to the prospectus or any amendment
prospectus shall have been filed, (ii) of the receipt of any comments from the
SEC, (iii) of any request of the SEC to amend the registration statement or
amend or supplement the
<PAGE> 13
13
prospectus or for additional information, and (iv) of the issuance by the SEC of
any stop order suspending the effectiveness of the registration statement or of
any order preventing or suspending the use of any preliminary prospectus, or of
the suspension of the qualification of the registration statement for offering
or sale in any jurisdiction, or of the institution or threatening of any
proceedings for any of such purposes;
(m) make every reasonable effort to prevent the issuance of
any stop order suspending the effectiveness of the registration statement or of
any order preventing or suspending the use of any preliminary prospectus and, if
any such order is issued, to obtain the withdrawal of any such order at the
earliest possible moment;
(n) if requested by the managing underwriter or agent or any
holder of Registrable Securities covered by the registration statement, promptly
incorporate in a prospectus supplement or post-effective amendment such
information as the managing underwriter or agent or such holder reasonably
requests to be included therein, including, with respect to the number of
Registrable Securities being sold by such holder to such underwriter or agent,
the purchase price being paid therefor by such underwriter or agent and with
respect to any other terms of the underwritten offering of the Registrable
Securities to be sold in such offering; and make all required filings of such
prospectus supplement or post-effective amendment as soon as practicable after
being notified of the matters incorporated in such prospectus supplement or
post-effective amendment;
(o) cooperate with the holders of Registrable Securities
covered by the registration statement and the managing underwriter or agent, if
any, to facilitate the timely preparation and delivery of certificates (not
bearing any restrictive legends) representing securities to be sold under the
registration statement, and enable such securities to be in such denominations
and registered in such names as the managing underwriter or agent, if any, or
the Registration Rights Holders may request;
(p) obtain for delivery to the holders of Registrable
Securities being registered and to the underwriter or agent an opinion or
opinions from counsel for the Company in customary form and in form, substance
and scope reasonably satisfactory to such holders, underwriters or agents and
their counsel; and
(q) cooperate with each seller of Registrable Securities and
each underwriter or agent participating in the disposition of such Registrable
Securities and their respective counsel in connection with any filings required
to be made with the NASD.
III.4. Other Registration-Related Matters. (a) The Company may
require any Person that is selling shares of Common Stock in a Public Offering
pursuant to Sections 3.1 or 3.2 to furnish to the Company in writing such
information regarding such Person and pertinent to the disclosure requirements
relating to the registration and the distribution of the Registrable Securities
which are included in such Public Offering as the Company may from time to time
reasonably request in writing.
(b) Each Registration Rights Holder agrees that, upon receipt
of any notice from the Company of the happening of any event of the kind
described in Section 3.3(f), it will forthwith discontinue disposition of
Registrable Securities pursuant to the registration statement
<PAGE> 14
14
covering such Registrable Securities until its receipt of the copies of the
amended or supplemented prospectus contemplated by Section 3.3(f) and, if so
directed by the Company, each Registration Rights Holder will deliver to the
Company (at the Company's expense) all copies, other than permanent file copies
then in their possession, of the prospectus covering such Registrable Securities
current at the time of receipt of such notice. In the event the Company gives
any such notice, the period for which the Company will be required to keep the
registration statement effective will be extended by the number of days during
the period from and including the date of the giving of such notice pursuant to
Section 3.3(f) to and including the date when each seller of Registrable
Securities covered by such registration statement has received the copies of the
supplemented or amended prospectus contemplated by Section 3.3(f).
(c) Each Registration Rights Holder will, in connection with a
Public Offering of the Company's securities, upon the request of the Company or
of the underwriters managing any underwritten offering of the Company's
securities, agree in writing not to effect any sale, disposition or distribution
of Registrable Securities (other than those included in the Public Offering)
without the prior written consent of the managing underwriter for such period of
time commencing 7 days before and ending 180 days (or such earlier date as the
managing underwriter shall agree) after the effective date of such registration.
(d) Upon delivering the notice referred to either in (i) the
second sentence of Section 3.1(a) or (ii) the first sentence in Section 3.2(a),
Lisco and each Permitted Transferee will, if requested by the Company, execute
and deliver a Custody Agreement and Power of Attorney, as described in Section
2.5.
III.5. Indemnification. (a) Indemnification by the Company. In
the event of any registration of any securities of the Company under the
Securities Act pursuant to Section 3.1 or 3.2, the Company hereby indemnifies
and agrees to hold harmless, to the extent permitted by law, the sellers of any
Registrable Securities covered by such registration statement (each a "Holder"),
each Affiliate of such Holder and their respective directors and officers or
general and limited partners (and the directors, officers, employees, affiliates
and controlling Persons of any of the foregoing), each other Person who
participates as an underwriter in the offering or sale of such securities and
each other Person, if any, who controls such Holder or any such underwriter
within the meaning of the Securities Act (collectively, the "Indemnified
Parties"), against any and all losses, claims, damages or liabilities, joint or
several, and expenses to which such Indemnified Party may become subject under
the Securities Act, common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof, whether or
not such Indemnified Party is a party thereto) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of any material fact
contained in any registration statement under which such securities were
registered under the Securities Act, any preliminary, final or summary
prospectus contained therein, or any amendment or supplement thereto, or (ii)
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
the case of a prospectus, in the light of the circumstances when they were made,
and the Company will reimburse such Indemnified Party for any legal or other
expenses reasonably incurred by it in connection with investigating or defending
any such loss, claim, liability, action or proceeding; provided that the Company
will not be liable to any Indemnified Party in any such case to the extent that
any such loss, claim, damage, liability (or action or proceeding in respect
thereof) or expense arises out of or is based upon any untrue statement or
alleged untrue statement or omission or alleged omission made in such
registration
<PAGE> 15
15
statement, in any such preliminary, final or summary prospectus, or any
amendment or supplement thereto in reliance upon and in conformity with written
information with respect to such Indemnified Party furnished to the Company by
such Indemnified Party expressly for use in the preparation thereof. Such
indemnity will remain in full force and effect regardless of any investigation
made by or on behalf of such Holder or any Indemnified Party and will survive
the Transfer of such securities by such Holder.
(b) Indemnification by the Holders and Underwriters. The
Company may require, as a condition to including any Registrable Securities in
any registration statement filed in accordance with Sections 3.1, that the
Company shall have received an undertaking reasonably satisfactory to it from
the Holder of such Registrable Securities or any prospective underwriter to
indemnify and hold harmless (in the same manner and to the same extent as set
forth in Section 3.5(a)) the Company, all other Holders or any prospective
underwriter, as the case may be, and any of their respective Affiliates,
directors, officers and controlling Persons, with respect to any untrue
statement in or omission from such registration statement, any preliminary,
final or summary prospectus contained therein, or any amendment or supplement,
if such untrue statement or omission was made in reliance upon and in conformity
with written information with respect to such Holder or underwriter furnished to
the Company by such Holder or underwriter expressly for use in the preparation
of such registration statement, preliminary, final or summary prospectus or
amendment or supplement, or a document incorporated by reference into any of the
foregoing. Such indemnity will remain in full force and effect regardless of any
investigation made by or on behalf of the Company or any of the Holders, or any
of their respective affiliates, directors, officers or controlling Persons and
will survive the Transfer of such securities by such Holder. In no event shall
the liability of any selling Holder of Registrable Securities hereunder be
greater in amount than the dollar amount of the proceeds actually received by
such Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
(c) Notices of Claims. Etc. Promptly after receipt by an
Indemnified Party hereunder of written notice of the commencement of any action
or proceeding with respect to which a claim for indemnification may be made
pursuant to this Section 3.5, such Indemnified Party will, if a claim in respect
thereof is to be made against an indemnifying party, give written notice to the
latter of the commencement of such action; provided that the failure of the
Indemnified Party to give notice as provided herein will not relieve the
indemnifying party of its obligations under Section 3.5(a) or 3.5(b), except to
the extent that the indemnifying party is actually prejudiced by such failure to
give notice. In case any such action is brought against an Indemnified Party,
unless in such Indemnified Party's reasonable judgment a conflict of interest
between such indemnified and indemnifying parties may exist in respect of such
claim, the indemnifying party will be entitled to participate in and to assume
the defense thereof, jointly with any other indemnifying party similarly
notified to the extent that it may wish, with counsel reasonably satisfactory to
such Indemnified Party, and after notice from the indemnifying party to such
Indemnified Party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such Indemnified Party for any legal or
other expenses subsequently incurred by the latter in connection with the
defense thereof other than reasonable costs of investigation. If, in such
Indemnified Party's reasonable judgment, having common counsel would result in a
conflict of interest between the interests of such indemnified and indemnifying
parties, then such Indemnified Party may employ separate counsel reasonably
acceptable to the indemnifying party to represent or defend such Indemnified
Party in such action, it being understood, however, that the indemnifying party
will not be liable for the reasonable fees and expenses of more than one
<PAGE> 16
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separate firm of attorneys at any time for all such Indemnified Parties (and not
more than one separate firm of local counsel at any time for all such
Indemnified Parties) in such action. No indemnifying party will consent to entry
of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect of such claim or
litigation.
(d) Contribution. If the indemnification provided for
hereunder from the indemnifying party is unavailable to an Indemnified Party
hereunder in respect of any losses, claims, damages, liabilities or expenses
referred to herein, then the indemnifying party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and Indemnified Parties in connection with the actions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative fault of such
indemnifying party and Indemnified Parties shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
such indemnifying party or Indemnified Parties, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action. The amount paid or payable by a party under this Section 3.5(d) as
a result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 3.5(d) were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
(e) Other Indemnification. Indemnification similar to that
specified in this Section 3.5 (with appropriate modifications) shall be given by
the Company and each seller of Registrable Securities with respect to any
required registration or other qualification of securities under any law or with
any governmental entity other than as required by the Securities Act.
(f) Non-Exclusivity. The obligations of the parties under this
Section 3.5 will be in addition to any liability which any party may otherwise
have to any other party.
ARTICLE IV. RIGHT OF FIRST OFFER
IV.1. Right of First Offer. (a) If at any time on or after the
fifth anniversary of the Closing Date Lisco or any Permitted Transferee (Lisco
and each Permitted Transferee being referred to in this Article IV as a "Selling
Holder") desires to Transfer all or any portion of the Common Stock held by it
(other than pursuant to a Transfer to a Permitted Transferee), the Selling
Holder shall deliver to the KKR Fund a written notice (the "First Offer
Notice"), which shall set forth the number of shares of Common Stock (the
"Offered Shares") proposed to be Transferred and the terms on which the Selling
Holder irrevocably offers to Transfer such shares
<PAGE> 17
17
to the KKR Fund. The KKR Fund shall have 30 days from the date the First Offer
Notice is received to determine whether to purchase all of the Offered Shares
for the purchase price and upon the terms specified in the First Offer Notice by
giving written notice (a "Section 4.1 Notice") to the Selling Holder and stating
its acceptance of such offer.
If the KKR Fund shall have agreed to purchase the Offered
Shares, it shall consummate its purchase of the Offered Shares by delivering,
against receipt of certificates or other instruments representing the Common
Stock being purchased, appropriately endorsed by the Selling Holder, the
aggregate purchase price to be paid by it (the "Required Funds") via wire
transfer of immediately available funds to an account specified by the Selling
Holder not less than one Business Day before the closing date, which closing
date will be the later of 30 days after the date of receipt of the Section 4.1
Notice by the Selling Holder and five Business Days after receipt of all
governmental and regulatory consents and approvals and the expiration of all
applicable waiting periods.
The right of first offer granted to the KKR Fund hereunder
shall terminate if unexercised within 30 days after receipt of the First Offer
Notice.
(b) If the Selling Holder shall be permitted to proceed with
the proposed Transfer of the Offered Shares, the Selling Holder shall have 90
days to consummate such proposed Transfer, on terms no more favorable to the
transferee(s) than those terms set forth in the First Offer Notice, before the
provisions of this Section 4.1 shall again be in effect with respect to such
shares of Common Stock. In connection with any Transfer of all or any portion of
the Offered Shares to the KKR Fund, the Selling Holder shall not be required to
make any representations and warranties, other than as to its beneficial
ownership of the Offered Shares and its authority as an entity to consummate
such Transfer, and shall not be required to provide any indemnities in respect
of the Offered Shares or any portion thereof; provided that the inclusion of any
such provisions in connection with a Transfer of the Offered Shares to a
transferee or transferees other than the KKR Fund will not be deemed to be on
terms more favorable to the purchaser(s) than those contained in the First Offer
Notice.
ARTICLE V. BOARD OF DIRECTORS
V.1. Board of Directors. The KKR Fund, Lisco and the Company
agree that at all times after the date hereof, the Board shall consist of not
more than one individual designated by Lisco and reasonably acceptable to the
Company and the KKR Fund (the "Lisco Representative"). Lisco and the KKR Fund
shall take all such actions as may be necessary or appropriate to cause the
Lisco Representative to be elected or re-elected as a member of the board of
directors of the Company and to be maintained in such position at all times;
provided, that such designee may be removed by the board of directors of the
Company and in the case of any such removal, subject to the terms of this
Agreement, Lisco may appoint a new representative who shall fill such vacancy so
long as such appointee is reasonably satisfactory to the Company's board of
directors.
ARTICLE VI. PREEMPTIVE RIGHTS
VI.1. Preemptive Right. Lisco shall have the right to purchase
for cash their Preemptive Right Pro Rata Share of New Common Stock which the
Company may from time to time propose to sell for cash. The "Preemptive Right
Pro Rata Share" shall be, at any given time,
<PAGE> 18
18
that proportion which the number of shares of Common Stock held by Lisco at such
time bears to the total Common Stock issued and outstanding at such time.
VI.2. Preemptive Notices. In the event the Company proposes to
undertake an issuance of New Common Stock for cash, it shall give Lisco written
notice (the "Preemptive Notice") of its intention to sell New Common Stock for
cash, the price, the identity of the purchaser and the principal terms upon
which the Company proposes to sell the same. Lisco shall have 15 Business Days
from the delivery date of any Preemptive Notice to agree to purchase a number of
shares of New Common Stock up to the Preemptive Right Pro Rata Share (in each
case calculated prior to the issuance) for the price and upon the terms
specified in the Preemptive Notice by giving written notice to the Company and
stating therein the number of shares of New Common Stock to be purchased.
VI.3. Failure to Exercise Preemptive Right. In the event Lisco
fails to purchase all of the Preemptive Right Pro Rata Share pursuant to this
Article VI, the Company shall have 180 days after the date of the Preemptive
Notice to consummate the sale of the New Common Stock with respect to which
Lisco's preemptive right was not exercised, at or above the price and upon terms
not more favorable to the purchasers of such New Common Stock than the terms
specified in the initial Preemptive Notice given in connection with such sale.
In the event the Company has not sold the New Common Stock within said 180-day
period, the Company shall not thereafter issue or sell any New Common Stock
without first offering such New Common Stock to Great Star in the manner
provided in this Article VI.
ARTICLE VII. MISCELLANEOUS
VII.1. Additional Securities Subject to Agreement. Lisco and
each Permitted Transferee to whom shares of Common Stock have been Transferred
pursuant to Section 2.2 agrees that any other equity securities of the Company
which it hereafter acquires by means of a stock split, stock dividend,
distribution, exercise of options or warrants or otherwise (other than pursuant
to a Public Offering) will be subject to the provisions of this Agreement to the
same extent as if held on the date hereof.
VII.2. Confidential Information. (a) Lisco and each Permitted
Transferee agrees that it will not use at any time any Confidential Information
(as defined below) of which Lisco or any Permitted Transferee is or becomes
aware except in connection with its investment in the Company.
(b) Lisco and each Permitted Transferee further agrees that
the Confidential Information will be kept strictly confidential and will not be
disclosed by it or its Representatives (as defined below), except (i) as
required by applicable law, regulation or legal process, and only after
compliance with Section 7.2(c) (provided that this clause (i) may not be relied
upon to the extent any action is taken by Lisco or a Permitted Transferee which
requires such disclosure and, but for such action, such disclosure would not
have been required) and (ii) that it may disclose the Confidential Information
or portions thereof to those of its officers, employees, directors and
representatives of its legal, accounting and financial advisors (the Persons to
whom such disclosure is permissible being "Representatives") who need to know
such information in
<PAGE> 19
19
connection with the investment by Lisco and any Permitted Transferees in the
Company; provided that such Representatives (x) are informed of the confidential
and proprietary nature of the Confidential Information and (y) agree to be bound
by and perform the provisions of this Section 7.2. Lisco and each Permitted
Transferee agrees to be responsible for any breach of this Section 7.2 by its
Representatives other than those Representatives who after the date hereof
execute a separate confidentiality agreement with the Company (it being
understood that such responsibility shall be in addition to and not by way of
limitation of any right or remedy the Company may have against such
Representatives with respect to any such breach).
(c) If Lisco or any Permitted Transferee or any Representative
becomes legally compelled (including by deposition, interrogatory, request for
documents, subpoena, civil investigative demand or similar process) to disclose
any of the Confidential Information, Lisco shall provide the Company with prompt
prior written notice of such requirement to disclose such Confidential
Information. Upon receipt of such notice, the Company may seek a protective
order or other appropriate remedy. If such protective order or other remedy is
not obtained, Lisco or such Permitted Transferee or Representative agrees to
disclose only that portion of the Confidential Information which is legally
required to be disclosed and to take all reasonable steps to preserve the
confidentiality of the Confidential Information. In addition, Lisco, the
Permitted Transferees and Representatives will not oppose any action (and will,
if and to the extent requested by the Company, cooperate with, assist and join
with the Company, at the Company's expense and on a reasonable basis, in any
reasonable action) by the Company to obtain an appropriate protective order or
other reliable assurance that confidential treatment will be accorded the
Confidential Information.
(d) "Confidential Information" means oral and written
information concerning the Company and its subsidiaries furnished to Lisco or
any Permitted Transferee by or on behalf of the Company (irrespective of the
form of communication and whether such information is so furnished before, on or
after the date hereof), and all analyses, compilations, data, studies, notes,
interpretations, memoranda or other documents prepared by Lisco or any Permitted
Transferee or any Representative containing or based in whole or in part on any
such furnished information. The term "Confidential Information" does not include
any information which (i) at the time of disclosure or thereafter is generally
available to the public (other than as a result of a disclosure directly or
indirectly by Lisco or any Permitted Transferee or Representative in violation
hereof) or (ii) is or becomes available to Lisco on a nonconfidential basis from
a source other than the Company or its advisors, provided that such source was
not known by Lisco or any Permitted Transferee to be prohibited from disclosing
such information to it by a legal, contractual or fiduciary obligation owed to
the Company.
VII.3. Termination. This Agreement, other than Sections 3.1,
3.2, 5.1 and 7.2, will terminate and be of no further force and effect at such
time as there shall have been one or more Public Offerings such that there
exists a public trading market in 20% or more of the Common Stock. Sections 3.1
and 3.2 will terminate and be of no further force and effect on the earlier of
the second anniversary of the date of the initial Public Offering and the tenth
anniversary of the date hereof. Sections 3.2 and 5.1 will terminate and be of no
further force and effect at such time as Lisco and its Affiliates own less than
20% of the issued and outstanding shares of Common Stock of the Company. Section
7.2 will terminate and be of no further force and effect on the third
anniversary of the first date on which neither Lisco nor any Permitted
Transferee owns any shares of Common Stock.
<PAGE> 20
20
VII.4. Notices. All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be given or made
(and shall be deemed to have been duly given or made upon receipt) by delivery
in person, by courier service, by cable, by telecopy, by telegram, by telex or
registered or certified mail (postage prepaid, return receipt requested) as
follows (or at such other address for a party as shall be specified in a notice
given in accordance with this Section 7.4):
if to the KKR Fund:
c/o Kohlberg Kravis Roberts & Co.
9 West 57th Street, Suite 4200
New York, NY 10019
Attention: Michael T. Tokarz
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Attention: Alan G. Schwartz, Esq.
if to Lisco:
Lisco, Inc.
c/o Spalding & Evenflo Companies, Inc.
425 Meadow Street
Chicopee, Massachusetts 01021-0901
Attention: General Counsel
if to the Company:
Evenflo Company, Inc.
Northwoods Business Center II
707 Crossroads Court
Vandalia, Ohio 45377
Attention: Richard Frank
VII.5. Further Assurances. The parties hereto will sign such
further documents, cause such meetings to be held, resolutions passed, exercise
their votes and do and perform and cause to be done such further acts and things
as may be necessary in order to give full effect to this Agreement and every
provision hereof.
VII.6. Non-Assignability. This Agreement will inure to the
benefit of and be binding on the parties hereto and their respective successors
and permitted assigns. This Agreement may not be assigned by any party hereto
without the express prior written consent of the other parties, and any
attempted assignment, without such consents, will be null and void; provided,
however, that the KKR Fund may assign or delegate its rights hereunder to any
<PAGE> 21
21
Affiliate, and in the event of any such assignment references to the "KKR Fund"
herein shall be deemed to refer to such Affiliate.
VII.7. 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 will 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, will be deemed to constitute a waiver by the party taking
such action of compliance with any covenants or agreements contained herein. The
waiver by any party hereto of a breach of any provision of this Agreement will
not operate or be construed as a waiver of any subsequent breach.
VII.8. Third Parties. This Agreement does not create any
rights, claims or benefits inuring to any Person that is not a party hereto nor
create or establish any third party beneficiary hereto.
VII.9. Governing Law; Waiver of Jury Trial. This Agreement
will be governed by, and construed in accordance with, the laws of the State of
New York. The parties to this Agreement hereby agree to submit to the
jurisdiction of the courts of the State of New York, the courts of the United
States of America for the Southern District of New York, and appellate courts
from any thereof in any action or proceeding arising out of or relating to this
Agreement. The parties hereto irrevocably and unconditionally waive trial by
jury in any legal action or proceeding in relation to this Agreement and for any
counterclaim therein.
VII.10. Specific Performance. Without limiting or waiving in
any respect any rights or remedies of the parties hereto under this Agreement
now or hereinafter existing at law or in equity or by statute, each of the
parties hereto will be entitled to seek specific performance of the obligations
to be performed by the other in accordance with the provisions of this
Agreement.
VII.11. Entire Agreement. This Agreement sets forth the entire
understanding of the parties hereto with respect to the subject matter hereof.
VII.12. Titles and Headings. The section headings contained in
this Agreement are for reference purposes only and will not affect the meaning
or interpretation of this Agreement.
VII.13. Severability. If any provision of this Agreement is
declared by any court of competent jurisdiction to be illegal, void or
unenforceable, all other provisions of this Agreement will not be affected and
will remain in full force and effect.
VII.14. Counterparts. This Agreement may be executed in any
number of counterparts, each of which will be deemed to be an original and all
of which together will be deemed to be one and the same instrument.
<PAGE> 22
22
IN WITNESS WHEREOF, each of the undersigned has executed this
Agreement or caused this Agreement to be executed on its behalf as of the date
first written above.
EVENFLO COMPANY, INC.
By:
-------------------------
KKR 1996 FUND L.P.
By: KKR Associates 1996 L.P., its
general partner
By: KKR 1996 GP LLC, its general
partner
By:
-------------------------
LISCO, INC.
By:
-------------------------
<PAGE> 1
EXHIBIT 4.6
CERTIFICATE OF DESIGNATIONS
OF
VARIABLE RATE CUMULATIVE PREFERRED STOCK
OF
EVENFLO & SPALDING HOLDINGS CORPORATION
-------------------------------
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
-------------------------------
Evenflo & Spalding Holdings Corporation (the "Corporation"), a
corporation organized and existing under the General Corporation Law of the
State of Delaware, does hereby certify that the following resolutions were duly
adopted by the Board of Directors of the Corporation on July 30, 1998 pursuant
to authority conferred upon the Board of Directors by the provisions of the
Restated Certificate of Incorporation of the Corporation which authorizes the
issuance of up to 50,000,000 shares of preferred stock, $.01 par value (the
"Authorized Preferred Stock"):
WHEREAS, the Board of Directors of the Corporation is
authorized, within the limitations and restrictions stated in the Restated
Certificate of Incorporation to fix by resolution or resolutions the designation
of each series of preferred stock and the powers, designations, preferences and
relative participating, optional or other rights, if any, or the qualifications,
limitations or restrictions thereof, including, without limiting the generality
of the foregoing, such provisions as may be desired concerning voting,
redemption, dividends, dissolution or the distribution of assets, conversion or
exchange, and such other subjects or matters as may be fixed by resolution or
resolutions of the Board of Directors under the General Corporation Law of the
State of Delaware; and
WHEREAS, it is the desire of the Board of Directors, pursuant
to its authority as aforesaid, to authorize and fix the terms of a series of
preferred stock and the number of shares constituting such series to be known as
Variable Rate Cumulative Preferred Stock;
NOW, THEREFORE, BE IT RESOLVED, that pursuant to the authority
granted to and vested in the Board of Directors of the Corporation, the Board of
Directors hereby creates a series of Preferred Stock, par value $.01 per share,
of the Corporation and hereby states the designation and number of shares and
fixes the
<PAGE> 2
2
relative rights, powers and preferences thereof, and the limitations thereof, as
follows:
1. Designation and Amount.
The shares of such series shall be designated as "Variable
Rate Cumulative Preferred Stock" and the number of shares constituting the
Variable Rate Cumulative Preferred Stock shall be 1,000,000, such number of
shares may be increased or decreased by resolution of the Board of Directors;
provided that no decrease shall reduce the number of shares of Variable Rate
Cumulative Preferred Stock to a number less than the number of shares then
outstanding. The liquidation preference (the "Liquidation Preference") for such
shares shall be $100 per share plus the amount of any accrued and unpaid
dividends on such shares.
2. Rank.
The Variable Rate Cumulative Preferred Stock shall, with
respect to dividend rights and rights on liquidation, winding-up and
dissolution, rank senior to all classes of common stock of the Corporation and
each other class of Capital Stock (as defined below) or series of preferred
stock. (All equity securities of the Corporation to which the Variable Rate
Cumulative Preferred Stock ranks senior are collectively referred to herein as
"Junior Securities").
3. Dividends.
(a) Beginning on the date of original issuance (the "Original
Issue Date"), the Holders of the outstanding shares of Variable Rate Cumulative
Preferred Stock shall be entitled to receive dividends when, as and if declared
by the Board of Directors, out of funds legally available for the payment of
dividends. All dividends shall be cumulative, whether or not earned or declared,
from the Original Issue Date and shall be payable quarterly in arrears on each
Dividend Payment Date, commencing on the first Dividend Payment Date after the
Original Issue Date at a rate (the "Dividend Rate") applied to the Liquidation
Preference (as adjusted for accrued and unpaid dividends). The Dividend Rate for
the Initial Dividend Period shall be 14.000% per annum and for each subsequent
period ending on September 30 of each year (each a "Subsequent Dividend Period")
shall be the rate determined in accordance with subparagraph (g) below. Each
such dividend shall be payable to Holders of record as they appear on the stock
books of the Corporation on such record dates, not less than ten (10) nor more
than sixty (60) days preceding the Dividend Payment Date, as shall be fixed by
the Board of Directors. Dividends shall cease to accrue in respect of the
Variable Rate Cumulative Preferred Stock on the Redemption Date. The dividend
payable on each share of Variable Rate Cumulative Preferred Stock with respect
to the period from the Original Issue Date to the first Dividend Payment Date
shall be equal to (i) 14% of the Liquidation Preference
<PAGE> 3
3
multiplied by (ii) a fraction equal to (A) the number of days from and including
the Original Issue Date to (but excluding) the Dividend Payment Date divided by
(B) 360.
(b) All dividends paid with respect to shares of the Variable
Rate Cumulative Preferred Stock pursuant to Section 3(a) shall be paid pro rata
to the Holders entitled thereto.
(c) Each fractional share of Variable Rate Cumulative
Preferred Stock outstanding shall be entitled to a ratably proportionate amount
of all dividends accruing with respect to each outstanding share of Variable
Rate Cumulative Preferred Stock pursuant to Section 3(a), and all such dividends
with respect to such outstanding fractional shares shall be cumulative and shall
accrue (whether or not declared), and shall be payable in the same manner and at
such times as provided for in Section 3(a) with respect to dividends on each
outstanding share of Variable Rate Cumulative Preferred Stock. Each fractional
share of Variable Rate Cumulative Preferred Stock outstanding shall also be
entitled to a ratably proportionate amount of any other distributions made with
respect to each outstanding share of Variable Rate Cumulative Preferred Stock,
and all such distributions shall be payable in the same manner and at the same
time as distributions on each outstanding share of Variable Rate Cumulative
Preferred Stock.
(d) Nothing herein contained shall in any way or under any
circumstances be construed or deemed to require the Board of Directors to
declare, or the Corporation to pay or set apart for payment, any dividends on
shares of the Variable Rate Cumulative Preferred Stock at any time.
(e) (i) Holders of shares of the Variable Rate Cumulative
Preferred Stock shall be entitled to receive the dividends provided for
in Section 3(a) hereof in preference to and in priority over any
dividends upon any of the Junior Securities.
(ii) So long as any shares of the Variable Rate Cumulative
Preferred Stock are outstanding and dividends on any Dividend Payment
Date have not been paid, the Corporation shall not: (a) declare, pay or
set apart for payment any dividend on any of the Junior Securities; (b)
make any payment on account of, or set apart for payment money for a
sinking or other similar fund for, the purchase, redemption or other
retirement of, any of the Junior Securities or any warrants, rights,
calls or options exercisable for or convertible into any of the Junior
Securities (other than the repurchase of Junior Securities held by
officers or other employees of the Corporation (if any) pursuant to the
terms of management stockholder agreements); (c) make any distribution
in respect of Junior Securities, either directly or indirectly, and
whether in cash, obligations or shares of the Corporation or other
property (other than distributions or dividends in Junior
<PAGE> 4
4
Securities to the holders of Junior Securities); or (d) permit any
corporation or other entity directly or indirectly controlling,
controlled by, or under common control with the Corporation to purchase
or redeem any of the Junior Securities or any warrants, rights, calls
or options exercisable for or convertible into any of the Junior
Securities.
(f) Subject to the foregoing provisions of this Section 3, the
Board of Directors may declare and the Corporation may pay or set apart for
payment dividends and other distributions on any of the Junior Securities, and
may purchase or otherwise redeem any of the Junior Securities or any warrants,
rights or options exercisable for or convertible into any of the Junior
Securities, and the Holders of the shares of the Variable Rate Cumulative
Preferred Stock shall not be entitled to share therein.
(g) The Dividend Rate for any Subsequent Dividend Period will
be a floating rate per annum determined by reference to the Treasury Rate,
determined as described below, plus 8.6%. The Treasury Rate with respect to the
calculation of the Dividend Rate for any Subsequent Dividend Period, will be
calculated by the Calculation Agent on the second Market Day preceding the
commencement of such Subsequent Dividend Period (each, a "Determination Date"),
as follows:
(i) The Treasury Rate shall be, with respect to any Determination
Date, the rate displayed for such Determination Date (or the most
recent publication of such rate prior to the Determination Date) on
Telerate Page 7055 under the caption "...Treasury Constant
Maturities...Federal Reserve Board Release H.15...Mondays Approximately
3:45 p.m.," under the column for 10-year U.S. Treasury securities. If
such rate is no longer displayed on the relevant page, or if not
displayed by 3:00 p.m., New York City time on such Determination Date,
the Treasury Rate with respect to such Subsequent Dividend Period will
be determined as described in subsection (ii) below.
(ii) If such rate is no longer displayed on Telerate Page 7055, or
if not displayed by 3:00 p.m., New York City time on the Determination
Date, as described in subsection (i) above, the Treasury Rate will be
such treasury constant maturity rate for 10-year U.S. Treasury
securities as published by the Board of Governors of the Federal
Reserve System in the weekly statistical release entitled "Statistical
Release H.15(519), Selected Interest Rates," or any successor
publication of the Board of Governors of the Federal Reserve System
("H.15(519)"). If such rate is no longer published, or if not published
by 3:00 p.m., New York City time on the Determination Date, the
Treasury Rate will be such treasury constant maturity rate (or other
United States Treasury rate) for 10-year U.S. Treasury securities as
may be then published by either the Board of
<PAGE> 5
5
Governors of the Federal Reserve System or the United States Department
of the Treasury that the Calculation Agent determines to be comparable
to the rate formerly displayed on Telerate Page 7055 and published in
the relevant H.15(519).
(iii) If on any Determination Date, the Calculation Agent is
required but unable to determine the Treasury Rate in the manner
provided in subparagraphs (i) and (ii) above, the Treasury Rate for
such Dividend Period shall be the Treasury Rate as determined on the
previous Determination Date.
(iv) Each calculation in respect of the Variable Rate Cumulative
Preferred Stock will be rounded, if necessary, to the nearest one
ten-thousandth of a percentage, with five hundred thousandths being
rounded upwards.
Notwithstanding the foregoing or anything herein to the contrary, (i) in the
event that the Dividend Rate as calculated in accordance with the foregoing
provisions would at any time exceed 16.0000%, such Dividend Rate shall be
reduced to 16.0000% per annum for such Subsequent Dividend Period, and (ii) in
the event that the Dividend Rate as calculated in accordance with the foregoing
provisions would at any time be less than 12.0000%, such Dividend Rate shall be
increased to 12.0000% per annum for such Subsequent Dividend Period.
(h) The Calculation Agent shall, as soon as practicable after
9:00 a.m., New York City time, on each Determination Date, determine the
Dividend Rate and inform the Paying Agent. The Paying Agent will calculate the
amount of dividends payable in respect of the following Dividend Payment Date
during the applicable Dividend Period (the "Dividend Amount").
(i) All certificates, communications, opinions,
determinations, calculations, quotations and decisions given, expressed, made or
obtained for the purpose of the provisions relating to the payment and
calculation of dividends on the Variable Rate Cumulative Preferred Stock,
whether by the Calculation Agent or Paying Agent, will (in the absence of
willful default, bad faith or manifest error) be final, conclusive and binding
on the Corporation and all of the holders of the Variable Rate Cumulative
Preferred Stock and no liability will (in the absence of willful default, bad
faith or manifest error) attach to the Calculation Agent or Paying Agent in
connection with the exercise or non-exercise by any of them of their powers,
duties and discretion. None of the Paying Agent, the Calculation Agent or the
Corporation (or any of their respective officers, directors, agents,
beneficiaries, employees or affiliates) shall have any liability to any person
for the determination of the Treasury Rate which is caused by circumstances
beyond its reasonable control.
<PAGE> 6
6
4. Liquidation Preference.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding-up of the affairs of the Corporation, the Holders of
shares of Variable Rate Cumulative Preferred Stock then outstanding shall be
entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders, whether such assets are capital, surplus or
earnings, an amount in cash equal to $100 for each share outstanding, plus an
amount in cash equal to accrued but unpaid dividends thereon to the date fixed
for liquidation, dissolution or winding-up (including an amount equal to a
prorated dividend from the last Dividend Payment Date to the date fixed for
liquidation, dissolution or winding-up) before any payment shall be made or any
assets distributed to the holders of any of the Junior Securities. After payment
of such amount to the Holders of Variable Rate Cumulative Preferred Stock, the
Holders of Variable Rate Cumulative Preferred Stock shall be entitled to no
further participation in any distribution of assets by the Corporation. If the
assets of the Corporation are not sufficient to pay in full the liquidation
payments payable to the Holders of outstanding shares of the Variable Rate
Cumulative Preferred Stock, then the Holders of all such shares shall share
ratably in such distribution of assets in accordance with the amounts which
would be payable on such distribution if the amounts to which the Holders of
outstanding shares of Variable Rate Cumulative Preferred Stock are entitled were
paid in full.
(b) For the purposes of this Section 4, neither the sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or any
other consideration) of all or substantially all of the property or assets of
the Corporation nor the consolidation or merger of the Corporation with or into
one or more corporations shall be deemed to be a liquidation, dissolution or
winding-up of the affairs of the Corporation.
5. Redemption.
(a) Optional Redemption. The Corporation may redeem, at the
option of the Board of Directors, at any time, from any source of funds legally
available therefor, in whole or in part, in the manner provided in Section 5(c)
hereof, any or all of the shares of Variable Rate Cumulative Preferred Stock, at
a redemption price equal to 100% of the aggregate liquidation preference of such
shares (which includes an amount equal to the accrued and unpaid dividends, if
any, with respect to all such shares through the date of redemption and which
shall include an amount equal to a prorated dividend for the period from the
last Dividend Payment Date to the Redemption Date)(the "Optional Redemption
Price").
(b) Pro Rata Redemption; Payment in Cash. In the event of a
redemption pursuant to Section 5(a) hereof of only a portion of the then
outstanding shares of Variable Rate Cumulative Preferred Stock redeemable
thereunder, the Corporation
<PAGE> 7
7
shall effect such redemption pro rata according to the number of shares held by
each Holder of such Variable Rate Cumulative Preferred Stock. All payments of
the Optional Redemption Price shall be made in cash.
(c) Procedure for Redemption. (i) At least ten (10) days and
not more than twenty (20) days prior to the date fixed for any redemption of the
Variable Rate Cumulative Preferred Stock, written notice (the "Redemption
Notice") shall be given by first class mail, postage prepaid, to each Holder of
record on the record date fixed for such redemption of the Variable Rate
Cumulative Preferred Stock at such Holder's address as the same appears on the
stock register of the Corporation, provided, however, that neither failure to
give such notice nor any deficiency therein shall affect the validity of the
procedure for the redemption of any shares of Variable Rate Cumulative Preferred
Stock to be redeemed except as to the Holder or Holders to whom the Corporation
has failed to give said notice or except as to the Holder or Holders whose
notice was defective. The Redemption Notice shall state:
(A) that the redemption is pursuant to Section
5(a) hereof;
(B) the Optional Redemption Price;
(C) whether all or less than all of the
outstanding shares of the Variable Rate
Cumulative Preferred Stock redeemable
thereunder are to be redeemed and the total
number of shares of such Variable Rate
Cumulative Preferred Stock being redeemed;
(D) the number of shares of Variable Rate
Cumulative Preferred Stock held by the
Holder that the Corporation intends to
redeem;
(E) the date fixed for redemption;
(F) that the Holder is to surrender to the
Corporation, at the place or places where
certificates for shares of Variable Rate
Cumulative Preferred Stock are to be
surrendered for redemption, in the manner
and at the price designated, the certificate
or certificates representing the shares of
Variable Rate Cumulative Preferred Stock to
be redeemed; and
(G) that dividends on the shares of the Variable
Rate Cumulative Preferred Stock to be
redeemed shall cease to accrue on such
Redemption Date unless the Corporation
defaults on the payment of the Optional
Redemption Price.
<PAGE> 8
8
(ii) On or before the date fixed for redemption, each Holder of
Variable Rate Cumulative Preferred Stock shall surrender the
certificate or certificates representing such shares of Variable Rate
Cumulative Preferred Stock to the Corporation, in the manner and at the
place designated in the Redemption Notice, and, on the Redemption Date,
the Corporation shall pay to such Holder the full Optional Redemption
Price. Such shares shall be payable in cash to the Person whose name
appears on such certificate or certificates as the owner thereof, and
each surrendered certificate shall be cancelled and retired. In the
event that less than all of the shares represented by any such
certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares.
(iii) Unless the Corporation defaults in the payment in full of the
Optional Redemption Price, dividends on the Variable Rate Cumulative
Preferred Stock called for redemption shall cease to accumulate on the
Redemption Date, and the Holders of such redeemed shares shall cease to
have any further rights with respect thereto on the Redemption Date,
other than the right to receive the Optional Redemption Price, without
interest.
6. Voting Rights.
(a) The Holders of Variable Rate Cumulative Preferred Stock,
except as otherwise required under Delaware law and as set forth in paragraphs
(b), (c) and (d) below, shall not be entitled or permitted to vote on any matter
required or permitted to be voted upon by the stockholders of the Corporation.
(b) Holders of a majority of the issued and outstanding shares
of Variable Rate Cumulative Preferred Stock, voting separately and as a class,
shall have the right to elect two additional members of the Board of Directors
in the event dividends have not been paid for six consecutive Dividend Payment
Dates.
(c) Holders of Variable Rate Cumulative Preferred Stock shall
have the right to approve by majority vote any sale, lease, transfer, conveyance
or other disposition (including by way of merger, consolidation or other
business combination), in one or a series of related transactions, of all or
substantially all of the assets or equity securities of the Corporation, any
liquidation of the Corporation and any amendment of the Corporation's
Certificate of Incorporation adverse to Holders of the Variable Rate Cumulative
Preferred Stock; provided, however, that (i) the creation, authorization or
issuance of any shares of Junior Securities or (ii) the increase or decrease in
the amount of authorized Capital Stock of any class, shall not require the
consent of the Holders of Variable Rate Cumulative Preferred Stock and shall not
be deemed to adversely affect the rights, preferences, privileges or voting
rights of Holders of shares of
<PAGE> 9
9
Variable Rate Cumulative Preferred Stock.
(d) If vacancies shall exist in the offices of directors
elected or to be elected by the Holders of Variable Rate Cumulative Preferred
Stock, a proper officer of the Corporation may, and upon the written request of
the Holders of record of at least twenty percent (20%) of the shares of Variable
Rate Cumulative Preferred Stock then outstanding addressed to the Secretary of
the Corporation shall, call a special meeting of the Holders of Preferred Stock
for the purpose of electing directors. Any such meeting shall be held at the
earliest practicable date at the place for the holding of the annual meetings of
stockholders. If such meeting shall not be called by a proper officer of the
Corporation within twenty (20) days after personal service of said written
request upon the Secretary of the Corporation, or within twenty (20) days after
mailing the same within the United States by certified mail, addressed to the
Secretary of the Corporation at its principal executive offices, then the
Holders of record of at least twenty percent (20%) of the outstanding shares of
Variable Rate Cumulative Preferred Stock may designate in writing one of their
number to call such meeting at the expense of the Corporation, and such meeting
may be called by the Person so designated upon the notice required for the
annual meeting of stockholders of the Corporation and shall be held at the place
for holding the annual meetings of stockholders. Any Holder of Variable Rate
Cumulative Preferred Stock so designated shall have access to the lists of
stockholders to be called pursuant to the provisions hereof.
(e) At any meeting held for the purpose of electing directors
at which the Holders of Variable Rate Cumulative Preferred Stock shall have the
right, voting together as a separate class, to elect directors as aforesaid, the
presence in person or by proxy of the Holders of at least a majority of the
outstanding Variable Rate Cumulative Preferred Stock shall be required to
constitute a quorum of such Variable Rate Cumulative Preferred Stock.
(f) Any vacancy occurring in the office of a director elected
by the Holders of Variable Rate Cumulative Preferred Stock may be filled by the
remaining directors elected by the Holders of Variable Rate Cumulative Preferred
Stock unless and until such vacancy shall be filled by the Holders of Variable
Rate Cumulative Preferred Stock.
(g) In any case in which the Holders of Variable Rate
Cumulative Preferred Stock shall be entitled to vote pursuant to this Section 6
or pursuant to Delaware law, each Holder of Preferred Stock shall be entitled to
one vote for each share of Preferred Stock held.
(h) The voting rights described in Section 6(b) above will
continue until such time as all dividends in arrears on the Variable Rate
Cumulative Preferred Stock are paid in full or any such default has been cured,
as the case may be, at which time
<PAGE> 10
10
the term of the directors elected pursuant to Section 6(b) shall terminate.
7. Conversion or Exchange.
Holders of shares of the Variable Rate Cumulative Preferred
Stock shall not have any rights herein, in the absence of any offer by the
Corporation, to convert such shares into or exchange such shares for shares of
any other class or classes or of any other series of any class or classes of
Capital Stock of the Corporation.
8. Preemptive Rights.
No shares of Variable Rate Cumulative Preferred Stock shall
have any rights of preemption whatsoever as to any securities of the
Corporation, or any warrants, rights or options issued or granted with respect
thereto by the Corporation at any time, regardless of how such securities or
such warrants, rights or options may be denominated, issued or granted.
9. Reissuance of Variable Rate Cumulative Preferred
Stock.
Shares of Variable Rate Cumulative Preferred Stock that have
been issued and reacquired in any manner, including, without limitation, shares
of Variable Rate Cumulative Preferred Stock redeemed or purchased pursuant to
Section 5, shall be cancelled and shall not be reissued until after such time as
there shall have been no shares of the Variable Rate Cumulative Preferred Stock
outstanding.
10. Business Day.
If any payment, redemption or exchange shall be required by
the terms hereof to be made on a day that is not a Business Day, such payment,
redemption or exchange shall be made on the immediately succeeding Business Day.
11. Definitions.
As used herein, the following terms shall have the following
meanings (with terms defined in the singular having comparable meanings when
used in the plural and vice versa), unless the context otherwise requires:
"Affiliate" of any specified Person shall mean any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by" and "under common control with"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting
<PAGE> 11
11
securities, by agreement or otherwise; provided, however, that beneficial
ownership of 10.0% or more of the voting securities of a Person shall be deemed
to be control.
"Business Day" shall mean a day other than a Saturday, Sunday,
national or New York state holiday or other day on which commercial banks in New
York City are authorized or required by law to close.
"Capital Stock" shall mean (i) in the case of a corporation,
corporate stock, (ii) in the case of an association or business entity, any and
all shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership or limited
liability company, partnership or membership interests (whether general or
limited) and (iv) any other interest or participation that confers on a Person
the right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Calculation Agent" shall mean any calculation agent (which
may be the Corporation) selected by the Corporation with respect to the Variable
Rate Cumulative Preferred Stock, in its capacity as calculation agent.
"Determination Date" shall have the meaning set forth in
Section 3(g) above.
"Dividend Payment Date" shall means each March 31, June 30,
September 30 and December 31 of each year.
"Dividend Amount" shall have the meaning set forth in Section
3(h) above.
"Dividend Period" shall mean, with respect to a share of
Variable Rate Cumulative Preferred Stock, the Initial Dividend Period and,
thereafter, each Subsequent Dividend Period.
"Dividend Rate" shall have the meaning set forth in Section
3(a) above.
"H.15(519)" shall have the meaning set forth in Section 3(g)
above.
"Holder" shall mean a record holder of shares of Variable Rate
Cumulative Preferred Stock.
"Initial Dividend Period" shall mean the dividend period
commencing on and including the Original Issue Date and ending on and including,
the fifth successive Dividend Payment Date to occur thereafter.
"Junior Securities" shall have the meaning set forth in
Section 2 above.
<PAGE> 12
12
"Market Day" shall mean any Business Day on which commercial
banks are open for business in New York City.
"Officer" shall mean the Chairman of the Board, the President,
any Executive Vice President, Senior Vice President or Vice President, the
Treasurer or the Secretary of the Corporation.
"Optional Redemption Price" shall have the meaning set forth
in Section 5(a) above.
"Original Issue Date" shall have the meaning set forth in
Section 3(a) above.
"Paying Agent" shall mean any paying agent (which may be the
Corporation) selected by the Corporation with respect to the Variable Rate
Cumulative Preferred Stock, in its capacity as paying agent.
"Permitted Holders" shall mean Kohlberg Kravis Roberts & Co.
L.P. and any of its Affiliates.
"Person" shall mean any individual, corporation, partnership,
limited liability company, joint venture association, joint stock company,
trust, unincorporated association, government or any agency or political
subdivision or any other entity.
"Redemption Date" with respect to any shares of Variable Rate
Cumulative Preferred Stock, shall mean the date on which such shares of Variable
Rate Cumulative Preferred Stock are redeemed by the Corporation.
"Redemption Notice" shall have the meaning set forth in
Section 5(c)(i) above.
"Related Parties" shall mean any Person controlled by a
Permitted Holder, including any partnership or limited liability company of
which a Permitted Holder or its Affiliates is the general partner or managing
member, as the case may be.
"Subsequent Dividend Period" shall have the meaning set forth in
Section 3(a) above.
"Subsidiary" shall mean, with respect to any Person, (i) any
corporation, association, or other business entity (other than a partnership,
joint venture, limited liability company or similar entity) of which more than
50% of the total voting power of shares of Capital Stock entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time of determination owned or
controlled, directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person or a combination thereof and (ii) any partnership,
joint venture, limited liability company or similar entity of which (x)
<PAGE> 13
13
more than 50% of the capital accounts, distribution rights, total equity and
voting interests or general or limited partnership interests, as applicable, are
owned or controlled, directly or indirectly, by such Person or one or more of
the other Subsidiaries of that Person or a combination thereof whether in the
form of membership, general, special or limited partnership or otherwise and (y)
such Person or any Wholly-Owned Subsidiary of such Person is a controlling
general partner or otherwise controls such entity.
"Telerate Page 7055" shall mean the display designated as Page
7055 on the Dow Jones Telerate Service (or such other pages as may replace Page
7055 on that service for the purpose of displaying Treasury Constant Maturities
as reported in H.15(519)).
"Treasury Rate" shall have the meaning set forth in Section
3(g) above.
"Voting Stock" of any Person as of any date shall mean the
Capital Stock of such person that is at the time entitled to vote in the
election of the Board of Directors of such person.
"Wholly-Owned Subsidiary" of any Person shall mean a
Subsidiary of such Person, 100% of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly-Owned Subsidiaries of
such Person and one or more Wholly-Owned Subsidiaries of such Person.
12. Legally Available Funds.
The Corporation shall use its best efforts, including, without
limitation, through the revaluation of its assets in accordance with the General
Corporation Law of the State of Delaware, to make or keep funds legally
available to satisfy in full its obligations under this Certificate, including,
without limitation, those obligations arising pursuant to Section 5 hereof. The
Variable Rate Cumulative Preferred Stock shall, with respect to dividend rights
and rights on liquidation, winding-up and dissolution, rank senior in right of
payment and otherwise to all classes of common stock of the Corporation and each
other class of Capital Stock or series of preferred stock of the Corporation.
<PAGE> 14
14
IN WITNESS WHEREOF, Evenflo & Spalding Holdings Corporation
has caused this certificate to be executed by duly authorized officers of the
Corporation on this 19th day of August, 1998.
EVENFLO & SPALDING HOLDINGS CORPORATION
By:______________________________
Name:
Title:
Attest:
By:____________________________
Name:
Title:
`
<PAGE> 1
Exhibit 10.4
[CONFORMED COPY]
CREDIT AGREEMENT AMENDMENT NO. 1
THIS CREDIT AGREEMENT AMENDMENT NO. 1 (this "Amendment"), dated as of
December 11, 1996, among E & S HOLDINGS CORPORATION, a company organized under
the laws of Delaware (the "Borrower"), and the Lenders (as defined below) party
hereto.
W I T N E S S E T H:
WHEREAS, pursuant to a Credit Agreement, dated as of September 30, 1996
(the "Credit Agreement"), among the Borrower, the financial institutions as are
or may become parties thereto (collectively, the "Lenders"), Bank of America
National Trust and Savings Association ("BofA"), as administrative agent for the
Lenders, together with Merrill Lynch Capital Corporation, as documentation agent
for the Lenders, Nationsbank, N.A. (South), as syndication agent for the
Lenders, the several financial institutions specifically identified as co-agents
on the signature pages thereof and the several financial institutions
specifically identified as lead managers on the signature pages thereof, the
Lenders extended Commitments to make Credit Extensions to the Borrower;
WHEREAS, Bank of America Illinois, an Illinois banking corporation and an
affiliate of BofA ("BAI"), has from time to time provided letter of credit and
banker's acceptance services to subsidiaries of the Borrower;
WHEREAS, the Borrower desires to amend the definitions of "Fronting
Lender" and "Swing Line Lender" set forth in Section 1.1 of the Credit Agreement
in order to include BAI as a Fronting Lender and as a Swing Line Lender; and
WHEREAS, the Majority Lenders are willing to consent to such amendments,
on the terms and subject to the conditions of this Amendment;
NOW, THEREFORE, for good and valuable consideration the receipt of which
is hereby acknowledged, the parties hereto agree as follows:
<PAGE> 2
ARTICLE I
DEFINITIONS
Unless otherwise defined or the context otherwise requires, terms for
which meanings are provided in the Credit Agreement shall have such meanings
when used in this Amendment.
ARTICLE II
AMENDMENTS
SECTION II.1. Amendments to the Credit Agreement. On the terms and
subject to the conditions set forth herein, Section 1.1 of the Credit
Agreement is amended by:
(a) adding the following term and definition:
"'BAI' means Bank of America Illinois, an Illinois banking
corporation.";
(b) adding after the reference to "BofA" in the definition of "Fronting
Lender" the phrase ", BAI and/or any of their respective affiliates"; and
(c) adding after the reference to "BofA" in the definition of "Swing Line
Lender" the phrase ", BAI and/or any of their respective affiliates" and
deleting the remainder of such definition.
SECTION II.2. Acknowledgement. It is acknowledged that each Letter of
Credit Issued by BAI or any of its affiliates, each Acceptance created by BAI or
any of its affiliates and each Swing Line Loan made by BAI or any of its
affiliates constitutes, as the case may be, a Letter of Credit, Acceptance or
Swing Line Loan under the Credit Agreement, in each case to the same extent as
if Issued, created or made by BofA. It is further acknowledged that (a) by
Issuing any such Letter of Credit or creating any such Acceptance, BAI or such
affiliate shall be the Fronting Lender with respect to such Letter of Credit or
Acceptance and shall be entitled to all the rights of, and subject to all the
obligations of, the Fronting Lender under the Credit Agreement with respect
thereto and (b) by making any such Swing Line Loan, BAI or such affiliate shall
be the Swing Line Lender with respect to such Swing Line Loan and shall be
entitled to all the rights of, and subject to all the obligations of, the Swing
Line Lender under the Credit Agreement with respect thereto.
ARTICLE III
-2-
<PAGE> 3
CONDITIONS PRECEDENT
This Amendment shall become effective, as of the date hereof, upon the
receipt by the Administrative Agent of counterparts hereof executed on behalf of
the Borrower and the Majority Lenders.
ARTICLE IV
MISCELLANEOUS PROVISIONS
SECTION IV.1. Ratification of and References to the Credit Agreement. This
Amendment shall be deemed to be an amendment to the Credit Agreement, and the
Credit Agreement, as amended hereby, is hereby ratified, approved and confirmed
in each and every respect. All references to the Credit Agreement in any other
document, instrument, agreement or writing shall hereafter be deemed to refer to
the Credit Agreement as amended hereby.
SECTION IV.2. Headings. The various headings of this Amendment are
inserted for convenience only and shall not affect the meaning or
interpretation of this Amendment or any provisions hereof.
SECTION IV.3. Execution in Counterparts. This Amendment may be executed by
the parties hereto in several counterparts, each of which shall be deemed to be
an original and all of which shall constitute together but one and the same
agreement.
SECTION IV.4. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-3-
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
E&S HOLDINGS CORPORATION
By /s/ W. Michael Kipphut
-----------------------------------
Name: W. Michael Kipphut
Title:Vice President
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By /s/ Eugene F. Martin
-----------------------------------
Name: Eugene F. Martin
Title:Vice President
MERRILL LYNCH CAPITAL CORPORATION
By /s/ E. T. Crook
-----------------------------------
Name: E. T. Crook
Title:Vice President
NATIONSBANK, N.A. (SOUTH)
By /s/ Miles C. Dearden III
-----------------------------------
Name: Miles C. Dearden III
Title:Vice President
THE BANK OF NOVA SCOTIA
-4-
<PAGE> 5
By /s/ Frank F. Sandler
-----------------------------------
Name: Frank F. Sandler
Title:Relationship Manager
BANKERS TRUST COMPANY
By /s/ Mary Jo Jolly
-----------------------------------
Name: Mary Jo Jolly
Title:Assistant Vice President
FLEET NATIONAL BANK
By
-----------------------------------
Name:
Title:
SOCIETE GENERALE
By /s/ John M. Stack
-----------------------------------
Name: John M. Stack
Title:Vice President
WELLS FARGO BANK, N.A.
By /s/ Dave Neumann
-----------------------------------
Name: Dave Neumann
Title:Vice President
-5-
<PAGE> 6
CIBC, INC.
By /s/ Timothy E. Doyle
-----------------------------------
Name: Timothy E. Doyle
Title:Authorized Signatory
ROYAL BANK OF CANADA
By /s/ Sheryl L. Greenberg
-----------------------------------
Name: Sheryl L. Greenberg
Title:Manager
VAN KAMPEN AMERICAN CAPITAL PRIME
RATE INCOME TRUST
By
-----------------------------------
Name:
Title:
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA
By /s/ Jorge Gonzalez
-----------------------------------
Name: Jorge Gonzalez
Title:Senior Vice President
THE FUJI BANK, LIMITED
NEW YORK BRANCH
By
-----------------------------------
Name:
Title:
-6-
<PAGE> 7
THE INDUSTRIAL BANK OF JAPAN,
LIMITED
By
-----------------------------------
Name:
Title:
LTCB TRUST COMPANY
By /s/ John J. Sullivan
-----------------------------------
Name: John J. Sullivan
Title:Executive Vice President
MASSACHUSETTS MUTUAL LIFE INSURANCE
COMPANY
By /s/ Michael P. Hermsen
-----------------------------------
Name: Michael P. Hermsen
Title:Managing Director
-7-
<PAGE> 8
OAK HILL SECURITIES FUND, L.P.
By Oak Hill Securities GenPar,
L.P., its General Partner
ByOak Hill Securities MGP,
Inc., its General Partner
By
---------------------------
Name:
Title:
PRIME INCOME TRUST
By
-----------------------------------
Name:
Title:
PROTECTIVE LIFE INSURANCE COMPANY
By Mark K. Okuda CFA
-----------------------------------
Name: Mark K. Okuda CFA
Title:Executive Vice President
Protective Asset
Management, L.L.C.
-8-
<PAGE> 9
ABN AMRO BANK N.V.
By /s/ Larry Kelley
-----------------------------------
Name: Larry Kelley
Title:Group Vice President
By /s/ Robert A. Budnek
-----------------------------------
Name: Robert A. Budnek
Title:Assistant Vice President
BANK OF TOKYO -- MITSUBISHI TRUST
COMPANY
By /s/ V. Bulzacchelli
-----------------------------------
Name: V. Bulzacchelli
Title:Vice President & Manager
BANQUE PARIBAS
By
-----------------------------------
Name:
Title:
By
-----------------------------------
Name:
Title:
BAYBANK, N.A.
By /s/ Kathi L. Donahue
-----------------------------------
Name: Kathi L. Donahue
Title:Vice President
-9-
<PAGE> 10
BHF-BANK AKTIENGESELLSCHAFT
By
-----------------------------------
Name:
Title:
By
-----------------------------------
Name:
Title:
CAISSE NATIONALE DE CREDIT AGRICOLE
By
-----------------------------------
Name:
Title:
CREDIT LYONNAIS ATLANTA AGENCY
By /s/ David M. Cawrse
-----------------------------------
Name: David M. Carse
Title:Vice President
CREDIT LYONNAIS NEW YORK BRANCH
By /s/ Attila Koc
-----------------------------------
Name: Attila Koc
Title:Vice President
-10-
<PAGE> 11
THE DAI-ICHI KANGYO BANK, LTD.
By Naoki Yamamori
-----------------------------------
Name: Naoki Yamamori
Title:Vice President
DLJ CAPITAL FUNDING, INC.
By /s/ Stephen P. Hickey
-----------------------------------
Name: Stephen P. Hickey
Title:Managing Director
GOLDMAN SACHS CREDIT PARTNERS L.P.
By
-----------------------------------
Name:
Title:
LEHMAN COMMERCIAL PAPER INC.
By /s/ Michele Swanson
-----------------------------------
Name: Michele Swanson
Title:Authorized Signatory
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
By
-----------------------------------
Name:
-11-
<PAGE> 12
Title:
NATIONAL CITY BANK
By /s/ Diego Tobon
-----------------------------------
Name: Diego Tobon
Title:Vice President
THE NIPPON CREDIT BANK, LTD.
By
-----------------------------------
Name:
Title:
THE SAKURA BANK, LIMITED
ATLANTA AGENCY
By /s/ Hiroyasu Imanishi
-----------------------------------
Name: Hiroyasu Imanishi
Title:Vice President & Senior
Manager
STATE STREET BANK AND TRUST COMPANY
By
-----------------------------------
Name:
Title:
CITY NATIONAL BANK
-12-
<PAGE> 13
By
-----------------------------------
Name:
Title:
ALLSTATE LIFE INSURANCE COMPANY
By /s/ Ronald A. Mendel
-----------------------------------
Name: Ronald A. Mendel
Title:Authorized Signatory
By /s/ Patricia W. Wilson
-----------------------------------
Name: Patricia W. Wilson
Title:Authorized Signatory
INDOSUEZ CAPITAL ASSET ADVISORS,
INC.
By
-----------------------------------
Name:
Title:
By
-----------------------------------
Name:
Title:
ING CAPITAL ADVISORS, INC., as
Agent for Bank Syndication
Account
By /s/ Michael D. Hatley
-----------------------------------
Name: Michael D. Hatley
Title:Vice President & Porfolio
Manager
-13-
<PAGE> 14
PPM AMERICA, INC., as attorney in
fact, on behalf of Jackson
National Life Insurance Company
By /s/ David Brett
-----------------------------------
Name: David Brett
Title:Vice President
CHL HIGH YIELD LOAN PORTFOLIO (a
unit of The Chase Manhattan Bank)
By /s/ Richard Stewart
-----------------------------------
Name: Richard W. Stewart
Title:Vice President
MERRILL LYNCH PRIME RATE
PORTFOLIO
By /s/ R. Douglas Henderson
-----------------------------------
Name: R. Douglas Henderson
Title:Authorized Signatory
RESTRUCTURED OBLIGATIONS
BACKED BY SENIOR ASSETS B.V.
By /s/ Christopher E. Jansen
-----------------------------------
Name: Christopher E. Jansen
Title:Managing Director
CAPTIVA FINANCE LTD.
By /s/ Darren P. Riley
-----------------------------------
-14-
<PAGE> 15
Name: Darren P. Riley
Title:Director
AERIES FINANCE LTD.
By /s/ Andrew Ian Wignall
-----------------------------------
Name: Andrew Ian Wignall
Title:Director
MEDICAL LIABILITY MUTUAL
INSURANCE COMPANY
By Chancellor LGT Senior Secured
Management, Inc., as
Investment Manager
By /s/ Christopher E. Jansen
-----------------------------------
Name: Christopher E. Jansen
Title:Managing Director
SENIOR DEBT PORTFOLIO
By Boston Management and Research,
as Investment Advisor
By /s/ Scott H. Page
---------------------------------
Name: Scott H. Page
Title:Vice Presidnet
-15-
<PAGE> 16
ACCEPTED:
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as Administrative Agent
By /s/ Eugene F. Martin
- --------------------------------
Name: Eugene F. Martin
Title: Vice President
BANK OF AMERICA ILLINOIS
By /s/ Eugene F. Martin
- ---------------------------------
Name: Eugene F. Martin
Title: Vice President
-16-
<PAGE> 1
Exhibit 10.5
[EXECUTION COPY]
CREDIT AGREEMENT AMENDMENT NO. 2
THIS CREDIT AGREEMENT AMENDMENT NO. 2, dated as of March 31, 1998 (this
"Amendment"), is made by and among Evenflo & Spalding Holdings Corporation
(formerly known as E&S Holdings Corporation), a company organized under the laws
of Delaware (the "Borrower"), the Lenders (as defined below) and Bank of America
National Trust & Savings Association ("Bank of America"), as the administrative
agent (the "Administrative Agent") for the Lenders.
W I T N E S S E T H:
WHEREAS, the Borrower, the various financial institutions parties thereto
from time to time (collectively, the "Lenders"), Bank of America, as swing line
lender, as fronting lender and as administrative agent for the Lenders, Merrill
Lynch Capital Corporation, as documentation agent for the Lenders, and
NationsBank N.A. South, as syndication agent for the Lenders, have heretofore
entered into that certain Credit Agreement, dated as of September 30, 1996 (as
amended by the First Amendment to Credit Agreement, dated as of December 11,
1996, the "Existing Credit Agreement"); and
WHEREAS, the Borrower has requested, and the Lenders and the
Administrative Agent are willing, subject to the terms and conditions set forth
below, to amend the Existing Credit Agreement as provided below (the Existing
Credit Agreement, as amended pursuant to the terms of this Amendment, being
referred to as the "Amended Credit Agreement");
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the Borrower, the Lenders and the Administrative Agent hereby
agree as follows:
ARTICLE I
DEFINITIONS
SUBPART I.1. Certain Definitions. The following terms (whether or not
underscored) when used in this Amendment shall have the following meanings (such
meanings to be equally applicable to the singular and plural forms thereof):
"Administrative Agent" is defined in the preamble.
"Amended Credit Agreement" is defined in the second recital.
"Amendment" is defined in the preamble.
<PAGE> 2
"Amendment Effective Date Certificate" means the amendment effective date
certificate executed and delivered by the Borrower pursuant to Subpart 3.8,
substantially in the form of Annex I hereto.
"Borrower" is defined in the preamble.
"Existing Credit Agreement" is defined in the first recital.
"Lenders" is defined in the first recital.
"Second Amendment Effective Date" is defined in Subpart 3.1.
"Security Agreement" means the Security Agreement executed and delivered
by the Borrower and each Domestic Subsidiary pursuant to Subpart 3.6,
substantially in the form of Exhibit A hereto, as amended, supplemented, amended
and restated or otherwise modified from time to time.
SUBPART I.2. Other Definitions. Terms for which meanings are provided in
the Amended Credit Agreement are, unless otherwise defined herein or the context
otherwise requires, used in this Amendment with such meanings.
ARTICLE II
AMENDMENTS
Effective on (and subject to the occurrence of) the Second Amendment
Effective Date, certain provisions of the Existing Credit Agreement are hereby
amended in accordance with this Article II; except expressly as so amended by
this Amendment, the Existing Credit Agreement shall continue in full force and
effect in accordance with its terms.
SUBPART II.1. Amendments to Article I of the Existing Credit Agreement.
Article I of the Existing Credit Agreement ("Definitions") is amended in
accordance with Subparts 2.1.1 and 2.1.2.
SUBPART II.1.1. Section 1.1 of the Existing Credit Agreement ("Certain
Defined Terms") is amended by inserting in such Section the following
definitions in the appropriate alphabetical order:
"Bank Book" means the Bank Book, dated March 23, 1998 and delivered
by the Borrower to the Lenders on such date.
"Casualty Event" means the damage, destruction or condemnation, as
the case may be, of any property of the Borrower or any of its
Subsidiaries.
"Casualty Proceeds" means, with respect to any Casualty Event, the
amount of any insurance proceeds or condemnation awards received by the
Borrower or any of its Subsidiaries in connection therewith.
"Liquidity Facility" means the Liquidity Facility, dated as of March
30, 1998, among Spalding & Evenflo Companies, Inc., as the borrower, the
lenders parties thereto, Bank of America National Trust & Savings
Association, as the administrative agent, Merrill Lynch
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<PAGE> 3
Capital Corporation, as the documentation agent and NationsBank N.A. South
as the syndication agent, as such Liquidity Facility may be amended,
modified, amended and restated or extended in accordance with its terms.
"Mortgage" means, collectively, each mortgage or deed of trust or
leasehold mortgage executed and delivered by the Borrower or any other
Obligor in favor of the Administrative Agent for the benefit of the
Lenders pursuant to the requirements of this Agreement, in form and
substance reasonably satisfactory to the Administrative Agent, in each
case as amended, supplemented, amended and restated or otherwise modified
from time to time.
"Refinancing" has the meaning set forth in Section 8.4(m).
"Second Amendment" means the Credit Agreement Amendment No. 2,
dated as of March 31, 1998, among the Borrower, the Lenders parties
thereto and the Administrative Agent.
"Security Agreement" means the Security Agreement executed and
delivered pursuant to this Agreement, substantially in the form of Exhibit
A to the Second Amendment, as amended, supplemented, amended and restated
or otherwise modified from time to time.
SUBPART II.1.2. The following definitions in Section 1.1 of the Existing
Credit Agreement ("Certain Defined Terms") are amended as follows:
(a) "Agreement": the definition of "Agreement" is hereby amended
and restated as follows:
"'Agreement" means this Credit Agreement, as amended
(including as previously amended), supplemented, amended and
restated or otherwise modified from time to time."
(b) "Applicable Margin": the definition of "Applicable Margin"
is hereby amended and restated as follows:
"'Applicable Margin' means, with respect to the Revolving
Loans, the Tranche A Term Loans or the Commitment Fee, as of any
date, the rate per annum determined pursuant to the following
pricing grid (expressed in basis points), subject to the provisions
of this definition set forth below:
PRICING GRID
<TABLE>
<CAPTION>
RATIO OF CONSOLIDATED
TOTAL DEBT TO EURODOLLAR RATE BASE RATE MARGIN COMMITMENT FEE
CONSOLIDATED EBITDA MARGIN
<S> <C> <C> <C>
X > 6.0 250.0 150.0 50.0
X <=6.0, but > 5.5 225.0 125.0 42.5
X <= 5.5, but > 5.0 200.0 100.0 37.5
X <= 5.0, but > 4.5 162.5 62.5 37.5
</TABLE>
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<PAGE> 4
<TABLE>
<CAPTION>
RATIO OF CONSOLIDATED
TOTAL DEBT TO EURODOLLAR RATE BASE RATE MARGIN COMMITMENT FEE
CONSOLIDATED EBITDA MARGIN
<S> <C> <C> <C>
X <= 4.5, but > 4.0 137.5 37.5 35.0
X <= 4.0, but > 3.5 112.5 12.5 30.0
X <= 3.5, but > 3.0 87.5 0.0 25.0
X <= 3.0 62.5 0.0 20.0
</TABLE>
The Applicable Margin for Tranche B Term Loans shall be: (i)
for so long as the ratio of Consolidated Total Debt to Consolidated
EBITDA is greater than 6.0:1.0: 3.00% for Eurodollar Loans and 2.00%
for Base Rate Loans, and (ii) for so long as the ratio of
Consolidated Total Debt to Consolidated EBITDA is less than or equal
to 6.0:1.0: 2.75% for Eurodollar Loans and 1.75% for Base Rate
Loans.
The Applicable Margin for Tranche C Term Loans shall be: (i)
for so long as the ratio of Consolidated Total Debt to Consolidated
EBITDA is greater than 6.0:1.0: 3.50% for Eurodollar Loans and 2.50%
for Base Rate Loans, and (ii) for so long as the ratio of
Consolidated Total Debt to Consolidated EBITDA is less than or equal
to 6.0:1.0: 3.25% for Eurodollar Loans and 2.25% for Base Rate
Loans.
The Applicable Margin for Tranche D Term Loans shall be: (i)
for so long as the ratio of Consolidated Total Debt to Consolidated
EBITDA is greater than 6.0:1.0: 4.00% for Eurodollar Loans and 3.00%
for Base Rate Loans, and (ii) for so long as the ratio of
Consolidated Total Debt to Consolidated EBITDA is less than or equal
to 6.0:1.0: 3.75% for Eurodollar Loans and 2.75% for Base Rate
Loans.
The Applicable Margin for Tranche A Term Loans, Revolving
Loans and the Commitment Fee, shall be determined pursuant to the
Pricing Grid above at such time. As set forth in the Pricing Grid,
"X" refers to the ratio of Consolidated Total Debt to Consolidated
EBITDA. For the purposes of determining the Applicable Margin with
respect to any Loan, the ratio of Consolidated Total Debt to
Consolidated EBITDA shall be determined (x) from and after the
effective date hereof to the date of the Compliance Certificate
referred to in clause (y), based on the highest such level set forth
above with respect to each Loan, and (y) on and after the date of
delivery of the Compliance Certificate delivered pursuant to clause
(b) of Section 7.2, based upon such certificate, and shall remain in
effect until such time as the next Compliance Certificate shall be
delivered (and, at such time, the Applicable Margin shall change
based on such next Compliance Certificate); provided, however, that,
if (i) any such Compliance Certificate is not delivered to the
Administrative Agent on or prior to the date required pursuant to
clause (b) of Section 7.2 and (ii) such Compliance Certificate
indicates a ratio of Consolidated Total Debt to Consolidated EBITDA
that would result in an Applicable Margin which is greater than the
Applicable Margin then in effect, then (A) such greater Applicable
Margin shall be deemed to be in effect for all purposes of this
Agreement from the date such Compliance Certificate was required to
be delivered to the Administrative Agent pursuant to clause (b) of
Section 7.2 and (B) in furtherance of the other terms of this
proviso, if the Borrower shall have made any payment in respect
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<PAGE> 5
of interest or fees during the period from the date such Compliance
Certificate was required to be delivered to the actual date of
delivery of such Compliance Certificate, then the Borrower shall pay
in the form of a supplemental payment of interest and/or fees, an
amount which equals the difference between the amount of interest
and/or fees that would otherwise have been paid determined as if
such Compliance Certificate was delivered on the date such
Compliance Certificate was required to be delivered and the amount
of such interest and/or fees so paid, which supplemental payment of
interest and/or fees shall be due and payable on the actual date of
delivery of such Compliance Certificate."
(c) "Capital Expenditures": clause (c) of the proviso to the
definition of "Capital Expenditures" is hereby amended and restated as
follows"
" (c) the purchase or construction of property, plant or equipment
with Casualty Proceeds within one year of the receipt of such
proceeds; and";
(d) "Consolidated EBITDA": subclause (viii) of clause (b) is hereby
amended and restated as follows:
"(viii) the amount of any restructuring charge or reserve; provided,
that for any computation of such amount with respect to a period
ending on or after March 31, 1998, the maximum aggregate amount of
any such restructuring charge or reserve shall be limited to the
aggregate amounts projected as of March 23, 1998 in the Bank Book
(and, without duplication, such charges taken or disclosed in the
Bank Book in respect of periods ending prior to March 31, 1998)";
(e) "Interest Period": the definition of "Interest Period" is
amended by deleting the words "three or six months thereafter (or ending 9
or 12 months thereafter if available to all Lenders making such Loans as
determined by such Lenders in good faith based on prevailing market
conditions)" beginning in the third line thereof and by inserting the
words "or three months thereafter" after the words "on the date one, two,"
appearing in the third line thereof;
(f) "Loan Documents": the definition of "Loan Documents" is
hereby amended and restated as follows:
"'Loan Documents" means this Agreement, any Notes, the
Guaranty, the Pledge Agreement, each Mortgage, the Security
Agreement and the Fee Letter.'"
(g) "Pledge Agreement": the definition of "Pledge Agreement" is
hereby amended and restated as follows:
"'Pledge Agreement' means the Pledge Agreement to be duly
executed and delivered by the Borrower and each Domestic Subsidiary
which is a Material Subsidiary, substantially in the form of Exhibit
F, as amended, supplemented, amended and restated or otherwise
modified from time to time."
(h) "Restricted Subsidiary": the definition of "Restricted
Subsidiary" is amended by deleting the words "which is not an
Unrestricted Subsidiary" in the Credit Agreement; and
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<PAGE> 6
(i) "Unrestricted Subsidiary": the definition of "Unrestricted
Subsidiary" is deleted from Section 1.1 of the Credit Agreement, and all
references to "Unrestricted Subsidiary" shall be deleted.
SUBPART II.2. Amendments to Article II of the Existing Credit
Agreement. Article II of the Existing Credit Agreement ("The Credits") is
amended in accordance with Subpart 2.2.1.
SUBPART II.2.1. Section 2.8 of the Existing Credit Agreement ("Mandatory
Prepayments of Loans") is amended as follows:
(a) clause (a) thereof is hereby amended and restated as follows:
"(a) Asset Dispositions. In the event that the Net Disposition
Proceeds of any Disposition (such Disposition, a "Current
Disposition") (other than a Disposition permitted pursuant to clause
(a), (b) or (c) of Section 8.2), and of all prior Dispositions as to
which a prepayment has not yet been made under this clause (a),
shall equal or exceed $250,000 then, the Borrower or such Restricted
Subsidiary shall, concurrently with the receipt of the Net
Disposition Proceeds of the Current Disposition, apply 100% of the
Net Disposition Proceeds of the Current Disposition and all such
prior Dispositions in accordance with clause (f).";
(b) clause (b) thereof is hereby amended by replacing the words
"Term Loans" in the fourth line thereof with the words "Loans and certain
other Indebtedness in accordance with clause (f),";
(c) clause (c) is amended by replacing the words "Term Loans" in the
sixth line thereof with the words "Loans and certain other Indebtedness in
accordance with clause (f),";
(d) a new clause (d) is added as follows:
"(d) Casualty Proceeds. If during any Fiscal Year one or more
Casualty Events shall have occurred for which the Borrower or any
Restricted Subsidiary shall receive Casualty Proceeds in excess of
$1,000,000 during such Fiscal Year, then the Borrower or such
Restricted Subsidiary may (provided that no payment Default or Event
of Default is continuing at such time), within 365 days after the
receipt by the Borrower or such Restricted Subsidiary of such
Casualty Proceeds, reinvest up to 100% of such Casualty Proceeds to
replace or repair the assets that were the subject of such Casualty
Event(s). Any Casualty Proceeds that are not reinvested in
accordance with the previous sentence shall be applied to prepay
Loans and certain other Indebtedness in accordance with clause (f),
(x) in the case of the continuance of a payment Default or an Event
of Default at such time, on the day such Casualty Proceeds are
received, in an amount equal to 100% of such Casualty Proceeds, and
(y) otherwise on the Business Day immediately succeeding the last
day of such 365-day period, in an aggregate amount equal to the
portion of such Casualty Proceeds not so reinvested. ";
(e) the previously existing clause (d) thereof is relettered as
"clause (f)" and is hereby amended and restated as follows:
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<PAGE> 7
"(f) Application of Proceeds. Any prepayment made pursuant to
clauses (a), (b), (c) and (d) shall be applied first, to prepay Term
Loans, allocated among the Term Loans as follows: (i) first, to the
next two scheduled and unpaid principal installments of the Tranche
A Term Loans (and any Tranche B Term Loan, Tranche C Term Loan and
Tranche D Term Loan installments payable on or before such
installment payment dates) in direct order of maturities, and (ii)
second, to the remaining installments of the Term Loans pro rata,
and, in each case, related interest on the Term Loans, second, to
reduce outstandings under the Commitment Amount (as defined in the
Liquidity Facility) under the Liquidity Facility, third to any other
Obligations (as defined in the Liquidity Facility) under the
Liquidity Facility, fourth, to prepay Revolving Loans and reduce the
related Revolving Commitment and fifth, to pay any other
Obligations"; and
(f) the previously existing clause (f) thereof is relettered as
"clause (h)" and is amended by deleting in its entirety the parenthetical
in the first sentence thereof.
SUBPART II.3. Amendments to Article VII of the Existing Credit Agreement.
Article VII of the Existing Credit Agreement ("Affirmative Covenants") is
amended in accordance with Subparts 2.3.1 through 2.3.4.
SUBPART II.3.1. Section 7.1 of the Existing Credit Agreement ("Financial
Statements") is amended as follows:
(a) a new clause (c) is added as follows:
"(c) promptly after available, but not later than 30 days
after the end of each calendar month, a copy of (i) the unaudited
consolidated balance sheet of the Borrower and its Restricted
Subsidiaries as of the end of such month and the related
consolidated statements of earnings, cash flows and, to the extent
prepared, shareholders' equity for the period commencing on the
first day and ending on the last day of such month and (ii) such
divisional and segment net sales and EBITDA reporting information
prepared by the Borrower consistent with the Borrower's normal
monthly internal reporting, certified by a Responsible Officer as
fairly presenting in all material respects (subject to year-end
audit adjustments) the financial position and the results of
operations of the Borrower and its Restricted Subsidiaries as of the
date thereof."
SUBPART II.3.2. Section 7.11 of the Existing Credit Agreement ("Future
Subsidiaries") is amended and restated as follows:
"7.11 Future Subsidiaries. Without limiting the effect of any
provision contained herein (including Section 8.3), upon any Person
becoming, after the date hereof, a Subsidiary of the Borrower (other
than any Subsidiary that is not a Material Subsidiary), including
any Person that was a Restricted Subsidiary, but not a Material
Subsidiary, but which becomes a Material Subsidiary through internal
growth or otherwise, or upon the Borrower or any Subsidiary
acquiring additional capital stock of any existing Subsidiary which
is then pledged under the Pledge Agreement, at the Borrower's
expense:
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<PAGE> 8
(a) regardless of whether such Person is a Material
Subsidiary, in the event such Person is a Domestic Subsidiary, the
Borrower shall cause such Person, if not theretofore a party to the
Guaranty, to execute a supplement to (i) the Guaranty for the
purpose of becoming a guarantor thereunder and (ii) the Security
Agreement for the purpose of becoming a grantor thereunder, together
with acknowledgment copies of Uniform Commercial Code financing
statements (form UCC-1) executed and delivered by such Subsidiary
naming such Subsidiary as the debtor and the Administrative Agent as
the secured party, or other similar instruments or documents, filed
under the Uniform Commercial Code of all jurisdictions as may be
necessary or, in the opinion of the Administrative Agent, desirable
to perfect the security interest of the Administrative Agent
pursuant to the Security Agreement; and
(b) (i) in the event such Person is a Domestic Subsidiary of
the Borrower or a Material Subsidiary which is a direct Foreign
Subsidiary of the Borrower or a Domestic Subsidiary of the Borrower,
the Borrower or such applicable Domestic Subsidiary shall, pursuant
to the Pledge Agreement, pledge to the Administrative Agent for the
benefit of the Lenders (free and clear of any other pledges relating
to such Person or any of its Subsidiaries) all of the outstanding
shares of such capital stock of such Subsidiary owned directly by it
(provided, that, in the event such Subsidiary is a Foreign
Subsidiary, the Borrower or Domestic Subsidiary shall not be
required to pledge more than 65% of the outstanding shares of the
capital stock of such Foreign Subsidiary), along with undated stock
powers for such certificates, executed in blank (or, if any such
shares of capital stock are uncertificated, confirmation and
evidence satisfactory to the Administrative Agent that the security
interest in such uncertificated securities has been perfected by the
Administrative Agent in accordance with Section 9-115 of the Uniform
Commercial Code as in effect in the State of New York or any similar
law which may be applicable); and
(ii) in the event such Person is a Material Subsidiary and a direct
Foreign Subsidiary of the Borrower or any Domestic Subsidiary of the
Borrower, the Borrower or such applicable Domestic Subsidiary shall,
within 60 days of such Person having become a Material Subsidiary of
the Borrower or such Domestic Subsidiary (and, in the case of any
such existing direct Foreign Subsidiary which is a Material
Subsidiary as of the Second Amendment Effective Date, within 60 days
of the Second Amendment Effective Date) execute and deliver a
supplement to the Pledge Agreement, which supplement shall, under
the law of incorporation of such Foreign Subsidiary, be effective to
create and perfect a valid security interest in 65% of the
outstanding shares of the capital stock of such Foreign Subsidiary,
accompanied by legal opinions of outside counsel to the Borrower in
respect of such collateral, reasonably satisfactory to the Agents."
SUBPART II.3.3. A new Section 7.15 is added as follows
"7.15. Real Estate. Within 45 days after the Second Amendment
Effective Date (or, with respect to the selection by the Agents of a
plant in substitution for any other single plant specified below
(and only with respect to such plant) in accordance with the terms
hereof, 45 days after the selection of such plant), the Borrower
shall cause to be delivered a duly executed Mortgage (together with
documentation requested by and reasonably satisfactory to the
Agents) with respect to the plant located in Chicopee, Massachusetts
and the plant located in Piqua, Ohio (or any other two plants
selected by the Agents for which the provision of a security
interest thereon is
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<PAGE> 9
reasonably practicable), accompanied by legal opinions of outside
counsel to the Borrower in respect of such collateral, reasonably
satisfactory to the Agents, all at the Borrower's expense."
SUBPART II.3.4. A new Section 7.16 is added as follows
"7.16. Pledged Stock of Foreign Subsidiaries. Within 60 days
after the Closing Date, the Borrower shall promptly deliver, or
cause to be delivered, appropriate supplemental security
documentation (consistent with the corresponding terms of the Pledge
Agreement) under the law of the jurisdiction of incorporation of
each Foreign Subsidiary which is a direct Subsidiary of the Borrower
or a Domestic Subsidiary to the Administrative Agent, duly executed
and delivered by an Authorized Officer of the pledgor thereof, all
in form and substance satisfactory to the Administrative Agent."
SUBPART II.4. Amendments to Article VIII of the Existing Credit Agreement.
Article VIII of the Existing Credit Agreement ("Negative Covenants") is amended
in accordance with Subparts 2.4.1 through 2.4.7.
SUBPART II.4.1. Section 8.1 of the Existing Credit Agreement ("Limitation
on Liens") is amended as follows:
(a) clause (l) thereof is amended by inserting "in an aggregate
amount not to exceed $5,000,000 at any time outstanding immediately
following the word "Indebtedness" in the third line of subclause (i)
thereof;
(b) the provision set forth in clause (m) thereof is deleted in its
entirety and replaced with the word "Reserved.";
(c) clause (q) thereof is amended by inserting "under the Liquidity
Facility (including any extensions thereof and any Refinancing permitted
pursuant to Section 8.4(m) (plus accrued interest and Obligations (as
defined in the Liquidity Facility) under the Liquidity Facility or such
Refinancing from time to time) plus the Lien on the plant located in
Chicopee, Massachusetts, existing on the date hereof and securing an
aggregate principal amount not to exceed $6,500,000;" at the end thereof;
and
(d) a new clause (t) is added as follows:
"(t) Liens placed on assets of any Foreign Subsidiary to
secure Indebtedness of a Foreign Subsidiary permitted pursuant to
Section 8.4(g), up to an aggregate principal amount at any time of
$50,000,000 and only to the extent that such Indebtedness is not
guaranteed by the Borrower or a Domestic Subsidiary (without
duplication)."
SUBPART II.4.2. Section 8.2 of the Existing Credit Agreement
("Consolidations and Mergers; Sales of Assets") is amended as follows:
(a) clause (b) thereof is amended by inserting "; provided that
neither the Borrower nor any Domestic Subsidiary may sell or otherwise
transfer (i) its assets to any Foreign
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<PAGE> 10
Subsidiary other than in the ordinary course of business or (ii) material
assets to one or more Subsidiaries which are not Guarantors" at the end
thereof;
(b) subclause (ii) of the proviso to clause (d) thereof is amended
by adding the words "; provided that in no event shall more than 15% of
the total consideration for any such Disposition consist of non-cash
consideration" at the end of such subclause; and
(c) clause (d) thereof is amended by adding a new subclause (iv) to
the proviso thereof as follows:
"(iv) any Disposition to an Affiliate of the Borrower or any
Restricted Subsidiary having an aggregate purchase price of
$10,000,000 or more shall require in advance of such Disposition an
independent fairness opinion with respect thereto, a copy of which
shall be delivered in advance of such Disposition to the Lenders,
from a firm reasonably acceptable to the Agents."
SUBPART II.4.3. Section 8.3 of the Existing Credit Agreement ("Loans,
Acquisitions and Investments") is amended as follows:
(a) clause (b) thereof is amended and restated as follows:
"(b) Investments in the Borrower or in any of its Subsidiaries
as reasonably necessary to conduct its business operations or as
necessary to effect the restructuring of the Borrower and its
Subsidiaries as contemplated;"
(b) clause (d) thereof is amended by deleting the number
"$5,000,000" appearing therein and inserting "$2,000,000" in replacement
therefor;
Section 8.3(h) is amended and restated as follows:
"(h) Investments by the Borrower or any Subsidiary constituting an
Acquisition which has been approved in writing by the Majority Lenders
(any such Acquisition so approved, a "Permitted Acquisition");"; and
(c) clause (i) thereof is hereby amended and restated as follows:
"(i) so long as no Event of Default or payment Default exists
and is continuing at the time of the making of such Investment (or
would occur immediately after giving effect thereto), additional
Investments by the Borrower or its Restricted Subsidiaries in an
aggregate amount not to exceed $1,000,000 at any time."
SUBPART II.4.4. Section 8.4 of the Existing Credit Agreement ("Limitation
on Indebtedness") is amended as follows:
(a) clause (c) thereof is amended by inserting "; provided that such
Indebtedness shall (i) if it is Indebtedness of the Borrower, be
subordinated to the Obligations and the Indebtedness under the Liquidity
Facility on terms reasonably satisfactory to the Agents and (ii) to the
extent it is Indebtedness held by the Borrower, be evidenced by one or
more promissory notes in form and substance reasonably satisfactory to the
Administrative Agent, which have
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<PAGE> 11
been duly executed, delivered and endorsed to the order of the
Administrative Agent in pledge pursuant to the Pledge Agreement;" at the
end thereof;
(b) subclause (ii) of the proviso to clause (d) is amended by
substituting the number "$75,000,000" with the number "$50,000,000" and by
adding at the end of such subclause the words "less the principal amount
of any such Indebtedness which is secured by a Lien permitted pursuant to
Section 8.1(t)";
(c) clause (e) thereof is amended by inserting "and the tenor
thereof is not in any respect shortened" immediately following the
parenthetical in subclause (i) of the proviso thereof;
(d) the provision set forth in clause (h) thereof is deleted in its
entirety and replaced with the word "Reserved.";
(e) the provision set forth in clause (i) thereof is deleted in its
entirety and replaced with the word "Reserved.";
(f) clause (l) thereof is amended by adding the word "unsecured"
after the word "additional" and by deleting the number "$50,000,000"
appearing therein and inserting "$25,000,000"; and
(g) a new clause (m) will be added as follows:
"(m) additional first-priority secured Indebtedness of the
Borrower and its Restricted Subsidiaries not to exceed $25,000,000
in principal amount at any time outstanding, incurred under the
Liquidity Facility (as amended or extended) and any refinancing
thereof (the "Refinancing") provided, that, as to any Refinancing,
(i) the Liquidity Facility has been repaid (or, concurrently with
the Refinancing, will be repaid) in full, (ii) the principal amount
of the Refinancing is not greater than $25,000,000, (iii) prior to
the Refinancing, the Borrower shall have requested the Agents to
amend or extend the Liquidity Facility and one or more of the Agents
have not agreed to such amendment or extension, (iv) the
institutions providing the Refinancing shall not include any person
which is not a Lender under this Agreement immediately prior to the
Refinancing, and (v) the Lien on any property securing the
Refinancing shall not be prior to the Lien securing the
Obligations."
SUBPART II.4.5. Section 8.5 of the Existing Credit Agreement ("Restricted
Payments") is amended as follows:
(a) the provision set forth in clause (b) thereof is deleted in its
entirety and replaced with the word "Reserved.";
(b) the provision set forth in clause (c) thereof is deleted in its
entirety and replaced with the word "Reserved.";
(c) clause (e) thereof is amended by inserting "all as in effect on
the Second Amendment Effective Date (as defined in the Second Amendment)"
at the end thereof; and
-11-
<PAGE> 12
(d) a new clause (g) will be added as follows:
"(g) Notwithstanding anything to the contrary in this Section
8.5, no Subsidiary shall declare or make any dividend payment unless
such dividend is payable to the Borrower or a wholly-owned
Subsidiary of the Borrower."
SUBPART II.4.6. Section 8.6 of the Existing Credit Agreement ("Financial
Covenants") is amended as follows:
(a) the table appearing in clause (a) thereof is amended as follows:
(i) the ratio set forth opposite "March 31, 1998" shall be amended to be
"1.35 : 1.00", (ii) the ratio set forth opposite "June 30, 1998" shall be
amended to be "1.30 : 1.00", and (iii) the ratio set forth opposite the
"September 30, 1998" shall be amended to be "1.25 : 1.00";
(b) the table appearing in clause (b) thereof is amended and
restated in its entirety to read as follows:
<TABLE>
<CAPTION>
"Date Ratio
----- -----
<S> <C>
September 30, 1997
and the last day of each
December, March, June and
September thereafter through
June 30, 1998 1.25 : 1.00
September 30, 1998 1.00 : 1.00
December 31, 1998
and the last day of each
December, March, June and
September thereafter through
June 30, 2000 1.25 : 1.00
September 30, 2000
and the last day of each
December, March, June and
September thereafter 1.35 : 1.00"
</TABLE>
(c) the table appearing in clause (c) thereof is amended as follows:
(i) the ratio set forth opposite "March 31, 1998" shall be amended to be
"7.75 : 1.00", (ii) the ratio set forth opposite "June 30, 1998" shall be
amended to be "7.75 : 1.00", and (iii) the ratio set forth opposite the
"September 30, 1998" shall be amended to be "7.75 : 1.00";
SUBPART II.4.7. A new Section 8.9 of the Existing Credit Agreement is
added as follows:
-12-
<PAGE> 13
"8.9 Assets of the Borrower. The Borrower shall not own beneficially
or of record any material assets other than the capital stock of its
Subsidiaries (and the assets represented by the ownership of such capital
stock)."
SUBPART II.5. Amendments to Article IX of the Existing Credit
Agreement. Article IX of the Existing Credit Agreement ("Events of Default")
is amended in accordance with Subpart 2.5.1.
SUBPART II.5.1. Section 9.1 of the Existing Credit Agreement ("Event of
Default") is amended as follows:
(a) clause (c) thereof is hereby amended and restated as follows:
" (c) Specific Defaults. The Borrower fails to perform or
observe any term, covenant or agreement contained in any of
clause (a)(i) of Section 7.3 or Sections 8.1, 8.2 through 8.8,
Section 4 of the Security Agreement or Section 8 of the Pledge
Agreement; or"
(b) clause (d) thereof is amended by (i) deleting "Borrower fails to
perform or observe any term, covenant or agreement contained in Section
8.1 and such default shall continue unremedied for 10 days after the date
upon which a Responsible Officer of the Borrower has actual knowledge or
receives written notice thereof; or the", and (ii) inserting "(i) a
Responsible Officer of the Borrower has actual knowledge thereof or (ii)"
immediately following the words "upon which" appearing in the sixth line
thereof;
(c) clause (k) thereof is amended and restated as follows:
"(k) Collateral. Any provision of the Pledge Agreement, the
Security Agreement or any Mortgage shall for any reason (other than
as a result of acts or omissions of the Administrative Agent or any
Lender) cease to create a valid security interest in the collateral
purported to be covered thereby (other than as to any such
collateral which is immaterial) or any material provision of the
Pledge Agreement, the Security Agreement, any Mortgage or the
Guaranty shall cease to be valid and binding on or enforceable
against the Borrower or any other Obligor party thereto, or the
Borrower or any other Obligor shall deny or disaffirm in writing its
obligations under the Pledge Agreement, the Security Agreement, any
Mortgage or the Guaranty."
SUBPART II.6. Amendments to Article X of the Existing Credit Agreement.
Article X of the Existing Credit Agreement ("The Agents") is amended in
accordance with Subpart 2.6.1.
SUBPART II.6.1. Section 10.11(a) of the Existing Credit Agreement
("Collateral Matters") is amended by adding the words ", the Security Agreement,
the Mortgages" after the words "to take any action with respect to any
collateral security" in the third line thereof.
ARTICLE III
CONDITIONS TO EFFECTIVENESS
-13-
<PAGE> 14
SUBPART III.1. Second Amendment Effective Date. This Amendment, and the
amendments and modifications contained herein, shall be and become effective on
the date (the "Second Amendment Effective Date") when each of the conditions set
forth in this Article III shall have been fulfilled to the satisfaction of the
Administrative Agent.
SUBPART III.2. Execution of Counterparts. The Administrative Agent shall
have received counterparts of this Amendment, duly executed and delivered on
behalf of the Borrower and each of the Majority Lenders.
SUBPART III.3. Resolutions; Incumbency. The Administrative Agent shall
have received (i) copies of the resolutions of the board of directors of the
Borrower authorizing the execution, delivery and performance of this Amendment,
each other Loan Document to be delivered by the Borrower in connection herewith
and the transactions contemplated hereby and thereby, certified as of the Second
Amendment Effective Date by the Secretary or an Assistant Secretary of the
Borrower, together with a certificate of the Secretary or Assistant Secretary of
the Borrower dated the Second Amendment Effective Date, certifying the names and
true signatures of the officers of the Borrower authorized to execute, deliver
and perform, as applicable, this Amendment, and such other Loan Documents to be
delivered by it in connection herewith; and (ii) copies of the resolutions of
the board of directors of each Subsidiary authorizing the delivery, execution
and performance by such Subsidiary of the Loan Documents to be delivered by it
in connection herewith, certified as of the Second Amendment Effective Date by
the Secretary or an Assistant Secretary of such Subsidiary, together with a
certificate of the Secretary or Assistant Secretary of such Subsidiary dated the
Second Amendment Effective Date, certifying the names and true signatures of the
officers of such Subsidiary authorized to execute, deliver and perform such Loan
Documents.
SUBPART III.4. Organization Documents. The Administrative Agent shall
have received the articles or certificate of incorporation and the bylaws of
each of Obligors for which such documents have not previously been delivered and
certified, in each case, as in effect on the Second Amendment Effective Date,
certified by the Secretary or Assistant Secretary of such Person as of the
Second Amendment Effective Date, together with a certification that any
documents which were previously delivered are in full force and effect and have
not, since the date of such delivery, been amended.
SUBPART III.5. Approvals. All necessary material governmental,
shareholders' and third-party approvals in connection with the execution,
delivery and performance of this Amendment and the other Loan Documents
delivered in connection herewith.
SUBPART III.6. Other Loan Documents. The Administrative Agent shall
have received:
(a) (x) an affirmation and consent by each of the Guarantors and (x)
a supplement to the Guaranty to add one or more additional Guarantors
thereunder and, in the case of (x) and (y), confirming that upon the sale
or other disposition of any Guarantor thereunder in accordance with the
terms of the Amended Credit Agreement, such Guarantor shall be
automatically released from all obligations thereunder to the extent that
such sale or other disposition causes such Guarantor to cease being a
Domestic Subsidiary of the Borrower,
(b) a Pledge Agreement by the Borrower and each applicable Domestic
Subsidiary, together with (i) the certificates, evidencing all of the
issued and outstanding shares of capital stock of the Subsidiary being
pledged thereby and (ii) executed blank undated stock powers, and
-14-
<PAGE> 15
(c) a Security Agreement, executed by the Borrower and each Domestic
Subsidiary in favor of the Administrative Agent.
SUBPART III.7. Filings. All UCC and intellectual property filings
necessary or, in the opinion of the Administrative Agent, desirable to perfect
and/or to maintain the perfection of the Liens (as defined in the Loan
Documents) provided for in the Loan Documents shall have been executed by the
Borrower and each applicable Subsidiary and delivered to the Administrative
Agent for filing at the Borrower's expense.
SUBPART III.8. Amendment Effective Date Certificate. The Administrative
Agent shall have received, with counterparts for each Agent, the Amendment
Effective Date Certificate, dated the Second Amendment Effective Date and duly
executed and delivered by an Authorized Officer of the Borrower, in which
certificate the Borrower shall agree and acknowledge that the statements made
therein shall be deemed to be true and correct (in all material respects)
representations and warranties of the Borrower made as of such date, and, at the
time each such certificate is delivered, such statements shall in fact be true
and correct.
SUBPART III.9. Legal Opinions. The Administrative Agent shall have
received a favorable legal opinion of (i) Simpson Thacher & Bartlett, special
counsel to the Obligors and (ii) the General Counsel to the Borrower, in each
case, addressed to the Administrative Agent and the Lenders and dated the Second
Amendment Effective Date, substantially in the forms of Annex A-1 and Annex A-2,
respectively.
SUBPART III.10. Fees and Expenses. The Administrative Agent shall have
received all costs, fees (including, for each Lender party hereto, an amendment
fee equal to .25% of such Lender's Commitment) and expenses due and payable
pursuant to Subpart 5.4 (to the extent then invoiced) and pursuant to the
Existing Credit Agreement (including all previously invoiced fees and expenses).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SUBPART IV.1. Representations and Warranties. In order to induce the
Lenders and the Administrative Agent to enter into this Amendment, the Borrower
hereby represents and warrants to each Agent and each Lender, as of the date
hereof, as follows:
(a) the representations and warranties contained in Article VI of
the Existing Credit Agreement (after giving effect to the amendments set
forth herein) and in each of the other Loan Documents are true and correct
in all material respects on and as of such date, as though made on and as
of such date (except to the extent such representations and warranties
expressly refer to an earlier date, in which case they shall be true and
correct in all material respects as of such earlier date);
(b) no Default or Event of Default exists or would result from the
amendments or modifications set forth in Article II or the other
transactions contemplated hereby or from the grant or perfection of the
Lien of the Administrative Agent and the Lenders on the collateral
security provided under the Loan Documents delivered in connection
herewith;
-15-
<PAGE> 16
(c) except as disclosed to the Lenders on March 23, 1998 or as
disclosed in the Bank Book, no Material Adverse Change has occurred since
September 30, 1997 and no material adverse change has occurred since
September 30, 1997 with respect to the business, assets, operations,
results of operations, condition (financial or otherwise) or prospects of
the Borrower or the Borrower and its Subsidiaries, taken as a whole; and
(d) neither the Borrower nor any of its Subsidiaries is subject to
any material litigation or governmental proceeding with respect to the
transactions contemplated hereby and no injunction or restraining order
exists with respect to such transactions.
SUBPART IV.2. Full Disclosure. (a) All factual information (taken as a
whole) heretofore or contemporaneously furnished by or on behalf of the Borrower
or any of its Subsidiaries in writing to any Agent and/or any Lender on or
before the Secondment Amendment Effective Date (including all information
contained herein and in the other Loan Documents delivered in connection
herewith) for purposes of or in connection with this Amendment or any
transactions contemplated herein is true and complete in all material respects
on the date as of which such information is dated or certified and not
incomplete by omitting to state any material fact necessary to make such
information (taken as a whole) not misleading at such time in light of the
circumstances under which such information was provided, it being understood and
agreed that for purposes of this clause (a), such factual information shall not
include projections and pro forma financial information.
(b) The projections and pro forma financial information contained in the
factual information referred to in clause (a) above were or are based on good
faith estimates and assumptions believed to be reasonable at the time made, it
being recognized by the Lenders that such projections as to future events are
not to be viewed as facts and that actual results during the period or periods
covered by any such projections may differ significantly from the projected
results.
ARTICLE V
MISCELLANEOUS
SUBPART V.1. Full Force and Effect; Limited Amendment. Except as expressly
amended hereby, all of the representations, warranties, terms, covenants,
conditions and other provisions of the Existing Credit Agreement and the other
Loan Documents shall remain unamended and unwaived and shall continue to be, and
shall remain, in full force and effect in accordance with their respective
terms. The amendments set forth herein shall be limited precisely as provided
for herein to the provisions expressly amended herein and shall not be deemed to
be an amendment to, consent to or modification of any other term or provision of
the Existing Credit Agreement, any other Loan Document referred to therein or
herein or of any transaction or further or future action on the part of the
Borrower or any other Obligor which would require the consent of the Lenders
under the Existing Credit Agreement or any of the other Loan Documents.
SUBPART V.2. Loan Document Pursuant to Existing Credit Agreement. This
Amendment is a Loan Document executed pursuant to the Existing Credit Agreement
and shall be construed, administered and applied in accordance with all of the
terms and provisions of the Existing Credit Agreement (and, following the date
hereof, the Amended Credit Agreement). Any breach of any representation or
warranty or covenant or agreement contained in this Amendment shall be deemed to
-16-
<PAGE> 17
be an Event of Default for all purposes of the Existing Credit Agreement and the
other Loan Documents.
SUBPART V.3. Further Assurances. The Borrower hereby agrees that it will
take any action that from time to time may be reasonably necessary to effectuate
the agreements contemplated herein.
SUBPART V.4. Fees and Expenses. The Borrower shall pay all reasonable
out-of-pocket expenses incurred by the Administrative Agent in connection with
the preparation, negotiation, execution and delivery of this Amendment and the
documents and transactions contemplated hereby, including the reasonable fees
and disbursements of Mayer, Brown, and Platt, as counsel for the Administrative
Agent and of Wachtell, Lipton, Rosen & Katz, as counsel for the Administrative
Agent.
SUBPART V.5. Headings. The various headings of this Amendment are
inserted for convenience only and shall not affect the meaning or
interpretation of this Amendment or any provisions hereof.
SUBPART V.6. Counterparts. This Amendment may be executed in any number of
separate counterparts, each of which, when so executed, shall be deemed an
original, and all of said counterparts taken together shall be deemed to
constitute but one and the same instrument.
SUBPART V.7. Cross-References. References in this Amendment to any
Article or Subpart are, unless otherwise specified or otherwise required by
the context, to such Article or Subpart of this Amendment.
SUBPART V.8. Successors and Assigns. This Amendment shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
SUBPART V.9. No Third Parties Benefited. This Amendment is made and
entered into for the sole protection and legal benefit of the Borrower, the
Lenders, each Agent and the Agent-Related Persons, and their permitted
successors and assigns, and no other Person shall be a direct or indirect legal
beneficiary of, or have any direct or indirect cause of action or claim in
connection with, this Amendment or any of the other Loan Documents.
SUBPART V.10. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
-17-
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered in New York, New York by their proper and duly
authorized officers as of the day and year first above written.
EVENFLO & SPALDING HOLDINGS
CORPORATION (formerly known as E&S
Holdings Corporation), as the
Borrower
By
----------------------------------
Name:
Title:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as
Administrative Agent
By
----------------------------------
Name:
Title:
Lenders:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By
----------------------------------
Name: Debra Seiter
Title:Vice President
MERRILL LYNCH CAPITAL CORPORATION
By
----------------------------------
Name: E.T. Crook
Title:Vice President
<PAGE> 19
MERRILL LYNCH DEBT STRATEGIES FUND,
INC.
By
----------------------------------
Name: R. Douglas Henderson
Title:Authorized Signatory
MERRILL LYNCH DEBT STRATEGIES
PORTFOLIO
By: Merrill Lynch Asset
Management, L.P., as
Investment Advisor
By
----------------------------------
Name: R. Douglas Henderson
Title:Authorized Signatory
SENIOR DEBT PORTFOLIO
(c/o Boston Management and
Research Co.)
By
----------------------------------
Name: Scott H. Page
Title:Vice President
NATIONSBANK N.A. SOUTH
By
----------------------------------
Name: Bradford Jones
Title:Attorney in Fact
THE BANK OF NOVA SCOTIA
By
----------------------------------
Name: W.J. Brown
Title:Vice President
<PAGE> 20
BANKERS TRUST COMPANY
By
----------------------------------
Name: Mary Jo Jolly
Title:Assistant Vice President
CITY NATIONAL BANK
By
----------------------------------
Name: Patrick M. Cassidy
Title:Vice President
FLEET NATIONAL BANK
By
----------------------------------
Name: Thomas J. Flanagan II
Title:Senior Vice President
SOCIETE GENERALE
By
----------------------------------
Name: John M. Stack
Title:Director
WELLS FARGO BANK, N.A.
By
----------------------------------
Name: David A. Neumann
Title:Vice President
<PAGE> 21
CIBC, INC.
By
----------------------------------
Name: William M. Swenson
Title:Authorized Signatory
ROYAL BANK OF CANADA
By
----------------------------------
Name: Colleen Roux
Title:Senior Manager
VAN KAMPEN AMERICAN CAPITAL PRIME
RATE INCOME TRUST
By
----------------------------------
Name: Jeffrey W. Maillet
Title:Senior Vice President &
Director
VAN KAMPEN CLO I, LTD.
By VAN KAMPEN AMERICAN CAPITAL
MANAGEMENT INC., as Collateral
Manager
By
----------------------------------
Name: Jeffrey W. Maillet
Title:Senior Vice President &
Director
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA
By
----------------------------------
Name: Lisa Stern
Title:Senior Vice President
THE INDUSTRIAL BANK OF JAPAN,
LIMITED
<PAGE> 22
By
----------------------------------
Name: Takuya Honjo
Title:Senior Vice President
LTCB TRUST COMPANY
By
----------------------------------
Name: Philip A. Marsden
Title:Senior Vice President
MASSACHUSETTS MUTUAL LIFE INSURANCE
COMPANY
By
----------------------------------
Name: John B. Wheeler
Title:Managing Director
OAK HILL SECURITIES FUND, L.P.
By: Oak Hill Securities GenPar,
L.P., its General Partner
By: Oak Hill Securities MGP,
Inc., its General Partner
By
----------------------------------
Name: Scott D. Krase
Title: Vice President
PRIME INCOME TRUST
By
----------------------------------
Name: Sheila Finnerty
Title:Assistant Vice President
AERIES FINANCE, LTD.
<PAGE> 23
By
----------------------------------
Name: Andrew Ian Wignall
Title:Director
ABN AMRO BANK N.V.
By
----------------------------------
Name: Steven L. Nipsman
Title:Vice President
By
----------------------------------
Name: Steven B. Farley
Title:Vice President
BANK OF TOKYO -- MITSUBISHI TRUST
COMPANY
By
----------------------------------
Name: Victor Bulzacchelli
Title:Senior Vice President
BANQUE PARIBAS
By
----------------------------------
Name: John J. McCormick, III
Title:Vice President
By
----------------------------------
Name: Duane Helkowski
Title:Vice President
BANK BOSTON, N.A. f/k/a
BAYBANK, N.A.
<PAGE> 24
By
----------------------------------
Name: Kathi L. Donahue
Title:Vice President
CAPTIVA FINANCE, LTD.
By
----------------------------------
Name: John H. Cullinane
Title:Director
CREDIT AGRICOLE INDOSUEZ
By
----------------------------------
Name: David Bouhl, F.V.P.
Title:Head of Corporate Banking
- Chicago
By
----------------------------------
Name: Katherine L. Abbott
Title:First Vice President
CREDIT LYONNAIS NEW YORK BRANCH
By
----------------------------------
Name: Attila Koc
Title:First Vice President
CYPRESS TREE INVESTMENT
<PAGE> 25
PARTNERS I, LTD
By: Cypress Tree
Investment Management
Co., as Portfolio
Manager
By
----------------------------------
Name: Peter K. Merrill
Title:Managing Director
THE DAI-ICHI KANGYO BANK, LTD.
By
----------------------------------
Name: Ronald Wolinsky
Title:Vice President & Group
Leader
DLJ CAPITAL FUNDING, INC.
By
----------------------------------
Name: Stephen P. Hickey
Title:Managing Director
GOLDMAN SACHS CREDIT PARTNERS L.P.
By
----------------------------------
Name: Stephen B. King
Title:Authorized Signatory
KZH HOLDING CORPORATION III
By
----------------------------------
Name: Virginia R. Conway
Title:Authorized Signatory
<PAGE> 26
LEHMAN SYNDICATED LOANS, INC.
By
----------------------------------
Name: Steve Rielly
Title:Vice President
MEDICAL LIABILITY MUTUAL
By
----------------------------------
Name: Anne McCarthy
Title:Authorized Signatory
ML CBO (CAYMAN) LTD.
By Protective Asset Management
Company, as Collateral Manager
By
----------------------------------
Name: James Dondero, CFA, CPA
Title: President
MORGAN STANLEY SENIOR
FUNDING, INC.
By
----------------------------------
Name: Christopher A. Pucillo
Title:Vice President
NATIONAL CITY BANK
By
----------------------------------
Name: Diego Tobon
Title:Vice President
<PAGE> 27
STATE STREET BANK AND TRUST COMPANY
By
----------------------------------
Name: Greg J. Mann
Title:Vice President
OCTAGON LOAN TRUST
(a unit of Chase Manhattan Bank),
as manager on behalf of the Trust
By
----------------------------------
Name: Richard W. Stewart
Title:Managing Director
ORIX USA CORPORATION
By
----------------------------------
Name: Hiroyuki Miyauchi
Title:Executive Vice President
PAMCO CAYMAN, LTD.
By: Protective Asset
Management Company, as
Collateral Manager
By
----------------------------------
Name: James Dondero, CFA, CPA
Title:President
ROYALTON COMPANY, LTD.
(c/o Pacific Investment
Management Co.)
By
----------------------------------
Name: Raymond Kennedy
Title:Vice President
<PAGE> 28
MERRILL LYNCH PRIME RATE PORTFOLIO
By: Merrill Lynch Asset
Management, L.P., as
Investment Advisor
By
------------------------------
Name: R. Douglas Henderson
Title:Authorized Signatory
<PAGE> 1
Exhibit 10.6
CREDIT AGREEMENT AMENDMENT NO. 3
THIS CREDIT AGREEMENT AMENDMENT NO. 3, dated as of July __30,
1998 (this "Amendment"), is made by and among Evenflo & Spalding Holdings
Corporation (formerly known as E&S Holdings Corporation), a company organized
under the laws of Delaware (the "Borrower"), the Lenders (as defined below) and
Bank of America National Trust & Savings Association ("Bank of America"), as the
administrative agent (the "Administrative Agent") for the Lenders.
W I T N E S S E T H:
WHEREAS, the Borrower, the various financial institutions
parties thereto from time to time (collectively, the "Lenders"), Bank of
America, as swing line lender, as fronting lender and as administrative agent
for the Lenders, Merrill Lynch Capital Corporation, as documentation agent for
the Lenders, and NationsBank N.A. South, as syndication agent for the Lenders,
have heretofore entered into that certain Credit Agreement, dated as of
September 30, 1996 (as amended by the First Amendment to Credit Agreement, dated
as of December 11, 1996 and the Second Amendment to Credit Agreement, dated as
of March 31, 1998, the "Existing Credit Agreement"); and
WHEREAS, the Borrower has requested, and the Lenders and the
Administrative Agent are willing, subject to the terms and conditions set forth
below, to amend the Existing Credit Agreement as provided below (the Existing
Credit Agreement, as amended pursuant to the terms of this Amendment, being
referred to as the "Amended Credit Agreement");
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein contained, the Borrower, the Lenders and the
Administrative Agent hereby agree as follows:
ARTICLE I
DEFINITIONS
SUBPART 1.1. Certain Definitions. The following terms (whether
or not underscored) when used in this Amendment shall have the following
meanings (such meanings to be equally applicable to the singular and plural
forms thereof):
"Administrative Agent" is defined in the preamble.
"Amended Credit Agreement" is defined in the second recital.
"Amendment" is defined in the preamble.
"Amendment Effective Date Certificate" means the amendment
effective date certificate executed and delivered by the Borrower pursuant to
Subpart 3.15, substantially in
<PAGE> 2
the form of Annex I hereto.
"Bank of America" is defined in the preamble.
"Borrower" is defined in the preamble.
"E & S Capital Contribution Agreement" means that Capital
Contribution Agreement to be entered into between the Borrower and Strata
Associates, L.P., an entity organized by KKR, pursuant to which Strata
Associates L.P. will purchase newly issued preferred stock of the Borrower for
an aggregate cash purchase price of at least One Hundred Million Dollars
($100,000,000).
"Evenflo" means Evenflo Company, Inc.
"Evenflo Collateral" means all of the assets of Evenflo
subject to Liens created in favor of the Administrative Agent pursuant to the
Security Agreement.
"Evenflo Pledged Shares" means the shares of stock of Evenflo
pledged to the Administrative Agent pursuant to the Pledge Agreement.
"Evenflo Stock Purchase Agreement" means that Stock Purchase
Agreement to be entered into between the Borrower and/or one or more of its
Subsidiaries, one or more affiliates of KKR and certain additional investors,
pursuant to which the Borrower and/or one or more of its Subsidiaries will sell
at least fifty-one percent (51%) of the outstanding capital stock of Evenflo to
one or more affiliates of KKR and certain additional investors, for an aggregate
consideration value of $200,000,000 with $177,000,000 thereof constituting cash
proceeds to the Borrower and/or one or more of its Subsidiaries (the amount of
such cash proceeds, the "Evenflo Stock Purchase Proceeds Amount").
"Evenflo Stock Purchase Proceeds Amount" is defined in the
definition of Evenflo Stock Purchase Agreement.
"Existing Credit Agreement" is defined in the first recital.
"Lenders" is defined in the first recital.
"Security Agreement" means that certain Security Agreement,
dated as of March 31, 1998, among the Borrower, the Subsidiary Grantors parties
thereto and the Administrative Agent for the Lenders.
"Third Amendment Effective Date" is defined in Subpart 3.1.
SUBPART 1.2. Other Definitions. Terms for which meanings are
provided in
<PAGE> 3
the Amended Credit Agreement are, unless otherwise defined herein or the context
otherwise requires, used in this Amendment with such meanings.
ARTICLE II
AMENDMENTS
Effective on (and subject to the occurrence of) the Third
Amendment Effective Date, certain provisions of the Existing Credit Agreement
are hereby amended in accordance with this Article II; except expressly as so
amended by this Amendment, the Existing Credit Agreement shall continue in full
force and effect in accordance with its terms.
SUBPART 2.1 Amendments to Article I of the Existing Credit
Agreement. Article I of the Existing Credit Agreement ("Definitions") is amended
in accordance with Subparts 2.1.1 and 2.1.2.
SUBPART 2.1.1. Section 1.1 of the Existing Credit Agreement
("Certain Defined Terms") is amended by inserting in such Section the following
definitions in the appropriate alphabetical order:
"Consolidated Senior Debt" means, as of any date of
determination, Consolidated Total Debt as of such date minus all Indebtedness
otherwise included therein that is outstanding on such date under the Senior
Subordinated Indenture and all other Indebtedness expressly subordinated in all
respects pursuant to subordination provisions acceptable to the Agents.
"Designated Consolidated EBITDA" means, with respect to the
Borrower for any period, the sum for such period of (a) Consolidated Net Income
plus (b) to the extent deducted in arriving at such Consolidated Net Income, the
sum, without duplication, of (i) Consolidated Interest Expense and non-cash
interest expense, (ii) taxes computed on the basis of income, (iii) depreciation
expense, (iv) amortization expense, including amortization of deferred financing
fees, (v) any expenses or charges resulting from any equity offering or
incurrence of Indebtedness, (vi) the non-cash portion of any non-recurring or
restructuring (or other) charge or reserve and (vii) the cash portion of any
non-recurring or restructuring (or other) charge or reserve; provided, that for
any computation of such amount with respect to a Test Period ending on or after
March 31, 1999, the amount of any such cash portion shall not exceed $7,500,000
for any such Test Period, minus (c) to the extent included in such Consolidated
Net Income, the sum, without duplication, of (i) non-recurring gains and (ii)
non-cash gains, in each case as determined on a consolidated basis for the
Borrower and its Restricted Subsidiaries in accordance with GAAP.
"Designated Performance Trigger Event" means the maintenance
by the
<PAGE> 4
Borrower for four consecutive Fiscal Quarters of a ratio of Consolidated Total
Debt to Designated Consolidated EBITDA for each Test Period ending with such
Fiscal Quarter not in excess of 5.50:1.00.
"Designated Performance Trigger Event Certificate" means a
certificate substantially in the form of Annex I to the Third Amendment.
"Third Amendment" means the Credit Agreement Amendment No. 3,
dated as of July __, 1998, among the Borrower, the Lenders parties thereto and
the Administrative Agent.
SUBPART 2.1.2. The following definitions in Section 1.1 of
the Existing Credit Agreement ("Certain Defined Terms") are amended as follows:
(a) "Capital Expenditures": clause (c) of the proviso to the
definition of "Capital Expenditures" is hereby amended by adding the following
immediately before the semi-colon at the end thereof:
"or, if, but only if, (i) the Designated Performance Trigger
Event has occurred, (ii) no Event of Default or payment Default has occurred and
is then continuing and (iii) a Designated Performance Trigger Event Certificate
duly executed by a Responsible Officer has been furnished to the Administrative
Agent, the purchase of plant, property or equipment made within one year of the
sale of any asset to the extent purchased with the proceeds of such sale";
(b) "Consolidated EBITDA": subclause (viii) of clause (b) is
hereby amended and restated as follows:
"(viii) the amount of any restructuring charge or reserve";
(c) "Interest Period": the definition of "Interest Period" is
hereby amended and restated in its entirety to read as follows:
"Interest Period" means, as to any Eurodollar Loan, the period
commencing on the Borrowing Date of such Loan or on the Conversion/Continuation
Date on which the Loan is converted into or continued as an Eurodollar Loan, and
ending on the date one, two, three or six months thereafter (or ending 9 or 12
months thereafter if available to all Lenders making such Loans as determined by
such Lenders in good faith based on prevailing market conditions) as selected by
the Borrower in its Notice of Borrowing or Notice of Conversion/Continuation;
provided that:
(i) the Borrower shall not be permitted to select Interest
Periods to be in effect at any one time which have expiration dates occurring on
more that 20 different dates;
<PAGE> 5
(ii) if any Interest Period would otherwise end on a day that
is not a Business Day, that Interest Period shall be extended to the following
Business Day unless the result of such extension would be to carry such Interest
Period into another calendar month, in which event such Interest Period shall
end on the preceding Business Day;
(iii) any Interest Period that begins on the last Business Day
of a calendar month (or on a day for which there is no numerically corresponding
day in the calendar month at the end of such Interest Period) shall end on the
last Business Day of the calendar month at the end of such Interest Period;
(iv) no Interest Period for any Term Loan shall extend beyond
the Tranche A Term Maturity Date, Tranche B Term Maturity Date, Tranche C Term
Maturity Date or Tranche D Term Maturity Date, as applicable, and no Interest
Period for any Revolving Loan shall extend beyond the Revolving Commitment
Termination Date; and
(v) no Interest Period applicable to a Term Loan or portion
thereof shall extend beyond any date upon which is due any scheduled principal
payment in respect of the Term Loans, unless the aggregate principal amount of
Term Loans represented by Base Rate Loans or by Eurodollar Loans having Interest
Periods that will expire on or before such date equals or exceeds the amount of
such principal payment; and
d. "Pledge Agreement": the definition of "Pledge Agreement" is
hereby amended and restated in its entirety to read as follows:
"Pledge Agreement" means the Amended and Restated
Pledge Agreement, dated as of March 31, 1998, by the Borrower and the other
Pledgors parties thereto in favor of the Administrative Agent for the Lenders,
as the same may be amended, supplemented, restated or otherwise modified from
time to time.
SUBPART 2.2. Amendment to Article II of the Existing Credit Agreement.
Article II of the Existing Credit Agreement ("The Credits") is amended in
accordance with Subpart 2.2.1.
SUBPART 2.2.1. Section 2.8 of the Existing Credit Agreement ("Mandatory
Prepayments of Loans") is amended by adding the following at the end of Section
2.8(a):
"; provided, however, if, but only if, (i) the Designated
Performance Trigger Event has occurred, (ii) no Event of Default or payment
Default has occurred and is then continuing and (iii) a Designated Performance
Trigger Event Certificate duly executed by a Responsible Officer has been
furnished to the Administrative Agent, then if the Borrower or
<PAGE> 6
any Restricted Subsidiary shall at any time thereafter make a Disposition (other
than a Disposition permitted pursuant to clause (a), (b) or (c) of Section 8.2),
then (i) the Borrower or such Restricted Subsidiary may, within 360 days after
the receipt by the Borrower or such Restricted Subsidiary of the Net Disposition
Proceeds of such Disposition, (A) reinvest up to 100% of such Net Disposition
Proceeds in the businesses described in Section 7.13 (including, subject to the
provisions of clause (h) of Section 8.3, making Acquisitions in such
businesses), unless at the time of such reinvestment an Event of Default or
payment Default has occurred and is then continuing (except in the case where
the Borrower or such Restricted Subsidiary is subject to a definitive agreement
that has been duly and fully executed at a time when no Event of Default or
payment Default existed and pursuant to which it is obligated to use such Net
Disposition Proceeds for a purpose permitted by this proviso), (B) prepay the
Term Loans within such 360-day period in an amount equal to such Net Disposition
Proceeds (or a portion thereof) or (C) retain the amount of such Net Disposition
Proceeds not so applied pending such application and (ii) to the extent such Net
Disposition Proceeds are not so applied during such 360-day period, the Borrower
shall prepay the Term Loans on the Business Day immediately succeeding the last
day of such 360-day period in an aggregate amount equal to the portion of such
Net Disposition Proceeds not so applied".
SUBPART 2.3. Amendments to Article VII of the Existing Credit
Agreement. Article VII of the Existing Credit Agreement ("Affirmative
Covenants") is amended in accordance with Subpart 2.3.1.s 2.3.1 through 2.3.2.
SUBPART 2.3.1. Section 7.1 of the Existing Credit Agreement
("Financial Statements") is amended by deleting the words "promptly after
available, but not later than 30 days after the end of each calendar month,"
appearing at the beginning of clause (c) thereof and inserting in replacement
thereof the following:
"other than with respect to a calendar month the end of which coincides with the
end of a Fiscal Quarter, promptly after available, but not later than 30 days
after the end of each such calendar month,".
SUBPART 2.3.2. Section 7.14 of the Existing Credit Agreement
("End of the Fiscal Year") is amended by inserting the following immediately
after the words "September 30 of each year" on the second line therein:
"prior to the Third Amendment Effective Date and thereafter on
December 31 of each year".
SUBPART 2.4. Amendments to Article VIII of the Existing Credit
Agreement. Article VIII of the Existing Credit Agreement ("Negative Covenants")
is amended in accordance with Subparts 2.4.1 through 2.4.6.
<PAGE> 7
SUBPART 2.4.1. Section 8.1 of the Existing Credit Agreement
("Limitation on Liens") is amended by amending and restating clause (q) thereof
in its entirety to read as follows:
"(i) Liens on the plant located in Chicopee, Massachusetts, existing on the date
hereof and securing an aggregate principal amount not to exceed $6,500,000 and
(ii) additional Liens (other than Liens on any collateral securing the
Obligations) securing obligations of the Borrower and its Restricted
Subsidiaries so long as the aggregate amount of the obligations so secured does
not exceed $18,500,000 at any time outstanding;".
SUBPART 2.4.2. Section 8.2 of the Existing Credit Agreement
("Consolidations and Mergers; Sales of Assets") is amended by (i) replacing the
phrase "Closing Date" in clause (d) thereof with the phrase "Third Amendment
Effective Date" and (ii) deleting the Dollar amount "$250,000,000" in clause (d)
thereof and inserting the following in replacement thereof :
"the excess, if any, of $250,000,000 over the Evenflo Stock
Purchase Proceeds Amount (as defined in the Third Amendment)".
Section 8.3 of the Existing Credit Agreement ("Loans,
Acquisitions and Investments") is amended as follows:
(a) clause (h) thereof is amended and restated in its entirety
to read as follows:
"(h) Investments by the Borrower or any Subsidiary
constituting one or more Acquisitions in an aggregate amount not to
exceed $10,000,000 (any such Acquisition, a "Pre-Trigger Permitted
Acquisition") or, if, but only if, (i) the Designated Performance
Trigger Event has occurred, (ii) no Event of Default or payment Default
has occurred and is then continuing and (iii) a Designated Performance
Trigger Event Certificate duly executed by a Responsible Officer has
been furnished to the Administrative Agent, Investments by the Borrower
or any Subsidiary constituting an Acquisition (any such Acquisition
occurring after the date upon which each of the conditions set forth in
subclauses (i), (ii) and (iii) of this clause (h) immediately above
have been duly satisfied, a "Designated Permitted Acquisition";
Designated Permitted Acquisitions, together with Pre-Trigger Permitted
Acquisitions, "Permitted Acquisitions"), so long as (i) the aggregate
consideration paid in respect of all Permitted Acquisitions after the
Third Amendment Effective Date does not exceed $50,000,000, (ii) such
Acquisition and all transactions related thereto are consummated in
accordance with applicable law, (iii) in the case of an Acquisition of
capital stock or other equity interest by the Borrower or a Subsidiary,
such Acquisition results in the
<PAGE> 8
issuer of such capital stock or other equity interest becoming a
Subsidiary and such Subsidiary (other than a Foreign Subsidiary)
executes an appropriate supplement to the Guaranty for the purposes of
becoming a Guarantor thereunder, (iv) no capital stock or other equity
interest or assets acquired in connection with such Acquisition shall
be subject to any Lien (other than Liens permitted by Section 8.1), (v)
neither the Borrower nor any other Restricted Subsidiary shall assume
or incur, directly or indirectly, any Indebtedness in connection with
such Acquisition (other than Indebtedness otherwise permitted by
Section 8.4), (vi) after giving effect to such Acquisition, no Event of
Default or payment Default shall have occurred and be continuing and
(vii) the Borrower shall have delivered to the Administrative Agent
prior to the consummation of such Acquisition (A) financial statements
prepared on a Pro Forma Basis for the period of four consecutive Fiscal
Quarters ending with the Fiscal Quarter then last ended for which
financial statements and the Compliance Certificate relating thereto
have been delivered to the Administrative Agent pursuant to Sections
7.1 and 7.2 and (B) a certificate of the Borrower executed by its chief
financial officer demonstrating that the financial results reflected in
such financial statements would comply with the requirements of Section
8.6 for the Fiscal Quarter in which such Investment is to be made.";
and
(b) clause (i) thereof is amended and restated in its entirety to read
as follows:
"(i) so long as no Event of Default or payment Default exists
and is continuing at the time of the making of such Investment (or
would occur immediately after giving effect thereto), additional
Investments by the Borrower or its Restricted Subsidiaries in an
aggregate amount not to exceed $10,000,000 at any time; provided,
however, that any such Investments shall be made exclusively from the
net cash proceeds realized from the substantially contemporaneous
purchase of capital stock of the Borrower by KKR or its affiliates;".
SUBPART 2.4.4. Section 8.4 of the Existing Credit Agreement
("Limitation on Indebtedness") is amended as follows:
(a) clause (h) thereof is amended and restated in its entirety to read as
follows:
"(h) unsecured Indebtedness of the Borrower (i) which does not
have any scheduled principal payment (including any sinking fund
requirement) prior to the Tranche D Term Maturity Date, (ii) which has
pricing terms, covenants, representations and defaults, which, taken as
a whole, are not more burdensome or restrictive on the Borrower than
the pricing terms, covenants, representations and defaults provided in
this Agreement and (iii) all net proceeds of which are immediately
applied pursuant to Section 2.8(c) to the payment of Loans and certain
other
<PAGE> 9
Indebtedness owed to the Lenders;";
(b) clause (l) thereof is amended by deleting (i) the Dollar amount
"$25,000,000" and inserting in replacement thereof "$50,000,000" and (ii) the
word "unsecured" therefrom; and
(c) clause (m) thereof is deleted in its entirety.
SUBPART 2.4.5. Section 8.5 of the Existing Credit Agreement
("Restricted Payments") is amended as follows:
(a) the following shall be inserted immediately after the words "Senior
Subordinated Notes" appearing in the fifth line of Section 8.5:
"(it being agreed that the contribution of Senior Subordinated
Notes by a holder thereof concurrently with the exchange of
such Senior Subordinated Notes for the Borrower's capital
stock shall not constitute such a redemption)"; and
(b) clause (e) thereof is amended by inserting the following at the end thereof:
"together with such other management and/or employee stock plans, stock
subscription agreements or shareholder agreements having comparable stock
repurchase terms; provided that the aggregate amount of stock repurchased under
such other management and/or employee stock plans, stock subscription agreements
or shareholder agreements shall not exceed 3% of the Common Stock outstanding on
the Third Amendment Effective Date (as defined in the Third Amendment)".
SUBPART 2.4.6. Section 8.6 of the Existing Credit Agreement
("Financial Covenants") is amended as follows:
(a) the table appearing in clause (a) thereof is amended by
(i) deleting the line beginning "June 30, 1998" appearing therein and
(ii) deleting the portion of such table appearing after such line and
replacing it with the following table:
<TABLE>
<CAPTION>
DATE RATIO
- ---- -----
<S> <C>
December 31, 1999 1.00:1.00
March 31, 2000 1:00:1.00
June 30, 2000 1.00:1.00
September 30, 2000 1.00:1.00
December 31, 2000 1.25:1.00
March 31, 2001 1.25:1.00
June 30, 2001 1.25:1.00
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, 2001 1.25:1.00
December 31, 2001 1.45:1.00
March 31, 2002 1.45:1.00
June 30, 2002 1.45:1.00
September 30, 2002 1.45:1.00
December 31, 2002 1.65:1.00
March 31, 2003 1.65:1.00
June 30, 2003 1.65:1.00
September 30, 2003 1.65:1.00
December 31, 2003
and the last day of
each March, June,
September and
December thereafter 2.00:1.00
</TABLE>
(b) the table appearing in clause (b) thereof is amended by (i) deleting the
line beginning "June 30, 1998" appearing therein and (ii) deleting the portion
of such table appearing after such line and replacing it with the following
table:
<TABLE>
<CAPTION>
DATE RATIO
<S> <C>
December 31, 1999 1.00:1.00
March 31, 2000 1:00:1.00
June 30, 2000 1.00:1.00
September 30, 2000 1.00:1.00
December 31, 2000 1.15:1.00
March 31, 2001 1.15:1.00
June 30, 2001 1.15:1.00
September 30, 2001 1.15:1.00
December 31, 2001 1.15:1.00
March 31, 2002 1.15:1.00
June 30, 2002 1.15:1.00
September 30, 2002 1.15:1.00
December 31, 2002 1.15:1.00
March 31, 2003 1.15:1.00
June 30, 2003 1.15:1.00
September 30, 2003 1.15:1.00
December 31, 2003 1.15:1.00
</TABLE>
<PAGE> 11
(c) clause (c) thereof is amended and restated in its entirety to read as
follows:
"(c) the ratio of Consolidated Senior Debt as at the last day of any Test Period
ending on or about any date set forth below to Consolidated EBITDA for such Test
Period, to be greater than or equal to the ratio set forth opposite such date:
<TABLE>
<CAPTION>
DATE RATIO
- ---- -----
<S> <C>
December 31, 1999 6.00:1.00
March 31, 2000 6.00:1.00
June 30, 2000 6.00:1.00
September 30, 2000 6.00:1.00
December 31, 2000 4.50:1.00
March 31, 2001 4.50:1.00
June 30, 2001 4.50:1.00
September 30, 2001 4.50:1.00
December 31, 2001 4.00:1.00
March 31, 2002 4.00:1.00
June 30, 2002 4.00:1.00
September 30, 2002 4.00:1.00
December 31, 2002 3.00:1.00
March 31, 2003 3.00:1.00
June 30, 2003 3.00:1.00
September 30, 2003 3.00:1.00
December 31, 2003
and the last day of
March, June,
September and
December thereafter 2.50:1.00"
</TABLE>
<PAGE> 12
ARTICLE III
CONDITIONS TO EFFECTIVENESS
SUBPART 3.1. Third Amendment Effective Date. This Amendment, and the
amendments and modifications contained herein, shall be and become effective on
the date (the "Third Amendment Effective Date") when each of the conditions set
forth in this Article III shall have been fulfilled to the satisfaction of the
Agents.
SUBPART 3.2. Execution of Counterparts. The Administrative Agent shall
have received counterparts of this Amendment, duly executed and delivered on
behalf of the Borrower and each of the Majority Lenders.
SUBPART 3.3. Resolutions; Incumbency. The Administrative Agent shall
have received (i) copies of the resolutions of the board of directors of the
Borrower authorizing the execution, delivery and performance of this Amendment,
each other Loan Document to be delivered by the Borrower in connection herewith
and the transactions contemplated hereby and thereby, certified as of the Third
Amendment Effective Date by the Secretary or an Assistant Secretary of the
Borrower, together with a certificate of the Secretary or Assistant Secretary of
the Borrower dated the Third Amendment Effective Date, certifying the names and
true signatures of the officers of the Borrower authorized to execute, deliver
and perform, as applicable, this Amendment, and such other Loan Documents to be
delivered by it in connection herewith; and (ii) copies of the resolutions of
the board of directors of each Subsidiary authorizing the delivery, execution
and performance by such Subsidiary of the Loan Documents to be delivered by it
in connection herewith, certified as of the Third Amendment Effective Date by
the Secretary or an Assistant Secretary of such Subsidiary, together with a
certificate of the Secretary or Assistant Secretary of such Subsidiary dated the
Third Amendment Effective Date, certifying the names and true signatures of the
officers of such Subsidiary authorized to execute, deliver and perform such Loan
Documents.
SUBPART 3.4. Organization Documents. The Administrative Agent shall
have received the articles or certificate of incorporation and the bylaws of
each of the Obligors for which such documents have not previously been delivered
and certified, in each case, as in effect on the Third Amendment Effective Date,
certified by the Secretary or Assistant Secretary of such Person as of the Third
Amendment Effective Date, together with a certification that any documents which
were previously delivered are in full force and effect and have not, since the
date of such delivery, been amended.
SUBPART 3.5. Approvals. All necessary material governmental,
shareholders' and third-party approvals in connection with the execution,
delivery and performance of this Amendment and the other Loan Documents
delivered in connection herewith shall have been obtained.
<PAGE> 13
SUBPART 3.6. Other Loan Documents. The Administrative Agent shall have
received an affirmation and consent by each of the Guarantors.
SUBPART 3.6. Evenflo Stock Purchase Agreement. The Evenflo Stock
Purchase Agreement shall have been duly executed and delivered and shall be in
full force and effect.
SUBPART 3.8. E&S Capital Contribution Agreement. The E&S Capital
Contribution Agreement shall have been duly executed and delivered and shall be
in full force and effect.
SUBPART 3.9. Fairness Opinion. The Administrative Agent and the Lenders
shall have received a fairness opinion from a nationally recognized investment
bank, in form and substance acceptable to the Agents, with respect to the sale
by the Borrower of at least fifty-one percent (51%) of the outstanding capital
stock of Evenflo.
SUBPART 3.10. Sale of Evenflo Shares. The Borrower shall have
consummated (or contemporaneously herewith will consummate) the sale of at least
fifty-one percent (51%) of the outstanding capital stock of Evenflo pursuant to
the Evenflo Stock Purchase Agreement, which Stock Purchase Agreement shall not
have been amended nor shall any provision thereof have been waived by any party
thereto, in each case unless such amendment or waiver is not adverse in any
material respect to the interests of the Lenders, and the Evenflo Stock Purchase
Agreement shall have been approved by the Board of Directors of the Borrower
(which approval shall not have been rescinded or withdrawn).
SUBPART 3.11. Borrower Capital Contribution. The Borrower shall have
received at least $100,000,000 in cash proceeds from the purchase of preferred
stock of the Borrower by KKR affiliates and (a) $75,000,000 of such proceeds
shall have been applied by the Borrower in the manner set forth in Schedule 3.11
to the Third Amendment to prepay permanently all amounts outstanding under the
Liquidity Facility, including, without limitation, any and all principal,
accrued and unpaid interest and fees in respect thereof, with the remainder of
such proceeds having been applied by the Borrower toward the permanent
prepayment of the Term Loans, including, without limitation, any and all
principal, accrued and unpaid interest and fees in respect thereof, in
accordance with the terms and provisions of the Amended Credit Agreement and (b)
$25,000,000 of such proceeds shall have been applied by the Borrower toward the
prepayment of the Revolving Loans, including, without limitation, any and all
principal, accrued and unpaid interest and fees in respect thereof, in
accordance with the terms and provisions of the Amended Credit Agreement.
SUBPART 3.12. Mandatory Prepayments. The Administrative Agent shall
have received, for the benefit of the Lenders, at least Two Hundred Fifty-Two
Million Dollars
<PAGE> 14
($252,000,000) in cash, which amount shall have been permanently applied by the
Borrower in accordance with Schedule 3.11 and Schedule 3.12 to the Third
Amendment against amounts outstanding under the Liquidity Facility, including,
without limitation, any and all principal, accrued and unpaid interest and fees
in respect thereof, with the remainder of such amount having been applied by the
Borrower toward the permanent prepayment of the Term Loans, including, without
limitation, any and all principal, accrued and unpaid interest and fees in
respect thereof, in accordance with the terms and provisions of the Amended
Credit Agreement.
SUBPART 3.13. Evenflo Capital Structure. The net book value of the
excess of all outstanding capital stock of Evenflo over the outstanding capital
stock of Evenflo to be purchased by one or more affiliates of KKR and certain
additional investors pursuant to the Evenflo Stock Purchase Agreement shall be
at least $19,000,000.
SUBPART 3.14. Filings. All UCC and intellectual property filings
(including foreign intellectual property filings) necessary or, in the opinion
of the Administrative Agent, desirable to perfect and/or to maintain the
perfection of the Liens (as defined in the Loan Documents) provided for in the
Loan Documents shall have been executed by the Borrower and each applicable
Subsidiary and delivered to the Administrative Agent for filing at the
Borrower's expense.
SUBPART 3.15. Amendment Effective Date Certificate. The Administrative
Agent shall have received the Amendment Effective Date Certificate, dated the
Third Amendment Effective Date and duly executed and delivered by an Authorized
Officer of the Borrower, in which certificate the Borrower shall agree and
acknowledge that the statements made therein shall be deemed to be true and
correct (in all material respects) representations and warranties of the
Borrower made as of such date, and, at the time each such certificate is
delivered, such statements shall in fact be true and correct.
SUBPART 3.16. Legal Opinions. The Administrative Agent shall have
received (a) a favorable legal opinion of (i) Simpson Thacher & Bartlett,
special counsel to the Obligors and (ii) the General Counsel to the Borrower, in
each case, addressed to the Administrative Agent and the Lenders and dated the
date that each of the conditions set forth in this Article III (other than
Subparts 3.7 through 3.13 and clause (b) of this Subpart 3.16) have been
fulfilled to the satisfaction of the Agents, substantially in the forms of Annex
A-1 and Annex A-2, respectively and (b) a favorable legal opinion of (i) Simpson
Thacher & Bartlett, special counsel to the Obligors and (ii) the General Counsel
to the Borrower, in each case, addressed to the Administrative Agent and the
Lenders and dated the Third Amendment Effective Date, substantially in the forms
of Annex A-1 and Annex A-2, respectively.
SUBPART 3.17. Fees and Expenses. The Administrative Agent shall have
<PAGE> 15
received all costs, fees (including, for each Lender party hereto, an amendment
fee in the amount set forth in the Fee Letter Agreement by and between the
Borrower and the Administrative Agent of even date herewith) and expenses due
and payable pursuant to Subpart 5.4 (to the extent then invoiced) and pursuant
to the Existing Credit Agreement (including all previously invoiced fees and
expenses).
SUBPART 3.18. Partial Effectiveness. Notwithstanding the foregoing, the
amendments contained in subclauses (a), (b) and (c) of Subpart 2.4.6, and
Subpart 2.3.1 shall become effective upon the satisfaction when each of the
conditions set forth in this Article III (other than Subparts 3.7 through 3.13
and clause (b) of Subpart 3.16) have been 3.13fulfilled to the satisfaction of
the Agents; provided that such effectiveness shall be automatically rescinded as
if such amendments never took place, if such remaining conditions set forth in
Subparts 3.7 through 3.13 and clause (b) of Subpart 3.16 are not duly satisfied
by August 15, 1998.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SUBPART 4.1. Representations and Warranties. In order to induce the Lenders and
the Administrative Agent to enter into this Amendment, the Borrower hereby
represents and warrants to each Agent and each Lender, as of the date hereof, as
follows:
(a) the representations and warranties contained in Article VI of the
Existing Credit Agreement (after giving effect to the amendments set forth
herein) and in each of the other Loan Documents are true and correct in all
material respects on and as of such date, as though made on and as of such date
(except to the extent such representations and warranties expressly refer to an
earlier date, in which case they shall be true and correct in all material
respects as of such earlier date and except as covered by clause (c) below);
(b) no Default or Event of Default exists (after giving effect to the
amendments or modifications set forth in Article II) or would result from the
amendments or modifications set forth in Article II or the other transactions
contemplated hereby;
(c) except as disclosed to the Lenders on July 2, 1998 or as disclosed
in the Bank Book, no Material Adverse Change has occurred since September 30,
1997 and no material adverse change has occurred since September 30, 1997 with
respect to the business, assets, operations, results of operations, condition
(financial or otherwise) or prospects of the Borrower or the Borrower and its
Subsidiaries, taken as a whole; and
(d) neither the Borrower nor any of its Subsidiaries is subject to any
material litigation or governmental proceeding with respect to the transactions
contemplated hereby and no injunction or restraining order exists with respect
to such transactions.
<PAGE> 16
SUBPART 4.2. Full Disclosure. (a) All factual information (taken as a whole)
heretofore or contemporaneously furnished by or on behalf of the Borrower or any
of its Subsidiaries in writing to any Agent and/or any Lender on or before the
Third Amendment Effective Date (including all information contained herein and
in the other Loan Documents delivered in connection herewith) for purposes of or
in connection with this Amendment or any transactions contemplated herein is
true and complete in all material respects on the date as of which such
information is dated or certified and not incomplete by omitting to state any
material fact necessary to make such information (taken as a whole) not
misleading at such time in light of the circumstances under which such
information was provided, it being understood and agreed that for purposes of
this clause (a), such factual information shall not include projections and pro
forma financial information.
(b) The projections and pro forma financial information contained in the factual
information referred to in clause (a) above were or are based on good faith
estimates and assumptions believed to be reasonable at the time made, it being
recognized by the Lenders that such projections as to future events are not to
be viewed as facts and that actual results during the period or periods covered
by any such projections may differ significantly from the projected results.
ARTICLE V
MISCELLANEOUS
SUBPART 5.1. Full Force and Effect; Limited Amendment. Except as
expressly amended hereby, all of the representations, warranties, terms,
covenants, conditions and other provisions of the Existing Credit Agreement and
the other Loan Documents shall remain unamended and unwaived and shall continue
to be, and shall remain, in full force and effect in accordance with their
respective terms. The amendments set forth herein shall be limited precisely as
provided for herein to the provisions expressly amended herein and shall not be
deemed to be an amendment to, consent to or modification of any other term or
provision of the Existing Credit Agreement, any other Loan Document referred to
therein or herein or of any transaction or further or future action on the part
of the Borrower or any other Obligor which would require the consent of the
Lenders under the Existing Credit Agreement or any of the other Loan Documents.
SUBPART 5.2. Loan Document Pursuant to Existing Credit Agreement. This
Amendment is a Loan Document executed pursuant to the Existing Credit Agreement
and shall be construed, administered and applied in accordance with all of the
terms and provisions of the Existing Credit Agreement (and, following the date
hereof, the Amended Credit Agreement). Any breach of any representation or
warranty or covenant or agreement
<PAGE> 17
contained in this Amendment shall be deemed to be an Event of Default for all
purposes of the Existing Credit Agreement and the other Loan Documents.
SUBPART 5.3. Direction. By the execution hereof by the Majority
Lenders, the Administrative Agent is hereby authorized and directed by the
Majority Lenders to (i) release (a) Evenflo from its obligations under the
Guaranty, (b) the Evenflo Collateral from the Liens created in favor of the
Administrative Agent pursuant to the Security Agreement and (c) the Evenflo
Pledged Shares sold pursuant to the Evenflo Stock Purchase Agreement from the
pledge thereof to the Administrative Agent pursuant to the Pledge Agreement and
take all actions reasonably necessary to implement the provisions hereof,
including all actions referred to in Subpart 5.6 below and (ii) amend the Pledge
Agreement in accordance with Subpart 5.5 below.
SUBPART 5.4. Release; Termination. Subject to (a) the receipt by the
Administrative Agent of the $252,000,000 referred to in Subpart 3.12 above and
the application by the Borrower of such amount in accordance with such Subpart
and (b) the receipt by the Borrower of the $100,000,000 referred to in Subpart
3.11 above and the application by the Borrower of such amount in accordance with
such Subpart, (i) the Administrative Agent hereby releases (A) Evenflo from its
obligations under the Guaranty, (B) the Evenflo Collateral from the Liens
created in favor of the Administrative Agent pursuant to the Security Agreement
and (C) the Evenflo Pledged Shares sold pursuant to the Evenflo Stock Purchase
Agreement from the pledge thereof to the Administrative Agent pursuant to the
Pledge Agreement and (ii) the Liquidity Facility is hereby terminated in all
respects.
SUBPART 5.5. Amendments to Pledge Agreement. Subject to (a) the receipt
by the Administrative Agent of the $252,000,000 referred to in Subpart 3.12
above and the application by the Borrower of such amount in accordance with such
Subpart and (b) the receipt by the Borrower of the $100,000,000 referred to in
Subpart 3.11 above and the application by the Borrower of such amount in
accordance with such Subpart, Section 8 of the Pledge Agreement ("Transfers and
Other Liens; Additional Collateral; Documents; Etc.") is amended as follows:
(a) subclause (ii) of clause (b) thereof is amended and restated in its entirety
to read as follows:
"(ii)(A) fail to pledge hereunder, immediately upon the issuance
thereof, any and all additional shares of stock or other securities of each such
issuer (other than Evenflo) of Pledged Shares and (B) fail to pledge hereunder,
immediately upon the issuance thereof to Pledgor, any and all additional shares
of stock or other securities of Evenflo of Pledged Shares and";
<PAGE> 18
(b) subclause (iii) of clause (b) thereof is amended by inserting the following
words immediately after the phrase "permit the issuance of any additional shares
of stock of such issuer" appearing therein:
"(other than Evenflo)"; and
(c) clause (c) thereof is amended by:
(i) inserting the following immediately after the word
"permit" appearing both in the first line thereof and in the fifth line thereof:
"(to the extent within its legal power)"; and
(ii) inserting the following at the end thereof:
", in each case with respect to Evenflo covered by
this clause (c) unless all holders of the common stock of Evenflo are accorded
equal treatment as such thereunder".
SUBPART 5.6. Further Assurances. (i) The Administrative Agent shall, at
the sole cost and expense of the Borrower, take such action, including executing
and delivering such other and further documents and instruments as may be
reasonably requested and prepared by the Borrower, to (a) to evidence the
releases contained in Subpart 5.4, including delivering any Uniform Commercial
Code partial termination statements requested and prepared by the Borrower (or
by the Administrative Agent on behalf of the Borrower) and (b) otherwise
implement fully or evidence further the provisions of this Amendment and (ii)
the Borrower shall, at its sole cost and expense, take such action, including
executing and delivering such other and further documents and instruments as may
be reasonably requested from time to time, to implement fully or evidence
further the provisions of this Amendment.
SUBPART 5.7. Fees and Expenses. The Borrower shall pay all reasonable
out-of-pocket expenses incurred by the Administrative Agent in connection with
the preparation, negotiation, execution and delivery of this Amendment and the
documents and transactions contemplated hereby, including the reasonable fees
and disbursements of Wachtell, Lipton, Rosen & Katz, as counsel for the
Administrative Agent.
SUBPART 5.8. Headings. The various headings of this Amendment are
inserted for convenience only and shall not affect the meaning or interpretation
of this Amendment or any provisions hereof.
SUBPART 5.9. Counterparts. This Amendment may be executed in any number
of separate counterparts, each of which, when so executed, shall be deemed an
<PAGE> 19
original, and all of said counterparts taken together shall be deemed to
constitute but one and the same instrument.
SUBPART 5.10. Cross-References. References in this Amendment to any
Article or Subpart are, unless otherwise specified or otherwise required by the
context, to such Article or Subpart of this Amendment.
SUBPART 5.11. Successors and Assigns. This Amendment shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
SUBPART 5.12. No Third Parties Benefited. This Amendment is made and
entered into for the sole protection and legal benefit of the Borrower, the
Lenders, each Agent and the Agent-Related Persons, and their permitted
successors and assigns, and no other Person shall be a direct or indirect legal
beneficiary of, or have any direct or indirect cause of action or claim in
connection with, this Amendment or any of the other Loan Documents.
SUBPART 5.13. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed and delivered in New York, New York by their proper and duly authorized
officers as of the day and year first above written.
EVENFLO & SPALDING HOLDINGS CORPORATION (formerly known as E&S Holdings
Corporation), as the Borrower
By
Name:
Title:
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as Administrative Agent
By
Name: Patrick W. Zetzman
Title: Vice President
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By
Name: Debra Seiter
Title: Vice President
MERRILL LYNCH CAPITAL
CORPORATION
By
Name:
Title:
MERRILL LYNCH DEBT STRATEGIES
FUND, INC.
By
Name:
Title:
<PAGE> 21
MERRILL LYNCH DEBT STRATEGIES
PORTFOLIO
By: Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By
Name:
Title:
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.
By
Name:
Title:
MERRILL LYNCH PRIME RATE
PORTFOLIO
By: Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By
Name:
Title:
INCOME STRATEGIES PORTFOLIO
(c/o Merrill Lynch Asset Management)
By
Name:
Title:
SENIOR HIGH INCOME PORTFOLIO, INC.
By
Name:
Title:
[Credit Agreement Amendment No. 3 Signature Page]
<PAGE> 22
DEBT STRATEGIES FUND II, INC.
By
Name:
Title:
SENIOR DEBT PORTFOLIO
(c/o Boston Management and Research Co.)
By
Name:
Title:
NATIONSBANK N.A. SOUTH
By
Name:
Title:
THE BANK OF NOVA SCOTIA
By
Name:
Title:
BANKERS TRUST COMPANY
By
Name:
Title:
SOCIETE GENERALE
By
Name:
Title:
WELLS FARGO BANK, N.A.
By
Name:
Title:
ROYAL BANK OF CANADA
By
Name:
Title:
[Credit Agreement Amendment No. 3 Signature Page]
<PAGE> 23
VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
By
Name:
Title:
VAN KAMPEN CLO I, LTD.
By: VAN KAMPEN AMERICAN CAPITAL
MANAGEMENT INC., as Collateral
Manager
By
Name:
Title:
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA
By
Name:
Title:
THE INDUSTRIAL BANK OF JAPAN,
LIMITED
By
Name:
Title:
LTCB TRUST COMPANY
By
Name:
Title:
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY
By
Name:
Title:
OAK HILL SECURITIES FUND, L.P.
By: Oak Hill Securities GenPar, L.P., its
General Partner
By: Oak Hill Securities MGP, Inc., its
General Partner
By
Name:
Title:
[Credit Agreement Amendment No. 3 Signature Page]
<PAGE> 24
MORGAN STANLEY DEAN WITTER
PRIME INCOME TRUST
By
Name:
Title:
AERIES FINANCE, LTD.
By
Name:
Title:
THE CHASE MANHATTAN BANK
By
Name:
Title:
TORONTO DOMINION BANK
By
Name:
Title:
ALLIANCE CAPITAL
By
Name:
Title:
BANK OF TOKYO -- MITSUBISHI TRUST
COMPANY
By
Name:
Title:
BANQUE PARIBAS
By
Name:
Title:
BANK BOSTON, N.A. f/k/a
BAYBANK, N.A.
By
Name:
Title:
CAPTIVA FINANCE, LTD
By
Name:
Title:
CREDIT AGRICOLE INDOSUEZ
By
Name:
Title:
[Credit Agreement Amendment No. 3 Signature Page]
<PAGE> 25
CREDIT LYONNAIS NEW YORK BRANCH
By
Name:
Title:
CYPRESS TREE INVESTMENT
PARTNERS I, LTD
By: Cypress Tree Investment
Management Co., as Portfolio
Manager
By
Name:
Title:
THE DAI-ICHI KANGYO BANK, LTD.
By
Name:
Title:
DLJ CAPITAL FUNDING, INC.
By
Name:
Title:
GOLDMAN SACHS CREDIT PARTNERS L.P.
By
Name:
Title:
KZH HOLDING CORPORATION III
By
Name:
Title:
LEHMAN SYNDICATED LOANS, INC.
By
Name:
Title:
MEDICAL LIABILTY MUTUAL
INSURANCE CO.
By: Chancellor LGT Senior Secured
Management, Inc., Invesco Senior
Secured Management, Inc., as
Investment Manager
[Credit Agreement Amendment No. 3 Signature Page]
<PAGE> 26
By
Name:
Title:
ML CBO IV, (CAYMAN) LTD.
By: Protective Asset Management CompanyHighland Capital Management, L.P.,
as Collateral Manager
By
Name:
Title:
MORGAN STANLEY SENIOR
FUNDING, INC.
By
Name:
Title:
NATIONAL CITY BANK
By
Name:
Title:
STATE STREET BANK AND TRUST
COMPANY
By
Name:
Title:
ORIX USA CORPORATION
By
Name:
Title:
PAMCO CAYMAN, LTD.
By: Protective Asset Management
Company, as Management Company,
as By: Highland Capital Management,
L.P., as Collateral Manager
By
Name:
Title: Acknowledged and agreed with
respect to Subpart 5.5:
EVENFLO & SPALDING HOLDINGS
CORPORATION
SPALDING & EVENFLO COMPANIES, INC.
EVENFLO COMPANY, INC.
[Credit Agreement Amendment No. 3 Signature Page]
<PAGE> 27
ETONIC WORLDWIDE CORPORATION
LISCO, INC.
SPALDING SPORTS CENTERS, INC.
ETONIC LISCO, INC.
LISCO FURNITURE, INC.
LISCO FEEDING, INC.
LISCO SPORTS, INC.
By
Name:
Title:
S&E FINANCE CO., INC.
By
Name:
Title:
[Credit Agreement Amendment No. 3 Signature Page]
<PAGE> 1
EXHIBIT 10.15
TAX ALLOCATION AND INDEMNIFICATION AGREEMENT
TAX ALLOCATION AND INDEMNIFICATION AGREEMENT, dated as of
August 20, 1998 (the "Agreement"), by and among Evenflo & Spalding Holdings
Corporation ("E&S"), a Delaware corporation, and its direct and indirect
subsidiaries (other than Evenflo Company, Inc. and its direct and indirect
subsidiaries) (each, an "E&S Subsidiary", and, collectively, the "E&S Group"),
and Evenflo Company, Inc. ("Evenflo"), a Delaware corporation, and its direct
and indirect subsidiaries (each, an "Evenflo Subsidiary", and, collectively, the
"Evenflo Group").
WITNESSETH:
WHEREAS, E&S is the common parent of an affiliated group (as
defined in Section 1504(a) of the Code) of United States corporations (the "E&S
Consolidated Group"), which includes Evenflo, LISCO Feeding, Inc., a Delaware
corporation ("LISCO Feeding") and LISCO Furniture, Inc., a Delaware corporation
("LISCO Furniture" and, together with LISCO Feeding, the "Evenflo United States
Subsidiaries" and the Evenflo United States Subsidiaries, together with Evenflo,
the "Evenflo Consolidated Group"), that has elected to file consolidated United
States federal income tax returns;
WHEREAS, the members of the E&S Consolidated Group, including
the members of the Evenflo Consolidated Group, are parties to the Consolidated
Federal Income Tax Liability Allocation Agreement among E&S Holdings Corporation
and its Subsidiaries, dated as of September 30, 1993 (the "Old Tax Sharing
Agreement");
WHEREAS, LISCO, Inc., a Delaware corporation and an indirect
wholly-owned subsidiary of E&S, proposes to sell a portion of the Evenflo common
stock that it currently owns;
WHEREAS, as a result of such sale of Evenflo common stock,
Evenflo and the Evenflo United States Subsidiaries will no longer be considered
members of the E&S Consolidated Group for United States federal income tax
purposes and, thus, will no longer be eligible to file consolidated United
States federal income tax returns with E&S and the other members of the E&S
Consolidated Group; and
WHEREAS, Evenflo and the other members of the Evenflo Group,
on the one hand, and E&S and the other members of the E&S Group, on the other
hand, desire to (x) terminate their respective rights, duties and obligations
under the Old Tax Sharing Agreement with respect to each other, (y) allocate the
tax burdens and benefits for taxable years or periods ending on or prior to the
Disaffiliation Date and (z) provide for certain other tax matters, including the
apportionment of tax attributes, the assignment of responsibility for the
preparation and filing
<PAGE> 2
2
of Tax Returns and the prosecution and defense of any Tax controversies;
NOW, THEREFORE, in consideration of the agreements and mutual
covenants contained herein, the parties hereto agree as follows:
Section 1. Definitions. As used in this Agreement, the
following terms shall have the following meaning:
"Affiliate" shall mean, with respect to any entity,
any other individual, corporation, partnership, joint venture, limited liability
company, association, joint-stock company, trust or unincorporated organization
which directly or indirectly controls, is controlled by or is under common
control with such entity.
"Code" shall mean the Internal Revenue Code of 1986,
as amended.
"Disaffiliation Date" shall mean the date on which
the members of the Evenflo Consolidated Group are no longer eligible to file a
consolidated United States federal income tax return with E&S and the other
members of the E&S Consolidated Group.
"Tax" or "Taxes" shall mean any federal, state, local
or foreign income, gross receipts, property, sales, use, license, excise,
franchise, employment, payroll, withholding, alternative or add-on minimum, ad
valorem, value added, transfer or excise tax, or any other tax, custom, duty,
governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest or penalty, imposed by any governmental authority.
"Tax Return" shall mean any return, report or similar
statement required to be filed with respect to any Tax (including any attached
schedules), including, without limitation, any information return, claim for
refund, amended return or declaration of estimated Tax.
Section 2. Termination of Prior Agreement. Except to the
extent expressly provided herein and in paragraph 9 of the Old Tax Sharing
Agreement, the rights, duties and obligations of Evenflo and the Evenflo United
States Subsidiaries (and, to the extent applicable, any other member of the
Evenflo Group) under the Old Tax Sharing Agreement shall terminate on the
Disaffiliation Date and the terms of this Agreement shall govern the matters
described herein and in the Old Tax Sharing Agreement. The terms of the Old Tax
Sharing Agreement shall remain in full force and effect after the Disaffiliation
Date with respect to the members of the E&S Consolidated Group, other than the
members of the Evenflo Consolidated Group and the other members of the Evenflo
Group. Except as expressly provided herein and in paragraph 9 of the Old Tax
Sharing Agreement, on
<PAGE> 3
3
and after the Disaffiliation Date, the terms of this Agreement shall supersede
the terms of the Old Tax Sharing Agreement as they pertain to the rights, duties
and obligations of the Evenflo Group with regard to the members of the E&S Group
and vice versa.
Section 3. Filing of Tax Returns and Payment of Taxes. (a) E&S
shall be responsible for preparing and filing all consolidated United States
federal income tax returns that include Evenflo and/or any of the Evenflo United
States Subsidiaries for all taxable years or periods ending on or prior to, or
including, the Disaffiliation Date. E&S shall cause all such consolidated
returns to be prepared and filed timely. E&S also shall be responsible for
preparing and filing any consents to, and/or requests for, an extension of time
for filing such consolidated returns or any related information or similar
returns. E&S shall provide Evenflo with copies of such consolidated returns for
its review at least 30 days prior to the date such returns are required to be
filed and shall furnish Evenflo a copy of such returns (as filed) promptly after
such returns have been filed. Subject to its right to reimbursement hereunder,
E&S shall be responsible for, and shall pay or cause to be paid timely, all
United States federal income taxes shown as due and owing on such consolidated
returns.
(b) Evenflo and each of the Evenflo United States Subsidiaries
shall furnish to E&S (or its designated representatives) on a timely basis such
information, schedules, analysis and any other items as are necessary, or are
reasonably requested by E&S, to allow E&S to prepare and file timely the
consolidated United States federal income tax returns described in (a) above.
(c) Evenflo and each of the Evenflo United States Subsidiaries
shall pay to E&S the amount of United States federal income taxes that such
entities are required to pay with respect to any consolidated United States
federal income tax return filed by E&S with respect to any taxable year or
period ending on or prior to, or including, the Disaffiliation Date as
determined in accordance with paragraph 2 of the Old Tax Sharing Agreement.
(d) E&S may, in its sole and absolute discretion, file amended
consolidated United States federal income tax returns for any taxable year or
period ending on or prior to the Disaffiliation Date. If any such amended return
affects or relates to Evenflo or the Evenflo United States Subsidiaries, E&S
shall provide Evenflo with a copy of such amended return for its review at least
30 days prior to the filing of such amended return and furnish a copy of such
amended return to Evenflo (as filed) promptly after such amended return has been
filed. Neither Evenflo nor the Evenflo United States Subsidiaries may file an
amended consolidated United States federal income tax return for, or on behalf
of, the E&S Consolidated Group for any taxable year or period ending on or prior
to the Disaffiliation Date.
<PAGE> 4
4
(e) Evenflo and the Evenflo Subsidiaries shall be responsible
for preparing and filing any Tax Return (each an "Evenflo Separate Return") that
is not required to be filed on a consolidated, combined or unitary basis with
E&S or any E&S Subsidiary. Evenflo and/or the Evenflo Subsidiaries shall be
responsible for, and shall pay or cause to be paid, all Taxes shown as due and
owing on any Evenflo Separate Return.
(f) E&S and the E&S Subsidiaries also shall be responsible for
preparing and filing any Tax Return (each an "E&S Separate Return") that is not
required to be filed on a consolidated, combined or unitary basis with Evenflo
or any Evenflo Subsidiary. E&S and/or the E&S Subsidiaries shall be responsible
for, and shall pay or cause to be paid, all Taxes shown as due and owing on any
E&S Separate Return.
(g) For all taxable years or years beginning after the
Disaffiliation Date, (i) E&S shall be responsible for filing, or causing to be
filed, all Tax Returns required to filed by, or on behalf of, (w) the E&S
Consolidated Group or any member thereof or (x) any other E&S Subsidiary, and
(ii) Evenflo shall be responsible for filing, or causing to be filed, all Tax
Returns required to be filed by, or on behalf of, (y) the Evenflo Consolidated
Group or any member thereof or (z) any other Evenflo Subsidiary. E&S shall be
responsible for, and shall pay or cause to be paid, all Taxes shown as due and
owing on any Tax Return described in (i) above, and Evenflo shall be responsible
for, and shall pay or cause to be paid, all Taxes shown as due and owing on any
Tax Return described in (ii) above.
Section 4. Tax Refunds and Attributes. (a) The United States
federal income tax attributes, including, but not limited to, net operating
losses, net capital losses, foreign tax credits, excess charitable
contributions, alternative minimum tax credits and research and development tax
credits, of the E&S Consolidated Group as of the day before the Disaffiliation
Date shall be apportioned among the E&S Consolidated Group and the members of
the Evenflo Consolidated Group in accordance with the applicable rules set forth
in Treasury Regulation Sections 1.1502-79 and 1.1502-79A; provided, however,
that (x) any alternative minimum tax credits shall be allocated and apportioned
in accordance with the rules set forth in proposed Treasury Regulation Section
1.1502-55 and (y) any research and development credits shall be allocated and
apportioned in accordance with the principles set forth in Treasury Regulation
Section 1.1502-79 and 1.1502-79A.
(b) In the event that Evenflo or any Evenflo United States
Subsidiary elects to carry back any deduction, loss or credit that is allocated
and apportioned to them (the "Evenflo tax attributes"), or that arises in a
taxable year or period that begins on or after the Disaffiliation Date, any
refund of Taxes that results from the carryback of such Evenflo tax attributes
shall be allocable to Evenflo and/or the relevant Evenflo United States
Subsidiary, and E&S shall pay the amount of such refund to
<PAGE> 5
5
Evenflo within 10 days of the date it receives such refund. If the carryback of
such Evenflo tax attributes reduces the United States federal income tax
liability of the E&S Consolidated Group for any taxable year or period (e.g., a
taxable year or period for which a tax return has not been filed) but does not
result in a refund of Taxes, and such tax attributes are considered to have been
utilized by a member of the E&S Consolidated Group (other than Evenflo or the
Evenflo United States Subsidiaries) pursuant to paragraph 3 of the Old Tax
Sharing Agreement, E&S and the relevant E&S Subsidiaries shall pay to Evenflo
the amounts required to be paid by them for the utilization of such Evenflo tax
attributes under such paragraph 3. In the event that members of the E&S
Consolidated Group (other than Evenflo and the Evenflo United States
Subsidiaries) also have tax attributes that may be carried back to the same
taxable period such tax attributes and the Evenflo tax attributes shall be
deemed to be used proportionately.
(c) If E&S or any of the E&S Subsidiaries receives any refund
of Taxes that is allocable to Evenflo or any of the Evenflo Subsidiaries under
paragraph 4 of the Old Tax Sharing Agreement or otherwise, E&S shall pay the
amount of such refund to Evenflo within 10 days of the date such refund is
received.
(d) If E&S or any E&S Subsidiary utilizes an Evenflo tax
attribute to reduce their United States federal income tax liability or their
liability for taxes under the Old Tax Sharing Agreement, E&S or the relevant E&S
Subsidiary shall pay Evenflo or the relevant Evenflo Subsidiary for the use of
such Evenflo tax attribute in accordance with paragraph 3 of the Old Tax Sharing
Agreement. If Evenflo or any Evenflo United States Subsidiary utilizes a tax
attribute of E&S or any E&S Subsidiary to reduce their United States federal
income tax liability or their liability for taxes under the Old Tax Sharing
Agreement, Evenflo shall pay E&S or the relevant E&S Subsidiary for the use of
such tax attribute in accordance with paragraph 3 of the Old Tax Sharing
Agreement.
Section 5. Contest Provisions. (a) E&S shall have the sole
right to represent Evenflo's and/or the Evenflo United States Subsidiaries'
interests in any audit or administrative or court proceeding relating to the
United States federal income tax liability of Evenflo and/or the Evenflo United
States Subsidiaries for any taxable year or period ending on or before, or
including, the Disaffiliation Date; provided, however, that E&S may not settle
or compromise any issue that would adversely affect Evenflo and/or the Evenflo
United States Subsidiaries without the prior written consent of Evenflo, which
consent may not be unreasonably withheld. Evenflo and the Evenflo United States
Subsidiaries also may participate, at their own expense, in any such audit or
administrative or court proceeding.
(b) E&S shall be responsible for, and shall control, all
audit, administrative or court proceedings related to a E&S Separate Return or
the Taxes reported thereon. Evenflo shall be
<PAGE> 6
6
responsible for, and shall control, all audit, administrative or court
proceedings related to an Evenflo Separate Return or the Taxes reported thereon.
(c) E&S shall be responsible for, and shall control, all
audit, administrative or court proceedings related to the United States federal
income tax liability of the E&S Consolidated Group for all taxable years or
periods beginning on or after the Disaffiliation Date, and Evenflo shall be
responsible for, and shall control all audit, administrative or court
proceedings related to the United States federal income tax liability of the
Evenflo Consolidated Group for all taxable years or periods beginning on or
after the Disaffiliation Date.
Section 6. Audit Adjustments. (a) If (i) the United States
federal income tax liability of the E&S Consolidated Group for any taxable year
or period ending on or before, or including, the Disaffiliation Date is
increased (whether by reason of the filing of an amended return or refund claim,
or as a result of an IRS audit or judicial decision) and (ii) any part of such
increase is attributable to Evenflo and/or an Evenflo Subsidiary, the liability
of Evenflo and/or the relevant Evenflo Subsidiary for such taxes shall be
redetermined in accordance with paragraphs 2, 3 and 4 of the Old Tax Sharing
Agreement and Evenflo and the Evenflo Subsidiaries shall be jointly and
severally liable to pay E&S any amounts required to be paid by Evenflo or the
relevant Evenflo Subsidiary under the Old Tax Sharing Agreement as a result of
such redetermination; provided, however, that Evenflo and the Evenflo
Subsidiaries shall not be required to pay any amount hereunder in respect of any
Taxes that are paid or indemnified by Abarco, N.V. ("Abarco") under Article VIII
of the Recapitalization and Stock Purchase Agreement, dated as of August 15,
1996, by and among Strata Holdings L.P., E&S Holdings Corporation and Abarco
(the "Abarco Tax Indemnity").
(b) If (i) the United States federal income tax liability of
the E&S Consolidated Group is adjusted or redetermined for any taxable year or
period ending on or before the Disaffiliation Date and (ii) as a result of such
adjustment or redetermination, the E&S Consolidated Group utilizes tax
attributes that are, or would have been, allocated and apportioned to members of
the Evenflo Consolidated Group but for such utilization, then E&S and the
relevant E&S Subsidiaries shall pay to Evenflo the amounts required to be paid
for the utilization of such tax attributes under paragraphs 3 and 4 of the Old
Tax Sharing Agreement. In the event that members of the E&S Consolidated Group
(other than Evenflo or the Evenflo United States Subsidiaries) also have tax
attributes that also may be utilized in the same taxable year or period as the
Evenflo tax attributes described in this Section 5(b), such E&S and Evenflo tax
attributes shall be deemed to be used proportionately.
(c) If (and to the extent that) E&S or any E&S Subsidiary
receives any amount from Abarco under the Abarco Tax Indemnity that is
attributable to any Taxes that were actually
<PAGE> 7
7
paid by Evenflo or an Evenflo Subsidiary, E&S shall pay such amounts to Evenflo
within 10 days of its receipt of such amount.
Section 7. Tax Indemnity. E&S and the E&S Subsidiaries shall
jointly and severally indemnify and hold harmless Evenflo and the Evenflo
Subsidiaries from and against any Taxes imposed on Evenflo or the Evenflo
Subsidiaries solely as a result of their being a member of the E&S Consolidated
Group pursuant to Treasury regulation Section 1.1502-6 or any similar provision
of state, local or foreign law.
Section 8. State, Local and Foreign Taxes. The principles set
forth herein also shall apply and govern the allocation of any state, local
and/or foreign tax liabilities and benefits for taxable years or periods ending
on or before, or including, the Disaffiliation Date, the apportioning of any tax
attributes allocable to the relevant parties and the assigning of responsibility
for preparing and filing any state, local or foreign consolidated, combined or
unitary tax returns and prosecuting or defending any controversies or other
matters with respect thereto with respect to any state, local and/or foreign
income or franchise taxes in any state, local and/or foreign jurisdiction where
Evenflo or any Evenflo Subsidiary has elected or has been required to file an
income or franchise tax return on a consolidated, combined, unitary or other
similar basis with E&S or any E&S Subsidiary.
Section 9. Alternative Minimum Tax. The principles of this
agreement also shall apply for purposes of determining the alternative minimum
tax liability of Evenflo and the Evenflo United States Subsidiaries for all
taxable years or periods ending on or before the Disaffiliation Date.
Section 10. Assistance and Cooperation. After the
Disaffiliation Date, each of E&S and Evenflo shall (and shall cause their
respective Affiliates to) provide each other with such cooperation and
information as either of them may reasonably request from the other for purposes
of (x) filing any Tax Return, amended Tax Return or refund claim, (y)
determining a Tax liability or a right to a refund of Taxes or (z) participating
in or conducting any audit, administrative, judicial or other proceeding with
respect to Taxes or otherwise in connection with contesting any Tax liability.
Each of the parties hereto and their respective Affiliates shall give the other
party timely notice of any pending or threatened Tax audits or proceeding that
may have an effect on the Tax liability of such other party or its Affiliates.
Any information obtained by any party under this Section 10 shall be kept
confidential except as may be otherwise necessary in connection with the filing
of Tax Returns or claims for refund, or in connection with an audit or other
administrative or judicial proceeding relating to Taxes or the Tax liability of
such party.
<PAGE> 8
8
Section 11. General Provisions.
(a) Effectiveness. This Agreement will be effective from and
after the Disaffiliation Date.
(b) Entire Agreement; Binding Effect. This Agreement
constitutes the entire agreement between the parties hereto and supersedes all
other agreements and understandings, both written and oral, between such parties
with respect to the subject matter hereof, including, except as expressly
provided otherwise herein, the Old Tax Sharing Agreement. This Agreement may not
be assigned by either party (by operation of law or otherwise) without the prior
written consent of the other party.
(c) Severability. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable, the
enforceability of the remaining provisions hereof will not in any way be
affected or impaired thereby.
(d) Applicable Law. This Agreement shall be governed by and be
construed in accordance with the laws of the State of New York, without giving
effect to the principles thereof relating to conflicts of laws.
(e) Notices. All notices, requests and other communications
hereunder shall be in writing and shall be deemed given if delivered personally,
if telecopied (only if confirmed), if sent by FedEx or other overnight courier
or delivery service, or if mailed by registered or certified mail (postage
prepaid, return receipt requested) to the parties at the following addresses or
facsimile numbers:
(a) if to E&S:
Evenflo & Spalding Holdings Corporation
425 Meadow Street
Chicopee, Massachusetts 01020
Attention: Wade Lewis, Acting Chief Financial Officer
Telephone: (413) 493-6205
Facsimile: (413) 535-2799
(b) if to Evenflo:
Evenflo Company, Inc.
Northwoods Business Center II
707 Crossroads Court
Vandalia, Ohio 45377
Attention: Daryle Lovett, Vice President and
Chief Financial Offer
Telephone: (937) 415-3205
Facsimile: (937) 415-3113
The address or facsimile number of a party, for the purposes of this Section
11(e), may be changed by giving written notice to the other party of such change
in the manner provided herein for
<PAGE> 9
9
giving notice. Unless and until such written notice is received, the addresses
and facsimile numbers provided herein shall be deemed to continue in effect for
all purposes hereunder.
(f) Amendment and Waiver. No amendment of any provision of
this Agreement shall in any event be effective, unless the same shall be in
writing and signed by the parties hereto. Any failure of any party to comply
with any obligation, agreement or condition hereunder may only be waived in
writing by the other party, but such waiver shall not operate as a waiver of, or
estoppel with respect to, any subsequent or other failure. No failure by any
party to take any action against any breach of this Agreement or default by the
other party shall constitute a waiver of such party's right to enforce any
provision hereof or to take any such action.
(g) Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, their respective
subsidiaries and, subject to Section 11(b) hereof, their respective successors
and assigns, and nothing in this Agreement, express or implied, is intended to
confer upon any other person any rights or remedies of any nature whatsoever
under or by reason of this Agreement.
(h) Counterparts. This Agreement may be executed in any number
of counterparts and by the different parties hereto on separate counterparts,
each of which when so executed and delivered shall be deemed an original, but
all of which together shall constitute one and the same instrument. E&S shall
execute this Agreement on behalf of itself and all of the E&S Subsidiaries and
Evenflo shall execute this Agreement on behalf of itself and all of the Evenflo
Subsidiaries.
(i) Headings; Pronouns and Conjunctions. The section and other
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. Unless
otherwise indicated herein or the context otherwise requires, the singular shall
include the plural and the plural shall include the singular. The word "or"
shall not be deemed inclusive.
<PAGE> 10
10
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of August 20, 1998.
EVENFLO & SPALDING HOLDINGS CORPORATION
By: ____________________________________
Name:
Title:
EVENFLO COMPANY, INC.
By: ____________________________________
Name:
Title:
<PAGE> 1
EXHIBIT 10.16
Employee Matters Agreement
This Agreement relating to employee benefit plans and certain
employment matters ("Employee Benefits Agreement") dated as of August 20, 1998,
is entered into between EVENFLO & SPALDING HOLDINGS CORPORATION, a Delaware
corporation ("Holdings"), and EVENFLO COMPANY, INC., a Delaware corporation
("Evenflo").
WHEREAS, the KKR 1996 Fund L.P. (the "1996 Fund") and Lisco, Inc., a
wholly-owned subsidiary of Holdings ("Lisco"), have entered into a Stock
Purchase Agreement dated as of July 30, 1998 (the "Stock Purchase Agreement"),
in which the 1996 Fund agrees to buy, and Lisco agrees to sell, 51% of the
authorized and outstanding shares of Class A Common Stock of Evenflo;
WHEREAS, the Stock Purchase Agreement provides that Holdings and
Evenflo shall enter into an Employee Matters Agreement covering labor,
employment, pension and employee benefit matters with respect to the employees
of Evenflo;
NOW THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties contained herein, the parties agree as follows:
ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Agreement, they
shall have the meaning specified below or in the Stock Purchase Agreement,
unless the context clearly indicates the contrary:
I.1 "Closing Date" shall mean the date specified in the Stock Purchase
Agreement for the sale of the Evenflo stock to the 1996 Fund.
I.2 "COBRA" shall mean the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended.
I.3 "Controlled Group Member" shall mean any "person" within the
meaning of ERISA Section 3(9) that would be regarded together with Evenflo or
any of its subsidiaries as a single employer under Code Sections 414(b), (c),
(m) and/or (o).
I.4 "Code" shall mean the Internal Revenue Code of 1986, as amended.
I.5 "DOL" shall mean the Department of Labor.
I.6 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
<PAGE> 2
I.7 "Employee" or "Employees" shall mean
(a) persons who, as of the date hereof or as of the Closing
Date, are employed by Evenflo, including without limitation, those persons who
are absent from work on account of short term or long term disability, layoff,
leave of absence or for other reasons, whether or not they return to active
employment with Evenflo after the Closing Date; and
(b) all persons who retired from Evenflo prior to the Closing
Date or whose employment otherwise terminated prior to the Closing Date;
provided, however, that those persons whose employment with Evenflo concluded
prior to the Closing Date, and who as of the Closing Date, continue to be
employed by Holdings or any of Holdings' subsidiaries other than Evenflo and its
subsidiaries, shall not be considered Employees of Evenflo.
I.8 "IRS" shall mean Internal Revenue Service.
I.9 "NLRA" shall mean the National Labor Relations Act of 1935, as
amended.
I.10 "Indemnity Agreement" shall mean the Indemnity Agreement dated as
of August __, 1998 between Holdings and Evenflo.
I.11 "OSHA" shall mean the Occupational Safety and Health Act of 1970,
as amended.
I.12 "PBGC" shall mean the Pension Benefit Guaranty Corporation.
I.13 "WARN" shall mean the Worker Adjustment and Retraining
Notification Act, Pub. L. 100-379.
ARTICLE II
EMPLOYEE BENEFIT PLANS
II.1 Continuation of Employment and Employee Benefits.
(a) Employment. Evenflo shall continue employment and
employment-related responsibility for Employees as of the Closing Date.
(b) Continuation of Employee Benefits. Except as otherwise
specifically provided herein or as required by law or regulations, for at least
one year following the Closing Date, Evenflo shall continue to provide employee
benefits pursuant to its agreements, plans, programs, policies and arrangements
that are, in the aggregate, no less favorable than the employee benefits
maintained for such Employees immediately prior to the Closing Date and upon
terms and conditions that are substantially similar to those in effect
immediately prior to the Closing Date. Nothing herein shall be construed to
prohibit Evenflo from modifying, amending or terminating such agreements, plans,
programs, policies and arrangements in accordance with the terms thereof and
with applicable law.
<PAGE> 3
(c) Individual Agreements. Except as required by law or
regulations, Evenflo shall continue to honor the terms of (i) the deferred
compensation program entered into between Darrell Lovett and Gerry and (ii) the
Agreements related to Change in Control, dated as of May 1, 1996, between
Spalding & Evenflo Companies, Inc. and certain executives. Nothing herein shall
be construed to prohibit Evenflo from modifying, amending or terminating such
program or agreements in accordance with the terms thereof and with applicable
law.
II.2 Qualified Plans.
(a) SERA Plan.
(i) As soon as practicable after the Closing
Date, Evenflo shall establish a new tax qualified defined benefit plan (the
"Evenflo Retirement Plan") providing benefits that are substantially similar to
the Spalding & Evenflo Retirement Account Plan (the "Holdings SERA") for future
service and identical for past service for the benefit of Employees who are
participants or beneficiaries under the Holdings SERA. Accruals of benefits
under the Evenflo Retirement Plan shall commence as of the Closing Date.
(ii) As soon as practicable after the
Closing Date, Holdings shall cause an independent actuary appointed by Holdings
(the "Holdings Actuary") to calculate the amount of assets necessary to satisfy
the applicable requirements of Sections 414(1) and 401(a)(12) of the Code as of
the Closing Date by using assumptions and methods specified in Table 1. In the
event assets exceed the value of the liabilities determined as of the Closing
Date, excess assets allocable to Evenflo shall be determined based on the pro
rata portion of total assets represented by the liabilities for Employees as of
the Closing Date. The above determination by the Holdings Actuary shall be
submitted to an independent actuary appointed by Evenflo (the "Evenflo Actuary")
for approval, but such approval shall be solely for the purpose of determining
that the calculation was made pursuant to this Section 2.2(a)(ii) using the
assumptions specified in Table 1. If the Evenflo Actuary shall disapprove such
determination and the Holding Actuary and the Evenflo Actuary are unable to
agree on a determination, they shall jointly designate a third independent
actuary whose determination shall be final and binding, provided that such third
actuary's determination shall relate only to the calculation on the basis set
forth above. Evenflo and Holdings shall each pay one-half of the cost of such
third actuary.
(iii) As soon as practicable after the
Closing Date, Evenflo shall provide Holdings with the plan document for the
Evenflo Retirement Plan, together with evidence reasonably satisfactory to
Holdings that the Evenflo Retirement Plan satisfies the requirements for
qualification under Section 401(a) of the Code as of its effective date and that
the transfer of assets provided in (iv) below shall not affect the qualification
of such plans. All required benefit payments to Employees and other
beneficiaries under the Holdings SERA between the Closing Date and the asset
transfer date shall be made from the Holdings SERA.
(iv) As soon as practicable after the latest
of (A) the date on which the asset transfer amount is determined, (B) the
expiration of 30 days following the filing of Forms 5310 with the IRS in respect
of the Holdings SERA and the Evenflo Retirement Plan, and
<PAGE> 4
(C) the receipt by the Holdings trustee of the evidence described in
subparagraph (a)(iii) above, Holdings shall cause the trustee of the Holdings
SERA to transfer to the trust forming a part of the Evenflo Retirement Plan cash
and/or securities reasonably acceptable to Evenflo in an amount equal to the
amount determined in (ii) above. Such amount shall be adjusted for investment
earnings and losses to the same extent as the actual investment return and
losses of the Holdings Master Trust for the period between the Closing Date and
the date on which assets are transferred from the Holdings Master Trust to a
trust established by Evenflo to fund the Evenflo Retirement Plan. Such amount
shall be decreased by (i) the benefit payments to the participants and
beneficiaries under Holdings SERA during the period from the Closing Date to the
asset transfer date and (ii) expenses approved by Evenflo.
(b) Spalding & Evenflo Savings Plus Plan.
(i) As soon as practicable after the Closing Date,
Evenflo will establish a new tax qualified defined contribution plan (the
"Evenflo Savings Plan") that is substantially similar to the Spalding & Evenflo
Savings Plus Plan (the "Holdings Savings Plan") for the benefit of Employees who
are participants under the Holdings Savings Plan.
(ii) As soon as practicable after the Closing Date
and after (i) above, Evenflo shall provide Holdings with evidence acceptable to
Holdings that the Evenflo Savings Plan satisfies the requirements under Section
401 of the Code and that the Evenflo Savings Plan shall continue to so qualify
after the asset transfers described in (iv) below.
(iii) On the Closing Date or such other date as
mutually agreed by Evenflo and Holdings, Evenflo shall file and Holdings shall
file with the IRS a Form 5310, if necessary, specifying a date after the filing
of such forms, as mutually agreed to by Evenflo and Holdings, on which assets
equal in value to the accounts of Employees in the Holdings Savings Plan trust
are to be transferred to the Evenflo Savings Plan trust.
(iv) As soon as practicable after the Closing Date,
Holdings shall cause the trustee of the Holdings Savings Plan to transfer the
value of accounts with respect to Employees to the trust fund under the Evenflo
Savings Plan to be credited to the accounts of such Employees whose assets are
transferred. Such transfer shall be made in cash or kind, including the assets
in the loan accounts of participants who have loan amounts outstanding pursuant
to the provisions of the Holdings Savings Plan. Assets in the loan accounts of
participants shall be transferred in the form of notes signed by the
participants. Assets that are transferred pursuant to this Section 2.2(b)(iv)
shall be transferred with all earnings and dividends that have accrued from the
most recent valuation date to the transfer date. Upon receipt by the Evenflo
Savings Plan of the assets so transferred, neither Holdings nor the trustee of
the Holdings Savings Plan shall have any further liability to such Employees for
benefits under the Holdings Savings Plan, with respect to which liabilities and
assets have been transferred. Holdings and Evenflo agree to use their best
efforts to request and obtain any approvals necessary from the Internal Revenue
Service and to make any amendments to their plans and trusts as may be necessary
or appropriate to effect the transfer contemplated by this provision.
<PAGE> 5
(c) Pension Plan for Hourly Employees of the Jasper, Alabama
Facility of Evenflo Company, Inc. Evenflo shall maintain all liabilities with
respect to the Pension Plan for Hourly Employees of the Jasper, Alabama Facility
of Evenflo Company, Inc. No assets shall be transferred therefrom.
(d) Gerry Wood Products Employee Profit Sharing and Savings
Plan. Evenflo shall maintain all liabilities with respect to the Gerry Wood
Products Employee Profit Sharing and Savings Plan. No assets shall be
transferred therefrom.
(e) Gerry Savings Plan. Evenflo shall maintain all liabilities
with respect to the Gerry Savings Plan. No assets shall be transferred
therefrom.
II.3 Nonqualified Plan.
Spalding and Evenflo Supplemental Retirement Plan.
(a) As soon as practicable after the Closing Date, Evenflo
shall establish a supplemental defined benefit plan (the "Evenflo SRP")
providing benefits that are substantially similar to those provided under the
Spalding & Evenflo Supplemental Retirement Plan (the "Holdings SRP") for future
service and identical for past service for the benefit of Employees who are
participants or beneficiaries under the Holdings SRP. Accruals of benefits under
the Evenflo SRP shall commence as of the Closing Date.
(b) As soon as practicable after the Closing Date, Holdings
shall cause the Trustee of the Holdings SRP to transfer to the trust forming a
part of Evenflo SRP cash and/or securities acceptable to Evenflo in an amount
equal to the assets allocated to Employees as of the Closing Date using the
methodology presented in Table B of a May 4, 1998 letter from Watson Wyatt to
Stephen J. Dryer providing the Holdings SRP asset allocation. Such amount shall
be adjusted for investment earnings and losses at the same rate as the actual
investment return and losses of the Holdings Trust for the period between the
Closing Date and the date on which assets are transferred from the Holdings
Trust to a trust established by Evenflo to fund the Evenflo SRP. Such amount
shall be decreased by (i) the benefit payments to the participants and
beneficiaries under Holdings SERA during the period from the Closing Date to the
asset transfer date and (ii) expenses approved by Evenflo.
II.4 Postretirement Welfare Benefit Plans.
(a) Evenflo shall provide postretirement health care benefits
and postretirement life insurance benefits to all eligible Employees under
Evenflo's employee benefit plans established and maintained for such Employees,
and such benefits shall be substantially comparable to the benefits in effect
under the benefit plans of Holdings or any of its subsidiaries as of the Closing
Date. Eligibility for such benefits shall be based on the aggregate of service
with Holdings, Evenflo or any of their subsidiaries. Holdings shall cause to be
accrued on the books of Evenflo a pro-rata portion of the contribution due in
1998 with respect to funding the postretirement health care benefits and retiree
life insurance qualified account as required under Financial Accounting
<PAGE> 6
Standard # 106 at the Closing Date.
II.5 Stock Purchase Option Plan.
(a) Holdings shall retain all liabilities under 1996 Stock
Purchase and Option Plan for Key Employees of Evenflo & Spalding Holdings
Corporation and subsidiaries.
(b) As soon as practicable after the Closing Date, Evenflo
shall establish the 1998 Stock Purchase and Option Plan for Key Employees of
Evenflo Company, Inc. and Subsidiaries, which will provide for the issuance of
common stock of Evenflo, stock options and other stock-based awards.
II.6 COBRA.
Evenflo shall continue health care continuation coverage
required to be provided under the provisions of Section 601 of ERISA for
Employees or their dependents, for qualifying events occurring before, on or
after the Closing Date.
II.7 Welfare Plan Claims.
On and after the Closing Date, Evenflo shall assume and pay
all hospital, medical, life insurance, disability and all other Welfare Plan (as
defined in Section 3(1) of ERISA) benefits and expenses for each Employee with
respect to claims incurred before, on or after the Closing Date.
II.8 Termination of Participation in Holdings' Plans.
Except as otherwise specifically provided herein, effective as
of the Closing Date Holdings shall take such action as is necessary to terminate
Employees' participation in employee benefit plans, training programs, or
similar arrangements maintained by Holdings.
ARTICLE III
LABOR
III.1 Collective Bargaining-Agreements.
Evenflo shall continue in accordance with its terms the
collective bargaining agreements covering the Employees represented by unions.
Evenflo shall recognize service with Holdings and its subsidiaries before the
Closing Date in the same manner as such service has been recognized by Holdings
and its subsidiaries prior to the Closing Date for purposes of determining
seniority rights and benefits under the collective bargaining agreements.
III.2 Service-based Compensation and Payroll Practices.
For all purposes of service-based compensation and payroll
practices, such as vacation allowances, service presently recognized by Holdings
or any of its subsidiaries through
<PAGE> 7
the Closing Date shall be counted by Evenflo after the Closing Date. Evenflo
shall recognize and pay for all vacation entitlements of Employees in accordance
with current practice of Holdings or its subsidiaries.
III.3 WARN.
Prior to the Closing Date, Holdings and its subsidiaries shall
comply in all material respects with WARN and shall indemnify and hold Evenflo
harmless from and against any and all claims, judgments, damages, losses,
liabilities and expenses that Evenflo may incur by reason of any non-compliance.
Prior to Closing Date, Holdings and its subsidiaries shall notify Evenflo of
every employment termination which may under WARN be a basis for aggregation for
meeting threshold requirements. On and after the Closing Date, Evenflo shall
comply in all material respects with WARN and Evenflo shall indemnify and hold
Holdings harmless from and against any and all claims, judgments, damages,
losses, liabilities and expenses that Holdings may incur by reason of any
non-compliance.
III.4 Labor Claims.
On and after the Closing Date, Evenflo shall retain liability
for any and all present or future claims, proceedings and other litigation
relating to employment of the Employees prior to the Closing Date, such as
discrimination claims, (including, without limitation, claims under federal and
state laws relating to discrimination by reason of race, creed, sex, national
origin or handicap) and claims under OSHA, NLRA and the Fair Labor Standards
Act. Evenflo shall indemnify and hold Holdings harmless from and against any and
all such claims, judgments, damages, losses, liabilities and expenses that
Holdings may incur as a result of any such claims, proceedings or litigation.
ARTICLE IV
SURVIVAL AND INDEMNIFICATION
IV.1 Survival.
The covenants of the parties shall survive the Closing and
continue in full force and effect thereafter.
IV.2 Indemnities.
(a) Holdings Indemnity.
Holdings shall indemnify Evenflo against, and hold Evenflo
harmless from, any loss, liability, cost, expense or damage (including, without
limitation, reasonable counsel fees and disbursements and court costs) accruing
from or resulting by reason of:
(i) any breach of any covenant made by Holdings
herein; or
(ii) any claim by the PBGC, the DOL or the IRS solely
because
<PAGE> 8
Evenflo or any of its subsidiaries is a Controlled Group Member.
(b) Evenflo Indemnities.
Evenflo shall indemnify Holdings against and hold Holdings
harmless from any loss, liability, cost, expense, or damage (including, without
limitation, reasonable counsel fees and disbursements and court costs) accruing
from or resulting by reason of:
(i) the breach of any covenant made by Evenflo
herein; or
(ii) any claim by Employees, the PBGC, or the DOL or
any other governmental agency or any other person in connection with
any Employee Benefit Plan retained or assumed by Evenflo.
The indemnities in this Section 4.2(b) shall not apply to
those events to which Holdings' indemnity applies in Section 4.2(a) above.
The parties shall notify one another promptly of every such
claim, suit, action or proceeding of which they become aware that may be brought
against either and cooperate to the extent reasonably necessary to the
resolution of such claim or to the defense of such suit, action or proceeding,
including making available any information and documents which are reasonably
necessary thereto. Notwithstanding the foregoing, this Section 4.2 shall be
applied in accordance with the Indemnity Agreement, including the procedures
therein.
ARTICLE V
GENERAL PROVISIONS
V.1 Notices.
All notices, demands, requests, consents, approvals or other
communications (collectively "Notices") required or permitted to be given
hereunder or which are given with respect to this Agreement shall be in writing
and shall be personally served or deposited in the United States mail,
registered or certified, return receipt requested, postage prepaid, addressed as
set forth below, or such other address as such party shall have specified most
recently by written notice. Notice shall be deemed given on the date of service
if personally served. Notice mailed as provided herein, shall be deemed given on
the third business day following the date so mailed.
(a) if to Evenflo, to:
Evenflo Company, Inc.
Northwoods Business Center II
707 Crossroads Court
Vandalia, Ohio 45377
Telephone: (937) 415-3300
Facsimile: (937) 415-3113
Attn: Richard W. Frank
<PAGE> 9
with a copy to:
Kohlberg Kravis Roberts & Co.
9 West 57th Street, Suite 4200
New York, New York 10019
Telephone: (212) 750-8300
Facsimile: (212) 750-0003
Attn: Michael T. Tokarz
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Telephone: (212) 455-2000
Facsimile: (212) 455-2502
Attn: Alan G. Schwartz, Esq.
and
(b) if to Holdings, to:
c/o Spalding & Evenflo Companies, Inc.
425 Meadow Street
Chicopee, Massachusetts 01021-0901
Telephone: (413) 536-1200
Attention: General Counsel
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Telephone: (212) 455-2000
Facsimile: (212) 455-2502
Attn: Charles I. Cogut, Esq.
V.2 Governing Law; Jurisdiction.
(a) THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF NEW YORK
(REGARDLESS OF THE LAWS THAT MIGHT BE APPLICABLE UNDER PRINCIPLES OF CONFLICTS
OF LAW) AS TO ALL MATTERS, INCLUDING BUT NOT LIMITED TO MATTERS OF VALIDITY,
CONSTRUCTION, EFFECT AND PERFORMANCE.
<PAGE> 10
(b) The parties hereto agree that any suit, action or
proceeding seeking to enforce any provision of, or based on any matter arising
out of or in connection with, this Agreement or the transactions contemplated
hereby may only be brought in the United States District Court for the Southern
District of New York or any New York State court sitting in New York City, and
each of the parties hereby consents to the jurisdiction of such courts (and of
the appropriate appellate courts therefrom) in any such suit, action or
proceeding and irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of the venue of any
such suit, action or proceeding in any such court or that any such suit, action
or proceeding which is brought in any such court has been brought in an
inconvenient forum. Process in any such suit, action or proceeding may be served
on any party anywhere in the world, whether within or without the jurisdiction
of any such court. Without limiting the foregoing, each party agrees that
service of process on such party as provided in Section 5.1 shall be deemed
effective service of process on such party.
V.3 Waiver Of Jury Trial.
EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO
THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
V.4 Termination.
This Agreement may be terminated at any time prior to the
Closing:
(a) by mutual written agreement of Holdings and Evenflo;
(b) by either Holdings or Evenflo if the Closing shall not
have been consummated as of the close of business on September 30,
1998; or
(c) by either Holdings or Evenflo if consummation of the
transactions contemplated hereby would violate any non-appealable final
order, decree or judgment of any court or governmental body having
competent jurisdiction.
The party desiring to terminate this Agreement pursuant to clauses 5.4(b) or (c)
shall promptly give notice of such termination to the other party.
V.5 Interrelationship with the Stock Purchase Agreement and the
Indemnity Agreement.
This Agreement expresses the entire agreement of the parties
relating to employee matters. In the event of any inconsistency or conflict
between Articles II or III of this Agreement and the provisions of the Stock
Purchase Agreement, the provisions of Articles II and III of this Agreement
shall apply. Otherwise, the provisions of the Stock Purchase Agreement shall
apply, provided, however, that in the event of any inconsistency or conflict
between Section 4.2 of this
<PAGE> 11
Agreement and the provisions of the Indemnity Agreement, the provisions of the
Indemnity Agreement shall apply.
V.6 Amendments and Waivers.
(a) Any provision of this Agreement may be amended or waived
if, but only if, such amendment or waiver is in writing and is signed, in the
case of an amendment, by each party to this Agreement, or in the case of a
waiver, by the party against whom the waiver is to be effective.
(b) No failure or delay by any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
V.7 Expenses.
Whether or not the transactions contemplated hereby are
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such costs or expenses.
V.8 Severability.
If one or more provisions of this Agreement are held to be
unenforceable under applicable law, such provision shall be deemed to be
excluded from this Agreement and the balance of this Agreement shall be
interpreted as if such provision were so excluded and shall be enforced in
accordance with its terms to the maximum extent permitted by law.
V.9 Titles and Headings.
Titles and headings of sections of this Agreement are for
convenience only and shall not affect the construction of any provision of this
Agreement.
V.10 Pronouns.
The masculine pronoun shall include the feminine and neuter,
and the singular pronoun shall include the plural where the context so
indicates.
V.11 Successors and Assigns.
The provisions of this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, provided that no party may assign, delegate or otherwise transfer any
of its rights or obligations under this Agreement without the consent of each
other party hereto.
<PAGE> 12
V.12 Counterparts; No Third Party Beneficiaries.
This Agreement may be signed in any number of counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument. This Agreement shall become
effective when each party hereto shall have received a counterpart hereof signed
by the other party hereto. Nothing herein shall confer upon any person
(including any current or former Employee) other than the parties hereto any
rights or remedies of any kind whatsoever under or by reason of this Agreement,
including, without limitation, any right to employment or continued employment,
or any right to a particular benefit.
<PAGE> 13
IN WITNESS WHEREOF, the undersigned, intending to be legally bound
hereby, have duly executed and delivered this Agreement as of the date first
above written.
EVENFLO & SPALDING HOLDINGS CORPORATION
By:
---------------------------------
Name:
---------------------------------
Title:
---------------------------------
EVENFLO COMPANY, INC.
By:
---------------------------------
Name:
---------------------------------
Title:
---------------------------------
<PAGE> 14
Table 1
ACTUARIAL ASSUMPTIONS
Interest Rate
5.40% for the first 25 years, 5.25% thereafter.
Demographic Assumptions
Mortality Rates:
The 1983 Group Annuity Mortality Table for males, set back six years
for females.
Retirement Age for Terminated Vested Benefits:
Age 65.
DATA
Actual data compiled as of the Closing Date will be utilized for any asset
transfer according to Section 414(l) of the Code.
ACTUARIAL METHODS
Accrued benefit measured as of the Closing Date shall use actual pay history,
including the partial year of pay in the year containing the Closing Date. The
value ("liability") of the accrued benefit for active participants as of the
Closing Date for purposes of the 414(l) allocation shall equal the cash balance
benefit (the "Account Balance") as of that date.
<PAGE> 1
EXHIBIT 10.17
TRANSITION SERVICES AGREEMENT
TRANSITION SERVICES AGREEMENT, dated as of August 20, 1998
(this "Agreement"), between EVENFLO & SPALDING HOLDINGS CORPORATION, a Delaware
corporation ("E&S") and EVENFLO COMPANY, INC., a Delaware corporation
("Evenflo").
1. Transition Services. (a) During the six month period (or
such other period set forth on Annex A hereto or otherwise agreed upon by the
parties) commencing on the effective date set forth in Section 10 (the
"Transition Period"), E&S agrees to provide, or to cause its relevant affiliates
to provide, to Evenflo the financial systems/accounting services set forth on
Annex A attached hereto (such financial systems/accounting services are
collectively referred to herein as "Services"). The quality and relative level
of each Service to be provided hereunder shall be the same as E&S and such
affiliates have provided to Evenflo at comparable times and periods during the
year preceding the date hereof. Evenflo agrees to pay E&S the amounts specified
in the cost schedule set forth on Annex A attached hereto in respect of the
provision of the respective Services. Evenflo shall reimburse E&S and its
affiliates in accordance with Section 3 hereof for all cash disbursements made
by E&S or any of its affiliates relating to payments for payroll and accounts
payable made by E&S or any such affiliate for Evenflo's account.
(b) Notwithstanding anything to the contrary contained herein,
E&S and Evenflo agree that E&S and its affiliates shall not be obligated
hereunder to provide any marketing, sales or distribution-related services to
Evenflo.
2. Billing and Payment. Evenflo agrees promptly to pay any
bills and invoices that it receives from E&S or its affiliates for Services
provided under this Agreement, subject to receiving such appropriate support
documentation for such bills and invoices as may be reasonably requested by
Evenflo. Such charges shall be billed as of the end of each calendar month.
3. Cash Disbursements. Evenflo agrees to establish promptly
after the date hereof procedures relating to the timely settlement of cash
disbursements made by E&S and its affiliates relating to payments for payroll
and accounts payable made by E&S or any of its affiliates for Evenflo's account.
E&S and Evenflo agree that such disbursements will be settled weekly and mode of
payment will be via wire transfer in immediately available funds to an account
in the United States designated by E&S.
4. Validity of Documents. The parties hereto shall be entitled
to rely upon the genuineness, validity or truthfulness of any document,
instrument or other writing presented in connection with this Agreement unless
such document, instrument or other writing appears on its face to be fraudulent,
false or forged.
5. Termination. Any or all of the services to be provided by
E&S or its relevant affiliates hereunder may be terminated by Evenflo prior to
the expiration of the
<PAGE> 2
Transition Period only on ten (10) days prior written notice to E&S, provided
that the payroll Services to be provided by E&S and its affiliates hereunder may
be terminated prior to the expiration of the Transition Period only on thirty
(30) days prior written notice to E&S.
7. Independent Contractors. In providing Services hereunder,
E&S and each relevant affiliate of E&S shall act solely as an independent
contractor. Nothing herein shall constitute or be construed to be or create a
partnership, joint venture or principal/agent relationship between E&S or any of
its affiliates and Evenflo. All persons employed by E&S or its affiliates in the
performance of the obligations of E&S hereunder shall be the sole responsibility
of E&S and its affiliates and Evenflo shall have no obligation or responsibility
with respect thereto.
8. Indemnification. Evenflo agrees to hold harmless and
indemnify E&S and its affiliates from and against all losses, claims, damages,
liabilities and expenses (including, but not limited to, any and all reasonable
expenses incurred in investigating, preparing or defending against any
litigation or proceeding, commenced or threatened, or any claim whatsoever
whether or not resulting in any liability) in connection with E&S's or any such
affiliate's provision of Services to Evenflo hereunder, unless such loss, claim,
damage, liability or expense results from the gross negligence or willful
misconduct of E&S or any of its affiliates or their respective employees or
agents. E&S agrees to hold harmless and indemnify Evenflo and its affiliates
from and against all losses, claims, damages, liabilities and expenses
(including, but not limited to, any and all reasonable expenses incurred in
investigating, preparing or defending against any litigation or proceeding,
commenced or threatened, or any claim whatsoever whether or not resulting in any
liability) in connection with Evenflo's or any such affiliate's provision of
Services to E&S hereunder, unless such loss, claim, damage, liability or expense
results from the gross negligence or willful misconduct of Evenflo or any of its
affiliates or their respective employees or agents.
9. Confidentiality. E&S shall, and shall cause each of its
affiliates to, hold all information relating to Evenflo obtained by E&S or any
such affiliate in connection with its performance of Services hereunder
confidential and not disclose any of such information to any party for a period
of three (3) years from the expiration of this Agreement except for disclosures
required by legal process or proceedings, as to which disclosures E&S shall
provide Evenflo with notice promptly after E&S becomes aware that such a
disclosure is required and prior to making such disclosure and except for
disclosures in connection with legal process or proceedings between Evenflo and
E&S relating to this Agreement.
10. Effective Date. This Agreement shall become effective upon
the closing of the Restructuring.
11. Books and Records. All books, records and accounts
maintained by E&S or its affiliates for Evenflo hereunder shall at all times be
the exclusive property of Evenflo, and neither E&S nor any of its affiliates
shall have any right, title nor interest therein. Evenflo shall be permitted to
inspect any such books, records and accounts at any reasonable time during
regular business hours and shall be entitled to such access as Evenflo
-2-
<PAGE> 3
shall reasonably request to the representatives, officers and employees of E&S
and its affiliates who are involved in the provision of Services hereunder. Upon
termination of the provision of any or all Services by E&S under this Agreement
all books, records, and accounts relating to the terminated Services shall
promptly be delivered to Evenflo at its address set forth below.
12. Miscellaneous. (a) Notices. All orders, notices, requests,
demands, waivers and other communications required or permitted to be given
under this Agreement shall be in writing and shall be deemed to have been duly
given if delivered personally or mailed, certified or registered mail with
postage prepaid, as follows:
(i) If to E&S, to it at:
Evenflo & Spalding Holdings Corporation
c/o Spalding & Evenflo Companies, Inc.
425 Meadow Street
Chicopee, Massachusetts 01021-0901
Attention: General Counsel
(ii) If to Evenflo, to it at:
Evenflo Company, Inc.
Northwoods Business Center II
707 Crossroads Court
Vandalia, Ohio 45377
Attention: Richard Frank
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Alan G. Schwartz, Esq.
or to such other person or address as either party shall specify by notice in
writing to the other party. All such notices, requests, demands, waivers 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.
(b) Entire Agreement. This Agreement constitutes the entire
agreement among the parties hereto with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and oral,
between or among either of the parties with respect to the subject matter
hereof.
-3-
<PAGE> 4
(c) 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.
(d) Assignability. This Agreement shall not be assigned by
either of the parties hereto without the prior written consent of the other
party.
(e) Amendment and Modification; Waiver. Subject to applicable
law, this Agreement may be amended, modified and supplemented by written
instrument authorized and executed by E&S and Evenflo at any time prior to the
termination hereof with respect to any of the terms contained herein. 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. The waiver
by either party hereto of a breach of any provision of this Agreement shall not
operate or be construed as a waiver of any other or subsequent breach.
(f) Section Headings. The section headings contained in this
Agreement are inserted for reference purposes only and shall not affect the
meaning or interpretation of this Agreement.
(g) Severability. If any provision of this Agreement is
declared by a court of competent jurisdiction to be illegal, void or
unenforceable, all other provisions of this Agreement shall remain in full force
and effect.
(h) Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original, and all of which shall be
deemed to be one and the same agreement.
(i) Applicable Law. This Agreement and the legal relations
between the parties shall be governed by and construed in accordance with the
laws of the State of New York.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties have signed this Agreement on
the date first set forth above.
EVENFLO & SPALDING HOLDINGS CORPORATION
By:___________________________
EVENFLO COMPANY, INC.
By:___________________________
-5-
<PAGE> 6
ANNEX A
E&S will continue to provide, or cause its affiliates to
continue to provide, as the case may be, the following financial
systems/accounting services at the monthly costs set forth below in accordance
with the terms of the Transition Services Agreement to which this Annex A is
attached:
FINANCIAL SYSTEM/ACCOUNTING SERVICES MONTHLY COST
[to come] [to come]
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Spalding Holdings Corporation
We consent to the incorporation by reference in Registration Statement No.
333-14569 of Spalding Holdings Corporation (formerly Evenflo & Spalding Holdings
Corporation) on Form S-8 of our reports dated November 12, 1998, appearing in
the Annual Report on Form 10-K of Spalding Holdings Corporation for the year
ended September 30, 1998.
DELOITTE & TOUCHE LLP
Tampa, Florida
December 28, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SPALDING HOLDINGS CORPORATION (FORMERLY EVENFLO &
SPALDING HOLDINGS CORPORATION) FOR THE PERIOD ENDED SEPTEMBER 30, 1998 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-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,695
<SECURITIES> 0
<RECEIVABLES> 146,063
<ALLOWANCES> (10,539)
<INVENTORY> 118,826
<CURRENT-ASSETS> 282,579
<PP&E> 104,676
<DEPRECIATION> (52,785)
<TOTAL-ASSETS> 535,964
<CURRENT-LIABILITIES> 153,520
<BONDS> 503,074
0
100,000
<COMMON> 969
<OTHER-SE> (238,118)
<TOTAL-LIABILITY-AND-EQUITY> 535,964
<SALES> 0
<TOTAL-REVENUES> 803,312
<CGS> 564,645
<TOTAL-COSTS> 263,271
<OTHER-EXPENSES> 8,014
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,041
<INCOME-PRETAX> (112,159)
<INCOME-TAX> 33,196
<INCOME-CONTINUING> (78,963)
<DISCONTINUED> 0
<EXTRAORDINARY> (5,909)
<CHANGES> 0
<NET-INCOME> (84,872)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
