<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________________ to__________________
Commission file number 333-14569
EVENFLO & SPALDING HOLDINGS CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 59-2439656
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
601 South Harbour Island Boulevard, Suite 200, Tampa, Florida 33602-3141
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (813) 204-5200
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check X 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
--- ---
The number of shares outstanding of the registrant's Common stock, par value
$.01 per share, at July 31, 1998, was 96,921,741 shares.
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Evenflo & Spalding Holdings Corporation and Subsidiaries
Unaudited Condensed Statements of Consolidated Earnings (Loss)
and Comprehensive Earnings (Loss)
For the three months ended June 30, 1998 and 1997
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Three months ended
June 30,
----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Net sales $ 237,584 251,411
Cost of sales 166,704 170,131
--------- ---------
Gross profit 70,880 81,280
Selling, general and administrative expenses 78,187 64,058
Royalty income, net (3,023) (3,742)
Restructuring costs 3,375 962
--------- ---------
Income (loss) from operations (7,659) 20,002
Interest expense, net 21,712 19,286
Currency loss, net 1,655 150
--------- ---------
Earnings (loss) before income taxes (31,026) 566
Income taxes (benefit) (10,614) 10,083
--------- ---------
Net earnings (loss) (20,412) (9,517)
Other comprehensive earnings (loss) - currency translation
adjustments net of tax benefit of $130 and $50 174 (420)
--------- ---------
Comprehensive earnings (loss) $ (20,238) (9,937)
--------- ---------
--------- ---------
</TABLE>
See Unaudited Notes to Condensed Consolidated Financial Statements
2
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Evenflo & Spalding Holdings Corporation and Subsidiaries
Unaudited Condensed Statements of Consolidated Earnings (Loss)
and Comprehensive Earnings (Loss)
For the nine months ended June 30, 1998 and 1997
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended
June 30,
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Net sales $ 631,184 582,476
Cost of sales 444,359 393,190
--------- ---------
Gross profit 186,825 189,286
Selling, general and administrative expenses 201,627 171,358
Royalty income, net (9,829) (9,514)
Restructuring costs 9,136 2,023
--------- ---------
Income (loss) from operations (14,109) 25,419
Interest expense, net 59,287 53,112
Currency loss, net 3,214 371
--------- ---------
Earnings (loss) before income taxes (76,610) (28,064)
Income taxes (benefit) (26,095) (4,232)
--------- ---------
Net earnings (loss) (50,515) (23,832)
Other comprehensive earnings (loss) - currency translation
adjustments net of tax benefit of $328 and $177 23 (632)
--------- ---------
Comprehensive earnings (loss) $ (50,492) (24,464)
--------- ---------
--------- ---------
</TABLE>
See Unaudited Notes to Condensed Consolidated Financial Statements
3
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Evenflo & Spalding Holdings Corporation and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
June 30, 1998 and September 30, 1997
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, September 30,
Assets 1998 1997
- ------ ----------- -------------
<S> <C> <C>
Current assets
Cash $ 20,569 5,168
Receivables, less allowance of $5,233 and $3,941 233,928 243,571
Inventories 215,070 157,512
Deferred income taxes 11,518 13,860
Other 9,532 8,955
----------- -----------
Total current assets 490,617 429,066
Property, plant and equipment, net 115,455 110,195
Intangible assets, net 162,227 154,123
Deferred income taxes 65,747 34,904
Deferred financing costs 28,408 29,594
Other 2,459 3,349
----------- -----------
Total assets $ 864,913 761,231
----------- -----------
----------- -----------
Liabilities and Shareholders' Equity (Deficiency)
Current liabilities
Non-U.S. bank loans $ 9,524 17,674
Current maturities of long-term debt 17,500 17,500
Accounts payable 171,947 183,657
Accrued expenses 78,808 79,348
Income taxes 109 811
----------- -----------
Total current liabilities 277,888 298,990
Long-term debt 774,174 609,900
Pension 12,155 12,327
Post-retirement benefits 8,910 8,910
Other 1,570 1,735
----------- -----------
Total liabilities 1,074,697 931,862
Shareholders' equity (deficiency)
Common stock, $.01 par value, 150,000,000 shares authorized
and 96,921,741 and 94,655,078 shares outstanding 970 947
Paid-in capital 443,097 431,780
Retained earnings (deficit) (649,582) (599,067)
Accumulated other comprehensive earnings (loss) - currency
translation adjustments (4,269) (4,291)
----------- -----------
Total shareholders' equity (deficiency) (209,784) (170,631)
----------- -----------
Total liabilities and shareholders' equity (deficiency) $ 864,913 761,231
----------- -----------
----------- -----------
</TABLE>
See Unaudited Notes to Condensed Consolidated Financial Statements
4
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Evenflo & Spalding Holdings Corporation and Subsidiaries
Unaudited Condensed Statements of Consolidated Cash Flows
For the nine months ended June 30, 1998 and 1997
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended
June 30,
------------------------
Increase (Decrease) in Cash 1998 1997
- --------------------------- --------- ---------
<S> <C> <C>
Cash flows from operating activities
Net earnings (loss) $ (50,515) (23,832)
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Depreciation 16,257 12,976
Intangibles amortization 4,141 3,537
Deferred income taxes (27,033) (2,297)
Deferred financing cost amortization 3,884 3,478
Other (172) (407)
--------- ---------
Subtotal (53,438) (6,545)
Receivables 9,643 (29,439)
Inventories (54,175) (25,629)
Current liabilities, excluding bank loans (14,052) 1,712
Other (14) (1,622)
--------- ---------
Net cash used by operating activities (112,036) (61,523)
Cash flows from investing activities
Capital expenditures (22,664) (21,033)
Payment to purchase net assets of Hogan (1,641) 0
Payment to purchase net assets of Gerry 0 (72,102)
--------- ---------
Net cash flows used in investing activities (24,305) (93,135)
--------- ---------
Net cash used before financing activities (136,341) (154,658)
Cash flows from financing activities
Net borrowings under revolving credit loan 154,600 88,700
Net borrowings of other indebtedness (1,501) 1,129
Payment of new credit agreement costs (2,698) 0
Proceeds from issuance of common stock 1,422 8,226
Repurchase of common stock (81) (283)
--------- ---------
Net cash flows provided (used) by financing activities 151,742 97,772
Cash - net change 15,401 (56,886)
beginning of period 5,168 75,298
--------- ---------
end of period $ 20,569 18,412
Supplemental cash flow data
Interest paid $ 61,519 41,370
Income taxes paid (refunded) (6,047) 2,316
Non-cash portion of acquisition of Hogan net assets for
common stock and a 10 1/2% note 13,025 0
Non-cash exchange of preferred stock into common stock 0 164,174
</TABLE>
See Unaudited Notes to Condensed Consolidated Financial Statements
5
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Evenflo & Spalding Holdings Corporation and Subsidiaries
Unaudited Notes to Condensed Consolidated Financial Statements
For the three months and nine months ended June 30, 1998 and 1997
(Dollar amounts in thousands, except per share amounts)
Basis of Presentation
The accompanying condensed consolidated balance sheet of Evenflo & Spalding
Holdings Corporation and subsidiaries (the "Company") as of June 30, 1998, and
the related condensed statements of consolidated earnings (loss) and
comprehensive earnings (loss) for the three and nine month periods ended June
30, 1998 and 1997, and of cash flows for the nine month periods ended June 30,
1998 and 1997, are unaudited. In the opinion of management, all adjustments
necessary for a fair presentation of such condensed consolidated financial
statements have been included. Such adjustments consisted only of normal
recurring items. Interim results may not be indicative of results for a full
year.
The condensed consolidated financial statements and notes are presented as
permitted by Form 10-Q of the Securities and Exchange Commission and do not
contain certain information included in the Company's annual consolidated
financial statements and notes. The condensed consolidated balance sheet as of
September 30, 1997, was derived from the Company's audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles. This Form 10-Q should be read in conjunction with the Company's
consolidated financial statements and accompanying notes included in its Annual
Report on Form 10-K for the year ended September 30, 1997 (file no. 333-14569).
Acquisitions
On April 21, 1997, the Company acquired certain net assets of Gerry Baby
Products Company ("Gerry") for a purchase price of $68,652. Gerry had
manufacturing and administrative operations in Colorado, which subsequent to
the acquisition have been consolidated into Evenflo's operations in Ohio and
Georgia. Gerry also has manufacturing operations in Wisconsin. Gerry
manufactured and/or marketed specialty juvenile products under the
Gerry-Registered Trademark- and Snugli-Registered Trademark- brand names. The
Gerry acquisition was accounted for using the purchase method of accounting;
accordingly, the operating results of Gerry have been included in the
condensed statement of consolidated earnings (loss) from the date of
acquisition. If the acquisition had taken place at October 1, 1996, rather
than in April 1997, Gerry's unaudited results of operations would have
increased pro forma consolidated net sales by $4,533 and would have increased
the net loss by $(742) for the quarter ended June 30, 1997, and would have
increased pro forma consolidated net sales by $61,362 and would have
increased the net loss by $(985) for the nine months ended June 30, 1997.
On November 26, 1997, the Company acquired certain assets of the Ben Hogan Co.
("Hogan") for a purchase price of $14,666, consisting of $10,000 in Company
common stock (2 million
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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.
The Hogan acquisition was accounted for using the purchase method of accounting;
accordingly, the operating results of Hogan have been included in the condensed
statements of consolidated earnings (loss) from the date of acquisition.
Consolidated pro forma net sales and net loss would not have been materially
different from the Company's reported amounts for the nine months ended June 30,
1998 and 1997.
Restructuring Costs
In fiscal 1997, the Company began to restructure Spalding's international
operations by streamlining operations in Japan and certain European countries.
In the 1998 second quarter, Spalding implemented an expanded international
restructuring program that will reduce the Company's international
infrastructure to a size sufficient to support a strategic focus on core golf
and sporting goods products in selected countries. Operations will be
significantly down-sized in Japan, consolidated in Europe, and closed in Mexico.
As a result, future sales activities in Mexico, France, Germany, Italy, and
Spain will be channeled through distributors.
Restructuring costs were $9,136 in the nine months ended June 30, 1998. Spalding
restructuring costs were $7,693 and consisted of (i) $4,344 principally for
international severance and lease settlements, (ii) $2,349 of management
severance costs, and (iii) $1,000 of severance and other costs at Etonic.
Evenflo restructuring costs were $1,443 to relocate Gerry Colorado
administrative and manufacturing operations to Evenflo's Ohio and Georgia
locations. The Company anticipates significant additional restructuring charges
in future periods. See Restructuring Costs discussion in "Management's
Discussion and Analysis."
Senior Credit Facility Amendment and Additional $25 Million Seasonal Credit
Facility
On March 31, 1998, the Company reached an agreement with its bank syndicate to
amend (the "Amendment") its senior credit agreement (the "Credit Facility") and
to provide an additional $25,000 senior secured credit facility (the "Seasonal
Credit Facility") for seasonal working capital needs until August 31, 1998.
See "-Liquidity and Capital Resources."
Other Financing Arrangements
On February 18, 1998, the Company financed the new 150,000 square feet Spalding
Chicopee, Massachusetts, 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 in years nine
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
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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 years sixteen through twenty requires $54 monthly amortization
payments. Massachusetts Development Finance Agency has been granted a security
interest in the warehouse.
Contingencies
The Company is in disagreement with the Internal Revenue Service (the "IRS")
regarding the valuation of trademarks purchased from an Abarco N.V. ("Abarco")
affiliate in 1994. The IRS has completed the field audit for the year in which
the transactions occurred, and has preliminarily indicated that a portion of the
original purchase price may be recharacterized as a dividend distribution, and
that a portion of the amortization deductions relating to such trademarks may be
disallowed. As a result, the Company expects that it may be assessed withholding
tax of approximately $30,000, and interest and penalties thereon of
approximately $25,000, related to this issue. The Company intends to vigorously
contest any assessment from the IRS. If the Company were unsuccessful in
appealing the assessment relating to these trademarks, a portion of the
Company's deferred tax asset ($42,582 at June 30, 1998) relating to future
amortization of such trademarks owned by the Company would be written off as a
charge to retained earnings (deficit). Under the terms of indemnity provisions
contained in the 1996 Recapitalization and Stock Purchase Agreement to which the
Company and Abarco were parties (the "Recapitalization"), the Company believes
that any resulting liability relating to years prior to the Recapitalization
would be indemnified by Abarco, the selling entity. With respect to the 1997 tax
year, the Company believes that its maximum liability, if any, will not exceed
$2,343, including interest and penalties.
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, local, and
foreign 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 condensed
consolidated financial statements.
<TABLE>
<CAPTION>
Inventories June 30, September 30,
1998 1997
------------ -------------
<S> <C> <C>
Finished goods $ 141,241 99,733
Work in process 40,141 28,031
Raw materials 33,688 29,748
-------- --------
Total inventories $ 215,070 157,512
-------- --------
-------- --------
</TABLE>
8
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Reclassifications
Certain reclassifications have been made to prior year amounts to conform with
current year presentations.
9
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Subsequent Event
On July 31, 1998, the Company announced its intention to separate its two
businesses, Evenflo Company, Inc. ("Evenflo") and Spalding Sports Worldwide,
into two stand-alone companies. Following completion of the restructuring, which
is expected to occur in August 1998, the Company's headquarters in Tampa,
Florida will be closed and its functions transferred to the separate Spalding
and Evenflo operations. The Company estimates restructuring costs associated
with the closure of the corporate office to be approximately $4,500.
KKR 1996 Fund L.P., a limited partnership affiliated with Kohlberg Kravis
Roberts & Co. L.P., plans to acquire 51% of the outstanding common shares of
Evenflo (the "Common Stock") for a purchase price of $25,500 and to acquire
cumulative preferred stock of Evenflo for a purchase price of $40,000, both to
be acquired from a subsidiary of the Company. The subsidiary of the Company will
receive such newly-authorized preferred stock as a distribution from Evenflo. In
addition, prior to the acquisition of the Common Stock by KKR 1996 Fund L.P.,
Great Star Corporation, an affiliate of Abarco, plans to acquire 6.6% of the
outstanding Common Stock for a purchase price of $3,300 from a subsidiary of the
Company. Evenflo plans (i) to issue and sell $110,000 aggregate principal amount
of senior notes in a private offering and (ii) to enter into a $100,000
revolving credit facility with a syndicate of banks and other financial
institutions and borrow $10,000 under such credit facility on the date the
transactions described above are closed. Evenflo plans to apply the proceeds of
these transactions to repay intercompany indebtedness of approximately $110,000
to the Company and to pay transaction fees and expenses of approximately
$10,000.
As part of the restructuring, the Company reached agreement with its bank
syndicate to amend its senior credit facilities to remove certain financial
ratio requirements until December 31, 1999, and to amend other covenants. KKR
1996 Fund L.P. plans to invest $100,000 in exchange for cumulative preferred
stock of the Company.
The proceeds from the above transactions will be used to repay approximately
$275,000 of the Company's senior credit facilities.
As a result of the Evenflo separation, the Company will allocate a portion of
its assets, liabilities and expenses to Evenflo. Deferred financing costs,
deferred income taxes and long-term debt will be allocated to Evenflo's
consolidated balance sheets and corporate administrative expenses, interest
expense and income taxes wil be allocated to Evenflo's statements of
consolidated earnings (loss).
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Independent Accountants' Report
- -------------------------------
The Board of Directors
Evenflo & Spalding Holdings Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Evenflo & Spalding Holdings Corporation and subsidiaries (the "Company") as of
June 30, 1998, and the related condensed statements of consolidated earnings
(loss) and comprehensive earnings (loss) for the three and nine months ended
June 30, 1998 and 1997, and of cash flows for the nine months ended June 30,
1998 and 1997. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company at September 30, 1997,
and the related statements of consolidated earnings (loss) and comprehensive
earnings (loss), consolidated cash flows and consolidated shareholders' equity
(deficiency) for the year then ended (not presented herein); and in our report
dated November 7, 1997, (May 20, 1998 as to note R) we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of September 30, 1997, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Tampa, Florida
August 7, 1998
11
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MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
Forward Looking Statements
With the exception of historical information (information relating to the
Company's financial condition and results of operations at historical dates or
for historical periods), the matters discussed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are
forward-looking statements that necessarily are based on certain assumptions and
are subject to certain risks and uncertainties. These forward-looking statements
are based on management's expectations as of the date hereof, and the Company
does not undertake any responsibility to update any of these statements in the
future. Actual future performance and results could differ from that contained
in or suggested by these forward-looking statements as a result of the factors
set forth in this Management's Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in this June 30, 1998, Form 10-Q and
other filings by the Company with the Securities and Exchange Commission.
Results of Operations
Quarter Ended June 30, 1998 ("1998 third quarter") as compared
to the Quarter Ended June 30, 1997 ("1997 third quarter")
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 $13.8 million or 5.5% to
$237.6 million for the 1998 third quarter compared to $251.4 million for the
same period in the prior year.
Spalding net sales were $155.1 million for the 1998 third quarter, a decrease
of $2.1 million or 1.3% compared to the 1997 third quarter results of $157.2
million. Domestic net sales of Spalding's golf equipment for the 1998 third
quarter were up $3.7 million or 4.2% over the 1997 third quarter primarily
due to higher net sales of Spalding-Registered Trademark- golf clubs, golf
bags, spikeless golf shoes, and the inclusion of Hogan golf products;
partially offset by $1.8 million lower net sales of golf balls. Domestic net
sales of other sporting goods declined $3.5 million or 12.8%, primarily due
to lower net sales of basketballs, volleyballs, softballs, athletic shoes,
bats, and ball gloves. International net sales at Spalding declined $2.3
million or 5.3% in the 1998 third quarter compared to the 1997 third quarter.
The decrease resulted primarily from lower net sales due to international
restructuring activities in the Asia/Pacific region, Mexico, and certain
European countries; partially offset by an increase in net sales in Canada
from strong growth in golf equipment net sales. Weaker currencies compared to
the U.S. dollar negatively impacted Spalding's international 1998 third
quarter net sales by approximately $2.0 million compared to the 1997 third
quarter.
Net sales at Evenflo for the 1998 third quarter decreased $11.7 million or 12.4%
to $82.5 million from $94.2 million for the 1997 third quarter. The decline in
Evenflo's net sales is due principally
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to (i) the effects of significantly reduced sales to Toys "R" Us, Inc.,
Evenflo's largest customer (Toys "R" Us recently announced a plan to reduce
its inventory levels), (ii) 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-TM-, Evenflo's newest entrant
in the play yard product category, which began to be shipped to retailers in
February 1998, (iii) the discontinuance of certain Gerry products that did
not fit with Evenflo's product line strategies, (iv) the withdrawal of
certain Gerry products from the marketplace to re-engineer such products to
meet Evenflo's standards, and (v) the effect of certain product safety
campaigns, partially offset by a reduced level of returns of breast pumps.
International net sales were down $0.3 million compared to the 1997 third
quarter due primarily to lower net sales in Canada and Malaysia and the
effect of weaker currencies compared to the U.S. dollar, partially offset by
higher net sales in Mexico and France. Weaker currencies compared to the U.S.
dollar negatively impacted Evenflo's international 1998 third quarter net
sales by approximately $0.8 million compared to the 1997 third quarter.
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. For the 1998 third quarter, Company
gross profit decreased $10.4 million to $70.9 million from $81.3 million for the
same period in the prior year. Gross profit as a percentage of net sales
decreased to 29.8% for the 1998 third quarter from 32.3% for the comparable
prior year quarter.
Gross profit as a percentage of net sales at Spalding decreased to 34.7% in
the 1998 third quarter from 39.7% in the 1997 third quarter. Spalding's gross
margin percentage decrease was primarily due to (i) lower golf ball
manufacturing volume that caused fixed costs to be spread over fewer units,
(ii) a less favorable sales mix including higher sales of Spalding-Registered
Trademark- golf clubs, golf bags, and golf shoes, which have lower margins
compared to golf balls, (iii) increased competitive pricing and close-out
programs of Etonic athletic shoes and spiked golf shoes, (iv) international
competitive pricing, combined with a shift to a less favorable international
sales mix and the strength of the U.S. dollar versus international
currencies, and (v) higher transportation costs.
Gross profit as a percentage of net sales at Evenflo increased to 20.6% in the
1998 third quarter from 20.1% in the 1997 third quarter. Evenflo's gross margin
percentage increase was primarily due to (i) operating efficiencies attributable
to Project Discovery, and (ii) lower returns; partially offset by (i) higher
fixed manufacturing costs per unit as Evenflo reduced production volume, and
(ii) a less favorable international sales mix combined with the strength of the
U.S. dollar versus international currencies and higher costs from the
integration of Gerry. Project Discovery expanded and upgraded the warehousing
and shipping facilities, modernized distribution systems, and re-engineered
assembly operations at Evenflo's Piqua, Ohio facility to improve productivity
and increase capacity levels.
Selling, general and administrative ("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
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corrective action campaign costs, and professional fees. SG&A expenses were
$78.2 million, or 22.0% higher than SG&A expenses of $64.1 million in the
comparable quarter last fiscal year.
Spalding's SG&A expenses increased $13.2 million in the 1998 third quarter
primarily from (i) higher advertising and promotion costs for premium golf
club and golf ball product lines, (ii) higher legal costs, (iii) higher
salesman wages and commissions from increasing the size of the golf products
sales force, and (iv) $5.7 million of costs due to the misapplication of
funds by Spalding's freight audit and payment provider who failed to pay
freight carriers funds advanced by Spalding; partially offset by lower
international SG&A expenses from restructuring activities that are downsizing
operations in Japan, consolidating operations in Europe and closing
operations in Mexico. See "Restructuring Costs".
Evenflo had $1.5 million higher SG&A expenses in the 1998 third quarter
principally due to higher (i) safety campaign and corrective action costs
relating to the Two-In-One-Registered Trademark- booster seat, the
On-My-Way-Registered Trademark- infant car seat, the Canadian
Ultara-Registered Trademark- car seat and the Happy Camper-Registered
Trademark- play yard, (ii) advertising and promotion costs, and (iii) product
liability expenses; partially offset by lower costs as a result of the
elimination of certain redundant functions as part of the Gerry integration.
The corporate office had $0.6 million lower SG&A expenses principally due to
Gerry acquisition costs incurred in the 1997 third quarter which did not recur
in the 1998 third quarter.
Royalty income was $3.0 million in the 1998 third quarter, down 18.9% from $3.7
million in the 1997 third quarter. The decrease is principally due to lower
royalty income from weak currency and economic conditions in Japan.
Restructuring costs were $3.4 million in the 1998 third quarter. Spalding
restructuring costs were $2.7 million and consisted of (i) $0.8 million
principally for international severance and lease settlements, (ii) $0.9 million
of management severance costs, and (iii) $1.0 million in severance and other
costs at Etonic. Evenflo restructuring costs were $0.7 million to relocate
Gerry Colorado administrative and manufacturing operations to Evenflo's Ohio
and Georgia locations. Restructuring costs were $1.0 million in the 1997 third
quarter and included $0.4 million of Gerry restructuring charges at Evenflo
and $0.6 million of international restructuring costs at Spalding. See EBITDA
discussion in "-Liquidity and Capital Resources".
In fiscal 1997, Spalding began to restructure its international operations by
streamlining operations in Japan and certain European countries. In the 1998
second quarter, Spalding implemented an expanded international restructuring
program that will reduce its international infrastructure to a size sufficient
to support a strategic focus on core golf and sporting goods products in
selected countries. Operations are being significantly downsized in Japan,
consolidated in Europe, and closed in Mexico. As a result, future sales
activities in Mexico, France, Germany, Italy, and Spain will be channeled
through distributors.
In addition to the restructuring costs, Spalding incurred $7.6 million of other
unusual costs in the 1998 third quarter associated with (i) the closure and
downsizing of certain international affiliates under the international
restructuring program, (ii) inventory write-downs and computer lease abandonment
at Etonic, and (iii) misapplication of funds by Spalding's freight audit and
payment provider who failed to pay freight carriers funds advanced by Spalding.
Spalding estimates it will have further
14
<PAGE>
restructuring and unusual costs in the 1998 fourth quarter including
approximately $4.5 million of restructuring costs relating to the closure of its
corporate headquarters in Tampa, Florida. See EBITDA discussion in "-Liquidity
and Capital Resources" and "Unaudited Notes to Condensed Consolidated Financial
Statements".
In July 1997, Evenflo adopted a plan to relocate the Gerry Colorado
administrative and manufacturing operations to Evenflo's Ohio and Georgia
locations. In addition to the Gerry restructuring costs, Evenflo incurred $0.2
million of other unusual costs in the 1998 third quarter for relocation and Year
2000 conversion costs. Evenflo had $1.9 million of unusual costs in the 1997
third quarter. The Company estimates fiscal 1998 Evenflo restructuring and other
unusual costs could approximate $2.6 million in total. See EBITDA discussion in
"-Liquidity and Capital Resources".
Interest expense increased to $21.7 million in the 1998 third quarter from $19.3
million in the 1997 third quarter, an increase of $2.4 million or 12.4%. This
increase is due to higher average borrowings under the Company's $25 million
seasonal credit facility (the "Seasonal Credit Facility") and $250 million
revolving credit facility (the "Revolving Credit Facility"), which combined with
$400 million of term loans comprise the Company's $675 million credit facility
(the "Credit Facility"). The Company also has outstanding $200 million 10 3/8%
Series B Senior Subordinated Notes ("Notes") due 2006. The Company's average
balance under the Notes, Credit Facility, certain non-U.S. borrowing
arrangements and other financing agreements for the 1998 third quarter was
approximately $776 million compared to approximately $725 million under the
Company's borrowing arrangements then in effect during the 1997 third quarter.
See further discussion in the "Unaudited Notes to Condensed Consolidated
Financial Statements" and "-Liquidity and Capital Resources".
Currency loss of $1.7 million was $1.5 million higher in the 1998 third
quarter than in the 1997 third quarter. See "-Liquidity and Capital
Resources."
Income taxes were a tax benefit of $10.6 million for the 1998 third quarter,
which represents an effective tax rate of 34% in relation to a loss before
income taxes of $31.0 million. The effective tax rate varied from a U.S. federal
statutory rate of 35% due to actual non-U.S. withholding taxes paid that reduce
the benefit realized on the loss. The $10.1 million tax expense for the 1997
third quarter resulted from a change in the Company's estimate of its effective
tax rate from 50% to 15% due to losses by certain non-U.S. subsidiaries for
which no tax benefit was anticipated.
Net loss was $20.4 million for the 1998 third quarter compared to $9.5 million
for the 1997 third quarter. The $10.9 million decrease in earnings was a result
of a $27.7 million decrease in earnings from operations, $2.4 million higher
interest expense, and $1.5 million higher currency loss, partially offset by a
$20.7 million higher income tax benefit.
15
<PAGE>
Nine Months Ended June 30, 1998 ("1998 nine months") as compared
to the Nine Months Ended June 30, 1997 ("1997 nine months")
Net sales increased $48.7 million or 8.4% to $631.2 million for the 1998 nine
months compared to $582.5 million for the same period in the prior year.
Spalding net sales increased 2.4% to $386.0 million for the 1998 nine months
compared to $376.8 million for the 1997 nine months. Domestic net sales of
Spalding's golf equipment for the 1998 nine months were up $31.5 million or
16.1% over the 1997 nine months due to increased sales of golf balls, golf
shoes, golf clubs, golf bags and the inclusion of Hogan golf products. Domestic
net sales of other sporting goods declined $8.4 million or 11.5%, primarily due
to lower net sales of basketballs, volleyballs, softballs, athletic shoes, bats
and ball gloves. Etonic athletic shoe net sales decreased $1.5 million from the
comparable prior period due to competitive pricing pressures. International net
sales at Spalding declined $13.9 million or 13.0% in the 1998 nine months
compared to the 1997 nine months. The decrease resulted primarily from lower net
sales in the Asia/Pacific region, Europe, and Mexico due in part to
international restructuring activities; partially offset by an increase in net
sales in Canada from strong growth in golf equipment net sales. Weaker
currencies compared to the U.S. dollar negatively impacted Spalding's
international 1998 nine months net sales by approximately $5.5 million compared
to the 1997 nine months.
Evenflo's net sales increased to $245.2 million in the 1998 nine months from
$205.7 million in the 1997 nine months, an increase of $39.5 million or 19.2%.
The net sales increase was principally due to the inclusion of Gerry net sales
in the 1998 nine months compared to the inclusion of Gerry net sales for
approximately two months in 1997 as a result of the April 1997 acquisition of
Gerry. The increase in net sales was partially offset by (i) 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-TM-, Evenflo's newest
entrant in the play yard product category, which began to be shipped to
retailers in February 1998, (ii) the discontinuance of certain Gerry products
that did not fit with Evenflo's product line strategies, (iii) the withdrawal of
certain Gerry products from the marketplace to re-engineer such products to meet
Evenflo's standards, (iv) the effect of certain product safety campaigns, and
(v) increased levels of returns of breast pumps, monitors and strollers.
International net sales were down $0.9 million compared to the 1997 nine months
due primarily to lower net sales in Canada and Malaysia and the effect of weaker
currencies compared to the U.S. dollar, partially offset by higher net sales in
Mexico and France. While net sales to Toys "R" Us have increased for the
comparable nine month periods, Toys "R" Us has recently announced a plan to
reduce its inventory levels. Evenflo, as a result of this action, recorded
significantly lower net sales to Toys "R" Us in the third quarter of fiscal 1998
than the comparable period of the prior year.
Gross profit for the 1998 nine months decreased $2.5 million to $186.8 million
from $189.3 million for the same period in the prior year. Gross profit as a
percentage of net sales decreased to 29.6% for the 1998 nine months from 32.5%
for the 1997 nine months.
16
<PAGE>
Gross profit as a percentage of net sales at Spalding decreased to 35.9% in the
1998 nine months from 38.4% in the 1997 nine months. Spalding's gross margin
percentage decrease was primarily due to (i) increased competitive pricing,
combined with a shift to a less favorable international sales mix and the
strength of the U.S. dollar versus international currencies, (ii) increased
competitive pricing in Etonic athletic shoes and spiked golf shoes, (iii) a less
favorable sales mix within golf products, (iv) weaker sales mix of sporting
goods, and (v) higher transportation costs.
Evenflo's gross profit increased to $48.1 million in the 1998 nine months from
$44.6 million in the 1997 nine months, an increase of $3.5 million or 7.8%.
However, Evenflo's gross margin decreased to 19.6% in the 1998 nine months from
21.7% in the 1997 nine months 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 impact of the Gerry
integration, partially offset by operating efficiencies attributable to Project
Discovery, (iii) an increased level of returns of breast pumps, monitors and
strollers, (iv) an increase in distribution costs, and (v) a less favorable
international sales mix due to the strength of the U.S. dollar versus certain
international currencies.
Selling, general and administrative ("SG&A") expenses for the 1998 nine months
were $201.6 million, or 17.6% higher than SG&A expenses of $171.4 million in the
comparable nine months last fiscal year.
Spalding's SG&A expenses increased $21.0 million in the 1998 nine months
primarily due to (i) higher advertising and promotion costs for premium golf
club and golf ball product lines, (ii) higher legal costs, (iii) higher salesman
wages and commissions from increasing the size of the golf products sales force,
and (iv) $5.7 million of costs due to the misapplication of funds by Spalding's
freight audit and payment provider who failed to pay freight carriers funds
advanced by Spalding; partially offset by lower international SG&A expenses
from restructuring activities that are downsizing operations in Japan,
consolidating operations in Europe and closing operations in Mexico.
See "Restructuring Costs".
Evenflo's SG&A expenses increased to $46.9 million in the 1998 nine months
from $37.1 million in the 1997 nine months. As a percentage of net sales,
SG&A expenses increased to 19.1% in the 1998 nine months from 18.0% in the
1997 nine months. Evenflo's $9.8 million increase in SG&A expenses was
principally due to (i) an increased number of selling and administrative
personnel during the Gerry integration, (ii) increased product development
and engineering efforts relating to a number of Evenflo's product lines,
(iii) $3.4 million higher safety campaign and corrective action costs
relating to the Happy Camper-Registered Trademark- play yard, the
On-My-Way-Registered Trademark- infant car seat, the Two-In-One booster car
seat and the Canadian Ultara-Registered Trademark- car seat, and (iv) higher
advertising and promotional costs, partially offset by (i) lower product
liability expenses compared to the 1997 nine months, and (ii) lower costs
from the elimination of certain redundant functions as part of the Gerry
integration.
The corporate office had $0.6 million lower SG&A expenses principally due to
Gerry acquisition costs incurred in the 1997 nine months which did not recur in
the 1998 nine months.
17
<PAGE>
Royalty income increased to $9.8 million in the 1998 nine months from $9.5
million in the 1997 nine months, an increase of $0.3 million or 3.2%. The
increase is principally due to royalty income settlements on Evenflo play yards
and Gerry strollers; partially offset by lower royalty income at Spalding from
weak currency and economic conditions in Japan.
Restructuring costs were $9.1 million in the 1998 nine months. Spalding
restructuring costs were $7.7 million and consisted of (i) $4.3 million
principally for international severance and lease settlements, (ii) $2.4 million
of management severance costs, and (iii) $1.0 million in severance and other
costs at Etonic. Evenflo restructuring costs were $1.4 million to relocate Gerry
Colorado administrative and manufacturing operations to Evenflo's Ohio and
Georgia locations. Restructuring costs were $2.0 million in the 1997 nine months
and included $1.6 million of Spalding international restructuring costs and $0.4
million of Gerry restructuring charges. See EBITDA discussion in "-Liquidity and
Capital Resources".
In fiscal 1997, Spalding began to restructure its international operations by
streamlining operations in Japan and certain European countries. In the 1998
second quarter, Spalding implemented an expanded international restructuring
program that will reduce the Company's international infrastructure to a size
sufficient to support a strategic focus on core golf and sporting goods products
in selected countries. Operations are being significantly downsized in Japan,
consolidated in Europe, and closed in Mexico. As a result, future sales
activities in Mexico, France, Germany, Italy, and Spain will be channeled
through distributors.
In addition to the restructuring costs, Spalding incurred $10.4 million of other
unusual expenses in the 1998 nine months associated with (i) the closure and
downsizing of certain international affiliates under the international
restructuring program, (ii) inventory write-downs and computer lease abandonment
at Etonic, and (iii) misapplication of funds by Spalding's freight audit and
payment provider who failed to pay freight carriers funds advanced by Spalding.
Spalding anticipates it will have further restructuring and unusual costs in
the 1998 fourth quarter including approximately $4.5 million of restructuring
costs relating to the closure of its corporate headquarters in Tampa, Florida.
See EBITDA discussion in "-Liquidity and Capital Resources" and "Unaudited
Notes to Condensed Consolidated Financial Statements".
In July 1997, the Company adopted a plan to relocate the Gerry Colorado
administrative and manufacturing operations to Evenflo's Ohio and Georgia
locations. In addition to the restructuring costs, Evenflo incurred $0.9 million
of other unusual expenses during the 1998 nine months to relocate the Gerry
Colorado warehouse operation to Evenflo's Ohio and Georgia locations, to
reconfigure the manufacturing and warehouse at Piqua, Ohio, and for Year 2000
conversion costs. The Company estimates fiscal 1998 Evenflo restructuring and
other unusual costs could approximate $2.6 million in total. See EBITDA
discussion in "-Liquidity and Capital Resources".
Interest expense increased to $59.3 million in the 1998 nine months from $53.1
million in the 1997 nine months, an increase of $6.2 million or 11.7%. The
Company's average balance under the Notes, Credit Facility, certain non-U.S.
borrowing arrangements and other financing agreements for the 1998 nine months
was approximately $736 million compared to
18
<PAGE>
approximately $663 million under the Company's borrowing arrangements then in
effect during the 1997 nine months. See further discussion in the "Unaudited
Notes to Condensed Financial Statements" and "-Liquidity and Capital Resources".
Currency loss of $3.2 million was $2.8 million higher in the 1998 nine months
than in the 1997 nine months. See "-Liquidity and Capital Resources."
Income taxes were a tax benefit of $26.1 million for the 1998 nine months, which
represents an effective tax rate of 34% in relation to a loss before income
taxes of $76.6 million. The effective tax rate varied from a U.S. federal
statutory rate of 35% due to actual non-U.S. withholding taxes paid that reduce
the benefit realized on the loss. The effective tax rate for the comparable nine
months in the prior year of 15% varied from the statutory rate due to non-U.S.
net operating losses for which no tax benefit was anticipated.
Net loss was $50.5 million for the 1998 nine months compared to $23.8 million
for the 1997 nine months. The $26.7 million decrease in earnings was a result of
a $39.5 million decrease in earnings from operations, $6.2 million higher
interest expense, and $2.8 million higher currency loss, partially offset by a
$21.8 million higher income tax benefit.
Liquidity and Capital Resources
The Company's principal sources of liquidity are from cash flows generated from
operations and from borrowings under the Revolving Credit Facility and certain
non-U.S. facilities. In addition, on March 30, 1998, the Company entered into a
$25 million senior secured credit facility (the "Seasonal Credit Facility")
available for seasonal working capital needs until August 31, 1998. The Company
believes its business is somewhat seasonal. For fiscal 1997, quarterly net sales
as a percentage of total sales were approximately 15%, 25%, 30%, and 30%,
respectively, and quarterly income (loss) from operations as a percentage of
total income (loss) from operations was approximately (13)%, 29%, 40%, and 44%,
respectively. 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 through third
quarters when cash generated from operating activities coupled with draw downs
from credit facilities have been invested in receivables and inventories.
For the 1998 nine months, the Company used $136.3 million in cash before
financing activities to fund $112.0 million in operating activities, and invest
$22.7 million in capital expenditures and $1.6 million in the acquisition of
Hogan. Cash used in operating and investing activities in the 1998 nine months
were funded from (i) $146.6 million in net borrowings from the Company's
Seasonal Credit Facility, Revolving Credit Facility and other non-U.S. credit
facilities, (ii) $6.5 million loan from the Massachusetts Development Finance
Agency, and (iii) $1.3 million in proceeds from the issuance of common stock
(net of repurchases) to certain key employees and directors of the Company under
the 1996 Stock Purchase and Option Plan for Key Employees of Evenflo & Spalding
Holdings Corporation and Subsidiaries, less (i) $2.7 million in fees relating
primarily to the amendment of its Credit Facility and the commitment for
19
<PAGE>
the seasonal credit facility, and (ii) a $15.4 million increase in cash.
Net cash flow used by operating activities for the 1998 nine months was
$112.0 million compared to $61.5 million for the 1997 nine months. The $50.5
million higher use of cash for operating activities when compared to the 1997
nine months was due to a $26.7 million higher net loss, a $20.2 million
decrease in deferred taxes and other non-cash expenses, and by $3.6 million
increase in the use of cash for working capital. The use of cash for working
capital in the 1998 nine months compared unfavorably to the 1997 nine months
due to a $14.1 million decrease in payables and other accounts, a $28.6
million increase in inventories; partially offset by a $39.1 million increase
in receivables.
Capital expenditures were $22.7 million for the 1998 nine months compared to
$21.0 million in the 1997 nine months. Spalding capital expenditures were $3.5
million higher in the 1998 nine months, the majority of which was used to
improve production equipment and continue a multiphase expansion of its
warehouse and golf ball facilities at its Chicopee, Massachusetts operations.
Management estimates the completion of the multiphase project could approximate
an additional $4.0 million to be invested in the remainder of fiscal 1998.
Capital expenditures at Evenflo were $13.1 million for the 1998 nine months
compared to $14.9 million in the 1997 nine months. Capital expenditures for the
1998 nine months were $1.8 million lower than the comparable 1997 nine months,
with Evenflo investing $0.5 million to complete Project Discovery, $6.7 million
to complete the expansion of its warehousing and shipping facilities in Piqua,
Ohio and Canton, Georgia in order to improve efficiency and accommodate the
consolidation of Gerry's Colorado operations, and $1.8 million on computer
hardware and software to unify and upgrade its management information systems to
achieve Year 2000 compliance. Evenflo also incurred $4.1 million in other
capital expenditures for the 1998 nine months. Management estimates that Evenflo
will make an additional $4.9 million in capital expenditures during the
remainder of fiscal 1998. Furthermore, Evenflo anticipates an additional $4.7
million of capital expenditures over the next nine months on computer hardware
and software to unify and upgrade its management information systems and to
achieve Year 2000 compliance. In fiscal 1999, Evenflo expects to make $12.5
million of capital expenditures, $4.4 million of which will represent
maintenance capital expenditures.
The primary sources of cash flows from financing activities are from borrowings
under the $250 million Revolving Credit Facility, the $25 million Seasonal
Credit Facility, and credit facilities available to certain of the Company's
non-U.S. facilities. At June 30, 1998, the Company had $20.6 million in cash and
an available borrowing capacity of approximately $3 million (reduced to reflect
$90 million of outstanding letters of credit and bankers' acceptances) under the
Revolving Credit Facility and the Seasonal Credit Facility. As of July 31, 1998,
the Company had approximately $6 million in cash and an available borrowing
capacity of approximately $16 million (reduced to reflect $88 million of
outstanding letters of credit and bankers' acceptances) under the Revolving
Credit Facility and the Seasonal Credit Facility. The $25 million Seasonal
Credit Facility is available to support the Company's seasonal working capital
needs through August 31, 1998.
The Company's ability to fund its operations, make capital expenditures and make
scheduled
20
<PAGE>
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, in addition to the
restructuring announced on July 31, 1998, to meet its debt service and other
obligations, and there can be no assurance as to the timing of such sales or the
proceeds that the Company could realize therefrom.
Restructuring. On July 31, 1998, the Company announced that its Board of
Directors has approved a restructuring that will result in the separation of its
two businesses, Evenflo Company, Inc. and Spalding Sports Worldwide, into two
stand-alone companies, the infusion of $100 million equity into the Company, and
the reduction of approximately $275 million of debt under the Company's senior
credit facilities.
The restructuring and the separation will allow both companies to better
implement their strategies and to achieve their growth objectives. Moreover, the
companies will benefit from the centralization of their business functions at
their respective headquarters and from fully dedicated, on-site management
teams. The corporate entity now known as Evenflo & Spalding Holdings Corporation
will be renamed Spalding Holdings Corporation and will include Spalding's
operations in addition to an equity interest of approximately 42% in Evenflo.
The separation will be accomplished through a sale by a Company subsidiary of
51% of the outstanding common stock of Evenflo to an affiliate of Kohlberg
Kravis Roberts & Co. L.P. ("KKR") for $25.5 million, and approximately 7% of
Evenflo's outstanding common stock to Great Star Corporation, an affiliate of
Abarco N.V. ("Abarco"), for $3.3 million. Both KKR and Abarco are currently
shareholders of the Company. KKR will also acquire shares of noncash pay
preferred stock of Evenflo for $40 million in cash. Evenflo will receive $120
million of proceeds from certain other debt financings to repay indebtedness
owed to the Company and to pay certain fees and expenses. The proceeds of these
transactions will be used to repay the Company debt under its senior debt
facilities. After giving effect to the recapitalization, Evenflo will have
approximately $48 million of availability for general corporate purposes under a
new $100 million revolving credit facility.
As part of the restructuring, the Company has reached an agreement with its bank
syndicate to amend its senior credit facilities. In addition, KKR has agreed to
invest $100 million in exchange for noncash pay preferred stock of the Company.
Proceeds of that investment, together with the proceeds received from Evenflo,
will be used to repay approximately $275 million of debt under the Company's
senior credit facility.
As part of the restructuring, the Company has reached an agreement with its bank
syndicate to
21
<PAGE>
amend its Credit Facility ("Amendment No. 3"). Amendment No. 3, (i) removes the
financial ratio compliance requirements until December 31, 1999, (ii) modifies
certain financial ratio test levels and definitions, (iii) releases collateral
on Evenflo assets and stock, (iv) provides that net cash proceeds from the sale
and financings of Evenflo and the Company's preferred stock proceeds be applied
to reduce indebtedness under the Credit Facility of approximately $275 million,
and (vi) modifies certain restrictive covenants. The effectiveness of Amendment
No. 3 is conditioned on the Evenflo sale, issuance of $100 million preferred
stock, receipt of a fairness opinion and an amendment fee. After the repayment
of debt, the Company's next scheduled principal payment under the amended Credit
Facility will be in the year 2002.
Following completion of restructuring, which is expected to occur in August
1998, corporate headquarters in Tampa, Florida will be closed and its functions
transferred to the separate Spalding and Evenflo operations.
The capital initiatives and senior credit facilities amendment described above
are conditioned upon the consummation of the restructuring in its entirety.
As a result of the Evenflo separation, the Company will allocate a portion of
its assets, liabilities and expenses to Evenflo. Deferred financing costs,
deferred income taxes and long-term debt will be allocated to Evenflo's
consolidated balance sheets and corporate administrative expenses, interest
expense and income taxes wil be allocated to Evenflo's statements of
consolidated earnings (loss). Accordingly, certain of the separate Evenflo
amounts described above would differ from similarly captioned amounts in any
separate stand-alone Evenflo consolidated financial statements.
EBITDA (earnings before interest, taxes, depreciation and amortization) is
included as a basis upon which the Company assesses its financial performance,
and certain covenants in the Company's borrowing arrangements are tied to
similar measures. The following sets forth certain information regarding the
Company's EBITDA and other net cash flow items for the 1998 third quarter and
the 1998 nine months:
Three Months Ended June 30, 1998
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
(dollar amounts in thousands)
------------------------------------------------------------------------------------
Historical Cash Flow
net cash provided by (used in)
---------------------------------------------
Other items
Historical affecting historical Operating Investing Financing
EBITDA EBITDA activities activities activities
------ ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Spalding $(3,807) 10,252 (15,188) (2,922) 19,913
Evenflo 3,287 872.00 (5,963) (2,936) 10,564
Corporate (1,828) 11 (25,303) - 36,011
-------- ------ -------- ------- ------
Consolidated $(2,348) 11,135 (46,454) (5,858) 66,488
-------- ------ -------- ------- ------
-------- ------ -------- ------- ------
</TABLE>
Spalding. Spalding's 1998 third quarter historical EBITDA was adversely affected
by $10,252 of restructuring and other unusual costs. Restructuring costs were
$2,665 and consisted of (i) $816 principally for international severance and
lease settlements, (ii) $849 of management severance costs, and (iii) $1,000 in
severance and other costs at Etonic. In addition, Spalding incurred $7,587 of
other unusual expenses consisting of (i) $10 in receivable cash discounts under
the international restructuring program that reduced net sales, (ii) $148 in
inventory write-offs in Japan and certain exiting countries expensed to cost of
sales, (iii) $900 in inventory write-offs at Etonic expensed to cost of sales,
(iv) $529 in receivable write-offs due to lower collection rates in exiting
countries charged to SG&A expenses, (v) $300 in computer lease abandonment at
22
<PAGE>
Etonic charged to SG&A expenses, and (vi) $5,700 charged to SG&A for the
misapplication of funds by Spalding's freight audit and payment provider who
failed to pay freight carriers funds advanced by Spalding.
Evenflo. Evenflo's 1998 third quarter historical EBITDA was adversely affected
by $872 of restructuring and other unusual costs. Restructuring costs were $710
to relocate the Gerry Colorado administrative and manufacturing operations to
Evenflo's Ohio and Georgia locations. In addition, Evenflo incurred $162 of
other unusual costs including $26 expensed to cost of sales to relocate the
Gerry Colorado warehouse operation to Evenflo's Ohio and Georgia locations and
$136 charged to SG&A expenses for Year 2000 conversion costs. The Company
estimates fiscal 1998 Evenflo restructuring and other unusual costs could
approximate $2,600 in total.
THREE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Three Months Ended June 30, 1997
(dollar amounts in thousands)
------------------------------------------------------------------------------------
Historical Cash Flow
net cash provided by (used in)
---------------------------------------------
Other items
Historical affecting historical Operating Investing Financing
EBITDA EBITDA activities activities activities
------ ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Spalding $21,074 558 31,592 (3,292) (21,100)
Evenflo 6,159 2,333 11,265 (78,247) 70,676
Corporate (1,950) 728 (26,133) - 27,314
------- ----- ------- ------- -------
Consolidated $25,283 3,619 16,724 (81,539) 76,890
------- ----- ------- ------- -------
------- ----- ------- ------- -------
</TABLE>
Spalding. Spalding's 1997 third quarter historical EBITDA was adversely affected
by $558 of international restructuring costs principally from severance and
other costs.
Evenflo. Evenflo's 1997 third quarter historical EBITDA was adversely affected
by $2,333 of restructuring and other unusual costs. Restructuring costs were
$404 to relocate the Gerry Colorado administrative and manufacturing operations
to Evenflo's Ohio and Georgia locations. In addition, Evenflo incurred $1,929 of
other unusual costs including $1,268 expensed to cost of sales for purchase
accounting effects of Gerry's inventory turnover, $285 expensed to cost of sales
attributable to the manufacturing and warehouse reconfiguration at Piqua, Ohio,
and $376 charged to SG&A expenses to consolidate certain of its operations that
were previously managed separately.
Corporate. Corporate's 1997 third quarter historical EBITDA was adversely
affected by $728 of other unusual costs from the acquisition of Gerry.
23
<PAGE>
Nine Months Ended June 30, 1998
<TABLE>
<CAPTION>
Nine Months Ended June 30, 1998
(dollar amounts in thousands)
------------------------------------------------------------------------------------
Historical Cash Flow
net cash provided by (used in)
---------------------------------------------
Other items
Historical affecting historical Operating Investing Financing
EBITDA EBITDA activities activities activities
------ ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Spalding $(2,933) 18,055 (42,233) (11,193) 56,382
Evenflo 11,558 2,377 (17,307) (13,112) 32,638
Corporate (5,550) 156 (52,496) - 62,722
------- ------ -------- ------- -------
Consolidated $ 3,075 20,588 (112,036) (24,305) 151,742
------- ------ -------- ------- -------
------- ------ -------- ------- -------
</TABLE>
Spalding. Spalding's 1998 nine months historical EBITDA was adversely affected
by $18,055 of restructuring and other unusual costs. Restructuring costs were
$7,693 and consisted of (i) $4,344 principally relating to international
severance and lease settlements, (ii) $2,349 of management severance costs, and
(iii) $1,000 in severance and other costs at Etonic. In addition, Spalding
incurred $10,362 of other unusual expenses consisting of (i) $536 in receivable
cash discounts under the international restructuring program that reduced net
sales, (ii) $1,425 in inventory write-offs in Japan and certain exiting
countries expensed to cost of sales, (iii) $900 in inventory write-offs at
Etonic expensed to cost of sales, (iv) $1,501 in receivable write-offs due to
lower collection rates in exiting countries charged to SG&A expenses, (v) $300
in computer lease settlements at Etonic charged to SG&A expenses, and (vi)
$5,700 charged to SG&A expenses for the misapplication of funds by Spalding's
freight audit and payment provider who failed to pay freight carriers funds
advanced by Spalding.
Evenflo. Evenflo's 1998 nine months historical EBITDA was adversely affected by
$2,377 of restructuring and other unusual costs. Restructuring costs were $1,443
to relocate the Gerry Colorado administrative and manufacturing operations to
Evenflo's Ohio and Georgia locations. In addition, Evenflo incurred $934 of
other unusual expenses including (i) $235 expensed to cost of sales to relocate
the Gerry Colorado warehouse operation to Evenflo's Ohio and Georgia locations,
(ii) $159 expensed to cost of sales attributable to the manufacturing and
warehouse reconfiguration at Piqua, Ohio, and (iii) $540 charged to SG&A
expenses for Year 2000 conversion costs. The Company estimates fiscal 1998
Evenflo restructuring and other unusual costs could approximate $2,600 in total.
Corporate. Corporate's 1998 nine month historical EBITDA was
adversely affected by $156 of other unusual costs from potential
acquisitions.
24
<PAGE>
Nine Months Ended June 30, 1997
<TABLE>
<CAPTION>
Nine Months Ended June 30, 1997
(dollar amounts in thousands)
------------------------------------------------------------------------------------
Historical Cash Flow
net cash provided by (used in)
---------------------------------------------
Other items
Historical affecting historical Operating Investing Financing
EBITDA EBITDA activities activities activities
------ ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Spalding $ 32,643 2,452 2,465 (6,168) (4,596)
Evenflo 14,489 4,244 (6,498) (86,967) 93,566
Corporate (5,571) 728 (57,490) - 8,802
-------- ------- ------- ------- ------
Consolidated $ 41,561 $ 7,424 (61,523) (93,135) 97,772
-------- ------- ------- ------- ------
-------- ------- ------- ------- ------
</TABLE>
Spalding. Spalding's 1997 nine months historical EBITDA was adversely affected
by $2,452 of restructuring and other unusual costs. Restructuring costs include
$1,619 of international restructuring costs. Unusual costs were $833 relating to
the October 1996 purchase of its Etonic Canadian distribution rights which were
charged to SG&A expenses.
Evenflo. Evenflo's 1997 nine months historical EBITDA was adversely affected by
$4,244 of restructuring and other unusual costs. Restructuring costs were $404
to relocate the Gerry Colorado administrative and manufacturing operations to
Evenflo's Ohio and Georgia locations. In addition, Evenflo incurred $3,840 of
other unusual costs including $1,268 expensed to cost of sales for purchase
accounting effects of Gerry's inventory turnover, $1,524 expensed to cost of
sales attributable to the manufacturing and warehouse reconfiguration at Piqua,
Ohio and $1,048 charged to SG&A expenses to consolidate certain of its
operations that were previously managed separately.
Corporate. Corporate's 1997 nine months historical EBITDA was adversely affected
by $728 of other unusual costs from the acquisition of Gerry.
Currency Hedging. In fiscal 1997, approximately 19% of the total Company net
sales were generated in non-U.S. currencies. A portion of the Company's foreign
sales during the 1998 nine month period were made in Asia/Pacific region
countries which have experienced significant currency fluctuations relative to
the U.S. dollar due to recent economic disruptions in that region. Fluctuations
in the value of these currencies relative to the U.S. dollar has had, and could
in future periods have a material effect on the Company's results of operations.
Although the Company sources many of its goods from foreign manufacturers, the
vast majority is sourced from China which has not experienced significant
currency fluctuations during this period relative to the U.S. dollar. The
Company, in its discretion, uses forward exchange contracts to hedge up to nine
month transaction exposures from U.S. dollar purchases made by its non-U.S.
operations.
Year 2000 Compliance. Many existing computer software and hardware systems use
only two digits to identify the year in date fields and, as such, could fail or
create erroneous results by or at
25
<PAGE>
the year 2000. The Company has made and will continue to make investments in its
software systems and applications to upgrade systems for year 2000 compliance.
This process is expected to be complete for Spalding's operations by December
1998, with minor aspects of the project continuing into the first half of
calendar 1999. The financial impact of becoming Year 2000 compliant has not been
and is not expected to be material to Spalding's results of operations.
Evenflo anticipates upgrades required for Year 2000 compliance to be completed
by December 1998. Evenflo expects to spend $6.5 million by December 1999 (with
$1.8 million of this amount spent in the 1998 third quarter) to unify and
upgrade its information systems and to resolve its Year 2000 compliance issues.
All costs associated with Year 2000 compliance will be expenses as incurred
other than acquisition of new software or hardware, which will be capitalized.
Although the Company is not aware of any material operational impediments
associated with upgrading its computer hardware and software systems to be Year
2000 compliant, the Company cannot make any assurances that the upgrade of the
Company's computer systems will be completed on schedule, that the upgraded
systems will be free of defects, or that the Company's alternative plans will
meet the Company's needs. If any such risks materialize, the Company could
experience material adverse consequences, material costs, or both.
Year 2000 compliance issues may also adversely affect the operations and
financial performance of the Company indirectly by affecting the operations of
any one or more of the Company's suppliers or customers. The Company is
currently contacting its significant suppliers and customers in an attempt to
identify any potential Year 2000 compliance issues with them. The Company is
currently unable to anticipate the magnitude of the operational or financial
impact on the Company of Year 2000 compliance issues with its suppliers and
customers.
26
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Part I, Item 3 "Legal Proceedings" of Registrant's Annual
Report on Form 10-K for the year ended September 30, 1997, filed December 19,
1997. Since December 19, 1997, the Company has not been named as a defendant in
any action which, to the best of the Company's knowledge, could have a material
adverse effect on the financial condition or results of operations of the
Company other than the action described below.
On February 20, 1998, the Company was sued by Callaway Golf Company, Inc. for
trademark infringement and false advertising involving the Company's
introduction of the Top-Flite(R) System C(TM) golf ball, which was designed for
use with a Callaway Great Big Bertha(R) driver. The case is in the pre-trial
discovery stage. The Company believes it has meritorious defenses to all claims.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.14 Credit Agreement Amendment No. 3 dated July 31,
1998, to the Credit Agreement dated September 30,
1996, among Evenflo & Spalding Holdings Corporation,
as the Borrower, the Lenders and Bank of America
National Trust & Savings Association, as the
administrative agent for the Lenders.
(b) Reports on Form 8-K
Current report on Form 8-K filed June 16, 1998,
which announced Richard W. Frank as Chairman and
Chief Executive Officer of Evenflo Company, Inc.
Current report on Form 8-K filed July 31, 1998,
which provided a cautionary statement for purposes
of the "Safe Harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and
announced the Company's Board of Directors
approved a restructuring of the Company.
27
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Evenflo & Spalding Holdings Corporation
(Registrant)
Date: August 14, 1998 By: /s/ W. Michael Kipphut
-----------------------
W. Michael Kipphut
Vice President and Treasurer
(a Principal Financial Officer and
authorized signatory)
28
<PAGE>
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 the form of Annex I hereto.
"Bank of America" is defined in the preamble.
"Borrower" is defined in the preamble.
1
<PAGE>
"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 the Amended Credit Agreement are, unless otherwise defined herein or
the context otherwise requires, used in this Amendment with such meanings.
2
<PAGE>
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 resultin 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
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.
3
<PAGE>
"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 it 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;
(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
4
<PAGE>
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 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
5
<PAGE>
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 portio 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.
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
6
<PAGE>
"$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)".
SUBPART 2.4.3 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 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
7
<PAGE>
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 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
8
<PAGE>
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)".
9
<PAGE>
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> <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
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 2.00:1.00
last day of each March, June,
September and December thereafter
</TABLE>
<PAGE>
(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> <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>
(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> <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 2.50:1.00"
last day of March, June,
September and December thereafter
</TABLE>
<PAGE>
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.
SUBPART 3.6. Other Loan Documents. The Administrative Agent shall have
received
<PAGE>
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, accrue 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 ($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
<PAGE>
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.
<PAGE>
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 tim 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
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 satisfactionwhen 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
<PAGE>
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 earlie 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>
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.
(a) Hidden Text
(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.
<PAGE>
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 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.
<PAGE>
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";
(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.
<PAGE>
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
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>
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
Lenders:
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:
MERRILL LYNCH DEBT STRATEGIES
PORTFOLIO
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
[Credit Agreement Amendment No. 3 Signature Page]
<PAGE>
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:
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>
VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
By
Name:
Title: VAN KAMPEN CLO I, LTD.
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.
Oak Hill Securities GenPar, L.P., its
General Partner
Oak Hill Securities MGP, Inc., its
General Partner
By
Name:
Title:
MORGAN STANLEY DEAN WITTER
PRIME INCOME TRUST
By
Name:
Title:
AERIES FINANCE, LTD.
By
Name:
[Credit Agreement Amendment No. 3 Signature Page]
<PAGE>
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 LYONNAIS NEW YORK BRANCH
By
Name:
Title:
CYPRESS TREE INVESTMENT
PARTNERS I, LTD
Cypress Tree Investment
Management Co., as Portfolio Manager
By
Name:
[Credit Agreement Amendment No. 3 Signature Page]
<PAGE>
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
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:
[Credit Agreement Amendment No. 3 Signature Page]
<PAGE>
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.
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]
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 20,569
<SECURITIES> 0
<RECEIVABLES> 239,161
<ALLOWANCES> 5,233
<INVENTORY> 215,070
<CURRENT-ASSETS> 490,617
<PP&E> 210,411
<DEPRECIATION> 94,956
<TOTAL-ASSETS> 864,913
<CURRENT-LIABILITIES> 277,888
<BONDS> 774,174
0
0
<COMMON> 970
<OTHER-SE> (188,119)
<TOTAL-LIABILITY-AND-EQUITY> 864,913
<SALES> 631,184
<TOTAL-REVENUES> 631,184
<CGS> 444,359
<TOTAL-COSTS> 444,359
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,287
<INCOME-PRETAX> (76,610)
<INCOME-TAX> (26,095)
<INCOME-CONTINUING> (50,515)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (50,515)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
