<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 OCTOBER 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO_______________
COMMISSION FILE NUMBER 333-14569
SPALDING HOLDINGS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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<CAPTION>
<S> <C>
DELAWARE 59-2439656
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
425 MEADOW STREET, CHICOPEE, MASSACHUSETTS 01013
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code:
(413) 536-1200
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.
[X] Yes [ ] No
The number of shares outstanding of the registrant's Common stock, par value
$.01 per share, at October 31, 1999, was 97,483,963 shares.
<PAGE> 2
INDEX TO FORM 10-Q
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Page No.
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Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Condensed Statements of Consolidated Earnings (Loss) for the Three
Fiscal Months Ended October 2, 1999 and September 30, 1998 ........................ 2
Condensed Statements of Consolidated Earnings (Loss) for the
Nine Fiscal Months Ended October 2, 1999 and September 30, 1998 ................... 3
Condensed Consolidated Balance Sheets at October 2, 1999 and
December 31, 1998 ............................................................... 4
Condensed Statements of Consolidated Cash Flows for the Nine
Fiscal Months Ended October 2, 1999 and September 30, 1998 ........................ 5
Notes to Condensed Consolidated Financial Statements................................. 6
Independent Accountants' Report .................................................. 10
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition ............................................................. 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk ............................ 19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................................... 20
Item 6. Exhibits and Reports on Form 8-K....................................................... 21
</TABLE>
1
<PAGE> 3
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED
EARNINGS (LOSS) FOR THE THREE FISCAL MONTHS
ENDED OCTOBER 2, 1999 AND SEPTEMBER 30, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
THREE FISCAL MONTHS ENDED
---------------------------
OCTOBER 2, SEPTEMBER 30,
1999 1998
--------- ---------
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NET SALES ................................................. $ 88,641 $ 179,102
Cost of sales ........................................ 59,843 117,138
--------- ---------
GROSS PROFIT .............................................. 28,798 61,964
Selling, general and administrative expenses ......... 44,205 71,054
Royalty income, net .................................. (3,256) (3,680)
Restructuring and other unusual costs ................ (184) 12,427
--------- ---------
INCOME (LOSS) FROM OPERATIONS ............................. (11,967) (17,837)
Interest expense, net ................................ 13,784 18,754
Currency (gain) loss, net ............................ (1,004) (278)
Equity in net (earnings) loss of Evenflo Company, Inc. (561) (1,476)
--------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES ....................... (24,186) (34,837)
Income taxes (benefit) ............................... (8,753) (6,852)
--------- ---------
EARNINGS (LOSS) BEFORE EXTRAORDINARY LOSS ................. (15,433) (27,985)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT,
NET OF INCOME TAX BENEFIT OF $3,182 .................. 0 (5,909)
--------- ---------
NET EARNINGS (LOSS) ....................................... $ (15,433) $ (33,894)
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
2
<PAGE> 4
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED
EARNINGS (LOSS) FOR THE NINE FISCAL MONTHS
ENDED OCTOBER 2, 1999 AND SEPTEMBER 30, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE FISCAL MONTHS ENDED
---------------------------
OCTOBER 2, SEPTEMBER 30,
1999 1998
--------- ---------
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NET SALES ................................................. $ 333,840 $ 665,493
Cost of sales ........................................ 196,893 443,807
--------- ---------
GROSS PROFIT .............................................. 136,947 221,686
Selling, general and administrative expenses ......... 134,879 236,012
Royalty income, net .................................. (8,205) (9,490)
Restructuring and other unusual costs ................ 482 21,154
--------- ---------
INCOME (LOSS) FROM OPERATIONS ............................. 9,791 (25,990)
Interest expense, net ................................ 41,699 59,799
Currency (gain) loss, net ............................ (331) 1,999
Equity in net (earnings) loss of Evenflo Company, Inc. 248 (1,476)
--------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS (31,825) (86,312)
Income taxes (benefit) ............................... (10,774) (24,374)
--------- ---------
EARNINGS (LOSS) BEFORE EXTRAORDINARY LOSS ................. (21,051) (61,938)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT,
NET OF INCOME TAX BENEFITS OF $3,182 ................. 0 (5,909)
--------- ---------
NET EARNINGS (LOSS) ....................................... $ (21,051) $ (67,847)
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE> 5
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 2, 1999 AND DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED)
OCTOBER 2, DECEMBER 31,
1999 1998
--------- ---------
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ASSETS
CURRENT ASSETS
Cash ................................................................................. $ 5,641 $ 8,036
Receivables, less allowance of $2,333 and $3,491, respectively ....................... 81,590 86,196
Inventories .......................................................................... 54,956 89,166
Deferred income taxes ................................................................ 9,053 11,592
Other ................................................................................ 2,439 1,098
--------- ---------
TOTAL CURRENT ASSETS ............................................................ 153,679 196,088
Property, plant and equipment, net ................................................... 58,503 51,660
Intangible assets, net ............................................................... 109,256 112,662
Deferred income taxes ................................................................ 99,751 85,838
Deferred financing costs ............................................................. 16,940 19,395
Investment in Evenflo Company, Inc. .................................................. 10,103 10,340
Other ................................................................................ 597 194
--------- ---------
TOTAL ASSETS .................................................................... $ 448,829 $ 476,177
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Non-U.S. bank loans .................................................................. $ 5,182 $ 6,531
Accounts payable ..................................................................... 61,006 85,198
Accrued expenses ..................................................................... 60,176 55,045
Income taxes ......................................................................... 182 349
--------- ---------
TOTAL CURRENT LIABILITIES ....................................................... 126,546 147,123
Long-term debt ....................................................................... 537,347 524,519
Pension .............................................................................. 9,652 8,360
Post-retirement benefits ............................................................. 8,043 7,549
Other ................................................................................ -- 67
--------- ---------
TOTAL LIABILITIES ............................................................... 681,588 687,618
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIENCY)
Preferred stock, $.01 par value, 50,000,000 shares authorized; 1,000,000 shares
outstanding (liquidation value $100 million and related common stock warrants) ..... 100,000 100,000
Common stock, $.01 par value, 150,000,000 shares authorized, 97,483,963 and 96,933,963
shares outstanding, respectively .................................................. 975 969
Additional paid-in capital ........................................................... 452,784 452,434
Accumulated deficit .................................................................. (782,409) (761,358)
Treasury stock, 17,222 shares, at cost ............................................... (77) (77)
Deferred compensation ................................................................ (250) 0
Accumulated other comprehensive earnings (loss) - currency translation adjustments ... (3,782) (3,409)
--------- ---------
Total shareholders' equity (deficiency) ........................................ (232,759) (211,441)
--------- ---------
Total liabilities and shareholders' equity (deficiency) .............................. $ 448,829 $ 476,177
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE> 6
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF
CONSOLIDATED CASH FLOWS FOR THE NINE FISCAL
MONTHS ENDED OCTOBER 2, 1999 AND SEPTEMBER 30,
1998
(DOLLAR AMOUNTS IN THOUSANDS)
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<CAPTION>
(UNAUDITED)
OCTOBER 2, SEPTEMBER 30,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) .......................................................... $ (21,051) $ (67,847)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in)
operating activities:
Write-down and write-off of inventories ................................. 8,662 0
Depreciation ............................................................ 5,946 15,264
Equity in (earnings) loss of Evenflo Company, Inc. ...................... 248 (1,476)
Amortization of intangibles ............................................. 3,354 4,423
Deferred income taxes ................................................... (11,374) (24,259)
Amortization of deferred financing costs ................................ 2,455 4,047
Extraordinary loss on extinguishment of debt ............................ 0 9,091
Other ................................................................... (384) 2,198
Changes in assets and liabilities:
Receivables ............................................................. 4,606 (25,911)
Inventories ............................................................. 25,548 24,677
Current liabilities, excluding bank loans ............................... (17,378) (7,215)
Other ................................................................... (1,824) 4,054
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ................. (1,192) (62,954)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ......................................................... (12,788) (20,174)
Sale of Evenflo and Settlement of intercompany balances:
Sale of 57.6% of Evenflo Common Stock ................................... 0 28,800
Sale of Evenflo Preferred Stock ......................................... 0 40,000
Repayment of intercompany debt by Evenflo ............................... 0 110,000
Effect of cash on sale of Evenflo ....................................... 0 (6,739)
--------- ---------
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES ........... (12,788) 151,887
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment under credit agreement ............................................. 0 (228,800)
Net borrowings (repayment) under revolving credit loan ....................... 12,828 54,600
Net borrowings (repayment) of other indebtedness ............................. (1,349) (2,916)
Payment of financing costs ................................................... 0 (4,915)
Proceeds from issuance of preferred stock .................................... 0 100,000
Proceeds from issuance of common stock ....................................... 106 111
Repurchase of common stock ................................................... 0 (52)
--------- ---------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES ........... 11,585 (81,972)
--------- ---------
NET INCREASE (DECREASE) IN CASH .............................................. (2,395) 6,961
Cash balance, beginning of period ............................................ 8,036 3,734
--------- ---------
Cash balance, end of period .................................................. $ 5,641 $ 10,695
========= =========
SUPPLEMENTAL CASH FLOW DATA:
Interest paid ................................................................ $ 39,817 $ 57,852
Income taxes paid (refunded) ................................................. 560 (398)
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE> 7
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNT IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet of Spalding Holdings
Corporation and subsidiaries (the "Company") as of October 2, 1999, and the
related condensed statements of consolidated earnings (loss) and of cash flows
for the three and nine fiscal month periods ended October 2, 1999 and September
30, 1998 are unaudited. In the opinion of management, all adjustments necessary
for a fair presentation of such consolidated financial statements have been
included. Such adjustments consist only of normal recurring items. Interim
results may not be indicative of results for a full year.
The primary subsidiary of the Company is Spalding Sports Worldwide, Inc.
("Spalding"). Spalding is a global manufacturer and marketer of branded consumer
products serving the sporting goods markets under the primary trade names
Spalding(R), Top Flite(R), Etonic(R), Strata(R), Ben Hogan(R), and Dudley(R).
Spalding markets and licenses a variety of recreational and athletic products
such as golf balls, golf clubs, golf shoes, golf bags and accessories,
basketballs, volleyballs, footballs, soccer balls, softballs, baseballs and
gloves, handballs, and clothing and equipment for many other sports.
Prior to August 20, 1998, Evenflo Company, Inc. ("Evenflo") was also a
subsidiary of the Company. Evenflo markets under the Evenflo(R), Gerry(R) and
Snugli(R) trademarks, specialty juvenile products, including reusable and
disposable baby bottle feeding systems, breast-feeding aids, pacifiers and oral
development items, baby bath, health and safety items, monitors and other baby
care products and accessories, as well as juvenile car seats, stationary
activity products, strollers, high chairs, portable play yards, cribs, dressers
and changing tables, gates, soft carriers and frame carriers, child carriers and
mattresses.
On August 20, 1998, the Company separated its two businesses, Spalding and
Evenflo, into two stand-alone companies (the "Reorganization"). Following
completion of the Reorganization, the Company's headquarters in Tampa, Florida
was closed and its functions transferred to the separate Spalding and Evenflo
operations. After giving effect to the Reorganization, the Company continues to
own 42.4% of the common stock of Evenflo.
Subsequent to the Reorganization of the businesses, the Company elected
Edwin L. Artzt (former Chairman and Chief Executive Officer of Procter & Gamble
Company) in October 1998 as Chairman of the Board of Directors and hired James
R. Craigie (formerly an Executive Vice President of Kraft, Inc.) in December
1998 as President and Chief Executive Officer. Under this new leadership, the
management of the Company is repositioning its brands to improve profitability
of its sales, restructuring its organization to lower operating expenses, and
reengineering its key business processes to lower working capital and improve
customer service.
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
December 31, 1998, 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 Transition Period (October 1, 1998 through December
31, 1998).
The Company's year end is December 31. Effective January 1, 1999, the
Company changed its quarterly operating cycle whereby each quarter closes on the
thirteenth Saturday of that period except the fourth quarter which always closes
on December 31. The Company's fiscal quarters for the 1999 calendar year are as
follows: April 3, July 3, October 2 and December 31.
Certain reclassifications have been made to prior period amounts to
conform with current period presentations.
6
<PAGE> 8
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 - CHANGE IN ACCOUNTING PRINCIPLE
Prior to 1999, costs for a majority of the U.S. inventories were
determined by the use of the last-in, first-out costing method ("LIFO").
Effective January 1, 1999, the Company changed its method of valuing U.S.
inventories from LIFO to the first-in, first-out costing method ("FIFO") to more
properly reflect the method of product consumption. All previously reported
amounts have been restated to reflect the retroactive application of this
accounting change as required by generally accepted accounting principles. As of
December 31, 1998, the effect of this change resulted in a $5,120 decrease in
inventory, a $1,792 increase in deferred tax assets and an overall $3,328
decrease in equity. The accounting change decreased the net loss for the three
months ended September 30, 1998 by $463 and increased the net loss for the nine
months ended September 30, 1998 by $519.
NOTE 3 - INVENTORIES
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<CAPTION>
October 2, December 31,
1999 1998
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Finished goods ........... $40,129 68,018
Work in process .......... 3,398 3,385
Raw materials ............ 11,429 17,763
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Total inventories $54,956 $89,166
======= =======
</TABLE>
Consistent with the Company's strategy of repositioning its core brands, certain
products and product lines that were not consistent with the Company's marketing
strategy were identified and discontinued by management during September 1999.
As a result the Company recorded approximately $8,662 of inventory write-downs
and write-off.
NOTE 4 - SEGMENT INFORMATION
The Company manages the operations of the business based on three
operating segments: U.S. Golf Products, U.S. Sporting Goods Products and
International Operations. The following table is presented in accordance with
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information."
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<CAPTION>
U.S
U.S. Sporting
Golf Goods International Evenflo All Other Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Three Fiscal Months ended October 2, 1999
Net sales .................................. $ 49,455 $ 19,149 $ 20,037 $ -- $ -- $ 88,641
Income (loss) from operations .............. (11,097) (4,429) 320 -- 3,239 (11,967)
Three Months ended September 30, 1998
Net sales .................................. $ 77,292 $ 28,338 $ 27,915 $ 45,557 $ -- $ 179,102
Income (loss) from operations .............. (9,846) 842 (7,698) (4,834) 3,699 (17,837)
Nine Fiscal Months Ended October 2, 1999
Net sales .................................. $ 188,554 $ 61,094 $ 84,192 $ -- $ -- $ 333,840
Income (loss) from operations .............. (2,677) (4,179) 8,713 -- 7,934 9,791
Nine Months Ended September 30, 1998
Net sales .................................. $ 256,645 $ 82,975 $ 104,733 $ 221,140 $ -- $ 665,493
Income (loss) from operations .............. (9,926) (5,797) (15,506) (3,243) 8,482 (25,990)
</TABLE>
7
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SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. Golf Products represent Spalding's largest operating segment. The
products included in this segment are golf balls, golf clubs, golf shoes and
golf accessories (bags, hats, club covers, towels and sports luggage).
Spalding currently markets its golf products under the following brand
names:
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GOLF BALLS GOLF CLUBS GOLF SHOES AND ACCESSORIES
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Strata(R) Ben Hogan(R) Etonic(R)
Top-Flite(R) Top-Flite(R) Ben Hogan(R)
Spalding(R) Spalding(R) Top-Flite(R)
Molitor(R) Spalding(R)
</TABLE>
U.S. Sporting Goods includes basketballs, softball and baseball products,
volleyballs, soccer balls, athletic shoes and other sports products. These
products are primarily sold under the Spalding(R) trademark. Softball products
are also marketed under the Dudley(R) trademark. During the 1999 third quarter,
the Company sold all the remaining inventory of the Etonic(R) athletic shoe
product line. Currently, this product line is inactive.
The International segment conducts operations outside of the U.S. and
consists of both subsidiary and third party distributors. Subsidiary operations
are maintained in key golf and sporting goods markets outside the U.S.,
including operations in Canada, Australia, New Zealand, United Kingdom, Sweden
and Japan. In addition to the subsidiary operations, Spalding conducts business
with over 100 third-party distributors in other markets throughout the world. In
both the subsidiary and distributor territories, Spalding markets a line of golf
and sporting goods products similar to those in the U.S. segments.
The "All Other" category includes worldwide licensing and other items not
allocable to one of the segments. Worldwide licensing is a result of Spalding
granting licensees the exclusive right to use specified Spalding trademarks for
specific product categories, in specific markets. The Spalding(R), Top-Flite(R),
Etonic(R) and Ben Hogan(R) names are licensed in a broad range of product
categories, including shoe and apparel lines. In exchange for these exclusive
licenses, the Spalding receives royalty fees. The majority of royalty revenues
are generated in the U.S. and Japanese markets.
NOTE 5 - INVESTMENT IN AFFILIATE
On August 20, 1998, the Company effectively completed the separation of
Spalding and Evenflo, into two stand-alone companies (see Note 1). For the
periods prior to August 20, 1998, the financial statements for Evenflo have been
consolidated with those of the Company. The financial statements for the periods
subsequent to the sale include the portion of Evenflo's results attributable to
the Company's ownership on an equity accounting basis.
8
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SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Summarized financial information of Evenflo for the three and nine months
ended September 30, 1999 is set forth below.
CONDENSED INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------ ------------------
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Net sales ............................................... $ 93,550 $ 258,595
========= =========
Gross profit ............................................ $ 23,372 $ 62,440
========= =========
Earnings (loss) before income tax and extraordinary items $ 719 $ (2,054)
========= =========
Net earnings (loss) ..................................... $ 1,324 $ (583)
========= =========
Company's proportionate share (42.4%) ................... $ 561 $ (248)
========= =========
</TABLE>
NOTE 6 - CONTINGENCIES
The Company, Spalding and Evenflo are plaintiffs and defendants in
numerous lawsuits incidental to its current and former operations, some alleging
substantial claims. In addition, the Company's operations are subject to
federal, state, and local environmental laws and regulations. The Company has
entered into settlement agreements with the U.S. Environmental Protection Agency
and other parties on several sites, and is still negotiating on other sites. The
settlement amount and estimated liabilities are not considered significant by
the Company based on present facts.
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 on the Company's
condensed consolidated financial statements.
Effective with the Reorganization on August 20, 1998, the Company and
Evenflo entered into an indemnity agreement whereby the Company and Evenflo
indemnified the other against liability or obligation related to their
respective operations or business whether arising prior to or after the
Reorganization. Additionally, the Company indemnified Evenflo against damages
including recall or other corrective action relating to any products
manufactured by Evenflo prior to the close of business on August 20, 1998. The
estimated liability as of October 2, 1999 recorded by the Company related to
these matters is approximately $1,100.
NOTE 7 - COMPREHENSIVE INCOME (LOSS)
For the three fiscal months ended October 2, 1999 and September 30, 1998,
the comprehensive income (loss) was $(16,050) and $(29,891), respectively. For
the nine fiscal months ended October 2, 1999 and September 30, 1998, the
comprehensive income (loss) was $(21,424) and $(63,783), respectively. The
components of the Company's comprehensive income (loss) are net income (loss)
adjusted for currency translation adjustments.
NOTE 8 - EQUITY
During the third quarter, the Company issued approximately 5.2 million
stock options to management and certain key employees at an exercise price of
$2.00 per share. In accordance with the Company's policy and Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees", no
stock-based compensation was recorded as a result of the grant of options in the
current period.
9
<PAGE> 11
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
Spalding Holdings Corporation
Chicopee, Massachusetts
We have reviewed the accompanying condensed consolidated balance sheet of
Spalding Holdings Corporation and subsidiaries (the "Company") as of October 2,
1999, and the related condensed consolidated statements of earnings (loss) for
the three and nine fiscal months ended October 2, 1999 and September 30, 1998
and of condensed consolidated cash flows for the nine fiscal months ended
October 2, 1999 and September 30, 1998. 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 December 31, 1998,
and the related statements of consolidated earnings (loss), consolidated cash
flows and consolidated shareholders' equity (deficiency) for the period October
1, 1998 through December 31, 1998 (not presented herein); and in our report
dated March 19, 1999, 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 December 31, 1998, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
As discussed in Note 2 to the condensed consolidated financial statements,
effective January 1, 1999, the Company changed its method of valuing U.S.
inventories from the Last-in, First-out costing method to the First-in,
First-out costing method.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
November 10, 1999
10
<PAGE> 12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
Sections of this Form 10-Q, including Management's Discussion and Analysis
of Results of Operations and Financial Condition ("MD&A"), contain various
forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995, with respect to the financial condition, results
of operation and business of the Company. Examples of forward-looking statements
are statements that use the words "expect", "anticipate", "plan", "intend",
"project", "believe" and similar expressions. These forward-looking statements
involve certain risks and uncertainties, and no assurance can be given that any
of such matters will be realized. Actual results may differ materially from
those contemplated by such forward looking statements as a result of, among
other things, failure by the Company to predict accurately customer preferences;
a decline in the demand for merchandise offered by the Company; failure of the
Company's brand repositioning strategy and organizational restructuring;
competitive influences; changes in levels of consumer spending habits;
effectiveness of the Company's brand awareness and marketing programs; general
economic conditions that are less favorable than expected or a downturn in the
consumer products industry; a significant change in the regulatory environment
applicable to the Company's business; an increase in the rate of import duties
or export quotas with respect to the Company's merchandise; any material adverse
effects of the Year 2000 issue on the business of the Company or third parties
with which the Company does business; any unforeseen problems relating to the
implementation of an integrated information system, or an adverse outcome of the
litigation referred to in "Legal Proceedings" that materially and adversely
affects the Company's financial condition. The Company assumes no obligation to
update or revise any such forward looking statements, which speak only as of
their date, even if experience or future events or changes make it clear that
any projected financial or operating results implied by such forward-looking
statements will not be realized.
Basis Of Presentation. As previously stated, on August 20, 1998, the
Company separated its two businesses, Spalding and Evenflo, into two stand-alone
companies. Accordingly, the unaudited financial statements presented for the
three and nine months ended September 30, 1998 include the results of operations
and cash flows for Evenflo. For improved comparability, the Company has provided
below, summary pro forma results of operations for the three and nine months
September 30, 1998 giving impact to the elimination of Evenflo from the
historical information as if the Reorganization had occurred on January 1, 1998.
The management's discussion and analysis provides analysis comparing the pro
forma September 30, 1998 financial statements. For additional information on
business segments, see Note 4 in the Notes to Condensed Consolidated Financial
Statements included elsewhere in the Form 10-Q.
11
<PAGE> 13
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED
EARNINGS (LOSS) FOR THE FISCAL THREE AND NINE
MONTHS ENDED OCTOBER 2, 1999 AND PRO FORMA
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 GIVING EFFECT TO THE
EXCLUSION OF EVENFLO COMPANY, INC.
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
PROFORMA PROFORMA
OCTOBER 2, SEPT 30, OCTOBER 2, SEPT 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES ................................................ $ 88,641 $ 133,545 $ 333,840 $ 444,346
Cost of sales ......................................... 59,843 79,670 196,893 267,286
--------- --------- --------- ---------
GROSS PROFIT ............................................. 28,798 53,875 136,947 177,060
Selling, general and administrative expenses .......... 44,205 58,108 134,879 189,230
Royalty income, net ................................... (3,256) (3,654) (8,205) (9,186)
Restructuring and other unusual costs ................. (184) 12,424 482 19,768
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS ............................ (11,967) (13,003) 9,791 (22,752)
Interest expense, net ................................. 13,784 17,095 41,699 52,530
Currency (gain) loss, net ............................. (1,004) (470) (331) 1,370
Equity in net (earnings) loss of Evenflo Company, Inc. (561) (1,476) 248 (1,476)
--------- --------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS (24,186) (28,152) (31,825) (75,176)
Income taxes (benefit) ................................ (8,753) (9,120) (10,774) (24,222)
--------- --------- --------- ---------
EARNINGS (LOSS) BEFORE EXTRAORDINARY LOSS ................ (15,433) (19,032) (21,051) (50,954)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT,
NET OF INCOME TAX BENEFIT ...................... -- 4,609 -- 4,609
--------- --------- --------- ---------
NET EARNINGS (LOSS) ...................................... $(15,433) $ (23,641) $ (21,051) $ (55,563)
========= ========= ========= =========
</TABLE>
12
<PAGE> 14
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 2, 1999 ("1999 THIRD QUARTER") AS COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 1998 ("1998 THIRD QUARTER").
Net Sales are gross sales net of returns, allowances and trade discounts.
The Company's net sales decreased 33.7% to $88.6 million for the 1999 third
quarter compared to $133.5 million for the 1998 third quarter. U.S. Golf net
sales decreased 36.0% to $49.5 million for the 1999 third quarter compared to
$77.3 million for the same quarter in 1998. The decrease in net sales was
expected as the Company continued its plan to exit low margin products and as a
result of a soft U.S. market for golf products. U.S. Sporting Goods decreased
32.5% to $19.1 million for the 1999 third quarter compared to $28.3 million for
the same quarter in 1998. The decrease is across all product lines, but is
primarily attributable to the elimination of many lower end and less profitable
businesses in all product categories. International sales decreased 28.3% to
$20.0 million for the 1999 third quarter compared to $27.9 million for the
comparable period in 1998. The international decrease is related to the 1998
closure of subsidiary operations in Mexico, Spain, Italy, France and Germany and
the downsizing of operations in Japan.
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
and production. The Company's gross profit decreased to $28.8 million in the
1999 third quarter from $53.9 million for the 1998 third quarter, a decrease of
$25.1 million or 46.6%. Also, gross profit as a percentage of net sales
decreased to 32.5% for the 1999 third quarter from 40.4% for the comparable
prior year quarter. This decrease is due to the write-down and write-off of
inventories in the 1999 third quarter of approximately $8.7 million that were
consistent with the Company's marketing strategy of repositioning its core
brands.
Excluding these inventory charges, gross profit as a percentage of net
sales increased by 1.9% for the 1999 third quarter as compared to the 1998 third
quarter. The increase in the gross profit margin was driven by improved margins
in golf ball, as well as increased international gross profit margins. The U.S.
golf ball gross profit margins improved as a result of stronger sales in the
higher tier Strata(R) and Top-Flite(R) families than in the lower-end golf
balls. These gains were partially offset by a decrease in margin rates for golf
clubs and accessories as a soft market, excess trade inventories and competition
continue to place downward pressure on prices of these products.
Selling, General and Administrative ("SG&A") Expenses decreased to $44.2
million for the 1999 third quarter from $58.1 million for the 1998 third
quarter, a decrease of $13.9 million or 23.9%.
SG&A in the U.S. decreased to $36.9 million for the 1999 third quarter
from $47.7 million for the 1998 third quarter, a decrease of $10.8 million or
22.6%. The decrease is primarily attributable to (i) $1.2 million of lower
advertising expenses, primarily due to a reduction in advertising golf clubs and
(ii) $9.6 million of reduced selling and administrative costs (net of costs
associated with the implementation of a new integrated information system for
domestic operations) associated with the restructuring of the sales force and
corporate office activities. Internationally, the SG&A expense decreased to $7.3
million from $10.4 million, a decrease of $3.1 million or 29.8%. The decrease in
the International segment was primarily the result of expense eliminated within
the restructured operations in Japan, Mexico, Spain, France, Germany and Italy.
The remainder of the reduction is a result of the elimination of U.S. overheads
related to the international operations.
Royalty Income decreased to $3.3 million in the 1999 third quarter from
$3.7 million in the 1998 third quarter, a decrease of $0.4 million or 10.8%. The
decrease was due primarily to a reduction in licensing revenue for athletic
footwear.
Restructuring and other unusual costs. In 1997, the Company implemented a
plan to restructure the Spalding domestic and international operations to focus
on core line golf and sporting goods products. In 1998, the plan was expanded to
reduce the infrastructure needed to support the international operations by
converting subsidiary operations to distributors in Mexico, France, Germany,
Italy and Spain and downsizing operations in Japan. This restructuring resulted
in the elimination of approximately 120 international positions at various
levels. Additionally, the U.S. operations incurred certain management severance
costs associated with the elimination of approximately 100 domestic positions
and the closing of the former headquarters in Tampa, Florida. During the 1999
third quarter, the Company recorded $0.2 million of income primarily related to
the reversal of a previously established restructuring accrual for a specific
foreign subsidiary that is currently closed.
13
<PAGE> 15
The Company aggressively continues its plan to consolidate its operations.
The Company paid $1.2 million of these restructuring costs in the 1999 third
quarter and charged $0.8 million in the 1999 third quarter of non-cash
write-offs against the restructuring accruals and currently anticipates that the
remaining restructuring actions will be substantially completed by the end of
1999. As of October 2, 1999, the total amount accrued for restructuring charges
is $6.2 million, relating principally to severance and remaining lease payments
and exit costs on an abandoned property.
Interest Expense decreased $3.3 million to $13.8 million in the 1999 third
quarter from $17.1 million in the 1998 third quarter, a decrease of 19.3%. The
decrease is principally due to the sale of a majority interest in Evenflo and
the related payment of $278.8 million of debt on August 20, 1998. This repayment
resulted in a decrease in average borrowings under the Company's Credit
Facility. The Revolving Credit Facility and the Term Loans make up the
outstanding portion of the Company's $650.0 million Credit Facility (the "Credit
Facility"). The Company has outstanding $200.0 million of 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. borrowings and other
financing agreements for the 1999 third quarter was approximately $542.2 million
compared to approximately $658.7 million then in effect during the 1998 third
quarter.
Net Currency Gains of $1.0 million represent an increase of $0.5 million
in the 1999 third quarter in comparison to the 1998 third quarter gain of $0.5
million. See "Liquidity and Capital Resources".
Income Taxes were a tax benefit of $8.8 million for the 1999 third quarter,
which represents an effective tax rate of 36.2% in relation to earnings (loss)
before income taxes of $24.2 million. The effective tax rate varied from a U.S.
federal statutory rate of 34% due to the Company's portion of Evenflo's net
income of $0.6 million for the 1999 Third Quarter for which tax expense has not
been recognized as prior equity losses had attributed no tax benefit. This was
offset by actual non-U.S. witholding taxes paid during the quarter.
Net Loss was $15.4 million for the 1999 third quarter compared to a net
loss of $23.6 million for the 1998 third quarter. The $8.2 million decrease in
net losses was a result of a $1.0 million increase in earnings from operations,
plus a decrease in interest expense of $3.3 million, a $0.5 million increase in
currency gains and an extraordinary loss incurred in the 1998 third quarter of
$4.6 million for the early extinguishment of debt (net of taxes). These gains
were offset by $0.4 million of lower income tax benefit and a $0.9 million
change in earnings related to the Company's remaining investment in Evenflo of
$0.6 million in the 1999 third quarter as compared to $1.5 million in the 1998
third quarter.
NINE MONTHS ENDED OCTOBER 2, 1999 ("1999 NINE MONTHS") AS COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1998 ("1998 NINE MONTHS").
Net Sales are gross sales net of returns, allowances and trade discounts.
The Company's net sales decreased 24.9% to $333.8 million for the 1999 nine
months compared to $444.3 million for the 1998 nine months. U.S. Golf net sales
decreased 26.5% to $188.6 million for the 1999 nine months compared to $256.6
million for the same period in 1998. The decrease in net sales was expected as
the Company continued its plan to exit lower-end and less profitable businesses
in all product categories. U.S. Sporting Goods decreased 26.4% to $61.1 million
for the 1999 nine months compared to $83.0 million for the same period in 1998.
The decrease is across all product lines, but is primarily attributable to the
elimination of many lower end, unprofitable products. International sales
decreased 19.7% to $84.1 million for the 1999 nine months compared to $104.7
million for the comparable period in 1998. The international decrease is related
to the 1998 closure of subsidiary operations in Mexico, Spain, Italy, France and
Germany and the downsizing of operations in Japan.
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
and production. The Company's gross profit decreased to $136.9 million in the
1999 nine months from $177.1 million for the 1998 nine months, a decrease of
$40.2 million or 22.7%. At the same time, gross profit as a percentage of net
sales increased to 41.0% for the 1999 nine months from 39.8% for the comparable
prior year period. Excluding inventory write-offs taken in the 1999 third
quarter of approximately $8.7 million, the increase in gross profit margin for
the 1999 nine months as compared to the 1998 nine months is 3.8%.
The increase in the gross profit margin rates were primarily driven by
improved margins in golf balls, golf accessories, basketballs, as well as
increased international gross profit margins.
Selling, General and Administrative ("SG&A") Expense decreased to $134.9
million for the 1999 nine months from $189.2 million for the 1998 nine months, a
decrease of $54.3 million or 28.7%.
14
<PAGE> 16
SG&A in the U.S. decreased to $111.0 million from $149.4 million, a
decrease of $38.4 million or 25.7%. The decrease is primarily attributable to
(i) $17.1 million of lower advertising expenses related to golf clubs and (ii)
$21.3 million of reduced selling and administrative costs, net of costs
associated with the implementation of a new integrated information system for
domestic operations) associated with the restructuring of the sales force and
corporate office activities. Internationally, the SG&A expense decreased to
$23.9 million from $39.9 million, a decrease of $16.0 million or 40.1%. The
decrease in the International segment was primarily the result of expense
reduced within Japan's downsized operation and the closures in Mexico, Spain,
France, Germany and Italy. The remainder of the reduction is a result of the
elimination of U.S. overheads related to the international operations.
Royalty Income decreased to $8.2 million in the 1999 nine months from $9.2
million in the 1998 nine months, a decrease of $1.0 million or 10.9%. The
decrease is primarily due to lower clothing royalties and athletic footwear in
the U.S., a result of a reorganization of the product category and the
discontinuance of licensees that no longer matched the Company's brand
strategies.
Restructuring and other unusual costs. In 1997, the Company implemented a
plan to restructure the Spalding domestic and international operations to focus
on core line golf and sporting goods products. In 1998, the plan was expanded to
reduce the infrastructure needed to support the international operations by
converting subsidiary operations to distributors in Mexico, France, Germany,
Italy and Spain and downsizing operations in Japan. This facility restructuring
resulted in the elimination of approximately 120 international positions at
various levels. Additionally, the U.S. operations incurred certain management
severance costs associated with the elimination of approximately 100 domestic
positions and the closing of the former headquarters in Tampa, Florida. During
the 1999 nine months, the Company recorded $0.8 million of additional charges
related to the restructuring of its operations, primarily management severance
and related expenses. These charges are offset by approximately $0.3 million of
restructuring income recorded in certain foreign operations for the reduction of
previously established accruals and cash received from customers that was
previously written off.
The Company aggressively continues its plan to consolidate its operations.
The Company paid $4.5 million of these restructuring costs in the 1999 nine
months and charged $1.5 million in the 1999 nine months of non-cash write-offs
against the restructuring accruals and currently anticipates that the remaining
restructuring actions will be substantially completed by the end of 1999.
Interest Expense decreased $10.8 million to $41.7 million in the 1999 nine
months from $52.5 million in the 1998 nine months, a decrease of 20.6%. The
decrease is principally due to the sale of a majority interest in Evenflo and
the related repayment of $278.8 million of debt on August 20, 1998. This
repayment resulted in a decrease in average borrowings under the Company's
Credit Facility. The Revolving Credit Facility and the Term Loans make up the
outstanding portion of the Company's $650.0 million Credit Facility (the "Credit
Facility"). The Company has outstanding $200.0 million of 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 and other financing
agreements for the 1999 nine months was $548.5 million compared to $725.2
million then in effect during the 1998 nine months.
Net Currency Gains of $0.3 million were $1.7 million higher in the 1999
nine months than in the 1998 nine months. See "Liquidity and Capital Resources".
Income Taxes were a tax benefit of $10.8 million for the 1999 nine months,
which represents an effective tax rate of 34.0% in relation to a loss before
income taxes of $31.8 million.
Net Loss was $21.1 million for the 1999 nine months compared to $55.6
million for the 1998 nine months. The $34.5 million decrease in the net loss was
a result of a $32.6 million increase in earning from operations, plus a decrease
in interest expense of $10.8 million, a $1.7 million decrease in currency losses
and a $4.6 million extraordinary loss incurred in 1998 for the early
extinguishment of debt (net of taxes). These gains were offset by $13.4 million
of lower income tax benefit and a $1.7 million difference in the $0.2 million
loss related to the Company's remaining investment in Evenflo for the 1999 nine
months as compared to earnings of $1.5 million for the 1998 nine months.
15
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are from cash flows generated
from operations and from borrowings under the Company's $250 million revolving
credit facility and certain non-U.S. facilities (the majority of which non-U.S.
borrowings are guaranteed by the Company). The Company's principal uses of
liquidity are to provide working capital, meet debt service requirements and
finance the Company's strategic plans. At October 2, 1999, the Company had an
available borrowing capacity under the Credit Facility of $59.7 million (net of
$33.8 million of outstanding letters of credit and bankers' acceptances). The
Company does not have any required amortization of Term Loans in calendar 1999.
The Company believes its business is somewhat seasonal. For calendar 1998
quarterly net sales as a percentage of total sales were approximately 29.8%,
32.3%, 26.6%, and 11.3%, 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 and fourth quarters when cash generated from operating activities coupled
with drawdowns from credit facilities have been invested in receivables and
inventories.
For the 1999 nine months, the Company used $14.0 million in cash before
financing activities to fund $12.8 million in capital expenditures (primarily an
integrated computer system). Operating activities used $1.2 million of cash.
Cash usage in the 1999 nine months was funded from $11.5 million in net
borrowings from the Company's Revolving Credit Facility and credit facilities
available to certain of the Company's non-U.S. operations.
Net cash flows used in operating activities were $1.2 million in the 1999
nine months compared to cash used in operating activities of $ 62.9 million for
the 1998 nine months. The $61.7 million lower use of cash for operating
activities when compared to the 1998 nine months was due to a $21.2 million
lower use of cash for working capital and a $46.8 million decrease in the net
loss. Such amounts were offset by a $6.3 million decrease in other non-cash
charges affecting cash flow from operations.
Capital expenditures during the 1999 nine months relate primarily to the
implementation of a new integrated computer system. The company expects to fund
$13.6 in capital expenditures for the remainder of 1999.
The Company's ability to fund its operations, make capital expenditures
and make scheduled payments or to refinance its indebtedness will depend upon
its future financial and operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors, some
of which are beyond its control. There can be no assurance that the Company's
results of operations, cash flow and capital resources will be sufficient to
fund its operations, capital expenditures, or its debt service obligations. In
the absence of improved operating results, the Company may face liquidity
problems and might be required to dispose of material assets or operations to
fund its operations and capital expenditures and to meet its debt service and
other obligations, and there can be no assurances as to the timing of such sales
or the proceeds that the Company could realize therefrom.
16
<PAGE> 18
EBITDA represents earnings before interest, taxes, depreciation and
amortization, and excludes extraordinary items. EBITDA is not intended to
represent cash flows from operations as defined by generally accepted accounting
principles ("GAAP") and should not be considered as an alternative to net income
as an indicator of the Company's operating performance or to cash flows as a
measure of liquidity. EBITDA 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
the calculation of the Company's EBITDA for the 1999 and 1998 (proforma basis)
third quarter and the 1999 and 1998 (proforma basis) nine months.
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- --------------------------
PROFORMA PROFORMA
OCTOBER 2, SEPT 30, OCTOBER 2, SEPT 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss ......... $(15,433) $(23,637) $(21,051) $(55,559)
Interest expense . 13,784 17,095 41,699 52,530
Income taxes ..... (8,753) (9,120) (10,774) (24,222)
Depreciation ..... 1,987 2,084 5,946 6,555
Amortization ..... 1,121 1,390 3,354 3,406
Extraordinary loss 0 4,605 0 4,605
-------- -------- -------- --------
EBITDA ........... $ (7,294) $ (7,583) $ 19,174 $(12,685)
======== ======== ======== ========
</TABLE>
SUBSEQUENT EVENT
During October 1999, the Company completed the implementation of a
fully-integrated computer system for its domestic operations. The implementation
included significant changes to customer service, warehousing, distribution and
financial processes. The Company encountered some start-up difficulties that
primarily affected the efficiency of warehouse and distribution operations.
While the Company was able to process and fulfill orders, it was not able to do
so at an adequate rate, thus risking the loss of future business if immediate
action was not taken to fulfill all orders. Accordingly, the Company has
temporarily returned its prior computer system to deliver a level of
distribution activity that will meet the ongoing demands for its products. The
start-up issues associated with the new computer system are not expected to have
a material adverse effect on the consolidated financial condition or results of
operations of the Company.
YEAR 2000
The Company has been conducting a comprehensive review of its computer
systems to identify those that could be adversely affected by the "Year 2000
issue" (which refers to the inability of many computer systems to process
accurately dates later than December 31, 1999), and has been executing a plan to
remediate or replace affected systems that use microchips or other embedded
technology. (For example, robotic systems at the Company's manufacturing
center.)
The Company's Year 2000 compliance project includes four phases: (1)
evaluation of the Company's owned or leased systems and equipment to identify
potential Year 2000 compliance issues; (2) remediation or replacement of Company
systems and equipment determined to be non-compliant (and testing of remediated
systems before returning them to production); (3) inquiry regarding Year 2000
readiness of material business partners and other third parties on whom the
Company's business is dependent; and (4) development of contingency plans, where
feasible, to address potential third party non-compliance or failure of material
Company systems.
The initial phase of the Company's Year 2000 compliance project was the
evaluation of all software, hardware and equipment owned or licensed by the
Company, and identification of those systems and equipment requiring Year 2000
remediation. Analysis of all material software and hardware has been completed.
Of those software systems requiring remediation or replacement, all material
systems have already been remediated. In addition, all mission critical computer
hardware in the Company's home offices, manufacturing center and distribution
center that was not Year 2000 compliant has been remediated and hardware and
software unique to the Company's offices located outside the United States has
been remediated. The Company will continue to apply Year 2000 upgrades
immediately upon notification of its information technology providers.
17
<PAGE> 19
The Company engaged a consultant to assist in the evaluation of the
equipment used in the Company's manufacturing center (other than computer
software and hardware, which were included in the analysis and remediation
efforts described in the preceding paragraph). The equipment evaluation was
completed in December 1998, and remediation or replacement of manufacturing
center equipment found not to be Year 2000 compliant is completed.
The costs and timing for replacement of certain of the Company's systems
that were not Year 2000 compliant have been anticipated as part of the Company's
planned information systems spending. The total cost to the Company specifically
associated with addressing the Year 2000 issue with respect to its systems and
equipment has not been, and is not anticipated to be, material to the Company's
financial position or results of operations. The Company estimates that the
total additional cost of managing its Year 2000 project, remediating existing
systems and replacing non-compliant systems, is approximately $1.3 million of
which approximately $0.6 million has been or will be expensed as incurred, and
$0.7 million has been or will be capitalized. Future costs, if any, will be
incurred as part of the integrated software implementation. Although the Company
believes its Year 2000 compliance efforts with respect to its systems will be
successful, any failure or delay could result in actual costs and timing
materially different from that presently contemplated, and in a disruption of
business. The Company is developing a contingency plan to permit its primary
operations to continue if the Company's modifications and conversions of its
systems are not successfully completed on a timely basis, but the foregoing cost
estimates do not take into account any expenditures associated with such
contingencies. The Company's cost estimates also do not include time or costs
that may be incurred as a result of third parties' not becoming Year 2000
compliant on a timely basis.
The Company is communicating with its business partners, including key
manufacturers, vendors, banks and other third parties with whom it does
business, to obtain information regarding their state of readiness with respect
to the Year 2000 issue. Failure of third parties to remediate Year 2000 issues
affecting their respective businesses on a timely basis, or to implement
contingency plans sufficient to permit uninterrupted continuation of their
businesses in the event of a failure of their systems, could have a material
adverse effect on the Company's business and results of operations. Assessment
of third party Year 2000 readiness has been substantially completed.
The Company's Year 2000 compliance project included development of a
contingency plan designed to support critical business operations in the event
of the occurrence of systems failures or the occurrence of reasonably likely
worst case scenarios. The Company's contingency plan is substantially complete
at October 31, 1999.
The Company may not be able to compensate adequately for business
interruption caused by certain third parties. Potential risks include suspension
or significant curtailment of service or significant delays by banks, utilities
or common carriers, or at U.S. ports of entry. The Company's business also could
be materially adversely affected by the failure of governmental agencies to
address Year 2000 issues affecting the Company's operations. For example, a
significant amount of the Company's merchandise is manufactured outside the
United States, and the Company is dependent upon the issuance by foreign
governmental agencies of export visas for, and upon the U.S. Customs Service to
process and permit entry into the United States of, such merchandise. If
failures in government systems result in the suspension or delay of these
agencies' services, the Company could experience significant interruption or
delays in its inventory flow.
The costs and the timing for management's completion of Year 2000
compliance, modification and testing processes are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, the success of third
parties' Year 2000 compliance efforts and other factors. There can be no
assurance that these assumptions will be realized or that actual results will
not vary materially.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative (that is, gains and losses) depends upon the intended use of the
derivative and resulting designation if used as a hedge. SFAS No. 133, as
amended by SFAS No. 137 "Deferral of the Effective Date of SFAS No. 133, is
effective for all periods beginning after June 15, 2000. The adoption of SFAS
No. 133 is not expected to have a material effect on the Company's consolidated
financial statements.
18
<PAGE> 20
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURE ABOUT FOREIGN CURRENCY RISK
Although the majority of the Company's transactions are in U.S. Dollars,
affiliates operate in their local currency with certain transactions for
inventory and royalties being denominated in U.S. Dollars. The Company may
purchase short-term forward exchange contracts to hedge payments that require
conversion to U.S. Dollars. The purpose of entering into these hedge contracts
is to minimize the impact of foreign currency fluctuation on the results of
operations. Certain increases or decreases in the affiliate U.S. dollar payments
are offset by gains and losses on the hedges. The contracts have maturity dates
that do not exceed twelve months. The Company does not purchase short-term
forward exchange contracts for trading purposes.
As of October 2, 1999, the Company had outstanding the following purchased
foreign exchange forward contracts (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
Weighted
Average
Contract Contract Unrealized
Amount Rate Gain (Loss)
------ ---- -----------
<S> <C> <C> <C>
Foreign currency forward
contracts:
British pound ............ $ 850 1.6214 $ (10)
Canadian dollar .......... $ 976 1.4812 $ (4)
------ ------
Total .............. $1,826 $ (14)
====== ======
</TABLE>
DISCLOSURE ABOUT INTEREST RATE RISK
The Company is subject to market risk from exposure to changes in interest
rates based on its financing, investing, and cash management activities. The
Company utilizes a balanced mix of debt maturities along with both fixed-rate
and variable-rate debt to manage its exposures to changes in interest rates. The
Company does not expect changes in interest rates to have a material effect on
income or cash flows in 1999, although there can be no assurances that interest
rates will not significantly change.
In order to reduce the impact of fluctuating rates on its variable rate
debt, on April 14, 1999, the Company entered into an interest rate cap on $300.0
million of its variable rate, Eurodollar debt associated with the Credit
Facility (total variable rate, Eurodollar debt at October 2, 1999 was $318.2
million). The cap has a strike rate of 5.16% and has a termination date of
December 31, 1999. At October 31, 1999, the effective Eurodollar debt interest
rate was 6.185%.
19
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Part I, Item 3 "Legal Proceedings" of the
Registrant's Annual Report on Form 10-K for the Transition Period ended December
31, 1998, filed March 29, 1999. Since March 29, 1999, the Company has not been
named as a defendant in any action that to the best of the Company's knowledge
could have a material adverse effect on the consolidated financial condition or
results of operations of the Company.
20
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Amendment of the Certificate of Incorporation of Evenflo
and Spalding Holdings Corporation
15 Letter in lieu of consent of Deloitte & Touche LLP RE: unaudited
interim financial information
27.1 Fiscal nine months ended October 2, 1999 Financial Data Schedule
27.2 Restated nine months September 30, 1998 Financial Data Schedule (*)
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission dated October 1, 1999 to announce the appointment
of Dan Frey as chief financial officer.
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission dated October 1, 1999 to disclose additional pro
forma financial information as a result of the separation of Spalding
Holdings Corporation and Evenflo Company, Inc. into two stand-alone
companies, effective August 21, 1998.
(*) Financial Data Schedule is restated to reflect the retroactive
application of the Company's change in method of valuing U.S. inventories
from LIFO to FIFO.
21
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be filed on its behalf by
the undersigned, thereunto duly authorized.
Spalding Holdings Corporation
(Registrant)
By: /s/ Daniel S. Frey
---------------------------------------
Daniel S. Frey
Chief Financial Officer
(a Principal Financial Officer and
authorized signatory)
Date: November 15, 1999
22
<PAGE> 1
Exhibit 3.1
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
EVENFLO & SPALDING HOLDINGS CORPORATION
Pursuant to Section 242 of the General Corporation Law of the
State of Delaware, Evenflo & Spalding Holdings Corporation, a corporation
organized and existing under the laws of the State of Delaware (the
"Company"), does hereby certify:
The provisions of Article First of the Company's Certificate of
Incorporation shall be amended to read as follows:
"FIRST: The name of the Company is Spalding Holdings
Corporation."
IN WITNESS WHEREOF, the Company has caused this Certificate to
be signed by Paul L. Whiting, its Chief Executive Officer, and attested
by Robert K. Adikes, its Secretary, this 1st day of September, 1998.
EVENFLO & SPALDING HOLDINGS CORPORATION
By /s/ Paul L. Whiting
Chief Executive Officer
(SEAL)
Attest:
/S/ Robert K. Adikes
Secretary
23
<PAGE> 1
EXHIBIT 15
November 15, 1999
The Board of Directors
Spalding Holdings Corporation
Chicopee, Massachusetts
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Spalding Holdings Corporation and subsidiaries (the "Company")
for the periods ended October 2, 1999 and September 30, 1998, as indicated in
our report dated November 10, 1999; because we did not perform an audit, we
expressed no opinion on the information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended October 2, 1999, is
incorporated by reference in Registration Statement No. 333-20463 on Form S-8 of
Spalding Holdings Corporation.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
Deloitte & Touche LLP
Hartford, Connecticut
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SPALDING HOLDINGS CORPORATION FOR THE FISCAL NINE MONTHS
ENDED OCTOBER 2, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> OCT-02-1999
<CASH> 5,641
<SECURITIES> 0
<RECEIVABLES> 83,923
<ALLOWANCES> (2,333)
<INVENTORY> 54,956
<CURRENT-ASSETS> 153,679
<PP&E> 109,162
<DEPRECIATION> (50,659)
<TOTAL-ASSETS> 448,829
<CURRENT-LIABILITIES> 128,396
<BONDS> 537,347
0
100,000
<COMMON> 975
<OTHER-SE> (333,734)
<TOTAL-LIABILITY-AND-EQUITY> 448,829
<SALES> 333,840
<TOTAL-REVENUES> 333,840
<CGS> 196,893
<TOTAL-COSTS> 134,879
<OTHER-EXPENSES> (7,806)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,699
<INCOME-PRETAX> (31,825)
<INCOME-TAX> (10,774)
<INCOME-CONTINUING> (21,051)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,051)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SPALDING HOLDINGS CORPORATION FOR THE FISCAL NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. THIS FINANCIAL DATA SCHEDULE IS RESTATED TO REFLECT THE
RETROACTIVE APPLICATION OF THE COMPANY'S CHANGE IN METHOD OF VALUING U.S.
INVENTORIES FROM LIFO TO FIFO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,695
<SECURITIES> 0
<RECEIVABLES> 146,063
<ALLOWANCES> (10,539)
<INVENTORY> 113,705
<CURRENT-ASSETS> 277,458
<PP&E> 104,676
<DEPRECIATION> (52,785)
<TOTAL-ASSETS> 532,635
<CURRENT-LIABILITIES> 153,520
<BONDS> 503,074
0
100,000
<COMMON> 969
<OTHER-SE> (241,447)
<TOTAL-LIABILITY-AND-EQUITY> 532,635
<SALES> 665,493
<TOTAL-REVENUES> 665,493
<CGS> 443,807
<TOTAL-COSTS> 236,012
<OTHER-EXPENSES> 12,187
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,799
<INCOME-PRETAX> (86,312)
<INCOME-TAX> (10,774)
<INCOME-CONTINUING> (61,938)
<DISCONTINUED> 0
<EXTRAORDINARY> (5,909)
<CHANGES> 0
<NET-INCOME> (67,847)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
