================================================================================
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 SEPTEMBER 30, 2000.
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)
<TABLE>
<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, 2000, was 98,901,747 shares.
================================================================================
<PAGE>
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Operations for the three fiscal
months ended September 30, 2000 and October 2, 1999....................... 3
Condensed Statements of Consolidated Operations for the nine fiscal months
ended September 30, 2000 and October 2, 1999.............................. 4
Condensed Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999......................................................... 5
Condensed Statements of Consolidated Cash Flows for the nine fiscal months
ended September 30, 2000 and October 2, 1999.............................. 6
Notes to Condensed Consolidated Financial Statements........................... 7
Independent Accountants' Report................................................ 11
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition....................................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 19
Item 6. Exhibits and Reports on Form 8-K................................................. 19
</TABLE>
2
<PAGE>
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
FOR THE THREE FISCAL MONTHS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
SEPTEMBER 30, OCTOBER 2,
2000 1999
------ ------
(UNAUDITED)
NET SALES .......................................... $ 80,842 $ 88,641
Cost of sales .................................... 39,014 59,843
-------- --------
GROSS PROFIT ....................................... 41,828 28,798
Selling, general and administrative expenses ..... 43,419 44,205
Royalty income, net .............................. (3,796) (3,256)
Restructuring and other unusual costs ............ (184)
-------- --------
INCOME (LOSS) FROM OPERATIONS ...................... 2,205 (11,967)
Interest expense, net ............................ 15,231 13,784
Currency loss (gain), net ........................ 1,677 (1,004)
Equity in net income of Evenflo Company, Inc. .... (561)
-------- --------
LOSS BEFORE INCOME TAXES ........................... (14,703) (24,186)
Income tax benefit .............................. (4,733) (8,753)
-------- --------
NET LOSS ........................................... $ (9,970) $(15,433)
======== ========
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
FOR THE NINE FISCAL MONTHS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
SEPTEMBER 30, OCTOBER 2,
2000 1999
------ ------
(UNAUDITED)
NET SALES .......................................... $ 316,493 $ 333,840
Cost of sales .................................... 152,767 196,893
--------- ---------
GROSS PROFIT ....................................... 163,726 136,947
Selling, general and administrative expenses ..... 142,239 134,879
Royalty income, net .............................. (8,937) (8,205)
Restructuring and other unusual costs ............ 482
--------- ---------
INCOME FROM OPERATIONS ............................. 30,424 9,791
Interest expense, net ............................ 44,707 41,699
Currency loss (gain), net ........................ 2,989 (331)
Equity in net loss of Evenflo Company, Inc. ...... 248
--------- ---------
LOSS BEFORE INCOME TAXES ........................... (17,272) (31,825)
Income tax benefit ............................... (5,639) (10,774)
--------- ---------
NET LOSS ........................................... $ (11,633) $ (21,051)
========= =========
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------ ------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash................................................................................ $ 3,686 $ 2,931
Receivables, less allowance of $2,084 and $2,050, respectively...................... 77,528 95,829
Inventories......................................................................... 71,570 49,012
Deferred income taxes............................................................... 11,412 12,218
Prepaid expenses.................................................................... 8,432 1,555
--------- ---------
TOTAL CURRENT ASSETS...................................................... 172,628 161,545
Property, plant and equipment, net.................................................. 45,867 58,734
Intangible assets, net.............................................................. 104,755 108,135
Deferred income taxes............................................................... 106,998 99,877
Deferred financing costs............................................................ 13,347 15,721
Other............................................................................... 736 400
--------- ---------
TOTAL ASSETS.............................................................. $ 444,331 $ 444,412
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Non-U.S. bank loans................................................................. $ 5,703 $ 4,081
Short-term debt..................................................................... 3,516 3,341
Accounts payable.................................................................... 70,041 74,098
Accrued expenses.................................................................... 59,113 60,270
Income taxes........................................................................ 315
--------- ---------
TOTAL CURRENT LIABILITIES................................................. 138,373 142,105
Long-term debt...................................................................... 524,983 510,700
Pension benefits.................................................................... 9,597 9,787
Postretirement benefits............................................................. 8,210 7,940
Other............................................................................... 92
--------- ---------
TOTAL LIABILITIES......................................................... 681,163 670,624
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIENCY)
Preferred stock, $.01 par value, 50,000,000 shares authorized; 1,000,000
outstanding, liquidation value $134.5 million and $120.9 million,
respectively................................................................... 100,000 100,000
Common stock, $.01 par value, 150,000,000 shares authorized, 98,901,747
and 98,058,948 shares outstanding, respectively............................... 989 981
Additional paid-in capital.......................................................... 466,417 466,088
Accumulated deficit................................................................. (800,312) (788,679)
Treasury stock, 27,441 shares, at cost.............................................. (128) (128)
Loans for stock..................................................................... (508) (644)
Deferred compensation............................................................... (162) (200)
Accumulated other comprehensive loss-- currency translation adjustments............. (3,128) (3,630)
--------- ---------
TOTAL SHAREHOLDERS' DEFICIENCY............................................ (236,832) (226,212)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY............................ $ 444,331 $ 444,412
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE NINE FISCAL MONTHS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, OCTOBER 2,
2000 1999
------ ------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss....................................................... $ (11,633) $ (21,051)
Adjustments to reconcile net loss to net cash used in
operating activities:
Write-down and write-off of inventories...................... 8,662
Depreciation................................................. 9,360 5,946
Non-cash expenses............................................ 171
Equity in net loss of Evenflo Company, Inc................... 248
Intangibles amortization..................................... 3,381 3,354
Deferred income taxes........................................ (6,316) (11,374)
Deferred financing cost amortization......................... 2,374 2,455
Other........................................................ 136 (384)
Changes in assets and liabilities:
Receivables.................................................. 18,298 4,606
Inventories.................................................. (22,558) 25,548
Current liabilities, excluding bank loans.................... (5,253) (17,378)
Prepaid expenses and other................................... (6,874) (1,824)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (18,914) (1,192)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of refunds........................... 3,502 (12,788)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.. 3,502 (12,788)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit loan..................... 13,518 12,828
Net borrowings (repayment) of other indebtedness............... 2,470 (1,349)
Proceeds from issuance of common stock......................... 8 106
Payments received from loans for stock, net.................... 171
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES............ 16,167 11,585
--------- ---------
NET INCREASE (DECREASE) IN CASH................................ 755 (2,395)
Cash balance, beginning of period.............................. 2,931 8,036
--------- ---------
Cash balance, end of period.................................... $ 3,686 $ 5,641
========= =========
SUPPLEMENTAL CASH FLOW DATA:
Interest paid.................................................. $ 34,020 $ 39,817
========= =========
Income taxes paid.............................................. $ 406 $ 560
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet of Spalding Holdings
Corporation and subsidiaries (the "Company") as of September 30, 2000, and the
related condensed statements of consolidated operations for the three and nine
fiscal month periods ended September 30, 2000 and October 2, 1999 and of
condensed consolidated cash flows for the nine fiscal months ended September 30,
2000 and October 2, 1999 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 sole subsidiary of the Company is Spalding Sports Worldwide, Inc.
("Spalding"). Spalding is a 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 and clothing, shoes
and equipment for many other sports.
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, 1999 was derived from the Company's audited financial statements,
but does not include all disclosures required by accounting principles generally
accepted in the United States of America. 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
December 31, 1999.
The Company's year-end is December 31. The Company closes each quarter on
the thirteenth Saturday of that period except the fourth quarter, which always
closes on December 31. The Company's fiscal quarters for the 2000 calendar year
are as follows: April 1, July 1, September 30 and December 31.
NOTE 2 -- INVENTORIES
SEPTEMBER 30, DECEMBER 31,
2000 1999
------ ------
Finished goods.................... $ 51,733 $ 34,729
Work in process.................... 5,483 2,798
Raw materials...................... 14,354 11,485
--------- ---------
Total inventories....... $ 71,570 $ 49,012
========= =========
7
<PAGE>
NOTE 3 -- 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."
<TABLE>
<CAPTION>
U.S.
U.S. SPORTING
GOLF GOODS INTERNATIONAL ALL OTHER TOTAL
---- ----- ------------- --------- -----
<S> <C> <C> <C> <C> <C>
THREE FISCAL MONTHS ENDED SEPTEMBER 30, 2000
Net sales......................................$ 49,371 $ 10,371 $ 21,100 $ -- $ 80,842
Income (loss) from operations.................. (1,191) (1,124) 331 4,189 2,205
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)
NINE FISCAL MONTHS ENDED SEPTEMBER 30, 2000
Net sales......................................$ 194,858 $ 34,487 $ 87,148 $ -- $316,493
Income (loss) from operations.................. 13,674 (1,898) 10,065 8,583 30,424
NINE FISCAL MONTHS ENDED OCTOBER 2, 1999
Net sales......................................$ 188,554 $ 61,094 $ 84,192 $ -- $333,840
Income (loss) from operations.................. (2,677) (4,179) 8,713 7,934 9,791
</TABLE>
U.S. Golf Products represent the Company's largest operating segment. The
products included in this segment are golf balls, golf clubs, golf shoes and
golf accessories (gloves, bags, hats, club covers, tees, towels and sports
luggage).
Spalding currently markets its golf products under the following brand
names:
GOLF SHOES AND
GOLF BALLS GOLF CLUBS ACCESSORIES
----------- ----------- -----------
STRATA(R) BEN HOGAN(R) ETONIC(R)
TOP-FLITE(R) TOP-FLITE(R) BEN HOGAN(R)
SPALDING(R) TOP-FLITE(R)
MOLITOR(R) SPALDING(R)
U.S. Sporting Goods includes basketballs, softballs, volleyballs,
footballs, soccer balls, and other sports products. These products are primarily
sold under the SPALDING(R) trademark. Softball products are marketed under the
DUDLEY(R) trademark.
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, Japan
and Sweden. In addition to subsidiary operations, the Company conducts business
with over 100 third-party distributors in other markets throughout the world. In
both the subsidiary and distributor territories, the Company markets a line of
golf and sporting goods products similar to those in the U.S. segments. For the
nine fiscal months ended September 30, 2000 and October 2, 1999, net sales of
operations in Canada totaled 10.9% and 10.1% of total consolidated net sales,
respectively. No other foreign country accounted for net sales representing more
than 10% of total consolidated net sales.
8
<PAGE>
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 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 licenses,
the Company receives royalty fees. The majority of royalty revenues are
generated in the U.S. and Japanese markets.
NOTE 4 -- INVESTMENT IN AFFILIATE
From August 20, 1998 through December 23, 1999, the Company owned 42.4% of
the common stock of Evenflo Company, Inc. ("Evenflo"). Evenflo markets specialty
juvenile products under the EVENFLO(R), GERRY(R) and SNUGLI(R) trademarks. On
December 23, 1999, the KKR 1996 Fund, a shareholder and affiliate of the
Company, purchased Spalding's 42.4% common stock ownership in Evenflo. The net
proceeds from this transaction of $23.0 million were used to repay term loans
under the Company's senior credit facilities.
Summarized financial information of Evenflo for the three and nine months
ended October 2, 1999 is set forth below.
CONDENSED INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
----- -----
<S> <C> <C>
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 5 -- CONTINGENCIES
The Company is both a plaintiff and defendant in numerous lawsuits
incidental to its current and former operations, some alleging substantial
claims. In addition, the Company's operations are subject to federal, state, and
local environmental laws and regulations. The Company has entered into
settlement agreements with the U.S. Environmental Protection Agency and other
parties on several sites, and is still negotiating on other sites. The
settlement 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.
During October 1999, the Company substantially completed the implementation
9
<PAGE>
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 returned to certain components of its prior computer
system to deliver a level of distribution activity that met the ongoing demands
for its products. The financial modules of the new computer system were
successfully implemented in October 1999 and are currently in use. During the
second quarter of 2000, the Company's assessment of the difficulties encountered
by the new computer system progressed to a point whereby the Company concluded
that those aspects of the system which had been deactivated during the fourth
quarter of 1999 will not be reactivated. While the Company's current computer
systems environment adequately supports its basic business needs, selected
system upgrades are planned over the remainder of 2000 and into 2001. As of
September 30, 2000, $0.8 million is capitalized relating to costs for the
financial modules that are in use and no amounts are capitalized related to the
deactivated modules.
NOTE 6 -- COMPREHENSIVE INCOME/(LOSS)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" which establishes standards for reporting and disclosure of
comprehensive income and its components. For the three fiscal months ended
September 30, 2000 and October 2, 1999, the comprehensive loss was $(9,728) and
$(16,050), respectively. For the nine fiscal months ended September 30, 2000 and
October 2, 1999, the comprehensive loss was $(11,131) and $(21,424),
respectively.
10
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To 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 September
30, 2000, and the related condensed consolidated statements of operations for
the three and nine fiscal months ended September 30, 2000 and October 2, 1999
and of condensed consolidated cash flows for the nine fiscal months ended
September 30, 2000 and October 2, 1999. These financial statements are the
responsibility of the Company's management.
We conducted our reviews 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 auditing standards generally accepted in the United States of
America, 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 reviews, 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 accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company at December 31, 1999, and the related consolidated statements of
operations, cash flows and shareholders' equity (deficiency) for the year then
ended (not presented herein); and in our report dated March 17, 2000, we
expressed an unqualified opinion (which includes an explanatory paragraph
regarding a change in the method of inventory valuation) on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1999 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
October 24, 2000
11
<PAGE>
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 Financial Conditions and Results of Operations ("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; 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.
RESULTS OF OPERATIONS
FISCAL QUARTER ENDED SEPTEMBER 30, 2000 ("2000 THIRD QUARTER") AS COMPARED
TO THE FISCAL QUARTER ENDED OCTOBER 2, 1999 ("1999 THIRD QUARTER").
NET SALES for the 2000 third quarter were $80.8 million as compared to
$88.6 million for the 1999 third quarter. Excluding the sale of discontinued
products totaling $9.8 million in the 1999 third quarter, net sales increased
2.6% for the 2000 third quarter.
U.S. Golf net sales of $49.4 million for the 2000 third quarter were
consistent with sales for the 1999 third quarter, which totaled $49.5 million.
Increases in the net sales of STRATA(R) golf balls and the new line of BEN
HOGAN(R) golf clubs, and to a lesser extent an increase in net sales of golf
shoes and gloves, were basically offset by the absence of net sales of the
discontinued SPALDING(R) golf club line and a decrease in net sales of TOP-FLITE
XL(R) golf balls.
Net sales of U.S. Sporting Goods decreased to $10.4 million in the 2000
third quarter as compared to $19.1 million in the 1999 third quarter. The
decrease is primarily a result of the Company's SKU rationalization and decision
to exit low-margin products in 1999 such as tennis, baseball and ETONIC(R)
athletic shoes and to a lesser extent from a decline in net sales of
basketballs. During 2000, the Company licensed the ETONIC(R) athletic shoe
business to a third party to generate a stream of future income.
12
<PAGE>
International net sales increased to $21.1 million in the 2000 third
quarter as compared to $20.0 million in the 1999 third quarter, representing a
5.3% increase. Excluding the effect of foreign currency translation,
international sales improved 10.9% for the 2000 third quarter as compared to the
1999 third quarter, driven primarily as a result of the introduction of BEN
HOGAN(R) irons in international markets during 2000.
GROSS PROFIT improved to $41.8 for the 2000 third quarter as compared to
$28.8 million in the 1999 third quarter, an increase of $13.0 million, or 45.2%.
Gross margin (gross profit as a percentage of net sales) increased 19.2
percentage points to 51.7% for the 2000 third quarter as compared to 32.5% for
the 1999 third quarter. Included in the 1999 third quarter was an inventory
write-down and write-off of approximately $8.7 million that was consistent with
the Company's marketing strategy of repositioning its core brands.
Excluding the effect of the inventory write-off in the 1999 third quarter,
gross profit in the 2000 third quarter increased $4.3 million as compared to the
1999 third quarter, and gross margin increased 9.4 percentage points for the
period. Improvements in gross profit and gross margin are due to a shift in
product mix towards higher-end golf products as indicated in the discussion of
net sales above. In addition, improvements have been generated by efficiencies
and cost savings achieved in manufacturing operations.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES decreased to $43.4
million for the 2000 third quarter as compared to $44.2 million for the 1999
third quarter. The decrease is principally due to lower selling expenses.
ROYALTY INCOME increased to $3.8 million for the 2000 third quarter as
compared to $3.3 million in the 1999 third quarter, representing a 16.6%
increase. The increase is primarily due to higher royalties for athletic
footwear in the U.S.
RESTRUCTURING AND OTHER UNUSUAL COSTS. During the 1999 third quarter, the
Company recorded $0.2 million of income related to the reversal of previously
established restructuring accruals for closed foreign subsidiaries.
INTEREST EXPENSE increased to $15.2 million in the 2000 third quarter as
compared to $13.8 million in the 1999 third quarter. The $1.4 million increase
is mainly attributable to an increase in the Company's average interest rate on
its borrowings from 9.75% in the 1999 third quarter to 10.63% in the 2000 third
quarter.
NET CURRENCY LOSSES were $1.7 million in the 2000 third quarter compared to
a gain of $1.0 million in the 1999 third quarter -- see "Item 3 -- Disclosure
About Foreign Currency Risk".
EVENFLO. The Company had earnings of $0.6 million from its 42.4% investment
in the common stock of Evenflo Company, Inc. for the 1999 third quarter. On
December 23, 1999, the KKR 1996 Fund, a shareholder and affiliate of the
Company, purchased Spalding's 42.4% investment in the common stock of Evenflo.
The net proceeds from this transaction of $23.0 million were used to repay term
loans under the Company's senior credit facilities.
INCOME TAX BENEFIT decreased to $4.7 million in the 2000 third quarter as
compared to $8.8 million in the 1999 third quarter. The decrease in tax benefit
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is a result of a decrease in the Company's net loss before income taxes in the
2000 third quarter as compared to the 1999 third quarter. During the 2000 third
quarter, the effective tax rate of 32.2% varied from the U.S. federal statutory
rate of 35% due to actual non-U.S. withholding taxes paid.
FISCAL NINE MONTHS ENDED SEPTEMBER 30, 2000 ("2000 NINE MONTHS") AS
COMPARED TO THE FISCAL NINE MONTHS ENDED OCTOBER 2, 1999 ("1999 NINE MONTHS").
NET SALES for the 2000 nine months were $316.5 million as compared to
$333.8 million for the 1999 nine months, representing a decrease of $17.3
million, or 5.2%. Overall, sales of discontinued products included in the 1999
nine months were $34.7 million. Excluding discontinued products, net sales
increased 5.8% for the 2000 nine months as compared to the 1999 nine months.
U.S. Golf net sales increased $6.2 million, or 3.3%, to $194.9 million for
the 2000 nine months as compared to $188.6 million for the 1999 nine months. The
increase is driven by improved net sales during the 2000 nine months of the
STRATA(R) AND TOP-FLITE(R) XL 2000(R) golf ball lines as compared to the 1999
nine months. These gains were partially offset by a decrease in net sales of
other golf ball products, golf clubs and golf shoes. The decrease in golf club
net sales is due to the discontinuation of the SPALDING(R) family of clubs,
partially offset by an increase in net sales of BEN HOGAN(R) clubs due to the
Company's successful introduction of the new APEX PLUS(TM) irons in the fourth
quarter of 1999.
Net sales of U.S. Sporting Goods decreased to $34.5 million in the 2000
nine months as compared to $61.1 million in the 1999 nine months. The decrease
is primarily a result of the Company's SKU rationalization and decision to exit
low-margin products such as tennis, baseball and ETONIC(R) athletic shoes and to
a lesser extent from a decline in net sales of basketballs. During 2000, the
Company licensed the ETONIC(R) athletic shoe business to a third party to
generate a stream of future income.
International net sales increased 3.5% to $87.1 million in the 2000 nine
months as compared to $84.1 million in the 1999 nine months. Excluding the
effect of foreign currency translation, international sales improved 5.9% for
the 2000 nine months as compared to the 1999 nine months driven primarily as a
result of the introduction of BEN HOGAN(R) irons in international markets during
2000.
GROSS PROFIT improved to $163.7 million for the 2000 nine months as
compared to $136.9 million in the 1999 nine months, an increase of $26.8
million, or 19.6%. Gross margin (gross profit as a percentage of sales)
increased 10.7 percentage points to 51.7% for the 2000 nine months as compared
to 41.0% for the 1999 nine months. Included in the 1999 nine months was an
inventory write-down and write-off of approximately $8.7 million that was
consistent with the Company's marketing strategy of repositioning its core
brands.
Excluding the effect of the inventory write-off in the 1999 nine months,
gross profit in the 2000 nine months increased $18.1 million as compared to the
1999 nine months, and gross margin increased 8.1 percentage points for the
period. Improvements in gross profit and gross margin are due to a shift in
product mix towards higher-end golf products as indicated in the discussion of
net sales above. In addition, improvements have been generated by efficiencies
and cost savings achieved in manufacturing operations.
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SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES increased to $142.2
million for the 2000 nine months as compared to $134.9 million for the 1999 nine
months. The increase is principally due to higher advertising and promotion
spending to drive sales across all distribution channels.
ROYALTY INCOME increased $0.7 million to $8.9 million in the 2000 nine
months as compared to $8.2 million in the 1999 nine months. The increase is
primarily due to higher royalties for athletic footwear in the U.S. that
occurred in the 2000 third quarter.
RESTRUCTURING AND OTHER UNUSUAL COSTS. During the 1999 nine months, the
Company recorded $0.8 million of charges for restructuring its operations,
primarily management severance and related expenses. These charges were offset
by restructuring income for the reduction of previously established
restructuring accruals for foreign subsidiaries that were closed.
INTEREST EXPENSE increased to $44.7 million in the 2000 nine months as
compared to $41.7 million in the 1999 nine months. The $3.0 million increase is
attributable to an increase in the Company's average interest rate on its
borrowings from 9.63% in the 1999 nine months to 10.49% in the 2000 nine months.
The increase related to interest rates was partially offset by a decrease in the
Company's average debt balance to $545.8 million in the 2000 nine months as
compared to $548.5 million in the 1999 nine months.
NET CURRENCY LOSSES were $3.0 million in the 2000 nine months, compared to
gains of $0.3 million in the 1999 nine months -- see Item 3 -- "Disclosure About
Foreign Currency Risk".
EVENFLO. The Company incurred a loss of $0.2 million from its 42.4%
investment in the common stock of Evenflo Company, Inc. for the 1999 nine
months. On December 23, 1999, the KKR 1996 Fund, a shareholder and affiliate of
the Company, purchased Spalding's 42.4% investment in the common stock of
Evenflo. The net proceeds from this transaction of $23.0 million were used to
repay term loans under the Company's senior credit facilities.
INCOME TAXES were a benefit of $5.6 million in the 2000 nine months as
compared to a benefit of $10.8 million in the 1999 nine months. The decrease in
the tax benefit is a result of a decrease in the Company's loss before income
taxes in the 2000 nine months as compared to the 1999 nine months. During the
2000 nine months, the effective tax rate of 32.7% varied from the U.S. federal
statutory rate of 35% due to actual non-U.S. withholding taxes paid.
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 September 30, 2000, the Company had an
available borrowing capacity under the Credit Facility of $41.3 million (net of
$38.4 million of outstanding letters of credit and bankers' acceptances). As of
October 31, 2000, the Company had an available borrowing capacity under the
Credit Facility of $15.6 million (net of $41.7 million of outstanding letters of
credit and bankers' acceptances).
The Company believes its business is somewhat seasonal. For calendar 1999
quarterly net sales as a percentage of total sales were approximately 26%, 30%,
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21%, and 23%, respectively. Many sporting goods marketed by Spalding, especially
golf products, generally 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 2000 nine months, the Company provided $19.7 million in cash from
financing activities and investing activities to fund $18.9 million in operating
activities. Net cash utilized by operating activities was $18.9 million in the
2000 nine months and $1.2 million in the 1999 nine months. The difference in
operating cash flows was driven primarily by increases in inventory and the
timing of payments for advertising and promotion costs, partially offset by a
decrease in receivables. For the 2000 nine months, capital expenditures
primarily consist of golf ball production expansion costs and software costs for
the development of an automated call center, net of refunds received.
The Company's ability to fund its operations, capital expenditures, and
debt service, 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 meet its
financial obligations, and there can be no assurances as to the timing of such
sales or the proceeds that the Company could realize therefrom. Although the
Company's operating performance has improved over the prior period, additional
improvements in operating performance are required in order to remain in
compliance with the financial covenants included in Spalding's senior credit
facility and to have adequate liquidity throughout the remainder of 2000 and
beyond. In the event the Company's operating performance does not improve to the
extent necessary, the Company will seek additional sources of liquidity and seek
modifications to its current senior credit facility. There can be no assurance,
however, that the Company will achieve the necessary improvements in operating
performance to satisfy these covenants or that additional funding or
modifications to the senior credit facility can be obtained.
The Company and/or affiliates of the Company, including entities related to
Kohlberg Kravis Roberts & Co., L.P., may, from time to time depending on market
conditions, purchase senior subordinated notes previously issued by the Company
in the open market or by other means.
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 2000 and 1999 nine months
and the 2000 and 1999 three months:
NINE MONTHS NINE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------ ------ ------ ------
Net loss ................... $(11,633) $(21,051) $ (9,970) $(15,433)
Interest expense ........... 44,707 41,699 15,231 13,784
Depreciation ............... 9,360 5,946 3,198 1,987
Amortization ............... 3,381 3,354 1,138 1,121
Income taxes ............... (5,639) (10,774) (4,733) (8,753)
-------- -------- -------- --------
EBITDA ..................... $ 40,176 $ 19,174 $ 4,864 $ (7,294)
======== ======== ======== ========
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CURRENCY HEDGING. In the 2000 nine months and for the year ended December
31, 1999, approximately 20.8% and 21.2%, respectively, of the Company's total
net sales were generated in non-U.S. currencies. Fluctuations in the value of
these currencies relative to the U.S. dollar could have a material effect on the
Company's results of operations. Additionally, the Company sources many of its
goods from foreign manufacturers; the vast majority is sourced from China which
has not experienced significant currency fluctuations relative to the U.S.
dollar. The Company, in its discretion, uses forward exchange contracts to hedge
transaction exposures from U.S. dollar purchases made by its non-U.S.
operations.
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 the 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 beginning January 1, 2001. In June 2000, the FASB issued SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an amendment of FASB Statement No. 133" which establishes accounting and
reporting standards for certain derivatives, derivative instruments embedded in
other contracts and for certain hedging activity. Management is currently
evaluating the impact of these statements and believes their adoption will not
materially affect the Company's consolidated financial position, results of
operations or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements", which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101, as amended by SAB
101A and SAB 101B, is effective for the Company's fourth quarter of 2000. It
requires companies to report any changes in revenue recognition as a cumulative
change in accounting principle at the time of implementation in accordance with
Accounting Principles Board Opinion 20, "Accounting Changes." The Company does
not expect that SAB 101 will have a material effect on its financial position or
results of operations.
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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 these hedge contracts is to
minimize the impact of foreign currency fluctuations on the results of
operations. Certain increases or decreases in the affiliate U.S. dollar payments
are offset by gains and losses on the hedges. The contracts have maturity dates
that do not exceed twelve months. The Company does not purchase short-term
forward exchange contracts for trading purposes.
As of September 30, 2000, the Company had outstanding foreign exchange
forward contracts (in thousands of U.S. dollars), in the following currency:
WEIGHTED
AVERAGE
CONTRACT CONTRACT UNREALIZED
AMOUNT RATE GAIN
------ ---- ----
Canadian dollar.... $ 1,000 $.679 $ 20
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 2000, although there can be no assurances that interest
rates will not significantly change.
In order to manage the impact of fluctuating rates on its variable rate
debt, in July 2000 the Company fixed $309.9 million of its variable rate debt in
accordance with the terms of its credit agreements until October 2000 using a
weighted-average base rate (Eurodollar rate) of 6.7%. In addition, in July 2000
the Company entered into an interest rate cap agreement on $300.0 million of its
variable rate debt that commences in October 2000 (total variable rate debt
based on the Eurodollar rate at September 30, 2000 was $307.0 million). The cap
has a strike rate of 6.85% and expires on January 26, 2001. At October 31, 2000,
the effective Eurodollar interest rate was 6.5%.
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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 year ended December 31, 1999, filed March 30,
2000. Since March 30, 2000, 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 financial condition or results of operations of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
15 Deloitte & Touche LLP letter in lieu of consent
27 Financial Data Schedule as of and for the nine fiscal months
ended September 30, 2000
(b) Reports on Form 8-K
None
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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
Date: November 9, 2000
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