<PAGE> 1
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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 APRIL 1, 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 (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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 mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
The number of shares outstanding of the registrant's Common stock, par
value $.01 per share, at April 30, 2000, was 98,401,747 shares.
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<PAGE> 2
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Operations for the
fiscal three months ended April 1, 2000 and April 3,
1999.................................................. 2
Condensed Consolidated Balance Sheets at April 1, 2000
and December 31, 1999................................. 3
Condensed Statements of Consolidated Cash Flows for the
fiscal three months ended April 1, 2000 and April 3,
1999.................................................. 4
Notes to Condensed Consolidated Financial Statements........ 5
Independent Accountants' Report............................. 8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 9
Item 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 12
Item 6. Exhibits and Reports on Form 8-K............................ 13
</TABLE>
1
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SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED APRIL 1, 2000 AND APRIL 3, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
APRIL 1, APRIL 3,
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
NET SALES................................................... $107,003 $117,156
Cost of sales............................................. 53,747 67,738
-------- --------
GROSS PROFIT................................................ 53,256 49,418
Selling, general and administrative expenses.............. 48,855 45,162
Royalty income, net....................................... (2,265) (2,097)
Restructuring and other unusual costs..................... 464
-------- --------
INCOME FROM OPERATIONS...................................... 6,666 5,889
Interest expense, net..................................... 14,648 14,001
Currency loss, net........................................ 578 962
Equity in net loss of Evenflo Company, Inc................ 85
-------- --------
LOSS BEFORE INCOME TAXES.................................... (8,560) (9,159)
Income tax benefit........................................ (2,823) (2,997)
-------- --------
NET LOSS.................................................... $ (5,737) $ (6,162)
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE> 4
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 1, 2000 AND DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 1, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
-----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash........................................................ $ 3,865 $ 2,931
Receivables, less allowance of $2,389 and $2,050,
respectively.............................................. 109,874 95,829
Inventories................................................. 58,743 49,012
Deferred income taxes....................................... 11,598 12,218
Prepaid expenses............................................ 7,717 1,555
--------- ---------
TOTAL CURRENT ASSETS.............................. 191,797 161,545
Property, plant and equipment, net.......................... 57,139 58,734
Intangible assets, net...................................... 107,015 108,135
Deferred income taxes....................................... 103,504 99,877
Deferred financing costs.................................... 14,930 15,721
Other....................................................... 401 400
--------- ---------
TOTAL ASSETS...................................... $ 474,786 $ 444,412
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Non-U.S. bank loans......................................... $ 5,292 $ 4,081
Short-term debt............................................. 3,341 3,341
Accounts payable............................................ 88,476 74,098
Accrued expenses............................................ 66,766 60,270
Income taxes................................................ 315
--------- ---------
TOTAL CURRENT LIABILITIES......................... 163,875 142,105
Long-term debt.............................................. 524,200 510,700
Pension benefits............................................ 10,138 9,787
Postretirement benefits..................................... 8,084 7,940
Other....................................................... 154 92
--------- ---------
TOTAL LIABILITIES................................. 706,451 670,624
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIENCY)
Preferred stock, $.01 par value, 50,000,000 shares
authorized; 1,000,000 outstanding, liquidation value
$125.3 million and $120.9 million,
respectively.............................................. 100,000 100,000
Common stock, $.01 par value, 150,000,000 shares authorized,
98,401,747 and 98,058,948 shares outstanding,
respectively.............................................. 984 981
Additional paid-in capital.................................. 466,222 466,088
Accumulated deficit......................................... (794,416) (788,679)
Treasury stock, 27,441 shares, at cost...................... (128) (128)
Loans for stock............................................. (629) (644)
Deferred compensation....................................... (187) (200)
Accumulated other comprehensive loss -- currency translation
adjustments............................................... (3,511) (3,630)
--------- ---------
TOTAL SHAREHOLDERS' DEFICIENCY.................... (231,665) (226,212)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY.... $ 474,786 $ 444,412
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 5
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE FISCAL THREE MONTHS ENDED APRIL 1, 2000 AND APRIL 3, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 1, APRIL 3,
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (5,737) $ (6,162)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 3,359 1,990
Equity in loss of Evenflo Company, Inc. .................. 85
Intangibles amortization.................................. 1,120 1,114
Deferred income taxes..................................... (3,007) (3,180)
Deferred financing cost amortization...................... 791 819
Other..................................................... 118 605
Changes in assets and liabilities:
Receivables............................................... (14,045) (31,207)
Inventories............................................... (9,731) 12,446
Current liabilities, excluding bank loans................. 20,703 1,664
Prepaid expenses and other................................ (5,602) (1,836)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES............. (12,031) (23,662)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES --
Capital expenditures........................................ (1,764) (1,895)
-------- --------
NET CASH FLOWS USED IN INVESTING ACTIVITIES....... (1,764) (1,895)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit loan.................. 13,500 27,004
Net borrowings (repayment) of other indebtedness............ 1,211 (25)
Proceeds from issuance of common stock...................... 3 105
Payments received from loans for stock, net................. 15
-------- --------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES... 14,729 27,084
-------- --------
NET INCREASE IN CASH........................................ 934 1,527
Cash balance, beginning of period........................... 2,931 8,036
-------- --------
Cash balance, end of period................................. $ 3,865 $ 9,563
======== ========
SUPPLEMENTAL CASH FLOW DATA:
Interest paid............................................... $ 8,669 $ 17,496
======== ========
Income taxes paid........................................... $ 506 $ 182
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL THREE MONTHS ENDED APRIL 1, 2000 AND APRIL 3, 1999
(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 April 1, 2000, and the
related condensed statements of consolidated operations and of cash flows for
the fiscal three month periods ended April 1, 2000 and April 3, 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
("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 generally accepted accounting
principles. This Form 10-Q should be read in conjunction with the Company's
consolidated financial statements and accompanying notes included in its Annual
Report on Form 10-K for the year ended 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.
Certain reclassifications have been made to prior year amounts to conform
to current year presentations.
NOTE 2 -- INVENTORIES
<TABLE>
<CAPTION>
APRIL 1, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Finished goods.............................................. $42,272 $34,729
Work in process............................................. 3,202 2,798
Raw materials............................................... 13,269 11,485
------- -------
Total inventories................................. $58,743 $49,012
======= =======
</TABLE>
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."
5
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SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
U.S.
U.S. SPORTING
GOLF GOODS INTERNATIONAL ALL OTHER TOTAL
------- -------- ------------- --------- --------
<S> <C> <C> <C> <C> <C>
Fiscal three months ended April 1,
2000
Net sales........................... $63,529 $11,978 $31,496 $ -- $107,003
Income (loss) from operations....... 1,668 (1,667) 4,253 2,412 6,666
Fiscal three months ended April 3,
1999
Net sales........................... $63,489 $23,356 $30,311 $ -- $117,156
Income from operations.............. 304 936 2,775 1,874 5,889
</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:
<TABLE>
<CAPTION>
GOLF BALLS GOLF CLUBS GOLF SHOES AND ACCESSORIES
- ---------- ---------- --------------------------
<S> <C> <C>
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, volleyballs, 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 the 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.
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 the 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.
6
<PAGE> 8
SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information of Evenflo for the fiscal quarter ended
March 31, 1999 is set forth below.
CONDENSED INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
JANUARY 1, 1999
THROUGH
MARCH 31, 1999
---------------
<S> <C>
Net sales................................................... $94,860
=======
Gross profit................................................ $22,054
=======
Earnings before income tax and extraordinary items.......... $ 58
=======
Net loss.................................................... $ (200)
=======
Company's proportionate share (42.4%)....................... $ (85)
=======
</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
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 will meet 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. The Company
is currently assessing the aspects of the new computer system that caused the
difficulties and expects to decide on a long-term solution in the second quarter
of 2000. To the extent that any of the new system is not part of the long-term
solution, some of the unrecoverable capitalized costs would be written off at
that time. To date, the Company has capitalized approximately $13.5 million in
costs related to this project (including approximately $4.3 million related to
the financial modules that are in use). This amount is included in the Company's
fixed assets.
NOTE 6 -- COMPREHENSIVE INCOME
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 fiscal three months ended April
1, 2000 and April 3, 1999, the comprehensive loss was $(5,618) and $(5,557),
respectively.
7
<PAGE> 9
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 April 1,
2000, and the related condensed consolidated statements of operations and cash
flows for the fiscal three months ended April 1, 2000 and April 3, 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
May 4, 2000
8
<PAGE> 10
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 April 1, 2000 ("2000 first quarter") as compared to
the fiscal quarter ended April 3, 1999 ("1999 first quarter").
Net sales for the 2000 first quarter were $107.0 million as compared to
$117.2 million for the 1999 first quarter, representing a decrease of $10.2
million, or 8.7%. The decrease was principally a result of the elimination of
low margin product lines and loss generating business that accounted for
approximately $14.9 million of domestic net sales in the 1999 first quarter.
U.S. Golf net sales totaled $63.5 million in the 2000 first quarter and the 1999
first quarter. Net sales of STRATA(R) and TOP-FLITE(R) golf ball lines improved
48% as compared to the 1999 first quarter, 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 SPALDING(R) and TOP-FLITE(R) family of clubs as the
Company reevaluates its strategy for these products, 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. Sales
of golf shoes also declined as the Company continues the transition to a more
focused product offering in that category.
Net sales of U.S. Sporting Goods decreased $11.4 million to $12.0 million
in the 2000 first quarter as compared to $23.4 million in the 1999 first
quarter. The decrease is primarily a result of the Company's SKU rationalization
and decision to exit low-margin products, including the Etonic Athletic Shoe.
During the 2000 first quarter the Company licensed the Etonic Athletic brand to
a third party to generate a stream of future income.
International net sales increased to $31.5 million in the 2000 first
quarter as compared to $30.3 million in the 1999 first quarter, representing a
4.0% increase.
Gross profit improved to $53.3 million in the 2000 first quarter as
compared to $49.4 million in the 1999 first quarter. The $3.9 million
improvement (despite lower sales of $10.2 million) was due to an improved shift
in product mix towards higher-end golf products as indicated in the discussion
of net sales above.
Selling, general and administrative ("SG&A") expenses increased $3.7
million to $48.9 million in the 2000 first quarter as compared to $45.2 million
in the 1999 first quarter. The increase is principally due to higher advertising
and promotion spending to drive sales across all distribution channels.
9
<PAGE> 11
Royalty income increased $0.2 million to $2.3 million in the 2000 first
quarter as compared to $2.1 million in the 1999 first quarter.
Restructuring and other unusual costs. The restructuring costs incurred in
the 1999 first quarter of $0.5 million were a result of the elimination of
positions at the Company's corporate office in Chicopee, Massachusetts.
Interest expense increased to $14.6 million in the 2000 first quarter as
compared to $14.0 million in the 1999 first quarter. The $0.6 million increase
is attributable to an increase in the Company's average interest rate on its
borrowings from 9.4% in the 1999 first quarter to 10.1% in the 2000 first
quarter. The increase related to interest rates was partially offset by a
decrease in the Company's average debt balance to $530.0 million in the 2000
first quarter as compared to $547.0 million in the 1999 first quarter.
Net currency losses decreased to $0.6 million in the 2000 first quarter
from $1.0 million in the 1999 first quarter -- see "Liquidity and Capital
Resources".
Evenflo. The Company incurred a loss of $0.1 million from its 42.4%
investment in the common stock of Evenflo Company, Inc. for the 1999 first
quarter. On December 23, 1999, the KKR 1996 fund, a shareholder and affiliate of
the Company, purchased the 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.
Income taxes were a benefit of $2.8 million in the 2000 first quarter as
compared to a benefit of $3.0 million in the 1999 first quarter. The decrease in
the tax benefit totaling $0.2 million is a result of a decrease in the Company's
loss before income taxes in the 2000 first quarter as compared to the 1999 first
quarter.
The Company's effective tax rate for the 2000 first quarter was 33%. The
effective rate varied from the U.S. statutory rate of 35% due to non-U.S.
withholding taxes paid during the 2000 first quarter.
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 April 1, 2000, the Company had an
available borrowing capacity under the Credit Facility of $30.9 million (net of
$49.1 million of outstanding letters of credit and bankers' acceptances). As of
April 28, 2000, the Company had an available borrowing capacity under the Credit
Facility of $15.6 million (net of $44.3 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%,
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 first quarter, the Company used $13.8 million in cash from
financing activities to fund $12.0 million in operating activities and $1.8
million in capital expenditures.
For the 1999 first quarter, the Company used $25.6 million in cash before
financing activities to fund $23.7 million in operating activities, and invest
$1.9 million in capital expenditures (primarily an integrated computer system).
Cash usage in the 2000 first quarter and 1999 first quarter was primarily funded
from 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 used by operating activities was $12.0 million in the 2000 first
quarter as compared to $23.7 million in the 1999 first quarter. The improvement
in operating cash flows was driven primarily by better
10
<PAGE> 12
management of the components of trading capital (receivables, inventory and
payables) which yielded a $15.0 million improvement in cash usage for the 2000
first quarter as compared to the 1999 first quarter.
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.
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 first quarter and
the 1999 first quarter:
<TABLE>
<CAPTION>
APRIL 1, APRIL 3,
2000 1999
-------- --------
<S> <C> <C>
Net loss................................................. $(5,737) $(6,162)
Interest expense......................................... 14,648 14,001
Depreciation............................................. 3,359 1,990
Amortization............................................. 1,120 1,114
Income taxes............................................. (2,823) (2,997)
------- -------
EBITDA................................................... $10,567 $ 7,946
======= =======
</TABLE>
Currency hedging. In the 2000 first quarter and for the year ended
December 31, 1999, approximately 26.4% 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 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. Management is currently evaluating the
impact of the statements and believes their adoption will not materially affect
the Company's consolidated financial position, results of operations or cash
flows.
11
<PAGE> 13
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 April 1, 2000, 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...................................... $ 245 1.63 $ 6
Canadian dollar.................................... 8,100 .68 (76)
------ ----
Total...................................... $8,345 $(70)
====== ====
</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 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 November of 1999 the Company fixed $293.2 million of its variable rate
debt in accordance with the terms of its credit agreements until May 2000 using
a weighted-average base rate (Eurodollar rate) of 6.0%. In addition, in January
2000 the Company entered into an interest rate cap agreement on $300.0 million
of its variable rate debt that commences in May 2000 (total variable rate debt
based on the Eurodollar rate at April 1, 2000 was $318.2 million). The cap has a
strike rate of 6.34% and expires on July 26, 2000. At April 28, 2000, the
effective Eurodollar interest rate was 6.15%.
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.
12
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
10.21 Stockholder's Agreement between Spalding Holdings
Corporation and Edwin L. Artzt dated March 8, 2000.
10.22 Sales Participation Agreement between Spalding Holdings
Corporation and Edwin L. Artzt dated March 8, 2000.
15 Deloitte & Touche LLP letter in lieu of consent
27 Financial Data Schedule as of and for the fiscal three
months ended April 1, 2000
</TABLE>
(b) Reports on Form 8-K
None
13
<PAGE> 15
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: May 16, 2000
14
<PAGE> 1
Exhibit 10.21
STOCKHOLDER'S AGREEMENT
This Stockholder's Agreement (this "Agreement") is entered
into as of March 8, 2000 (the "Execution Date") between SPALDING HOLDINGS
CORPORATION, a Delaware corporation (the "Company"), and EDWIN L. ARTZT, Trustee
of the Edwin L. Artzt Revocable Trust Under Agreement Dated 6/16/82, As Amended
(the "Purchaser") (the Company and the Purchaser being hereinafter collectively
referred to as the "Parties").
WHEREAS, Mr. Artzt joined the Company's Board of Directors on
September 10, 1997, and in connection therewith, the Company sold 200,000 shares
of its Common Stock, par value $.01 per share (the "Common Stock") pursuant to a
stockholder's agreement, such agreement dated September 23, 1997 (the "1997
Agreement Date"), and such shares of Common Stock were issued to Purchaser; and
WHEREAS, Mr. Artzt continues to serve on the Company's Board
of Directors, and in connection therewith, the Company desires to sell 342,799
shares of its Common Stock to Purchaser (such shares, "Purchase Stock").
NOW, THEREFORE, in consideration of the representations,
warranties, covenants and agreements contained in this Agreement, the Parties
agree as follows:
1. Purchase of Stock.
(a) Subject to the terms and conditions hereinafter set forth,
the Purchaser hereby subscribes for and shall purchase, and the Company shall
sell to the Purchaser and deliver to the Purchaser the Purchase Stock at a
purchase price of $0.01 per share on March 8, 2000 (the "Purchase Date").
(b) The aggregate price for the Purchase Stock shall be
$3,254.43 (such amount hereinafter sometimes referred to as the "Purchase
Price"). On the Purchase Date, the Purchase Price shall be paid to the Company
by the Purchaser by a certified bank check payable to the order of the Company
in the aggregate amount of the Purchase Price or by wire transfer of immediately
available funds of the aggregate amount of the Purchase Price. On the Purchase
Date, in consideration of receipt of the Purchase Price, the Company will
deliver to the Purchaser a certificate, registered in the Purchaser's name, for
the Purchase Stock, which shall be subject to the terms and conditions
hereinafter set forth.
2. Purchaser's Representations, Warranties and Agreements.
(a) The Purchaser hereby represents and warrants that he is
acquiring the Purchase Stock and at the time of other acquisitions, all other
Stock for investment for his own account and not with a view to, or for resale
in connection with, the distribution or other disposition thereof. The Purchaser
agrees and acknowledges that he will not, directly or indirectly, offer,
transfer, sell, assign, pledge, hypothecate or otherwise dispose of (any such
act
<PAGE> 2
2
being herein referred to as a "transfer") any shares of the Stock unless such
transfer complies with Section 3 of this Agreement. Furthermore, if the
Purchaser is an "affiliate" (as defined under Rule 405 of the rules and
regulations promulgated under the Act and as interpreted by the Board of
Directors of the Company) of the Company (an "Affiliate"), the Purchaser agrees
and acknowledges that he will not transfer any shares of the Stock unless (i)
the transfer is pursuant to an effective registration statement under the
Securities Act of 1933, as amended, or the rules and regulations in effect
thereunder (the "Act"), and in compliance with applicable provisions of state
securities laws or (ii) counsel for the Purchaser (which shall be such counsel
acceptable to the Company) shall have furnished the Company with an opinion,
satisfactory in form and substance to the Company, that no such registration is
required because of the availability of an exemption from registration under the
Act. Notwithstanding the foregoing, the Company acknowledges and agrees that any
of the following transfers are deemed to be in compliance with the Act and this
Agreement and no opinion of counsel is required in connection therewith: (x) a
transfer made pursuant to Section 4, 5 or 6 hereof, (y) a transfer upon the
death of the Purchaser to his executors, administrators, testamentary trustees,
legatees or beneficiaries (the "Purchaser's Estate") or a transfer to the
executors, administrators, testamentary trustees, legatees or beneficiaries of a
person who has become a holder of Stock in accordance with the terms of this
Agreement, provided that it is expressly understood that any such transferee
shall be bound by the provisions of this Agreement and (z) a transfer made after
the Purchase Date in compliance with the federal securities laws to a trust or
custodianship the beneficiaries of which may include only the Purchaser, his
spouse or his lineal descendants (a "Purchaser's Trust") or a transfer made
after the third anniversary of the Execution Date to such a trust by a person,
other than the Purchaser, who has become a holder of Stock in accordance with
the terms of this Agreement, provided that such transfer is made expressly
subject to this Agreement and that the transferee agrees in writing to be bound
by the terms and conditions hereof.
(b) During the term of this Agreement, the certificate (or
certificates) representing the Purchase Stock shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF UNLESS SUCH TRANSFER, SALE, ASSIGNMENT,
PLEDGE, HYPOTHECATION OR OTHER DISPOSITION COMPLIES WITH THE
PROVISIONS OF THE STOCKHOLDER'S AGREEMENT DATED AS OF MARCH 8,
2000 BETWEEN SPALDING HOLDINGS CORPORATION (THE "COMPANY") AND
THE PURCHASER NAMED ON THE FACE HEREOF (A COPY OF WHICH IS ON
FILE WITH THE SECRETARY OF THE COMPANY)."
(c) The Purchaser acknowledges that he has been advised that
(i) the Purchase Stock has been registered on Form S-8 under the Act, (ii) a
restrictive legend in the form heretofore set forth shall be placed on the
certificates representing the Stock and (iii) a notation shall be made in the
appropriate records of the Company indicating that the Stock is subject to
restrictions on transfer and appropriate transfer restrictions will be issued to
the Company's transfer agent with respect to the Stock. If the Purchaser is an
Affiliate, the Purchaser also
<PAGE> 3
3
acknowledges that (i) the Stock must be held indefinitely and the Purchaser must
continue to bear the economic risk of the investment in the Stock unless it is
subsequently registered under the Act or an exemption from such registration is
available, (ii) it is not anticipated that there will be any market on an
exchange or a quotation service for the Stock, (iii) when and if shares of the
Stock may be disposed of without registration in reliance on Rule 144 or the
rules and regulations promulgated under the Act, such disposition can be made
only in limited amounts in accordance with the terms and conditions of such
Rule, and (iv) if the Rule 144 exemption is not available, public sale without
registration will require compliance with Regulation A or some other exemption
under the Act.
(d) If any shares of the Purchase Stock are to be disposed of
in accordance with Rule 144 under the Act or otherwise, the Purchaser shall
promptly notify the Company of such intended disposition and shall deliver to
the Company at or prior to the time of such disposition such documentation as
the Company may reasonably request in connection with such sale and, in the case
of a disposition pursuant to Rule 144, shall deliver to the Company an executed
copy of any notice on Form 144 required to be filed with the Securities and
Exchange Commission (the "SEC").
(e) The Purchaser agrees that, if any shares of the capital
stock of the Company are offered to the public pursuant to an effective
registration statement under the Act (other than registration of securities
issued under an employee plan), the Purchaser will not effect any public sale or
distribution of any shares of the Purchase Stock not covered by such
registration statement within 7 days prior to, or within 180 days after, the
effective date of such registration statement, unless otherwise agreed to in
writing by the Company.
(f) The Purchaser represents and warrants that (i) he has
received and reviewed the documents comprising the Prospectus relating to the
Purchase Stock and the documents referred to therein, certain of which documents
set forth the rights, preferences and restrictions relating to the Purchase
Stock and (ii) he has been given the opportunity to obtain any additional
information or documents and to ask questions and receive answers about such
documents, the Company and the business and prospects of the Company which he
deems necessary to evaluate the merits and risks related to his investment in
the Purchase Stock and to verify the information contained in the Prospectus and
the information received as indicated in this Section 2(f)(ii), and he has
relied solely on such information.
(g) The Purchaser further represents and warrants that (i) his
financial condition is such that he can afford to bear the economic risk of
holding the Purchase Stock for an indefinite period of time and has adequate
means for providing for his current needs and personal contingencies, (ii) he
can afford to suffer a complete loss of his investment in the Purchase Stock,
(iii) he understands and has taken cognizance of all risk factors related to the
purchase of the Purchase Stock, including those set forth in the Prospectus
referred to above, and (iv) his knowledge and experience in financial and
business matters are such that he is capable of evaluating the merits and risks
of his purchase of the Purchase Stock as contemplated by this Agreement.
<PAGE> 4
4
3. Restriction on Transfer.
Except for transfers permitted by clauses (x), (y) and (z) of
Section 2(a) or a sale of shares of Purchase Stock pursuant to an effective
registration statement under the Act filed by the Company or pursuant to the
Sale Participation Agreement (as defined below), the Purchaser agrees that he
will not transfer any shares of the Purchase Stock at any time prior to the
fifth anniversary of the 1997 Agreement Date. No transfer of any such shares in
violation hereof shall be made or recorded on the books of the Company and any
such transfer shall be void and of no effect.
4. Right of First Refusal.
If at any time after the fifth anniversary of the 1997
Agreement Date and prior to a Public Offering (as defined below), the Purchaser
receives a bona fide offer to purchase any or all of his shares of Purchase
Stock (the "Offer") from a third party (the "Offeror") which the Purchaser
wishes to accept, the Purchaser shall cause the Offer to be reduced to writing
and shall notify the Company in writing of his wish to accept the Offer. The
Purchaser's notice shall contain an irrevocable offer to sell such shares of
Purchase Stock to the Company (in the manner set forth below) at a purchase
price equal to the price contained in, and on the same terms and conditions of,
the Offer, and shall be accompanied by a true copy of the Offer (which shall
identify the Offeror). At any time within 30 days after the date of the receipt
by the Company of the Purchaser's notice, the Company shall have the right and
option to purchase, or to arrange for a third party to purchase, all of the
shares of Purchase Stock covered by the Offer either (i) at the same price and
on the same terms and conditions as the Offer or (ii) if the Offer includes any
consideration other than cash, then at the sole option of the Company, at the
equivalent all cash price, determined in good faith by the Company's Board of
Directors, by delivering a certified bank check or checks in the appropriate
amount (and any such non-cash consideration to be paid) to the Purchaser at the
principal office of the Company against delivery of certificates or other
instruments representing the shares of the Purchase Stock so purchased,
appropriately endorsed by the Purchaser. If at the end of such 30 day period,
the Company has not tendered the purchase price for such shares in the manner
set forth above, the Purchaser may during the succeeding 30 day period sell not
less than all of the shares of Purchase Stock covered by the Offer to the
Offeror at a price and on terms no less favorable to the Purchaser than those
contained in the Offer. Promptly after such sale, the Purchaser shall notify the
Company of the consummation thereof and shall furnish such evidence of the
completion and time of completion of such sale and of the terms thereof as may
reasonably be requested by the Company. If, at the end of 30 days following the
expiration of the 30 day period for the Company to purchase the Purchase Stock,
the Purchaser has not completed the sale of such shares of the Purchase Stock as
aforesaid, all the restrictions on sale, transfer or assignment contained in
this Agreement shall again be in effect with respect to such shares of the
Purchase Stock.
<PAGE> 5
5
5. Purchaser's Resale of Purchase Stock to the Company
Upon The Purchaser's Death or Disability.
(a) Except as otherwise provided herein, if at any time prior
to a Public Offering (i) the Purchaser is still a director of the Company, or
had retired as a director of the Company and (ii) the Purchaser either dies or
becomes permanently disabled, then the Purchaser, the Purchaser's Estate or a
Purchaser's Trust, as the case may be, shall have the right, for six months (or
such longer time as determined by the Board of Directors) following the date of
death or permanent disability, to (I) sell to the Company, and the Company shall
be required to purchase, on one occasion, all or any portion of the shares of
Purchase Stock then held by the Purchaser, the Purchaser's Trust and/or the
Purchaser's Estate, as the case may be, at the Section 5 Repurchase Price, as
determined in accordance with Section 7. The Purchaser, the Purchaser's Estate
and/or the Purchaser's Trust, as the case may be, shall send written notice to
the Company of its intention to sell shares of Purchase Stock in exchange for
the payment referred to in the preceding sentence (the "Redemption Notice"). The
completion of the purchase shall take place at the principal office of the
Company on the tenth business day after the giving of the Redemption Notice. The
Section 5 Repurchase Price shall be paid by delivery to the Purchaser, the
Purchaser's Estate or the Purchaser's Trust, as the case may be, of a wire
transfer of immediately available funds or a certified bank check or checks in
the appropriate amount payable to the order of the Purchaser, the Purchaser's
Estate or the Purchaser's Trust, as the case may be, against delivery of
certificates or other instruments representing the Purchase Stock so purchased,
appropriately endorsed or executed by the Purchaser, the Purchaser's Estate or
the Purchaser's Trust, or his or its duly authorized representative. For
purposes of this Agreement, Purchaser shall be deemed to have a "permanent
disability" when the majority of the Board of Directors of the Company shall, in
good faith, so determine.
(b) Notwithstanding anything in Section 5(a) to the contrary
and subject to Section 10, if there exists and is continuing a default or an
event of default on the part of the Company or any subsidiary of the Company
under any loan, guarantee or other agreement under which the Company or any
subsidiary of the Company has borrowed money or if the repurchase referred to in
Section 5(a) would result in a default or an event of default on the part of the
Company or any subsidiary of the Company under any such agreement or if a
repurchase would not be permitted under the Delaware General Corporation Law
(the "DGCL") (or if the Company reincorporates in another state, the business
corporation law of such state) (each such occurrence being an "Event"), the
Company shall not be obligated to repurchase any of the Purchase Stock from the
Purchaser, the Purchaser's Estate or the Purchaser's Trust, as the case may be,
until the first business day which is 10 calendar days after all of the
foregoing Events have ceased to exist (the "Repurchase Eligibility Date");
provided, however, that the number of shares of Purchase Stock subject to
repurchase under this Section 5(b) shall be that number of shares of Purchase
Stock, held by the Purchaser, the Purchaser's Estate or a Purchaser's Trust, as
the case may be, at the time of delivery of a Redemption Notice in accordance
with Section 5(a) hereof; provided, further, that the Repurchase Calculation
Date (as defined herein) shall be determined in accordance with Section 7 as of
the Repurchase Eligibility Date (unless the Section 5 Repurchase Price would be
greater if the Repurchase Calculation Date had been determined as if no Event
<PAGE> 6
6
had occurred in which case, solely for purposes of this proviso, the Repurchase
Calculation Date shall be determined as if no Event had occurred).
(c) Notwithstanding any other provision of this Section 5 to
the contrary and subject to Section 10, the Purchaser, the Purchaser's Estate or
the Purchaser's Trust, as the case may be, shall have the right to withdraw any
Redemption Notice which has been pending for 60 or more days and which has
remained unsatisfied because of the provisions of Section 5(b).
6. The Company's Option to Repurchase Purchase Stock of
Purchaser.
(a) If, on or prior to the fifth anniversary of the 1997
Agreement Date, (i) the beneficiaries of a Purchaser's Trust shall include any
person or entity other than the Purchaser, his spouse or his lineal descendants,
or (ii) the Purchaser shall effect a transfer of any of the Purchase Stock other
than as permitted in this Agreement (alternatively, a "Call Event"), the Company
shall have the right to purchase all, but not less than all, of the shares of
the Purchase Stock then held by the Purchaser or a Purchaser's Trust at the
Section 6 Repurchase Price determined in accordance with Section 7 hereof. The
Company shall have a period of 75 days from the date of a Call Event in which to
give notice in writing to the Purchaser of the exercise of such election ("Call
Notice").
(b) The completion of the purchases pursuant to the foregoing
shall take place at the principal office of the Company on the tenth business
day after the giving of notice of the exercise of the option to purchase. The
Section 5 Repurchase Price or the Section 6 Repurchase Price, as the case may
be, shall be paid by delivery to the Purchaser of a wire transfer of immediately
available funds or a certified bank check or checks in the appropriate amount
payable to the order of the Purchaser against delivery of certificates or other
instruments representing the Purchase Stock so purchased, appropriately endorsed
or executed by the Purchaser, the Purchaser's Trust or his or its authorized
representative.
(c) Notwithstanding any other provision of this Section 6 to
the contrary and subject to Section 10, if there exists and is continuing any
Event, the Company shall delay the repurchase of any of the Purchase Stock
(pursuant to a Call Notice given on a timely basis in accordance with Section
6(a) hereof) from the Purchaser, the Purchaser's Estate, or the Purchaser's
Trust, as the case may be, until the Repurchase Eligibility Date; provided,
however, that the number of shares of Purchase Stock subject to repurchase under
this Section 6(c) shall be that number of shares of Purchase Stock and held by
the Purchaser, the Purchaser's Estate or a Purchaser's Trust, as the case may
be, at the time of delivery of a Call Notice in accordance with Section 6(a)
hereof; provided, further, that the Repurchase Calculation Date shall be
determined in accordance with Section 7 based on the Repurchase Eligibility Date
(unless the applicable Repurchase Price would be greater if the Repurchase
Calculation Date had been determined as if no Event had occurred, in which case,
solely for purposes of this proviso, the Repurchase Calculation Date shall be
determined as if no Event had occurred).
<PAGE> 7
7
7. Determination of Repurchase Price.
(a) The Section 5 Repurchase Price and the Section 6
Repurchase Price are hereinafter collectively referred to as the "Repurchase
Price." The Repurchase Price shall be calculated on the basis of the unaudited
financial statements of the Company or the Market Price Per Share (as defined in
Section 7(f)) as of the last day of the fiscal quarter preceding the later of
(i) the fiscal quarter in which the event giving rise to the repurchase occurs
and (ii) the fiscal quarter in which the Repurchase Eligibility Date occurs
(hereinafter called the "Repurchase Calculation Date"). The event giving rise to
the repurchase shall be the event set forth in Section 5 or 6 and not the giving
of any notice required pursuant to such sections.
(b) Prior to a Public Offering (as hereinafter defined), the
Section 5 Repurchase Price shall be a per share Repurchase Price equal to $2.00
plus the amount, if any, by which the Book Value Per Share (as defined in
Section 7(d)) as of the Repurchase Calculation Date exceeds $2.00. After a
Public Offering, the Section 5 Repurchase Price shall be a per share Repurchase
Price equal to $2.00 plus the amount, if any, by which the Market Price Per
Share as of the Repurchase Calculation Date exceeds $2.00.
(c) Prior to a Public Offering, the Section 6 Repurchase Price
shall be a per share Repurchase Price equal to the lesser of (i) the Book Value
Per Share (as defined in paragraph (d) below) or (ii) $2.00 plus (x) the
Percentage (as defined below) multiplied by (y) the amount, if any, by which the
Book Value Per Share as of the Repurchase Calculation Date exceeds $2.00. After
a Public Offering, the Section 6 Repurchase Price shall be a per share
Repurchase Price equal to the lesser of (i) Market Price Per Share or (ii) $2.00
plus (a) the Percentage multiplied by (b) the amount, if any, by which the
Market Price Per Share as of the Repurchase Calculation Date exceeds $2.00.
The "Percentage" shall be determined as follows:
<TABLE>
<CAPTION>
Repurchase Calculation Date Percentage
- --------------------------- ----------
<S> <C>
Purchase Date through and including the third anniversary of the 1997 Agreement 40%
Date
After the third anniversary of the 1997 Agreement Date through and including 60%
the fourth anniversary of the 1997 Agreement Date
After the fourth anniversary of the 1997 Agreement Date through and including 80%
the fifth anniversary of the 1997 Agreement Date
After the fifth anniversary of the 1997 Agreement Date 100%
</TABLE>
(d) For purposes of this Agreement, "Book Value Per Share"
shall be the quotient of (a) (i) $250 million plus (ii) the aggregate net income
of the Company from and after September 30, 1996 (as decreased by any net losses
from and after such date) plus (iii) the
<PAGE> 8
8
aggregate dollar amount contributed to (or credited to Common Stockholders'
equity of) the Company after September 30, 1996 as equity of the Company
(including consideration to be received upon exercise of any options and other
stock equivalents) plus (iv) to the extent reflected as deductions to Book Value
Per Share in clause (ii) above, or minus, to the extent reflected as additions
to Book Value Per Share in clause (ii) above, unusual or other items recognized
by the Company, if and to the extent determined in the sole discretion of the
Compensation Committee of the Board of Directors of the Company, minus, (v) the
aggregate dollar amount of any dividends paid by the Company after September 30,
1996 divided by (b) the sum of the number of shares of Common Stock then
outstanding and the number of shares of Common Stock issuable upon the exercise
of all outstanding stock options and other rights to acquire Common Stock and
the conversion of all securities convertible into shares of Common Stock. The
calculations set forth in clauses (a)(ii), (a)(iii), (a)(iv) and (a)(v) of the
immediately preceding sentence shall be determined in accordance with generally
accepted accounting principles applied on a basis consistent with any prior
periods as reflected in the consolidated financial statements of the Company.
(e) As used herein the term "Public Offering" shall mean the
sale of shares of Common Stock to the public subsequent to the date hereof
pursuant to a registration statement under the Act which has been declared
effective by the SEC (other than a registration statement on Form S-8 or any
other similar form) which results in an active trading market in the Common
Stock if such a market does not already exist. A "Qualified Public Offering"
shall mean a Public Offering pursuant to an effective registration statement
relating to the sale of shares of the Company Stock held by Strata Associates,
L.P., a Delaware limited partnership and its affiliates; provided, however, that
a "Qualified Public Offering" shall be deemed to have occurred if there has been
a Public Offering and there exists an active trading market in 40% or more of
the Common Stock.
(f) As used herein the term "Market Price Per Share" shall
mean the price per share equal to the average of the last sale price of the
Common Stock on the Repurchase Calculation Date on each exchange on which the
Common Stock may at the time be listed or, if there shall have been no sales on
any of such exchanges on the Repurchase Calculation Date, the average of the
closing bid and asked prices on each such exchange at the end of the Repurchase
Calculation Date or if there is no such bid and asked price on the Repurchase
Calculation Date on the next preceding date when such bid and asked price
occurred or, if the Common Stock shall not be so listed, the average of the
closing sales prices as reported by NASDAQ at the end of the Repurchase
Calculation Date. If the Common Stock is not so listed or reported by NASDAQ,
then the Market Price Per Share shall be the Book Value Per Share.
(g) In determining the Repurchase Price, appropriate and
equitable adjustments shall be made by the Compensation Committee for any future
issuances of rights to acquire and securities convertible into Common Stock and
any stock dividends, splits, combinations, recapitalizations or any other
adjustment in the number of outstanding shares of Common Stock.
<PAGE> 9
9
8. The Company's Representations and Warranties.
(a) The Company represents and warrants to the Purchaser that
(i) this Agreement has been duly authorized, executed and delivered by the
Company and (ii) the Purchase Stock, when issued and delivered in accordance
with the terms hereof, will be duly and validly issued, fully paid and
nonassessable.
(b) If the Company shall have engaged in a Public Offering,
the Company will file the reports required to be filed by it under the Act and
the Exchange Act and the rules and regulations adopted by the SEC thereunder, to
the extent required from time to time to enable the Purchaser to sell shares of
Purchase Stock without registration under the Act within the limitations of the
exemptions provided by (i) Rule 144 or Rule 144A under the Act, as such Rule may
be amended from time to time, or (ii) any similar rule or regulation hereafter
adopted by the SEC. Notwithstanding anything contained in this Section 8(b), the
Company may deregister under Section 12 of the Exchange Act if it is then
permitted to do so pursuant to the Exchange Act and the rules and regulations
thereunder. Nothing in this Section 8(b) shall be deemed to limit in any manner
the restrictions on sales of Purchase Stock contained in this Agreement.
9. "Piggyback" Registration Rights.
(a) Effective upon the purchase of Common Stock pursuant to
this Agreement, until the later of (i) the first occurrence of a Qualified
Public Offering (as defined in Section 7(e) above) or (ii) the fifth anniversary
of the 1997 Agreement Date, the Purchaser hereby agrees to be bound by all of
the terms, conditions and obligations of the Registration Rights Agreement dated
as of September 30, 1996, among the Company, Strata Associates, L.P. and KKR
Partners II, L.P. (the "Registration Rights Agreement") and, in the case of a
Qualified Public Offering and subject to the limitations set forth in this
Section 9, shall have all of the rights and privileges of the Registration
Rights Agreement, in each case as if the Purchaser were an original party (other
than the Company) thereto; provided, however, that the Purchaser shall not have
any rights to request registration under Section 3 of the Registration Rights
Agreement; and provided, further, that the Purchaser shall not be bound by any
amendments to the Registration Rights Agreement unless Purchaser consents
thereto. Notwithstanding anything to the contrary contained in the Registration
Rights Agreement, the Purchaser's rights and obligations under the Registration
Rights Agreement shall be subject to the limitations and additional obligations
set forth in this Section 9. All shares of Purchase Stock purchased by the
Purchaser pursuant to this Agreement and held by the Purchaser, the Purchaser's
Trust or the Purchaser's Estate shall be deemed to be Registrable Securities as
defined in the Registration Rights Agreement.
(b) The Company will promptly notify the Purchaser in writing
(a "Notice") of any proposed registration (a "Proposed Registration") in
connection with a Qualified Public Offering. If within 15 days of the receipt by
the Purchaser of such Notice, the Company receives from the Purchaser, the
Purchaser's Trust or the Purchaser's Estate a written request (a "Request") to
register shares of Purchase Stock held by the Purchaser, the Purchaser's Estate
or the Purchaser's Trust (which Request will be irrevocable unless otherwise
mutually agreed to in
<PAGE> 10
10
writing by the Purchaser and the Company), shares of Purchase Stock will be so
registered as provided in this Section 9; provided, however, that for each such
registration statement only one Request, which shall be executed by the
Purchaser, the Purchaser's Trust or the Purchaser's Estate, as the case may be,
may be submitted for all Registrable Securities held by the Purchaser, the
Purchaser's Estate and the Purchaser's Trust.
(c) The maximum number of shares of Purchase Stock which will
be registered pursuant to a Request will be the lowest of (i) the number of
shares of Purchase Stock then held by the Purchaser (which for purposes of this
subparagraph (c) shall include shares held by the Purchaser's Estate or a
Purchaser's Trust) or (ii) the maximum number of shares of Purchase Stock which
the Company can register in the Proposed Registration without adverse effect on
the offering in the view of the managing underwriters (reduced pro rata with all
Other Purchasers (as defined in Section 10)) as more fully described in
subsection (d) of this Section 9 or (iii) the maximum number of shares which the
Purchaser (pro rata based upon the aggregate number of shares of Common Stock
the Purchaser and all Other Purchasers have requested be registered) and all
Other Purchasers are permitted to register under the Registration Rights
Agreement.
(d) If a Proposed Registration involves an underwritten
offering and the managing underwriter advises the Company in writing that, in
its opinion, the number of shares of Purchase Stock requested to be included in
the Proposed Registration exceeds the number which can be sold in such offering,
so as to be likely to have an adverse effect on the price, timing or
distribution of the shares of Purchase Stock offered in such Qualified Public
Offering as contemplated by the Company, then the Company will include in the
Proposed Registration (i) first, 100% of the shares of Purchase Stock the
Company proposes to sell and (ii) second, to the extent of the number of shares
of Purchase Stock requested to be included in such registration which, in the
opinion of such managing underwriter, can be sold without having the adverse
effect referred to above, the number of shares of Purchase Stock which the
"Holders" (as defined in the Registration Rights Agreement), including, without
limitation, the Purchaser and Other Purchasers, have requested to be included in
the Proposed Registration, such amount to be allocated pro rata among all
requesting Holders on the basis of the relative number of shares of Purchase
Stock then held by each such Holder (provided that any shares thereby allocated
to any such Holder that exceed such Holder's request will be reallocated among
the remaining requesting Holders in like manner).
(e) Upon delivering a Request the Purchaser will, if requested
by the Company, execute and deliver a custody agreement and power of attorney in
form and substance satisfactory to the Company with respect to the shares of
Purchase Stock to be registered pursuant to this Section 9 (a "Custody Agreement
and Power of Attorney"). The Custody Agreement and Power of Attorney will
provide, among other things, that the Purchaser will deliver to and deposit in
custody with the custodian and attorney-in-fact named therein a certificate or
certificates representing such shares of Purchase Stock (duly endorsed in blank
by the registered owner or owners thereof or accompanied by duly executed stock
powers in blank) and irrevocably appoint said custodian and attorney-in-fact as
the Purchaser's agent and
<PAGE> 11
11
attorney-in-fact with full power and authority to act under the Custody
Agreement and Power of Attorney on the Purchaser's behalf with respect to the
matters specified therein.
(f) The Purchaser agrees that he will execute such other
agreements as the Company may reasonably request to further evidence the
provisions of this Section 9.
10. Pro Rata Repurchases.
Notwithstanding anything to the contrary contained in Sections
5, 6 or 7, if at any time consummation of all purchases and payments to be made
by the Company pursuant to this Agreement and the purchasers' agreements entered
into between the Company and certain employees, among others ("Other
Purchasers"), of the Company pursuant to which such purchasers acquired Common
Stock and options for Common Stock would result in an Event, then the Company
shall make purchases from, and payments to, the Purchaser and such Other
Purchasers pro rata (on the basis of the proportion of the number of shares of
Purchase Stock and the number of options each such Purchaser and all Other
Purchasers have elected or are required to sell to the Company) for the maximum
number of shares of Purchase Stock permitted without resulting in an Event (the
"Maximum Repurchase Amount"). The provisions of Section 5(b) and 6(c) shall
apply in their entirety to payments and repurchases with respect to shares of
Purchase Stock which may not be made due to the limits imposed by the Maximum
Repurchase Amount under this Section 10. Until all of such Purchase Stock and
options are purchased and paid for by the Company, the Purchaser and the Other
Purchasers whose Purchase Stock and options are not purchased in accordance with
this Section 10 shall have priority, on a pro rata basis, over other purchases
of Common Stock and options by the Company pursuant to this Agreement and Other
Purchasers' Agreements.
11. Rights to Negotiate Repurchase Price.
Nothing in this Agreement shall be deemed to restrict or
prohibit the Company from purchasing shares of Purchase Stock from the
Purchaser, at any time, upon such terms and conditions, and for such price, as
may be mutually agreed upon between the Parties, whether or not at the time of
such purchase circumstances exist which specifically grant the Company the right
to purchase, or the Purchaser the right to sell, shares of Purchase Stock under
the terms of this Agreement.
12. Covenant Regarding 83(b) Election.
Except as the Company may otherwise agree in writing, the
Purchaser hereby covenants and agrees that he will make an election provided
pursuant to Treasury Regulation 1.83-2 with respect to the Purchase Stock; and
Purchaser further covenants and agrees that he will furnish the Company with
copies of the forms of election the Purchaser files within 30 days after the
Purchase Date.
13. Notice of Change of Beneficiary.
<PAGE> 12
12
Immediately prior to any transfer of Purchase Stock to a
Purchaser's Trust, the Purchaser shall provide the Company with a copy of the
instruments creating the Purchaser's Trust and with the identity of the
beneficiaries of the Purchaser's Trust. The Purchaser shall notify the Company
immediately prior to any change in the identity of any beneficiary of the
Purchaser's Trust.
14. Expiration of Certain Provisions.
The provisions contained in Sections 4, 5 and 6 of this
Agreement and the portion of any other provision of this Agreement which
incorporates the provisions of Sections 4, 5 and 6, shall terminate and be of no
further force or effect with respect to any shares of Purchase Stock sold by the
Purchaser (i) pursuant to an effective registration statement filed by the
Company pursuant to Section 9 hereof or (ii) pursuant to the terms of the Sale
Participation Agreement of even date herewith, among the Purchaser and Strata
Associates, L.P.
The provisions contained in Sections 2(e), 3, 4, 5, 6 and 12
of this Agreement, and the portion of any other provisions of this Agreement
which incorporate the provisions of such Sections, shall terminate and be of no
further force or effect upon the consummation of a merger, reorganization,
business combination or liquidation of the Company, or a sale of Common Stock
owned by the Investors, but only if such merger, reorganization, business
combination, liquidation or sale of Common Stock results in Strata Associates,
L.P. or any affiliate thereof, no longer having the power (i) to elect a
majority of the Board of Directors of the Company or such other corporation
which succeeds to the Company's rights and obligations pursuant to such merger,
reorganization, business combination, liquidation or stock sale, or (ii) if the
resulting entity of such merger, reorganization, business combination,
liquidation or stock sale is not a corporation, to select the general partner(s)
or other persons or entities controlling the operations and business of the
resulting entity.
15. Recapitalizations, etc.
The provisions of this Agreement shall apply, to the full
extent set forth herein with respect to the Purchase Stock, to any and all
shares of capital stock of the Company or any capital stock, partnership units
or any other security evidencing ownership interests in any successor or assign
of the Company (whether by merger, consolidation, sale of assets or otherwise)
which may be issued in respect of, in exchange for, or substitution of the
Purchase Stock, by reason of any stock dividend, split, reverse split,
combination, recapitalization, liquidation, reclassification, merger,
consolidation or otherwise.
16. State Securities Laws.
The Company hereby agrees to use its best efforts to comply
with all state securities or "blue sky" laws which might be applicable to the
sale of the Purchase Stock to the Purchaser.
<PAGE> 13
13
17. Binding Effect.
The provisions of this Agreement shall be binding upon and
accrue to the benefit of the parties hereto and their respective heirs, legal
representatives, successors and assigns. In the case of a transferee permitted
under Section 2(a) hereof, such transferee shall be deemed the Purchaser
hereunder; provided, however, that no transferee (including without limitation,
transferees referred to in Section 2(a) hereof) shall derive any rights under
this Agreement unless and until such transferee has delivered to the Company a
valid undertaking and becomes bound by the terms of this Agreement.
18. Amendment.
This Agreement may be amended only by a written instrument
signed by the Parties hereto.
19. Amendment to Prior Stockholder Agreement.
Notwithstanding the provision in the Stockholder Agreement
dated as of September 23, 1997 between the Company and the Purchaser that
defines "Stock" to include all stock acquired at any time by the Purchaser from
the Company, the Purchase Stock to be sold under this Agreement shall not be
included in the definition of "Stock" under the prior Stockholder Agreement and
the provisions of this Agreement shall supersede in all respects the provisions
of the prior Stockholder's Agreement with respect to the Purchase Stock in all
respects.
20. Closing.
Except as otherwise provided herein, the closing of each
purchase and sale of shares of Purchase Stock, pursuant to this Agreement shall
take place at the principal office of the Company on the tenth business day
following delivery of the notice by either Party to the other of its exercise of
the right to purchase or sell such Purchase Stock hereunder.
21. Applicable Law.
The laws of the state of Delaware (or if the Company
reincorporates in another state, of that state) shall govern the interpretation,
validity and performance of the terms of this Agreement, regardless of the law
that might be applied under principles of conflicts of law. Any suit, action or
proceeding against the Purchaser, with respect to this Agreement, or any
judgment entered by any court in respect of any thereof, may be brought in any
court of competent jurisdiction in the State of Delaware (or if the Company
reincorporates in another state, in that state) or New York, as the Company may
elect in its sole discretion, and the Purchaser hereby submits to the
non-exclusive jurisdiction of such courts for the purpose of any such suit,
action,
<PAGE> 14
14
proceeding or judgment. By the execution and delivery of this Agreement, the
Purchaser appoints The Corporation Trust Company, at its office in New York, New
York or Wilmington, Delaware (or if the Company reincorporates in another state,
an office in that state), as the case may be, as his agent upon which process
may be served in any such suit, action or proceeding. Service of process upon
such agent, together with notice of such service given to the Purchaser in the
manner provided in Section 23 hereof, shall be deemed in every respect effective
service of process upon him in any suit, action or proceeding. Nothing herein
shall in any way be deemed to limit the ability of the Company to serve any such
writs, process or summonses in any other manner permitted by applicable law or
to obtain jurisdiction over the Purchaser, in such other jurisdictions and in
such manner, as may be permitted by applicable law. The Purchaser hereby
irrevocably waives any objections which he may now or hereafter have to the
laying of the venue of any suit, action or proceeding arising out of or relating
to this Agreement brought in any court of competent jurisdiction in the State of
Delaware (or if the Company reincorporates in another state, in that state) or
New York, and hereby further irrevocably waives any claim that any such suit,
action or proceeding brought in any such court has been brought in any
inconvenient forum. No suit, action or proceeding against the Company with
respect to this Agreement may be brought in any court, domestic or foreign, or
before any similar domestic or foreign authority other than in a court of
competent jurisdiction in the State of Delaware (or if the Company
reincorporates in another state, in that state) or New York, and the Purchaser
hereby irrevocably waives any right which he may otherwise have had to bring
such an action in any other court, domestic or foreign, or before any similar
domestic or foreign authority. The Company hereby submits to the jurisdiction of
such courts for the purpose of any such suit, action or proceeding.
22. Assignability of Certain Rights by the Company.
The Company shall have the right to assign any or all of its
rights or obligations to purchase shares of Purchase Stock pursuant to Sections
4, 5 and 6 hereof; provided, however, that the Company shall remain obligated to
perform its obligations notwithstanding such assignment in the event that such
assignee fails to perform the obligations so assigned to it.
23. Miscellaneous.
In this Agreement (i) all references to "dollars" or "$" are
to United States dollars and (ii) the word "or" is not exclusive. If any
provision of this Agreement shall be declared illegal, void or unenforceable by
any court of competent jurisdiction, the other provisions shall not be affected,
but shall remain in full force and effect.
24. Notices.
All notices and other communications provided for herein shall
be in writing and shall be deemed to have been duly given if delivered by hand
(whether by overnight courier or otherwise) or sent by registered or certified
mail, return receipt requested, postage prepaid, to the Party to whom it is
directed:
<PAGE> 15
15
(a) If to the Company, to it at the following address:
c/o Kohlberg Kravis Roberts & Co.
9 West 57th Street
Suite 4200
New York, New York 10019
Attn: Michael T. Tokarz
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017-3909
Attn: Arthur D. Robinson, Esq.
(b) If to the Purchaser, to him at the address set forth
below under his signature; or at such other address
as either party shall have specified by notice in
writing to the other.
25. Confidential Information.
The Purchaser will not disclose or use at any time any
Confidential Information (as defined below) of which the Purchaser is or becomes
aware, whether or not such information is developed by him, except to the extent
that such disclosure or use is directly related to and required by the
Purchaser's performance of duties, if any, assigned to the Purchaser by the
Company. As used in this Agreement, the term "Confidential Information" means
information that is not generally known to the public and that is used,
developed or obtained by the Company or its subsidiaries in connection with its
business, including but not limited to (i) products or services, (ii) fees,
costs and pricing structures, (iii) designs, (iv) computer software, including
operating systems, applications and program listings, (v) flow charts, manuals
and documentation, (vi) data bases, (vii) accounting and business methods,
(viii) inventions, devices, new developments, methods and processes, whether
patentable or unpatentable and whether or not reduced to practice, (ix)
customers and clients and customer or client lists, (x) other copyrightable
works, (xi) all technology and trade secrets, and (xii) all similar and related
information in whatever form. Confidential Information will not include any
information that has been published in a form generally available to the public
prior to the date the Purchaser proposes to disclose or use such information.
The Purchaser acknowledges and agrees that all copyrights, works, inventions,
innovations, improvements, developments, patents, trademarks and all similar or
related information which relate to the actual or anticipated business of the
Company and its subsidiaries (including its predecessors) and conceived,
developed or made by the Purchaser while employed by the Company or its
subsidiaries belong to the Company. The Purchaser will perform all actions
reasonably requested by the Company (whether during or after
<PAGE> 16
16
the Noncompete Period) to establish and confirm such ownership at the Company's
expense (including without limitation assignments, consents, powers of attorney
and other instruments).
IN WITNESS WHEREOF, the Parties have executed this Agreement
as of the date first above written.
SPALDING HOLDINGS CORPORATION
By: /s/ James R. Craigie
--------------------------------
James R. Craigie
President
/s/ Edwin L. Artzt
------------------------------------
Edwin L. Artzt, Trustee of the
Edwin L. Artzt Revocable Trust Under
Agreement Dated 6/16/82, As Amended
900 Adams Crossing
Apartment 11100
Cincinnati, Ohio 45202
<PAGE> 1
Exhibit 10.22
SALE PARTICIPATION AGREEMENT
March 8, 2000
Edwin L. Artzt, Trustee of the
Edwin L. Artzt Revocable Trust Under
Agreement Dated 6/16/82, As Amended
900 Adams Crossing
Apartment 11100
Cincinnati, Ohio 45202
Dear Mr. Artzt:
You have entered into a Stockholder's Agreement, dated as of March
8, 2000 (the "Stockholder's Agreement"), between Spalding Holdings Corporation,
a Delaware corporation (the "Company"), and you relating to the purchase from
the Company of shares of the common stock, par value $.01 per share, of the
Company ("Common Stock"). The undersigned "Investors," which include KKR
Partners II, L.P., a Delaware limited partnership ("KKR Partners"), and Strata
Associates, L.P., a Delaware limited partnership ("Strata Associates"), also
have purchased shares of Common Stock and hereby agree with you as follows,
effective upon such purchase of Common Stock by you:
1. In the event that at any time KKR Partners or Strata Associates,
as the case may be (each a "Selling Partnership" and collectively, the "Selling
Partnerships"), proposes to sell for cash or any other consideration any shares
of Common Stock owned by it, in any transaction other than a Public Offering (as
defined in the Stockholder's Agreement) or a sale to an affiliate of KKR
Partners or Strata Associates, as the case may be, the Selling Partnership will
notify you or your Purchaser's Estate or Purchaser's Trust (as such terms are
defined in Section 2 of the Stockholder's Agreement), as the case may be, in
writing (a "Notice") of such proposed sale (a "Proposed Sale") and the material
terms of the Proposed Sale as of the date of the Notice (the "Material Terms")
promptly, and in any event not less than 15 days prior to the consummation of
the Proposed Sale and not more than 5 days after the execution of the definitive
agreement relating to the Proposed Sale, if any (the "Sale Agreement"). If
within 10 days of your or your Purchaser's Estate's or Purchaser's Trust's, as
the case may be, receipt of such Notice the Selling Partnership receives from
you or your Purchaser's Estate or Purchaser's Trust, as the case may be, a
written request (a "Request") to include Common Stock held by you or your
Purchaser's Estate or Purchaser's Trust, as the case may be, in the Proposed
Sale (which Request shall be irrevocable unless (a) there shall be a material
adverse change in the Material Terms or (b) if otherwise mutually agreed to in
writing by you or your Purchaser's Estate or Purchaser's Trust, as the case may
be, and the Selling Partnership), the Common Stock held by you will be so
included as provided herein; provided that only one Request, which shall be
executed by you or your Purchaser's Estate or Purchaser's Trust, as the case may
be, may be delivered with respect to
<PAGE> 2
any Proposed Sale for all Common Stock held by you or your Purchaser's Estate or
Purchaser's Trust. Promptly after the consummation of the transactions
contemplated thereby, the Selling Partnership will furnish you, your Purchaser's
Trust or your Purchaser's Estate with a copy of the Sale Agreement, if any. In
the event that both KKR Partners and Strata Associates propose to sell shares of
Common Stock in the Proposed Sale, the term "Selling Partnership" shall refer
only to Strata Associates and not to KKR Partners.
2. The number of shares of Common Stock which you or your
Purchaser's Estate or Purchaser's Trust, as the case may be, will be permitted
to include in a Proposed Sale pursuant to a Request will be the lesser of (a)
the sum of the number of shares of Common Stock then owned by you or your
Purchaser's Estate or Purchaser's Trust, as the case may be, plus all shares of
Common Stock which you are then entitled to acquire under an unexercised option
to purchase shares of Common Stock, to the extent such option is then vested or
would become vested as a result of the consummation of the Proposed Sale and (b)
the sum of the shares of Common Stock then owned by you or your Purchaser's
Estate or Purchaser's Trust, as the case may be, plus all shares of Common Stock
which you are entitled to acquire under an unexercised option to purchase shares
of Common Stock, whether or not fully vested, multiplied by a percentage
calculated by dividing the aggregate number of shares of Common Stock which KKR
Partners and Strata Associates propose to sell in the Proposed Sale by the total
number of shares of Common Stock owned by the Selling Partnership or, in the
case both KKR Partners and Strata Associates propose to sell in the Proposed
Sale, KKR Partners and Strata Associates. If one or more holders of shares of
Common Stock who have been granted the same rights granted to you or your
Purchaser's Estate or Purchaser's Trust, as the case may be, hereunder elect not
to include the maximum number of shares of Common Stock which such holders would
have been permitted to include in a Proposed Sale (the "Eligible Shares"), KKR
Partners or Strata Associates, or such remaining holders of shares of Common
Stock, or any of them, may sell in the Proposed Sale a number of additional
shares of Common Stock owned by any of them equal to their pro rata portion of
the number of Eligible Shares not included in the Proposed Sale, based on the
relative number of shares of Common Stock then held by each such holder, and
such additional shares of Common Stock which any such holder or holders propose
to sell shall not be included in any calculation made pursuant to the first
sentence of this Paragraph 2 for the purpose of determining the number of shares
of Common Stock which you or your Purchaser's Estate or Purchaser's Trust, as
the case may be, will be permitted to include in a Proposed Sale. KKR Partners
and Strata Associates, or any of them, may sell in the Proposed Sale additional
shares of Common Stock owned by any of them equal to any remaining Eligible
Shares which will not be included in the Proposed Sale pursuant to the
foregoing.
3. If the Investors receive an offer from a person to purchase in a
Proposed Sale (a) at least a majority of the shares of Common Stock then
outstanding or (b) all or substantially all of the shares of Common Stock owned
by the Investors, and such offer is accepted by the Investors, then each of you,
your Purchaser's Estate and your Purchaser's Trust hereby agrees that, if
requested by the Investors (a "KKR Request"), you, your Purchaser's Estate and
your Purchaser's Trust will sell in such Proposed Sale on the same terms and
conditions (including, without limitation, time of payment and form of
consideration) as to be paid and given to the Investors, the number of shares of
Common Stock equal to the number of shares of Common Stock owned by you, your
Purchaser's Estate and your Purchaser's Trust multiplied by (x) in the case of a
Proposed Sale described in clause (a) above, the percentage of the then
outstanding
<PAGE> 3
shares of Common Stock to which the Proposed Sale is applicable or (y) in the
case of a Proposed Sale described in clause (b) above, the percentage of the
shares of Common Stock owned by the Investors to which the Proposed Sale is
applicable.
4. (a) Except as may otherwise be provided herein, shares of Common
Stock subject to a Request will be included in a Proposed Sale pursuant hereto
and in any agreements with purchasers relating thereto on the same terms and
subject to the same conditions applicable to the shares of Common Stock which
the Selling Partnership proposes to sell in the Proposed Sale. Such terms and
conditions shall include, without limitation: the sales price; the payment of
fees, commissions and expenses; the provision of, and representation and
warranty as to, information requested by Strata Associates; and the provision of
requisite indemnifications; provided that any indemnification provided by you,
your Purchaser's Estate or your Purchaser's Trust shall be pro rata in
proportion with the number of shares of Common Stock to be sold.
(b) In the event of a transaction (such as a merger or
consolidation) involving the Company which results in a change of control
transaction but is not a Proposed Sale (a "Proposed Transaction"), you agree on
behalf of yourself, your Purchaser's Estate and your Purchaser's Trust to bear
your pro rata share of any fees, commissions, adjustments to purchase price,
expenses or indemnities borne by the Investors.
(c) Your pro rata share of any amount pursuant to Paragraphs 4(a)
and (b) shall be based upon the number of shares of Common Stock owned by you,
your Purchaser's Estate and your Purchaser's Trust plus the number of shares of
Common Stock you would have the right to acquire under unexercised options which
are then vested or would become vested as a result of the Proposed Sale or
Proposed Transaction.
(d) The Investors shall be entitled to estimate the amount of fees,
commissions, adjustments to purchase price, expenses or indemnities in
connection with any Proposed Sale or Proposed Transaction and to withhold such
amounts from payments to be made to you, your Purchaser's Estate and your
Purchaser's Trust at the time of closing of such Proposed Sale or Proposed
Transaction; provided that, (i) such estimate shall not preclude the Investors
from recovering additional amounts from you, your Purchaser's Estate and your
Purchaser's Trust in respect of such fees, commissions, adjustments to purchase
price, expenses or indemnities and (ii) the Investors shall reimburse you, your
Purchaser's Estate and your Purchaser's Trust to the extent actual amounts are
ultimately less than the estimated amounts.
5. Upon delivering a Request, you or your Purchaser's Estate or
Purchaser's Trust, as the case may be, will, if requested by the Selling
Partnership, execute and deliver a custody agreement and power of attorney in
form and substance satisfactory to the Selling Partnership with respect to the
shares of Common Stock which are to be sold by you or your Purchaser's Estate or
Purchaser's Trust, as the case may be, pursuant hereto (a "Custody Agreement and
Power of Attorney"). The Custody Agreement and Power of Attorney will provide,
among other things, that you or your Purchaser's Estate or Purchaser's Trust, as
the case may be, will deliver to and deposit in custody with the custodian and
attorney-in-fact named therein a certificate or certificates representing such
shares of Common Stock (duly endorsed in blank by the registered owner or owners
thereof) and irrevocably appoint said custodian and attorney-in-fact as your or
your Purchaser's Estate's or Purchaser's Trust's, as the case may be, agent and
attorney-in-fact with full power and authority to act under the Custody
Agreement and Power of Attorney on your
15
<PAGE> 4
or your Purchaser's Estate's or Purchaser's Trust's, as the case may be, behalf
with respect to the matters specified therein.
6. Your or your Purchaser's Estate's or Purchaser's Trust's, as the
case may be, right pursuant hereto to participate in a Proposed Sale shall be
contingent on your or your Purchaser's Estate's or Purchaser's Trust's, as the
case may be, strict compliance with each of the provisions hereof and your or
your Purchaser's Estate's or Purchaser's Trust's, as the case may be,
willingness to execute such documents in connection therewith as may be
reasonably requested by the Selling Partnership.
7. The obligations of KKR Partners and Strata Associates hereunder
shall extend only to you or your Purchaser's Estate or Purchaser's Trust, as the
case may be, and no other of your or your Purchaser's Estate's or Purchaser's
Trust's, as the case may be, successors or assigns shall have any rights
pursuant hereto.
8. This Agreement shall terminate and be of no further force and
effect on the fifth anniversary of the first occurrence of a Public Offering (as
defined in the Purchase Agreement).
9. All notices and other communications provided for herein shall be
in writing and shall be deemed to have been duly given when delivered to the
party to whom it is directed:
(a) If to KKR Partners or Strata Associates, to it at the
following address:
c/o Kohlberg Kravis Roberts & Co.
9 West 57th Street
New York, New York 10019
Attn: Michael T. Tokarz
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attn: Arthur D. Robinson, Esq.
(b) If to you, to you at the address first set forth above herein;
(c) If to your Purchaser's Estate or Purchaser's Trust, at the
address provided to such partnerships by such entity;
or at such other address as any of the above shall have specified by notice in
writing delivered to the others by certified mail.
10. The laws of the State of Delaware (or if the Company
reincorporates in another state, of that state) shall govern the interpretation,
validity and performance of the terms of this Agreement. No suit, action or
proceeding with respect to this Agreement may be brought in any court or before
any similar authority other than in a court of competent jurisdiction in the
16
<PAGE> 5
State of Delaware (or if the Company reincorporates in another state, of that
state) or New York, as the Selling Partnerships may elect in their sole
discretion, and you hereby submit to the non-exclusive jurisdiction of such
courts for the purpose of such suit, proceeding or judgment. You hereby
irrevocably waive any right which you may have had to bring such an action in
any other court, domestic or foreign, or before any similar domestic or foreign
authority.
11. If KKR Partners or Strata Associates transfers its interest in
the Company to an affiliate of KKR Partners or Strata Associates, as the case
may be, such affiliate shall assume the obligations hereunder of KKR Partners or
Strata Associates, as the case may be.
This Agreement constitutes the full and entire understanding and
agreement between the undersigned and you with regards to the subjects hereof
and to the extent that you have previously executed an agreement with regard to
the subjects hereof, this Agreement shall supersede any such previous agreement.
It is the understanding of the undersigned that you are aware that
no Proposed Sale presently is contemplated and that such a sale may never occur.
This Agreement may be signed in counterparts, each of which shall be
an original, with the same effect as if the signatures thereto and hereto were
upon the same instrument.
<PAGE> 6
If the foregoing accurately sets forth our agreement, please
acknowledge your acceptance thereof in the space provided below for that
purpose.
Very truly yours,
STRATA ASSOCIATES, L.P.
By: KKR ASSOCIATES (STRATA), L.P.
By: STRATA L.L.C.,
as General Partner
By: /s/ Michael T. Tokarz
-------------------------------------
KKR PARTNERS II, L.P.
By: KKR ASSOCIATES (STRATA), L.P.
By: STRATA L.L.C.,
as General Partner
By: /s/ Michael T. Tokarz
-------------------------------------
Accepted and agreed to:
/s/ Edwin L. Artzt
----------------------------------
Edwin L. Artzt, Trustee of the
Edwin L. Artzt Revocable Trust Under
Agreement Dated 6/16/82, As Amended
<PAGE> 1
EXHIBIT 15
May 15, 2000
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 fiscal periods ended April 1, 2000 and April 3, 1999, as
indicated in our report dated May 4, 2000; 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 fiscal quarter ended April 1, 2000, is
incorporated by reference in Registration Statement No. 333-11340 on Form S-8,
No. 333-20463 on Form S-8 and No. 333-31154 on Form S-8.
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
Statements 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
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SPALDING HOLDINGS CORPORATION FOR THE FISCAL QUARTER OF
JANUARY 1, 2000 THROUGH APRIL 1, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> APR-01-2000
<CASH> 3,865
<SECURITIES> 0
<RECEIVABLES> 112,263
<ALLOWANCES> (2,389)
<INVENTORY> 58,743
<CURRENT-ASSETS> 191,797
<PP&E> 112,233
<DEPRECIATION> (55,094)
<TOTAL-ASSETS> 474,786
<CURRENT-LIABILITIES> 163,875
<BONDS> 532,833
0
100,000
<COMMON> 984
<OTHER-SE> (332,649)
<TOTAL-LIABILITY-AND-EQUITY> 474,786
<SALES> 107,003
<TOTAL-REVENUES> 107,003
<CGS> 53,747
<TOTAL-COSTS> 53,747
<OTHER-EXPENSES> 47,168
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,648
<INCOME-PRETAX> (8,560)
<INCOME-TAX> (2,823)
<INCOME-CONTINUING> (5,737)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,737)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
