<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 10, 1999
REGISTRATION NO. 333-64893
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
EVENFLO COMPANY, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 6719 31-1360477
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
--------------------------
NORTHWOODS BUSINESS CENTER II
707 CROSSROADS COURT
VANDALIA, OHIO 45377
(937) 415-3300
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
--------------------------
NORTHWOODS BUSINESS CENTER II
707 CROSSROADS COURT
VANDALIA, OHIO 45377
(937) 415-3300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
WITH A COPY TO:
ARTHUR D. ROBINSON, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 455-2000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act Registration number of the earlier effective
Registration Statement for the same offering: / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities
Registration Statement number of the earlier effective Registration Statement
for the same offering: / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE OR
JURISDICTION.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 10, 1999
PROSPECTUS
EVENFLO COMPANY, INC.
OFFER TO EXCHANGE UP TO
$110,000,000 OF ITS 11 3/4% SERIES B SENIOR NOTES DUE 2006
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OF ITS OUTSTANDING
11 3/4% SENIOR NOTES DUE 2006
Evenflo Company, Inc., a Delaware corporation (the "Company" or "Evenflo"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (together, constituting
the "Exchange Offer"), to exchange an aggregate of up to $110,000,000 principal
amount of 11 3/4% Series B Senior Notes due 2006 (the "Exchange Notes") of the
Company for an identical face amount of the issued and outstanding 11 3/4%
Senior Notes due 2006 (the "Old Notes" and, together with the Exchange Notes,
the "Notes") of the Company from the holders thereof. As of the date of this
Prospectus, there is $110,000,000 aggregate principal amount of the Old Notes
outstanding. The terms of the Exchange Notes are identical in all material
respects to the Old Notes, except that the Exchange Notes have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), and
therefore will not bear legends restricting their transfer and will not contain
provisions providing for an increase in the interest rate on the Old Notes under
the circumstances described in the Registration Rights Agreement (as defined),
which provisions will terminate as to all of the Notes upon the consummation of
the Exchange Offer. See "Description of the Exchange Notes-- Registration
Rights; Liquidated Damages."
The Exchange Notes will bear interest at a rate of 11 3/4% per annum,
payable semi-annually on August 15 and February 15 of each year, commencing
February 15, 1999. The Exchange Notes will mature on August 15, 2006. At any
time or from time to time on or after August 15, 2002, the Company may redeem
the Exchange Notes, in whole or in part, at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, to the date of redemption.
Notwithstanding the foregoing, at any time or from time to time on or prior to
August 15, 2001, the Company may redeem up to 35% of the aggregate principal
amount of the Exchange Notes originally issued at a redemption price equal to
111.75% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the date of redemption with the net cash proceeds of one or more Equity
Offerings (as defined); PROVIDED that at least 65% in aggregate principal amount
of the Exchange Notes originally issued remains outstanding after each such
redemption. The Exchange Notes will not be subject to any sinking fund
requirements. Upon the occurrence of a Change of Control (as defined), the
Company will have the option, at any time on or prior to August 15, 2002, to
redeem the Exchange Notes, in whole but not in part, at a redemption price equal
to 100% of the principal amount thereof plus the Applicable Premium (as
defined), together with accrued and unpaid interest, if any, to the date of
redemption. Upon the occurrence of a Change of Control, if the Company does not
so redeem such Exchange Notes or if a Change of Control occurs after August 15,
2002, the Company will be required to make an offer to purchase all of the
outstanding Exchange Notes at a price equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase. See
"Risk Factors--Change of Control" and "Description of the Exchange
Notes--Repurchase at the Option of Holders--Change of Control."
The Exchange Notes will be senior unsecured obligations of the Company and
will rank PARI PASSU in right of payment to all existing and future senior
indebtedness of the Company. The Exchange Notes will be effectively subordinated
to all existing and future senior secured indebtedness of the Company to the
extent of the value of the assets securing such indebtedness and will be
effectively subordinated to all obligations of the subsidiaries of the Company.
As of December 31, 1998, the Exchange Notes would have been effectively
subordinated to $7.8 million of senior secured indebtedness and $6.1 million of
obligations of the Company's subsidiaries. As of December 31, 1998, the
aggregate principal amount of the Company's long-term indebtedness was
approximately $117.8 million, $7.8 million of which was senior secured
indebtedness under the Credit Facility (as defined) (excluding $61.0 million of
availability under the Credit Facility after giving effect to $31.2 million of
outstanding letters of credit and bankers' acceptances). See "Description of the
Exchange Notes." As of December 31, 1998, the aggregate principal amount of the
outstanding liabilities and commitments of the subsidiaries of the Company was
approximately $6.1 million (excluding guarantees in respect of the Credit
Facility). The Company currently does not have any indebtedness which would be
subordinate to the Exchange Notes. See "Description of the Exchange
Notes--General," "Risk Factors--Effective Structural Subordination" and
"--Encumbrances on Assets to Secure Credit Facility."
(CONTINUED ON NEXT PAGE)
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
------------------------
THE EXCHANGE NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE>
(CONTINUED FROM COVER PAGE)
The Old Notes were issued and sold on August 20, 1998 (the "Closing Date")
in a private placement to initial purchasers, which offered the Old Notes for
resale within the United States to "qualified institutional buyers" pursuant to
Rule 144A under the Securities Act and outside the United States in accordance
with Regulation S under the Securities Act (the "Offering"). In general, the Old
Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act. The Exchange Notes are being offered hereby in order to satisfy
certain obligations of the Company contained in the Registration Rights
Agreement. Based on interpretations by the staff (the "Staff") of the Securities
and Exchange Commissions (the "Commission") set forth in no-action letters
issued to third parties, the Company believes that the Exchange Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by any holder thereof (other than any
such holder that is an "affiliate" of the Company within the meaning of Rule 405
promulgated under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, PROVIDED that such
Exchange Notes are acquired in the ordinary course of such holder's business,
such holder has no arrangement with any person to participate in the
distribution of such Exchange Notes and neither such holder nor any such other
person is engaging in or intends to engage in a distribution of such Exchange
Notes. However, the Company has not sought, and does not intend to seek, its own
no-action letter, and there can be no assurance that the Staff of the Commission
would make a similar determination with respect to the Exchange Offer.
Notwithstanding the foregoing, each broker-dealer that receives Exchange Notes
for its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with any resale of Exchange Notes received in exchange for such
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities (other than Old Notes
acquired directly from the Company). A broker-dealer may not participate in the
Exchange Offer with respect to Old Notes acquired other than as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 90 days after the date of this Prospectus, it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution." If any holder of Old Notes is an
affiliate of the Company, is engaged in or intends to engage in or has any
arrangement or understanding with any person to participate in the distribution
of the Exchange Notes to be acquired in the Exchange Offer, such holder (i) can
not rely on the applicable interpretations of the Commission and (ii) must
comply with the registration requirements of the Securities Act in connection
with any resale transaction.
The Old Notes are designated for trading in the Private Offerings, Resales
and Trading through Automated Linkages ("PORTAL") market. There is no
established trading market for the Exchange Notes. The Company currently does
not intend to list the Exchange Notes on any securities exchange or to seek
approval for quotation of the Exchange Notes through any automated quotation
system. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange. The date of acceptance and
exchange of the Old Notes (the "Exchange Date") will be the third business day
following the Expiration Date. Old Notes tendered pursuant to the Exchange Offer
may be withdrawn at any time prior to the Expiration Date. The Company will not
receive any proceeds from the Exchange Offer. The Company will pay all of the
expenses incident to the Exchange Offer. The Exchange Offer will expire 5:00
p.m., New York City Time, on , 1999 (the "Expiration Date"). The
Company does not currently intend to extend the Expiration Date.
i
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the Securities Act with respect to the
Exchange Notes being offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Exchange Notes, reference is made to the Registration Statement. While the
Company believes that the material information has been provided regarding the
contracts and documents described herein, the statements contained in this
Prospectus as to the contents of any such contract or other document are not
necessarily complete, and, where such contract or other document is an exhibit
to the Registration Statement, each such statement is qualified in all respects
by the provisions in such exhibit, to which reference is hereby made. The
Company is not currently subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon
completion of the Exchange Offer, the Company will be subject to the information
requirements of the Exchange Act and, in accordance therewith, will file
periodic reports and other information with the Commission. The Registration
Statement, such reports and other information can be inspected and copied at the
Public Reference Section of the Commission located at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington D.C. 20549 and at regional public
reference facilities maintained by the Commission located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material,
including copies of all or any portion of the Registration Statement, can be
obtained from the Public Reference Section of the Commission at prescribed
rates. Such material may also be accessed electronically by means of the
Commission's home page on the Internet (http://www.sec.gov). In addition,
pursuant to the Indenture governing the Notes, the Company has agreed that,
beginning with the fiscal period ending September 30, 1998 and for so long as
any of the Notes remain outstanding, it will furnish to the holders of the Notes
(the "Holders") within 15 days after it is or would have been required to file
such with the Commission, quarterly and annual financial statements
substantially equivalent to financial statements that would have been included
in reports filed with the Commission, if the Company were subject to Section 13
or 15(d) of the Exchange Act, including, with respect to annual information
only, a report thereon by the Company's certified independent public accountants
as such would be required in such reports to the Commission, and, in each case,
together with a management's discussion and analysis of financial condition and
results of operations which would be so required. Such requirements may be
satisfied through the filing and provision of such documents and reports which
would otherwise be required pursuant to Section 13 in respect of the Company.
UNTIL , 1999 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------
FORWARD-LOOKING STATEMENTS
This Prospectus, including the "Prospectus Summary," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" sections, contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995, which can be identified by
the use of forward-looking terminology, such as "may," "intend," "will,"
"expect," "anticipate," "plan," "the Company believes," "management believes,"
"estimate," "continue," or "position" or the negative thereof or other
variations thereon or comparable terminology. In particular, any statements,
express or implied, concerning future operating results or the ability to
generate revenues, income or cash flow to service the Exchange Notes are
forward-looking statements. Investors in the Exchange Notes offered hereby are
cautioned that reliance on any forward-looking statements involves risks and
uncertainties and that, although the Company believes that the assumptions on
which the forward-looking statements contained herein are based are reasonable,
any of those assumptions could be incorrect, and actual results may differ
materially from any results indicated or suggested thereby. The uncertainties in
this
ii
<PAGE>
regard include, but are not limited to, those identified herein under "Risk
Factors." In light of these and other uncertainties, the inclusion of a
forward-looking statement herein should not be regarded as a representation by
the Company that the Company's plans and objectives will be achieved. All
forward-looking statements are expressly qualified by such cautionary
statements, and the Company expressly disclaims any duty to update such
forward-looking statements.
CERTAIN DEFINED TERMS AND MARKET SHARE DATA
As used in this Prospectus, unless the context otherwise requires, the
"Company" or "Evenflo" refers to Evenflo Company, Inc. and its direct and
indirect subsidiaries and "Spalding" refers to Spalding Holdings Corporation
(formerly known as Evenflo & Spalding Holdings Corporation), and its direct and
indirect subsidiaries. Through September 30, 1998, the Company's fiscal year
ended September 30, and thus all references to "fiscal 1998" refer to the twelve
months ended September 30, 1998 and all references to prior fiscal years refer
to the twelve months ended September 30 of the referenced year. Commencing with
fiscal 1999, the Company's fiscal year end will be December 31. To avoid
confusion, references to the fiscal year ended December 31, 1999 will be
referred to as "calendar 1999." References to "fiscal 1997 pro forma net sales"
give effect to the April 1997 acquisition of Gerry Baby Products as if such
acquisition had occurred as of October 1, 1996.
As used in this Prospectus, unless the context otherwise requires, the
"juvenile products industry" refers to hard goods, as opposed to clothing,
linens and other apparel items, manufactured for infants and juveniles. Although
the Company's previous fiscal years ended on September 30, market share data,
the size of given markets and the Company's relative ranking within a certain
product category have each been prepared on the basis of a calendar year and on
the basis of U.S. dollar sales for the domestic market. The Company has defined
its markets to include "On The Go" products, "Play Time" products, "Bed and
Bath" products and "Feeding Time" products and has presented market share and
other data on the basis of such product categories, although industry sources do
not similarly divide the juvenile products industry. This Prospectus includes
market share information for certain products in each of these categories and
such products do not represent the entirety of the Company's product line in
each such category. In addition, the Company does not compete in every product
line it includes in its definition of On The Go, Play Time, Bed and Bath and
Feeding Time products. With respect to data relating to the juvenile products
industry as a whole and the size of given markets, such data was prepared by the
Juvenile Products Manufacturing Association ("JPMA") for the 1997 calendar year
(the latest year for which such data is available) on the basis of net sales
reported by its members. Unless otherwise indicated, all references to market
share data and the Company's relative ranking within a certain product category
with respect to feeding products are prepared on the basis of U.S. retail sales
data prepared by ACNielsen Corporation ("ACNielsen") reporting for food stores,
drug stores and mass merchandisers for the 1997 calendar year (the latest year
for which such data is available). In all other product categories, such data is
based on U.S. retail sales data prepared by The NPD Group, Inc. ("NPD")
reporting for a sampling of retailers, excluding all specialty retailers, which
have elected to participate in its database for the 1997 calendar year.
BELTRIGHT-Registered Trademark-, CARRY RIGHT-TM-,
CHAMPION-Registered Trademark-, DISCOVERY-TM-, DISCOVERY TRAVEL SYSTEM-TM-,
EVENFLO-Registered Trademark-, EVENFLO-Registered Trademark- TO GROW-TM-,
EVOLUTION-Registered Trademark-, EXERSAUCER-Registered Trademark-, FIRST
CHOICE-TM-, GERRY-Registered Trademark-, HAPPY CAMPER-Registered Trademark-,
HIKE 'N ROLL-Registered Trademark-, HORIZON-TM-, HOUDINI-Registered Trademark-,
MEDALLION-Registered Trademark-, ON MY WAY-Registered Trademark-, ON MY WAY
TRAVEL SYSTEM-Registered Trademark-, PHASES-Registered Trademark-, PLAY
CRIB-TM-, SCOUT-Registered Trademark- (registered trademark in Australia only),
SIDEKICK-TM-, SNUGLI-Registered Trademark-, SUPERSAUCER-TM-, TEACH ME TOYS-TM-,
TRAVEL TANDEM-Registered Trademark-, TRENDSETTER-TM-,
TROOPER-Registered Trademark-, TWO-IN-ONE (registration pending),
ULTARA-Registered Trademark- and ULTARA I-Registered Trademark- are trademarks
of the Company. This Prospectus also includes references to companies other than
the Company, including Babies "R" Us ("Babies "R" Us"), a division of Toys "R"
Us, Inc. ("Toys "R" Us"), the Children's National Medical Center, a non-profit
corporation that operates the National SAFE KIDS CAMPAIGN-Registered Trademark-
(the "SAFE KIDS CAMPAIGN-Registered Trademark-"), Disney Enterprises, Inc.
("Disney"), Huffy Corporation ("Huffy"), Kmart Corporation ("Kmart"), Lamaze
Institute for Higher Education ("Lamaze"), Lordship Industrial Co. ("Lordship"),
OshKosh B'Gosh, Inc. ("OshKosh"), Sears, Roebuck & Co. ("Sears"), Serta, Inc.
("Serta"), Service Merchandise Company, Inc. ("Service Merchandise"), Target (a
division of Dayton Hudson Corporation) ("Target"), Wal-Mart Stores, Inc.
("Wal-Mart") and Warner Bros., a division of Time Warner Entertainment Company
L.P. ("Warner Bros."), and to trademarks of other companies, including DISNEY
BABIES-Registered Trademark-, BABY LOONEY TUNES-Registered Trademark-, OSHKOSH
B'GOSH-Registered Trademark- and SERTA-Registered Trademark-.
iii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND OTHER FINANCIAL DATA,
INCLUDING THE FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. YOU ARE URGED TO READ THIS PROSPECTUS IN ITS
ENTIRETY.
GENERAL
Evenflo is one of the largest manufacturers and marketers of juvenile
products in the United States as well as a leader in several international
markets based on pro forma net sales in 1997. Established in 1920, Evenflo is
one of the oldest and most recognized names in the juvenile products industry,
with a 97% brand awareness for infant feeding products among new mothers in the
United States. The Company believes it is a leading supplier of juvenile
products to such key national retailers as Toys "R" Us, Wal-Mart, Sears, Kmart
and Target.
Evenflo distinguishes itself from its competitors by developing innovative,
high quality products which have sometimes redefined their product categories.
For example, the 1994 introduction of the EXERSAUCER redefined the activity
product category. Evenflo followed this success with the introduction of the ON
MY WAY TRAVEL SYSTEM in 1996, which was, according to NPD, the single largest
selling product in the juvenile products industry by dollar volume in 1997. The
Company further distinguishes itself from its competitors through its co-branded
product offerings with other national brands such as OSHKOSH
B'GOSH-Registered Trademark- and SERTA-Registered Trademark-. For the three
months ended December 31, 1998, the Company had net sales of $72.6 million and
Adjusted EBITDA (as defined) of $1.4 million. For the same period, the Company's
operating activities used $8.3 million of cash, its investing activities used
$2.4 million of cash and financing activities provided $7.8 million of cash. For
fiscal 1998, the Company had net sales of $339.1 million and Adjusted EBITDA of
$20.7 million. For the same period, the Company's operating activities used $6.8
million of cash, its investing activities used $18.1 million of cash and
financing activities provided $30.5 million of cash.
The Company's products fall into four principal categories, representing the
daily activities in which the products are used: (i) "On The Go" products,
including car seats, strollers, travel systems and carriers, (ii) "Play Time"
products, including stationary activity products, swings, gates and doorway
jumpers, (iii) "Bed and Bath" products, including cribs, portable play yards,
monitors, mattresses, bath items and toilet trainers and (iv) "Feeding Time"
products, including reusable and disposable nurser systems, breastfeeding aids,
high chairs, oral development items such as teethers and pacifiers, bibs and
other feeding accessories.
During fiscal 1997 and fiscal 1998, Evenflo invested an aggregate of
approximately $108 million to improve its operations, expand its product lines
and support the growth of its base business. In March 1998, Evenflo completed a
$15.9 million capital expenditure program ($12.8 million of which was invested
in fiscal 1997 and fiscal 1998) ("Project Discovery") to improve productivity
and increase capacity levels by reengineering its Piqua, Ohio assembly lines and
reconfiguring its principal warehouse. In April 1997, Evenflo acquired certain
net assets of Gerry Baby Products ("Gerry") for a purchase price of $68.7
million (the "Gerry Acquisition"). The Gerry Acquisition provided Evenflo with
additional market leading products in categories such as gates, monitors, infant
carriers and baths, which complemented the Company's traditional strengths in
juvenile furniture and infant feeding products. To realize the manufacturing
efficiencies achievable through the Gerry Acquisition, Evenflo invested an
additional $7.4 million to integrate the Gerry operations into the Company's
Piqua, Ohio and Canton, Georgia plants. The Company anticipates that significant
production efficiencies will be realized in calendar 1999 from Project Discovery
and the integration of Gerry. In addition, the Company has implemented a
stock-keeping unit ("SKU") rationalization program (the "SKU Rationalization")
to discontinue a substantial number of SKUs the Company has produced in order to
eliminate certain low margin SKUs and to decrease the manufacturing burden of
producing a significant number of product variations. The SKU Rationalization
generated a $7.9 million non-cash charge in the three months ended December 31,
1998 to eliminate certain items of inventory that will not be carried forward.
The Company believes that this effort will contribute to a reduction in
inventory levels and an improvement in margins.
1
<PAGE>
BUSINESS STRATEGY
The Company's primary business objective is to increase net sales and
improve cash flow by increasing worldwide market share and improving operating
efficiencies. Evenflo seeks to achieve this objective by leveraging its leading
market positions, strong brand recognition and innovative product development
efforts in the pursuit of the following strategies:
ATTAIN LEADING MARKET SHARE IN ADDITIONAL KEY PRODUCT AREAS. In 1997,
Evenflo was the largest domestic manufacturer of juvenile products measured by
total pro forma dollar sales, with products competing in ten of the fifteen
highest dollar volume product categories for juvenile products. Evenflo has the
number one or number two market share (by dollars based on pro forma net sales
in 1997) in many of its key product categories as demonstrated by the following
table.
<TABLE>
<CAPTION>
1997 U.S.
1997 1997 RETAIL MARKET
U.S. MARKET U.S. MARKET SIZE
PRODUCT CATEGORY(1) SHARE RANK (MILLIONS)
- ------------------------------------------------------------- ----------------- ----------------- -------------
<S> <C> <C> <C>
ON THE GO
Infant Car Seats........................................... 45% 1 $ 46.0
Convertible Car Seats...................................... 47% 1 $ 113.9
Stroller Travel Systems.................................... 43% 1 $ 58.0
Soft Infant Carriers....................................... 62% 1 $ 15.2
Frame Infant Carriers...................................... 99% 1 $ 4.0
PLAY TIME
Gates...................................................... 58% 1 $ 50.7
Stationary Activity Products (excluding walkers)........... 51% 1 $ 31.8
BED AND BATH
Baby Baths................................................. 40% 1 $ 15.7
Play Yards................................................. 14% 2 $ 82.2
Baby Monitors.............................................. 23% 2 $ 38.5
FEEDING TIME
Breastfeeding Products..................................... 48% 1 $ 39.9
Reusable Nurser Systems.................................... 26% 2 $ 110.8
High Chairs................................................ 27% 2 $ 55.9
</TABLE>
- ------------------------
Source: NPD and ACNielsen sales data.
(1) The Company has defined its four principal categories to include "On The Go"
products, "Play Time" products, "Bed and Bath" products and "Feeding Time"
products and has presented market share and other data on the basis of such
product categories, although industry sources do not similarly divide the
juvenile products industry. The above chart includes market share
information for selected products in each of these categories and such
products do not represent the entirety of the Company's product line in each
such category. In addition, the Company does not compete in every product
line it includes in its definitions of On The Go, Play Time, Bed and Bath
and Feeding Time.
In 1997, Evenflo held leading market share positions (number one or number
two) in products that generated 78% of its pro forma net sales and 85% of its
pro forma gross profit. Evenflo believes that its strong market shares are
attributable to its dedication to products that appeal to parents' desires for
safe, convenient and fashionable products. The Company intends to focus its
marketing and product development resources on product categories in which the
Company believes it can achieve either a number one or a number two market
share. The Company believes that a number one or number two market share for a
product category is an important factor in achieving a desirable level of shelf
space with its key mass merchant and national accounts.
2
<PAGE>
CONTINUE TO FOCUS ON PRODUCT DEVELOPMENT AND INNOVATION. The Company
believes that it is one of the leading innovators in the juvenile products
industry, with frequent introductions of innovative products and refinements
that improve a product's design and appeal. Throughout its long history, Evenflo
has developed innovative juvenile products, from its introduction of the first
fully integrated baby bottle system in 1935, to its successful 1994 introduction
of the EXERSAUCER stationary activity product, a safer alternative to infant
walkers. Also introduced in 1994 was the ON MY WAY car seat, with its
innovative, ergonomically correct CARRY RIGHT handle. The ON MY WAY car seat was
the best selling infant car seat in U.S. dollar sales in 1997 (Evenflo's ULTARA
I was the best selling convertible car seat in U.S. dollar sales in 1997). In
1995, the Company introduced the PHASES multi-use high chair, which converts
from an infant feeding seat to a booster seat to a play table and chair. In
1997, the PHASES line was the second best selling line of high chairs in U.S.
dollar sales. In 1996, Evenflo achieved incremental growth opportunities in
strollers by designing a stroller that integrates with the ON MY WAY car seat to
form the new ON MY WAY TRAVEL SYSTEM, the best selling travel system in U.S.
dollar sales in 1997. The Company plans to continue its tradition of product
development and innovation by introducing new products to serve each of its four
principal product categories with over twenty new products expected to be
introduced in the next twelve months.
CAPITALIZE ON STRONG BRAND IDENTITY. The Company believes that the strength
and 78 year history of its brand name creates a significant competitive
advantage. Evenflo is one of the most widely recognized names in the juvenile
products industry and benefits from a 97% brand awareness for infant feeding
products among new mothers in the United States. Evenflo believes that its long
history of developing safety-tested, high quality, innovative products is
responsible for the high levels of brand loyalty achieved by its products.
Evenflo's strength in core products such as car seats and high chairs (required
products for most families with infants and juveniles) contributes to customers
recognizing Evenflo as a brand name associated with high quality consumer
products. By capitalizing on its strong brand identity, Evenflo is able to
introduce new lines and related products, such as Evenflo's car seat/stroller
combination, or product innovations, such as the EXERSAUCER.
The Company is implementing measures to improve the appeal of its product
line through an increased emphasis on fashionable patterns and fabrics for
products such as strollers and play yards. In order to further distinguish its
products, the Company has arrangements with other national brands such as Serta,
Disney, Warner Bros. and OshKosh in co-branded product offerings such as new
infant mattresses by SERTA-Registered Trademark-, Play Time products decorated
with BABY LOONEY TUNES-REGISTERED TRADEMARK- characters and Feeding Time
products decorated with DISNEY BABIES-Registered Trademark- characters. As part
of its co-branding strategy, Evenflo recently introduced a line of OSHKOSH
B'GOSH-Registered Trademark- by Evenflo products, including car seats,
strollers, play yards and carriers, which the Company believes is the first
product grouping with an integrated look of this kind in the industry. The
Company intends to pursue additional opportunities to improve the design appeal
of its products through co-branding arrangements in the future.
IMPROVE CUSTOMER SERVICE AND SUPPORT. Evenflo's customer service strategy
is premised on management's belief that Evenflo has two customer audiences: the
retail merchant and the end-user of its products. To improve service to its
retail customers, Evenflo has made significant investments as part of Project
Discovery to improve its distribution and warehousing facilities as well as
increase the flexibility of its manufacturing operations to satisfy the "just in
time" needs of many of its largest customers. In addition, Evenflo is in the
process of implementing a $6.5 million information technology program designed
to enhance the Company's information systems, electronic data interchange
("EDI") capabilities and data processing capabilities pursuant to which the
Company spent $4.8 million in the aggregate in calendar 1998. The Company's
improved EDI system will lower order placement costs and increase the accuracy
and timeliness of order processing while enabling the customer to manage
inventory levels more efficiently. In addition, the enhanced information
capabilities will permit improved analyses of orders, sales, customer service
levels and inventory and more readily permit the identification of trends in
these items. To improve customer service levels to end-users, in the past twelve
months the Company completed construction of a consumer service center in Ohio
which is staffed with 36 service representatives. In addition, Evenflo has
launched its own website (www.evenflo.com) and has formed alliances with Lamaze
3
<PAGE>
and the SAFE KIDS CAMPAIGN-Registered Trademark-, a childrens safety advocacy
group, to provide safety-related educational materials to new parents. Further,
Evenflo has recently launched a marketing and education program targeting
Hispanic child birth educators and expectant parents in order to serve the
Hispanic community, one of the fastest growing demographic groups in the United
States.
INCREASE INTERNATIONAL PENETRATION. The Company intends to be a global
leader in juvenile products and to significantly increase international net
sales and cash flow. The Company believes that higher birth rates, increasing
income levels, the lowering of trade barriers and the standardization of
juvenile product regulations in certain world markets present significant growth
opportunities. The Company's international sales have historically been made
primarily through its Canadian, Mexican and Philippine operations, as well as
through independent distributors selling to customers in 63 foreign countries.
Recently, the Company has begun to develop additional sales and marketing
capabilities in targeted markets. For example, in May 1998, the Company entered
the European market on a direct basis with a line of locally manufactured
products sold through its own sales and marketing group. The Company is
exploring similar opportunities in Southeast Asia.
REALIZE BENEFITS OF PROJECT DISCOVERY AND GERRY INTEGRATION. During fiscal
1997 and fiscal 1998, Evenflo invested an aggregate of approximately $88.9
million in capital expenditures to expand its product line (through the Gerry
Acquisition), improve its operations and integrate the operations of Gerry into
its manufacturing and distribution infrastructure. Evenflo has begun to realize
operating efficiencies from these investments, although the challenges posed by
the integration of Gerry's operations resulted in increased costs during fiscal
1998 for indirect and non-standard labor, product testing, scrap, freight,
inventory obsolescence and delays in product introductions which have more than
offset the cost savings achieved through these investments. The Company believes
that the process of integrating the manufacture and distribution of Gerry
product lines at the Company's facilities has been substantially completed. In
calendar 1999, the Company believes that its investments in improved
manufacturing and distribution facilities and the increased experience of its
workforce in manufacturing and distributing Gerry products will result in
significant production efficiencies. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Effects of Gerry Integration;
Factors Affecting Fiscal 1998 Performance." In an effort to improve customer
service and operating efficiencies, Evenflo is refining a program to discontinue
a substantial number of SKUs it produces in order to eliminate certain low
margin SKUs and to decrease its manufacturing burden.
------------------------
The Company's principal offices are located at Northwoods Business Center
II, 707 Crossroads Court, Vandalia, Ohio 45377, and its telephone number is
(937) 415-3300.
4
<PAGE>
THE TRANSACTIONS
On the Closing Date, the Company (i) issued and sold $110.0 million
aggregate principal amount of Old Notes in the Offering and (ii) entered into a
$100.0 million revolving credit facility led by Merrill Lynch Capital
Corporation, DLJ Capital Funding, Inc. and Bank of America National Trust and
Savings Association (the "Credit Facility") and borrowed $10.0 million under the
Credit Facility (with an additional $42.0 million of the Credit Facility used to
support outstanding letters of credit and bankers' acceptances on the Closing
Date). The Offering and the borrowings under the Credit Facility are
collectively referred to in this Prospectus as the "Financings."
The Company applied the proceeds of the Financings to repay approximately
$110.0 million of indebtedness owed to Spalding as part of the Stock
Acquisitions, as described below, and pay transaction fees and expenses of
approximately $10.0 million. The sources and uses of the funds for the
Financings and the related transactions for the Company were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
MILLIONS)
------------------
<S> <C>
SOURCES OF FUNDS
Old Notes............................................................... $ 110.0
Credit Facility......................................................... 10.0
-------
Total............................................................... $ 120.0
-------
-------
USES OF FUNDS
Repayment of intercompany debt to Spalding.............................. $ 110.0
Transaction fees and expenses........................................... 10.0
-------
Total............................................................... $ 120.0
-------
-------
</TABLE>
Also, on the Closing Date, the Company's then existing stockholders entered
into the following transactions, which (other than the Preferred Stock
Distribution described below) did not have an effect on the Company's financial
statements. KKR 1996 Fund L.P., a Delaware limited partnership affiliated with
Kohlberg Kravis Roberts & Co. L.P. ("KKR"), entered into a stock purchase
agreement (the "KKR Stock Purchase Agreement") pursuant to which KKR 1996 Fund
L.P. acquired from Lisco, Inc., a wholly-owned subsidiary of Spalding ("Lisco"),
(i) 51% (5,100,000 shares) of the outstanding shares of common stock, par value
$1.00 per share, of the Company (the "Common Stock"), for a purchase price of
$25.5 million and (ii) 400,000 shares of variable rate cumulative preferred
stock with a liquidation preference of $100.00 per share (the "Cumulative
Preferred Stock") for a purchase price of $40.0 million, representing 100% of
the outstanding shares of Cumulative Preferred Stock (the "Preferred Stock
Investment"). Lisco had received the 400,000 shares of newly-authorized
Cumulative Preferred Stock as a distribution from the Company prior to the
Closing Date (the "Preferred Stock Distribution"). In addition, on the Closing
Date, Great Star Corporation ("Great Star"), an affiliate of Abarco N.V.
("Abarco"), entered into a stock purchase agreement (the "Great Star Stock
Purchase Agreement") pursuant to which, prior to the acquisition of Common Stock
by KKR 1996 Fund L.P., Great Star acquired 6.6% (660,000 shares) of the
outstanding shares of Common Stock from Lisco for a purchase price of $3.3
million (collectively, the "Stock Acquisitions"). Lisco continues to own 42.4%
(4,240,000 shares) of the Company's outstanding Common Stock after giving effect
to the Transactions. Abarco currently holds approximately 7% of the outstanding
common stock of Spalding. Spalding is a manufacturer and marketer of branded
consumer products in the sporting goods industry. Lisco, a wholly-owned
subsidiary of Spalding, holds, directly and indirectly, the intellectual
property rights of Spalding as well as its investment in the Company. KKR is a
private equity firm specializing in management buyouts. The Financings, the
Preferred Stock Distribution, the Preferred Stock Investment, the Stock
Acquisitions and the repayment of approximately $110.0 million of indebtedness
which was owed to Spalding are collectively referred to in this Prospectus as
the "Transactions."
------------------------
5
<PAGE>
The following charts set forth the ownership of the Company's Common Stock
both prior to and following the Stock Acquisitions.
CHART
6
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer................ The Company is offering to exchange pursuant to the
Exchange Offer up to $110,000,000 aggregate principal
amount of its Exchange Notes for a like aggregate
principal amount of its Old Notes. The terms of the
Exchange Notes are identical in all material respects
(including principal amount, interest rate and maturity)
to the terms of the Old Notes for which they may be
exchanged pursuant to the Exchange Offer, except that
the Exchange Notes will not bear legends restricting
their transfer, and will not contain provisions
providing for an increase in interest rates under the
circumstances described in the Registration Rights
Agreement. See "The Exchange Offer" and "Description of
the Exchange Notes--Registration Rights; Liquidated
Damages."
Minimum Condition................. The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Notes being tendered
for exchange.
Expiration Date; Withdrawal of
Tender.......................... The Exchange Offer will expire at 5:00 p.m., New York
City time, on , 1999, unless the Exchange
Offer is extended, in which case the term "Expiration
Date" means the latest date and time to which the
Exchange Offer is extended. The Company does not
currently intend to extend the Expiration Date. Tenders
may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date. See "The
Exchange Offer--Withdrawal Rights."
Exchange Date..................... The date of acceptance for exchange of the Old Notes
will be the third business day following the Expiration
Date.
Conditions to the Exchange
Offer........................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. The
Company currently expects that each of the conditions
will be satisfied and that no waivers will be necessary.
See "The Exchange Offer--Certain Conditions to the
Exchange Offer." The Company reserves the right to
terminate or amend the Exchange Offer at any time prior
to the Expiration Date upon the occurrence of any such
condition. If the Company waives or amends any of such
conditions, it will, if required by law, extend the
Exchange Offer for a minimum of five business days from
the date that the Company first gives notice, by public
announcement or otherwise, of such waiver or amendment,
if the Exchange Offer would otherwise expire within such
five business day period.
Procedures for Tendering
Old Notes....................... Each Holder wishing to accept the Exchange Offer must
complete, sign and date the Letter of Transmittal, or a
facsimile thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such facsimile,
together with the Old Notes and any other required
documentation to the Exchange Agent at the address set
forth therein. See "The Exchange Offer--
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Procedures for Tendering Old Notes" and "Plan of
Distribution."
Use of Proceeds................... There will be no proceeds to the Company from the
exchange of Notes pursuant to the Exchange Offer.
Federal Income Tax Consequences... The exchange of Notes pursuant to the Exchange Offer
will not be a taxable event for federal income tax
purposes.
Special Procedures for Beneficial
Owners.......................... Any beneficial owner whose Old Notes are registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should
contact such registered holder promptly and instruct
such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to
tender on such beneficial owner's own behalf, such
beneficial owner must, prior to completing and executing
the Letter of Transmittal and delivering the Old Notes,
either make appropriate arrangements to register
ownership of the Old Notes in such beneficial owner's
name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership
may take considerable time. See "The Exchange
Offer--Procedures for Tendering Old Notes."
Guaranteed Delivery Procedures.... Holders of Old Notes who wish to tender their Old Notes
and whose Old Notes are not immediately available or who
cannot deliver their Old Notes, the Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Old Notes according to
the guaranteed delivery procedures set forth in "The
Exchange Offer--Procedures for Tendering Old Notes."
Acceptance of Old Notes and
Delivery of Exchange Notes...... The Company will accept for exchange any and all Old
Notes which are properly tendered in the Exchange Offer
prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Notes issued pursuant to
the Exchange Offer will be delivered promptly following
the Expiration Date. See "The Exchange Offer--Acceptance
of Old Notes for Exchange; Delivery of Exchange Notes."
Effect on Holders of Old Notes.... As a result of the making of, and upon acceptance for
exchange of all validly tendered Old Notes pursuant to
the terms of this Exchange Offer, the Company will have
fulfilled a covenant contained in the Registration
Rights Agreement (the "Registration Rights Agreement")
dated as of August 20, 1998 among the Company and
Donaldson, Lufkin & Jenrette Securities Corporation,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and
BancAmerica Robertson Stephens (the "Initial
Purchasers") and, accordingly, there will be no increase
in the interest rate on the Old Notes under the
circumstances described in the Registration Rights
Agreement, and the holders of the Old Notes will have no
further registration or other rights under the
Registration Rights Agreement. Holders of the Old
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Notes who do not tender their Old Notes in the Exchange
Offer will continue to hold such Old Notes and will be
entitled to all the rights and limitations applicable
thereto under the Indenture dated as of August 20, 1998
between the Company and HSBC Bank USA (formerly known as
Marine Midland Bank) relating to the Old Notes and the
Exchange Notes (the "Indenture"), except for any such
rights under the Registration Rights Agreement that by
their terms terminate or cease to have further
effectiveness as a result of the making of, and the
acceptance for exchange of all validly tendered Old
Notes pursuant to, the Exchange Offer. All untendered
Old Notes will continue to be subject to the
restrictions on transfer provided for in the Old Notes
and in the Indenture. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading
market for untendered Old Notes could be adversely
affected. See "Description of the Exchange
Notes--Registration Rights; Liquidated Damages."
Consequence of Failure
to Exchange..................... Holders of Old Notes who do not exchange their Old Notes
for Exchange Notes pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer
of such Old Notes as set forth in the legend thereon. In
general, the Old Notes may not be offered or sold,
unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state
securities laws. Other than in connection with the
Exchange Offer, the Company does not currently
anticipate that it will register the Old Notes under the
Securities Act.
Exchange Agent.................... HSBC Bank USA is serving as exchange agent (the
"Exchange Agent") in connection with the Exchange Offer.
See "The Exchange Offer--Exchange Agent."
</TABLE>
THE EXCHANGE NOTES
<TABLE>
<S> <C>
Issuer:........................... Evenflo Company, Inc.
Securities Offered:............... $110,000,000 aggregate principal amount of 11 3/4%
Series B Senior Notes due 2006.
Maturity Date:.................... August 15, 2006.
Interest Payment Dates:........... Interest on the Exchange Notes will accrue at the rate
of 11 3/4% per annum, payable semi-annually in cash in
arrears on August 15, and February 15, of each year,
commencing February 15, 1999.
Optional Redemption:.............. At any time or from time to time on or after August 15,
2002, the Company may redeem the Exchange Notes, at the
redemption prices set forth herein, plus accrued and
unpaid interest, if any, to the date of redemption.
Notwithstanding the foregoing, at any time or from time
to time on or prior to August 15, 2001, the Company may
redeem, at its option, up to 35% of the aggregate
principal amount of the Exchange Notes
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
originally issued at a redemption price equal to 111.75%
of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of redemption with the net
cash proceeds of one or more Equity Offerings; PROVIDED
that at least 65% in aggregate principal amount of the
Exchange Notes originally issued remains outstanding
after each such redemption. See "Description of the
Exchange Notes--Optional Redemption."
Ranking:.......................... The Exchange Notes will be senior unsecured obligations
of the Company and will rank PARI PASSU in right of
payment to all existing and future senior indebtedness
of the Company. The Exchange Notes will be effectively
subordinated to all existing and future senior secured
indebtedness of the Company to the extent of the value
of the assets securing such indebtedness and will be
effectively subordinated to all obligations of the
subsidiaries of the Company. As of December 31, 1998,
the Exchange Notes would have been effectively
subordinated to $7.8 million of senior secured
indebtedness and $6.1 million of obligations of the
Company's subsidiaries. As of December 31, 1998, the
aggregate principal amount of long-term indebtedness of
the Company was approximately $117.8 million, $7.8
million of which was senior secured indebtedness under
the Credit Facility (excluding $61.0 million of
availability under the Credit Facility after giving
effect to $31.2 million of outstanding letters of credit
and bankers' acceptances). As of December 31, 1998, the
aggregate principal amount of the outstanding
liabilities and commitments of the subsidiaries of the
Company was approximately $6.1 million (excluding
guarantees in respect of the Credit Facility). The
Company currently does not have any indebtedness which
would be subordinate to the Exchange Notes. See "Risk
Factors--Effective Structural Subordination",
"--Encumbrances on Assets to Secure Credit Facility" and
"Description of the Credit Facility."
Change of Control:................ Upon the occurrence of a Change of Control, the Company
will have the option, at any time on or prior to August
15, 2002, to redeem the Exchange Notes, in whole but not
in part, at a redemption price equal to 100% of the
aggregate principal amount thereof plus the Applicable
Premium, together with accrued and unpaid interest, if
any, to the date of redemption. Upon the occurrence of a
Change of Control, if the Company does not so redeem the
Exchange Notes or if a Change of Control occurs after
August 15, 2002, the Company will be required to make an
offer to purchase all of the outstanding Exchange Notes
at a price equal to 101% of the principal amount thereof
plus accrued and unpaid interest, if any, to the date of
purchase. See "Description of the Exchange Notes--
Repurchase at the Option of Holders--Change of Control."
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Certain Covenants:................ The Indenture (as defined) contains certain covenants
that, among other things, limit the ability of the
Company and its Restricted Subsidiaries (as defined) to:
(i) incur additional indebtedness; (ii) repay certain
other indebtedness; (iii) pay dividends or make certain
other distributions; (iv) repurchase equity interests;
(v) consummate certain asset sales; (vi) enter into
certain transactions with affiliates; (vii) enter into
sale and leaseback transactions; (viii) incur liens;
(ix) merge or consolidate with any other person; (x)
enter into certain guarantees of indebtedness; (xi)
sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of the assets of the
Company or a Restricted Subsidiary; or (xii) enter into
certain agreements which restrict the rights of
subsidiaries to make dividends or sell assets. See "Risk
Factors--Restrictive Covenants" and "Description of the
Exchange Notes--Certain Covenants." In addition, under
certain circumstances, the Company is required to make
an offer to purchase the Exchange Notes at a price equal
to 100% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of purchase,
with the proceeds of certain Asset Sales (as defined).
See "Description of the Exchange Notes--Repurchase at
the Option of Holders--Asset Sales."
Use of Proceeds:.................. There will be no cash proceeds to the Company from the
exchange pursuant to the Exchange Offer.
</TABLE>
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by holders of Old Notes prior to tendering Old Notes in the Exchange
Offer.
11
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth certain summary historical and pro forma
consolidated financial data of the Company. The historical consolidated
operating statement data of the Company for the three fiscal years ended
September 30, 1998 and the three months ended December 31, 1998 have been
derived from, and should be read in conjunction with, the audited Consolidated
Financial Statements of the Company and the related notes thereto included
elsewhere in this Prospectus. The historical financial data for the three months
ended December 31, 1997 have been derived from unaudited consolidated financial
statements of the Company and the related notes thereto included elsewhere in
this Prospectus. The pro forma consolidated financial data have been derived
from the Pro Forma Financial Statement (as defined) and the related notes
thereto included elsewhere in this Prospectus. The pro forma operating statement
data for fiscal 1998 give effect to the Transactions as if such transactions
were consummated on October 1, 1997. See "Selected Consolidated Historical
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Pro Forma Condensed Consolidated Financial
Statement" and the historical Consolidated Financial Statements and the related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------- PRO FORMA --------------------
1996 1997 1998 1998 1997 1998
--------- --------- --------- ----------- --------- ---------
(DOLLAR AMOUNTS IN THOUSANDS)
(AS RESTATED)(11)
<S> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA
Net sales...................................... $237,165 $296,743 $339,077 $339,077 $69,650 $72,552
Cost of sales(1)............................... 178,733 235,925 270,708 270,708 58,070 66,811
--------- --------- --------- ----------- --------- ---------
Gross profit................................... 58,432 60,818 68,369 68,369 11,580 5,741
Selling, general and administrative
expenses(2).................................. 42,801 52,232 63,133 65,699 13,203 16,071
Allocated Spalding expenses(3)................. 2,500 2,900 2,566 0 700 0
Restructuring costs(4)......................... 0 8,371 2,666 2,666 60 0
1994 Management Stock Ownership Plan
expense(5)................................... 2,621 0 0 0 0 0
--------- --------- --------- ----------- --------- ---------
Income (loss) from operations.................. 10,510 (2,685) 4 4 (2,383) (10,330)
Interest expense, net.......................... 4,128 7,243 11,458 16,268 2,494 4,220
Currency (gain) loss, net...................... 204 47 1,076 1,076 77 (251)
--------- --------- --------- ----------- --------- ---------
Earnings (loss) before income taxes and
extraordinary loss........................... 6,178 (9,975) (12,530) (17,340) (4,954) (14,299)
Income taxes (benefit)......................... 3,197 (4,364) (4,171) (6,047) (1,255) (5,413)
--------- --------- --------- ----------- --------- ---------
Earnings (loss) before extraordinary loss...... 2,981 (5,611) (8,359) $(11,293)(6) (3,699) (8,886)
-----------
-----------
Extraordinary (loss) on early extinguishment of
debt, net of tax benefit of $360 and $696.... (560) 0 (1,304) 0 0
--------- --------- --------- --------- ---------
Net earnings (loss)............................ $2,421 $(5,611) $(9,663) $(3,699) $(8,886)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER DATA
EBITDA(7)...................................... $16,808 $14,952 15,463 15,463 1,009 (6,511)
Adjusted EBITDA(7)............................. 20,450 24,710 20,657 20,657 1,358 1,372
Statement of cash flows:
Operating activities......................... 24,287 (942) (6,789) (5,936) (8,345)
Investing activities......................... (9,740) (89,579) (18,118) (4,228) (2,400)
Financing activities......................... (12,244) 87,312 30,513 10,036 7,800
Capital expenditures........................... 9,377 20,927 18,118 4,228 2,400
Cash interest expense paid(8).................. 3,732 6,763 9,824 2,537 942
Depreciation and amortization.................. 6,502 9,313 13,869 3,409 3,568
Adjusted EBITDA to pro forma cash interest expense.............................. 1.3x
Total debt to Adjusted EBITDA................................................... 5.3x
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1998
-------------
<S> <C>
BALANCE SHEET DATA
Cash and cash equivalents.......................................................................... $ 4,197
Working capital(9)................................................................................. 56,626
Total assets....................................................................................... 275,453
Total debt(10)..................................................................................... 117,800
Shareholders' equity............................................................................... 64,386
</TABLE>
- ------------------------------
(1) Included in cost of sales are unusual costs related to (i) Project
Discovery for the manufacturing and warehouse reconfiguration at Piqua,
Ohio, consisting of charges of $2.7 million in fiscal 1997, $0.2 million in
fiscal 1998 and $0.2 million in the three months ended December 31, 1997,
(ii) the integration of Gerry for (a) a $3.1 million inventory write-down
in fiscal 1997 resulting from a decision to discontinue the sale of certain
Gerry products, (b) a charge of $1.3 million in fiscal 1997 as a result of
expensing the increase to fair value of Gerry's inventories as such
inventory was sold, such increase resulting from the application of
purchase accounting in the Gerry Acquisition and (c) a charge of $0.2
million in fiscal 1998, for expenses to relocate the Gerry Colorado
warehouse operations to Evenflo's Ohio and Georgia locations and (iii) the
SKU Rationalization, consisting of a non-cash charge of $7.9 million for an
inventory write-down in the three months ended December 31, 1998.
(2) Included in selling, general and administrative expenses are unusual costs
related to (i) combining Evenflo's feeding and furniture operations which
were previously managed separately, consisting of charges of $1.3 million
in fiscal 1996 and $2.6 million in fiscal 1997, (ii) accounts receivable
charge-offs as a result of the bankruptcy of two of its customers
consisting of a charge of $2.3 million in fiscal 1996, (iii) $4.0 million
in legal fees, accounting fees and other charges related to the
Transactions in fiscal 1998 and (iv) Year 2000 conversion costs consisting
of a charge of $0.8 million in fiscal 1998 and $0.2 million in the three
months ended December 31, 1997.
(3) Represents an allocation from Spalding (based on the Company's net sales as
a percentage of those of Spalding) of administrative expenses for
assistance provided in the areas of accounting, auditing, employee
relations, insurance, legal, planning, tax and treasury and $0.8 million in
allocated out-of-pocket expenses relating to acquisition activity incurred
by Spalding on behalf of the Company in fiscal 1997. After the
Transactions, the Company will incur expenses pursuant to the Transition
Services Agreement (as defined) with Spalding at the cost of providing such
services for the continuation of such services during the period in which
the Company develops its internal capabilities. Such costs will be
reflected as a selling, general and administrative expense. After the
termination of the Transition Services Agreement, the Company expects to
incur $3.0 million of expense on an annual basis to replace such services.
The Transition Services Agreement terminated with respect to the majority
of such services on September 30, 1998.
(4) In fiscal 1997, fiscal 1998 and the three months ended December 31, 1997,
the Company incurred $8.4 million, $2.7 million and $0.1 million,
respectively, of restructuring costs to relocate the Gerry Colorado
administrative and manufacturing operations to Evenflo's Ohio and Georgia
locations. See Note G of the Notes to the Consolidated Financial Statements
appearing elsewhere in this Prospectus.
(5) Represents $2.6 million of compensation expense for fiscal 1996 related to
the increase in the value of common stock of Spalding held by certain
members of Company management through the 1994 Management Stock Ownership
Plan and to the settlement of such plan in the 1996 recapitalization of
Spalding (the "Recapitalization").
(6) Represents pro forma earnings (loss) before extraordinary loss and before
reduction for annual preferred stock dividend requirement of $5.6 million,
at the annual dividend rate of 14% as of September 30, 1998.
(7) "EBITDA", as defined, represents earnings (loss) before interest expense,
income taxes, depreciation, amortization, extraordinary items and
restructuring costs. "Adjusted EBITDA" represents EBITDA before unusual
costs. The Company believes that EBITDA and Adjusted EBITDA provide useful
information regarding the Company's ability to service its debt, and the
Company understands that such information is considered by certain
investors to be an additional basis for evaluating the Company's ability to
pay interest and repay debt. EBITDA and Adjusted EBITDA do not, however,
represent cash flow from operations as defined by generally accepted
accounting principles and should not be considered as a substitute for net
earnings as an indicator of the Company's operating performance or cash
flow as a measure of liquidity. Because EBITDA and Adjusted EBITDA are not
calculated identically by all companies, the presentation herein may not be
comparable to other similarly titled measures of other companies. EBITDA,
as defined, has been presented before giving effect to restructuring costs
for fiscal 1997, fiscal 1998 and the three months ended December 31, 1997.
After giving effect to such restucturing costs, earnings (loss) before
interest expense, income taxes, depreciation, amortization and
extraordinary items for such periods are $6.6 million for fiscal 1997,
$12.8 million for fiscal 1998, $0.9 million for the three months ended
December 31, 1997 and a loss of $6.5 million for the three months ended
December 31, 1998. See the Company's Consolidated Financial Statements, and
related notes thereto, included elsewhere in this Prospectus.
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<PAGE>
The components of EBITDA and Adjusted EBITDA are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------------------- DECEMBER 31,
PRO FORMA --------------------
1996 1997 1998 1998 1997 1998
--------- --------- --------- ----------- --------- ---------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss) before income taxes and extraordinary
loss................................................. $ 6.2 $ (10.0) $ (12.5) $ (17.3) $ (5.0) $ (14.3)
Interest expense...................................... 4.1 7.2 11.5 16.3 2.5 4.2
Depreciation and amortization......................... 6.5 9.3 13.9 13.9 3.4 3.6
Restructuring costs(a)................................ -- 8.4 2.7 2.7 0.1 --
--------- --------- --------- ----------- --------- ---------
EBITDA................................................ 16.8 15.0 15.5 15.5 1.0 (6.5)
Unusual costs(a):
Project Discovery................................. -- 2.7 0.2 0.2 0.2 --
Combining feeding and furniture operations........ 1.3 2.6 -- -- -- --
Gerry integration................................. -- 4.4 0.2 0.2 -- --
Transaction related expenses...................... -- -- 4.0 4.0 -- --
SKU Rationalization............................... -- -- -- -- -- 7.9
Other............................................. 2.3 -- 0.8 0.8 0.2 --
--------- --------- --------- ----------- --------- ---------
Adjusted EBITDA....................................... $ 20.5 $ 24.7 $ 20.7 $ 20.7 $ 1.4 $ 1.4
--------- --------- --------- ----------- --------- ---------
--------- --------- --------- ----------- --------- ---------
- ------------------------------
</TABLE>
(a) For a more complete description of such items, see footnotes (1), (2)
and (3) above.
(8) Cash interest expense is defined as interest expense paid exclusive of
amortization of deferred financing costs.
(9) Working capital excludes cash and cash equivalents.
(10) Historical total debt includes the Old Notes.
(11) Restructuring costs of $1.2 million originally recorded in fiscal 1997 and
reversed in fiscal 1998 have been restated, along with the related income
tax effect of $0.5 million. See Note G of the Notes to the Consolidated
Financial Statements appearing elsewhere in this Prospectus.
14
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY ALL OF THE INFORMATION SET FORTH IN THIS
PROSPECTUS AND, IN PARTICULAR, SHOULD EVALUATE THE FOLLOWING RISKS BEFORE
DECIDING TO TENDER OLD NOTES IN THE EXCHANGE OFFER. THE RISK FACTORS SET FORTH
BELOW ARE GENERALLY APPLICABLE TO THE OLD NOTES AS WELL AS THE EXCHANGE NOTES.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. In general,
Old Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. The Company does not currently intend to register the Old Notes under the
Securities Act. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Old Notes will be adversely affected.
SIGNIFICANT LEVERAGE AND DIVIDEND REQUIREMENTS
The Company incurred substantial indebtedness and preferred stock dividend
requirements in connection with the Transactions. As a result, the Company is
highly leveraged. As of December 31, 1998, the Company had $117.8 million of
consolidated indebtedness and $24.4 million of consolidated common shareholders'
equity. Interest expense for fiscal 1998, after giving pro forma effect to the
Financings, would have been $16.3 million. See "Capitalization" and "Pro Forma
Condensed Consolidated Financial Statements." In addition, the Company issued
$40.0 million of aggregate liquidation preference of Cumulative Preferred Stock
on August 20, 1998. On a pro forma basis after giving effect to the
Transactions, for fiscal 1998, the Company would have had preferred stock
dividends of $5.6 million. As of December 31, 1998, the Exchange Notes would
have been effectively subordinated to $7.8 million of senior secured
indebtedness and $6.1 million of obligations of the Company's subsidiaries. The
Company currently does not have any indebtedness which would be subordinate to
the Exchange Notes. The Company and its subsidiaries may incur additional
indebtedness in the future, subject to certain limitations contained in the
instruments governing its indebtedness, including the Exchange Notes.
Accordingly, the Company will have significant debt service obligations.
The Company's debt service obligations could have important consequences to
the Holders, including the following: (i) a substantial portion of the Company's
cash flow will be dedicated to the payment of principal and interest on its
indebtedness, thereby reducing the funds available to the Company for
operations, product research and development, future business opportunities and
other purposes and increasing the Company's vulnerability to adverse general
economic and industry conditions; (ii) the Company's ability to obtain
additional financing in the future may be limited; (iii) certain of the
Company's borrowings (including, but not limited to, $7.8 million of borrowings
under the Credit Facility as of December 31, 1998) are and will continue to be
at variable rates of interest, which could cause the Company to be vulnerable to
increases in interest rates; (iv) all of the indebtedness incurred in connection
with the Credit Facility will become due prior to the time the principal
payments on the Exchange Notes will become due and the Credit Facility contains
cross-default provisions which, in the event the Company fails to comply with
the obligations contained in the Indenture, could result in acceleration of the
related debt together with indebtedness under the Credit Facility and any other
indebtedness which contains cross-default provisions; and (v) the Company will
be substantially more leveraged than certain of its competitors, which might
place the Company at a competitive disadvantage.
The Company's ability to make scheduled payments of the principal of, or to
pay interest on, or to refinance its indebtedness (including the Exchange
Notes), to make scheduled payments under its leases, to fund planned capital
expenditures and finance acquisitions depends on its future performance, which
to
15
<PAGE>
a certain extent is subject to economic, financial, competitive and other
factors beyond its control. Based upon the current level of operations and
anticipated growth, management believes that future cash flow from operations,
together with available borrowings under the Credit Facility, will be adequate
to meet the Company's anticipated requirements for working capital, capital
expenditures, lease payments, interest payments and scheduled principal
payments. Any future acquisitions, joint ventures or other similar transactions
will likely require additional capital and there can be no assurance that any
such capital will be available to the Company on acceptable terms or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." There can also be no assurance
that the Company's business will continue to generate sufficient cash flow from
operations in the future to service its debt, make necessary capital
expenditures or meet its other cash needs. If unable to do so, the Company may
be required to refinance all or a portion of its existing debt, including the
Exchange Notes, to sell assets or to obtain additional financing. There can be
no assurance that any such refinancing would be possible or that any such sales
of assets or additional financing could be achieved on terms reasonably
favorable to the Company.
RESTRICTIVE COVENANTS
The Credit Facility and the Indenture contain numerous financial and
operating covenants that limit the discretion of the Company's management with
respect to certain business matters. These covenants place significant
restrictions on, among other things, the ability of the Company to incur
additional indebtedness, to create liens or other encumbrances, to make certain
payments and investments, and to sell or otherwise dispose of assets and merge
or consolidate with other entities. See "Description of the Credit Facility" and
"Description of the Exchange Notes--Certain Covenants." The Credit Facility also
requires the Company to meet certain financial ratios and tests. The ability of
the Company to comply with these and other provisions of the Credit Facility and
the Indenture may be affected by changes in economic or business conditions or
other events beyond the Company's control. A failure to comply with the
obligations contained in the Credit Facility or the Indenture could result in an
event of default under either the Credit Facility or the Indenture which could
result in acceleration of the related debt and the acceleration of debt under
other instruments evidencing indebtedness that may contain cross-acceleration or
cross-default provisions. If the indebtedness under the Credit Facility were to
be accelerated, there can be no assurance that the assets of the Company would
be sufficient to repay in full such indebtedness and the other indebtedness of
the Company, including the Exchange Notes.
EFFECTIVE STRUCTURAL SUBORDINATION
The Company derives a substantial portion of its revenue from its
subsidiaries. The Company's major subsidiaries are: Evenflo Mexico, S.A. de
C.V., R.B.D. de Mexico, S.A., Muebles Para Ninos de Baja, S.A. de C.V., Evenflo
(Philippines), Inc., Lisco Feeding, Inc., Lisco Furniture, Inc., Evenflo Canada,
Inc. and Evenflo Europe SARL, all of which are engaged in the juvenile products
industry. Holders of indebtedness of, and trade creditors of, subsidiaries of
the Company would generally be entitled to payment of their claims from the
assets of the affected subsidiaries before such assets were made available for
distribution to the Company. The Indenture permits the incurrence of substantial
indebtedness by the Company's subsidiaries and permits significant investments
by the Company in subsidiaries, including Restricted Subsidiaries. In the event
of a bankruptcy, liquidation or reorganization of a subsidiary, holders of any
of such subsidiary's indebtedness will have a claim to the assets of the
subsidiary that is prior to the Company's interest in those assets. As of
December 31, 1998, the aggregate principal amount of the outstanding liabilities
and commitments of the subsidiaries of the Company was $6.1 million (excluding
guarantees in respect of the Credit Facility). As of December 31, 1998, the
Exchange Notes would not have been senior to any indebtedness of the Company.
16
<PAGE>
ENCUMBRANCES ON ASSETS TO SECURE CREDIT FACILITY
The Exchange Notes will not be secured by any of the Company's assets. The
Exchange Notes will be effectively subordinated to any secured indebtedness of
the Company to the extent of the value of the assets securing such indebtedness,
including indebtedness under the Credit Facility. The Company's obligations
under the Credit Facility are secured by a first priority pledge of and security
interest in (i) the stock of all the existing and subsequently acquired material
direct domestic subsidiaries of the Company other than common stock of
unrestricted subsidiaries and certain subsidiaries created or acquired in
connection with permitted acquisitions, (ii) 65% of the common stock of existing
and subsequently acquired material direct foreign subsidiaries, with certain
exceptions, and (iii) accounts receivable, inventory and certain intangible
assets, including intellectual property, with certain exceptions. In addition,
the Company's obligations under the Credit Facility are guaranteed by each of
its domestic subsidiaries, with certain exceptions, and the Exchange Notes will
not be similarly guaranteed. If the Company becomes insolvent or is liquidated,
or if payment under the Credit Facility is accelerated, the lenders under the
Credit Facility will be entitled to exercise the remedies available to a secured
lender under applicable law. Holders will participate ratably with all holders
of unsecured indebtedness of the Company that is deemed to be of the same class
as the Exchange Notes, and potentially with all other general creditors of the
Company, based upon the respective amounts owed to each holder or creditor, in
the remaining assets of the Company. In any of the foregoing events, there can
be no assurance that there would be sufficient assets to pay amounts due on the
Exchange Notes. As a result, Holders may receive less, ratably, than holders of
secured indebtedness.
As of December 31, 1998, $7.8 million was outstanding under the Credit
Facility (excluding $61.0 million of availability under the Credit Facility,
subject to certain limitations after giving effect to $31.2 million of
outstanding letters of credit and bankers' acceptances). The Indenture permits
the incurrence of substantial secured indebtedness by the Company and its
Restricted Subsidiaries in the future. See "Description of the Credit Facility"
and "Description of the Exchange Notes."
POTENTIAL INABILITY TO MAKE A CHANGE OF CONTROL OFFER
The Indenture provides that, upon the occurrence of a Change of Control
(unless the Change of Control occurs on or prior to August 15, 2002 and the
Company elects to redeem the Exchange Notes), the Company will make an offer to
purchase all of the Exchange Notes at a price in cash equal to 101% of the
aggregate principal amount thereof together with accrued and unpaid interest, if
any, to the date of purchase. The Credit Facility prohibits the Company from
repurchasing any Exchange Notes, except with the proceeds of one or more Equity
Offerings and a portion of excess cash flow and other amounts not applied to
repay borrowings. The Credit Facility also provides that certain change of
control events with respect to the Company will constitute a default thereunder.
A default under the Credit Facility would result in an Event of Default under
the Indenture if the lenders under the Credit Facility accelerate their loans.
Any future credit agreements or other agreements to which the Company becomes a
party may contain similar restrictions and provisions. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing the
Exchange Notes, or if the Company is required to make an Asset Sale Offer (as
defined) pursuant to the terms of the Exchange Notes, the Company could seek the
consent of its lenders to the purchase of the Exchange Notes or could attempt to
refinance the borrowings that contain such prohibition. If the Company does not
obtain such a consent or repay such borrowings, the Company will remain
prohibited from purchasing the Exchange Notes. In such case, the Company's
failure to purchase tendered Exchange Notes would constitute an Event of Default
under the Indenture, which would result in an event of default under the Credit
Facility. The provisions relating to a Change of Control included in the
Indenture may increase the difficulty of a potential acquiror obtaining control
of the Company. See "Description of the Exchange Notes--Repurchase at the Option
of Holders--Change of Control" and "Description of the Credit Facility."
17
<PAGE>
POTENTIAL FOR INCREASED COMPETITION
The juvenile products industry is highly competitive and is characterized by
frequent introductions of new products, often accompanied by advertising and
promotional programs. Evenflo competes with numerous national and international
companies which manufacture and distribute infant and juvenile products, a
number of which have greater financial and other resources at their disposal.
Evenflo's principal competitors include Century Products Company, Inc. (a
subsidiary of Rubbermaid, Inc., which was recently acquired by Newell Co.)
("Century"), Graco Children's Products, Inc. (a subsidiary of Rubbermaid, Inc.)
("Graco"), Cosco Inc. (a subsidiary of Dorel Industries Inc.) ("Cosco"), The
First Years, Inc. ("First Years"), Fisher-Price (a division of Mattel, Inc.)
("Fisher-Price"), Gerber Products Company (a subsidiary of Sandoz Ltd.)
("Gerber"), Johnson & Johnson, Kolcraft Enterprises, Inc. ("Kolcraft"), Playtex
Products, Inc. ("Playtex") and Safety 1st, Inc. ("Safety 1st").
A number of factors affect competition in the juvenile products manufactured
and/or sold by the Company, including quality, price competition from
competitors and price points parameters established by the Company's customers.
Shelf space is a key factor in determining retail sales of juvenile care
products. A competitor that is able to maintain or increase the amount of retail
space allocated to its product may gain a competitive advantage for that
product. The allocation of retail space is influenced by many factors, including
brand name recognition, quality and price of the product, level of service by
the manufacturer and promotions.
In addition, new product introductions are an important factor in the
categories in which the Company's products compete. Other important competitive
factors are brand identification, style, design, packaging and the level of
service provided to customers. The importance of these competitive factors
varies from customer to customer and from product to product. See "--Product
Innovation" and "Business--Competition." There can be no assurance that the
Company will be able to compete successfully against current and future sources
of competition or that the current and future competitive pressures faced by the
Company will not adversely affect its profitability or financial performance.
In the On The Go product category, Graco has recently entered the monitor
and travel system markets, which has resulted in an increase in competition in
these markets.
NO PRIOR OPERATIONS AS AN INDEPENDENT COMPANY
Prior to the Transactions, the Company was operated as a wholly-owned
subsidiary of Spalding. While a wholly-owned subsidiary of Spalding, Spalding
provided the Company with credit support, as well as accounting, auditing,
employee relations, insurance, legal, planning, tax, treasury and other
administrative support services. Spalding has agreed to continue to provide many
of these services for up to six months after the Closing Date, after which time
the Company will be required to provide for such services either internally or
through third parties. The Transition Services Agreement terminated with respect
to the majority of such services on September 30, 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--General" and "Certain Relationships and Related Transactions." There
can be no assurance that the Company will be able to obtain replacement sources
for such services, or if obtained, that the cost of such services will not be
significantly in excess of allocated Spalding expenses for periods prior to the
Transactions or that the provision of such services during the transition period
after the termination of the Transition Services Agreement will be performed
without interruption or delay due to unanticipated circumstances. The historical
financial statements and Pro Forma Financial Statements presented in this
Prospectus may not necessarily be indicative of the results that would have been
attained had the Company operated as an independent entity.
POTENTIAL INABILITY TO IMPLEMENT BUSINESS STRATEGY
The Company is pursuing a strategy of attaining leading market shares in
additional product areas, focusing on production and development, capitalizing
on its strong brand identity, improving customer
18
<PAGE>
service and support, increasing its international penetration and realizing the
benefits of Project Discovery and the Gerry integration. The Company's ability
to achieve its objectives is subject to a variety of factors, many of which are
beyond the Company's control. In recent periods, the Company's financial results
have been adversely affected by inventory reductions by Toys "R" Us, declines in
international sales due to, among other things, economic disruptions in certain
Asian economies, the effects of product recalls and corrective actions, delays
in product introductions, delays in the shipment of products to certain
customers, product introductions by competitors and a change in the mix of sales
as the Company expedites the sale of certain slower moving inventory in
anticipation of the SKU reduction program. In addition, while the Company has
begun to realize operating efficiencies from its investments in integrating
Gerry and from Project Discovery, the challenges posed by the integration of
Gerry's operations have resulted in increased costs during fiscal 1998 for
indirect and non-standard labor, product testing, scrap, freight, inventory
obsolescence and delays in product introductions which have more than offset the
cost savings achieved from these investments. While the process of integrating
the manufacture and distribution of Gerry product lines at the Company's
facilities was substantially completed by the end of fiscal 1998, there can be
no assurance that the anticipated savings will be achieved or that any such
savings will not be offset by the factors discussed above or other factors, some
of which may be beyond the control of the Company. There can be no assurance
that the Company will be successful in implementing its business strategy or
that the implementation of this strategy will improve operating results. See
"--Risks Associated with International Markets; Dependence on Foreign
Manufacturing," "--Product Regulation; Product Recalls," "--Product Liability
Litigation" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Effects of Gerry Integration; Factors Affecting Fiscal
1998 Performance."
DEPENDENCE ON CERTAIN CUSTOMERS
IMPORTANCE OF MAJOR CUSTOMERS
Certain customers are material to the business and operations of the
Company. The five largest customers of Evenflo represented approximately 70% of
Evenflo's net sales for the three months ended December 31, 1998. The five
largest customers of Evenflo represented approximately 65% of Evenflo's net
sales for fiscal 1998 with Toys "R" Us, Wal-Mart, Target and Sears representing
25%, 17%, 8% and 8%, respectively, of net sales for such period. For fiscal
1997, the five largest customers of Evenflo represented approximately 59% of
Evenflo's pro forma net sales with Toys "R" Us, Wal-Mart and Sears representing
20%, 17% and 8%, respectively, of pro forma net sales for such period. In
addition, Service Merchandise (one of the ten largest customers of the Company)
recently announced its decision to discontinue the sale of juvenile products. In
fiscal 1998, the Company's net sales to Service Merchandise totaled
approximately $5 million.
EFFECTS OF TOYS "R" US INVENTORY REDUCTION
Toys "R" Us announced in April 1998 that it would change its buying patterns
to reduce inventory and spread purchasing more evenly throughout the year. The
Company, as a result of this action, recorded lower net sales to Toys "R" Us in
the third quarter of fiscal 1998 than in the comparable period of the prior
year, although the Company's overall sales to Toys "R" Us in fiscal 1998
exceeded fiscal 1997 sales. In addition, in September 1998, Toys "R" Us
announced additional measures to restructure its business, including closing 59
U.S. and international stores and further reducing inventory levels. In its
fourth quarter of fiscal 1998, Toys "R" Us reported that it decreased inventory
levels by $200 million over the same period in 1997. As Toys "R" Us achieves its
year-end inventory objectives, further sales reductions could have an impact on
the Company's net sales. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Integration of Gerry; Factors Affecting
Fiscal 1998."
19
<PAGE>
EFFECTS ON NO LONG-TERM AGREEMENTS WITH CUSTOMERS
The Company does not have long-term sales agreements or other contractual
assurances as to future sales to its major customers. Decreased levels or the
deferral of orders by the Company's major customers in the past have had, and in
the future may have, a material adverse effect on the Company's results of
operations. In addition, due to the allocation of retail shelf space to
suppliers' products far in advance of the placement and shipment of orders for
such products, the Company's net sales are reliant to a certain extent on the
ability of its national accounts to successfully execute on such plans, and any
deferral of orders may not allow sufficient notice to obtain satisfactory
alternative arrangements for the sale of such products. Although management does
not currently expect to lose any of these customers, the loss of one or more
such customers would have a material adverse effect on the business and
operations of the Company.
RISKS OF INDUSTRY CONSOLIDATION
In addition, continued consolidation within the retail industry has resulted
in an increasingly concentrated retail base. To the extent such consolidation
continues to occur, the Company's net sales and profitability may be
increasingly sensitive to a deterioration in the financial condition of or other
adverse developments in its relationships with one or more customers.
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS; DEPENDENCE ON FOREIGN MANUFACTURING
DECLINES IN INTERNATIONAL SALES
A significant portion of the Company's sales is derived from international
markets. During fiscal 1998, approximately 13% of the Company's net sales were
generated outside of the United States, primarily in Mexico and Canada. In
recent periods, the Company has experienced declines in net sales in its
international markets and there can be no assurance that such trend will not
continue in future periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
POTENTIAL INABILITY TO INCREASE SALES TO INTERNATIONAL MARKETS
Increasing its sales in international markets, particularly Europe, Latin
America and Asia, is a component of the Company's business strategy. As a
result, economic conditions in these markets could have an increasingly
significant effect on the Company's operating results. Certain Asian economies
have experienced recent economic disruptions, including significant currency
devaluation. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
RISKS INVOLVED IN FOREIGN MANUFACTURING
For fiscal 1998, sales of products which were manufactured by suppliers in
foreign countries, primarily in China, Thailand, Taiwan, Hong Kong and other
countries in Southeast Asia, represented approximately 27% of the Company's net
sales, with one supplier, Lordship, manufacturing products representing
approximately 14% of Evenflo's net sales for fiscal 1998. For the three months
ended December 31, 1998, sales of products which were manufactured in foreign
countries represented approximately 41% of the Company's net sales for that
period. Although the Company believes that products manufactured by its foreign
suppliers could be replaced over time, any interruption in the supply of such
goods or increase in price or decline in quality could have a material adverse
effect on its results of operations. In addition, the Company owns two
manufacturing facilities in Mexico. The facility in Mexico City produces goods
for sale in Mexico and elsewhere in Latin America and the facility in Tijuana
produces goods for sale in the United States and Canada. Products produced by
the Company's facilities in Mexico generated 6.4% of the Company's fiscal 1998
net sales and 7.3% of the Company's net sales for the three months ended
December 31, 1998.
20
<PAGE>
The Company's international sales, operations and arrangements with foreign
manufacturers are also subject to other risks, including different legal and
regulatory requirements in local jurisdictions; export duties or import quotas;
domestic and foreign customs and tariffs or other trade barriers; potential
difficulties in staffing and labor disputes; managing and obtaining support and
distribution for local operations; increased costs of transportation or
shipping; credit risk or financial condition of local customers and
distributors; potential difficulties in protecting intellectual property; risk
of nationalization of private enterprises; potential imposition of restrictions
on investments; potentially adverse tax consequences, including imposition or
increase of withholding and other taxes on remittances and other payments by
subsidiaries; foreign exchange restrictions; and local political and social
conditions, including the possibility of hyperinflationary conditions and
political instability in certain countries. There can be no assurance that the
foregoing factors will not have a material adverse effect on the Company's
international operations or sales or arrangements with foreign manufacturers and
therefore upon its financial condition and results of operations.
The Company's continued growth is dependent in part upon its ability to
expand its operations into international markets where it currently has little
presence. The Company may experience difficulty entering new international
markets due to greater regulatory barriers than in the United States, the
necessity of adapting to new regulatory systems and problems related to entering
new markets with different cultural bases and political systems. As the Company
continues to expand its international operations, these and other risks
associated with international operations are likely to increase. In addition, as
the Company enters new geographic markets, it may encounter significant
competition from the primary participants in such markets, some of which may
have substantially greater resources than the Company.
CURRENCY EXCHANGE RATE FLUCTUATIONS
Approximately 18% of the Company's international net sales in fiscal 1998
and 15% in the three months ended December 31, 1998 were made in U.S. dollars,
with the balance realized in other currencies. Currency exchange rate
fluctuations may significantly affect the Company's foreign sales and earnings.
Increased strength of the U.S. dollar will increase the effective price of the
Company's products sold in U.S. dollars and therefore may materially adversely
affect net sales. The Company's costs are primarily denominated in U.S. dollars,
although the Company sources product from China, Thailand, Taiwan, Hong Kong and
other countries in Southeast Asia. In fiscal 1998, approximately 10% of the
Company's net sales were generated in non-U.S. currencies. With respect to the
sales generated in foreign currencies, the increased strength of the U.S. dollar
could decrease the Company's reported revenues and margins in respect of such
sales to the extent the Company is unable or unwilling to increase local
currency prices. The Company has had and will continue to have a less favorable
sales mix due to the strength of the U.S. dollar versus certain international
currencies and a less favorable margin due to increased costs without a
corresponding increase in selling price. The exchange rate fluctuations during
fiscal 1998 impacted the Company's profitability by $1.9 million. In fiscal
1998, the Company's costs of goods sold increased due to currency changes by
$0.8 million, and the reported currency loss was $1.1 million. For the three
months ended December 31, 1998, costs of goods sold were not affected by
currency changes, and the reported currency gain was $0.3 million.
PRODUCT REGULATION; PRODUCT RECALLS
The Company's products are subject to the provisions of the Federal Consumer
Product Safety Act and the Federal Hazardous Substances Act, the Highway Safety
Act of 1970 (collectively, the "Safety Acts") and the regulations promulgated
thereunder. The Safety Acts authorize the Consumer Product Safety Commission
("CPSC") to protect the public from products which present a substantial risk of
injury. The Highway Safety Act of 1970 authorizes the National Highway Traffic
Safety Administration (the "NHTSA") to protect the public from risks of injury
from motor vehicles and motor vehicle equipment.
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The CPSC, the NHTSA and the Federal Trade Commission (the "FTC") can initiate
litigation requesting that a manufacturer be required to remedy, repurchase or
recall articles which fail to comply with federal regulations, which contain a
safety related defect or which represent a substantial risk of injury to users.
They may also impose fines or penalties on the manufacturer. Similar laws exist
in some states and in other countries in which the Company markets its products.
Any recall of its products could have a material adverse effect on the Company.
In the past five years, Evenflo had two product recalls and took twelve
corrective actions with respect to recalled and other products. Corrective
actions are steps taken by the Company short of a recall which involve
delivering instructions or repair kits to consumers in order to assure proper
usage and performance of a product. Within the last eighteen months, the Company
executed two recalls and took five corrective actions, including: the offer of a
repair kit for the ON MY WAY car seat in March 1998 affecting approximately
800,000 units due to the potential for slippage of the handle lock when used as
a carrier; and the provision of a retrofit plastic reinforcing sleeve for the
HAPPY CAMPER play yard in June 1997 affecting approximately 1.2 million units to
encourage full rotation of the locking hinge and to prevent breaking or cracking
of the plastic hinges. These two corrective actions accounted for 59% of the
Company's expenditures for recalls and corrective actions in fiscal 1997 and
fiscal 1998. In fiscal 1997 and fiscal 1998, the aggregate cost of recalls and
other corrective actions was $4.4 million and $5.2 million, respectively
(including costs related to the May 1998 recall of the TWO-IN-ONE booster car
seat affecting approximately 32,000 units due to cracking and breakage during
testing). In addition, the Company has reannounced its December 1996 corrective
action for its HOUDINI play yards affecting approximately 200,000 units, as part
of an industrywide corrective action for play yards with protruding rivets. The
Company anticipates that this recall will cost approximately $0.1 million in the
aggregate. The Company believes it is indemnified by Spalding for the costs of
the recall of the HOUDINI play yards under the terms of the Indemnification
Agreement (as defined below) entered into on the Closing Date. See
"Transactions." Expenditures during the three months ended December 31, 1998
were less than $0.1 million. The Company expects that recalls had an effect on
fiscal 1998 net sales and may continue to have such an effect in calendar 1999.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." In addition to product recalls and corrective actions required by
the CPSC or the NHTSA, Consumers Union, the publisher of CONSUMER REPORTS, and
other product evaluation groups conduct product safety testing and publish the
results of such evaluations. The results of these reports are widely
disseminated and may spur investigations by governmental agencies or result in
negative publicity.
Child safety is a principal factor in the purchase decision for car seats
and other juvenile products, as consumers in the highly competitive juvenile
products industry are particularly sensitive to safety and quality issues. The
Company's reputation for safety and quality is essential to maintain its market
share in all of its product categories. Although the Company does not believe
that its recent recalls and corrective actions have adversely affected its
reputation, recalls and/or corrective actions taken in connection with the
Company's products as well as negative reports by Consumer Union or other
adverse media coverage may adversely affect the reputation of the Company as a
manufacturer of high-quality, safe juvenile products and could have a material
adverse effect on the Company's results of operations.
Pursuant to the Indemnification Agreement entered into on the Closing Date,
Spalding indemnified the Company for the expense of product recalls and
corrective actions relating to products manufactured by the Company prior to the
Closing Date.
In January 1999, the Company purchased an insurance policy to cover the
costs of recalls and corrective actions. The policy has a premium for calendar
1999 of $0.5 million and a deductible of $0.5 million per occurrence and
coverage of up to $10.0 million per year.
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PRODUCT LIABILITY LITIGATION
Due to the nature of its products, the Company has been engaged in, and will
continue to be engaged in, the defense of product liability claims related to
its products, particularly with respect to juvenile car seats and play yards.
Such claims have caused the Company to incur material litigation and insurance
expenses. From April 1, 1988 to December 31, 1998, approximately 293 product
liability claims have been brought against the Company, 201 of which related to
juvenile car seats.
Since 1988, out-of-pocket indemnities and expenses (exclusive of payments by
insurers and insurance premiums) for car seat claims (including damage awards,
settlements, attorneys' fees and other related expenses) have averaged
approximately $1.6 million per year, when allocated to the policy periods when
the related injuries occurred, while the total out-of-pocket indemnities and
expenses (exclusive of payments by insurers and insurance premiums) for all
product liability claims have averaged approximately $2.0 million per year, on a
similar basis. From fiscal 1993 through fiscal 1998, the Company has incurred
average costs for out-of-pocket indemnities and expenses (exclusive of payments
by insurers and insurance premiums) for all product liability claims of
approximately $2.7 million per year when allocated to the policy periods when
the related injuries occurred. The increase in average costs for product
liability claims from $2.0 million per year for the ten-year average to $2.7
million per year for the five-year average is due to an increase in Spalding's
insurance policy deductibles. Prior to the Transactions, the Company's insurance
was purchased on a consolidated basis by Spalding. Spalding increased the size
of its insurance deductibles due to industry wide increases in insurance
premiums. As described below, Spalding purchased separate additional indemnity
insurance in 1995 to reduce the size of its insurance deductibles. The Company
anticipates that it will continue to incur average product liability claims of
levels similar to the five-year average for the next several years.
Based on its experience with product liability claims, the amount of
reserves established for product liability claims against it and the levels of
insurance that it maintains, the Company believes that there are no product
liability claims pending which, if adversely determined, would have a material
adverse effect on its consolidated financial position, results of operations or
cash flows. However, due to the inherent uncertainty of litigation, it is
possible that the Company may be subject to adverse judgments which, singly or
in the aggregate, could be substantial in amount and may not be covered by
insurance or reserves. In addition, no assurance can be given that in the future
a claim will not be brought against the Company which would have a material
adverse effect on the Company. In addition, in any product liability claim, a
judgment against the Company may include the imposition of punitive damages, the
award of which, pursuant to certain state laws, may not be covered by insurance.
In addition, because there may be a lapse of time between a product recall or
corrective action and the filing of lawsuits against the Company relating to
alleged defects, the Company may experience, due to the occurrence of a number
of recent recalls and corrective actions, an increase in the number of product
liability claims in future periods. See "Business--Legal Proceedings."
Prior to the Transactions, the Company's insurance was purchased on a
consolidated basis by Spalding. In fiscal 1998, the cost of such insurance
allocated to the Company was $1.3 million. Spalding product liability insurance
coverage has been established on policy years beginning April 1 of each year.
Spalding's primary insurance per occurrence deductible for 1998 was $2.0 million
and the corresponding policy aggregate deductible was $4.5 million. Spalding
purchased separate additional indemnity insurance to effectively reduce the per
occurrence deductible from $2.0 million to $0.5 million and to reduce the policy
year aggregate deductible from $4.5 million to $3.0 million. Spalding's lead
umbrella insurance carrier provided for $5.0 million of insurance coverage above
the deductible amount of $2.0 million per occurrence and $4.5 million in the
aggregate. Commencing in 1992, Spalding purchased a total of $75 million in
umbrella coverage for each policy year. The Company believes that, for periods
prior to the Transactions, its reserve levels for out-of-pocket indemnities and
expenses for product liability claims are adequate. The Company is currently in
the process of implementing an insurance program with substantially the same
coverage and deductibles for slightly increased premiums.
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The Gerry Acquisition did not impact insurance coverage or materially impact
product liability premium costs. The Company is indemnified by Huffy pursuant to
the Gerry Acquisition purchase agreement for any liability arising out of claims
with respect to products shipped prior to the date of the Gerry Acquisition.
There have not been any known significant claims with respect to Gerry products
since the date of the Gerry Acquisition.
NEED FOR PRODUCT INNOVATION TO REMAIN COMPETITIVE
The Company depends, in part, on the continued introduction of products
which represent an improvement over existing products offered by the Company or
other manufacturers. The Company believes that its future growth and success
will depend significantly on its continued ability to introduce innovative
juvenile products, and there can be no assurance of the Company's ability to do
so. Innovative designs are often not successful, and successful product designs
are frequently displaced by the introduction of other product designs by
competitors which shift market preferences in their favor. The Company's
operating results may fluctuate as a result of the amount, timing and market
acceptance of new product introductions by the Company or its competition.
FLUCTUATIONS IN COST AND AVAILABILITY OF CERTAIN MATERIALS USED IN THE COMPANY'S
PRODUCTS
Plastic resins, natural and synthetic rubbers, wood, textiles and paper
products are significant components of the Company's products and packaging. A
shortage of any of these components or significant increases in price could
adversely affect the Company's ability to maintain its profit margin in the
event price competition did not permit the Company to increase prices. Plastic
resins prices may fluctuate as a result of changes in natural gas and crude oil
prices and the capacity, supply and demand for resins and the petrochemical
intermediates from which they are produced.
IMPACT OF ENVIRONMENTAL REGULATIONS
The Company's operations are subject to federal, state, local and foreign
environmental laws and regulations that impose limitations on the discharge of
pollutants into the environment and establish standards for the handling,
generation, emission, release, discharge, treatment, storage and disposal of
certain materials, substances and wastes and the remediation of environmental
contamination (collectively, "Environmental Laws"). Risks of significant costs
and liabilities are inherent in the Company's operations and facilities as they
are with other companies engaged in like businesses. The Company believes that
its operations are in substantial compliance with the terms of all applicable
Environmental Laws as currently interpreted.
While historically the costs of environmental compliance have not had a
material adverse effect on the consolidated financial condition, results of
operations or cash flows of the Company, the Company cannot predict with
certainty its future costs of environmental compliance because of continually
changing compliance standards and technology. Compliance with such requirements
may make it necessary, at costs which may be substantial, to retrofit existing
facilities with additional pollution-control equipment and to undertake new
measures in connection with the storage, transportation, treatment and disposal
of by-products and wastes.
The Company has been named as a potentially responsible party ("PRP") with
respect to the generation and disposal of hazardous substances at the Miami
County Incinerator Site, in Miami County, Ohio (the "Miami Site") and the
Mid-State Disposal Landfill (the "Mid-State Site") in Marathon County, Wisconsin
under the federal "Superfund" statute. Pursuant to various federal, state and
local laws and regulations, PRPs can become liable for the costs of removal
and/or remediation of those hazardous substances disposed on, or in or about
such properties. The liability imposed by the Superfund statute and analogous
state statutes generally is joint and several and imposed without regard to
whether the generator knew of, or was responsible for, the presence of such
hazardous substances. The Company estimates its
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liability with respect to the Miami Site is approximately $86,000 in the
aggregate, $54,000 of which was paid through December 31, 1998, and with respect
to the Mid-State Site is $105,000 in the aggregate, all of which has been paid,
based on its share of Environmental Protection Agency estimates of cleanup
costs, settlement negotiations and discussions with contractors. However, there
can be no assurance that such liabilities will not exceed this estimate. Prior
to the consummation of the Transactions, Spalding and its subsidiaries were
identified as PRPs at 14 sites, including the Miami Site and the Mid-State Site.
Pursuant to the KKR Stock Purchase Agreement, the Company has been indemnified
by Spalding for environmental liabilities unrelated to the business of the
Company which might be incurred regarding these sites. The Company does not
anticipate that any material expenditures will be required regarding these
sites.
CONTROL BY KKR
Following the Transactions, 51% (5,100,000 shares) of the outstanding shares
of Common Stock is owned by KKR 1996 Fund L.P. and 42.4% (4,240,000 shares) is
owned by Spalding. Approximately 9% of the outstanding shares of Spalding are
currently owned by KKR 1996 Fund L.P. KKR 1996 Fund L.P. is a Delaware limited
partnership whose sole general partner is KKR Associates 1996 L.P. KKR
Associates 1996 L.P. is a Delaware limited partnership whose sole general
partner is KKR 1996 GP LLC. KKR 1996 GP LLC is a Delaware limited liability
company whose members are also the members of the limited liability company that
is the general partner of KKR. Strata Associates L.P. ("Strata"), of which KKR
Associates (Strata), L.P. ("KKR Associates (Strata)") is the general partner,
owns approximately 79% of the outstanding shares of Spalding. The general
partner of KKR Associates (Strata) is Strata L.L.C., a limited liability company
organized under Delaware law. The members of Strata L.L.C. are also the members
of the limited liability company which is the general partner of KKR.
Accordingly, affiliates of KKR control the Company and have the power to elect
all of its directors, appoint new management and approve any action requiring
the approval of the Company's shareholders, including adopting amendments to the
Company's certificate of incorporation and approving mergers or sales of
substantially all of the Company's assets. There can be no assurance that the
interests of the members of KKR and its affiliates will not conflict with the
interests of Holders. See "Management," "Ownership of Common Stock" and "Certain
Relationships and Related Transactions."
DEPENDENCE ON MANAGEMENT; NEED FOR ADDITIONAL PERSONNEL
The Company is currently dependent upon the ability and experience of
certain members of its senior management team and administrative services
provided by Spalding. In particular, the Company believes it has benefited from
the services of its Chief Executive Officer, Richard W. Frank. As part of the
Company's transition to stand-alone capabilities, the Company is currently in
the process of an executive search for the position of Treasurer. Competition
for qualified personnel is intense, and the process of hiring such qualified
personnel can be lengthy. The loss of the services of key personnel or the
inability to attract and retain additional qualified personnel could have an
adverse effect on the Company's operations. Pursuant to the Transition Services
Agreement, which expired with respect to the majority of such services on
September 30, 1998, Spalding provided certain administrative services to the
Company following the Stock Acquisitions. There can be no assurance, however,
that after the termination of the Transition Services Agreement that the Company
will be able to replace Spalding's services under such agreement for the fees
charged by Spalding, that the functions assumed by the Company will not cost
significantly in excess of allocated Spalding expenses for periods prior to the
Transactions or that the provision of such services during the transition period
after the Transactions will be performed without interruption or delay due to
unanticipated circumstances. The Company does not maintain key man life
insurance polices on any of its executives nor has it entered into employment
agreements with any of its executives. See "Management."
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RISKS ASSOCIATED WITH LABOR RELATIONS
As of December 31, 1998, approximately 29% of the Company's employees were
covered by collective bargaining agreements. While the Company believes that its
relations with its employees are good, a prolonged labor dispute could have a
material adverse effect on the Company.
FRAUDULENT TRANSFER CONSIDERATIONS
Under applicable provisions of the U.S. Bankruptcy Code or comparable
provisions of state fraudulent transfer or conveyance law, if the Company, at
the time it issues the Exchange Notes, (a) incurs such indebtedness with the
intent to hinder, delay or defraud creditors, or (b)(i) receives less than
reasonably equivalent value or fair consideration, and (ii)(A) is insolvent at
the time of such incurrence, (B) is rendered insolvent by reason of such
incurrence (and the application of the proceeds thereof), (C) is engaged or was
about to engage in a business or transaction for which the assets remaining with
the Company constituted unreasonably small capital to carry on its business, or
(D) intends to incur, or believes that it would incur, debts beyond its ability
to pay such debts as they mature, then, in each such case, a court of competent
jurisdiction could avoid, in whole or in part, the Exchange Notes or, in the
alternative, subordinate the Exchange Notes to existing and future indebtedness
of the Company. The measure of insolvency for purposes of the foregoing would
likely vary depending upon the law applied in such case. Generally, however, the
Company would be considered insolvent if the sum of its debts, including
contingent liabilities, was greater than all of its assets at a fair valuation,
or if the present fair saleable value of its assets was less than the amount
that would be required to pay the probable liabilities on its existing debts,
including contingent liabilities, as such debts become absolute and matured.
Management of the Company believes that, for purposes of the U.S. Bankruptcy
Code and state fraudulent transfer or conveyance laws, the Exchange Notes are
being issued without the intent to hinder delay or defraud creditors and for
proper purposes and in good faith, and that the Company will receive reasonably
equivalent value or fair consideration therefor. Based on projections prepared
by the Company of expected cash flows and estimates of the fair value of the
Company's assets and liabilities, management believes that after the issuance of
the Exchange Notes and the application of the net proceeds therefrom, the
Company will be solvent, will have sufficient capital for carrying on its
business and will be able to pay its debts as they mature. However, there can be
no assurance that a court passing on such issues would agree with the
determination of the Company's management.
ABSENCE OF A PUBLIC MARKET
The Exchange Notes are being offered to the holders of the Old Notes. The
Old Notes were offered and sold in August 1998 to a small number of
institutional investors and are eligible for trading in the PORTAL Market.
The Company does not intend to apply for a listing of the Exchange Notes on
a securities exchange. There is currently no established market for the Exchange
Notes and there can be no assurance as to the liquidity of markets that may
develop for the Exchange Notes, the ability of the holders of the Exchange Notes
to sell their Exchange Notes or the price at which such holders would be able to
sell their Exchange Notes. If such markets were to exist, the Exchange Notes
could trade at prices that may be lower than the initial market values thereof
depending on many factors, including prevailing interest rates and the markets
for similar securities. Although there is currently no market for the Exchange
Notes, the Initial Purchasers have advised the Company that they currently
intend to make a market in the Exchange Notes. However, the Initial Purchasers
are not obligated to do so, and any market making with respect to the Exchange
Notes may be discontinued at any time without notice.
The liquidity of, and trading market for, the Exchange Notes also may be
adversely affected by general declines in the market for similar securities.
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TRANSACTIONS
GENERAL
KKR 1996 Fund L.P. entered into the KKR Stock Purchase Agreement with Lisco
on the Closing Date pursuant to which KKR 1996 Fund L.P. acquired from Lisco (i)
5,100,000 shares of Common Stock for a purchase price of $25.5 million,
representing 51% of the outstanding shares of Common Stock, and (ii) 400,000
shares of Cumulative Preferred Stock for a purchase price of $40.0 million,
representing 100% of the outstanding shares of Cumulative Preferred Stock,
subsequent to the Preferred Stock Distribution. In addition, Great Star entered
into the Great Star Stock Purchase Agreement on the Closing Date pursuant to
which, prior to the acquisiton of Common Stock by KKR 1996 Fund L.P., Great Star
acquired from Lisco 660,000 shares of Common Stock for a purchase price of $3.3
million, representing 6.6% of the outstanding shares of Common Stock.
Concurrently with the Stock Acquisitions and the Preferred Stock Investment, the
Company (i) issued and sold $110.0 million aggregate principal amount of Old
Notes in the Offering and (ii) entered into the Credit Facility and borrowed
$10.0 million under the Credit Facility (with an additional $42.0 million of the
Credit Facility used to support outstanding letters of credit and bankers'
acceptances on the Closing Date).
The Company applied the proceeds of the Financings to repay approximately
$110.0 million of indebtedness owed to Spalding as part of the Stock
Acquisitions, and to pay transaction fees and expenses of approximately $10.0
million. As of December 31, 1998, $7.8 million was outstanding under the Credit
Facility (excluding $61.0 million of availability under the Credit Facility
after giving effect to $31.2 million of outstanding letters of credit and
bankers' acceptances).
TRANSITION SERVICES AGREEMENT
On the Closing Date, Spalding and the Company entered into a Transition
Services Agreement (the "Transition Services Agreement"). Pursuant to the
Transition Services Agreement, for a period of up to six months Spalding will
provide certain financial, accounting and other corporate related services to
the Company for the costs associated with providing such services. The Company
also reimburses Spalding for its out-of-pocket expenses incurred in rendering
such services. The Transition Services Agreement terminated with respect to the
majority of such services on September 30, 1998.
STOCKHOLDERS AGREEMENTS
On the Closing Date, the Company, KKR 1996 Fund L.P. and Lisco entered into
a stockholders agreement (the "KKR Stockholders Agreement"). Pursuant to the KKR
Stockholders Agreement, Lisco has the right to participate pro rata in certain
sales of Common Stock by KKR 1996 Fund L.P. and affiliates (a "Tag Along"), and
KKR 1996 Fund L.P. has the right to require Lisco to participate pro rata in
certain sales of Common Stock by KKR 1996 Fund L.P. and affiliates (a "Drag
Along"). The KKR Stockholders Agreement provides Lisco with "piggyback"
registration rights and two demand registration rights and provides for certain
restrictions and rights regarding the transfer of Common Stock by Lisco. The KKR
Stockholders Agreement also grants Lisco the right to appoint one member of the
Company's Board of Directors, subject to maintaining specified ownership
thresholds.
On the Closing Date, the Company, KKR 1996 Fund L.P. and Great Star entered
into a stockholders agreement (the "Great Star Stockholders Agreement").
Pursuant to the Great Star Stockholders Agreement, Great Star has a Tag Along
right with respect to sales of Common Stock by KKR 1996 Fund L.P. and KKR 1996
Fund L.P. has a Drag Along right to require Great Star to participate in certain
sales of Common Stock by KKR 1996 Fund L.P. The Great Star Stockholders
Agreement also provides Great Star certain "piggyback" registration rights and
provides for certain restrictions and rights regarding the transfer of Common
Stock held by Great Star.
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REGISTRATION RIGHTS AGREEMENT
KKR 1996 Fund L.P. has the right, under certain circumstances and subject to
certain conditions, to require the Company to register under the Securities Act
shares of Common Stock held by it and its affiliates pursuant to a registration
rights agreement entered into between KKR 1996 Fund L.P. and the Company on the
Closing Date (the "Fund Registration Rights Agreement"). The Fund Registration
Rights Agreement provides, among other things, that the Company will pay all
registration expenses in connection with the first six demand registrations
requested by KKR 1996 Fund L.P. or its affiliates.
INDEMNIFICATION AGREEMENT
On the Closing Date, Spalding and the Company entered into an
Indemnification Agreement (the "Indemnification Agreement") pursuant to which
Spalding agreed to indemnify the Company for all losses and liabilities of any
kind relating to any non-Evenflo related matters and the Company agrees to
indemnify Spalding for all losses and liabilities of any kind relating to the
Evenflo business. In addition, Spalding agreed to indemnify the Company for the
expense of product recalls and corrective actions relating to products
manufactured by the Company prior to the Closing Date. As of September 30, 1998,
for active recalls and corrective actions indemnified by Spalding, the Company
has incurred actual expenses of approximately $0.2 million and recorded a
product recall liability for additional estimated costs of approximately $0.9
million. As a result of the indemnification, the Company has also recorded a
receivable from Spalding for approximately $1.1 million.
EMPLOYEE MATTERS AGREEMENT
On the Closing Date, the Company and Spalding entered into an Employee
Matters Agreement (the "Employee Matters Agreement") to allocate assets and
liabilities with respect to labor, employment and employee benefit matters. The
Employee Matters Agreement provides that the Company will retain all
employment-related responsibility no matter when incurred for current and former
employees of Evenflo. The Company will provide, for at least one year following
the Closing Date, employee benefits that are, in the aggregate, no less
favorable than those maintained for the Evenflo employees immediately prior to
the closing of the Transactions.
TAX ALLOCATION AND INDEMNITY AGREEMENT
Prior to the Closing Date, Evenflo and its subsidiaries filed a consolidated
United States federal income tax return together with Spalding and its other
subsidiaries (collectively, the "Spalding Consolidated Group"). As of the
Closing Date, Evenflo and its subsidiaries (collectively, the "Evenflo Group")
will no longer be eligible to file United States federal income tax returns on a
consolidated basis with Spalding and its subsidiaries (other than members of the
Evenflo Group) (collectively, the "Spalding Group"). Consequently, on the
Closing Date, Spalding and Evenflo entered into a tax allocation and indemnity
agreement (the "Tax Allocation Agreement").
Pursuant to the Tax Allocation Agreement, (i) the tax attributes of the
Spalding Consolidated Group (e.g., net operating losses, net capital losses and
tax credits) will be allocated and apportioned among the members of the Evenflo
Group and the members of the Spalding Group in accordance with the applicable
United States Treasury regulations, (ii) Spalding will be responsible for (x)
preparing and filing all consolidated United States federal income tax returns
(including any amended returns) for the taxable years during which Evenflo and
its subsidiaries were members of the Spalding Consolidated Group and (y) paying
all taxes shown as due and owing on such consolidated returns, and (iii)
Spalding will have the sole right to represent Evenflo's and its subsidiaries'
interests in any audit or other administrative or judicial proceeding related to
such consolidated returns.
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Under the Tax Allocation Agreement, Evenflo and its subsidiaries are
required to pay to Spalding the amount of United States federal income taxes
that are attributable to Evenflo and its subsidiaries (as determined in
accordance with the provisions of the Consolidated Federal Income Tax Liability
Allocation Agreement among Spalding and its Subsidiaries, dated as of September
30, 1993 (the "Old Tax Sharing Agreement")) for all taxable years during which
Evenflo and its subsidiaries were members of the Spalding Consolidated Group
(including, without limitation, any such taxes that are imposed as a result of
an audit or other adjustment). Evenflo and its subsidiaries will be entitled to
any refunds of such taxes and Spalding is required to pay Evenflo and its
subsidiaries the amount of any tax refund attributable to such parties. In
addition, under the Tax Allocation Agreement, the members of the Evenflo Group
will be required to reimburse the Spalding Group for any tax attributes of the
Spalding Group that are utilized by the Evenflo Group (or any member thereof) to
reduce its tax liability and Spalding and the other members of the Spalding
Group will have similar obligations to reimburse the Evenflo Group for any tax
attributes of the Evenflo Group that are utilized by the Spalding Group (or any
member thereof).
Spalding and the other members of the Spalding Group will jointly and
severally indemnify and hold harmless Evenflo and its subsidiaries for any taxes
imposed on Spalding or other members of the Spalding Group other than taxes that
are attributable to Evenflo and its subsidiaries.
Pursuant to the terms of the Tax Allocation Agreement, the above principles
will govern the filing of any state, local or foreign tax returns required to be
filed by Spalding or other members of the Spalding Group on a consolidated,
combined or unitary basis with Evenflo or any of its subsidiaries and the
allocation of the liability for any taxes with respect thereto.
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USE OF PROCEEDS
There will be no proceeds to the Company from the exchange of Old Notes for
New Notes pursuant to the Exchange Offer. The Company used the gross proceeds
from the Financings to (i) repay approximately $110.0 million of indebtedness
owed to Spalding as part of the Stock Acquisitions and (ii) pay transaction fees
and expenses of approximately $10.0 million. See "Transactions" and "Description
of the Credit Facility." The approximately $110.0 million of indebtness that was
owed to Spalding consisted of (i) a $59.0 million intercompany balance which was
the Company's allocated portion of indebtedness payable by Spalding under the
credit facility entered into in connection with the Recapitalization, (ii) a
$49.1 million note payable to Spalding issued to finance a portion of the Gerry
Acquisition and (iii) a $1.9 million intercompany balance which did not bear
interest.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1998:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1998
---------------
(DOLLARS IN
MILLIONS)
<S> <C>
Long-term debt (including current portion):
Credit Facility(1)........................................ $ 7.8
Old Notes................................................. 110.0
-------
Total long-term debt.................................... 117.8
Cumulative Preferred Stock.................................. 40.0
Common shareholders' equity................................. 24.4
-------
Total capitalization.................................... $ 182.2
-------
-------
</TABLE>
- ------------------------
(1) At December 31, 1998, the Company had borrowing availability of
approximately $61.0 million under the Credit Facility subject to certain
conditions (after giving effect to $31.2 million of outstanding letters of
credit and bankers' acceptances). See "Description of the Credit Facility."
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PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENT
The following unaudited pro forma condensed statement of consolidated
earnings (loss) for the year ended September 30, 1998 (the "Pro Forma Financial
Statement") has been derived by the application of pro forma adjustments to the
Company's historical statement of consolidated earnings (loss) and comprehensive
earnings (loss) included elsewhere in this Prospectus. The Pro Forma Financial
Statement gives effect to the (i) Financings and related repayment of $110.0
million owed to Spalding and (ii) the Preferred Stock Investment as if such
transactions had occurred on October 1, 1997. The adjustments necessary to
record such transactions are described in the accompanying notes. The Financings
and related debt repayment to Spalding, the Preferred Stock Investment and the
Stock Acquisitions have been accounted for as a recapitalization; accordingly,
the historical carrying values of the Company's assets and liabilities have not
been impacted by such transactions. The Pro Forma Financial Statement should not
be considered indicative of actual results that would have been achieved had the
Transactions been consummated on the date or for the periods indicated and do
not purport to indicate results of operations for any future period. The Pro
Forma Financial Statement should be read in conjunction with the Company's
historical consolidated financial statements and the notes thereto included
elsewhere in this Prospectus.
31
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED EARNINGS (LOSS)
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR THE
HISTORICAL TRANSACTIONS PRO FORMA
------------ ------------ ----------
<S> <C> <C> <C>
Net sales................................................................. $ 339,077 $ 339,077
Cost of sales............................................................. 270,708 270,708
------------ ----------
Gross profit.............................................................. 68,369 68,369
Selling, general and administrative expenses.............................. 63,133 $ 2,566(a) 65,699
Restructuring costs....................................................... 2,666 2,666
Allocated Spalding expenses............................................... 2,566 (2,566)(a) 0
------------ ------------ ----------
Income from operations.................................................... 4 0 4
Interest expense, net..................................................... 11,458 4,810(b) 16,268
Currency loss, net........................................................ 1,076 1,076
------------ ------------ ----------
Earnings (loss) before income taxes and extraordinary loss................ (12,530) (4,810) (17,340)
Income taxes (benefit).................................................... (4,171) (1,876)(c) (6,047)
------------ ------------ ----------
Earnings (loss) before extraordinary loss................................. $ (8,359) $ (2,934) $ (11,293)
------------ ------------ ----------
------------ ------------ ----------
Preferred stock dividend requirement (d).................................. $ 5,600
----------
----------
Ratio of earnings to fixed charges (e).................................... --
----------
----------
Deficiency of earnings to fixed charges................................... $ 17,340
----------
----------
Deficiency of earnings (loss) to combined fixed
charges and preferred stock dividends (e)............................... $ 26,520
----------
----------
</TABLE>
32
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
STATEMENT OF CONSOLIDATED EARNINGS (LOSS)
(DOLLAR AMOUNTS IN THOUSANDS)
(a) Historically, the Company has been allocated certain administrative expenses
(based on the Company's net sales as a percentage of those of Spalding) and
has been allocated out-of-pocket expenses relating to acquisition activity
incurred by Spalding on behalf of the Company. After the Transactions, the
Company expected to incur approximately the same amount of expenses on an
annual basis pursuant to the Transition Services Agreement with Spalding for
the continuation of such administrative services through September 30, 1998
as the Company developed its internal capabilities. After the termination of
the Transition Services Agreement, the Company expects to continue to incur
approximately the same amount of expenses on an annual basis to replace such
services.
(b) The pro forma adjustment to interest expense for the year ended September
30, 1998 is calculated as follows:
<TABLE>
<S> <C>
Historical interest on letters of credit, bankers' acceptances, and non-U.S. debt
and historical special facility fees............................................. $ 1,618
Pro forma interest expense on Revolving Credit Facility borrowings of $10 million
at 9 1/4%, due 2005.............................................................. 925
Pro forma interest expense on Exchange Notes of $110 million at 11 3/4%, due
2006............................................................................. 12,925
Pro forma amortization of deferred financing costs of $6 million................... 800
---------
Total pro forma interest expense............................................... 16,268
Deduct historical interest expense for the year ended September 30, 1998 (see Note
below)......................................................................... 11,458
---------
Net increase in interest expense............................................... $ 4,810
---------
---------
</TABLE>
- --------------------
Note--Historical interest expense includes interest on (i) the note payable
to Spalding, (ii) the allocated portion of Spalding debt and (iii) the
Senior Notes due 2006 and the borrowings under the Revolving Credit Facility
for the period from August 20, 1998 to September 30, 1998, as well as
amortization of deferred financing costs, interest on letters of credit,
bankers' acceptances and non-U.S. debt and special facility fees.
A 0.125% change in the weighted average interest rate would change annual pro
forma interest expense by $150. A $1,000 change in borrowings under the
Credit Facility would change annual pro forma interest expense by $93.
(c) Reflects the tax effect of deductible adjustments at a 39% U.S. federal and
state statutory income tax rate for 1998.
(d) As a part of the Transactions, Spalding received $40.0 million (400,000
shares) of the Company's Cumulative Preferred Stock. This amount reflects
the annual cumulative dividend requirement on shares of Cumulative Preferred
Stock at a rate of 14% as of September 30, 1998.
(e) For purposes of determining the pro forma ratios of earnings (loss) to fixed
charges and of earnings (loss) to combined fixed charges and preferred stock
dividends, earnings (loss) is defined as earnings (loss) before income taxes
and extraordinary loss and before other comprehensive earnings (loss) plus
fixed charges (net of capitalized interest). Fixed charges consist of
interest expense on all indebtedness, whether expensed or capitalized,
amortization of deferred financing costs and one-third of rental expense on
operating leases, representing that portion of rental expense deemed by the
Company to be attributable to interest. For purposes of the computation of
the ratio of earnings (loss) to combined fixed charges and preferred stock
dividends, the preferred stock dividend requirements were increased to an
amount representing the pre-tax earnings which are required to cover such
dividend requirements.
(f) "EBITDA", as defined, represents earnings (loss) before interest expense,
income taxes, depreciation, amortization, extraordinary items and
restructuring costs. "Adjusted EBITDA" represents EBITDA before unusual
costs. The Company believes that EBITDA and Adjusted EBITDA provide useful
33
<PAGE>
information regarding the Company's ability to service its debt, and the
Company understands that such information is considered by certain investors
to be an additional basis for evaluating the Company's ability to pay
interest and repay debt. EBITDA and Adjusted EBITDA do not, however,
represent cash flow from operations as defined by generally accepted
accounting principles and should not be considered as a substitute for net
earnings as an indicator of the Company's operating performance or cash flow
as a measure of liquidity. Because EBITDA and Adjusted EBITDA are not
calculated identically by all companies, the presentation herein may not be
comparable to other similarly titled measures of other companies. EBITDA, as
defined, has been presented before giving effect to restructuring costs for
the pro forma year ended September 30, 1998. After giving effect to such
restructuring costs, earnings (loss) before interest expense, income taxes,
depreciation, amortization and extraordinary loss for such year is $12.8
million. See the Company's consolidated financial statements, and related
notes thereto, included elsewhere in this Prospectus.
The components of EBITDA and Adjusted EBITDA are as follows:
<TABLE>
<S> <C>
Pro forma earnings (loss) before income taxes and extraordinary loss.......... $ (17.3)
Interest expense.............................................................. 16.3
Depreciation and amortization................................................. 13.9
Restructuring costs........................................................... 2.7
---------
EBITDA.................................................................... 15.5
Unusual costs:
Project Discovery........................................................... 0.2
Gerry integration........................................................... 0.2
Transaction related expenses................................................ 4.0
Other....................................................................... 0.8
---------
Adjusted EBITDA........................................................... $ 20.7
---------
---------
</TABLE>
34
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth certain selected historical consolidated
financial data of the Company. The historical consolidated financial data for
each of the three fiscal years ended September 30, 1998 and the three months
ended December 31, 1998 have been derived from, and should be read in
conjunction with, the audited Consolidated Financial Statements of the Company
and the related notes thereto included elsewhere in this Prospectus. The
historical consolidated financial data for the year ended September 30, 1995
have been derived from audited financial statements of the Company that do not
appear elsewhere in this Prospectus. The historical consolidated financial data
for the three months ended December 31, 1997 have been derived from unaudited
consolidated financial statements of the Company that appear elsewhere in this
Prospectus. The historical consolidated financial data for the fiscal year ended
September 30, 1994 have been derived from unaudited consolidated financial
statements of the Company that do not appear elsewhere in this Prospectus. In
the opinion of management, the unaudited financial data include all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the data
for such period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Pro Forma Condensed Consolidated
Financial Statement," and the historical Consolidated Financial Statements and
the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(DOLLAR AMOUNTS IN THOUSANDS)
(AS RESTATED)(13)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA
Net sales................................ $ 171,533 $ 210,039 $ 237,165 $ 296,743 $ 339,077 $ 69,650 $ 72,552
Cost of sales(1)......................... 123,501 157,611 178,733 235,925 270,708 58,070 66,811
--------- --------- --------- --------- --------- --------- ---------
Gross profit............................. 48,032 52,428 58,432 60,818 68,369 11,580 5,741
Selling, general and administrative
expenses(2)............................ 37,070 41,518 42,801 52,232 63,133 13,203 16,071
Allocated Spalding expenses(3)........... 2,300 2,500 2,500 2,900 2,566 700 0
Restructuring costs(4)................... 0 0 0 8,371 2,666 60 0
1994 Management Stock Ownership Plan
expense(5)............................. 0 107 2,621 0 0 0 0
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations............ 8,662 8,303 10,510 (2,685) 4 (2,383) (10,330)
Interest expense, net.................... 1,203 4,273 4,128 7,243 11,458 2,494 4,220
Currency (gain) loss, net................ (120) 833 204 47 1,076 77 (251)
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) before income taxes and
extraordinary loss..................... 7,579 3,197 6,178 (9,975) (12,530) (4,954) (14,299)
Income taxes (benefit)................... 3,523 1,052 3,197 (4,364) (4,171) (1,255) (5,413)
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) before extraordinary
loss................................... 4,056 2,145 2,981 (5,611) (8,359) (3,699) (8,886)
Extraordinary (loss) on early
extinguishment of debt, net of tax
benefit of $360 and $696............... 0 0 (560) 0 (1,304) 0 0
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss)...................... 4,056 2,145 2,421 (5,611) (9,663) (3,699) (8,886)
Other comprehensive earnings (loss)(6)... (149) (551) (260) (367) (1,720) (313) (1,175)
--------- --------- --------- --------- --------- --------- ---------
Comprehensive earnings (loss)............ $ 3,907 $ 1,594 $ 2,161 $ (5,978) $ (11,383) $ (4,012) $ (10,061)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Ratio of earnings (loss) to fixed
charges(7)(8).......................... 6.27x 1.68x 2.32x -- -- -- --
OTHER DATA
EBITDA(9)................................ $ 14,350 $ 12,988 $ 16,808 $ 14,952 $ 15,463 $ 1,009 $ (6,511)
Adjusted EBITDA(9)....................... 14,350 12,988 20,450 24,710 20,657 1,358 1,372
Statements of cash flows:
Operating activities................... (382) 1,419 24,287 (942) (6,789) (5,936) (8,345)
Investing activities................... (10,425) (6,531) (9,740) (89,579) (18,118) (4,228) (2,400)
Financing activities................... 11,165 5,613 (12,244) 87,312 30,513 10,036 7,800
Capital expenditures..................... 9,668 6,531 9,377 20,927 18,118 4,228 2,400
Cash interest expense(10)................ 1,095 4,266 3,732 6,763 9,824 2,537 942
Depreciation and amortization............ 5,568 5,518 6,502 9,313 13,869 3,409 3,568
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
----------------------------------------------------- ------------------------
1994 1995 1996 1997 1998 1997 1998
--------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents........................ $ 1,941 $ 2,442 $ 4,745 $ 1,536 $ 7,142 $ 1,408 $ 4,197
Working capital(11).............................. 22,269 29,308 17,074 50,690 57,060 54,886 56,626
Total assets..................................... 139,674 155,496 177,391 255,205 285,361 244,006 275,453
Total debt(12)................................... 12,000 32,000 43,000 95,966 110,000 96,120 117,800
Shareholders' equity............................. 72,969 66,858 61,825 63,719 74,447 65,917 64,386
</TABLE>
35
<PAGE>
- ------------------------------
(1) Included in cost of sales are unusual costs related to (i) Project Discovery
for the manufacturing and warehouse reconfiguration at Piqua, Ohio,
consisting of charges of $2.7 million in fiscal 1997, $0.2 million in fiscal
1998 and $0.2 million in the three months ended December 31, 1997, (ii) the
integration of Gerry for (a) a $3.1 million inventory write-down in fiscal
1997 resulting from a decision to discontinue the sale of certain Gerry
products, (b) a charge of $1.3 million in fiscal 1997, as a result of
expensing the increase to fair value of Gerry's inventories as such
inventory was sold, such increase resulting from the application of purchase
accounting in the Gerry Acquisition and (c) a charge of $0.2 million in
fiscal 1998, for expenses to relocate the Gerry Colorado warehouse
operations to Evenflo's Ohio and Georgia locations and (iii) the SKU
Rationalization, consisting of a non-cash charge of $7.9 million for an
inventory write-down in the three months ended December 31, 1998.
(2) Included in selling, general and administrative expenses are unusual costs
related to (i) combining Evenflo's feeding and furniture operations which
were previously managed separately, consisting of charges of $1.3 million in
fiscal 1996 and $2.6 million in fiscal 1997, (ii) accounts receivable
charge-offs as a result of the bankruptcy of two of its customers consisting
of a charge of $2.3 million in fiscal 1996, (iii) $4.0 million in legal
fees, accounting fees and other charges related to the Transactions in
fiscal 1998 and (iv) Year 2000 conversion costs consisting of a charge of
$0.8 million in fiscal 1998 and $0.2 million in the three months ended
December 31, 1997. Selling, general and administrative expenses, on a pro
forma basis, include an amount equal to the expense incurred by the Company
for allocated Spalding expenses. See footnote 3.
(3) Represents an allocation from Spalding (based on the Company's net sales as
a percentage of those of Spalding) of administrative expenses for assistance
provided in the areas of accounting, auditing, employee relations,
insurance, legal, planning, tax and treasury and $0.8 million in allocated
out-of-pocket expenses relating to acquisition activity incurred by Spalding
on behalf of the Company in fiscal 1997. After the Transactions, the Company
will incur expenses pursuant to the Transition Services Agreement with
Spalding at the cost of providing such services for the continuation of such
services during the period in which the Company develops its internal
capabilities. Such costs will be reflected as a selling, general and
administrative expense. After the termination of the Transition Services
Agreement, the Company expects to incur $3.0 million of expense on an annual
basis to replace such services. The Transition Services Agreement terminated
with respect to the majority of such services on September 30, 1998.
(4) In fiscal 1997, fiscal 1998 and the three months ended December 31, 1997,
the Company incurred $8.4 million, $2.7 million and $0.1 million,
respectively, of restructuring costs to relocate the Gerry Colorado
administrative and manufacturing operations to Evenflo's Ohio and Georgia
locations. See Note G of the Notes to the Consolidated Financial Statements
appearing elsewhere in this Prospectus.
(5) Represents $0.1 million and $2.6 million of compensation expense for fiscal
1995 and 1996, respectively, related to the increase in the value of common
stock of Spalding held by certain members of Company management through the
1994 Management Stock Ownership Plan and to the settlement of such plan in
the Recapitalization.
(6) Other comprehensive earnings (loss) includes changes in currency translation
adjustment.
(7) For purposes of determining the ratio of earnings (loss) to fixed charges,
earnings are defined as earnings (loss) before income taxes and
extraordinary loss and before other comprehensive earnings (loss) plus fixed
charges (net of capitalized interest). Fixed charges consist of interest
expense on all indebtedness, whether expensed or capitalized, amortization
of deferred financing costs and one-third of rental expense on operating
leases, representing that portion of rental expense deemed by the Company to
be attributable to interest.
(8) The deficiency of earnings to fixed charges for fiscal 1997 and fiscal 1998
was approximately $10.0 million and $12.5 million, respectively. The
deficiencies of earnings to fixed charges for the three months ended
December 31, 1997 and 1998 were approximately $5.0 million and $14.3
million, respectively.
(9) "EBITDA", as defined, represents earnings (loss) before interest expense,
income taxes, depreciation, amortization, extraordinary items and
restructuring costs. "Adjusted EBITDA" represents EBITDA before unusual
costs. The Company believes that EBITDA and Adjusted EBITDA provide useful
information regarding the Company's ability to service its debt, and the
Company understands that such information is considered by certain investors
to be an additional basis for evaluating the Company's ability to pay
interest and repay debt. EBITDA and Adjusted EBITDA do not, however,
represent cash flow from operations as defined by generally accepted
accounting principles and should not be considered as a substitute for net
earnings as an indicator of the Company's operating performance or cash flow
as a measure of liquidity. Because EBITDA and Adjusted EBITDA are not
calculated identically by all companies, the presentation herein may not be
comparable to other similarly titled measures of other companies. EBITDA, as
defined, has been presented before giving effect to restructuring costs for
fiscal 1997, fiscal 1998 and the three months ended December 31, 1997. After
giving effect to such restructuring costs, earnings (loss) before interest
expense, income taxes, depreciation, amortization and extraordinary items
for such periods are $6.6 million for fiscal 1997, $12.8 million for fiscal
1998, $0.9 million for the three months ended December 31, 1997 and a loss
of $6.5 million for the three months ended December 31, 1998. See the
Company's Consolidated Financial Statements, and related notes thereto,
included elsewhere in this Prospectus. The components of EBITDA and Adjusted
EBITDA are as follows:
36
<PAGE>
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
DECEMBER
FISCAL YEAR ENDED SEPTEMBER 30, 31,
----------------------------------------------------- ---------
1994 1995 1996 1997 1998 1997
--------- --------- --------- --------- --------- ---------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss) before income taxes and
extraordinary loss.................................... $ 7.6 $ 3.2 $ 6.2 $ (10.0) $ (12.5) $ (5.0)
Interest expense........................................ 1.2 4.3 4.1 7.2 11.5 2.5
Depreciation and amortization........................... 5.6 5.5 6.5 9.3 13.9 3.4
Restructuring costs(a).................................. -- -- -- 8.4 2.7 0.1
--------- --------- --------- --------- --------- ---------
EBITDA.................................................. 14.4 13.0 16.8 15.0 15.5 1.0
Unusual costs(a):
Project Discovery..................................... -- -- -- 2.7 0.2 0.2
Combining feeding and furniture operations............ -- -- 1.3 2.6 -- --
Gerry integration..................................... -- -- -- 4.4 0.2 --
Transaction related expenses.......................... -- -- -- -- 4.0 --
SKU Rationalization................................... -- -- -- -- -- --
Other................................................. -- -- 2.3 -- 0.8 0.2
--------- --------- --------- --------- --------- ---------
Adjusted EBITDA......................................... $ 14.4 $ 13.0 $ 20.5 $ 24.7 $ 20.7 $ 1.4
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
- ------------------------------
<CAPTION>
1998
---------
<S> <C>
Earnings (loss) before income taxes and
extraordinary loss.................................... $ (14.3)
Interest expense........................................ 4.2
Depreciation and amortization........................... 3.6
Restructuring costs(a).................................. --
---------
EBITDA.................................................. (6.5)
Unusual costs(a):
Project Discovery..................................... --
Combining feeding and furniture operations............ --
Gerry integration..................................... --
Transaction related expenses.......................... --
SKU Rationalization................................... 7.9
Other................................................. --
---------
Adjusted EBITDA......................................... $ 1.4
---------
---------
- ------------------------------
</TABLE>
(a) For a more complete description of such items, see footnotes (1), (2) and
(3) above.
(10) Cash interest expense is defined as interest expense paid exclusive of
amortization of deferred financing costs.
(11) Working capital excludes cash and cash equivalents.
(12) Total debt includes the Old Notes.
(13) Restructuring costs of $1.2 million originally recorded in fiscal 1997 and
reversed in fiscal 1998 have been restated, along with the related income
tax effect of $0.5 million. See Note G of the Notes to the Consolidated
Financial Statements appearing elsewhere in this Prospectus.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Evenflo, with net sales of $339 million in fiscal 1998, is a leader in the
$2.0 billion U.S. juvenile products industry, as well as a market leader in such
products in several international markets. The Company's products fall into four
principal categories, representing the daily activities in which the products
are used: (i) On The Go products, including car seats, strollers, travel systems
and carriers, (ii) Play Time products, including stationary activity products,
swings, gates and doorway jumpers, (iii) Bed and Bath products, including cribs,
portable play yards, monitors, mattresses, bath items and toilet trainers and
(iv) Feeding Time products, including reusable and disposable nurser systems,
breastfeeding aids, high chairs, oral development items such as teethers and
pacifiers, bibs and other feeding accessories.
In April 1997, Evenflo completed the acquisition of Gerry for a purchase
price of $68.7 million. The Gerry acquisition provided Evenflo with additional
market leading products in categories such as gates, monitors, infant carriers
and baths, which complemented the Company's traditional strengths in juvenile
furniture and feeding products. To realize the manufacturing efficiencies
achievable through the Gerry Acquisition, the Company elected to close the Gerry
operations in Colorado and transfer these operations into the Company's Piqua,
Ohio and Canton, Georgia plants. This eliminated all manufacturing processes and
distribution of Gerry products from the 381,000 square foot facility in Thorton,
Colorado; where, in April of 1997, approximately 434 people were employed.
RESTRUCTURING CHARGES (AS RESTATED, SEE NOTE FOLLOWING THE TABLE BELOW)
In July 1997, Company management initiated the development of a plan to
integrate the Gerry Colorado administrative and manufacturing operations into
Evenflo's Ohio and Georgia locations. As a result of this plan, the Company
recorded a charge of $8,371 for restructuring costs. At September 30, 1997, the
remaining accrual of $7,027, represented restructuring charges that meet the
definition of "exit costs" in accordance with EITF Issue No. 94-3. This accrual
included: severance and outplacement benefit costs for most of the personnel at
the Gerry Colorado location; shutdown of the facility and termination of the
lease; and other costs, principally asset impairment and costs to settle
supplier contractual obligations arising from, or affected by, the Colorado
shut-down.
The table below shows the components of the fiscal 1997 and fiscal 1998
restructuring provisions, which include a reserve balance of $7,027 as of
September 30, 1997, and the activity affecting the reserve balance through
December 31, 1998, as follows:
<TABLE>
<CAPTION>
1997 1998
1997 ACTIVITY BALANCE AT ACTIVITY 1998 BALANCE AT
RESTRUCTURING CHARGED TO SEPTEMBER 30, CHARGED TO RESTRUCTURING SEPTEMBER 30,
PROVISION RESERVE 1997 RESERVE PROVISION 1998
------------- ----------- --------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Severance costs................ $ 4,105 $ (163) $ 3,942 $ (3,681) $ (61) $ 200
Facility shutdown.............. 2,630 (201) 2,429 (4,005) 1,576 0
Other.......................... 1,619 (963) 656 (92) (564) 0
------------- ----------- ------- ----------- ------------- -----
Total reserve activity......... $ 8,354 $ (1,327) $ 7,027 $ (7,778) 951 $ 200
----------- ------- ----------- -----
----------- ------- ----------- -----
Additional relocation related
costs........................ 17 1,715
------------- -------------
Restructuring costs for fiscal
1997 and 1998 (see Note)..... $ 8,371 $ 2,666
------------- -------------
------------- -------------
<CAPTION>
BALANCE AT
ACTIVITY CHARGED DECEMBER 31,
TO RESERVE 1998
----------------- ---------------
<S> <C> <C>
Severance costs................ $ (3) $ 197
Facility shutdown.............. 0 0
Other.......................... 0 0
--- -----
Total reserve activity......... $ (3) $ 197
--- -----
--- -----
Additional relocation related
costs........................
Restructuring costs for fiscal
1997 and 1998 (see Note).....
</TABLE>
- ----------------------------------
Note-- On May 6, 1999, after discussion with the staff of the Securities and
Exchange Commission, the Company's management reconsidered its accrual
for computer conversion costs. Such costs were originally accrued as a
component of the Company's restructuring charges in fiscal 1997 and
were reversed in fiscal 1998 when the Company's management adopted a
different approach to resolve its computer conversion requirements. As
a result, restructuring charges in fiscal 1997 have been reduced by
$1,220, and restructuring charges in fiscal 1998 have been increased
by $1,220. The fiscal 1997 and 1998 financial statements have been
restated to reflect such changes together with the related income tax
benefits of $520.
38
<PAGE>
Explanations of the amounts in the table above are summarized as follows:
- Severance costs of $4,105 were accrued for 176 salaried personnel and 241
collective bargaining unit personnel. Severance payments were made to 128
salaried personnel and 237 collective bargaining unit personnel from
December 1997 through April 1998. The lower number of terminated
employees resulted from individuals voluntarily leaving the Company
before qualifying for the full severance payment.
- Various sections of the facility were closed during the period from
December 1997 through April 1998 and the facility was turned over to the
landlord in July 1998. Costs for facility shutdown of $2,630 include
noncancelable lease obligations and costs to be incurred subsequent to
operations ceasing but prior to termination of the lease. These costs
include repairs to the facilities to meet the landlord's specifications,
utilities during facility closing and salaries and benefits of employees
retained to complete the closure of the facilities. Actual costs of
$1,576 in excess of the restructuring accrual were caused by the
cessation of operations earlier than anticipated, resulting in more of
the facility costs being considered exit costs as opposed to ongoing
operating costs.
In fiscal 1998, the Company revised its estimate for the fiscal 1997
restructuring costs and recorded the following: an additional charge of $1,576
for the Gerry Colorado facility shutdown and a reversal of $625 of severance and
other costs. The Company incurred an additional $1,715 of restructuring costs in
fiscal 1998 that did not meet the criteria under EITF 94-3 for accrual as of
September 30, 1997. These costs, which were incurred and recorded in fiscal
1998, consist of recruitment and training, freight on transfer of inventory to
Evenflo's Ohio and Georgia locations, computer conversion costs and costs
related to transferring molds and tooling. The net of the additional fiscal 1998
charges and the above reversal of the fiscal 1997 restructuring provision are
included in the restructuring costs of $2,666 for fiscal 1998.
The integration of Gerry to date has been more difficult than the Company
originally contemplated and, as a result, the Company's results for fiscal 1998
do not reflect the manufacturing and distribution efficiencies previously
anticipated. For the first nine months of fiscal 1998, and to a lesser extent
for the remainder of fiscal 1998, the integration process resulted in higher
costs for indirect and non-standard labor, product testing, scrap, freight,
inventory obsolescence and delays in product introductions which more than
offset the cost savings achieved by the Company's capital expenditure program.
In addition, the demands of the integration process have resulted in the delayed
introduction of new Gerry products and reduced levels of customer service as the
Company redesigned certain Gerry products, each of which negatively impacted net
sales and costs of production per unit. The Company expects that these
efficiencies will be realized in calendar 1999 from the investments made in
Project Discovery and the integration of Gerry into the Company's manufacturing
and distribution infrastructure.
A substantial portion of the Company's net sales growth since April 1997 is
the result of the acquisition of certain net assets of Gerry, which was
accounted for under the purchase method of accounting. Gerry's product lines,
which include gates, booster car seats, bath products, monitors and toilet
trainers, are lower margin items than the Company's traditional strengths in car
seats and stationary activity products. As a result, the Company's historical
consolidated results of operations are not directly comparable for the periods
discussed below. Since the acquisition of Gerry, the Company has eliminated
Gerry's manufacturing and distribution operations at Thornton, Colorado and
integrated them into the Company's Piqua, Ohio and Canton, Georgia facilities.
During fiscal 1997 and fiscal 1998, Evenflo invested
39
<PAGE>
approximately $108 million to improve its operations, expand its product lines
and support the growth of its base business. The following chart outlines these
expenditures:
<TABLE>
<CAPTION>
FISCAL 1997
FISCAL 1997 FISCAL 1998 AND FISCAL 1998
------------- ------------- ---------------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN MILLIONS)
Gerry Acquisition....................................................... $ 68.7 -- $ 68.7
Capital expenditures:
Project Discovery(1).................................................. 12.2 $ 0.6 12.8
Integration of Gerry.................................................. 0.1 7.3 7.4
Other capital expenditures............................................ 8.6 10.2 18.8
----- ----- ------
Total................................................................... $ 89.6 $ 18.1 $ 107.7
----- ----- ------
----- ----- ------
</TABLE>
- ------------------------
(1) In addition, the Company invested $3.1 million in fiscal 1996 for Project
Discovery.
Net sales are gross sales net of returns, allowances, trade discounts,
freight on goods sold and royalties paid on third-party trademarks used on the
Company's products. Evenflo's products are distributed through mass merchants
(such as Wal-Mart, Kmart and Target), national accounts (such as Toys "R" Us and
Sears), grocery and drugstores, as well as other retail outlets.
Gross profit is net sales less cost of sales which includes the costs
necessary to make the Company's products, including the costs of raw materials,
production, warehousing and procurement. The principal elements of the Company's
cost of sales are raw materials and packaging supplies, labor, manufacturing
overhead and purchased product costs. Raw materials, among other things, consist
of plastic resins, fabrics, wood and paper products, the overall costs of which
have remained relatively stable during the periods discussed below, despite
susceptibility to significant price fluctuations. Labor costs consist primarily
of hourly wages plus employee fringe benefits. Manufacturing overhead generally
includes indirect labor, plant costs and manufacturing supplies. See "Risk
Factors--Cost and Availability of Certain Materials."
Selling, general and administrative expenses include the costs necessary to
sell the Company's products and the general and administrative costs of managing
the business, including salaries and related benefits, commissions, advertising
and promotion expenses, bad debts, travel, amortization of intangible assets,
insurance and product liability costs, corrective action and product recall
costs and professional fees.
Allocated Spalding expenses represent an allocation from Spalding (based on
the Company's net sales as a percentage of those of Spalding) of expenses for
assistance provided in the areas of accounting, auditing, employee relations,
insurance, legal, planning, tax and treasury as well as $0.8 million in
allocated out-of-pocket expenses relating to acquisition activity incurred by
Spalding on behalf of the Company in fiscal 1997. Allocated Spalding expenses
increased or decreased depending on the total corporate expenses incurred by
Spalding and on the level of acquisition activity benefiting the Company.
Pursuant to the Transition Services Agreement, Spalding has agreed to continue
to provide many of these services for six months after the Closing Date at the
cost of providing such services, after which time the Company will be required
to provide for such services either internally or through third parties, with
such expenses being accounted for as SG&A. After the termination of the
Transition Services Agreement, the Company expects to incur $3.0 million of
expense on an annual basis for such services. The Transition Services Agreement
terminated with respect to the majority of such services on September 30, 1998.
See "Risk Factors--No Prior Operations as an Independent Company" and
"--Dependence on Management; Need for Additonal Personnel."
SEPARATION FROM SPALDING
Prior to the Transactions, the Company operated as a wholly-owned subsidiary
of Spalding. During this period, Spalding provided assistance to the Company in
the areas of accounting, auditing, employee relations, insurance, legal,
planning, tax and treasury. For these services, the Company paid Spalding an
allocated charge based on the Company's net sales as a percentage of those of
Spalding as well as allocated
40
<PAGE>
out-of-pocket expenses relating to acquisition activity incurred by Spalding on
behalf of the Company, which are set forth on the historical income statements
as allocated Spalding expenses. Under the Transition Services Agreement entered
into on the Closing Date, Spalding continues to provide these services at
negotiated rates; however, the Transition Services Agreement terminated with
respect to the majority of such services on September 30, 1998.
During the effectiveness of the Transition Services Agreement, the Company
has been developing its internal capabilities to provide these services or has
entered into arrangements with third parties for the provision of such services
at costs consistent with the fees to be charged by Spalding under the Transition
Services Agreement (which are estimated to be $3.0 million annually). However,
there can be no assurance that after the termination of the Transition Services
Agreement that the Company will be able to replace Spalding's services under the
Transition Services Agreement for the fees charged by Spalding or that the
provision of such services during the transition period after the termination of
the Transition Services Agreement will be performed without interruption or
delay due to unanticipated circumstances.
EFFECTS OF GERRY INTEGRATION; FACTORS AFFECTING FISCAL 1998 PERFORMANCE
The integration of Gerry to date has been more difficult than the Company
originally contemplated and, as a result, the Company's results for fiscal 1998
do not reflect the manufacturing and distribution efficiencies previously
anticipated. The Company expects that these efficiencies will be realized in
calendar 1999 from the investments made in Project Discovery and the integration
of Gerry into the Company's manufacturing and distribution infrastructure. For
the first nine months of fiscal 1998, and to a lesser extent for the remainder
of fiscal 1998, the integration process resulted in higher costs for indirect
and non-standard labor, product testing, scrap, freight, inventory obsolescence
and delays in product introductions which more than offset the cost savings
achieved by the Company's capital expenditure program. In addition, the demands
of the integration process have resulted in the delayed introduction of new
Gerry products and reduced levels of customer service as the Company redesigned
certain Gerry products, each of which negatively impacted net sales and costs of
production per unit. Other factors which adversely affected the Company's
results in fiscal 1998 include inventory reductions by Toys "R" Us, the effects
of product recalls and corrective actions and product introductions by
competitors and declines in international sales due to lower net sales in Canada
and Malaysia and the effect of weaker currencies compared to the U.S. dollar. In
its fourth quarter of fiscal 1998, the Company implemented a program to evaluate
its product platforms and SKUs to eliminate low volume, low profit products to
improve the margin mix of the Company's product lines. The SKU Rationalization
has generated a $7.9 million non-cash charge in the three months ended December
31, 1998 to eliminate certain items of inventory that will not be carried
forward. While the SKU reduction program is expected to enhance the Company's
gross margin percentage in fiscal 1999, during fiscal 1998 the Company's gross
margin was affected by a change in mix of sales as the Company expedites the
sale of certain slower moving inventory as part of the SKU reduction program. In
addition, in September 1998, Toys "R" Us announced additional measures to
restructure its business including closing 59 U.S. and international stores and
further reducing inventory levels. In the fourth quarter of fiscal 1998, Toys
"R" Us reported that it decreased inventory levels by $200 million over the same
period in 1997. During fiscal 1998, Toys "R" Us did not, compared to fiscal
1997, reduce its level of purchases from the Company. As Toys "R" Us achieves
its year end inventory objectives, further sales reductions could have an impact
on the Company's net sales. In addition, Service Merchandise (a top 10 customer)
recently announced its decision to discontinue the sale of juvenile products. In
fiscal 1998, the Company's sales to Service Merchandise totalled approximately
$5 million.
RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations of the
Company covers periods before completion of the Transactions, including those
periods during fiscal 1998 prior to August 20, 1998. Accordingly, the discussion
and analysis of such periods does not reflect the significant impact that the
Transactions had on the Company. In addition, the Gerry Acquisition had a
significant impact on the Company's results of operations. As a result, the
Company's historical consolidated results of operations
41
<PAGE>
are not directly comparable for the periods discussed below. See "Risk Factors,"
and the discussion below under "--Liquidity and Capital Resources" for further
discussion relating to the impact that the Transactions may have on the Company.
The following table sets forth operating results of the Company expressed as
a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------------- --------------------
1996 1997 1998 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales.................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................................. 75.4 79.5 79.8 83.4 92.1
--------- --------- --------- --------- ---------
Gross profit............................................... 24.6 20.5 20.2 16.6 7.9
Selling, general and administrative expenses............... 18.0 17.6 18.6 18.9 22.1
Restructuring costs (as restated for fiscal 1997 and
1998).................................................... 0.0 2.8 0.8 0.1 0.0
Allocated Spalding expenses................................ 1.1 1.0 0.8 1.0 0.0
1994 Management Stock Ownership Plan Expense............... 1.1 0.0 0.0 0.0 0.0
--------- --------- --------- --------- ---------
Income (loss) from operations.............................. 4.4 (0.9) 0.0 (3.4) (14.2)
Interest expense, net...................................... 1.7 2.4 3.4 3.6 5.8
Currency (gain) loss, net.................................. 0.1 0.1 0.3 0.1 (0.3)
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes and extraordinary
loss..................................................... 2.6 (3.4) (3.7) (7.1) (19.7)
Income taxes (benefit) (as restated for fiscal 1997 and
1998).................................................... 1.3 (1.5) (1.2) (1.8) (7.4)
--------- --------- --------- --------- ---------
Earnings (loss) before extraordinary loss.................. 1.3 (1.9) (2.5) (5.3) (12.3)
Extraordinary loss on early extinguishment of debt, net of
tax benefit of $360,000 and $696,000..................... 0.3 0.0 0.4 0.0 0.0
--------- --------- --------- --------- ---------
Net earnings (loss)........................................ 1.0 (1.9) (2.9) (5.3) (12.3)
Other comprehensive earnings (loss)--currency translation
adjustment............................................... (0.1) (0.1) (0.5) (0.5) (1.6)
--------- --------- --------- --------- ---------
Comprehensive earnings (loss).............................. 0.9% (2.0)% (3.4)% (5.8)% (13.9)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1998 ("1998 THREE MONTHS") COMPARED TO THE THREE
MONTHS ENDED DECEMBER 31, 1997 ("1997 THREE MONTHS")
NET SALES. The Company's net sales increased to $72.6 million for the 1998
three months from $69.7 million for the 1997 three months, an increase of $2.9
million or 4.2%. The net sales increase was principally due to (i) increased
distribution of the convenience stroller line and travel systems due to an
expanded product line following the Gerry Acquisition and (ii) increased net
sales of play yards due to the introduction of the PLAY CRIB during 1998,
partially offset by (i) the discontinuance of certain Gerry booster car seats
and high chairs and (ii) the reduction in sales of convertible car seats and
activity centers due to competition from new entries.
GROSS PROFIT. The Company's gross profit decreased to $5.7 million in the
1998 three months from $11.6 million in the 1997 three months, a decrease of
$5.9 million. The Company's gross margin decreased to 7.9% in the 1998 three
months from 16.6% in the 1997 three months, due principally to a $7.9 million
inventory write-down resulting from a decision to discontinue certain products
due to the SKU Rationalization. Without this write-down the Company's gross
margin would have increased to 18.8% in the 1998 three months from 16.6% in the
1997 three months, due principally to (i) the Gerry integration, (ii) a
reduction in some material prices and (iii) improved manufacturing costs due to
Project Discovery.
42
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. The Company's SG&A
expenses increased to $16.1 million in the 1998 three months from $13.2 million
in the 1997 three months. As a percentage of net sales, SG&A expenses increased
to 22.1% in the 1998 three months from 18.9% in the 1997 three months. The
Company's $2.9 million increase in SG&A expenses was principally due to (i) a
$1.2 million royalty income settlement on play yards and strollers that offset
SG&A expenses in 1997 and was not repeated in 1998, (ii) $0.7 million in
corporate administrative expenses previously allocated from Spalding and
included as a separate line item in 1997, (iii) increased outside services to
aid in re-engineering processes and (iv) a $0.3 million increase in product
liability expense. A decrease in expense of $0.4 million resulted from lower
product safety campaign expenses.
RESTRUCTURING COSTS. In the 1998 three months and the 1997 three months,
the Company incurred no expense and $0.1 million, respectively.
INTEREST EXPENSE. Interest expense increased to $4.2 million in the 1998
three months from $2.5 million in the 1997 three months. The increase was due
primarily to the issuance of the Notes.
CURRENCY (GAIN) LOSS. The currency gain of $0.3 million in the 1998 three
months compares to the currency loss of $0.1 million in the 1997 three months.
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1997
NET SALES. The Company's net sales increased to $339.1 million for fiscal
1998 from $296.7 million for fiscal 1997, an increase of $42.4 million or 14.3%.
The net sales increase was principally due to the inclusion of Gerry net sales
in fiscal 1998 compared to the inclusion of Gerry net sales for approximately
five months in 1997 as a result of the April 1997 acquisition of Gerry. The
increase in net sales was partially offset by (i) lower net sales of play yards
due to the expiration of a patent license for the manufacture of play yards and
a nine-month delay in introducing the PLAY CRIB, the Company's newest entrant in
the play yard product category, which began to be shipped to retailers in
February 1998, (ii) the discontinuance of certain Gerry products that did not
fit with the Company's product line strategies, (iii) the withdrawal of certain
Gerry products from the marketplace to re-engineer such products to meet
Evenflo's standards, (iv) the effect of certain product safety campaigns and (v)
increased levels of returns of breast pumps, monitors and strollers. See
"Business--Legal Proceedings." While net sales to Toys "R" Us have increased for
the comparable fiscal year, Toys "R" Us has recently announced a plan to reduce
its inventory levels.
GROSS PROFIT. The Company's gross profit increased to $68.4 million in
fiscal 1998 from $60.8 million in fiscal 1997, an increase of $7.6 million or
12.5%. However, the Company's gross margin decreased to 20.2% in fiscal 1998
from 20.5% in fiscal 1997 principally due to (i) the addition of lower margin
products such as gates, booster car seats, bath products, monitors and toilet
trainers acquired in the Gerry Acquisition, (ii) the impact of the factors
discussed in "--Effects of Gerry Integration; Factors Affecting Fiscal 1998
Performance," partially offset by operating efficiencies attributable to Project
Discovery, (iii) an increased level of returns of breast pumps, monitors and
strollers, (iv) an increase in distribution costs, (v) a less favorable
international sales mix due to the strength of the U.S. dollar versus certain
international currencies and (vi) a less favorable margin in international
markets due to increased costs without a corresponding price increase.
SG&A EXPENSES. The Company's SG&A expenses increased to $63.1 million in
fiscal 1998 from $52.2 million in fiscal 1997. As a percentage of net sales,
SG&A expenses increased to 18.6% in fiscal 1998 from 17.6% in fiscal 1997. The
Company's $10.9 million increase in SG&A expenses was principally due to (i) an
increased number of selling and administrative personnel during the Gerry
integration, (ii) $1.7 million in increased product development and engineering
costs relating to a number of the Company's product lines, (iii) $0.8 million
for higher safety campaign and corrective action costs relating to the HAPPY
CAMPER play yard, the ON MY WAY infant car seat, the TWO-IN-ONE booster car seat
and the Canadian ULTARA car seat, (iv) higher advertising and promotional costs,
(v) higher product liability expenses of $2.7 million and (vi) $4.0 million in
transaction related expenses including legal fees, accounting fees and other
charges, partially offset by (i) reduced sales commissions of $1.3 million, (ii)
$1.2 million of royalty income
43
<PAGE>
settlements on play yards and strollers and (iii) lower costs from the
elimination of certain redundant functions as part of the Gerry integration.
RESTRUCTURING COSTS. In fiscal 1998 and fiscal 1997, the Company incurred
$2.7 million, and $8.4 million, respectively, of restructuring costs to relocate
the Gerry Colorado administrative and manufacturing operations to Evenflo's Ohio
and Georgia locations.
ALLOCATED SPALDING EXPENSES. In fiscal 1998, allocated Spalding expenses
were $2.6 million, compared to $2.9 million in fiscal 1997.
INTEREST EXPENSE. Interest expense increased to $11.5 million in fiscal
1998 from $7.2 million in fiscal 1997, an increase of $4.3 million. The increase
was primarily due to the Company's issuance of a $49.1 million note to Spalding
as a result of the Gerry Acquisition.
CURRENCY LOSS. The currency loss of $1.1 million was $1.0 million higher in
fiscal 1998 than in fiscal 1997. See "--Liquidity and Capital Resources."
INCOME TAXES. Evenflo had a tax benefit of $4.2 million for fiscal 1998,
which represents an effective tax rate of 33% in relation to a loss before
income taxes of $12.5 million. The effective tax rate for fiscal 1997 was 44%.
EXTRAORDINARY LOSS. The extraordinary loss on early extinquishment of debt
relates to a $2.0 million pre-tax (and $1.3 million after-tax) write-off of
unamortized deferred financing costs related to certain Spalding bank borrowings
as allocated to the Company by Spalding.
NET LOSS. The Company had a net loss of $9.7 million for fiscal 1998
compared to a net loss of $5.6 million for fiscal 1997. The $4.1 million
decrease in earnings was the result of a $4.3 million higher interest expense,
$1.0 million higher currency loss, $1.3 million extraordinary loss, and a $0.2
million lower income tax benefit, offset by a $5.3 million increase in income
from operations.
YEAR ENDED SEPTEMBER 30, 1997 ("FISCAL 1997") COMPARED TO YEAR ENDED SEPTEMBER
30, 1996 ("FISCAL 1996")
NET SALES. The Company's net sales increased to $296.7 million for fiscal
1997 from $237.2 million for fiscal 1996, an increase of $59.5 million or 25.1%.
When compared to fiscal 1996, Evenflo net sales were flat after excluding the
April 1997 Gerry Acquisition which contributed $60.3 million in net sales for
the final five months of fiscal 1997. Evenflo's net sales of car seats and
stationary activity products decreased from fiscal 1996 levels, principally due
to shortages of fabric pads and competitive pricing. Evenflo's net sales of play
yards decreased from fiscal 1996 levels principally due to the expiration of a
patent license for the manufacture of play yards and safety campaigns.
Offsetting the decreases were 1997 net sales of strollers and high chairs which
were up 74% and 27%, respectively, over the fiscal 1996 comparable period.
International net sales were up $4.7 million compared to fiscal 1996 due
primarily to higher net sales in Canada, Mexico and certain other export
markets.
GROSS PROFIT. The Company's gross profit grew to $60.8 million in fiscal
1997 from $58.4 million in fiscal 1996, an increase of $2.4 million or 4.1%. The
Company's gross margin decreased to 20.5% in fiscal 1997 from 24.6% in fiscal
1996 principally due to (i) the addition of lower margin products, such as
gates, booster car seats, bath products, monitors and toilet trainers acquired
in the Gerry Acquisition, (ii) a shift to increased sales of strollers and high
chairs which have lower margins than car seats and stationary activity products,
(iii) $2.8 million in unusual costs associated with the manufacturing and
warehouse reconfiguration at Piqua, Ohio, (iv) $3.1 million in inventory
write-downs resulting from a decision to discontinue the sale of certain Gerry
products as a result of the integration of Gerry into the Company and (v) $1.3
million as a result of expensing the increase to fair value of Gerry's inventory
as such inventory was sold, such increase resulting from the application of
purchase accounting in the Gerry Acquisition.
44
<PAGE>
SG&A EXPENSES. The Company's SG&A expenses increased to $52.2 million
during fiscal 1997 from $42.8 million in fiscal 1996, an increase of $9.4
million or 22.0%. However, as a percentage of net sales, SG&A expenses decreased
to 17.6% for fiscal 1997 from 18.0% for fiscal 1996. The fiscal 1997 $9.4
million increase in SG&A expenses over fiscal 1996 is principally due to (i)
$6.5 million for five months of Gerry expenses (excluding promotion costs) in
fiscal 1997, (ii) $3.6 million in higher corrective action costs (in fiscal
1997, Evenflo incurred $4.4 million on four corrective actions on certain car
seats and play yards), (iii) $2.9 million in higher promotion costs and (iv)
$1.3 million in higher unusual costs to combine Evenflo's feeding and furniture
operations which were previously managed separately, partially offset by (i)
$2.7 million lower product liability expenses from a lower number of claims,
(ii) $1.6 million in transaction bonuses from the Recapitalization and (iii)
$0.6 million in other costs.
RESTRUCTURING COSTS. In fiscal 1997, the Company incurred $8.4 million of
restructuring costs to relocate the Gerry Colorado administrative and
manufacturing operations to Evenflo's Ohio and Georgia locations.
ALLOCATED SPALDING EXPENSES. In fiscal 1997, allocated Spalding expenses
were $2.9 million, an increase of $0.4 million from fiscal 1996. Evenflo's
increased allocation of Spalding resources was due primarily to $0.8 million of
allocated out-of-pocket expenses relating to acquisition activity, partially
offset by lower SG&A expenses at Spalding to be allocated to Evenflo.
INTEREST EXPENSE. Interest expense increased to $7.2 million in fiscal 1997
from $4.1 million in fiscal 1996, an increase of $3.1 million. The increase was
primarily due to higher interest expense related to allocated indebtedness from
Spalding as a result of Spalding's higher average borrowings and a higher
average borrowing rate after the Recapitalization, as well as the Company's
issuance of a $49.1 million note to Spalding as a result of the Gerry
Acquisition.
CURRENCY LOSS. The Company incurred an insignificant currency loss in
fiscal 1997 compared to a currency loss of $0.2 million in fiscal 1996. See
"--Liquidity and Capital Resources."
INCOME TAXES. The Company had a tax benefit of $4.4 million for fiscal
1997, which represents an effective tax rate of 44% in relation to a loss before
income taxes of $10.0 million. The effective tax rate varied from a U.S. federal
and state statutory rate of 39% due to utilization of non-U.S. net operating
losses. The effective tax rate for the prior year of 52% varied from the
statutory rate due primarily to the effect of the 1994 Management Stock
Ownership Plan expense which was not deductible on the Company's income tax
return.
NET LOSS. The Company had a net loss of $5.6 million for fiscal 1997
compared to net earnings of $2.4 million for fiscal 1996. The $8.0 million
decrease in earnings was a result of a $13.2 million decrease in earnings from
operations and $3.1 million higher interest expense, partially offset by $8.6
million higher income tax benefit, $0.1 million lower currency loss and $0.6
million in fiscal 1996 extraordinary loss on early extinguishment of debt, net
of a $0.4 million tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company currently believes that cash flow from operating
activities, together with borrowings available under the Credit Facility, will
be sufficient to fund the Company's currently anticipated working capital,
capital expenditures, interest payments and other liquidity needs for the
Company's next fiscal year. Any future acquisitions, joint ventures or other
similar transactions will likely require additional capital and there can be no
assurance that any such capital will be available to the Company on acceptable
terms or at all. There can be no assurance, however, that the Company's business
will continue to generate sufficient cash flow from operations in the future to
service its debt, make necessary capital expenditures or meet its other cash
needs. If unable to do so, the Company may be required to refinance all or a
portion of its existing debt, including the Notes, to sell assets or to obtain
additional financing. There can be no assurance that any such refinancing would
be possible or that any such sales of assets or additional financing could be
achieved on terms reasonably favorable to the Company.
45
<PAGE>
The Company incurred substantial indebtedness in connection with the
Transactions. As of December 31, 1998, the Company had $117.8 million of
combined indebtedness and a common shareholders' equity of $24.4 million.
Following the Transactions, the Company's liquidity requirements have been
significantly increased, primarily due to increased interest expense
obligations. Had the Transactions been consummated on October 1, 1997, interest
expense (net) incurred in fiscal 1998 associated with indebtedness under the
Notes and the Credit Facility would have been $16.3 million, compared with the
$11.5 million of interest expense (net) actually incurred. In addition, on a pro
forma basis after giving effect to the Transactions, for fiscal 1998, the
Company would have had preferred stock dividends of $5.6 million. See "Pro Forma
Condensed Consolidated Financial Statement." The known commitments for fiscal
1999 will be $12.9 million of interest on the Notes and $5.6 million in
preferred stock dividends. Because indebtedness under the Credit Facility bears
a floating rate of interest and the Company is unable to predict the amount of
borrowings it will make under the Credit Facility, which is dependent on its
results of operations, the Company cannot predict its level of interest expense
for fiscal 1999. The Credit Facility and the Indenture permit the Company to
incur or guarantee certain additional indebtedness, subject to certain
limitations. See "Description of the Credit Facility" and "Description of the
Exchange Notes."
On the Closing Date, the Company entered into the Credit Facility, which
provides for $100.0 million of commitments. The obligations of the Company under
the Credit Facility are secured by certain assets of the Company and its
subsidiaries and are guaranteed by certain subsidiaries of the Company. On the
Closing Date, the Company borrowed $10.0 million under the Credit Facility and
applied approximately $42.0 million of the commitments to support outstanding
letters of credit and bankers' acceptances. As of December 31, 1998, there was
$7.8 million outstanding under the Credit Facility. The remaining commitments
under the Credit Facility are available to fund the working capital, capital
expenditures, general corporate and other cash needs of the Company. Borrowings
under the Credit Facility bear interest at a rate per annum equal (at the
Company's option) to a margin over either a base rate or a "eurodollar rate." At
December 31, 1998, the Credit Facility bore interest at a rate of 9.25%. All
outstanding revolving credit borrowings under the Credit Facility will become
due on the date that is seven years after the Closing Date. The Company expects
that its working capital needs and other cash requirements will require it to
obtain replacement revolving credit facilities at that time. No assurance can be
given that any such replacement can be successfully obtained. See "Description
of the Credit Facility."
The Exchange Notes will mature in 2006. The obligations of the Company under
the Exchange Notes and the Indenture will not be guaranteed by subsidiaries of
the Company on the issuance date of the Exchange Notes and will not be secured
by any assets of the Company or any of its subsidiaries. The Credit Facility and
the Indenture contain numerous financial and operating covenants that limit the
discretion of the Company's management with respect to certain business matters.
These covenants place significant restrictions on, among other things, the
ability of the Company to incur additional indebtedness, pay dividends and other
distributions, prepay subordinated indebtedness, enter into sale and leaseback
transactions, create liens or other encumbrances, make capital expenditures,
make certain investments or acquisitions, engage in certain transactions with
affiliates, sell or otherwise dispose of assets and merge or consolidate with
other entities and otherwise restrict corporate activities. The Credit Facility
also requires the Company to meet certain financial ratios and tests. The Credit
Facility and the Indenture contain customary events of default. See "Description
of the Credit Facility" and "Description of the Exchange Notes."
CASH FLOWS
1998 THREE MONTHS COMPARED TO THE 1997 THREE MONTHS. For the 1998 three
months, the Company used $10.7 million in cash before financing activities to
fund $8.3 million in operating activities and invest $2.4 million in capital
expenditures. Cash used in operating activities and investing activities in the
1998 three months was funded from $7.8 million of financing activities,
resulting in a $2.9 million decrease in cash.
Net cash flow used in operating activities in the 1998 three months was $8.3
million compared to $5.9 million in the 1997 three months. The $2.4 million
higher use of cash for operating activities when
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compared to the 1997 three months was due to a $5.2 million decrease in net
earnings, a $3.4 million decrease in deferred taxes and other non-cash items,
and a $0.6 million increase in the use of cash for working capital. The source
of cash from working capital in the 1998 three months was unfavorable as
compared to 1997 due to a $0.4 million increase in current liabilities and other
items and a $5.2 million increase in inventories, partially offset by a $4.2
million decrease in receivables.
FISCAL 1998 COMPARED TO FISCAL 1997. For fiscal 1998, the Company used
$24.9 million in cash before financing activities to fund $6.8 million in
operating activities and invest $18.1 million in capital expenditures. Cash used
in operating and investing activities in fiscal 1998 was funded from $30.5
million of financing activities, resulting in a $5.6 million increase in cash.
Net cash flow used in operating activities in fiscal 1998 was $6.8 million
compared to $0.9 million for fiscal 1997. The $5.9 million higher use of cash
for operating activities when compared to fiscal 1997 was due to a $2.1 million
decrease in net earnings, a $4.0 million increase in the use of cash for working
capital and a $2.4 million increase in deferred taxes and other non-cash items,
partially offset by $4.6 million higher depreciation and amortization and a $2.0
million extraordinary loss due to the early extinguishment of debt. The use of
cash for working capital in fiscal 1998 was unfavorable as compared to fiscal
1997 due to a $20.8 million increase in the use of cash for receivables and a
$1.6 million decrease in cash provided from current liabilities and other items,
partially offset by a $18.4 million decrease in the use of cash for inventories.
Capital expenditures were $18.1 million for fiscal 1998 compared to $20.9
million in fiscal 1997. Capital expenditures for fiscal 1998 were $2.8 million
lower than fiscal 1997, with the Company investing $0.6 million to complete
Project Discovery, $7.3 million to complete the expansion of its warehousing and
shipping facilities in Piqua, Ohio and Canton, Georgia in order to improve
efficiency and accommodate the consolidation of Gerry's Colorado operations and
$3.6 million on computer hardware and software to unify and upgrade its
management information systems to achieve Year 2000 compliance. The Company also
incurred $6.6 million in other capital expenditures for fiscal 1998. In fiscal
1999, the Company expects to make $12.5 million of capital expenditures, of
which $3.1 million is related to maintenance capital expenditures, $6.5 million
is related to new product development and introduction and $2.9 million is
related to upgrades in the Company's information systems. See "--Year 2000
Compliance."
FISCAL 1997 COMPARED TO FISCAL 1996. For fiscal 1997, the Company used
$90.5 million in cash before financing activities to invest $20.9 million in
capital expenditures, $68.7 million in the acquisition of Gerry, and $0.9
million in cash used by operating activities. Cash used in operating and
investing activities in fiscal 1997 was funded from $87.5 million of financing
activities with Spalding, $68.7 million of which related to the Gerry
Acquisition, offset by a $0.2 million reduction in non-U.S debt, which in the
aggregate resulted in a $3.2 million decrease in cash.
Net cash flow used in operating activities for fiscal 1997 was $0.9 million
compared to $24.3 million generated by operating activities in fiscal 1996. The
$25.2 million lower generation of cash by operating activities when compared to
fiscal 1996 was due to $8.0 million lower net earnings, a $14.8 million increase
in the use of cash for working capital and an $5.2 million decrease in deferred
taxes and other non-cash items; partially offset by $2.8 million higher
depreciation and amortization. The use of cash for working capital in fiscal
1997 compared unfavorably to fiscal 1996 due to a $9.1 million decrease in cash
provided by payables and other accounts, plus a $7.3 million increase in the use
of cash for inventories, partially offset by a $1.6 million decrease in the use
of cash for receivables.
Capital expenditures for fiscal 1997 were $20.9 million compared with $9.4
million in fiscal 1996. The Company's fiscal 1997 capital expenditures of $20.9
million included $12.2 million to expand and upgrade its warehousing and
shipping facilities, modernize distribution systems and reconfigure assembly
operations at its Piqua, Ohio operations as part of Project Discovery and $0.1
million to integrate Gerry's operations into the Company's Ohio and Georgia
plants. The other capital expenditures of $8.6 million were used primarily for
new product introductions and to upgrade existing production equipment.
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EBITDA
EBITDA, as defined (earnings before interest expense, income taxes,
depreciation, amortization, extraordinary items and restructuring costs), is
included because the Company believes it provides useful information regarding
its ability to service its debt and because the Company understands that such
information is considered by certain investors to be an additional basis for
evaluating the Company's ability to pay interest and repay debt. EBITDA does
not, however, represent cash flow from operations as defined by generally
accepted accounting principles and should not be considered as a substitute for
net earnings as an indicator of the Company's operating performance or cash flow
as a measure of liquidity. The following sets forth certain information
regarding the Company's EBITDA and other net cash flow items for fiscal 1997,
fiscal 1998 and the three months ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
--------------------- ---------------------
1997 1998 1997 1998
--------- ---------- --------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
EBITDA.............................................................. $ 14,952 $ 15,463 $ 1,009 $ (6,511)
Other items affecting EBITDA........................................ 9,758 5,194 349 7,883
Historical cash flow net cash provided by (used in)
Operating activities.............................................. (942) (6,789) (5,936) (8,345)
Investing activities.............................................. (89,579) (18,118) (4,228) (2,400)
Financing activities.............................................. 87,312 30,513 10,036 7,800
</TABLE>
The Company's fiscal 1997 EBITDA was adversely affected by $9.8 million of
unusual costs consisting of (i) $7.1 million in cost of sales unusual charges
for the following items: (a) $2.7 million attributable to the manufacturing and
warehouse reconfiguration at Piqua, Ohio, (b) a $3.1 million inventory
write-down resulting from a decision to discontinue the sale of certain Gerry
products as a result of the integration of Gerry into the Company and (c) $1.3
million as a result of expensing the increase to fair value of Gerry's inventory
as such inventory was sold, such increase resulting from the application of
purchase accounting in the Gerry Acquisition and (ii) $2.6 million of selling,
general and administrative expenses unusual charges for costs to combine
Evenflo's feeding and furniture operations which were previously managed
separately.
The Company's fiscal 1998 EBITDA was adversely affected by $5.2 million in
unusual costs consisting of (i) cost of sales unusual charges for the following
items (a) $0.2 million attributable to the manufacturing and warehouse
reconfiguration at Piqua, Ohio; (b) a charge of $0.2 million for expenses to
relocate the Gerry Colorado warehouse operations to Evenflo's Ohio and Georgia
locations and (ii) $4.8 million in selling and administrative expenses
consisting of (a) $4.0 million in transaction related expenses including legal
fees, accounting fees and other charges and (c) $0.8 million of expenses related
to Year 2000 conversion costs.
The Company's EBITDA for the three months ended December 31, 1997 was
adversely affected by $0.4 million in unusual costs consisting of (i) $0.2
million of cost of sales unusual charges attributable to the manufacturing and
warehouse reconfiguration at Piqua, Ohio and (ii) $0.2 million of selling
general and administrative expenses unusual charges for Year 2000 conversion
costs.
The Company's EBITDA for the three months ended December 31, 1998 was
adversely affected by $7.9 million in unusual costs due to a non-cash charge for
the SKU Rationalization.
CURRENCY HEDGING
In fiscal 1998, approximately 10% of the total Company net sales were
generated in non-U.S. currencies. Fluctuations in the value of these currencies
relative to the U.S. dollar could have a material effect on the Company's
results of operations. The Company's costs could be adversely affected if the
Chinese Renminbi appreciates significantly relative to the U.S. dollar. Although
the Company generally pays for its products in U.S. dollars, the cost of such
products fluctuates with the value of the Chinese Renminbi. The Company is
exposed to the impact of changes in foreign currency exchange rates on its
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results of operations as a result of U.S. dollar-denominated intercompany
balances owed from international subsidiaries, primarily for purchases of
products from the Company's U.S. operations and long-term notes receivable. The
impact of a hypothetical unfavorable change in foreign currency exchange rates
of 10% would result in additional losses before taxes of approximately $1.1
million and $0.8 million based on intercompany balances as of September 30, 1998
and December 31, 1998, respectively.
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 has the Notes and the Credit Facility to maintain the desired level of
exposure to risk of interest rate fluctuations and to minimize interest expense.
The Company utilizes a mix of debt maturities along with both fixed- and
variable-rate debt to manage its exposure 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 calendar 1999, although there can be no assurances that
interest rates will not materially change.
INFLATION
Inflation has not been material to the Company's operations within the
periods presented.
YEAR 2000 COMPLIANCE
Many computer software and hardware systems currently are not able to read,
calculate or output correctly using dates after 1999, and such systems will
require significant modifications in order to be "Year 2000 compliant." The
Company has reviewed its computer hardware and software systems and has recently
begun to identify those systems that are not Year 2000 compliant. The Company
expects to spend approximately $6.5 million by December 1999 to unify and
upgrade the Company's information systems, to improve the Company's electronic
data interchange ("EDI") capabilities and to resolve the Company's Year 2000
compliance issues, $4.8 million of which was invested in the aggregate in
calendar 1998. The enhanced system will be completed by December 1999 with the
upgrades required for Year 2000 compliance to be completed by June 1999. To
date, the Company has assessed 95% of its systems and has identified 85% as
requiring replacement or remediation. The Company expects that 100% of the
systems will be replaced and tested by June 1999. As of December 31, 1998, none
of these systems had been replaced in anticipation of the Company's information
systems upgrade discussed above. The Company is currently developing alternative
plans in the event that critical system upgrades are not completed on time. The
Company will complete the development of such contingency plans by April 30,
1999. Contingency plans will exist in each of the business units to correct and
upgrade those existing systems where potential failures could occur should the
targeted implementation dates of the new systems not be met or if the
implementation dates are after the end of the century. All costs associated with
Year 2000 compliance will be expensed as incurred, other than acquisition of new
software or hardware, which will be capitalized. The capital expenditures budget
for fiscal 1998 included and for fiscal 1999 includes the cost of the compliant
systems.
A Corporate Oversight Committee ("COC") has been formed to deal with both
non-information technology ("non-IT") and information technology ("IT") issues.
Its members will coordinate with all major functional areas within the Company.
The COC has developed an initial Year 2000 Concerns list, conducted strategic
planning sessions, launched a Corporate Year 2000 awareness program and is in
the process of corresponding with suppliers requesting Year 2000 certification.
Efforts with major customers are planned for the near future to discuss,
identify, test and remediate, if required, potential issues. The COC is working
with each business unit to identify potential impacts on both IT and non-IT
systems at their specific location, prioritizing each risk, and developing and
implementing remediation plans where necessary.
Although the Company is not aware of any material operational impediments
associated with upgrading its computer hardware and software systems to be Year
2000 compliant, the Company cannot make any assurances that the upgrade of the
Company's computer systems will be completed on schedule,
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<PAGE>
that the upgraded systems will be free of defects, or that the Company's
alternative plans will meet the Company's needs. If any such risks materialize,
the Company could experience material adverse consequences, material costs or
both.
There are many risks associated with the year 2000 compliance issue and the
most reasonably likely worst case scenario for the Company is undeterminable in
the current environment, but may include, without limitation, the possible
failure of the Company's computer and information systems, the possible failure
in the timely conversion of the systems of other companies on which the
Company's systems rely or the possibility that a conversion may be incompatible
with the Company's systems. Any such failure could have a material adverse
effect on the Company including the inability to bill and collect payments from
customers, the inability to order and receive materials and services from
suppliers and the potential for errors and omissions in accounting and financial
data. In addition, the Company is exposed to the inability of third parties to
perform as a result of year 2000 compliance. Any such failure by a third party,
including a bank, software product or service provider, utility or other entity
may have a material adverse financial or operational effect on the Company. The
Company expects to have developed a contingency plan to deal with this scenario
by April 30, 1999.
The Company is currently contacting its significant suppliers and customers
in an attempt to identify any potential Year 2000 compliance issues with them.
The Company is currently unable to anticipate the magnitude of the operational
or financial impact on the Company of Year 2000 compliance issues with its
suppliers and customers. See "Business--Information Technology."
SEASONALITY
The Company's business is seasonal based on the juvenile product buying
patterns of Evenflo's major customers. For fiscal 1998, quarterly net sales as a
percentage of total sales were approximately 21%, 27%, 24%, and 28%,
respectively, for the first through the fourth quarters of the fiscal year. The
Company's need for cash historically has been greater in its first and second
quarters when cash generated from operating activities coupled with drawdowns
from bank lines have been invested in receivables and inventories.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires
public entities to report certain information about operating segments, their
products and services, the geographic areas in which they operate, and their
major customers, in complete financial statements and in condensed interim
financial statements issued to shareholders. The Company adopted SFAS No. 131
during the three months ended December 31, 1998. This standard addresses
disclosure issues and therefore did not affect the Company's financial position
or results of operations.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Post-retirement Benefits" ("SFAS No. 132"). SFAS No. 132
revises employers' disclosures about pension and other post-retirement benefit
plans. SFAS No. 132 is effective for fiscal years beginning after December 15,
1997. The adoption of SFAS No. 132 is not expected to have a material effect on
the Company's consolidated financial statements. This standard addresses
disclosure issues and therefore will not affect the Company's financial position
or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative (that is, gains and losses) depends upon the intended use of the
derivative and resulting designation as a hedge. SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. The Company
has not evaluated whether this standard will have a material effect on the
Company's financial position or results of operations.
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BUSINESS
GENERAL
Evenflo is one of the largest manufacturers and marketers of juvenile
products in the United States as well as a leader in several international
markets based on pro forma net sales in 1997. Established in 1920, Evenflo is
one of the oldest and most recognized names in the juvenile products industry,
with a 97% brand awareness for infant feeding products among new mothers in the
United States. The Company believes it is a leading supplier of juvenile
products to such key national retailers as Toys "R" Us, Wal-Mart, Sears, Kmart
and Target.
Evenflo distinguishes itself from its competitors by developing innovative,
high quality products which have sometimes redefined their product categories.
For example, the 1994 introduction of the EXERSAUCER redefined the activity
product category. Evenflo followed this success with the introduction of the ON
MY WAY TRAVEL SYSTEM in 1996, which was, according to NPD, the single largest
selling product in the juvenile products industry by dollar volume in 1997. The
Company further distinguishes itself from its competitors through its co-branded
product offerings with other national brands such as OSHKOSH
B'GOSH-Registered Trademark- and SERTA-Registered Trademark-. For the three
months ended December 31, 1998, the Company had net sales of $72.6 million and
Adjusted EBITDA (as defined) of $1.4 million. For the same period, the Company's
operating activities used $8.3 million of cash, its investing activities used
$2.4 million of cash and financing activities provided $7.8 million of cash. For
fiscal 1998, the Company had net sales of $339.1 million and Adjusted EBITDA of
$20.7 million. For the same period, the Company's operating activities used $6.8
million of cash, its investing activities used $18.1 million of cash and
financing activities provided $30.5 million of cash.
The Company's products fall into four principal categories, representing the
daily activities in which the products are used: (i) "On The Go" products,
including car seats, strollers, travel systems and carriers, (ii) "Play Time"
products, including stationary activity products, swings, gates and doorway
jumpers, (iii) "Bed and Bath" products, including cribs, portable play yards,
monitors, mattresses, bath items and toilet trainers and (iv) "Feeding Time"
products, including reusable and disposable nurser systems, breastfeeding aids,
high chairs, oral development items such as teethers and pacifiers, bibs and
other feeding accessories.
During fiscal 1997 and fiscal 1998, Evenflo invested an aggregate of
approximately $108 million to improve its operations, expand its product lines
and support the growth of its base business. In March 1998, Evenflo completed
Project Discovery to improve productivity and increase capacity levels by
reengineering its Piqua, Ohio assembly lines and reconfiguring its principal
warehouse at a cost of $15.9 million ($12.8 million of which was invested in
fiscal 1997 and fiscal 1998) and in April 1997, Evenflo completed the Gerry
Acquisition for a purchase price of $68.7 million. The Gerry Acquisition
provided Evenflo with additional market leading products in categories such as
gates, monitors, infant carriers and baths, which complemented the Company's
traditional strengths in juvenile furniture and infant feeding products. To
realize the manufacturing efficiencies achievable through the Gerry Acquisition,
Evenflo invested an additional $7.4 million to integrate the Gerry operations
into the Company's Piqua, Ohio and Canton, Georgia plants. The Company
anticipates that significant production efficiencies will be realized in
calendar 1999 from Project Discovery and the integration of Gerry. In addition,
the Company has implemented the SKU Rationalization aimed at the discontinuance
of a substantial number of SKUs the Company has produced in order to eliminate
certain low margin SKUs and to decrease the manufacturing burden of producing a
significant number of product variations. The SKU Rationalization has generated
a $7.9 million non-cash charge in the three months ended December 31, 1998 to
eliminate certain items of inventory that will not be carried forward. The
Company believes that this effort will contribute to a reduction in inventory
levels and an improvement in margins.
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BUSINESS DESCRIPTION
ON THE GO (47.1% of Fiscal 1998 Net Sales)
The Company is a leader in the $488 million United States wholesale market
for products in the On The Go category. Evenflo's On The Go products, which
include car seats, strollers, travel systems and carriers generated fiscal 1998
net sales of $159.8 million and represent its strongest performing product
category.
Evenflo sold more juvenile car seats in the United States in 1997 (in
dollars) than any other company. The U.S. juvenile car seat market consists of
infant car seats (for children under twenty pounds), convertible (infant to
toddler) car seats and booster car seats. Evenflo had the number one market
position in both the infant and convertible car seat categories, and the number
three position in booster car seats in 1997, and had $102.3 million of net sales
of car seats in fiscal 1998. Evenflo's ON MY WAY car seat was the best selling
infant car seat (retail price of approximately $60), and the Company's ULTARA I
car seat was the best selling convertible car seat (retail price of
approximately $80) in 1997. The Company also offers other innovative products,
such as the DISCOVERY car seat introduced in January 1998 (retail price of
approximately $50), which was the second best selling infant car seat in the
United States in June 1998 behind the ON MY WAY car seat. Evenflo also markets
infant car seats under the TRAVEL TANDEM and FIRST CHOICE model names and
convertible car seats under the MEDALLION, HORIZON, CHAMPION, TROOPER and SCOUT
model names. Evenflo's car seats (depending on the model) offer features such as
detachable bases, five-point harness systems, adjustable shields, removable pad
and pillow inserts and the exclusive CARRY RIGHT handle which incorporates a
uniquely curved shape designed for ease of carrying.
In addition to net sales of $11.4 million in fiscal 1998 in the standard
stroller category, Evenflo has achieved success in the travel system product
category with net sales of $27.1 million in the product category with its ON MY
WAY TRAVEL SYSTEM, which is designed to integrate the popular ON MY WAY car seat
with a stroller to form a car seat/stroller combination product. In 1998,
Evenflo introduced the DISCOVERY TRAVEL SYSTEM, which combines the DISCOVERY car
seat and the TRENDSETTER stroller. The Company believes its travel systems have
provided Evenflo with a substantial opportunity by leveraging its leadership
position in car seats into a competitive advantage in strollers. As a result,
Evenflo has a number one market position in this innovative product category.
Additionally, Evenflo's SNUGLI brand is the leading soft infant carrier
product with a 62% market share in 1997. Carrier product offerings include soft
or frame carriers in face-in, face-out, hip or back-pack styles and accounted
for $10.6 million in net sales in fiscal 1998.
PLAY TIME (17.0% of Fiscal 1998 Net Sales)
The Company is a leading competitor in the $424 million U.S. wholesale
market for products in the Play Time product category, which includes activity
products, swings, toys, gates, bouncers and doorway jumpers. Evenflo's Play Time
products, which include the Company's leading line of EXERSAUCER stationary
activity products, swings, gates and doorway jumpers, generated fiscal 1998 net
sales of $57.6 million. The EXERSAUCER generated fiscal 1998 net sales of $17.3
million in the United States. The EXERSAUCER captured 21% of the overall U.S.
activity products category in 1997 (which includes walkers, a product line that
the Company does not produce). The EXERSAUCER offers an innovative exercise and
entertainment format which enables a child to play, spin, rock and bounce in
place, making the product a desirable alternative to walkers. The EXERSAUCER
features a patented saucer base which provides rocking action in all directions
and stationary feet which pull down to stop the rocking action when desired. The
EXERSAUCER product line covers lower, medium and high price points with such
products as the SUPERSAUCER which features a more elaborate play tray than the
standard line.
The Company had the number one market position in safety gates in 1997, and
safety gates accounted for $31.3 million in net sales in fiscal 1998. The
Company's gates are designed with features to make them
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both child-resistant and adult-friendly and are offered in a wide variety of
models, such as plastic mesh, wood, soft and wire mesh.
In 1998, Evenflo introduced a line of battery operated swings with wheels,
soothing "car ride" vibration options and removable play trays. In addition,
Evenflo offers a line of doorway jumpers for infants. In the Company's EVENFLO
TO GROW product line, the Company offers a variety of innovative electronic
TEACH ME TOYS products which promote the development of tactile, auditory,
creative thinking and visual skills.
BED AND BATH (13.6% of Fiscal 1998 Net Sales)
The Company is a leading competitor in the $726 million U.S. wholesale
market for Bed and Bath products, which includes cribs, play yards, monitors,
mattresses, bath items and toilet trainers (as well as a variety of soft goods
for the nursery that the Company does not produce). For fiscal 1998, Evenflo's
Bed and Bath products generated $46.2 million in net sales in the United States.
The Company's product offerings in the Bed and Bath category include juvenile
furniture products such as cribs, portable play yards, monitors, mattresses,
bath items and toilet trainers. Evenflo recently obtained a license to use the
SERTA-Registered Trademark- brand on its juvenile mattresses in a co-branded
product offering. The Company recently reentered the play yard product category
with its PLAY CRIB, with a patented locking hinge design that folds into a
convenient container. The Company is also a market leader in the sale of
monitors.
In 1997, the Company was the leader in bath items, offering infant to
toddler tubs, splash seats and a wide range of bath toys and accessories. Other
baby health products in this category include digital fever thermometers,
toothbrushes, humidifiers, vaporizers, medicine droppers and infant manicure
sets.
FEEDING TIME (22.3% of Fiscal 1998 Net Sales)
Evenflo is a leading competitor in the $366 million U.S. wholesale Feeding
Time category. For fiscal 1998, Feeding Time products generated $75.6 million in
net sales. In this category, Evenflo offers reusable and disposable nurser
systems, breastfeeding aids, high chairs, oral development items such as
teethers and pacifiers, bibs and other feeding accessories. Evenflo benefits
from the right to use Disney's DISNEY BABIES-Registered Trademark- licensed
characters on many of its most important feeding products.
Evenflo's reusable nurser system was the number two selling brand in the
United States in 1997 and generated $27.3 million in net sales in fiscal 1998,
with a full line of nursers, nipples and accessories at all price points.
Evenflo also markets an entire line of disposable bottle-feeding items,
including disposable bottle liners, nipples, holders and kits. In 1997, Evenflo
maintained its number one market position in breastfeeding products, offering a
complete line of breast pumps, including manual pumps as well as battery and
electric operated pumps for reusable and disposable nursers. Evenflo also
markets washable and disposable nursing pads. The Company anticipates
significant growth in sales of breastfeeding products, as recent research in the
lactation field demonstrating the benefits of breastfeeding is more widely
disseminated.
Evenflo ranked second in the U.S. high chair market with a 27% market share
in 1997, and generated net sales of $12.5 million in fiscal 1998. In recent
years, Evenflo has gained substantial market share in high chairs, largely as a
result of the 1995 introduction of its PHASES multi-use high chairs, which
convert from an infant feeding seat to booster seat to play table and chair.
SUBSIDIARIES
The Company derives a substantial portion of its revenue from its
subsidiaries, of which the material subsidiaries are the following:
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- Lisco Feeding, Inc--holds the intellectual property rights for certain of
the Company's products in the Feeding Time category, including reusable
and disposable nurser systems and oral development aids
- Lisco Furniture, Inc.--holds the intellectual property rights for the
Company's other products, including car seats, strollers and travel
systems
- R.B.D. de Mexico, S.A.--produces certain of the Company's products in
Mexico and sells them to Evenflo Mexico, S.A. de C.V.
- Evenflo Mexico, S.A. de C.V.--distributes products produced by R.B.D. de
Mexico, S.A., as well as imported products of the Company, in Mexico and
other countries in Latin America
- Mueblos Para Ninos de Baja, S.A. de C.V.--produces cribs for sale by the
Company in the United States
- Evenflo Canada, Inc.--distributes the Company's products in Canada
- Evenflo Europe SARL--contracts with a third-party manufacturer for the
production of certain of the Company's products for distribution in
Europe and distributes the Company's products in Europe
- Evenflo (Philippines), Inc.--distributes the Company's products in the
Philippines
INTERNATIONAL
Evenflo believes that higher birth rates, the adoption of mandatory
automobile child restraint laws, increasing income levels, the lowering of trade
barriers and the standardization of regulations in certain world markets present
significant growth opportunities. Evenflo has had an international presence for
over 50 years, selling its products in 63 foreign countries, with established
operations in Canada, Mexico and the Philippines. International sales
represented $43 million, or 13% of Evenflo's net sales in fiscal 1998. See "Risk
Factors--Risks Associated with International Markets; Dependence on Foreign
Manufacturing."
DISTRIBUTION AND SALES
The five largest customers of Evenflo represented approximately 70% of
Evenflo's net sales for the three months ended December 31, 1998. For fiscal
1998, the five largest customers of Evenflo represented approximately 65% of
Evenflo's net sales with Toys "R" Us, Wal-Mart, Target and Sears representing
25%, 17%, 8% and 8%, respectively, of net sales for such period. For fiscal
1997, the five largest customers of Evenflo represented approximately 59% of
Evenflo's pro forma net sales with Toys "R" Us, Wal-Mart and Sears representing
20%, 17% and 8%, respectively, of pro forma net sales for such period. No other
customer accounted for more than 10% of Evenflo's worldwide net sales. The
Company has strong, long-standing relationships with many of its largest
customers. As is customary in the industry, the Company's products are generally
purchased by means of purchase orders. The Company's products are sold in the
United States and in 63 foreign countries. The Company's sales organization in
the United States is divided into national accounts, non-national accounts and
food and drug accounts. A national account manager is designated for each of
Toys "R" Us, Wal-Mart, Sears, Target and Kmart. For non-national accounts, a
vice president coordinates the selling efforts of 5 independent manufacturer's
representatives. For food and drug accounts, a vice president and five regional
managers oversee 55 food brokers which carry Evenflo's merchandise. A separate
account services manager is responsible for customer service and order
processing. A business development manager and a forecasting manager report to
the senior vice president in charge of sales.
The Company's international sales have historically been made primarily
through its Canadian, Mexican and Philippine operations and independent
distributors selling to customers in 63 foreign countries. Recently, the Company
has begun to develop additional sales and marketing capabilities in
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targeted markets. For example, in May 1998, the Company entered the European
market on a direct basis with a line of locally manufactured products sold
through its own sales and marketing group. The Company is exploring similar
opportunities in Southeast Asia and will continue to examine opportunities in
overseas markets for establishing sales and marketing offices in the future. See
"Risk Factors-- Dependence on Certain Customers."
MARKETING
Evenflo's marketing efforts are focused on building brand identity through
broad advertising and packaging programs as well as emphasizing product
innovation and customer service. The Company conducts extensive research on
juvenile products industry trends, including consumer buying trends and
focus-group research with parents and children. The Company uses this data in
making determinations with respect to product offerings and new product
introductions to respond to consumer demands.
In order to further distinguish its products, the Company has arrangements
with other national brands such as Serta, Disney, Warner Bros. and OshKosh in
co-branded product offerings such as new infant mattresses by
SERTA-Registered Trademark-, Play Time products decorated with BABY LOONEY
TUNES-Registered Trademark- characters and Feeding Time products decorated with
DISNEY BABIES-Registered Trademark- characters. As part of its co-branding
strategy, Evenflo recently introduced a line of OSHKOSH
B'GOSH-Registered Trademark- by Evenflo products, including car seats,
strollers, play yards and carriers, which the Company believes is the first
product grouping with an integrated look of this kind in the industry. The
Company intends to pursue additional opportunities to improve the design appeal
of its products through co-branding arrangements in the future.
Marketing programs are national in scope and primarily consist of print
advertising, trade and consumer promotions and targeted sampling. The Company
collaborates with significant accounts to develop shelf space allocations for
the Company's products in upcoming selling seasons. For key accounts, the
Company also designs and sets up in-store promotional displays for products,
including new product introductions. Advertising and promotion expenditures
amounted to approximately 5% of Evenflo's net sales in fiscal 1998, 1997 and
1996.
In addition to traditional advertising and promotion efforts, the Company is
allocating resources to public relations and grass-roots efforts, including
promotions with Lamaze and the SAFE KIDS CAMPAIGN-Registered Trademark-.
Marketing is supported at the consumer level through the Company's Internet site
(www. evenflo.com) and through a toll-free consumer hotline staffed by 36
service representatives to address questions on products and safety. Further,
Evenflo has recently launched a marketing and education program targeting
Hispanic child birth educators and expectant parents in order to serve the
Hispanic community, one of the fastest growing demographic groups in the United
States.
RESEARCH & DEVELOPMENT
Evenflo dedicates substantial resources to its product development efforts,
including 24 professionals at December 31, 1998 in research and development. As
of December 31, 1998, Evenflo's research and development group has developed
over 317 U.S. patents and 121 foreign patents. Evenflo has developed a number of
innovative infant and juvenile products, including the first fully transparent
baby bottle, the first decorated nurser, the first convertible (infant to
toddler) car seat to pass applicable federal testing standards and the first
juvenile stationary activity product. Evenflo strives to consistently introduce
innovative new products. For example, the Company introduced the HORIZON
convertible car seat and the DISCOVERY infant car seat in 1998. In addition, by
designing a car seat that attaches to a stroller to form a new travel system,
Evenflo has created incremental growth opportunities in the stroller category
and expects to introduce a higher-end travel system in 1999. Each new product
Evenflo develops is subjected to extensive evaluation for quality and safety. At
December 31, 1998, Evenflo had 63 patents pending at the U.S. Patent and
Trademark Office.
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In addition to Evenflo's in-house professionals, outside sources are used
for research and development, including individual designers/inventors, design
houses, universities and engineering services. As a leader in the U.S. car seat
market, Evenflo dedicates significant resources to the design and testing of its
car seat product line. In addition, the Company has completed the construction
of a quality control laboratory at is Piqua, Ohio, facility and implemented a
formal hazard analysis process for product testing which will enable the Company
to improve the safety and quality of its products.
MANUFACTURING AND DISTRIBUTION FACILITIES, PROCUREMENT AND RAW MATERIALS
Evenflo maintains six manufacturing and assembly plants located in Ohio,
Georgia, Alabama, Wisconsin and two in Mexico. Evenflo also operates
distribution centers in Canada and the Philippines and has entered into a joint
manufacturing arrangement with a French corporation for the manufacture and
distribution of ON MY WAY car seats and the EXERSAUCER in European markets.
Evenflo manufactures bottles and nipples and assembles certain infant feeding
and baby care products primarily at its facilities in Canton, Georgia and Mexico
City. Car seats, high chairs, mattresses and stationary activity products are
assembled at Evenflo's plant in Piqua, Ohio. Jasper, Alabama serves as a soft
goods manufacturing feeder plant for the final assembly operations in Ohio.
Evenflo's cribs are manufactured and assembled at a facility in Tijuana, Mexico,
while wood products (primarily gates) are produced at its plant in Suring,
Wisconsin. The Company recently completed the elimination of Gerry's
manufacturing and distribution operations at Thornton, Colorado and the
integration of those operations into the Company's Piqua, Ohio and Canton,
Georgia facilities and closed the Thornton facility. In addition to the
integration of Gerry into the Company's operations, the Company recently
completed the reengineering of the Piqua assembly lines to improve productivity
and capacity, including the installation of large-piece injection molding
equipment. As part of this project, the Company also redesigned the Piqua and
Canton warehouses, installed computer-controlled fabric cutting systems in
Jasper and centralized the Company's administrative offices in Vandalia, Ohio.
As a result of Project Discovery, Evenflo is the only major U.S. juvenile
products manufacturer with ISO 9000 registration status.
Evenflo's sourced products are manufactured according to its specifications
by third-party manufacturers located within the United States and abroad,
primarily in China, Thailand, Taiwan, Hong Kong and other Southeast Asian
countries. Products representing 27% of Evenflo's net sales in fiscal 1998 were
produced by foreign third party manufacturers and only one supplier accounted
for products representing more than 10% of Evenflo's fiscal 1998 net sales. For
the three months ended December 31, 1998, sales of products which were
manufactured in foreign countries represented approximately 41% of the Company's
net sales for that period. (Lordship accounted for products representing
approximately 14% of Evenflo's fiscal 1998 net sales). Evenflo continually
monitors its sourced products with a staff headquartered in Hong Kong to improve
the quality of its sourced products. Evenflo believes it has alternative sources
of supply for nearly all of the products currently produced by third party
manufacturers; however, any interruption in the supply of such goods or increase
in price or decline in quality could have a material adverse effect on the
Company's results of operations. See "Risk Factors--Risks Associated with
International Markets; Dependence on Foreign Manufacturing."
The principal raw materials used by Evenflo in the manufacture of its
products include various plastic resins, natural and synthetic rubbers, wood,
textiles and paper products, all of which are normally readily available. While
all raw materials are purchased from outside sources, Evenflo is not dependent
upon a single supplier in any of its operations for any material essential to
its business or not otherwise commercially available to Evenflo. Evenflo does
not anticipate any significant material shortages or price movements in its
inputs. Plastic resins prices may fluctuate as a result of changes in natural
gas and crude oil prices and the capacity, supply and demand for resins and the
petrochemical intermediates from which they are produced. See "Risk
Factors--Cost and Availability of Certain Materials."
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COMPETITION
The juvenile product industry is highly competitive and is characterized by
frequent introductions of new products, often accompanied by advertising and
promotional programs. Evenflo competes with numerous national and international
companies which manufacture and distribute infant and juvenile products, a
number of which have greater financial and other resources at their disposal.
Evenflo's principal competitors include Century, Graco, Cosco, First Years,
Fisher-Price, Gerber, Johnson & Johnson, Kolcraft, Playtex and Safety 1st.
Newell Co. recently acquired Rubbermaid, Inc., the parent company of Century and
Graco.
A number of factors affect competition in the juvenile products manufactured
and/or sold by the Company, including quality, price competition from
competitors and price points parameters established by the Company's customers.
Shelf space is a key factor in determining retail sales of juvenile care
products. A competitor that is able to maintain or increase the amount of retail
space allocated to its product may gain a competitive advantage for that
product. The allocation of retail space is influenced by many factors, including
brand name recognition, quality and price of the product, level of service by
the manufacturer and promotions.
In addition, new product introductions are an important factor in the
categories in which the Company's products compete. Other important competitive
factors are brand identification, style, design, packaging and the level of
service provided to customers. The importance of these competitive factors
varies from customer to customer and from product to product. See "--Product
Innovation." There can be no assurance that the Company will be able to compete
successfully against current and future sources of competition or that the
current and future competitive pressures faced by the Company will not adversely
affect its profitability or financial performance. See "Risk Factors--Potential
for Increased Competition."
In the On The Go product category, Graco has recently entered the monitor
and travel system markets, which has resulted in an increase in competition in
these markets.
PROPERTIES
The Company's manufacturing and distribution facilities and U.S. sales
operations are generally located on owned or leased premises. The Company
conducts a significant portion of its international sales operations on leased
premises, which have remaining terms generally ranging from two to three years.
Substantially all leases contain renewal options pursuant to which the Company
may extend the lease terms in increments of three to five years. The Company
does not anticipate any difficulties in renewing its leases as they expire. The
Company believes that its facilities are suitable for their present and intended
purposes and are adequate for the Company's current and expected levels of
operations. The Company does not believe that the lease of any one facility is
material to its business.
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The following table sets forth information as of December 31, 1998 with
respect to the manufacturing, warehousing and office facilities used by the
Company in its businesses:
<TABLE>
<CAPTION>
OWNED/ SQUARE
LOCATION DESCRIPTION LEASED FOOTAGE
- ---------------------------------------------------- -------------------------------------- --------- ---------
<S> <C> <C> <C>
Canton, Georgia..................................... Manufacturing/Warehousing/Office Owned 380,500
Piqua, Ohio......................................... Manufacturing/Warehousing/Office Owned 347,400
Piqua, Ohio......................................... Warehousing Leased 87,800
Piqua, Ohio......................................... Warehousing Owned 155,000
Piqua, Ohio......................................... Warehousing Leased 30,000
Sidney, Ohio........................................ Warehousing Leased 110,000
Vandalia, Ohio...................................... Offices Leased 34,210
Shawano, Wisconsin.................................. Warehousing Leased 5,000
Suring, Wisconsin................................... Manufacturing/Warehousing/Office Owned 139,984
Suring, Wisconsin................................... Warehousing Leased 3,200
Suring, Wisconsin................................... Warehousing Leased 2,100
Suring, Wisconsin................................... Warehousing Leased 7,000
Suring, Wisconsin................................... Warehousing Leased 3,600
Jasper, Alabama..................................... Manufacturing/Office Owned 103,000
Mexico City, Mexico................................. Manufacturing/Warehousing/Office Owned 76,308
Tijuana, Mexico..................................... Manufacturing Owned 50,061
Oakville, Ontario................................... Warehousing/Office Leased 26,780
Philippines......................................... Office Leased 2,422
Hong Kong........................................... Office Leased 1,730
France.............................................. Office Leased 900
Taiwan.............................................. Office Leased 700
</TABLE>
TRADEMARKS AND PATENTS
Evenflo has proprietary rights to a number of trademarks that are important
to its business, including EVENFLO, GERRY and SNUGLI. In addition the Company
has non-exclusive licenses to use DISNEY BABIES-Registered Trademark- and BABY
LOONEY TUNES-Registered Trademark- characters on many of its products in the
United States and certain international markets, exclusive licenses to use the
OSHKOSH B'GOSH-Registered Trademark- brand on car seats, carriers, play yards
and strollers in the United States and Canada and a non-exclusive license to use
the SERTA-Registered Trademark- brand on its juvenile mattresses in the United
States.
The policy of the Company is to protect proprietary products by obtaining
patents for such products when practicable. At December 31, 1998, Evenflo owned
317 patents and 316 trademarks and had 63 patent applications and 81 trademarks
pending at the U.S. Patent and Trademark Office. In addition, the Company also
maintains patent protection for certain of its products in other countries and
has a number of patent applications pending in foreign countries. In addition to
its patent portfolio, the Company possesses a wide array of unpatented
proprietary technology and know-how. The Company believes that its patents,
trademarks, trade names, service marks and other proprietary rights are
important to the development and conduct of its business and the marketing of
its products. As such, the Company vigorously protects its intellectual property
rights. In some cases, litigation or other proceedings may be necessary to
defend against or assert claims of infringement, to enforce patents issued to
the Company or its licensors, to protect trade secrets, know-how or other
intellectual property rights owned by the Company, or to determine the scope and
validity of the proprietary rights of the Company or of third parties. On April
22, 1998, the Company sued Graco for patent infringement relating to the
Company's CARRY RIGHT patent. Graco has filed an answer and a counterclaim
alleging infringement by Evenflo of three different patents relating to stroller
technology. In addition, on August 7, 1998, Century filed suit against both
Evenflo and Spalding alleging the infringement of two patents relating to the
design of the storage
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compartment and base of certain of the Company's car seats. The Company intends
to vigorously defend this action and believes that an adverse outcome would not
materially adversely affect the Company. There can be no assurance that the
Company will prevail in either of these suits or in similar litigation.
See "--Legal Proceedings." Although the Company believes that, collectively, its
patents are important to its business, the loss of any one patent would not have
a material adverse effect on the Company's business and results of operations.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state, and local
Environmental Laws that continue to be adopted and amended. These Environmental
Laws regulate, among other things, air and water emissions and discharges at the
Company's manufacturing facilities; the generation, storage, treatment,
transportation and disposal of solid and hazardous waste by the Company; the
remediation of environmental contamination; the release of toxic substances,
pollutants and contaminants into the environment at properties operated by the
Company and at other sites; and, in some circumstances, the environmental
condition of property prior to a transfer or sale (including certain facilities
previously owned or operated by the Company). Risks of significant costs and
liabilities are inherent in the Company's operations and facilities, as they are
with other companies engaged in like businesses. The Company believes, however,
that its operations are in substantial compliance with all applicable
Environmental Laws as currently interpreted.
While historically the costs of environmental compliance have not had a
material adverse effect on the consolidated financial condition, results of
operations or cash flows of the Company, the Company cannot predict with
certainty its future costs of environmental compliance because of continually
changing compliance standards and technology. Compliance with such requirements
may make it necessary, at costs which may be substantial, to retrofit existing
facilities with additional pollution-control equipment and to undertake new
measures in connection with the storage, transportation, treatment and disposal
of by-products and wastes. See "Risk Factors--Environmental Matters."
PRODUCT REGULATION
The Company's products are subject to the provisions of the Safety Acts and
the regulations promulgated thereunder. The Safety Acts authorize the CPSC to
protect the public from products which present a substantial risk of injury. The
Highway Safety Act of 1970 authorizes the NHTSA to protect the public from risks
of injury from motor vehicles and motor vehicle equipment. The CPSC, the NHTSA
and the FTC can initiate litigation requesting that a manufacturer be required
to remedy, repurchase or recall articles which fail to comply with federal
regulations, which contain a safety related defect or which present a
substantial risk of inquiry to users. They may also impose fines or penalties on
the manufacturer. Similar laws exist in some states and in other countries in
which the Company markets its products. Any recall of its products could have a
material adverse effect on the Company. In 1997, the CPSC announced 55 recalls
of seven million juvenile products. See "Risk Factors--Product Regulation;
Product Recalls" for a discussion of certain recent recalls and corrective
actions undertaken by the Company.
The Company invests considerable resources in the development of
well-designed, safe products, and it is a core value of Evenflo to subject new
products to extensive testing and safety analyses and to continue to improve its
products and safety features. The Company recently entered into a consulting
agreement with Intertek Testing Services NA, Inc. ("Intertek"), a risk and
hazard analysis company which specializes in the safe design of products.
Intertek's staff of engineers and safety experts will provide additional support
from the product design stage through product distribution to improve the
Company's safety profile. In addition, the Company has completed the
construction of a quality control laboratory at its Piqua, Ohio, facility and
has implemented a formal hazard analysis process for product testing which will
enable the Company to improve the safety and quality of its products. In January
1999, the Company purchased an insurance policy to cover the costs of recalls
and corrective actions. The policy has a
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premium for calendar 1999 of $0.5 million and a deductible of $0.5 million per
occurrence and coverage of up to $10.0 million per year.
LEGAL PROCEEDINGS
Due to the nature of its products, the Company has been engaged in, and will
continue to be engaged in, the defense of product liability claims related to
its products, particularly with respect to juvenile car seats and play yards.
Such claims have caused the Company to incur material litigation and insurance
expenses. Since 1988, approximately 293 product liability claims have been
brought against the Company, 201 of which related to juvenile car seats.
From April 1, 1988 to September 30, 1998, out-of-pocket indemnities and
expenses (exclusive of payments by insurers and insurance premiums) for car seat
claims (including damage awards, settlements, attorneys' fees and other related
expenses) have averaged approximately $1.6 million per year, when allocated to
the policy periods when the related injuries occurred, while the total
out-of-pocket indemnities and expenses (exclusive of payments by insurers and
insurance premiums) for all product liability claims have averaged approximately
$2.0 million per year, on a similar basis. From fiscal 1993 through fiscal 1998,
the Company has incurred average costs for out-of-pocket indemnities and
expenses (exclusive of payments by insurers and insurance premiums) for all
product liability claims of approximately $2.7 million per year when allocated
to the policy periods when the related injuries accurred. The increase in
average costs for product liability claims from $2.0 million per year for the
ten-year average to $2.7 million per year for the five-year average is due to an
increase in Spalding's insurance policy deductibles. Prior to the Transactions,
the Company's insurance was purchased on a consolidated basis by Spalding.
Spalding increased the size of its insurance deductibles due to industry wide
increases in insurance premiums. As described below, Spalding purchased separate
additional indemnity insurance in 1995 to reduce the size of its insurance
deductibles. The Company anticipates that it will continue to incur average
product liability claims of levels similar to the five-year average for the next
several years.
Spalding, on behalf of the Company, currently carries substantial insurance
(at a cost to the Company in fiscal 1998 of $1.3 million) and the Company
maintains reserves for potential claims. Based on its experience with product
liability claims, the amount of reserves established for product liability
claims against it and the levels of insurance that it maintains, the Company
believes that there are no product liability claims pending which, if adversely
determined, would have a material adverse effect on its consolidated financial
position, results of operations or cash flows. However, due to the inherent
uncertainty of litigation, it is possible that the Company may be subject to
adverse judgments which, singly or in the aggregate, could be substantial in
amount and may not be covered by insurance or reserves. In addition, no
assurance can be given that in the future a claim will not be brought against
the Company which would have a material adverse effect on the Company. In
addition, in any product liability claim, a judgment against the Company may
include the imposition of punitive damages, the award of which, pursuant to
certain state laws, may not be covered by insurance. In addition, because there
may be a lapse of time between a product recall or corrective action and the
filing of lawsuits against the Company relating to alleged defects, the Company
may experience, due to the occurrence of a number of recent recalls and
corrective actions, an increase in the number of product liability claims in
future periods.
Prior to the Transactions, the Company's insurance was purchased on a
consolidated basis by Spalding. Spalding product liability insurance coverage
has been established on policy years beginning April 1 of each year. Spalding's
primary insurance per occurrence deductible for 1998 is $2.0 million and the
corresponding policy aggregate deductible is $4.5 million. Spalding purchases
separate additional indemnity insurance to effectively reduce the per occurrence
deductible from $2.0 million to $0.5 million and to reduce the policy year
aggregate deductible from $4.5 million to $3.0 million. Spalding's lead umbrella
insurance carrier provides for $5.0 million of insurance coverage above the
deductible amount of $2.0 million per occurrence and $4.5 million in the
aggregate. Commencing in 1992, Spalding purchased a total of $75 million in
umbrella coverage for each policy year. The Company believes that, for periods
prior
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to the Transactions, its reserve levels for out-of-pocket indemnities and
expenses for product liability claims are adequate. The Company is currently in
the process of implementing an insurance program with substantially the same
coverage and deductibles for slightly increased premiums.
The Gerry Acquisition did not impact insurance coverage or materially impact
product liability premium costs. The Company is indemnified by Huffy pursuant to
the Gerry Acquisition purchase agreement for any liability arising out of claims
with respect to products shipped prior to the date of the Gerry Acquisition.
There have not been any known significant claims with respect to Gerry products
since the date of the Gerry Acquisition. See "Risk Factors--Product Liability
Litigation."
In addition to the defense of product liability claims, the Company has
recalled certain of its products, in response to consumer complaints and
following internal Company testing, identified product safety problems or
manufacturing defects. Product recalls have been primarily in the juvenile car
seat and play yard categories. Remedial measures have included increasing
notices to consumers on the product itself and improving design. See "--Product
Regulation."
From time to time the Company also is involved in patent infringement
actions. The Company believes that it is not presently a defendant or plaintiff
in any patent infringement action, the outcome of which would have a material
adverse effect on its consolidated financial position, results of operations or
cash flows. The Company filed a patent infringement action on April 22, 1998 in
the U.S. District Court for the Northern District of Ohio against Graco relating
to the Company's CARRY RIGHT handle used on Evenflo's line of car seats. On May
6, 1998, Graco filed an answer and counterclaim alleging infringement by Evenflo
of three different patents relating to stroller technology. In addition, on
August 7, 1998, Century filed suit in U.S. District Court for the Northern
District of Ohio against both Evenflo and Spalding alleging the infringement of
two patents relating to the design of the storage compartment and base of
certain of the Company's car seats. There can be no assurance as to the outcome
of either such litigation.
In 1989, Evenflo entered into a license agreement for the design of the
HAPPY CAMPER play yard. The license agreement was cancelled in April 1997 by the
licensor, and on July 18, 1997 Evenflo filed suit for breach of contract. The
licensor has filed a claim charging Evenflo with patent infringement and breach
of contract. It is anticipated that the consolidated case will go to trial in
early 1999. There can be no assurance as to the outcome of such litigation. The
loss of the license required the Company to design a new play yard, which
interrupted shipments to customers for a nine-month period. However, the Company
has recently re-entered the play yard product category with the PLAY CRIB.
In addition to such product liability and patent infringement claims, the
Company is a party to various lawsuits arising in the ordinary course of
business. None of these other lawsuits is believed to be material with respect
to the business, assets and continuing operations of the Company.
On September 22, 1998, Spalding, on behalf of all the entities included in
the Spalding consolidated federal income tax return (including the Company),
entered into an agreement with the Internal Revenue Service ("IRS") completing
the audit of the September 30, 1994 and 1995 consolidated federal income tax
returns, and finally determining Spalding's tax liability for those years. The
primary issue in that audit was the tax treatment accorded the 1994 acquisition
of certain foreign trademarks acquired from an affiliate. Under that agreement
with the IRS, the fair market value of those trademarks for tax purposes was
reduced, resulting in an additional tax liability due to trademark amortization
deductions. As part of the Spalding Recapitalization, Abarco indemnified
Spalding for the additional tax liability related to periods prior to September
30, 1996. The additional tax liability for the Company and the related reduction
of the Company's deferred tax asset were not significant.
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EMPLOYEES
The Company's worldwide workforce consisted of approximately 2,254 employees
(full- and part-time) as of December 31, 1998.
At the Company's facilities, approximately 651 of the Company's employees
are represented under collective bargaining agreements, which agreements expire
from January 1999 through September 2001. The Company does not anticipate
difficulty in extending or negotiating these agreements as they expire. The
Company believes that its labor relations are good and no material labor cost
increases, other than in the ordinary course of business are expected.
INFORMATION TECHNOLOGY
Following the Gerry Acquisition, the Company has operated its information
systems utilizing three different software systems operating on three different
hardware platforms. As part of the integration of Gerry's operations and the
unification of the Company's Ohio and Georgia operations, the Company is in the
process of a $6.5 million information technology program, of which $4.8 million
was spent in the aggregate in the calendar 1998, designed to enhance the
Company's information systems, EDI capabilities and data processing capabilities
and to resolve the Company's Year 2000 compliance issues. The new system will
replace roughly 90% of the Company's current information systems and will be
implemented in three phases scheduled to be completed in December 1999. See
"--Year 2000 Compliance."
The Company's improved EDI system will allow less costly order placement and
increase the accuracy and timeliness of order processing while enabling the
customer to decrease inventory levels. The enhanced information capabilities
will reduce the complexity of information gathering, permit improved analyses of
orders, sales, customer service levels and inventory and more readily permit the
identification of trends in these items.
YEAR 2000 COMPLIANCE
Many computer software and hardware systems currently are not able to read,
calculate or output correctly using dates after 1999, and such systems will
require significant modifications in order to be "Year 2000 compliant." The
Company has reviewed its computer hardware and software systems and has recently
begun to identify those systems that are not Year 2000 compliant. The Company
expects to spend approximately $6.5 million by December 1999 to unify and
upgrade its information systems, to improve its EDI capabilities and to resolve
the Company's Year 2000 compliance issues, with $4.8 million of this amount
spent in calendar 1998. The enhanced system will be completed by December 1999,
with the upgrades required for Year 2000 compliance to be completed by June
1999. To date, the Company has assessed 95% of its systems and has identified
85% as requiring replacement or remediation. The Company expects that 100% of
the systems will be replaced and tested by June 1999. As of December 31, 1998,
none of these systems had been replaced in anticipation of the Company's
information systems upgrade discussed above. The Company is currently developing
alternative plans in the event that critical system upgrades are not completed
on time. The Company will complete the development of such contingency plans by
April 30, 1999. Contingency plans will exist in each of the business units to
correct and upgrade those existing systems where potential failures could occur
should the targeted implementation dates of the new systems not be met or if the
implementation dates are after the end of the century. All costs associated with
Year 2000 compliance will be expensed as incurred, other than acquisition of new
software or hardware, which will be capitalized. The capital expenditures budget
for fiscal 1998 included and for fiscal 1999 includes the cost of the compliant
systems.
A Corporate Oversight Committee ("COC") has been formed to deal with both
non-information technology ("non-IT") and information technology ("IT") issues.
Its members will coordinate with all major functional areas within the Company.
The COC has developed an initial Year 2000 Concerns list, conducted strategic
planning sessions, launched a Corporate Year 2000 awareness program and is in
the
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process of corresponding with suppliers requesting Year 2000 certification.
Efforts with major customers are planned for the near future to discuss,
identify, test and remediate, if required, potential issues. The COC is working
with each business unit to identify potential impacts on both IT and non-IT
systems at their specific location, prioritizing each risk, and developing and
implementing remediation plans where necessary.
Although the Company is not aware of any material operational impediments
associated with upgrading its computer hardware and software systems to be Year
2000 compliant, the Company cannot make any assurances that the upgrade of the
Company's computer systems will be completed on schedule, that the upgraded
systems will be free of defects, or that the Company's alternative plans will
meet the Company's needs. If any such risks materialize, the Company could
experience material adverse consequences, material costs or both.
There are many risks associated with the year 2000 compliance issue and the
most reasonably likely worst case scenario for the Company is undeterminable in
the current environment, but may include, without limitation, the possible
failure of the Company's computer and information systems, the possible failure
in the timely conversion of the systems of other companies on which the
Company's systems rely or the possibility that a conversion may be incompatible
with the Company's systems. Any such failure could have a material adverse
effect on the Company including the inability to bill and collect payments from
customers, the inability to order and receive materials and services from
suppliers and the potential for errors and omissions in accounting and financial
data. In addition, the Company is exposed to the inability of third parties to
perform as a result of year 2000 compliance. Any such failure by a third party,
including a bank, software product or service provider, utility or other entity
may have a material adverse financial or operational effect on the Company. The
Company expects to have developed a contingency plan to deal with this scenario
by April 30, 1999. The Company is currently contacting its significant suppliers
and customers in an attempt to identify any potential Year 2000 compliance
issues with them. The Company is currently unable to anticipate the magnitude of
the operational or financial impact on the Company of Year 2000 compliance
issues with its suppliers and customers.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following individuals are the directors and executive officers of the
Company following the Transactions:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- -----------------------------------------------
<S> <C> <C>
Richard W. Frank..................... 55 Chairman of the Board of Directors and Chief
Executive Officer
George A. Harris..................... 52 President
Michael L. Johnson................... 40 Senior Vice President--Operations
Daryle A. Lovett..................... 49 Senior Vice President--Finance
Richard F. Schaub, Jr................ 38 Senior Vice President--Marketing
David J. Bimschleger................. 43 Senior Vice President--Sales
John D. Dupps........................ 41 Vice President--Human Resources
Bachar El Zein....................... 42 Vice President--International
Edwin L. Artzt....................... 68 Director
Henry R. Kravis...................... 53 Director
George R. Roberts.................... 53 Director
Michael T. Tokarz.................... 47 Director
Marc S. Lipschultz................... 29 Director
</TABLE>
RICHARD W. FRANK--Mr. Frank has been Chairman of the Board of Directors of the
Company (the "Board of Directors") and Chief Executive Officer of the Company
since June 1998. Prior to joining the Company, Mr. Frank served as
President--USA, Consumer OTC Healthcare, a division of Bayer Corporation, which
he joined in 1995. He was Vice President--Consumer Marketing of Helene Curtis
prior to 1995. Mr. Frank also held a variety of marketing positions during his
eleven year tenure with The Procter & Gamble Company ("P&G").
GEORGE A. HARRIS--Mr. Harris has been the President of the Company since October
1995. Mr. Harris joined Evenflo Juvenile Furniture Company, Inc., a subsidiary
of Spalding, as President in November 1990 and was named President of Evenflo
companies in May 1995. Mr. Harris has announced his resignation effective April
30, 1999. His position will not be replaced and his duties will be assumed by
Mr. Frank. He was Vice President--Sales and Marketing, of the Coleman Company,
Inc., Outdoor Products Division, prior to October 1990.
MICHAEL L. JOHNSON--Mr. Johnson has been the Senior Vice President--Operations
of the Company since March 1996. Mr. Johnson joined the Company in January 1993
as Vice President--Operations. Prior to joining the Company, Mr. Johnson was
employed by General Electric Company as the Operations Manager of the Aerospace
Operations Division in Daytona Beach, Florida and served as Production
Engineering Manager and Manager of Advanced Manufacturing Engineering.
DARYLE A. LOVETT--Mr. Lovett has been the Senior Vice President--Finance of the
Company since he joined the Company in April 1997. From January 1995 to April
1997, Mr. Lovett served as President of Gerry, and from 1981 to January 1995 he
served in the capacities of Vice President--Operations and Vice
President--Finance for Gerry.
RICHARD F. SCHAUB, JR.--Mr. Schaub was the Senior Vice President--Marketing of
the Company from joining the Company in August 1997 to March 3, 1999, the
effective date of his resignation. From 1994 to August 1997, Mr. Schaub served
as President of Priss Prints, and from 1991 to 1994, he served as Vice
President--Sales and Marketing for Dolly, Inc. He also held a variety of
merchandising and marketing positions at Child World, Inc.
DAVID J. BIMSCHLEGER--Mr. Bimschleger has been Senior Vice President--Sales
since he joined the Company in October 1998. Prior to joining the Company, Mr.
Bimschleger was Vice President--Sales and
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Marketing for Strategic Decisions, a category management consulting firm. Prior
to joining Strategic Decisions, Mr. Bimschleger was Vice President of Central
Division Sales for Chiquita Brands International. Mr. Bimschleger held various
sales and category management assignments during his 19 year tenure with Kraft
Foods.
JOHN D. DUPPS--Mr. Dupps has been the Vice President--Human Resources of the
Company since he joined the Company in March 1996. From 1992 to March 1996, Mr.
Dupps was employed by Emerson Electric Company as Vice President--Human
Resources for its Wiegand and Fusite Divisions.
BACHAR EL ZEIN--Mr. El Zein has been Vice President-International of the Company
since 1993. Mr. El Zein joined the Company in February 1982. Mr. El Zein served
in various financial and sales capacities at the Company prior to becoming Vice
President-International.
EDWIN L. ARTZT--Mr. Artzt became a director of the Company on September 22,
1998. He is the former chairman and Chief Executive Officer of P&G, and is
currently a director and Chairman of the Executive Committee of the Board of
Directors of P&G. Mr. Artzt is also a director of American Express Company, GTE
Corporation, Delta Airlines and the Barilia Company of Parma, Italy. He is also
a member of the boards of University of Pennsylvania's Wharton School of
Business, UCLA's Andersen School of Business and Emory Graduate School of
Business. He has also served on President Clinton's Advisory Committee on Trade
Policy and Negotiations, the Committee for Economic Development and the Business
Roundtable.
HENRY R. KRAVIS--Mr. Kravis became a director of the Company on the Closing
Date. He is a managing member of KKR & Co. L.L.C., the limited liability company
which serves as the general partner of KKR. He is also a director of Accuride
Corporation, Amphenol Corporation, Borden, Inc., The Boyds Collection, Ltd.,
Bruno's, Inc., The Gillette Company, IDEX Corporation, KinderCare Learning
Centers, Inc., KSL Recreation Group, Inc., Newsquest Capital plc,
Owens-Illinois, Inc., Owens-Illinois Group, Inc., PRIMEDIA, Inc., Randall's Food
Markets, Inc., Regal Cinemas, Inc., Safeway Inc., Sotheby's Holdings Inc. and
Spalding.
GEORGE R. ROBERTS--Mr. Roberts became a director of the Company on the Closing
Date. He is a managing member of KKR & Co. L.L.C., the limited liability company
which serves as the general partner of KKR. He is also a director of Accuride
Corporation, Amphenol Corporation, Borden, Inc., The Boyds Collection, Ltd.,
Bruno's, Inc., IDEX Corporation, KinderCare Learning Centers, Inc., KSL
Recreation Group, Inc., Owens-Illinois, Inc., Owens-Illinois Group, Inc.,
PRIMEDIA, Inc., Randall's Food Markets, Inc., Regal Cinemas, Inc., Safeway Inc.
and Spalding.
MICHAEL T. TOKARZ--Mr. Tokarz became a director of the Company on the Closing
Date. He is a member of KKR & Co. L.L.C., the limited liability company which
serves as the general partner of KKR. He is also a director of IDEX Corporation,
KSL Recreation Group, Inc., PRIMEDIA, Inc., Safeway Inc., Spalding and Walter
Industries, Inc.
MARC S. LIPSCHULTZ--Mr. Lipschultz became a director of the Company on the
Closing Date. He has been an executive at KKR since 1995. Prior thereto, he was
an investment banker with Goldman, Sachs & Co. He is also a director of Amphenol
Corporation, The Boyds Collection, Ltd. and Spalding.
Messrs. Kravis and Roberts are first cousins.
The business address of Messrs. Kravis, Tokarz and Lipschultz is 9 West 57th
Street, New York, New York 10019 and of Mr. Roberts is 2800 Sand Hill Road,
Suite 200, Menlo Park, California 94025.
COMPENSATION OF DIRECTORS
All directors are reimbursed for their usual and customary expenses incurred
in attending all board and committee meetings. Each director who is not an
employee of the Company receives an aggregate
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annual fee of $25,000, payable in quarterly installments. Directors who are also
employees of the Company will receive no remuneration for serving as directors.
SUMMARY COMPENSATION TABLE FOR FISCAL 1998
The following table sets forth the compensation paid, accrued or awarded by
the Company for the account of each of the president and the four most highly
compensated executive officers (the "Named Executive Officers") for their
services in all capacities to the Company during the fiscal year ended September
30, 1998. All references in the following tables to stock and stock options
relate to awards of, and options to purchase, the common stock of Spalding.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION
------------------------ -----------------------
<S> <C> <C> <C> <C> <C>
AWARDS PAYOUTS
----------- ----------
<CAPTION>
SECURITIES
UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUSES(1) OPTIONS(#) PAYOUTS COMPENSATION(2)
- ------------------------------------------- ----------- ----------- ----------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Richard W. Frank, Chief Executive
Officer.................................. $ 208,653(3) $ 125,000 -- -- $ 6,731
George A. Harris, President................ 304,411 -- 855,414 134,150 5,000
Richard F. Schaub, Jr., Senior Vice
President-Marketing...................... 175,000 60,000 77,778 -- 4,441
Daryle A. Lovett, Senior Vice
President-Finance........................ 170,000 -- 77,778 -- 4,918
Michael L. Johnson, Senior Vice
President-Operations..................... 167,423 -- 97,588 110,780 4,850
</TABLE>
- ------------------------------
(1) Bonus awarded as a starting incentive.
(2) Company matching contributions to the Savings Plus Plan.
(3) Represents compensation from June 15, 1998, Mr. Frank's first date of
employment with the Company.
STOCK OPTION GRANTS IN FISCAL 1998
The Company did not grant any stock options to its officers in Fiscal 1998.
EVENFLO SUCCESS PLAN
Evenflo maintains the Evenflo Success Plan ("ESP") for certain identified
key executives of Evenflo, including department managers and executives senior
thereto, including the Named Executive Officers, pursuant to which eligible
employees are awarded bonuses based on each such employee's performance and that
of his or her respective business unit (as determined in accordance with general
accepted accounting principles) as compared with a target established prior to
the beginning of the year. Awards under the ESP range within a guideline of 5%
to 80% of annual salary payments, depending upon a participant's position and
commensurate responsibility. If the annual results do not meet the pre-
established objectives, no bonus is earned. If annual results exceed the
pre-established objectives, the bonus paid is increased proportionally, up to a
maximum of 210% of the employee's guideline bonus percentage.
1996 EMPLOYEE STOCK OWNERSHIP PLAN
The 1996 Stock Purchase and Option Plan for Key Employees of Evenflo &
Spalding Holdings Corporation and Subsidiaries (the "1996 Employee Stock
Ownership Plan") provides for the issuance of shares of authorized but unissued
or reacquired shares of Spalding common stock, subject to adjustment to reflect
certain events such as stock dividends, stock splits, recapitalizations, mergers
or reorganizations of or by the Company. The 1996 Employee Stock Ownership Plan
is intended to assist Spalding in attracting and retaining employees of
outstanding ability and to promote the identification of their interests with
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<PAGE>
those of the stockholders of Spalding. The 1996 Employee Stock Ownership Plan
permits the issuance of Spalding common stock and the grant of non-qualified
stock options and incentive options to purchase shares of Spalding common stock
and other stock-based awards. Following the consummation of the Transactions,
Spalding canceled the 1996 Employee Stock Ownership Plan with respect to
Evenflo's employees. The Company intends to adopt the 1998 Stock Purchase and
Option Plan for Key Employees of Evenflo Company, Inc., as described below.
LONG-TERM INCENTIVE PLAN
In connection with the 1996 Employee Stock Ownership Plan, Spalding canceled
the Long-Term Incentive Plan ("LTIP") and paid the total outstanding awards in
the 1997 fiscal year.
The LTIP's provided certain key employees with cash awards based upon the
attainment of established financial goals for a predefined period, generally
three years. Each participant made an election at the beginning of each program
period to receive full payments upon vesting or to defer partial or total
payment up to seven years. This cash payout was based upon the value of a unit,
which was determined by a net earnings formula set forth in the LTIP and
calculated as of the September 30 preceding the payment. The LTIP had been in
effect since 1985. Most participants elected to defer all or a portion of their
cash award at the end of each cycle. The value of units for which payment was
deferred was based on the net earnings formula set forth in the LTIP.
RETIREMENT PLANS
SPALDING & EVENFLO RETIREMENT ACCOUNT PLAN ("SERA"). Spalding sponsors
SERA, a cash balance defined benefit pension plan qualified under Section 401(a)
of the Internal Revenue Code of 1986, as amended (the "Code"), for substantially
all U.S. salaried employees. This plan includes U.S. salaried employees of
Evenflo, except the Suring, Wisconsin location, and non-union hourly employees
at the Piqua, Ohio location. SERA covers all eligible full-time employees who
are over age 20 and have at least one year of service. Annually, an addition is
made to each participant's account based on a percentage of the participant's
salary for that year up to a maximum salary of $160,000. The percentage ranges
from 2% of pay for employees under age 25 to 9% of pay for employees age 60 and
over. The accounts are credited with interest at a rate determined annually
based on an average of 30 year treasury bonds.
SUPPLEMENTAL RETIREMENT PLAN ("SRP"). As a supplement to the SERA, Spalding
sponsors the non-qualified SRP which covers highly compensated employees whose
benefits are limited by compensation and benefit limitations under the Code. For
employees with a salary in excess of $160,000, an addition is made to each
participant's account based on a percentage of the participant's salary for that
year. The percentage ranges from 2% of pay for employees under age 25 to 9% of
pay for employees age 60 and over. The accounts are credited with interest at a
rate determined annually based on an average of 30 year treasury bonds.
The estimated annual benefits payable under SERA and SRP upon retirement at
normal retirement age for each of the Named Executive Officers at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
ESTIMATED ANNUAL
BENEFIT IF RETIRES
YEAR ATTAINS AT NORMAL RETIREMENT
NAME AGE 65 AGE (1)
- ---------------------------------------------------------- ------------- --------------------
<S> <C> <C>
Richard W. Frank.......................................... 2009 $ 37,317
George A. Harris.......................................... 2012 56,355
Richard F. Schaub, Jr..................................... 2024 50,274
Daryle A. Lovett.......................................... 2015 31,010
Michael L. Johnson........................................ 2023 50,977
</TABLE>
- ------------------------
(1) Under SERA and SRP the normal retirement age is 65. The plans allow
benefits to be paid as a lump sum payment. The estimated annual benefits
shown above are in the form of a single life annuity which is the
equivalent of the individual's
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<PAGE>
projected cash balance account. Benefits have been determined assuming no
increase in 1998 compensation levels and an annual interest credit of 6.5%
for 1998. An annual interest credit of 5.2% was used for 1999 and future
years. Benefits are computed without reference to limitations on
compensation and benefits to which the SERA is subject under the Code
because any benefits for the Named Executive Officers that are affected by
such limitations are made up under Spalding's SRP.
SAVINGS PLUS PLAN. Spalding sponsors a defined contribution plan qualified
under the Code, commonly referred to as a 401(k) plan, for substantially all
U.S. salaried employees (the "Savings Plus Plan" and, together with SERA and
SRP, the "Retirement Plans"). This plan includes all U.S. Evenflo employees
except employees covered by a collective bargaining agreement, Piqua, Ohio
non-union factory hourly employees and Suring, Wisconsin employees. Participants
may make pre-tax contributions up to 15% of their aggregate annual salaries.
Spalding makes a 50% matching contribution on the first 6% of participant
contributions. Spalding does not match participant contributions in excess of
6%.
On the Closing Date, the Company and Spalding entered into the Employee
Matters Agreement to allocate assets and liabilities with respect to labor,
employment and employee benefit matters. The Employee Matters Agreement provides
that the Company will retain all employment-related responsibility no matter
when incurred for current and former employees of Evenflo. The Company will
provide, for at least one year following the Closing Date, employee benefits
that are, in the aggregate, no less favorable than those maintained for the
Evenflo employees immediately prior to the closing of the Transactions.
Following the Closing Date, the Company and Spalding equitably allocated the
assets and the liability of the Retirement Plans. The Company is currently in
the process of establishing new plans substantially similar to the Retirement
Plans on behalf of the Company's employees.
1998 STOCK PLAN
The Company intends to adopt the 1998 Stock Purchase and Option Plan for Key
Employees of Evenflo Company, Inc. (the "1998 Stock Plan") providing for the
issuance of shares of authorized but unissued or reacquired shares of Common
Stock, subject to adjustment to reflect certain events such as stock dividends,
stock splits, recapitalizations, mergers or reorganizations of or by the
Company. The 1998 Stock Plan is intended to assist the Company in attracting and
retaining employees of outstanding ability and to promote the identification of
their interests with those of the stockholders of the Company. The 1998 Stock
Plan will permit the issuance of Common Stock (the "Purchase Stock") and the
grant of Non-Qualified Stock Options and Incentive Stock Options (the "Options")
to purchase shares of Common Stock and other stock-based awards (the issuance of
Purchase Stock and the grant of Options and other stock-based awards pursuant to
the 1998 Stock Plan being a "Grant"). Unless sooner terminated by the Company's
Board of Directors, the 1998 Stock Plan will expire ten years after its approval
by the Company's stockholders. Such termination will not affect the validity of
any Grant outstanding on the date of termination.
The Compensation Committee of the Board of Directors of the Company will
administer the 1998 Stock Plan, including, without limitation, the determination
of the employees to whom Grants will be made, the number of shares of Common
Stock subject to each Grant, and the various terms of such Grants. The
Compensation Committee of the Board of Directors may from time to time amend the
terms of any Grant, but, except for adjustments made upon a change in the Common
Stock of the Company by reason of a stock split, spin-off, stock dividend, stock
combination or reclassification, recapitalization, reorganization,
consolidation, change of control, or similar event, such action shall not
adversely affect the rights of any participant under the 1998 Stock Plan with
respect to the Purchase Stock and the Options without such participant's
consent. The Board of Directors will retain the right to amend, suspend or
terminate the 1998 Stock Plan.
MANAGEMENT STOCKHOLDERS' AGREEMENTS
In connection with the 1998 Stock Plan, the Company and each employee who
has received a Grant will enter into a management stockholders' agreement and a
stock option agreement. The management
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<PAGE>
stockholders' agreement and related sale participation agreement will (i) place
restrictions on each such employee's ability to transfer shares of Common Stock,
including a right of first refusal in favor of the Company, (ii) provide each
such employee the right to participate pro rata in certain sales of Common Stock
by KKR 1996 Fund L.P. or its affiliates and (iii) provide KKR 1996 Fund L.P. and
its affiliates the right to require each such employee to participate pro rata
in certain sales of Common Stock by KKR 1996 Fund L.P. or its affiliates. The
management stockholders' agreements will also grant "piggyback" registration
rights to each such employee pursuant to the Fund Registration Rights Agreement.
In addition, the management stockholders' agreement will give the Company the
right to purchase shares and options held by each such employee upon termination
of employment for any reason and will permit each such employee to sell stock
and options to the Company, and the Company will be required to purchase such
stock upon the occurrence of certain events.
CHANGE IN CONTROL SEVERANCE AGREEMENT
Spalding maintains Change In Control Severance Agreements (the "Severance
Contracts") for certain executives of Evenflo pursuant to which these executives
will be compensated and will receive severance benefits when terminated by the
Company without cause or by such executive with good reason upon a change in
control or potential change in control of Spalding. The Recapitalization
constituted a change of control under the Severance Contracts. All but one of
these agreements terminated on September 25, 1998. One such agreement, with
George A. Harris, will terminate on June 1, 1999.
The Severance Contracts generally permit an eligible employee to receive
severance payments for a period of 24 or 35 months, as the case may be,
consisting of (a) monthly payments equal to 1/12 of such person's highest annual
base salary during the 36 months immediately prior to September 1, 1996, (b)
annual bonus for each fiscal year of the Company within such 24 or 35 month
period and (c) continued perquisites and life, disability, accident and health
insurance benefits (in lieu of such person's COBRA benefits). In addition, the
executives shall become 100% vested in their accrued benefit and/or account
balance under any non-qualified deferred compensation plan and will receive an
additional lump-sum payment of 50% or 100% of the amount by which the employee's
benefits under their tax-qualified retirement plans maintained by Spalding or
one of its subsidiaries would have been increased if contributions and/or
benefit accruals under such plans had continued during the period of continued
benefits. These executives shall also be entitled to receive a gross-up payment
such that the net benefit retained by such executives, after taking account of
the excise tax imposed under Section 4999 of the Code and any federal, state and
local income tax, shall be equal to the benefit to which he or she is entitled
under any arrangement in connection with a change of control or termination of
employment.
DEFERRED COMPENSATION PLAN
Prior to the Gerry Acquisition, Gerry maintained on behalf of certain of its
executives a Deferred Compensation Plan (the "Deferred Compensation Plan")
pursuant to which such employees could elect to have a designated percentage of
their salary deferred. Pursuant to the Gerry Acquisition, the Company assumed
the obligations with respect to the Deferred Compensation Plan; however, no
additional deferrals may be made subsequent to the Gerry Acquisition. Currently,
Daryle A. Lovett and one other employee of the Company are participants in the
Deferred Compensation Plan.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
KKR 1996 GP LLC beneficially owns 51% (5,100,000 shares) of the Company's
outstanding shares of Common Stock. KKR 1996 GP LLC also beneficially owns
approximately 9% of the outstanding shares of Spalding, which holds 42.4%
(4,240,000 shares) of the outstanding Common Stock. The managing members of KKR
1996 GP LLC are Messrs. Henry R. Kravis and George R. Roberts and the other
members of which are Messrs. Robert I. MacDonnell, Paul E. Raether, Michael W.
Michelson, Michael T. Tokarz, James H. Greene, Jr., Perry Golkin, Clifton S.
Robbins, Scott M. Stuart and Edward A. Gilhuly. Messrs. Kravis, Roberts and
Tokarz are also directors of the Company, as is Mr. Marc S. Lipschultz, who is
an executive of KKR. Each of the members of KKR 1996 GP LLC is also a member of
KKR & Co. L.L.C., which serves as the general partner of KKR. KKR assisted the
Company in negotiating the Transactions and arranging the financing therefor,
and was reimbursed for its expenses in connection therewith, and from time to
time in the future, KKR may receive customary investment banking fees for
services rendered to the Company in connection with divestitures, acquisitions,
and certain other transactions. In addition, KKR has agreed to render
management, business strategy, consulting and financial services to the Company
for an annual fee of $300,000. See "Management--Directors and Executive
Officers" and "Principal Stockholders."
Strata L.L.C. beneficially owns 42.4% of the Company's outstanding shares of
Common Stock. Shares of Common Stock shown as beneficially owned by Strata
L.L.C. are beneficially owned by Strata Associates L.P. ("Strata") through its
investment in Spalding. The members of Strata L.L.C. are Messrs. Henry R.
Kravis, George R. Roberts, Robert I. MacDonnell, Paul E. Raether, Michael W.
Michelson, Michael T. Tokarz, James H. Greene, Jr., Perry Golkin, Clifton S.
Robbins, Scott M. Stuart and Edward A. Gilhuly. Messrs. Kravis and Roberts are
members of the Executive Committee of Strata L.L.C. Messrs. Kravis, Roberts and
Tokarz are also directors of the Company, as is Mr. Marc S. Lipschultz who is a
limited partner of KKR Associates (Strata). Each of the members of Strata L.L.C.
is also a member of the limited liability company which serves as the general
partner of KKR and Mr. Lipschultz is an executive of KKR. See
"Management--Directors and Executive Officers," "--Compensation of Directors"
and "Principal Stockholders."
Strata L.L.C. is the general partner of KKR Associates (Strata) a Delaware
limited partnership, of which certain past and present employees of KKR and
partnerships and trusts for the benefit of the families of such past and present
employees and a former partner of KKR are the limited partners. KKR Associates
(Strata) is the general partner of Strata, which beneficially owns 42.4% of the
outstanding Common Stock.
Great Star holds 6.6% of the outstanding Common Stock and an affiliate,
Abarco, holds approximately 7% of the outstanding shares of Spalding. Spalding
holds 42.4% of the outstanding Common Stock. A trust for the benefit of the
family of Mr. Gustavo Cisneros and a trust for the benefit of the family of Mr.
Ricardo Cisneros each owns a 50% indirect beneficial ownership interest in each
of Great Star and Abarco. See "Transactions."
TRANSITION SERVICES AGREEMENT
On the Closing Date, Spalding and the Company entered into the Transition
Services Agreement pursuant to which, for a period of up to six months, Spalding
will provide certain financial, accounting and other corporate related services
to the Company for the costs associated with providing such services. The
Company will also reimburse Spalding for its out-of-pocket expenses incurred in
rendering such services. The Transition Services Agreement terminated with
respect to the majority of such services on September 30, 1998.
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<PAGE>
INDEMNIFICATION AGREEMENT
On the Closing Date, Spalding and the Company entered into the
Indemnification Agreement pursuant to which Spalding agreed to indemnify the
Company for all losses and liabilities of any kind relating to any non-Evenflo
related matters and the Company will agree to indemnify Spalding for all losses
and liabilities of any kind relating to the Evenflo business. In addition,
Spalding agreed to indemnify the Company for the expense of product recalls and
corrective actions relating to products manufactured prior to the Closing Date.
STOCKHOLDERS AGREEMENTS
On the Closing Date, the Company, KKR 1996 Fund L.P. and Lisco entered into
the KKR Stockholders Agreement pursuant to which Lisco has the right to
participate pro rata in certain sales of Common Stock by KKR 1996 Fund L.P. and
affiliates through a Tag Along and KKR 1996 Fund L.P. has the right to require
Lisco to participate pro rata in certain sales of Common Stock by KKR 1996 Fund
L.P. and affiliates through a Drag Along. The KKR Stockholders Agreement
provides Lisco with "piggyback" registration rights and two demand registration
rights and provides for certain restrictions and rights regarding the transfer
of Common Stock by Lisco. The KKR Stockholders Agreement also grants Lisco the
right to appoint one member of the Company's Board of Directors, subject to
maintaining specified ownership thresholds.
On the Closing Date, the Company, KKR 1996 Fund L.P. and Great Star entered
into the Great Star Stockholders Agreement pursuant to which Great Star has a
Tag Along right with respect to sales of Common Stock by KKR 1996 Fund L.P. and
KKR 1996 Fund L.P. has a Drag Along right to require Great Star to participate
in certain sales of Common Stock by KKR 1996 Fund L.P. The Great Star
Stockholders Agreement also provides Great Star certain "piggyback" registration
rights and provides for certain restrictions and rights regarding the transfer
of Common Stock held by Great Star.
REGISTRATION RIGHTS AGREEMENT
KKR 1996 Fund L.P. has the right, as described below, to require the Company
to register under the Securities Act shares of Common Stock held by it pursuant
to the Fund Registration Rights Agreement. Such registration rights are
generally available to KKR 1996 Fund L.P. until registration under the
Securities Act is no longer required to enable it to resell the Common Stock
owned by it. The Fund Registration Rights Agreement provides, among other
things, that the Company will pay all expenses in connection with the first six
demand registrations requested by KKR 1996 Fund L.P. and in connection with any
registration commenced by the Company as a primary offering in which KKR 1996
Fund L.P. participates through "piggyback" registration rights granted under
such agreement. The Company has the right to postpone any demand registration if
to register would require an audit of the Company other than its regular audit,
if another registration statement has been declared effective under the
Securities Act within 180 days or, for a period of 90 days, if the Company
determines that it is in the best interests of the Company to do so. The rights
of KKR 1996 Fund L.P. to exercise its "piggyback" registration rights are
subject to the right of the Company to reduce on a pro rata basis among all
requesting holders the number of requested shares of Common Stock to be
registered if in the opinion of the managing underwriter the total number of
shares to be so registered exceeds that number which may be sold without having
an adverse effect on the price, timing or distribution of the offering of the
shares. See "Transactions."
EMPLOYEE MATTERS AGREEMENT
On the Closing Date, the Company and Spalding entered into the Employee
Matters Agreement to allocate assets and liabilities with respect to labor,
employment and employee benefit matters. The Employee Matters Agreement provides
that the Company will retain all employment-related responsibility no matter
when incurred for current and former employees of Evenflo. The Company will
provide, for at
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least one year following the Closing Date, employee benefits that are, in the
aggregate, no less favorable than those maintained for the Evenflo employees
immediately prior to the closing of the Transactions.
TAX ALLOCATION AND INDEMNITY AGREEMENT
Prior to the Closing Date, Evenflo and its subsidiaries filed a consolidated
United States federal income tax return together with Spalding and its other
subsidiaries (collectively, the "Spalding Consolidated Group"). As of the
Closing Date, Evenflo and its subsidiaries (collectively, the "Evenflo Group")
will no longer be eligible to file United States federal income tax returns on a
consolidated basis with Spalding and its subsidiaries (other than members of the
Evenflo Group) (collectively, the "Spalding Group"). Consequently, on the
Closing Date, Spalding and Evenflo entered into a tax allocation and indemnity
agreement (the "Tax Allocation Agreement").
Pursuant to the Tax Allocation Agreement, (i) the tax attributes of the
Spalding Consolidated Group (e.g., net operating losses, net capital losses and
tax credits) will be allocated and apportioned among the members of the Evenflo
Group and the members of the Spalding Group in accordance with the applicable
United States Treasury regulations, (ii) Spalding will be responsible for (x)
preparing and filing all consolidated United States federal income tax returns
(including any amended returns) for the taxable years during which Evenflo and
its subsidiaries were members of the Spalding Consolidated Group and (y) paying
all taxes shown as due and owing on such consolidated returns, and (iii)
Spalding will have the sole right to represent Evenflo's and its subsidiaries'
interests in any audit or other administrative or judicial proceeding related to
such consolidated returns.
Under the Tax Allocation Agreement, Evenflo and its subsidiaries are
required to pay to Spalding the amount of United States federal income taxes
that are attributable to Evenflo and its subsidiaries (as determined in
accordance with the provisions of the Consolidated Federal Income Tax Liability
Allocation Agreement among Spalding and its Subsidiaries, dated as of September
30, 1993 (the "Old Tax Sharing Agreement")) for all taxable years during which
Evenflo and its subsidiaries were members of the Spalding Consolidated Group
(including, without limitation, any such taxes that are imposed as a result of
an audit or other adjustment). Evenflo and its subsidiaries will be entitled to
any refunds of such taxes and Spalding is required to pay Evenflo and its
subsidiaries the amount of any tax refund attributable to such parties. In
addition, under the Tax Allocation Agreement, the members of the Evenflo Group
will be required to reimburse the Spalding Group for any tax attributes of the
Spalding Group that are utilized by the Evenflo Group (or any member thereof) to
reduce its tax liability and Spalding and the other members of the Spalding
Group will have similar obligations to reimburse the Evenflo Group for any tax
attributes of the Evenflo Group that are utilized by the Spalding Group (or any
member thereof).
Spalding and the other members of the Spalding Group will jointly and
severally indemnify and hold harmless Evenflo and its subsidiaries for any taxes
imposed on Spalding or other members of the Spalding Group other than taxes that
are attributable to Evenflo and its subsidiaries.
Pursuant to the terms of the Tax Allocation Agreement, the above principles
will govern the filing of any state, local or foreign tax returns required to be
filed by Spalding or other members of the Spalding Group on a consolidated,
combined or unitary basis with Evenflo or any of its subsidiaries and the
allocation of the liability for any taxes with respect thereto.
REPAYMENT OF INTERCOMPANY DEBT
On the Closing Date, the Company applied $110.0 million of the proceeds from
the issuance of the Old Notes and borrowings under the Credit Facility to repay
intercompany indebtedness to Spalding.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information concerning beneficial
ownership of shares of Common Stock by: (i) persons known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock; (ii) each
person who is a director of the Company; (iii) each person who is a Named
Executive Officer; and (iv) all directors and executive officers of the Company
as a group.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP PERCENTAGE OF CLASS
NAME OF BENEFICIAL OWNER OF COMMON STOCK OUTSTANDING(A)
- ------------------------------------------------------------------------- ------------------- -------------------
<S> <C> <C>
KKR 1996 GP LLC(b)
c/o Kohlberg Kravis Roberts & Co. L.P.
9 West 57th Street
New York, NY 10019..................................................... 5,100,000 51.0%
Strata L.L.C.(c)
c/o Kohlberg Kravis Roberts & Co. L.P.
9 West 57th Street
New York, NY 10019..................................................... 4,240,000 42.4%
Henry R. Kravis(b)(c).................................................... -- --
George R. Roberts(b)(c).................................................. -- --
Michael T. Tokarz(b)(c).................................................. -- --
Marc S. Lipschultz(b)(c)................................................. -- --
Great Star Corporation(d)
c/o ABN Trustcompany
(Curacao N.V.)
P.O. Box 224
15 Pietermaai
Curacao, Netherlands Antilles.......................................... 660,000 6.6%
Edwin L. Artzt........................................................... -- --
Richard W. Frank(e)...................................................... -- --
George A. Harris(e)...................................................... -- --
Daryle A. Lovett(e)...................................................... -- --
Allen E. Seymour(e)...................................................... -- --
Michael L. Johnson(e).................................................... -- --
Bachar El Zein(e)........................................................ -- --
All directors and executive officers as group (b)(c)(e).................. -- --
</TABLE>
- ------------------------
(a) The amounts and percentage of Common Stock beneficially owned are reported
on the basis of regulations of the Commission governing the determination of
beneficial ownership of securities. Under the rules of the Commission, a
person is deemed to be a "beneficial owner" of a security if that person has
or shares "voting power," which includes the power to vote or to direct the
voting of such security, or "investment power," which includes the power to
dispose of or to direct the disposition of such security. A person is also
deemed to be a beneficial owner of any securities of which that person has a
right to acquire beneficial ownership within 60 days. Under these rules,
more than one person may be deemed a beneficial owner of the same securities
and a person may be deemed to be a beneficial owner of securities as to
which he or she has no economic interest.
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<PAGE>
(b) Shares of Common Stock shown as beneficially owned by KKR 1996 GP LLC are
held by KKR 1996 Fund L.P. KKR 1996 GP LLC is the sole general partner of
KKR Associates 1996 L.P., a Delaware limited partnership. KKR Associates
1996 L.P. is the sole general partner of KKR 1996 Fund L.P. KKR 1996 GP LLC
is a Delaware limited liability company, the managing members of which are
Messrs. Henry R. Kravis and George R. Roberts and the other members of which
are Messrs. Robert I. MacDonnell, Paul E. Raether, Michael W. Michelson,
Michael T. Tokarz, James H. Greene, Jr., Perry Golkin, Clifton S. Robbins,
Scott M. Stuart and Edward A. Gilhuly. Messrs. Kravis, Roberts and Tokarz
became directors of the Company on the Closing Date. Each of Messrs. Kravis,
Roberts, MacDonnell, Raether, Michelson, Tokarz, Greene, Golkin, Robbins,
Stuart and Gilhuly may be deemed to share beneficial ownership of the shares
shown as beneficially owned by KKR 1996 GP LLC. Each of such individuals
disclaims beneficial ownership of such shares. Mr. Marc S. Lipschultz became
a director of the Company on the Closing Date and is also an executive of
KKR and a limited partner of KKR Associates 1996 L.P. Mr. Lipschultz
disclaims that he is the beneficial owner of any shares beneficially owned
by KKR Associates 1996 L.P. KKR 1996 GP LLC is also the beneficial owner of
approximately 9% of the outstanding shares of Spalding on a fully diluted
basis.
(c) Shares of Common Stock shown as beneficially owned by Strata L.L.C. are
beneficially held by Strata through its investment in Spalding. Strata
L.L.C. is the sole general partner of KKR Associates (Strata). KKR
Associates (Strata), a Delaware a limited partnership, is the sole general
partner of Strata. Strata L.L.C. is a Delaware limited liability company the
members of which are Messrs. Kravis, Roberts, MacDonnell, Raether,
Michelson, Tokarz, Greene, Golkin, Robbins, Stuart and Gilhuly. Messrs.
Kravis and Roberts are members of the Executive Committee of Strata L.L.C.
Messrs. Kravis, Roberts and Tokarz became directors of the Company on the
Closing Date. Each of Messrs. Kravis, Roberts, MacDonnell, Raether,
Michelson, Tokarz, Greene, Golkin, Robins, Stuart and Gilhuly may be deemed
to share beneficial ownership of the shares shown as beneficially owned by
Strata L.L.C. Each of such individuals disclaim beneficial ownership of such
shares. Mr. Lipschultz became a director of the Company on the Closing Date
and is also an executive of KKR and a limited partner of KKR Associates
(Strata). Mr. Lipschultz disclaims that he is the beneficial owner of any
shares beneficially owned by KKR Associates (Strata).
(d) A trust for the benefit of the family of Mr. Gustavo Cisneros and a trust
for the benefit of the family of Mr. Ricardo Cisneros each owns a 50%
indirect beneficial ownership interest in Great Star. The trustees of both
trusts are Dr. Peter Marxer and Protec Trust Management Establishment, each
with the address Postfach 484, Heiligkreuz 6, F1 9490 Vaduz, Liechtenstein.
Messrs. Gustavo and Ricardo Cisneros each may be deemed to have beneficial
ownership of the shares beneficially owned by the trusts created by them.
Messrs. Gustavo and Ricardo Cisneros each may also be deemed the beneficial
owner of approximately 7% of the outstanding shares of Spalding held by
Abarco. Messrs. Gustavo and Ricardo Cisneros each disclaims beneficial
ownership of such shares.
(e) The Company intends to adopt the 1998 Stock Plan. Awards to individuals have
not yet been determined.
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<PAGE>
DESCRIPTION OF THE CREDIT FACILITY
The Credit Facility is provided by a syndicate of banks and other financial
institutions led by Merrill Lynch Capital Corporation as lead arranger and
syndication agent, Bank of America National Trust and Savings Association as
administrative agent ("Administrative Agent") and DLJ Capital Funding, Inc. as
documentation agent. The Credit Facility provides for $100 million of
commitments for revolving credit loans (the "Revolving Credit Loans"), letters
of credit and bankers' acceptances. The Credit Facility includes borrowing
capacity available for letters of credit and bankers' acceptances, and for
borrowings on same-day notice ("Swingline Loans"). The Credit Facility
terminates seven years after the Closing Date. As of December 31, 1998, $7.8
million was outstanding under the Credit Facility.
The Revolving Credit Loans bear interest, at the Company's option, at
either: (a) a "base rate" equal to the higher of (i) the federal funds rate plus
0.50% per annum or (ii) the Administrative Agent's prime rate, plus, in each
case, an additional margin ranging from 1.25% to 0% per annum depending on the
then current ratio of total debt to EBITDA, or (b) a "eurodollar rate" plus an
additional margin ranging from 2.50% to 1.0% per annum depending on the then
current ratio of total debt to EBITDA (the "eurodollar margin"). Swingline Loans
may only be made as base rate loans.
The Company will pay a commitment fee which will be equal to 0.50% to 0.30%
per annum depending on the then current ratio of total debt to EBITDA. Such fee
will be payable quarterly in arrears and upon termination of the Credit
Facility.
The Company will pay fees for letters of credit and bankers' acceptances at
a rate per annum equal to the then applicable eurodollar margin less 0.125% on
all outstanding letters of credit and unmatured acceptances, plus a fronting fee
of 0.125% per annum of the stated amount of each letter of credit. Such fees
will be payable quarterly in arrears and upon termination of the Credit
Facility. In addition, the Company will pay customary transaction charges in
connection with any letter of credit or bankers' acceptance.
The Credit Facility prohibits the Company from repurchasing any Notes or
Preferred Stock, subject to limited exceptions. The Company's obligations under
the Credit Facility are secured by a pledge of the stock of its material direct
domestic subsidiaries and 65% of the stock of its material direct foreign
subsidiaries, with certain exceptions, as well as accounts receivable, inventory
and certain intangible assets, including intellectual property, with certain
exceptions. In addition, indebtedness under the Credit Facility is guaranteed by
the domestic subsidiaries of the Company, with certain exceptions. See "Risk
Factors-- Effective Structural Subordination" and "--Encumbrances on Assets to
Secure Credit Facility."
The Credit Facility contains customary covenants and restrictions on the
Company's ability to engage in certain activities, including those limiting the
ability of the Company and certain of its subsidiaries to: create liens, incur
indebtedness, pay dividends or make other distributions, acquire any of their
capital stock, redeem the notes, make capital expenditures or enter into
transactions with affiliates.
In addition, the Credit Facility requires the Company to:
(a) maintain a minimum EBITDA to cash interest expense ratio during the four
consecutive fiscal quarters immediately preceding the dates set forth below of:
<TABLE>
<CAPTION>
DATE RATIO
- ---------------------------------------------------------------------------------- ----------
<S> <C>
March 31, 1999.................................................................... 1.10:1.00
June 30 and September 30, 1999.................................................... 1.25:1.00
December 31, 1999 and March 31 and June 30, 2000.................................. 1.50:1.00
September 30 and December 31, 2000 and March 31 and June 30, 2001................. 1.75:1.00
September 30 and December 31, 2001 and March 31 and June 30, 2002................. 2.00:1.00
September 30, 2002 and the end of each fiscal quarter thereafter.................. 2.50:1.00
</TABLE>
75
<PAGE>
(b) not exceed a maximum total debt to EBITDA ratio during the four
consecutive fiscal quarters immediately preceding the dates set forth below of:
<TABLE>
<CAPTION>
DATE RATIO
- ---------------------------------------------------------------------------------- ----------
<S> <C>
March 31, 1999.................................................................... 6.95:1.00
June 30, 1999..................................................................... 6.50:1.00
September 30 and December 31, 1999 and March 31, June 30 and September 30, 2000... 5.50:1.00
December 31, 2000 and March 31, June 30 and September 30, 2001.................... 5.00:1.00
December 2001 and March 31 and June 30, 2002...................................... 4.50:1.00
September 30, 2002 and the end of each fiscal quarter thereafter.................. 4.00:1.00
</TABLE>
(c) not exceed a maximum capital expenditures limit per fiscal year of 4% of
net sales, subject to certain exceptions.
The Credit Facility includes customary events of default including failure
by the Company or certain subsidiaries to pay principal and interest when due,
comply with the covenants described above, comply with any other covenants in
the credit agreement for 30 days after written notice is received, pay a final
judgment in excess of $9.0 million if such judgment remains unvacated and
unstayed pending appeal for a period of 60 days, or maintain certain pension
plans, as well as the occurrence of bankruptcy or insolvency of the Company or a
change of control of the Company. In addition, (i) a default in payment on any
other indebtedness (including the Notes) or (ii) failure to comply with any
other provisions or covenants governing such other indebtedness that results in
an acceleration of the related debt, will constitute an event of default, the
result of which would be the termination of the lenders' commitment under the
Credit Facility and the acceleration of the amounts thereunder then outstanding.
76
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The certificate of incorporation of the Company authorizes 25,000,000 shares
of Common Stock, of which 10,000,000 shares are outstanding, and 10,000,000
shares of preferred stock, par value $.01 per share, issuable in series by
resolution of the Board of Directors of the Company.
COMMON STOCK
The certificate of incorporation of the Company authorizes 20,000,000 shares
of Common Stock designated as the "Class A Common Stock" and 5,000,000 shares of
non-voting Common Stock designated as the "Class B Common Stock." As of December
31, 1998, 10,000,000 shares of Class A Common Stock were outstanding and no
shares of Class B Common Stock were outstanding. The holders of Class A Common
Stock are entitled to one vote per share for each share held of record on all
matters submitted to a vote of stockholders. The Class B Common Stock is
identical in all respects to the Class A Common Stock except that holders of
Class B Common Stock do not have any voting rights with the exception of those
described below. Subject to preferential rights with respect to any series of
preferred stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors on the Common Stock out
of funds legally available therefor, and in the event of a liquidation,
dissolution or winding-up of the affairs of the Company, are entitled to share
equally and ratably in all remaining assets and funds of the Company. The
holders of Common Stock have no preemptive rights, cumulative voting rights, or
rights to convert shares of Common Stock into any other securities and are not
subject to future calls or assessments by the Company. All outstanding shares of
Common Stock are fully paid and nonassessable.
Under Delaware law, holders of Class B Common Stock are entitled to vote as
a class upon a proposed amendment to the certificate of incorporation, whether
or not entitled to vote thereon by the certificate of incorporation, if the
amendment would increase or decrease the par value of the shares of such class,
increase or decrease the aggregate number of authorized shares of such class or
alter or change the powers, preferences or special rights of the shares of such
class so as to affect them adversely.
PREFERRED STOCK
The Board of Directors of the Company, in its sole discretion, may designate
and issue one or more series of preferred stock from the authorized and unissued
shares of preferred stock, subject to limitations imposed by law or the
Company's certificate of incorporation. The Board of Directors is empowered to
determine the designation of and the number of shares constituting a series of
preferred stock; the dividend rate for the series; the terms and conditions of
any voting, conversion and exchange rights for the series; the amounts payable
on the series upon redemption or the Company's liquidation, dissolution or
winding-up; the provisions of any sinking fund for the redemption of purchase of
shares of any series; and the preferences and relative rights among the series
of preferred stock.
CUMULATIVE PREFERRED STOCK
The summary contained herein of certain provisions of the Cumulative
Preferred Stock does not purport to be complete and is qualified in its entirety
by reference to the provisions of the Company's certificate of incorporation.
GENERAL. On the Closing Date, the Company issued 400,000 shares of
Cumulative Preferred Stock which were distributed to Lisco in the Preferred
Stock Distribution and purchased by KKR 1996 Fund L.P. in the Preferred Stock
Investment. The Company filed a restated certificate of incorporation containing
the terms of the Cumulative Preferred Stock with the Secretary of State of the
State of Delaware as required by Delaware law. The Cumulative Preferred Stock
ranks junior in right of payment to all liabilities and obligations (whether or
not for borrowed money) of the Company (other than Common Stock and any
preferred stock of the Company which by its terms is junior to, or on parity
with, the Cumulative Preferred Stock). In addition, creditors and stockholders
of the Company's subsidiaries also have priority over the Cumulative Preferred
Stock with respect to claims on the assets of such subsidiaries.
77
<PAGE>
The Cumulative Preferred Stock is fully paid and nonassessable, and the holders
thereof have no subscription or preemptive rights related thereto.
RANKING. The Cumulative Preferred Stock, with respect to dividend rights
and rights on liquidation, winding-up and dissolution of the Company, ranks
senior to all classes of common stock and each other class of Capital Stock or
series of preferred stock (collectively referred to as "Junior Securities");
provided that the holders of the Cumulative Preferred Stock representing a
majority of the liquidation preference may approve the issuance of preferred
stock of the Company senior to, or on a parity with, the Cumulative Preferred
Stock.
DIVIDENDS. Holders of Cumulative Preferred Stock are entitled to receive,
when, as and if declared by the Board of Directors, dividends on each
outstanding share of the Cumulative Preferred Stock, at a variable rate based on
the ten-year treasury rate, based on the then effective liquidation preference
per share of Cumulative Preferred Stock. Dividends on the Cumulative Preferred
Stock are payable quarterly in arrears on August 15, November 15, February 15
and May 15 of each year, commencing on November 15, 1998. The initial dividend
rate with respect to the Cumulative Preferred Stock is 14% per annum. The right
to dividends on the Cumulative Preferred Stock is cumulative and dividends
accrue (whether or not declared), without interest, from the date of issuance of
the Cumulative Preferred Stock.
No dividends or distributions may be paid or set apart for such payment on
Junior Securities (except dividends or distributions on Junior Securities in
additional shares of Junior Securities), and no Junior Securities may be
repurchased, redeemed or otherwise retired nor may funds be set apart for
payment with respect thereto, if full dividends have not been paid in cash on
the Cumulative Preferred Stock.
OPTIONAL REDEMPTION. The Company at its option may, but shall not be
required to, redeem, at any time, for cash (subject to contractual and other
restrictions with respect thereto and to the legal availability of funds
therefor), in whole or in part, any or all of the shares of Cumulative Preferred
Stock at a redemption price equal to 100% of the aggregate liquidation
preference of such shares, together with all accumulated and unpaid dividends to
the redemption date (including an amount equal to a prorated dividend for the
period from the dividend payment date immediately prior to the redemption date
to the redemption date). In the event of partial redemptions of Cumulative
Preferred Stock, the shares to be redeemed will be determined PRO RATA according
to the number of shares held by each holder of Cumulative Preferred Stock.
CHANGE OF CONTROL. The certificate of incorporation provides that, upon the
occurrence of a Change of Control, the Company will be required to make an offer
to purchase the Cumulative Preferred Stock for cash at a purchase price of 101%
of the liquidation preference thereof, together with all accumulated and unpaid
dividends to the date of purchase. The definition of "Change of Control" in the
certificate of incorporation has substantially the same meaning as set forth
under "Description of the Exchange Notes-- Certain Definitions--Change of
Control."
PROCEDURE FOR REDEMPTION. On and after a redemption date, unless the
Company defaults in the payment of the applicable redemption price, dividends
will cease to accrue on shares of Cumulative Preferred Stock called for
redemption, and all rights of holders of such shares will terminate except for
the right to receive the redemption price. The Company will send a written
notice of redemption by first class mail to each holder of record of shares of
Cumulative Preferred Stock, not fewer than 10 days nor more than 20 days prior
to the date fixed for such redemption. Shares of Cumulative Preferred Stock
issued and reacquired will, upon compliance with the applicable requirements of
Delaware law, have the status of authorized but unissued shares of preferred
stock of the Company undesignated as to series and may, with any and all other
authorized but unissued shares of preferred stock of the Company, be designated
or redesignated and issued or reissued, as the case may be, as part of any
series of preferred stock of the Company, except that any issuance or reissuance
of shares of Cumulative Preferred Stock must be in compliance with the
certificate of incorporation.
78
<PAGE>
LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding-up of the Company, holders of Cumulative Preferred Stock
will be entitled to be paid out of the assets of the Company available for
distribution $100 per share, plus an amount in cash equal to all accumulated and
unpaid dividends thereon to the date fixed for liquidation, dissolution or
winding-up of the Company (including an amount equal to a prorated dividend from
the last dividend payment date to the date fixed for liquidation, dissolution or
winding-up), before any distribution is made on any Junior Securities,
including, without limitation, on any Common Stock. After payment of the full
amount of the liquidation preferences and accumulated and unpaid dividends to
which they are entitled, the holders of shares of Cumulative Preferred Stock
will not be entitled to any further participation in any distribution of assets
of the Company. However, neither the sale, conveyance, exchange or transfer (for
cash, shares of stock, securities or other consideration) of all or
substantially all of the property or assets of the Company nor the consolidation
or merger of the Company with or into one or more corporations shall be deemed
to be a liquidation, dissolution or winding-up of the Company.
The certificate of incorporation does not contain any provision requiring
funds to be set aside to protect the liquidation preference of the Cumulative
Preferred Stock, although such liquidation preference is substantially in excess
of the par value of such shares of Cumulative Preferred Stock. In addition, the
Company is not aware of any provision of Delaware law or any controlling
decision of the courts of the State of Delaware (the state of incorporation of
the Company) that requires a restriction upon the surplus of the Company solely
because the liquidation preference of the Cumulative Preferred Stock exceeds its
par value. Consequently, there will be no restriction upon any surplus of the
Company solely because the liquidation preference of the Cumulative Preferred
Stock exceeds the par value, and there will be no remedies available to holders
of the Cumulative Preferred Stock before or after the payment of any dividend,
other than in connection with the liquidation of the Company, solely by reason
of the fact that such dividend would reduce the surplus of the Company to an
amount less than the difference between the liquidation preference of the
Cumulative Preferred Stock and its par value.
VOTING RIGHTS. Holders of the Cumulative Preferred Stock have no voting
rights with respect to general corporate matters except as provided by law or as
set forth in the certificate of incorporation. The certificate of incorporation
provides that: (a) two additional members will be added to the Company's Board
of Directors and holders of the Cumulative Preferred Stock, voting separately as
a class, will have the right to elect two directors of the expanded Board of
Directors if dividends on the Cumulative Preferred Stock are in arrears and
unpaid for six consecutive quarterly periods; and (b) holders of the Cumulative
Preferred Stock have the right to approve any amendment of the certificate of
incorporation adverse to the holders of the Cumulative Preferred Stock. The
voting rights set forth in (a) above will continue until such time as all
dividends in arrears on the Cumulative Preferred Stock are paid in full, at
which time the term of the directors elected pursuant to the provisions of this
paragraph shall terminate.
Any vacancy occurring in the office of the director elected by holders of
the Cumulative Preferred Stock may be filled by the remaining directors elected
by such holders unless and until such vacancy shall be filled by such holders.
The certificate of incorporation also provides that (a) the creation,
authorization or issuance of any shares of Junior Securities or (b) the increase
or decrease in the amount of authorized Capital Stock of any class, including
any preferred stock, shall not require the consent of the holders of Cumulative
Preferred Stock and shall not be deemed to affect adversely the rights,
preferences, privileges or voting rights of holders of shares of Cumulative
Preferred Stock.
Under Delaware law, holders of preferred stock are entitled to vote as a
class upon a proposed amendment to the certificate of incorporation, whether or
not entitled to vote thereon by the certificate of incorporation, if the
amendment would increase or decrease the par value of the shares of such class,
increase or decrease the aggregate number of authorized shares of such class or
alter or change the powers, preferences or special rights of the shares of such
class so as to affect them adversely.
TRANSFER AGENT AND REGISTRAR. HSBC Bank USA is the transfer agent and
registrar for the Cumulative Preferred Stock.
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<PAGE>
THE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the Exchange Offer), to exchange up to $110.0 million
aggregate principal amount of Exchange Notes for a like aggregate principal
amount of Old Notes properly tendered on or prior to the Expiration Date and not
withdrawn as permitted pursuant to the procedures described below. The Exchange
Offer is being made with respect to all of the Old Notes.
As of the date of this Prospectus, $110.0 million aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about , 1999, to all holders
of Old Notes known to the Company. The Company's obligation to accept Old Notes
for exchange pursuant to the Exchange Offer is subject to certain conditions set
forth under "--Certain Conditions to the Exchange Offer" below. The Company
currently expects that each of the conditions will be satisfied and that no
waivers will be necessary.
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were issued on August 20, 1998, in a transaction exempt from
the registration requirements of the Securities Act. Accordingly, the Old Notes
may not be reoffered, resold, or otherwise transferred unless so registered or
unless an applicable exemption from the registration and prospectus delivery
requirements of the Securities Act is available.
In connection with the issuance and sale of the Old Notes, the Company
entered into the Registration Rights Agreement, which requires the Company to
file with the Commission a registration statement relating to the Exchange Offer
not later than 135 days after the date of issuance of the Old Notes; and to use
its best efforts to cause the registration statement relating to the Exchange
Offer to become effective under the Securities Act not later than 240 days after
the date of issuance of the Old Notes and, unless the Exchange Offer would not
be permitted by applicable law or Commission policy, the Company will commence
the Exchange Offer and use its best efforts to issue on or prior to 30 business
days after the date on which the registration statement relating to the Exchange
Offer was declared effective by the Commission, Exchange Notes in exchange for
Old Notes tendered prior thereto in the Exchange Offer. A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement.
The Exchange Offer is being made by the Company to satisfy its obligations
with respect to the Registration Rights Agreement. The term "holder," with
respect to the Exchange Offer, means any person in whose name Old Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder, or any person whose
Old Notes are held of record by The Depository Trust Company ("DTC"). Other than
pursuant to the Registration Rights Agreement, the Company is not required to
file any registration statement to register any outstanding Old Notes. Holders
of Old Notes who do not tender their Old Notes or whose Old Notes are tendered
but not accepted would have to rely on exemptions to registration requirements
under the securities laws, including the Securities Act, if they wish to sell
their Old Notes.
The Company is making the Exchange Offer in reliance on the position of the
Staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the Staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
Staff, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a Holder (other than any Holder who is a broker-dealer
or an "affiliate" of the Company within the meaning of Rule 405 of the
Securities Act) without further
80
<PAGE>
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such Holder's business and that such Holder is not participating, and
has no arrangement or understanding with any person to participate, in a
distribution (within the meaning of the Securities Act) of such Exchange Notes.
See "--Resale of Exchange Notes." Each broker-dealer that receives Exchange
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, subject to the conditions set forth
herein and in the Letter of Transmittal accompanying this Prospectus, $1,000 in
principal amount of Exchange Notes for each $1,000 in principal amount of the
Old Notes. The terms of the Exchange Notes are identical in all material
respects to the terms of the Old Notes for which they may be exchanged pursuant
to this Exchange Offer, except that the Exchange Notes will generally be freely
transferable by holders thereof and will not be subject to any covenant
regarding registration. The Exchange Notes will evidence the same indebtedness
as the Old Notes and will be entitled to the benefits of the Indenture. See
"Description of Exchange Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
The Company has not requested, and does not intend to request, an
interpretation by the Staff of the Commission with respect to whether the
Exchange Notes issued pursuant to the Exchange Offer in exchange for the Old
Notes may be offered for sale, resold or otherwise transferred by any holder
without compliance with the registration and prospectus delivery provisions of
the Securities Act. Instead, based on an interpretation by the Staff of the
Commission set forth in a series of no-action letters issued to third parties,
the Company believes that Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for sale, resold and otherwise
transferred by any holder of such Exchange Notes (other than any such holder
that is a broker-dealer or is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder has no arrangement or understanding with any person to participate
in the distribution of such Exchange Notes and neither such holder nor any other
such person is engaging in or intends to engage in a distribution of such
Exchange Notes. Since the Commission has not considered the Exchange Offer in
the context of a no-action letter, there can be no assurance that the Staff of
the Commission would make a similar determination with respect to the Exchange
Offer. Any holder who is an affiliate of the Company or who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes cannot rely on such interpretation by the Staff of the Commission
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. Each holder, other
than a broker-dealer, must acknowledge that it is not engaged in, and does not
intend to engage in, a distribution of Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. A broker-dealer
may not participate in the Exchange Offer with respect to Old Notes acquired
other than as a result of market-making activities or other trading activities.
See "Plan of Distribution."
Interest on the Exchange Notes will accrue from the last Interest Payment
Date on which interest was paid on the Old Notes so surrendered or, if no
interest has been paid on such Notes, from August 20, 1998.
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Tendering holders of the Old Notes shall not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Old Notes
pursuant to the Exchange Offer.
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The Exchange Offer will expire at 5:00 p.m., New York City time, on
, 1999, unless the Company, in its sole discretion, has extended the
period of time for which the Exchange Offer is open (such date, as it may be
extended, is referred to herein as the "Expiration Date"). The Expiration Date
will be at least 20 business days after the commencement of the Exchange Offer
in accordance with Rule 14e-1(a) under the Exchange Act. The Company expressly
reserves the right, at any time or from time to time, to extend the period of
time during which the Exchange Offer is open, and thereby delay acceptance for
exchange of any Old Notes, by giving oral or written notice to the Exchange
Agent and by timely public announcement no later than 9:00 a.m. New York City
time, on the next business day after the previously scheduled Expiration Date.
During any such extension, all Old Notes previously tendered will remain subject
to the Exchange Offer unless properly withdrawn. The Company does not anticipate
extending the Expiration Date.
The Company expressly reserves the right to (i) terminate or amend the
Exchange Offer and not to accept for exchange any Old Notes not theretofore
accepted for exchange upon the occurrence of any of the events specified below
under "--Certain Conditions to the Exchange Offer" which have not been waived by
the Company and (ii) amend the terms of the Exchange Offer in any manner which,
in its good faith judgment, is advantageous to the holders of the Old Notes,
whether before or after any tender of the Notes. If any such termination or
amendment occurs, the Company will notify the Exchange Agent and will either
issue a press release or give oral or written notice to the holders of the Old
Notes as promptly as practicable. If required by the federal securities laws,
the Company will file a post-effective amendment to the Registration Statement
of which this Prospectus forms a part relating to an amendment.
For purposes of the Exchange Offer, a "business day" means any day other
than Saturday, Sunday or a date on which banking institutions are required or
authorized by New York State law to be closed, and consists of the time period
from 12:01 a.m. through 12:00 midnight, New York City time. Unless the Company
terminates the Exchange Offer prior to 5:00 p.m., New York City time, on the
Expiration Date, the Company will exchange the Exchange Notes for the Old Notes
on the Exchange Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal.
A holder of Old Notes may tender the same by (i) properly completing and
signing the Letter of Transmittal or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees
and any other documents required by the Letter of Transmittal, to the Exchange
Agent at its address set forth below on or prior to the Expiration Date (or
complying with the procedure for book-entry transfer described below) or (ii)
complying with the guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
INSURE TIMELY DELIVERY. NO OLD NOTES OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO
THE COMPANY.
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If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the Exchange Notes to be issued in exchange therefor are to
be issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in DTC (also referred to as a "book-entry transfer facility")
whose name appears on a security listing as the owner of Old Notes), the
signature of such signer need not be guaranteed. In any other case, the tendered
Old Notes must be endorsed or accompanied by written instruments of transfer in
form satisfactory to the Company and duly executed by the registered holder, and
the signature on the endorsement or instrument of transfer must be guaranteed by
a bank, broker, dealer, credit union, savings association, clearing agency or
other institution (each an "Eligible Institution") that is a member of a
recognized signature guarantee medallion program within the meaning of Rule
17Ad-15 under the Exchange Act. If the Exchange Notes and/or Old Notes not
exchanged are to be delivered to an address other than that of the registered
holder appearing on the note register for the Old Notes, the signature in the
Letter of Transmittal must be guaranteed by an Eligible Institution.
The Exchange Agent will make a request within two business days after the
date of receipt of this Prospectus to establish accounts with respect to the Old
Notes at the book-entry transfer facility for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is participant in the book-entry transfer facility's system may
make book-entry delivery of Old Notes by causing such book-entry transfer
facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the book-entry transfer facility's
procedures for such transfer. Although delivery of Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the book-entry
transfer facility, an appropriate Letter of Transmittal with any required
signature guarantee and all other required documents must in each case be
transmitted to and received or confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its address set forth below on or prior to the Expiration Date, a letter,
telegram or facsimile transmission (receipt confirmed by telephone and an
original delivered by guaranteed overnight courier) from an Eligible Institution
setting forth the name and address of the tendering holder, the names in which
the Old Notes are registered and, if possible, the certificate numbers of the
Old Notes to be tendered, and stating that the tender is being made thereby and
guaranteeing that within three business days after the Expiration Date, the Old
Notes in proper form for transfer (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at the book-entry transfer
facility), will be delivered by such Eligible Institution together with a
properly completed and duly executed Letter of Transmittal (and any other
required documents). Unless Old Notes being tendered by the above-described
method are deposited with the Exchange Agent within the time period set forth
above (accompanied or preceded by a properly completed Letter of Transmittal and
any other required documents), the Company may, at its option, reject the
tender. Copies of the notice of guaranteed delivery ("Notice of Guaranteed
Delivery") which may be used by Eligible Institutions for the purposes described
in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the book-entry transfer facility)
is received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
from an Eligible Institution is received by the Exchange Agent. Issuances of
Exchange Notes in exchange for Old Notes tendered pursuant to a Notice of
Guaranteed Delivery or letter, telegram or facsimile transmission to similar
effect (as provided above) by
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an Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or not to accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects or irregularities or conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
right to waive the ineligibility of any holder who seeks to tender Old Notes in
the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the Company
shall determine. Neither the Company, the Exchange Agent nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of Old Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders appear on the Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each holder will represent to the Company that, among other
things, the Exchange Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder, that neither the
holder nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such Exchange Notes and that
neither the holder nor any such other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company, or if it is an affiliate it will
comply with the registration and prospectus requirements of the Securities Act
to the extent applicable.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Notes for exchange (the "Transferor") exchanges, assigns
and transfers the Old Notes to the Company and irrevocably constitutes and
appoints the Exchange Agent as the Transferor's agent and attorney-in-fact to
cause the Old Notes to be assigned, transferred and exchanged. The Transferor
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the Old Notes and to acquire Exchange Notes
issuable upon the exchange of such tendered Notes, and that, when the same are
accepted for exchange, the Company will acquire good and unencumbered title to
the tendered Old Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also warrants
that it will, upon request, execute and deliver
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any additional documents deemed by the Exchange Agent or the Company to be
necessary or desirable to complete the exchange, assignment and transfer of
tendered Old Notes or transfer ownership of such Old Notes on the account books
maintained by a book-entry transfer facility. The Transferor further agrees that
acceptance of any tendered Old Notes by the Company and the issuance of Exchange
Notes in exchange therefor shall constitute performance in full by the Company
of certain of its obligations under the Registration Rights Agreement. All
authority conferred by the Transferor will survive the death or incapacity of
the Transferor and every obligation of the Transferor shall be binding upon the
heirs, legal representatives, successors, assigns, executors and administrators
of such Transferor.
The Transferor certifies that it is not an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act and that it is acquiring the
Exchange Notes offered hereby in the ordinary course of such Transferor's
business and that such Transferor has no arrangement with any person to
participate in the distribution of such Exchange Notes. Each holder, other than
a broker-dealer, must acknowledge that it is not engaged in, and does not intend
to engage in, a distribution of Exchange Notes. Each Transferor which is a
broker-dealer receiving Exchange Notes for its own account must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. By so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of Exchange
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company will, for a period of 90 days after the Expiration Date,
make copies of this Prospectus available to any broker-dealer for use in
connection with any such resale.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal sent by
facsimile transmission (receipt confirmed by telephone) or letter must be
received by the Exchange Agent at the address set forth herein prior to the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) specify the principal
amount of Notes to be withdrawn, (iv) include a statement that such holder is
withdrawing his election to have such Old Notes exchanged, (v) be signed by the
holder in the same manner as the original signature on the Letter of Transmittal
by which such Old Notes were tendered or as otherwise described above (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee under the Indenture register the transfer of such
Old Notes into the name of the person withdrawing the tender and (vi) specify
the name in which any such Old Notes are to be registered, if different from
that of the Depositor. The Exchange Agent will return the properly withdrawn Old
Notes promptly following receipt of notice of withdrawal. If Old Notes have been
tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at the book-entry
transfer facility to be credited with the withdrawn Old Notes or otherwise
comply with the book-entry transfer facility procedure. All questions as to the
validity of notices of withdrawals, including time of receipt, will be
determined by the Company and such determination will be final and binding on
all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account with such
book-entry transfer facility specified by the holder) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may
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be retendered by following one of the procedures described under "Procedures for
Tendering Old Notes" above at any time on or prior to the Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly on the Exchange Date, all Old Notes properly
tendered and will issue the Exchange Notes promptly after such acceptance. See
"--Certain Conditions to the Exchange Offer" below. For purposes of the Exchange
Offer, the Company shall be deemed to have accepted properly tendered Old Notes
for exchange when, as and if the Company has given oral or written notice
thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive an Exchange Note having a principal amount equal to that of the
surrendered Old Note.
In all cases, issuance of Exchange Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely book-entry
confirmation of such Old Notes into the Exchange Agent's account at the
book-entry transfer facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer into the Exchange Agent's account at the
book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such non-exchanged Old Notes will be credited to an account
maintained with such book-entry transfer facility) as promptly as practicable
after the expiration of the Exchange Offer.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company shall not be required to accept for exchange,
or to issue Exchange Notes in exchange for, any Old Notes and may terminate or
amend the Exchange Offer (by oral or written notice to the Exchange Agent or by
a timely press release) if at any time before the acceptance of such Old Notes
for exchange or the exchange of the Exchange Notes for such Old Notes, any of
the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency or regulatory authority or any
injunction, order or decree is issued with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or have a material
adverse effect on the contemplated benefits of the Exchange Offer to the
Company; or
(b) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company that is or may be adverse to the Company, or the
Company shall have become aware of facts that have or may have adverse
significance with respect to the value of the Old Notes or the Exchange
Notes or that may materially impair the contemplated benefits of the
Exchange Offer to the Company; or
(c) any law, rule or regulation or applicable interpretations of the
Staff of the Commission is issued or promulgated which, in the good faith
determination of the Company, do not permit the Company to effect the
Exchange Offer; or
(d) any governmental approval has not been obtained, which approval the
Company, in its sole discretion, deems necessary for the consummation of the
Exchange Offer; or
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(e) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation (or an amendment to any existing law statute, rule or
regulation) which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or have
a material adverse effect on the contemplated benefits of the Exchange Offer
to the Company; or
(f) there shall occur a change in the current interpretation by the
Staff of the Commission which permits the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Old Notes to be offered for resale,
resold and otherwise transferred by holders thereof (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such
Exchange Notes are acquired in the ordinary course of such holders' business
and such holders have no arrangement with any person to participate in the
distribution of such Exchange Notes; or
(g) there shall have occurred (i) any general suspension of, shortening
of hours for, or limitation on prices for, trading in securities on any
national securities exchange or in the over-the-counter market (whether or
not mandatory), (ii) any limitation by any governmental agency or authority
which may adversely affect the ability of the Company to complete the
transactions contemplated by the Exchange Offer, (iii) a declaration of a
banking moratorium or any suspension of payments in respect of banks by
Federal or state authorities in the United States (whether or not
mandatory), (iv) a commencement of a war, armed hostilities or other
international or national crisis directly or indirectly involving the United
States, (v) any limitation (whether or not mandatory) by any governmental
authority on, or other event having a reasonable likelihood of affecting,
the extension of credit by banks or other leading institutions in the United
States, or (vi) in the case of any of the foregoing existing at the time of
the commencement of the Exchange Offer, a material acceleration or worsening
thereof.
The Company expressly reserves the right to terminate the Exchange Offer and
not accept for exchange any Old Notes upon the occurrence of any of the
foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Old Notes). In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date if
any of the conditions set forth above occur. Moreover, regardless of whether any
of such conditions has occurred, the Company may amend the Exchange Offer in any
manner which, in its good faith judgment, is advantageous to holders of the Old
Notes.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time. If the Company waives or amends the foregoing
conditions, it will, if required by law, extend the Exchange Offer for a minimum
of five business days from the date that the Company first gives notice, by
public announcement or otherwise, of such waiver or amendment, if the Exchange
Offer would otherwise expire within such five business-day period. Any
determination by the Company concerning the events described above will be final
and binding upon all parties.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no Exchange Notes will be issued in exchange for any such Old
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended. In any such event the Company is required to use every
reasonable effort to obtain the withdrawal of any stop order at the earliest
possible time.
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The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange.
EXCHANGE AGENT
HSBC Bank USA has been appointed as the Exchange Agent for the exchange
Offer. All executed Letters of Transmittal should be directed to the Exchange
Agent at one of the addresses set forth below:
<TABLE>
<S> <C>
BY HAND/OVERNIGHT COURIER: BY MAIL:
HSBC Bank USA (insured or registered recommended)
140 Broadway, Level A HSBC Bank USA
New York, New York 10005-1180 140 Broadway Level A
Attention: Paulette Shaw New York, New York 10005-1180
Attention: Paulette Shaw
BY OVERNIGHT COURIER: BY FACSIMILE:
HSBC Bank USA (212) 658-2292
140 Broadway, Level A (For Eligible Institutions Only)
New York, New York 10005-1180 BY TELEPHONE:
Attention: Paulette Shaw (212) 658-5931
</TABLE>
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the address and
telephone number set forth in the Letter of Transmittal.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE LETTER OF TRANSMITTAL,
OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER OTHER THAN THE
ONES SET FORTH ON THE LETTER OF TRANSMITTAL, WILL NOT CONSTITUTE A VALID
DELIVERY.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The
Company will also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this and other related documents to the beneficial owners of the Old
Notes and in handling forwarding tenders for their customers.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
approximately $200,000, which includes fees and expenses of the Exchange Agent,
Trustee, registration fees, accounting, legal, printing and related fees and
expenses.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Notes in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in
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any such jurisdiction and extend the Exchange Offer to holders of Old Notes in
such jurisdiction. In any jurisdiction in which the securities laws or blue sky
laws of which require the Exchange Offer to be made by a licensed broker or
dealer, the Exchange Offer is being made on behalf of the Company by one or more
registered brokers or dealers which are licensed under the laws of such
jurisdiction.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the carrying value of the Old Notes
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company upon the exchange of Exchange Notes for Old Notes. Expenses incurred in
connection with the issuance of the Exchange Notes will be amortized over the
term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. Old Notes not
exchanged pursuant to the Exchange Offer will continue to remain outstanding in
accordance with their terms. In general, the Old Notes may not be offered or
sold unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register the Old Notes under the Securities Act.
Participation in the Exchange Offer is voluntary, and holders of Old Notes
should carefully consider whether to participate. Holders of Old Notes are urged
to consult their financial and tax advisors in making their own decision on what
action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Exchange Offer, the
Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of Old Notes who do not tender their Old Notes in the
Exchange Offer will continue to hold such Old Notes and will be entitled to all
the rights and limitations applicable thereto under the Indenture, except for
any such rights under the Registration Rights Agreement that by their terms
terminate or cease to have further effectiveness as a result of the making of
this Exchange Offer. All untendered Old Notes will continue to be subject to the
restrictions on transfer set forth in the Indenture. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered Old Notes could be adversely affected.
The Company may in the future seek to acquire, subject to the terms of the
Indenture, untendered Old Notes in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. The Company has
no present plan to acquire any Old Notes which are not tendered in the Exchange
Offer.
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RESALE OF EXCHANGE NOTES
The Company is making the Exchange Offer in reliance on the position of the
Staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the Staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
Staff, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a Holder (other than any Holder who is a broker-dealer
or an "affiliate" of the Company within the meaning of Rule 405 of the
Securities Act) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such Holder's business and that such
Holder is not participating, and has no arrangement or understanding with any
person to participate, in a distribution (within the meaning of the Securities
Act) of such Exchange Notes. However, any Holder who is an "affiliate" of the
Company or who has an arrangement or understanding with respect to the
distribution of the Exchange Notes to be acquired pursuant to the Exchange
Offer, or any broker-dealer who purchased Old Notes from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities Act
(i) could not rely on the applicable interpretations of the Staff and (ii) must
comply with the registration and prospectus delivery requirements of the
Securities Act. A broker-dealer who holds Old Notes that were acquired for its
own account as a result of market-making or other trading activities may be
deemed to be an "underwriter" within the meaning of the Securities Act and must,
therefore, deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of Exchange Notes. Each such broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge in the Letter of
Transmittal that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the Exchange Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the Exchange Notes for
offer or sale under the securities or blue sky laws of such jurisdictions as any
holder of the Exchange Notes reasonably requests. Such registration or
qualification may require the imposition of restrictions or conditions
(including suitability requirements for offerees or purchasers) in connection
with the offer or sale of any Exchange Notes.
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DESCRIPTION OF THE EXCHANGE NOTES
GENERAL
The Old Notes were issued, and the Exchange Notes offered hereby will be
issued, pursuant to an Indenture (the "INDENTURE") between the Company and HSBC
Bank USA (formerly known as Marine Midland Bank), as trustee (the "TRUSTEE").
The terms of the Exchange Notes include those stated in the Indenture as well as
those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (the "TRUST INDENTURE ACT"). The Notes are subject to all such
terms, and Holders of Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following summarizes the material
provisions of the Indenture and is qualified in its entirety by reference to the
provisions of the Indenture, including the definitions therein of certain terms
used below. The definitions of certain terms used in the following summary are
set forth below under "--Certain Definitions." The Indenture is an exhibit to
the Registration Statement of which this Prospectus is a part. For purposes of
this summary, the term "Company" refers only to Evenflo Company, Inc. and not to
any of its Subsidiaries.
On August 20, 1998, the Company issued $110.0 million aggregate principal
amount of Old Notes under the Indenture. The terms of the Exchange Notes are
identical in all material respects to the Old Notes, except for certain transfer
restrictions and registration and other rights relating to the exchange of the
Old Notes for Exchange Notes. The Trustee will authenticate and deliver Exchange
Notes for original issue only in exchange for a like principal amount of Old
Notes. Any Old Notes that remain outstanding after the consummation of the
Exchange Offer, together with the Exchange Notes, will be treated as a single
class of securities under the Indenture. Accordingly, all references herein to
specified percentages in aggregate principal amount of the outstanding Exchange
Notes shall be deemed to mean, at any time after the Exchange Offer is
consummated, such percentage in aggregate principal amount of the Old Notes and
Exchange Notes then outstanding.
The Notes will be senior unsecured obligations of the Company and will rank
PARI PASSU in right of payment to all existing and future senior Indebtedness of
the Company, including Indebtedness pursuant to the Senior Credit Facility. The
Notes will be effectively subordinated to all existing and future senior secured
Indebtedness of the Company to the extent of the value of the assets securing
such Indebtedness and will be effectively subordinated to all obligations of the
Subsidiaries of the Company. As of December 31, 1998, the Exchange Notes would
have been effectively subordinated to $7.8 million of senior secured
Indebtedness and $6.1 million of obligations of the Subsidiaries of the Company.
As of December 31, 1998, the aggregate principal amount of the Company's
outstanding Indebtedness was approximately $117.8 million, $7.8 million of which
was senior secured Indebtedness under the Senior Credit Facility (excluding
$61.0 million of availability under the Senior Credit Facility after giving
effect to $31.2 million of outstanding letters of credit and bankers'
acceptances). The Indenture permits the Company to incur additional
indebtedness, including senior secured Indebtedness, subject to certain
limitations. The Company currently does not have any indebtedness which would be
subordinate to the Exchange Notes. See "Risk Factors--Effective Structural
Subordination" and "--Encumbrances on Assets to Secure Credit Facility" and
"Description of the Credit Facility."
As of December 31, 1998, the aggregate principal amount of the outstanding
liabilities and commitments of the Subsidiaries of the Company was $6.1 million
(excluding guarantees in respect of the Senior Credit Facility). Holders of
indebtedness of, and trade creditors of, Subsidiaries of the Company would
generally be entitled to payment of their claims from the assets of the affected
Subsidiaries before such assets were made available for distribution to the
Company. The Indenture permits the incurrence of substantial indebtedness by the
Company's Subsidiaries and permits significant investments by the Company in
Subsidiaries, including Restricted Subsidiaries. In the event of bankruptcy,
liquidation or reorganization of a Subsidiary, holders of any such Subsidiary's
indebtedness will have a claim to the assets of the Subsidiary that is prior to
the Company's interest in those assets. See "Risk Factors--Effective Structural
Subordination."
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Under certain circumstances, the Company will be able to designate future
Subsidiaries as Unrestricted Subsidiaries or Restricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to any of the restrictive
covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes were initially issued in an aggregate principal amount of $110.0
million and will mature on August 15, 2006. The Indenture for the Notes provides
that the aggregate principal amount of the Notes outstanding at any one time
will be limited to $200.0 million, PROVIDED that any increase in the aggregate
principal amount outstanding after the Offering will be subject to the
compliance with all of the covenants under the Indenture. Interest on the Notes
will accrue at the rate of 11 3/4% per annum and will be payable semi-annually
in arrears on August 15 and February 15, commencing on February 15, 1999, to
Holders of record on the immediately preceding August 1 and February 1. Interest
on the Notes will accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from the date of original issuance.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. Principal of, premium if any, Liquidated Damages, if any, and
interest on the Notes will be payable at the office or agency of the Company
maintained for such purpose within the City and State of New York or at such
office or agency of the Company as may be maintained for such purpose or, at the
option of the Company, payment of Liquidated Damages, if any, or interest may be
made by check mailed to the Holders of the Notes at their respective addresses
set forth in the register of Holders; PROVIDED that all payments of principal,
premium, if any, Liquidated Damages, if any, and interest with respect to Notes
the Holders of which have given wire transfer instructions to the Company will
be required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof; PROVIDED further that all payments in
respect of Notes represented by one or more permanent global Notes registered in
the name of or held by The Depository Trust Company or its nominee will be made
by wire transfer of immediately available funds to the accounts specified by the
Holders or Holders thereof. Until otherwise designated by the Company the
Company's office or agency in New York will be the office of the Trustee
maintained for such purpose. The Notes will be issued in denominations of $1,000
and integral multiples thereof.
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
OPTIONAL REDEMPTION
Except as described below, the Notes will not be redeemable at the Company's
option prior to August 15, 2002. From and after August 15, 2002, the Notes will
be subject to redemption at any time at the option of the Company, in whole or
in part, upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below, plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the
applicable redemption date (subject to the rights of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date), if redeemed during the twelve-month period beginning on August 15 of each
of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2002............................................................................. 105.875%
2003............................................................................. 103.917%
2004............................................................................. 101.958%
2005 and thereafter.............................................................. 100.000%
</TABLE>
In addition, at any time or from time to time, on or prior to August 15,
2001, the Company may, at its option, redeem up to 35.0% of the aggregate
principal amount of Notes originally issued under the
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Indenture on the Issuance Date at a redemption price equal to 111.75% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the redemption date (subject to the
rights of holders of record on the relevant record date to receive interest due
on the relevant interest payment date), with the net cash proceeds of one or
more Equity Offerings; PROVIDED that at least 65.0% of the aggregate principal
amount of Notes originally issued under the Indenture on the Issuance Date
remains outstanding immediately after the occurrence of each such redemption;
PROVIDED FURTHER that each such redemption occurs within 60 days of the date of
closing of each such Equity Offering. The Trustee shall select the Notes to be
purchased in the manner described under "Repurchase at the Option of
Holders--Selection and Notice."
At any time on or prior to August 15, 2002, the Notes may also be redeemed,
in whole but not in part, at the option of the Company upon the occurrence of a
Change of Control, upon not less than 30 nor more than 60 days prior notice (but
in no event more than 90 days after the occurrence of such Change of Control)
mailed by first-class mail to each Holder's registered address, at a redemption
price equal to 100% of the principal amount thereof plus the Applicable Premium
as of, and accrued and unpaid interest and Liquidated Damages, if any, to the
date of redemption (the "REDEMPTION DATE") (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date).
"APPLICABLE PREMIUM" means, with respect to any Note on any Redemption Date,
the greater of (i) 1.0% of the principal amount of such Note and (ii) the excess
of (A) the present value at such Redemption Date of (1) the redemption price of
such Note at August 15, 2002 (such redemption price being set forth in the table
above) plus (2) all required interest payments due on such Note through August
15, 2002 (excluding accrued but unpaid interest), computed using a discount rate
equal to the Treasury Rate on such Redemption Date plus 50 basis points over (B)
the principal amount of such Note.
"TREASURY RATE" means, as of any Redemption Date, the yield to maturity as
of such Redemption Date of U.S. Treasury securities with a constant maturity (as
compiled and published in the most recent Federal Reserve Statistical Release
H.15 (519) that has become publicly available at least two Business Days prior
to the Redemption Date (or, if such Statistical Release is no longer published,
any publicly available source of similar market data)) most nearly equal to the
period from the Redemption Date to August 15, 2002; PROVIDED, HOWEVER, that if
the period from the Redemption Date to August 15, 2002 is less than one year,
the weekly average yield on actually traded U.S. Treasury securities adjusted to
a constant maturity of one year shall be used.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL. The Indenture provides that, upon the occurrence of a
Change of Control, unless the Company has elected to redeem the Notes in
connection with such Change of Control, the Company will make an offer to
purchase all or any part (equal to $1,000 or an integral multiple thereof) of
the Notes pursuant to the offer described below (the "CHANGE OF CONTROL OFFER")
at a price in cash (the "CHANGE OF CONTROL PAYMENT") equal to 101.0% of the
aggregate principal amount thereof plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of purchase (subject to the rights of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date). The Indenture provides that within 30 days
following any Change of Control, the Company will mail a notice to each Holder
of Notes issued under the Indenture, with a copy to the Trustee, with the
following information: (1) a Change of Control Offer is being made pursuant to
the covenant entitled "Change of Control," and that all Notes properly tendered
pursuant to such Change of Control Offer will be accepted for payment; (2) the
purchase price and the purchase date, which will be no earlier than 30 days nor
later than 60 days from the date such notice is mailed, except as may be
otherwise required by applicable law (the "CHANGE OF CONTROL PAYMENT DATE"); (3)
any Note not properly tendered will remain outstanding and continue to accrue
interest; (4) unless the Company defaults in the payment of the Change of
Control Payment, all Notes accepted for payment pursuant to the Change of
Control Offer will cease to accrue interest on the Change of Control Payment
Date; (5) Holders electing to have any Notes purchased pursuant to a Change
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of Control Offer will be required to surrender the Notes, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Notes completed, to
the paying agent specified in the notice at the address specified in the notice
prior to the close of business on the third Business Day preceding the Change of
Control Payment Date; (6) Holders will be entitled to withdraw their tendered
Notes and their election to require the Company to purchase such Notes, PROVIDED
that the paying agent receives, not later than the close of business on the last
day of the Offer Period (as defined in the Indenture), a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of Notes tendered for purchase, and a statement that such
Holder is withdrawing his or her tendered Notes and his or her election to have
such Notes purchased; and (7) that Holders whose Notes are being purchased only
in part will be issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered, which unpurchased portion must be equal to
$1,000 in principal amount or an integral multiple thereof.
The Indenture provides that, prior to complying with the provisions of this
covenant, but in any event within 30 days following a Change of Control, the
Company will either repay all outstanding obligations under the Senior Credit
Facility or obtain the requisite consents thereunder to permit the purchase of
the Notes required by this covenant.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the repurchase
of the Notes pursuant to a Change of Control Offer. To the extent that the
provisions of any securities laws or regulations conflict with the provisions of
the Indenture, the Company will comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations described
in the Indenture by virtue thereof.
The Indenture provides that on the Change of Control Payment Date, the
Company will, to the extent permitted by law, (1) accept for payment all Notes
or portions thereof properly tendered pursuant to the Change of Control Offer,
(2) deposit with the paying agent an amount equal to the aggregate Change of
Control Payment in respect of all Notes or portions thereof so tendered and (3)
deliver, or cause to be delivered, to the Trustee for cancellation the Notes so
accepted together with an Officers' Certificate stating that such Notes or
portions thereof have been tendered to and purchased by the Company. The
Indenture provides that the paying agent will promptly mail to each Holder of
Notes the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any, PROVIDED, that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
With certain exceptions, the Senior Credit Facility does, and future credit
agreements or other agreements relating to Indebtedness to which the Company
becomes a party may, prohibit the Company from purchasing any Notes as a result
of a Change of Control and/or provide that certain change of control events with
respect to the Company would constitute a default thereunder. In the event a
Change of Control occurs at a time when the Company is prohibited from
purchasing the Notes, the Company could seek the consent of its lenders to the
purchase of the Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing the Notes. In
such case, the Company's failure to purchase tendered Notes would constitute an
Event of Default under the Indenture which would, in turn, constitute an event
of default under the Senior Credit Facility. See "Risk Factors--Change of
Control."
The existence of a Holder's right to require the Company to repurchase such
Holder's Notes upon the occurrence of a Change of Control may deter a third
party from seeking to acquire the Company in a transaction that would constitute
a Change of Control.
ASSET SALES. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, cause, make or suffer to exist an
Asset Sale, unless (x) the Company, or its
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Restricted Subsidiaries, as the case may be, receives consideration at the time
of such Asset Sale at least equal to the fair market value (as determined in
good faith by the Company) of the assets sold or otherwise disposed of and (y)
at least 75.0% of the consideration therefor received by the Company, or such
Restricted Subsidiary, as the case may be, is in the form of cash or Cash
Equivalents; PROVIDED that the amount of (a) any liabilities (as shown on the
Company's or such Restricted Subsidiary's most recent balance sheet or in the
notes thereto) of the Company or any Restricted Subsidiary (other than
liabilities that are by their terms subordinated to the Notes), that are assumed
by the transferee of any such assets, (b) any notes or other obligations
received by the Company or such Restricted Subsidiary from such transferee that
are converted by the Company or such Restricted Subsidiary into cash (to the
extent of the cash received) within 180 days following the closing of such Asset
Sale and (c) any Designated Noncash Consideration received by the Company or any
of its Restricted Subsidiaries in such Asset Sale having an aggregate fair
market value, taken together with all other Designated Noncash Consideration
received pursuant to this clause (c) that is at that time outstanding, not to
exceed the greater of (x) $25.0 million or (y) 10.0% of Total Assets at the time
of the receipt of such Designated Noncash Consideration (with the fair market
value of each item of Designated Noncash Consideration being measured at the
time received and without giving effect to subsequent changes in value), shall
be deemed to be cash for purposes of this provision and for no other purpose.
Within 365 days after the Company's or any Restricted Subsidiary's receipt
of the Net Proceeds of any Asset Sale, the Company or such Restricted Subsidiary
may apply the Net Proceeds from such Asset Sale, at its option, (i) to
permanently reduce (x) Obligations under the Senior Credit Facility (and to
correspondingly reduce commitments with respect thereto) or other Indebtedness
(other than Subordinated Indebtedness) (provided that if the Company shall so
reduce Obligations under such Indebtedness, it will equally and ratably reduce
Obligations under the Notes if the Notes are then prepayable or, if the Notes
may not be then prepaid, the Company will make an offer (in accordance with the
procedures set forth below for an Asset Sale Offer) to all Holders to purchase
the amount of Notes that would otherwise be prepaid at a price in cash equal to
100% of the principal amount thereof plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of purchase) or (y) Indebtedness of a
Wholly-Owned Restricted Subsidiary (other than Indebtedness owed to the Company
or another Restricted Subsidiary), (ii) to an investment in any one or more
businesses, capital expenditures or acquisitions of other assets in each case,
used or useful in a Similar Business and/or (iii) to make an investment in
properties or assets that replace the properties and assets that are the subject
of such Asset Sale. Pending the final application of any such Net Proceeds, the
Company or such Restricted Subsidiary may temporarily reduce Indebtedness under
a revolving credit facility, if any, or otherwise invest such Net Proceeds in
Cash Equivalents or Investment Grade Securities. The Indenture provides that any
Net Proceeds from the Asset Sale that are not invested or applied as provided
and within the time period set forth in the first sentence of this paragraph
will be deemed to constitute "EXCESS PROCEEDS." When the aggregate amount of
Excess Proceeds exceeds $10.0 million, the Company shall make an offer to all
Holders of Notes (an "ASSET SALE OFFER") to purchase the maximum principal
amount of Notes, that is an integral multiple of $1,000, that may be purchased
out of the Excess Proceeds at an offer price in cash in an amount equal to 100%
of the principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, to the date fixed for the closing of such offer, in accordance
with the procedures set forth in the Indenture. The Company will commence an
Asset Sale Offer with respect to Excess Proceeds within ten Business Days after
the date that Excess Proceeds exceeds $10.0 million by mailing the notice
required pursuant to the terms of the Indenture, with a copy to the Trustee. To
the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale
Offer is less than the Excess Proceeds, the Company may use any remaining Excess
Proceeds for general corporate purposes. If the aggregate principal amount of
Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes to be purchased in the manner described under the
caption "Selection and Notice" below. Upon completion of any such Asset Sale
Offer, the amount of Excess Proceeds shall be reset at zero.
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The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the repurchase
of the Notes pursuant to an Asset Sale Offer. To the extent that the provisions
of any securities laws or regulations conflict with the provisions of the
Indenture, the Company will comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations described
in the Indenture by virtue thereof.
With certain exceptions, the Senior Credit Facility does, and future credit
agreements or other agreements relating to Indebtedness to which the Company
becomes a party may, prohibit the Company from purchasing any Notes pursuant to
this covenant. In the event the Company is prohibited from purchasing the Notes,
the Company could seek the consent of its lenders to the purchase of the Notes
or could attempt to refinance the borrowings that contain such prohibition. If
the Company does not obtain such a consent or repay such borrowings, the Company
will remain prohibited from purchasing the Notes. In such case, the Company's
failure to purchase such tendered Notes would constitute an Event of Default
under the Indenture which would, in turn, constitute an event of default under
the Senior Credit Facility.
SELECTION AND NOTICE. If less than all of the Notes are to be redeemed at
any time or if more Notes are tendered pursuant to an Asset Sale Offer than the
Company is required to purchase, selection of such Notes for redemption or
purchase, as the case may be, will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
such Notes are listed, or, if such Notes are not so listed, on a pro rata basis,
by lot or by such other method as the Trustee shall deem fair and appropriate
(and in such manner as complies with applicable legal requirements); PROVIDED
that no Notes of $1,000 or less shall he purchased or redeemed in part.
Notices of purchase or redemption shall be mailed by first class mail,
postage prepaid, at least 30 but not more than 60 days before the purchase or
redemption date to each Holder of Notes to be purchased or redeemed at such
Holder's registered address. If any Note is to be purchased or redeemed in part
only, any notice of purchase or redemption that relates to such Note shall state
the portion of the principal amount thereof that has been or is to be purchased
or redeemed.
A new Note in principal amount equal to the unpurchased or unredeemed
portion of any Note purchased or redeemed in part will be issued in the name of
the Holder thereof upon cancellation of the original Note. On and after the
purchase or redemption date unless the Company defaults in payment of the
purchase or redemption price, interest shall cease to accrue on Notes or
portions thereof purchased or called for redemption.
CERTAIN COVENANTS
LIMITATION ON RESTRICTED PAYMENTS. The Indenture provides that the Company
will not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly: (i) declare or pay any dividend or make any distribution on account
of the Company's or any of its Restricted Subsidiaries' Equity Interests,
including any dividend or distribution payable in connection with any merger or
consolidation (other than (A) dividends or distributions by the Company payable
in Equity Interests (other than Disqualified Stock) of the Company or (B)
dividends or distributions by a Restricted Subsidiary so long as, in the case of
any dividend or distribution payable on or in respect of any class or series of
securities issued by a Subsidiary other than a Wholly-Owned Subsidiary, the
Company or a Restricted Subsidiary receives at least its PRO RATA share of such
dividend or distribution in accordance with its Equity Interests in such class
or series of securities); (ii) purchase, redeem, defease or otherwise acquire or
retire for value any Equity Interests of the Company or any direct or indirect
parent of the Company; (iii) make any principal payment on, or redeem,
repurchase, defease or otherwise acquire or retire for value in each case, prior
to any scheduled repayment, or maturity, any Subordinated Indebtedness (other
than Indebtedness permitted under clauses (g) and (i) of the covenant described
under "--Limitations on Incurrence of Indebtedness and Issuance of Disqualified
Stock"); or (iv) make any Restricted Investment (all such payments and other
actions set forth
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in clauses (i) through (iv) above being collectively referred to as "RESTRICTED
PAYMENTS"), unless, at the time of such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) immediately after giving effect to such transaction on a pro forma
basis, the Company could incur $1.00 of additional Indebtedness under the
provisions of the first paragraph of "--Limitations on Incurrence of
Indebtedness and Issuance of Disqualified Stock;" and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Issuance Date (including Restricted Payments
permitted by clauses (i), (ii) (with respect to the payment of dividends on
Refunding Capital Stock pursuant to clause (b) thereof), (v) (only to the
extent that amounts paid pursuant to such clause are greater than amounts
that could have been paid pursuant to such clause if $2.5 million and $5.0
million were substituted in such clause for $5.0 million and $10.0 million,
respectively), (vi) and (ix) of the next succeeding paragraph, but excluding
all other Restricted Payments permitted by the next succeeding paragraph),
is less than the sum of (i) 50.0% of the Consolidated Net Earnings of the
Company for the period (taken as one accounting period) from the fiscal
quarter that first begins after the Issuance Date to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, in the
case such Consolidated Net Earnings for such period is a deficit, minus 100%
of such deficit), PLUS (ii) 100% of the aggregate net cash proceeds and the
fair market value, as determined in good faith by the Board of Directors, of
marketable securities received by the Company since immediately after the
closing of the Transactions from the issue or sale of Equity Interests of
the Company (including Retired Capital Stock (as defined below), but
excluding cash proceeds and marketable securities received from the sale of
Equity Interests to members of management, directors or consultants of the
Company and its Subsidiaries after the Issuance Date to the extent such
amounts have been applied to Restricted Payments in accordance with clause
(v) of the next succeeding paragraph and excluding Excluded Contributions)
or debt securities of the Company that have been converted into such Equity
Interests of the Company (other than Refunding Capital Stock (as defined
below) or Equity Interests or convertible debt securities of the Company
sold to a Restricted Subsidiary of the Company and other than Disqualified
Stock or debt securities that have been converted into Disqualified Stock),
PLUS (iii) 100% of the aggregate amount of cash and marketable securities
contributed to the capital of the Company following the Issuance Date
(excluding Excluded Contributions), PLUS (iv) 100% of the aggregate amount
received in cash and the fair market value of marketable securities (other
than Restricted Investments) received from (A) the sale or other disposition
(other than to the Company or a Restricted Subsidiary) of Restricted
Investments made by the Company and its Restricted Subsidiaries or (B) a
dividend from, or the sale (other than to the Company or a Restricted
Subsidiary) of the stock of, an Unrestricted Subsidiary (other than an
Unrestricted Subsidiary the Investment in which was made by the Company or a
Restricted Subsidiary pursuant to clauses (vii) or (x) below).
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at the date of declaration such payment would have
complied with the provisions of the Indenture;
(ii) (a) the redemption, repurchase, retirement or other acquisition of
any Equity Interests (the "RETIRED CAPITAL STOCK") or Subordinated
Indebtedness of the Company in exchange for, or out of the proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary) of,
Equity Interests of the Company (other than any Disqualified Stock) (the
"REFUNDING CAPITAL STOCK"), and (b) if immediately prior to the retirement
of Retired Capital Stock, the declaration and payment of dividends thereon
was permitted under clause (vi) of this paragraph, the declaration and
payment of dividends on the Refunding Capital Stock in an aggregate amount
per year no greater than the
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aggregate amount of dividends per annum that was declarable and payable on
such Retired Capital Stock immediately prior to such retirement; PROVIDED,
HOWEVER, that at the time of the declaration of any such dividends, no
Default or Event of Default shall have occurred and be continuing or would
occur as a consequence thereof;
(iii) distributions or payments of Receivables Fees;
(iv) the redemption, repurchase or other acquisition or retirement of
Subordinated Indebtedness of the Company made by exchange for, or out of the
proceeds of the substantially concurrent sale of, new Indebtedness of the
Company so long as (A) the principal amount of such new Indebtedness does
not exceed the principal amount of the Subordinated Indebtedness being so
redeemed, repurchased, acquired or retired for value (plus the amount of any
premium required to be paid under the terms of the instrument governing the
Subordinated Indebtedness being so redeemed, repurchased, acquired or
retired), (B) such Indebtedness is subordinated to the Notes at least to the
same extent as such Subordinated Indebtedness so purchased, exchanged,
redeemed, repurchased, acquired or retired for value, (C) such Indebtedness
has a final scheduled maturity date equal to or later than the final
scheduled maturity date of the Subordinated Indebtedness being so redeemed,
repurchased, acquired or retired and (D) such Indebtedness has a Weighted
Average Life to Maturity equal to or greater than the remaining Weighted
Average Life to Maturity of the Subordinated Indebtedness being so redeemed,
repurchased, acquired or retired;
(v) a Restricted Payment to pay for the repurchase, retirement or other
acquisition or retirement for value of common Equity Interests of the
Company held by any future, present or former employee, director or
consultant of the Company, any Subsidiary of the Company or Evenflo &
Spalding Holdings Corporation or any subsidiary thereof pursuant to any
management equity plan or stock option plan or any other management or
employee benefit plan or agreement; PROVIDED, HOWEVER, that the aggregate
Restricted Payments made under this clause (v) does not exceed in any
calendar year $5.0 million (with unused amounts in any calendar year being
carried over to succeeding calendar years subject to a maximum (without
giving effect to the following proviso) of $10.0 million in any calendar
year); PROVIDED FURTHER that such amount in any calendar year may be
increased by an amount not to exceed (i) the cash proceeds from the sale of
Equity Interests of the Company to members of management, directors or
consultants of the Company and its Subsidiaries that occurs after the
Issuance Date (to the extent the cash proceeds from the sale of such Equity
Interest have not otherwise been applied to the payment of Restricted
Payments by virtue of the preceding paragraph (c)) plus (ii) the cash
proceeds of key man life insurance policies received by the Company and its
Restricted Subsidiaries after the Issuance Date less (iii) the amount of any
Restricted Payments previously made pursuant to clauses (i) and (ii) of this
subparagraph (v); and PROVIDED FURTHER that cancellation of Indebtedness
owing to the Company from members of management of the Company or any of its
Restricted Subsidiaries in connection with a repurchase of Equity Interests
of the Company will not be deemed to constitute a Restricted Payment for
purposes of this covenant or any other provision of the Indenture;
(vi) the declaration and payment of dividends to holders of any class or
series of Designated Preferred Stock (other than Disqualified Stock) issued
after the Issuance Date (including, without limitation, the declaration and
payment of dividends on Refunding Capital Stock in excess of the dividends
declarable and payable thereon pursuant to clause (ii)); PROVIDED, HOWEVER,
that for the most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date
of issuance of such Designated Preferred Stock or the declaration of such
excess dividends on Refunding Capital Stock, after giving effect to such
issuance or declaration on a pro forma basis, the Company and its Restricted
Subsidiaries would have had a Fixed Charge Coverage Ratio of at least 2.00
to 1.00;
(vii) Investments in Unrestricted Subsidiaries having an aggregate fair
market value, taken together with all other Investments made pursuant to
this clause (vii) that are at that time outstanding, not to exceed $10.0
million at the time of such Investment (with the fair market value of each
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Investment being measured at the time made and without giving effect to
subsequent changes in value);
(viii) repurchases of Equity Interests deemed to occur upon exercise of
stock options if such Equity Interests represent a portion of the exercise
price of such options;
(ix) the payment of dividends on the Company's Common Stock, following
the first public offering of the Company's Common Stock after the Issuance
Date, of up to 6.0% per annum of the net proceeds received by the Company in
such public offering, other than public offerings with respect to the
Company's Common Stock registered on Form S-8;
(x) Investments in Unrestricted Subsidiaries that are made with Excluded
Contributions;
(xi) the payment of dividends on Disqualified Stock which is issued in
accordance with the covenant described under "--Limitations on Incurrence of
Indebtedness and Issuance of Disqualified Stock;"
(xii) other Restricted Payments in an aggregate amount not to exceed
$10.0 million; PROVIDED, HOWEVER, that at the time of, and after giving
effect to, any Restricted Payment permitted under clauses (iv), (v), (vi),
(vii), (viii), (ix), (xi), and (xii), no Default or Event of Default shall
have occurred and be continuing or would occur as a consequence thereof; and
PROVIDED FURTHER that for purposes of determining the aggregate amount
expended for Restricted Payments in accordance with clause (c) of the
immediately preceding paragraph, only the amounts expended under clauses
(i), (ii) (with respect to the payment of dividends on Refunding Capital
Stock pursuant to clause (b) thereof), (v) (only to the extent that amounts
paid pursuant to such clause are greater than amounts that would have been
paid pursuant to such clause if $2.5 million and $5.0 million were
substituted in such clause for $5.0 million and $10.0 million,
respectively), (vi) and (ix) shall be included; and
(xiii) the repurchase, redemption or other acquisition or retirement for
value of preferred stock or Subordinated Indebtedness of the Company or any
of its Restricted Subsidiaries pursuant to a "change of control" or "asset
sale" covenant set forth in the indenture or certificate of designations
pursuant to which the same is issued; PROVIDED that such repurchase,
redemption or other acquisition or retirement for value shall only be
permitted if all of the terms and conditions in such provisions have been
complied with and such repurchases, redemptions or other acquisitions or
retirements for value are made in accordance with such indenture or
certificate of designations pursuant to which the same is issued and
PROVIDED FURTHER that the Company has repurchased all Notes required to be
repurchased by the Company pursuant to the terms and conditions described
under the caption "--Repurchase at the Option of Holders--Change of Control"
or "--Repurchase at the Option of Holders--Asset Sales," as the case may be,
prior to the repurchase, redemption or other acquisition or retirement for
value of such preferred stock or Subordinated Indebtedness pursuant to the
"change of control" or "asset sale" covenant included in such indenture of
certificate of designations.
As of the Issuance Date, all of the Company's Subsidiaries will be
Restricted Subsidiaries. In the future, the Company will not permit any
Unrestricted Subsidiary to become a Restricted Subsidiary except pursuant to the
second to last sentence of the definition of "Unrestricted Subsidiary." For
purposes of designating any Restricted Subsidiary as an Unrestricted Subsidiary,
all outstanding Investments by the Company and its Restricted Subsidiaries
(except to the extent repaid) in the Subsidiary so designated will be deemed to
be Restricted Payments in an amount determined as set forth in the last sentence
of the definition of "Investments." Such designation will only be permitted if a
Restricted Payment in such amount would be permitted at such time (whether
pursuant to the first paragraph of this covenant or under clause (vii), (x) or
(xii)) and if such Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary. Unrestricted Subsidiaries will not be subject to any of the
restrictive covenants set forth in the Indenture.
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LIMITATIONS ON INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED
STOCK. The Indenture provides that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "INCUR" and
collectively, an "INCURRENCE") any Indebtedness (including Acquired
Indebtedness) and that the Company will not issue any shares of Disqualified
Stock and will not permit any of its Restricted Subsidiaries to issue any shares
of preferred stock; PROVIDED, HOWEVER, that the Company may incur Indebtedness
(including Acquired Indebtedness) or issue shares of Disqualified Stock if the
Fixed Charge Coverage Ratio for the Company's and its Restricted Subsidiaries'
most recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been at
least 2.00 to 1.00, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred, or the Disqualified Stock had been issued, as the case may
be, and the application of proceeds therefrom had occurred at the beginning of
such four-quarter period.
The foregoing limitations will not apply to:
(a) the incurrence by the Company or its Restricted Subsidiaries of
Indebtedness under Credit Facilities and the issuance and creation of
letters of credit and banker's acceptances thereunder (with letters of
credit and banker's acceptances being deemed to have a principal amount
equal to the face amount thereof) up to an aggregate principal amount of
$100.0 million outstanding at any one time;
(b) the incurrence by the Company of Indebtedness represented by the
Notes issued on the Issuance Date;
(c) the Existing Indebtedness (other than Indebtedness described in
clauses (a) and (b));
(d) Indebtedness (including Capitalized Lease Obligations) incurred by
the Company or any of its Restricted Subsidiaries, to finance the purchase,
lease or improvement of property (real or personal) or equipment (whether
through the direct purchase of assets or the Capital Stock of any Person
owning such assets) in an aggregate principal amount which, when aggregated
with the principal amount of all other Indebtedness then outstanding and
incurred pursuant to this clause (d) and including all Refinancing
Indebtedness incurred to refund, refinance or replace any other Indebtedness
incurred pursuant to this clause (d), does not exceed the greater of (x)
$15.0 million or (y) 10.0% of Total Assets;
(e) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including without
limitation letters of credit in respect of workers' compensation claims or
self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims; PROVIDED, HOWEVER, that
upon the drawing of such letters of credit or the incurrence of such
Indebtedness, such obligations are reimbursed within 30 days following such
drawing or incurrence;
(f) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with
the disposition of any business, assets or a Subsidiary, other than
guarantees of Indebtedness incurred by any Person acquiring all or any
portion of such business, assets or a Subsidiary for the purpose of
financing such acquisition; PROVIDED, HOWEVER, that (i) such Indebtedness is
not reflected as a dollar amount on the balance sheet of the Company or any
Restricted Subsidiary (contingent obligations referred to in a footnote to
financial statements will not be deemed to be reflected on such balance
sheet for purposes of this clause (i)) and (ii) the maximum assumable
liability in respect of all such Indebtedness shall at no time exceed the
gross proceeds including noncash proceeds (the fair market value of such
noncash proceeds being measured at the
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time received and without giving effect to any subsequent changes in value)
actually received by the Company and its Restricted Subsidiaries in
connection with such disposition;
(g) Indebtedness of the Company to a Restricted Subsidiary; PROVIDED
that any such Indebtedness is made pursuant to an intercompany note and is
subordinated in right of payment to the Notes; PROVIDED FURTHER that any
subsequent issuance or transfer of any Capital Stock or any other event
which will result in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any other subsequent transfer of any such
Indebtedness (except to the Company or another Restricted Subsidiary) shall
be deemed, in each case to be an incurrence of such Indebtedness;
(h) shares of preferred stock of a Restricted Subsidiary issued to the
Company or another Restricted Subsidiary; PROVIDED that any subsequent
issuance or transfer of any Capital Stock or any other event which results
in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or
any other subsequent transfer of any such shares of preferred stock (except
to the Company or another Restricted Subsidiary) shall be deemed, in each
case, to be an issuance of shares of preferred stock;
(i) Indebtedness of a Restricted Subsidiary to the Company or another
Restricted Subsidiary; PROVIDED that (i) any such Indebtedness is made
pursuant to an intercompany note and (ii) if a Guarantor incurs such
Indebtedness from a Restricted Subsidiary that is not a Guarantor such
Indebtedness is subordinated in right of payment to the Guarantee of such
Guarantor; PROVIDED FURTHER that any subsequent transfer of any such
Indebtedness (except to the Company or another Restricted Subsidiary) shall
be deemed, in each case, to be an incurrence of such Indebtedness;
(j) Hedging Obligations that are incurred in the ordinary course of
business (1) for the purpose of fixing or hedging interest rate risk with
respect to any Indebtedness that is permitted by the terms of the Indenture
to be outstanding or (2) for the purpose of fixing or hedging currency
exchange rate risk with respect to any currency exchanges;
(k) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business;
(l) Indebtedness of any Guarantor in respect of such Guarantor's
Guarantee;
(m) Indebtedness and Disqualified Stock of the Company and Indebtedness
and preferred stock of any of its Restricted Subsidiaries not otherwise
permitted hereunder in an aggregate principal amount or liquidation
preference, which when aggregated with the principal amount and liquidation
preference of all other Indebtedness and Disqualified Stock then outstanding
and incurred pursuant to this clause (m), does not exceed $20.0 million at
any one time outstanding; PROVIDED, HOWEVER, that Indebtedness of Foreign
Subsidiaries, which when aggregated with the principal amount of all other
Indebtedness of Foreign Subsidiaries then outstanding and incurred pursuant
to this clause (m), does not exceed $15.0 million (or the equivalent thereof
in any other currency) at any one time outstanding (it being understood that
any Indebtedness incurred pursuant to this clause (m) shall cease to be
deemed incurred or outstanding for purposes of this clause (m) but shall be
deemed to be incurred for purposes of the first paragraph of this covenant
from and after the first date on which the Company could have incurred such
Indebtedness under the first paragraph of this covenant without reliance on
this clause (m));
(n) (i) any guarantee by the Company of Indebtedness or other
obligations of any of its Restricted Subsidiaries so long as the incurrence
of such Indebtedness incurred by such Restricted Subsidiary is permitted
under the terms of the Indenture and (ii) any Excluded Guarantee (as defined
below under "--Limitation on Guarantees of Indebtedness by Restricted
Subsidiaries") of a Restricted Subsidiary;
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(o) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness which serves to refund, refinance or restructure any
Indebtedness incurred as permitted under the first paragraph of this
covenant and clauses (b) and (c) above, this clause (o) and clause (p) below
or any Indebtedness issued to so refund, refinance or restructure such
Indebtedness including additional Indebtedness incurred to pay premiums and
fees in connection therewith (the "REFINANCING INDEBTEDNESS") prior to its
respective maturity; PROVIDED, HOWEVER, that such Refinancing Indebtedness
(i) has a Weighted Average Life to Maturity at the time such Refinancing
Indebtedness is incurred which is not less than the remaining Weighted
Average Life to Maturity of Indebtedness being refunded or refinanced, (ii)
to the extent such Refinancing Indebtedness refinances Indebtedness
subordinated or PARI PASSU to the Notes, such Refinancing Indebtedness is
subordinated or PARI PASSU to the Notes at least to the same extent as the
Indebtedness being refinanced or refunded and (iii) shall not include (x)
Indebtedness of a Subsidiary that refinances Indebtedness of the Company or
(y) Indebtedness of the Company or a Restricted Subsidiary that refinances
Indebtedness of an Unrestricted Subsidiary;
(p) Indebtedness or Disqualified Stock of Persons that are acquired by
the Company or any of its Restricted Subsidiaries or merged into a
Restricted Subsidiary in accordance with the terms of the Indenture;
PROVIDED that such Indebtedness or Disqualified Stock is not incurred in
contemplation of such acquisition or merger; and PROVIDED FURTHER that after
giving effect to such acquisition or merger, either (i) the Company would be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first sentence of this
covenant or (ii) the Fixed Charge Coverage Ratio is greater than immediately
prior to such acquisition or merger; and
(q) Indebtedness incurred in respect of the Indemnity Agreement.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories of
permitted Indebtedness described in clauses (a) through (p) above or is entitled
to be incurred pursuant to the first paragraph of this covenant, the Company
shall, in its sole discretion, classify such item of Indebtedness in any manner
that complies with this covenant and such item of Indebtedness will be treated
as having been incurred pursuant to only one of such clauses or pursuant to the
first paragraph hereof, except as otherwise set forth in clause (m) above.
Accrual of interest, the accretion of accreted value and the payment of interest
in the form of additional Indebtedness will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant.
LIMITATION ON LIENS. The Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur or suffer to
exist any Lien (other than Permitted Liens) upon any of its property or assets
(including Capital Stock), whether owned on the date of the Indenture or
thereafter acquired, securing any Indebtedness, unless contemporaneously
therewith effective provision is made to secure the Indebtedness due under the
Indenture and the Notes or, in respect of Liens on any Restricted Subsidiary's
property or assets, any Guarantee of such Restricted Subsidiary, equally and
ratably with (or prior to in the case of Liens with respect to Subordinated
Indebtedness) the Indebtedness secured by such Lien for so long as such
Indebtedness is so secured.
MERGER, CONSOLIDATION, OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS. The
Indenture provides that the Company may not consolidate or merge with or into or
wind up into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to any Person
unless (i) the Company is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
will have been made is a corporation organized or existing under the laws of the
United States, any state thereof, the District of Columbia, or any territory
thereof (the Company or such Person, as the case may be, being herein called the
"SUCCESSOR COMPANY"); (ii) the Successor Company (if other than the Company)
expressly assumes all the obligations of the Company under the Indenture and the
Notes pursuant to a
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supplemental indenture or other documents or instruments in form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no Default
or Event of Default exists; (iv) immediately after giving pro forma effect to
such transaction, as if such transaction had occurred at the beginning of the
applicable four quarter period, (A) the Successor Company would be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first sentence of the covenant described
under "--Limitations on Incurrence of Indebtedness and Issuance of Disqualified
Stock" or (B) the Fixed Charge Coverage Ratio for the Successor Company and its
Restricted Subsidiaries would be greater than such Ratio for the Company and its
Restricted Subsidiaries immediately prior to such transaction; (v) each
Guarantor, if any, unless it is the other party to the transactions described
above, shall have by supplemental indenture confirmed that its Guarantee shall
apply to such Person's obligations under the Indenture and the Notes; and (vi)
the Company shall have delivered to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that such consolidation, merger or transfer and
such supplemental indenture (if any) comply with the Indenture. The Successor
Company will succeed to, and be substituted for, the Company under the Indenture
and the Notes. Notwithstanding the foregoing clause (iv), (a) any Restricted
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to the Company and (b) the Company may merge with an
Affiliate incorporated solely for the purpose of reincorporating the Company in
another State of the United States so long as the amount of Indebtedness of the
Company and its Restricted Subsidiaries is not increased thereby.
Each Guarantor, if any, shall not, and the Company will not permit a
Guarantor to, consolidate or merge with or into or wind up into (whether or not
such Guarantor is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions to, any Person unless (i) such
Guarantor is the surviving corporation or the Person formed by or surviving any
such consolidation or merger (if other than such Guarantor) or to which such
sale, assignment, transfer, lease, conveyance or other disposition will have
been made is a corporation organized or existing under the laws of the United
States, any state thereof, the District of Columbia, or any territory thereof
(such Guarantor or such Person, as the case may be, being herein called the
"SUCCESSOR GUARANTOR"); (ii) the Successor Guarantor (if other than such
Guarantor) expressly assumes all the obligations of such Guarantor under the
Indenture and such Guarantor's Guarantee pursuant to a supplemental indenture or
other documents or instruments in form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction no Default or Event of Default exists;
and (iv) the Guarantor shall have delivered or caused to be delivered to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
such consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture. The Successor Guarantor will succeed to, and be
substituted for, such Guarantor under the Indenture and such Guarantor's
Guarantee.
TRANSACTIONS WITH AFFILIATES. The Indenture provides that the Company will
not, and will not permit any of its Restricted Subsidiaries to, make any payment
to, or sell, lease, transfer or otherwise dispose of any of its properties or
assets to, or purchase any property or assets from, or enter into or make or
amend any transaction, contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any Affiliate of the Company (each of the
foregoing, an "AFFILIATE TRANSACTION") involving aggregate consideration in
excess of $5.0 million, unless (a) such Affiliate Transaction is on terms that
are not materially less favorable to the Company or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable transaction
by the Company or such Restricted Subsidiary with an unrelated Person and (b)
the Company delivers to the Trustee with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration in
excess of $10.0 million, a resolution adopted by the majority of the Board of
Directors of the Company approving such Affiliate Transaction and set forth in
an Officers' Certificate certifying that such Affiliate Transaction complies
with clause (a) above.
The foregoing provisions will not apply to the following: (i) transactions
between or among the Company and/or any of its Restricted Subsidiaries; (ii)
Restricted Payments permitted by the provisions of
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the Indenture described above under the covenant "--Limitation on Restricted
Payments"; (iii) the payment of customary annual management, consulting and
advisory fees and related expenses to KKR and its Affiliates; (iv) the payment
of reasonable and customary fees paid to, and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary; (v) payments by the Company or any of its Restricted Subsidiaries to
KKR and its Affiliates made for any financial advisory, financing, underwriting
or placement services or in respect of other investment banking activities,
including, without limitation, in connection with acquisitions or divestitures
which payments are approved by a majority of the Board of Directors of the
Company in good faith; (vi) transactions in which the Company or any of its
Restricted Subsidiaries, as the case may be, delivers to the Trustee a letter
from an Independent Financial Advisor stating that such transaction is fair to
the Company or such Restricted Subsidiary from a financial point of view or
meets the requirements of clause (a) of the preceding paragraph; (vii) payments
or loans to employees or consultants which are approved by a majority of the
Board of Directors of the Company in good faith; (viii) any agreement as in
effect as of the Issuance Date or any amendment thereto (so long as any such
amendment is not disadvantageous to the holders of the Notes in any material
respect) or any transaction contemplated thereby; (ix) the existence of, or the
performance by the Company or any of its Restricted Subsidiaries of its
obligations under the terms of, any stockholders agreement (including any
registration rights agreement or purchase agreement related thereto) to which it
is a party as of the Issuance Date and any similar agreements which it may enter
into thereafter; PROVIDED, HOWEVER, that the existence of, or the performance by
the Company or any of its Restricted Subsidiaries of obligations under any
future amendment to any such existing agreement or under any similar agreement
entered into after the Issuance Date shall only be permitted by this clause (ix)
to the extent that the terms of any such amendment or new agreement are not
otherwise disadvantageous to the Holders of the Notes in any material respect;
(x) the Transactions and the payment of all fees and expenses related to the
Transactions; (xi) transactions with customers, clients, suppliers, or
purchasers or sellers of goods or services, in each case in the ordinary course
of business and otherwise in compliance with the terms of the Indenture which
are fair to the Company or its Restricted Subsidiaries, in the reasonable
determination of the Board of Directors of the Company or the senior management
thereof, or are on terms at least as favorable as might reasonably have been
obtained at such time from an unaffiliated party; (xii) sales of accounts
receivable, or participations therein, in connection with any Receivables
Facility; and (xiii) the issuance of Equity Interests (other than Disqualified
Stock) of the Company to any Permitted Holder and their Related Parties.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The
Indenture provides that the Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or consensual
restriction on the ability of any Restricted Subsidiary to:
(a) (i) pay dividends or make any other distributions to the Company or
any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with
respect to any other interest or participation in, or measured by, its
profits, or (ii) pay any Indebtedness owed to the Company or any of its
Restricted Subsidiaries;
(b) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(c) sell, lease or transfer any of its properties or assets to the
Company or any of its Restricted Subsidiaries, except (in each case) for
such encumbrances or restrictions existing under or by reason of:
(1) contractual encumbrances or restrictions in effect on the Issuance
Date, including pursuant to the Senior Credit Facility and its
related documentation;
(2) the Indenture, the Notes and the provisions of the Company's
certificate of incorporation relating to the preferred stock of the
Company to be issued on the Issuance Date and any
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certificate of designations or revision to the certificate of
incorporation relating to preferred stock issued in exchange for, or
as a refinancing, refunding or replacement of, the preferred stock
issued on the Issuance Date;
(3) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature discussed
in clause (c) above on the property so acquired;
(4) applicable law or any applicable rule, regulation or order;
(5) any agreement or other instrument of a Person acquired by the Company
or any Restricted Subsidiary in existence at the time of such
acquisition (but not created in contemplation thereof), which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired;
(6) contracts for the sale of assets, including, without limitation,
customary restrictions with respect to a Subsidiary pursuant to an
agreement that has been entered into for the sale or disposition of
all or substantially all of the Capital Stock or assets of such
Subsidiary;
(7) secured Indebtedness otherwise permitted to be incurred pursuant to
the covenants described under "--Limitations on Incurrence of
Indebtedness and Issuance of Disqualified Stock" and "--Liens" that
limit the right of the debtor to dispose of the assets securing such
Indebtedness;
(8) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business;
(9) other Indebtedness or preferred stock of Restricted Subsidiaries
permitted to be incurred subsequent to the Issuance Date pursuant to
the provisions of the covenant described under "--Limitations on
Incurrence of Indebtedness and Issuance of Disqualified Stock;"
(10) customary provisions in joint venture agreements and other similar
agreements entered into in the ordinary course of business;
(11) customary provisions contained in leases and other agreements
entered into in the ordinary course of business;
(12) restrictions created in connection with any Receivables Facility
that, in the good faith determination of the Board of Directors of
the Company, are necessary or advisable to effect such Receivables
Facility; or
(13) any encumbrances or restrictions of the type referred to in clauses
(a), (b) and (c) above imposed by any amendments, modifications,
restatements, renewals, increases, supplements, refundings,
replacements or refinancings of the contracts, instruments or
obligations referred to in clauses (1) through (12) above, PROVIDED
that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings are,
in the good faith judgment of the Company's Board of Directors, no
more restrictive with respect to such dividend and other payment
restrictions than those contained in the dividend or other payment
restrictions prior to such amendment, modification, restatement,
renewal, increase, supplement, refunding, replacement or refinancing.
LIMITATION ON GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES. (a)
The Indenture provides that the Company will not permit any Restricted
Subsidiary to guarantee the payment of any Indebtedness of the Company or any
Indebtedness of any other Restricted Subsidiary unless (i) such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture to the
Indenture providing for a Guarantee
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of payment of the Notes by such Restricted Subsidiary except that if such
Indebtedness is by its express terms subordinated in right of payment to the
Notes, any such guarantee of such Restricted Subsidiary with respect to such
Indebtedness shall be subordinated in right of payment to such Restricted
Subsidiary's Guarantee with respect to the Notes substantially to the same
extent as such Indebtedness is subordinated to the Notes; (ii) such Restricted
Subsidiary waives and will not in any manner whatsoever claim or take the
benefit or advantage of, any rights of reimbursement, indemnity or subrogation
or any other rights against the Company or any other Restricted Subsidiary as a
result of any payment by such Restricted Subsidiary under its Guarantee; and
(iii) such Restricted Subsidiary shall deliver to the Trustee an opinion of
counsel to the effect that (A) such Guarantee of the Notes has been duly
executed and authorized and (B) such Guarantee of the Notes constitutes a valid,
binding and enforceable obligation of such Restricted Subsidiary, except insofar
as enforcement thereof may be limited by bankruptcy, insolvency or similar laws
(including, without limitation, all laws relating to fraudulent transfers) and
except insofar as enforcement thereof is subject to general principles of
equity; PROVIDED that this paragraph (a) shall not be applicable to any
guarantee of any Restricted Subsidiary (x) that (A) existed at the time such
Person became a Restricted Subsidiary of the Company and (B) was not incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary of the Company or (y) that guarantees the payment of Obligations of
the Company or any Restricted Subsidiary under the Senior Credit Facility or any
other Credit Facility (other than in respect of Subordinated Indebtedness) and
any refunding, refinancing or replacement thereof, in whole or in part, PROVIDED
that such refunding, refinancing or replacement thereof constitutes Indebtedness
that is not Subordinated Indebtedness and is not incurred pursuant to a
registered offering of securities under the Securities Act or a private
placement of securities (including under Rule 144A) pursuant to an exemption
from the registration requirements of the Securities Act, which private
placement provides for registration rights under the Securities Act (any
guarantee excluded by operation of this clause (y) being an "EXCLUDED
GUARANTEE").
(b) Notwithstanding the foregoing and the other provisions of the Indenture,
any Guarantee by a Restricted Subsidiary of the Notes shall provide by its terms
that it shall be automatically and unconditionally released and discharged upon
(i) any sale, exchange or transfer, to any Person not an Affiliate of the
Company, of all of the Company's Capital Stock in, or all or substantially all
the assets of, such Restricted Subsidiary (which sale, exchange or transfer is
not prohibited by the Indenture) or (ii) the release or discharge of the
guarantee which resulted in the creation of such Guarantee, except a discharge
or release by or as a result of payment under such guarantee.
REPORTS AND OTHER INFORMATION. The Indenture provides that, commencing with
the period ended September 30, 1998, whether or not the Company is subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company shall deliver to the Trustee and to each Holder and to prospective
purchasers of Notes identified to the Company by the Initial Purchasers, within
15 days after it is or would have been required to file such with the
Commission, annual and quarterly financial statements substantially equivalent
to financial statements that would have been included in reports filed with the
Commission, if the Company were subject to the requirements of Section 13 or
15(d) of the Exchange Act, including, with respect to annual information only, a
report thereon by the Company's certified independent public accountants as such
would be required in such reports to the Commission, and, in each case, together
with a management's discussion and analysis of financial condition and results
of operations which would be so required. Notwithstanding the foregoing, such
requirements shall be deemed satisfied prior to the Exchange Offer or the
effectiveness of the Shelf Registration Statement by the filing with the
Commission of the Exchange Offer Registration Statement and/or Shelf
Registration Statement, and any amendments thereto, with such financial
information that satisfies Regulation S-X of the Securities Act.
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EVENTS OF DEFAULT AND REMEDIES
The following events constitute Events of Default under the Indenture:
(i) default in payment when due and payable, upon redemption,
acceleration or otherwise, of principal of, or premium, if any, on the
Notes;
(ii) default for 30 days or more in the payment when due of interest on,
or Liquidated Damages with respect to, the Notes;
(iii) failure by the Company or any Guarantor for 30 days after receipt
of written notice given by the Trustee or the holders of at least 30.0% in
principal amount of the Notes then outstanding to comply with any of its
other agreements in the Indenture or the Notes;
(iv) default under any mortgage, indenture or instrument under which
there is issued or by which there is secured or evidenced any Indebtedness
for money borrowed by the Company or any of its Restricted Subsidiaries or
the payment of which is guaranteed by the Company or any of its Restricted
Subsidiaries (other than Indebtedness owed to the Company or a Restricted
Subsidiary), whether such Indebtedness or guarantee now exists or is created
after the Issuance Date, if both (A) such default either (1) results from
the failure to pay any such Indebtedness at its stated final maturity (after
giving effect to any applicable grace periods) or (2) relates to an
obligation other than the obligation to pay principal of any such
Indebtedness at its stated final maturity and results in the holder or
holders of such Indebtedness causing such Indebtedness to become due prior
to its stated maturity and (B) the principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in default
for failure to pay principal at stated final maturity (after giving effect
to any applicable grace periods), or the maturity of which has been so
accelerated, aggregate $10.0 million or more at any one time outstanding;
(v) failure by the Company or any Significant Subsidiary or group of
Restricted Subsidiaries that, taken together (as of the latest audited
consolidated financial statements for the Company and its Subsidiaries)
would constitute a Significant Subsidiary to pay final judgments aggregating
in excess of $10.0 million (net of any amounts with respect to which a
reputable and creditworthy insurance company has acknowledged liability in
writing), which judgments are not paid, discharged or stayed for a period of
60 days;
(vi) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries; or
(vii) any Guarantee shall for any reason cease to be in full force and
effect or be declared null and void or any responsible officer of the
Company or any Guarantor denies that it has any further liability under any
Guarantee or gives notice to such effect (other than by reason of the
termination of the Indenture or the release of any such Guarantee in
accordance with the Indenture).
If any Event of Default (other than of a type specified in clause (vi)
above) occurs and is continuing under the Indenture, the Trustee or the Holders
of at least 30.0% in principal amount of the then outstanding Notes may declare
the principal, premium, if any, interest and any other monetary obligations on
all the then outstanding Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising under
clause (vi) of the first paragraph of this section, all outstanding Notes will
become due and payable without further action. Holders of the Notes may not
enforce the Indenture or the Notes except as provided in the Indenture. Subject
to certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Indenture provides that the Trustee may withhold from Holders of Notes
notice of any continuing Default or Event of Default (except a Default or Event
of Default relating to the payment of principal, premium, if any, or interest)
if it determines that withholding notice is in their
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interest. In addition, the Trustee shall have no obligation to accelerate the
Notes, if in the best judgment of the Trustee, acceleration is not in the best
interests of the holders.
The Indenture provides that the Holders of a majority in aggregate principal
amount of the then outstanding Notes issued thereunder by notice to the Trustee
may on behalf of the Holders of all of such Notes waive any existing Default or
Event of Default and its consequences under the Indenture except a continuing
Default or Event of Default in the payment of interest on, premium, if any, or
the principal of any such Note held by a non-consenting Holder. In the event of
any Event of Default specified in clause (iv) above, such Event of Default and
all consequences thereof (including, without limitation, any acceleration or
resulting payment default) shall be annulled, waived and rescinded,
automatically and without any action by the Trustee or the Holders of the Notes,
if within 20 days after such Event of Default arose (x) the Indebtedness or
guarantee that is the basis for such Event of Default has been discharged, or
(y) the holders thereof have rescinded or waive the acceleration, notice or
action (as the case may be) giving rise to such Event of Default, or (z) if the
default that is the basis for such Event of Default has been cured.
The Indenture provides that the Company is required to deliver to the
Trustee annually a statement regarding compliance with the Indenture, and the
Company is required, within five Business Days, upon becoming aware of any
Default or Event of Default or any default under any document, instrument or
agreement representing Indebtedness of the Company or any Guarantor, to deliver
to the Trustee a statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee incorporator or stockholder of the Company or
any Guarantor, shall have any liability for any obligations of the Company or
the Guarantors under the Notes, the Guarantees or the Indenture or for any claim
based on, in respect of, or by reason of such obligations or their creation.
Each Holder of Notes by accepting a Note waives and releases all such liability.
The waiver and release are part of the consideration for assistance of the
Notes. Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such a waiver is
against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The obligations of the Company and the Guarantors, if any, under the
Indenture will terminate (other than certain obligations) and will be released
upon payment in full of all of the Notes. The Company may, at its option and at
any time, elect to have all of its obligations discharged with respect to the
outstanding Notes and have each Guarantor's obligation discharged with respect
to its Guarantee ("LEGAL DEFEASANCE") and cure all then existing Events of
Default except for (i) the rights of Holders of outstanding Notes to receive
payments in respect of the principal of, premium, if any, and interest and
Liquidated Damages, if any, on such Notes when such payments are due solely out
of the trust created pursuant to the Indenture, (ii) the Company's obligations
with respect to Notes concerning issuing temporary Notes, registration of such
Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and the
Company's obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. In addition, the Company may, at its option and at
any time, elect to have the obligations of the Company and each Guarantor
released with respect to certain covenants that are described in the Indenture
("COVENANT DEFEASANCE") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment on other indebtedness, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
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In order to exercise either Legal Defeasance or Covenant Defeasance with
respect to the Notes:
(i) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders of the Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest
due on the outstanding Notes on the stated maturity date or on the
applicable redemption date, as the case may be, of such principal, premium,
if any, or interest on the outstanding Notes;
(ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that, subject to customary assumptions
and exclusions, (A) the Company has received from, or there has been
published by, the United States Internal Revenue Service a ruling or (B)
since the Issuance Date, there has been a change in the applicable U.S.
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel in the United States shall confirm that, subject to
customary assumptions and exclusions, the Holders of the outstanding Notes
will not recognize income, gain or loss for U.S. federal income tax purposes
as a result of such Legal Defeasance and will be subject to U.S. federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that, subject to customary
assumptions and exclusions, the Holders of the outstanding Notes will not
recognize income, gain or loss for U.S. federal income tax purposes as a
result of such Covenant Defeasance and will be subject to U.S. federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be
continuing with respect to certain Events of Default on the date of such
deposit;
(v) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, any material
agreement or instrument (other than the Indenture) to which, the Company or
any Guarantor is a party or by which the Company or any Guarantor is bound;
(vi) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that, as of the date of such opinion and subject to
customary assumptions and exclusions following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally under
any applicable U.S. federal or state law, and that the Trustee has a
perfected security interest in such trust funds for the ratable benefit of
the Holders;
(vii) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of defeating, hindering, delaying or defrauding any creditors of the
Company or any Guarantor or others; and
(viii) the Company shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel in the United States (which opinion of
counsel may be subject to customary assumptions and exclusions) each stating
that all conditions precedent provided for or relating to the Legal
Defeasance or the Covenant Defeasance, as the case may be, have been
complied with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect as
to all Notes issued thereunder, when (a) either (i) all such Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes which have
been replaced or paid and Notes for whose payment money has theretofore
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been deposited in trust and thereafter repaid to the Company) have been
delivered to the Trustee for cancellation; or (ii) all such Notes not
theretofore delivered to such Trustee for cancellation have become due and
payable by reason of the making of a notice of redemption or otherwise or will
become due and payable within one year and the Company or any Guarantor has
irrevocably deposited or caused to be deposited with such Trustee as trust funds
in trust solely for the benefit of the Holders, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such amounts as
will be sufficient without consideration of any reinvestment of interest, to pay
and discharge the entire indebtedness on such Notes not theretofore delivered to
the Trustee for cancellation for principal, premium, if any, and accrued
interest and Liquidated Damages, if any, to the date of maturity or redemption;
(b) no Default or Event of Default with respect to the Indenture or the Notes
shall have occurred and be continuing on the date of such deposit or shall occur
as a result of such deposit and such deposit will not result in a breach or
violation of, or constitute a default under, any other instrument to which the
Company or any Guarantor is a party or by which the Company or any Guarantor is
bound; (c) the Company or any Guarantor has paid or caused to be paid all sums
payable by it under such Indenture; and (d) the Company has delivered
irrevocable instructions to the Trustee under such Indenture to apply the
deposited money toward the payment of such Notes at maturity or the redemption
date, as the case may be. In addition, the Company must deliver an Officers'
Certificate and an opinion of counsel to the Trustee stating that all conditions
precedent to satisfaction and discharge have been satisfied.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture, any
Guarantee and the Notes issued thereunder may be amended or supplemented with
the consent of the Holders of at least a majority in principal amount of the
Notes then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes),
and any existing Default or compliance with any provision of the Indenture or
the Notes may be waived with the consent of the Holders of a majority in
principal amount of the then outstanding Notes (including consents obtained in
connection with a tender offer or exchange offer for Notes).
The Indenture provides that without the consent of each Holder affected, an
amendment or waiver may not (with respect to any Notes held by a non-consenting
Holder of the Notes): (i) reduce the principal amount of Notes whose Holders
must consent to an amendment, supplement or waiver, (ii) reduce the principal of
or change the fixed maturity of any such Note or alter or waive the provisions
with respect to the redemption of the Notes (other than provisions relating to
the covenants described above under the caption "--Repurchase at the Option of
Holders"), (iii) reduce the rate of or change the time for payment of interest
on any Note, (iv) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the Notes (except a rescission
of acceleration of the Notes by the Holders of at least a majority in aggregate
principal amount of such Notes and a waiver of the payment default that resulted
from such acceleration), or in respect of a covenant or provision contained in
the Indenture or any Guarantee which cannot be amended or modified without the
consent of all Holders, (v) make any Note payable in money other than that
stated in such Notes, (vi) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of Holders of Notes to
receive payments of
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principal of or premium, if any, or interest on the Notes, (vii) make any change
in the foregoing amendment and waiver provisions or (viii) impair the right of
any Holder of the Notes to receive payment of principal of, or interest on such
Holder's Notes on or after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such Holder's Notes.
The Indenture provides that, notwithstanding the foregoing, without the
consent of any Holder of Notes, the Company, any Guarantor (with respect to a
Guarantee or the Indenture to which it is a party) and the Trustee may amend or
supplement the Indenture, any Guarantee or the Notes (i) to cure any ambiguity,
omission, defect or inconsistency, (ii) to provide for uncertificated Notes in
addition to or in place of certificated Notes, (iii) to comply with the covenant
relating to mergers, consolidations and sales of assets, (iv) to provide for the
assumption of the Company's or any Guarantor's obligations to Holders of such
Notes, (v) to make any change that would provide any additional rights or
benefits to the Holders of Notes or that does not adversely affect the legal
rights under the Indenture of any such Holder, (vi) to add covenants for the
benefit of the Holders or to surrender any right or power conferred upon the
Company, (vii) to comply with the requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the Trust Indenture
Act, (viii) to evidence and provide for the acceptance of appointment under the
Indenture by a successor Trustee pursuant to the requirements thereof, or (ix)
to add a Guarantor under the Indenture.
The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of and such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, or resign.
The Indenture provides that the Holders of a majority in principal amount of
the outstanding Notes issued thereunder will have the right to direct the time,
method and place of conducting any proceeding for exercising any remedy
available to the Trustee, subject to certain exceptions. The Indenture provides
that in case an Event of Default shall occur (which shall not be cured), the
Trustee will be required, in the exercise of its power, to use the degree of
care of a prudent person in the conduct of his or her own affairs. Subject to
such provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any Holder of such Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
the Registration Rights Agreement without charge by writing to the Company at
Northwoods Business Center II, 707 Crossroads Court, Vandalia, Ohio 45377,
Attention: Secretary.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, Exchange Notes will be issued in registered,
global form in minimum denominations of $1,000 and integral multiples of $1,000
in excess thereof. Exchange Notes initially will be represented by one or more
Exchange Notes in registered, global form without interest coupons
(collectively, the "GLOBAL EXCHANGE NOTES"). The Global Exchange Notes will be
deposited with the Trustee as custodian for DTC in New York, New York, and
registered in the name of DTC or its nominee (a "NOMINEE"), in each case, for
credit to an account of a direct or indirect participant in DTC as described
below.
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The Global Exchange Notes may be transferred, in whole and not in part, only
to another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Exchange Notes may be
exchanged for Exchange Notes in certificated form in certain limited
circumstances. See "--Transfer of Interests in Global Exchange Notes for
Certificated Exchange Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The Exchange
Notes may be presented for registration of transfer and exchange at the offices
of the Registrar.
DEPOSITARY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities of its participating organizations (collectively, the
"DIRECT PARTICIPANTS") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Direct Participants. The Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations, including the Euroclear System
("EUROCLEAR") and Cedel Bank, societe anonyme ("CEDEL"). Access to DTC's system
is also available to other entities that clear through or maintain a direct or
indirect, custodial relationship with a Direct Participant (collectively, the
"INDIRECT PARTICIPANTS"). DTC may hold securities beneficially owned by other
persons only through the Direct Participants or Indirect Participants and such
other persons' ownership interest and transfer of ownership interest will he
recorded only on the records of the Direct Participant and/or Indirect
Participant, and not on the records maintained by DTC.
DTC has also advised the Company that, pursuant to DTC's procedures, (i)
upon deposit of the Global Exchange Notes, DTC will credit the accounts of the
Direct Participants with portions of the principal amount of the Global Exchange
Notes, and (ii) DTC will maintain records of the ownership interests of such
Direct Participants in the Global Exchange Notes and the transfer of ownership
interests by and between Direct Participants. DTC will not maintain records of
the ownership interests of, or the transfer of ownership interests by and
between, Indirect Participants or other owners of beneficial interests in the
Global Exchange Notes. Direct Participants and Indirect Participants must
maintain their own records of the ownership interests of, and the transfer of
ownership interests by and between, Indirect Participants and other owners of
beneficial interests in the Global Exchange Notes.
Investors in the Global Exchange Notes may hold their interests therein
directly through DTC if they are Direct Participants in DTC or indirectly
through organizations that are Direct Participants in DTC. All ownership
interests in any Global Exchange Notes, including those of customers' securities
accounts held through Euroclear or CEDEL, may be subject to the procedures and
requirements of DTC. Those interests held through Euroclear or CEDEL may also be
subject to the procedures and requirements of such systems.
The laws of some states require that certain persons take physical delivery
in definitive, certificated form of securities that they own. This may limit or
curtail the ability to transfer beneficial interests in a Global Exchange Note
to such persons. Because DTC can act only on behalf of Direct Participants,
which in turn act on behalf of Indirect Participants and others, the ability of
a person having a beneficial interest in a Global Exchange Note to pledge such
interest to persons or entities that are not Direct Participants in DTC, or to
otherwise take actions in respect of such interests, may be affected by the lack
of physical certificates evidencing such interests.
EXCEPT AS DESCRIBED IN "TRANSFERS OF INTERESTS IN GLOBAL EXCHANGE NOTES FOR
CERTIFICATED EXCHANGE NOTES," OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL
EXCHANGE NOTES WILL NOT HAVE EXCHANGE NOTES REGISTERED IN THEIR NAMES, WILL NOT
RECEIVE PHYSICAL DELIVERY OF EXCHANGE NOTES IN CERTIFICATED FORM AND WILL NOT BE
CONSIDERED THE REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY
PURPOSE.
Under the terms of the Indenture, the Company and the Trustee will treat the
persons in whose names the Notes are registered (including Exchange Notes
represented by Global Exchange Notes) as the owners
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thereof for the purpose of receiving payments and for any and all other purposes
whatsoever. Payments in respect of the principal, premium, if any, and interest
on Global Exchange Notes registered in the name of DTC or its nominee will be
payable by the Trustee to DTC or its nominee as the registered holder under the
Indenture. Consequently, neither the Company, the Trustee nor any agent of the
Company or the Trustee has or will have any responsibility or liability for (i)
any aspect of DTC's records or any Direct Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the Global Exchange Notes or for maintaining, supervising
or reviewing any of DTC's records or any Direct Participant's or Indirect
Participant's records relating to the beneficial ownership interests in any
Global Exchange Note or (ii) any other matter relating to the actions and
practices of DTC or any of its Direct Participants or Indirect Participants.
DTC has advised the Company that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the
Exchange Notes is to credit the accounts of the relevant Direct Participants
with such payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Exchange Notes as
shown on DTC's records. Payments by Direct Participants and Indirect
Participants to the beneficial owners of the Exchange Notes will be governed by
standing instructions and customary practices between them and will not be the
responsibility of DTC, the Trustee or the Company. Neither the Company nor the
Trustee will be liable for any delay by DTC or its Direct Participants or
Indirect Participants in identifying the beneficial owners of the Exchange
Notes, and the Company and the Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee as the registered
owner of the Exchange Notes for all purposes.
Except for trades involving only Euroclear or CEDEL participants, interests
in the Global Exchange Notes are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System and, therefore, transfers between Direct
Participants in DTC will be effected in accordance with DTC's procedures, and
will be settled in immediately available funds. Transfers between Indirect
Participants (other than Indirect Participants who hold an interest in the
Exchange Notes through Euroclear or CEDEL) who hold an interest through a Direct
Participant will be effected in accordance with the procedures of such Direct
Participant but generally will settle in immediately available funds. Transfers
between and among Indirect Participants who hold interests in the Exchange Notes
through Euroclear and CEDEL will be effected in the ordinary way in accordance
with their respective rules and operating procedures.
Cross-market transfers between Direct Participants in DTC, on the one hand,
and Indirect Participants who hold interests in the Exchange Notes through
Euroclear or CEDEL, on the other hand, will be effected by Euroclear or CEDEL's
respective Nominee through DTC in accordance with DTC's rules on behalf of
Euroclear or CEDEL; HOWEVER, delivery of instructions relating to cross-market
transactions must be made directly to Euroclear or CEDEL, as the case may be, by
the counterparty in accordance with the rules and procedures of Euroclear or
CEDEL, as the case may be, and within their established deadlines (Brussels time
for Euroclear and U.K. time for CEDEL). Indirect Participants who hold interest
in the Exchange Notes through Euroclear and CEDEL may not deliver instructions
directly to Euroclear's or CEDEL's Nominee. Euroclear or CEDEL will, if the
transaction meets its settlement requirements, deliver instructions to its
respective Nominee to deliver or receive interests on Euroclear's or CEDEL's
behalf in the relevant Global Exchange Note in DTC, and make or receive payment
in accordance with normal procedures for same-day fund settlement applicable to
DTC.
Because of time zone differences, the securities account of an Indirect
Participant who holds an interest in the Exchange Notes through Euroclear or
CEDEL purchasing an interest in a Global Exchange Note from a Direct Participant
in DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or CEDEL Indirect Participant during the European business day
immediately following the settlement date of DTC in New York. Although recorded
in DTC's accounting records as of DTC's settlement date in New York, Euroclear
and CEDEL customers will not have access to the cash amount credited to their
accounts as a result of a sale of an interest in a Global Exchange Note to a DTC
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participant until the European business day for Euroclear or CEDEL immediately
following DTC's settlement date.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of Exchange Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Exchange Notes are
credited and only in respect of such portion of the aggregate principal amount
of the Exchange Notes as to which such Direct Participant or Direct Participants
has or have given direction. However, if there is an Event of Default under the
Exchange Notes, DTC reserves the right to exchange Global Exchange Notes
(without the direction of one or more of its Direct Participants) for legended
Exchange Notes in certificated form, and to distribute such certificated forms
of Exchange Notes to its Direct Participants.
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Exchange Notes among Direct
Participants, Euroclear and CEDEL, they are under no obligation to perform or to
continue to perform such procedures, and such procedures may be discontinued at
any time. Neither the Company nor the Trustee will have any responsibility for
the performance by DTC, Euroclear or CEDEL or their respective Direct and
Indirect Participants of their respective obligations under the rules and
procedures governing any of their operations.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
TRANSFERS OF INTERESTS IN GLOBAL EXCHANGE NOTES FOR CERTIFICATED EXCHANGE NOTES
An entire Global Exchange Note may be exchanged for definitive Exchange
Notes in registered, certificated form without interest coupons ("CERTIFICATED
EXCHANGE NOTES") if (i) DTC (x) notifies the Company that it is unwilling or
unable to continue as depositary for the Global Exchange Notes and the Company
thereupon fails to appoint a successor depositary within 90 days or (y) has
ceased to be a clearing agency registered under the Exchange Act, (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of Certificated Exchange Notes or (iii) there shall have occurred
and be continuing a Default or an Event of Default with respect to the Exchange
Notes. In any such case, the Company will notify the Trustee in writing that,
upon surrender by the Direct and Indirect Participants of their interest in such
Global Exchange Note, Certificated Exchange Notes will be issued to each person
that such Direct and Indirect Participants and DTC identify as being the
beneficial owner of the related Exchange Notes.
Beneficial interests in Global Exchange Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Exchange Notes upon request to
DTC, by such Direct Participant (for itself or on behalf of an Indirect
Participant), but only upon at least 20 days' prior written notice given to the
Trustee by or on behalf of DTC in accordance with customary DTC procedures.
Certificated Exchange Notes delivered in exchange for any beneficial interest in
any Global Exchange Note will be registered in the names, and issued in any
approved denominations, requested by DTC on behalf of such Direct or Indirect
Participants (in accordance with DTC's customary procedures).
Neither the Company nor the Trustee will be liable for any delay by the
holder of the Global Exchange Notes or the DTC in identifying the beneficial
owners of Exchange Notes, and the Company and the Trustee may conclusively rely
on, and will be protected in relying on, instructions from the holder of the
Global Exchange Note or DTC for all purposes.
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SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Exchange Notes
represented by the Global Exchange Notes (including principal, premium, if any,
and interest) be made by wire transfer of immediately available funds to the
accounts specified by the holder of such Global Exchange Note. With respect to
Certificated Exchange Notes, the Company will make all payments of principal,
premium, if any, and interest by wire transfer of immediately available funds to
the accounts specified by the Holders thereof or, if no such account is
specified, by mailing a check to each such holder's registered address. The
Company expects that secondary trading in the Certificated Exchange Notes will
also be settled in immediately available funds.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
Pursuant to the Registration Rights Agreement, the Company agreed to file
the Exchange Offer Registration Statement on the appropriate form under the
Securities Act with the Commission with respect to the Exchange Notes. Upon the
effectiveness of the Exchange Offer Registration Statement, the Company will
offer to the Holders of Transfer Restricted Securities (as defined) who are able
to make certain representations the opportunity to exchange their Transfer
Restricted Securities for Exchange Notes in the Exchange Offer. If (i) the
Company is not required to file the Exchange Offer Registration Statement or
permitted to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy or (ii) any Holder of Transfer
Restricted Securities notifies the Company prior to the 20th day following
consummation of the Exchange Offer that (A) it is prohibited by law or
Commission policy from participating in the Exchange Offer or (B) that it may
not resell the Exchange Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus and the prospectus contained in the Exchange
Offer Registration Statement is not available for such resales or (C) that it is
a broker-dealer and owns Old Notes acquired directly from the Company or an
affiliate of the Company, the Company will file with the Commission a shelf
registration statement pursuant to Rule 415 under the Securities Act (a "SHELF
REGISTRATION STATEMENT" and, together with the Exchange Offer Registration
Statement, the "REGISTRATION STATEMENTS") to cover resales of the Notes by the
Holders thereof who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement. The Company
will use its reasonable best efforts to cause the applicable registration
statement to be declared effective as promptly as possible by the Commission.
For purposes of the foregoing, "Transfer Restricted Securities" means each Old
Note until (i) the date on which such Old Note has been exchanged by a person
for an Exchange Note in the Exchange Offer, (ii) the date on which such Old Note
has been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or (iii) the date on which such
Old Note is distributed to the public pursuant to Rule 144 under the Act.
Pursuant to the Registration Rights Agreement, the Company shall make available,
for a period of 90 days after the consummation of the Exchange Offer, a
prospectus meeting the requirements of the Securities Act to any broker-dealer
for use in connection with any resale of the Exchange Notes.
The Registration Rights Agreement provides that (i) the Company will file an
Exchange Offer Registration Statement with the Commission on or prior to 135
days after the Closing Date, (ii) the Company will use its best efforts to have
the Exchange Offer Registration Statement declared effective by the Commission
on or prior to 240 days after the Issuance Date, (iii) unless the Exchange Offer
would not be permitted by applicable law or Commission policy, the Company will
commence the Exchange Offer and use its best efforts to issue on or prior to 30
business days after the date on which the Exchange Offer Registration Statement
was declared effective by the Commission, Exchange Notes in exchange for all Old
Notes tendered prior thereto in the Exchange Offer and (iv) if obligated to file
the Shelf Registration Statement, the Company will use its best reasonable
efforts to file the Shelf Registration Statement with the Commission on or prior
to 75 days after such filing obligation arises and to cause the Shelf
Registration Statement to be declared effective by the Commission on or prior to
60 days after such filings. If (a) the Company fails to file any of the
Registration Statements required by the Registration Rights Agreement on
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or before the date specified for such filing, (b) any of such Registration
Statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "EFFECTIVENESS TARGET DATE"), (c) the
Company fails to consummate the Exchange Offer within 30 business days of the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement or (d) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted Securities
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (d) above a "REGISTRATION DEFAULT"),
then the Company will pay liquidated damages to each Holder of Notes
("Liquidated Damages"). Liquidated Damages will accrue, at an annual rate of
0.25% of the aggregate principal amount of the Old Notes, on the date of such
Registration Default, payable in cash semi-annually in arrears on each interest
payment date, commencing on the date of such Registration Default. All accrued
liquidated damages will be paid by the Company on each interest payment date
until cured or waived to the global Old Note Holder by wire transfer of
immediately available funds and to Holders of certificated Old Notes by wire
transfer to the accounts specified by them or by mailing checks to their
registered addresses if no such accounts have been specified. Following the cure
of all Registration Defaults, the accrual of Liquidated Damages will cease.
Holders of Old Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Old Notes included
in the Shelf Registration Statement and benefit from the provisions regarding
Liquidated Damages set forth above.
The Registration Rights Agreement provides that the Liquidated Damages
specified above will be the exclusive remedy available to Holders of Transfer
Restricted Securities for any failure by the Company to comply with the
registration requirements of the Registration Rights Agreement.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all of the provisions of the Registration Rights Agreement.
GOVERNING LAW
The Indenture, the Notes and the Guarantees, if any, will be, subject to
certain exceptions, governed by and construed in accordance with the internal
laws of the State of New York.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided. For
purposes of the Indenture, unless otherwise specifically indicated, the term
"consolidated" with respect to any Person refers to such Person consolidated
with its Restricted Subsidiaries, and excludes from such consolidation any
Unrestricted Subsidiary as if such Unrestricted Subsidiary were not an Affiliate
of such Person.
"ACQUIRED INDEBTEDNESS" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured by
a Lien encumbering any asset acquired by such specified Person.
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"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED, HOWEVER,
that beneficial ownership of 10.0% or more of the voting securities of a Person
shall be deemed to be control.
"ASSET SALE" means (i) the sale, conveyance, transfer or other disposition
(whether in a single transaction or a series of related transactions) of
property or assets (including by way of a sale and leaseback) of the Company or
any Restricted Subsidiary (each referred to in this definition as a
"DISPOSITION") or (ii) the issuance or sale of Equity Interests of any
Restricted Subsidiary (whether in a single transaction or a series of related
transactions), in each case, other than: (a) a disposition of Cash Equivalents
or Investment Grade Securities or obsolete or worn equipment in the ordinary
course of business or inventory or goods held for sale in the ordinary course of
business; (b) the disposition of all or substantially all of the assets of the
Company in a manner permitted pursuant to the provisions described above under
"--Certain Covenants--Merger, Consolidation or Sale of All or Substantially All
Assets" or any disposition that constitutes a Change of Control pursuant to the
Indenture; (c) the making of any Restricted Payment or Permitted Investment that
is permitted to be made, and is made, pursuant to the first paragraph of the
covenant described above under "--Certain Covenants--Limitation on Restricted
Payments;" (d) any disposition of assets with an aggregate fair market value of
less than $1.0 million; (e) any disposition of property or assets by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly-Owned Restricted Subsidiary; (f) any exchange of like
property pursuant to Section 1031 of the Internal Revenue Code of 1986, as
amended, for use in a Similar Business; (g) any financing transaction with
respect to property built or acquired by the Company or any Restricted
Subsidiary after the Issuance Date including, without limitation,
sale-leasebacks and assets securitizations; (h) foreclosures on assets; (i)
sales of accounts receivable, or participations therein, in connection with any
Receivables Facility; and (j) any sale of Equity Interests in, or Indebtedness
or other securities of, an Unrestricted Subsidiary.
"CAPITALIZED LEASE OBLIGATION" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized and reflected as a liability on
a balance sheet (excluding the footnotes thereto) in accordance with GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"CASH EQUIVALENTS" means (i) U.S. dollars, (ii) securities issued or
directly and fully guaranteed or insured by the U.S. government or any agency or
instrumentality thereof, (iii) certificates of deposit, time deposits and
eurodollar time deposits with maturities of one year or less from the date of
acquisition, bankers' acceptances with maturities not exceeding one year and
overnight bank deposits, in each case with any commercial bank having capital
and surplus in excess of $500.0 million, (iv) repurchase obligations for
underlying securities of the types described in clauses (ii) and (iii) entered
into with any financial institution meeting the qualifications specified in
clause (iii) above, (v) commercial paper rated A-1 or the equivalent thereof by
Moody's or S&P and in each case maturing within one year after the date of
acquisition, (vi) investment funds investing 95.0% of their assets in securities
of the types described in clauses (i)-(v) above, (vii) readily marketable direct
obligations issued by any state of the United States of America or any political
subdivision thereof having one of the two highest rating categories obtainable
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from either Moody's or S&P and (viii) Indebtedness or preferred stock issued by
Persons with a rating of "A" or higher from S&P or "A2" or higher from Moody's.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(i) the sale, lease or transfer, in one or a series of related
transactions, of all or substantially all of the assets of the Company and
its Subsidiaries, taken as a whole; or
(ii) the Company becomes aware of (by way of a report or any other
filing pursuant to Section 13(d) of the Exchange Act, proxy, vote, written
notice or otherwise) the acquisition by any Person or group (within the
meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any
successor provision), including any group acting for the purpose of
acquiring, holding or disposing of securities (within the meaning of Rule
13d-5(b)(1) under the Exchange Act), other than the Permitted Holders and
their Related Parties, in a single transaction or in a related series of
transactions, by way of merger, consolidation or other business combination
or purchase of beneficial ownership (within the meaning of Rule 13d-3 under
the Exchange Act, or any successor provision) of 50.0% or more of the total
voting power of the Voting Stock of the Company.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries (determined on a consolidated
basis). Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a Holder of Notes to require
the Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
"CONSOLIDATED" with respect to any Person refers to such Person consolidated
with its Restricted Subsidiaries, and excludes from such consolidation any
Unrestricted Subsidiary as if such Unrestricted Subsidiary were not an Affiliate
of such Person.
"CONSOLIDATED DEPRECIATION AND AMORTIZATION EXPENSE" means with respect to
any Person for any period, the total amount of depreciation and amortization
expense of such Person and its Restricted Subsidiaries for such period on a
consolidated basis and otherwise determined in accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any period, the sum,
without duplication, of: (a) consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, to the extent such expense was
deducted in computing Consolidated Net Earnings (including amortization of
original issue discount, non-cash interest payments, the interest component of
Capitalized Lease Obligations, and net payments and receipts (if any) pursuant
to Hedging Obligations to the extent included in Consolidated Interest Expense,
excluding amortization of deferred financing fees) and (b) consolidated
capitalized interest of such Person and its Restricted Subsidiaries for such
period, whether paid or accrued; PROVIDED, HOWEVER, that Receivables Fees shall
be deemed not to constitute Consolidated Interest Expense.
"CONSOLIDATED NET EARNINGS" means, with respect to any Person for any
period, the aggregate of the Net Earnings, of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, and otherwise determined
in accordance with GAAP; PROVIDED, HOWEVER, that (i) any net after-tax
extraordinary gains or losses (less all fees and expenses relating thereto)
shall be excluded, (ii) the Net Earnings for such period shall not include the
cumulative effect of a change in accounting principles during such period, (iii)
any net after-tax earnings (loss) from discontinued operations and any net
after-tax gains or losses on disposal of discontinued operations shall be
excluded, (iv) any net after-tax gains or losses (less all fees and expenses
relating thereto) attributable to asset dispositions other than in the ordinary
course of business (as determined in good faith by the Board of Directors of the
Company) shall be excluded, (v) the Net Earnings for such period of any Person
that is not a Subsidiary, or is an Unrestricted Subsidiary, or that is accounted
for by the equity method of accounting, shall be included only to the extent of
the amount of dividends or distributions or other payments paid in cash (or to
the extent converted into cash) to the
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referent Person or a Wholly-Owned Restricted Subsidiary thereof in respect of
such period, (vi) the Net Earnings of any Person acquired in a pooling of
interests transaction shall not be included for any period prior to the date of
such acquisition and (vii) the Net Earnings for such period of any Restricted
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Restricted Subsidiary of its Net
Earnings is not at the date of determination permitted without any prior
governmental approval (which has not been obtained) or, directly or indirectly,
by the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule, or governmental regulation applicable to
that Restricted Subsidiary or its stockholders, unless such restriction with
respect to the payment of dividends or in similar distributions has been legally
waived.
"CONTINGENT OBLIGATIONS" means, with respect to any Person, any obligation
of such Person guaranteeing any leases, dividends or other obligations that do
not constitute Indebtedness ("PRIMARY OBLIGATIONS") of any other Person (the
"PRIMARY OBLIGOR") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person, whether or not contingent,
(i) to purchase any such primary obligation or any property constituting direct
or indirect security therefor, (ii) to advance or supply funds (A) for the
purchase or payment of any such primary obligation or (B) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency of the primary obligor, or (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation against loss in respect thereof.
"CREDIT FACILITIES" means, with respect to the Company, one or more debt
facilities (including, without limitation, the Senior Credit Facility) or
commercial paper facilities with banks or other institutional lenders or
indentures providing for revolving credit loans, term loans, receivables
financing (including through the sale of receivables to such lenders or to
special purpose entities formed to borrow from such lenders against such
receivables), letters of credit or other long-term Indebtedness, in each case,
as amended, restated, modified, renewed, refunded, replaced or refinanced in
whole or in part from time to time.
"DEFAULT" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"DESIGNATED NONCASH CONSIDERATION" means the fair market value of noncash
consideration received by the Company or one of its Restricted Subsidiaries in
connection with an Asset Sale that is so designated as Designated Noncash
Consideration pursuant to an Officers' Certificate, setting forth the basis of
such valuation, executed by the principal executive officer and the principal
financial officer of the Company, less the amount of cash or Cash Equivalents
received in connection with a subsequent sale of such Designated Noncash
Consideration.
"DESIGNATED PREFERRED STOCK" means preferred stock of the Company (other
than Disqualified Stock) that is issued for cash (other than to a Restricted
Subsidiary) and is so designated as Designated Preferred Stock, pursuant to an
Officers' Certificate executed by the principal executive officer and the
principal financial officer of the Company, on the issuance date thereof, the
cash proceeds of which are excluded from the calculation set forth in paragraph
(c) of the covenant described under "--Certain Covenants-- Limitation on
Restricted Payments."
"DISQUALIFIED STOCK" means, with respect to any Person, any Capital Stock
of such Person which, by its terms (or by the terms of any security into which
it is convertible or for which it is putable or exchangeable), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or is redeemable at the option of the
holder thereof, in whole or in part, in each case prior to the date 91 days
after the earlier of the maturity date of the Notes or the date the Notes are no
longer outstanding; PROVIDED, HOWEVER that if such Capital Stock is issued to
any employee or to any plan for the benefit of employees of the Company or its
Subsidiaries or by any such plan to such
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employees, such Capital Stock shall not constitute Disqualified Stock solely
because it may be required to be repurchased by the Company or its Subsidiaries
in order to satisfy applicable statutory or regulatory obligations, PROVIDED,
FURTHER, that any Capital Stock that would constitute Disqualified Stock solely
because the holders thereof (or of any security into which it is convertible or
for which it is putable or exchangeable) have the right to require the issuer to
repurchase such Capital Stock (or such security into which it is convertible or
for which it is putable or exchangeable) upon the occurrence of any of the
events constituting an asset sale or a change of control shall not constitute
Disqualified Stock if such Capital Stock (and all such securities into which it
is convertible or for which it is putable or exchangeable) provides that the
issuer thereof will not repurchase or redeem any such Capital Stock (or any such
security into which it is convertible or for which it is putable or
exchangeable) pursuant to such provisions prior to compliance by the Company
with the provisions of the Indenture described under the caption "Repurchase at
the Option of Holders--Change of Control" or "Repurchase at the Option of
Holders--Asset Sales," as the case may be.
"EBITDA" means, with respect to any Person for any period, the Consolidated
Net Earnings of such Person for such period plus (a) provision for taxes based
on income or profits of such Person for such period deducted in computing
Consolidated Net Earnings, plus (b) Consolidated Interest Expense of such Person
for such period and any Receivables Fees paid by such Person or any of its
Restricted Subsidiaries during such period, in each case to the extent the same
was deducted in calculating such Consolidated Net Earnings, plus (c)
Consolidated Depreciation and Amortization Expense of such Person for such
period to the extent such depreciation and amortization were deducted in
computing Consolidated Net Earnings, plus (d) any expenses or charges related to
any Equity Offering, Permitted Investment or Indebtedness permitted to be
incurred by the Indenture (including such expenses or charges related to the
Transactions) or any costs incurred in the cancellation of stock options and, in
each case, deducted in such period in computing Consolidated Net Earnings, plus
(e) the amount of any restructuring charge deducted in such period in computing
Consolidated Net Earnings, plus (f) without duplication, any other non-cash
charges reducing Consolidated Net Earnings for such period (excluding any such
charge which requires an accrual of a cash reserve for anticipated cash charges
for any future period), plus (g) the amount of any minority interest expense
deducted in calculating Consolidated Net Earnings, less, without duplication (h)
non-cash items increasing Consolidated Net Earnings of such Person for such
period (excluding any items which represent the reversal of any accrual of, or
cash reserve for, anticipated cash charges in any prior period).
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EQUITY OFFERING" means any public or private sale of common stock or
preferred stock of the Company (excluding Disqualified Stock), other than (i)
public offerings with respect to the Company's Common Stock registered on Form
S-8 and (ii) any such public or private sale that constitutes an Excluded
Contribution.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"EXCLUDED CONTRIBUTIONS" means the net cash proceeds received by the
Company after the closing of the Transactions from (a) contributions to its
equity capital other than contributions from the issuance of Disqualified Stock
and (b) the sale (other than to a Subsidiary or to any Company or Subsidiary
management equity plan or stock option plan or any other management or employee
benefit plan or agreement) of Capital Stock (other than Disqualified Stock) of
the Company, in each case designated as Excluded Contributions pursuant to an
Officers' Certificate executed by the principal executive officer and the
principal financial officer of the Company on the date such capital
contributions are made or the date such Equity Interests are sold, as the case
may be, the cash proceeds of which are excluded from the calculation set forth
in paragraph (c) of the "Limitation on Restricted Payments" covenant.
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"EXISTING INDEBTEDNESS" means Indebtedness of the Company or its Restricted
Subsidiaries in existence on the Issuance Date, plus interest accruing thereon,
after application of the net proceeds of the sale of the Notes as described in
this Prospectus.
"FIXED CHARGE COVERAGE RATIO" means, with respect to any Person for any
period, the ratio of EBITDA of such Person for such period to the Fixed Charges
of such Person for such period. In the event that the Company or any of its
Restricted Subsidiaries incurs, assumes, guarantees or redeems any Indebtedness
or issues or redeems Disqualified Stock or preferred stock subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but prior to the event for which the calculation of the Fixed Charge
Coverage Ratio is made (the "CALCULATION DATE"), then the Fixed Charge Coverage
Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, guarantee or redemption of Indebtedness, or such issuance or
redemption of Disqualified Stock or preferred stock, as if the same had occurred
at the beginning of the applicable four-quarter period. For purposes of making
the computation referred to above, Investments, acquisitions, dispositions,
mergers, consolidations and discontinued operations (as determined in accordance
with GAAP) that have been made by the Company or any of its Restricted
Subsidiaries during the four-quarter reference period or subsequent to such
reference period and on or prior to or simultaneously with the Calculation Date
shall be calculated on a pro forma basis assuming that all such Investments,
acquisitions, dispositions, discontinued operations, mergers and consolidations
(and the reduction of any associated fixed charge obligations and the change in
EBITDA resulting therefrom) had occurred on the first day of the four-quarter
reference period. If since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period) shall
have made any Investment, acquisition, disposition, discontinued operation,
merger or consolidation that would have required adjustment pursuant to this
definition, then the Fixed Charge Coverage Ratio shall be calculated giving pro
forma effect thereto for such period as if such Investment, acquisition,
disposition, discontinued operation, merger or consolidation had occurred at the
beginning of the applicable four-quarter period. For purposes of this
definition, whenever pro forma effect is to be given to a transaction, the pro
forma calculations shall be made in good faith by a responsible financial or
accounting officer of the Company. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest on such Indebtedness
shall be calculated as if the rate effect on the Calculation Date had been the
applicable rate for the entire period (taking into account any Hedging
Obligations applicable to such Indebtedness). Interest on a Capitalized Lease
Obligation shall be deemed to accrue at an interest rate reasonably determined
by a responsible financial or accounting officer of the Company to be the rate
of interest implicit in such Capitalized Lease Obligation in accordance with
GAAP. For purposes of making the computation referred to above, interest on any
Indebtedness under a revolving credit facility computed on a pro forma basis
shall be computed based upon the average daily balance of such Indebtedness
during the applicable period. Interest on Indebtedness that may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rate, shall be deemed to have been
based upon the rate actually chosen, or, if none, then based upon such optional
rate chosen as the Company may designate.
"FIXED CHARGES" means, with respect to any Person for any period, the sum
of (a) Consolidated Interest Expense of such Person for such period and (b) all
cash dividend payments (excluding items eliminated in consolidation) on any
series of Disqualified Stock of such Person.
"FOREIGN SUBSIDIARY" means a Restricted Subsidiary not organized or
existing under the laws of the United States, any State thereof, the District of
Columbia, or any territory thereof.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issuance Date.
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"GOVERNMENT SECURITIES" means securities that are (a) direct obligations of
the United States of America for the timely payment of which its full faith and
credit is pledged or (b) obligations of a Person controlled or supervised by and
acting as an agency or instrumentality of the United States of America the
timely payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act), as custodian with respect to any such Government Securities
or a specific payment of principal of or interest on any such Government
Securities held by such custodian for the account of the holder of such
depository receipt; PROVIDED that (except as required by law) such custodian is
not authorized to make any deduction from the amount payable to the holder of
such depository receipt from any amount received by the custodian in respect of
the Government Securities or the specific payment of principal of or interest on
the Government Securities evidenced by such depository receipt.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness or other obligations.
"GUARANTEE" means any guarantee of the obligations of the Company under the
Indenture and the Notes by any Person in accordance with the provisions of the
Indenture. When used as a verb, "Guarantee" shall have a corresponding meaning.
No Guarantees will be issued in connection with the initial offering and sale of
the Notes.
"GUARANTOR" means any Person that incurs a Guarantee; PROVIDED that upon
the release and discharge of such Person from its Guarantee in accordance with
the Indenture, such Person shall cease to be a Guarantor. No Guarantees will be
issued in connection with the initial offering and sale of the Notes.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) currency exchange or interest rate swap agreements,
currency exchange or interest rate cap agreements and currency exchange or
interest rate collar agreements and (ii) other agreements or arrangements
designed to protect such Person against fluctuations in currency exchange or
interest rates.
"HOLDER" means a holder of the Notes.
"INDEBTEDNESS" means, with respect to any Person, (a) any indebtedness of
such Person, whether or not contingent (i) in respect of borrowed money, (ii)
evidenced by bonds, notes, debentures or similar instruments or letters of
credit or bankers' acceptances (or, without double counting, reimbursement
agreements in respect thereof), (iii) representing the balance deferred and
unpaid of the purchase price of any property (including Capitalized Lease
Obligations), except any such balance that constitutes a trade payable or
similar obligation to a trade creditor, in each case accrued in the ordinary
course of business or (iv) representing any Hedging Obligations, if and to the
extent of any of the foregoing Indebtedness (other than letters of credit and
Hedging Obligations) that would appear as a liability upon a balance sheet
(excluding the footnotes thereto) of such Person prepared in accordance with
GAAP, (b) to the extent not otherwise included, any obligation by such Person to
be liable for, or to pay, as obligor, guarantor or otherwise, on the
Indebtedness of another Person (other than by endorsement of negotiable
instruments for collection in the ordinary course of business) and (c) to the
extent not otherwise included, Indebtedness of another Person secured by a Lien
on any asset owned by such Person (whether or not such Indebtedness is assumed
by such Person); PROVIDED, HOWEVER, that Contingent Obligations incurred in the
ordinary course of business shall be deemed not to constitute Indebtedness and
obligations under or in respect of Receivables Facilities shall not be deemed to
constitute Indebtedness of a Person.
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"INDEMNITY AGREEMENT" means the agreement to be entered into between the
Company and Evenflo & Spalding Holdings Corporation pursuant to which each party
will indemnify the other for all losses arising from the other's business prior
to the Transactions.
"INDEPENDENT FINANCIAL ADVISOR" means an accounting, appraisal, investment
banking firm or consultant to Persons engaged in Similar Businesses of
nationally recognized standing that is, in the reasonable judgment of the
Company's Board of Directors, qualified to perform the task for which it has
been engaged.
"INVESTMENT GRADE SECURITIES" means (i) securities issued or directly and
fully guaranteed or insured by the U.S. government or any agency or
instrumentality thereof (other than Cash Equivalents), (ii) debt securities or
debt instruments with a rating of BBB- or higher by S&P or Baa3 or higher by
Moody's or the equivalent of such rating by such rating organization, or, if no
rating of S&P or Moody's then exists, the equivalent of such rating by any other
nationally recognized securities rating agency, but excluding any debt
securities or instruments constituting loans or advances among the Company and
its Subsidiaries, and (iii) investments in any fund that invests exclusively in
investments of the type described in clauses (i) and (ii) which fund may also
hold immaterial amounts of cash pending investment and/or distribution.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of loans (including
guarantees), advances or capital contributions (excluding accounts receivable,
trade credit, advances to customers, commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Indebtedness, Equity Interests or other
securities issued by any other Person and investments that are required by GAAP
to be classified on the balance sheet (excluding the footnotes thereto) of the
Company in the same manner as the other investments included in this definition
to the extent such transactions involve the transfer of cash or other property.
For purposes of the definition of "Unrestricted Subsidiary" and the covenant
described under "--Certain Covenants--Limitation on Restricted Payments," (i)
"Investments" shall include the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of a
Subsidiary of the Company at the time that such Subsidiary is designated an
Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon a redesignation of such
Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue
to have a permanent "Investment" in an Unrestricted Subsidiary equal to an
amount (if positive) equal to (x) the Company's "Investment" in such Subsidiary
at the time of such redesignation less (y) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of such Subsidiary at the time of such redesignation and (ii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer, in each case as determined
in good faith by the Board of Directors.
"ISSUANCE DATE" means the closing date for the sale and original issuance
of the Notes under the Indenture.
"KKR" means Kohlberg Kravis Roberts & Co. L.P.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction);
provided that in no event shall an operating lease be deemed to constitute a
Lien.
"MANAGEMENT GROUP" means the group consisting of the Officers of the
Company.
"MOODY'S" means Moody's Investors Service, Inc.
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"NET EARNINGS" means, with respect to any Person, the net earnings (loss)
of such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends.
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
Designated Noncash Consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale and the sale or disposition of such Designated
Noncash Consideration (including, without limitation, legal, accounting and
investment banking fees, and brokerage and sales commissions), and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements related thereto), amounts required
to be applied to the repayment of principal, premium (if any) and interest on
Indebtedness required (other than required by clause (i) of the second paragraph
of "--Repurchase at the Option of Holders--Asset Sales") to be paid as a result
of such transaction and any deduction of appropriate amounts to be provided by
the Company as a reserve in accordance with GAAP against any liabilities
associated with the asset disposed of in such transaction and retained by the
Company after such sale or other disposition thereof, including, without
limitation, pension and other post-employment benefit liabilities and
liabilities related to environmental matters or against any indemnification
obligations associated with such transaction.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements (including, without limitation, reimbursement
obligations with respect to letters of credit and banker's acceptances), damages
and other liabilities and guarantees of payment of such principal, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"OFFICER" means the Chairman of the Board, the President, any Executive
Vice President, Senior Vice President or Vice President, the Treasurer, the
Controller or the Secretary of the Company.
"OFFICERS' CERTIFICATE" means a certificate signed on behalf of the Company
by two Officers of the Company, one of whom must be the principal executive
officer, the principal financial officer, the treasurer or the principal
accounting officer of the Company that meets the requirements set forth in the
Indenture.
"PERMITTED HOLDERS" means KKR and any of its Affiliates and the Management
Group.
"PERMITTED INVESTMENTS" means (a) any Investment in the Company or any
Restricted Subsidiary; (b) any Investment in cash and Cash Equivalents or
Investment Grade Securities; (c) any Investment by the Company or any Restricted
Subsidiary of the Company in a Person that is engaged in a Similar Business if
as a result of such Investment (i) such Person becomes a Restricted Subsidiary
or (ii) such Person, in one transaction or a series of related transactions, is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary; (d) any Investment in securities or other assets not
constituting cash or Cash Equivalents and received in connection with an Asset
Sale made pursuant to the provisions of "--Repurchase at the Option of
Holders--Asset Sales" or any other disposition of assets not constituting an
Asset Sale; (e) any Investment existing on the Issuance Date; (f) advances to
employees not in excess of $5.0 million outstanding at any one time, in the
aggregate; (g) any Investment acquired by the Company or any of its Restricted
Subsidiaries (i) in exchange for any other Investment or accounts receivable
held by the Company or any such Restricted Subsidiary in connection with or as a
result of a bankruptcy, workout, reorganization or recapitalization of the
issuer of such other Investment or accounts receivable or (ii) as a result of a
foreclosure by the Company or any of its Restricted Subsidiaries with respect to
any secured Investment or other transfer of title with respect to any secured
Investment in default; (h) Hedging Obligations permitted under clause (j) of the
"Limitation of Incurrence of Indebtedness and Issuance of Disqualified Stock"
covenant; (i) loans and advances to officers, directors and employees for
business-related travel expenses, moving expenses and other similar expenses, in
each case incurred in the ordinary
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course of business; (j) any Investment in a Similar Business (other than an
Investment in an Unrestricted Subsidiary) having an aggregate fair market value,
taken together with all other Investments made pursuant to this clause (j) that
are at that time outstanding, not to exceed the greater of (x) $25.0 million or
(y) 10.0% of Total Assets at the time of such Investment (with the fair market
value of each Investment being measured at the time made and without giving
effect to subsequent changes in value); (k) Investments the payment for which
consists of Equity Interests of the Company (exclusive of Disqualified Stock);
PROVIDED, HOWEVER, that such Equity Interests will not increase the amount
available for Restricted Payments under clause (c) of the "Limitation on
Restricted Payments" covenant; (l) additional Investments having an aggregate
fair market value, taken together with all other Investments made pursuant to
this clause (l) that are at that time outstanding, not to exceed the greater of
(x) $15.0 million or (y) 5.0% of Total Assets at the time of such Investment
(with the fair market value of each Investment being measured at the time made
and without giving effect to subsequent changes in value); (m) any transaction
to the extent it constitutes an investment that is permitted by and made in
accordance with the provisions of the second paragraph of the covenant described
under "--Certain Covenants--Transactions with Affiliates" (except transactions
described in clauses (ii) and (vi) of such paragraph); (n) any Investment by
Restricted Subsidiaries in other Restricted Subsidiaries and Investments by
Subsidiaries that are not Restricted Subsidiaries in other Subsidiaries that are
not Restricted Subsidiaries; (o) Investments relating to any special purpose
Wholly-Owned Subsidiary of the Company organized in connection with a
Receivables Facility that, in the good faith determination of the Board of
Directors of the Company, are necessary or advisable to effect such Receivables
Facility; and (p) guarantees (including Guarantees) of Indebtedness permitted
under the covenant "--Certain Covenants--Limitations on Incurrence of
Indebtedness and Issuance of Disqualified Stock".
"PERMITTED LIENS" means, with respect to any Person, (a) pledges or deposits
by such Person under workmen's compensation laws, unemployment insurance laws or
similar legislation, or in connection with bids, tenders, contracts (other than
for the payment of Indebtedness) or leases to which such Person is a party, or
to secure public or statutory obligations of such Person or deposits or cash or
U.S. government bonds to secure surety or appeal bonds to which such Person is a
party, or for contested taxes or import or custom duties or for the payment of
rent, in each case incurred in the ordinary course of business; (b) Liens
imposed by law, including carriers', warehousemen's, mechanics', materialmen and
repairmen Liens, in each case for sums not yet due or being contested in good
faith by appropriate proceedings, if a reserve or other appropriate provision,
if any, as shall be required by GAAP shall have been made in respect thereof;
(c) Liens for taxes, assessments or other governmental charges not yet subject
to penalties for non-payment or which are being contested in good faith by
appropriate proceedings provided reserves required pursuant to GAAP have been
taken on the books of the Company or its Restricted Subsidiaries, as the case
may be; (d) Liens in favor of issuers of surety or performance bonds or bankers'
acceptance or letters of credit issued pursuant to the request of and for the
account of such Person in the ordinary course of its business; PROVIDED,
HOWEVER, that such letters of credit do not constitute Indebtedness; (e)
encumbrances, easements or reservations of, or rights of others for, licenses,
rights of way, sewers, electric lines, telegraph and telephone lines and other
similar purposes, or zoning or other restrictions as to the use of real
properties or liens incidental to the conduct of the business of such Person or
to the ownership of its properties which do not in the aggregate materially
adversely affect the value of said properties or materially impair their use in
the operation of the business of such Person; (f) Liens securing a Hedging
Obligation, so long as the related Indebtedness is, and is permitted to be under
the Indenture, secured by a Lien on the same property; (g) leases and subleases
of real property which do not materially interfere with the ordinary conduct of
the business of the Company or any of its Restricted Subsidiaries; (h) judgment
Liens not giving rise to an Event of Default so long as such Lien is adequately
bonded and any appropriate legal proceedings which may have been duly initiated
for the review of such judgment have not been finally terminated or the period
within which such proceedings may be initiated has not expired; (i) Liens for
the purpose of securing the payment (or the refinancing of the payment) of all
or a part of the purchase price of, or Capitalized Lease Obligations with
respect to, assets or property acquired or
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constructed in the ordinary course of business provided that (x) the aggregate
principal amount of Indebtedness secured by such Liens is otherwise permitted to
be incurred under the Indenture and does not exceed the cost of the assets or
property so acquired or constructed and (y) such Liens are created within 90
days of construction or acquisition of such assets or property and do not
encumber any other assets or property of the Company or any Restricted
Subsidiary other than such assets or property and assets affixed or appurtenant
thereto; (j) Liens arising solely by virtue of any statutory or common law
provision relating to banker's Liens, rights of set-off or similar rights and
remedies as to deposit accounts or other funds maintained with a depository
institution; PROVIDED that such deposit account is not a pledged cash collateral
account; (k) Liens arising from Uniform Commercial Code financing statement
filings regarding operating leases entered into by the Company and its
Restricted Subsidiaries in the ordinary course of business; (l) Liens existing
on the Issuance Date; (m) Liens on property or shares of stock of a Person at
the time such Person becomes a Subsidiary; PROVIDED, HOWEVER, that such Liens
are not created, incurred or assumed in connection with, or in contemplation of,
such other Person becoming a Subsidiary; PROVIDED FURTHER, HOWEVER, that any
such Lien may not extend to any other property owned by the Company or any
Restricted Subsidiary; (n) Liens on property at the time the Company or a
Subsidiary acquired the property, including any acquisition by means of a merger
or consolidation with or into the Company or any Restricted Subsidiary;
PROVIDED, HOWEVER, that such Liens are not created, incurred or assumed in
connection with, or in contemplation of, such acquisition; PROVIDED FURTHER,
HOWEVER, that such Liens may not extend to any other property owned by the
Company or any Restricted Subsidiary; (o) Liens securing Indebtedness or other
obligations of a Subsidiary owing to the Company or a Wholly-Owned Subsidiary;
(p) Liens securing the Notes and Guarantees; (q) Liens securing Indebtedness
incurred to refinance Indebtedness that was previously so secured, provided that
(A) such Liens are not materially less favorable to the Holders and (B) any such
Lien is limited to all or part of the same property or assets (plus
improvements, accessions, proceeds or dividends or distributions in respect
thereof) that secured (or, under the written arrangements under which the
original Lien arose, could secure) the obligations to which such Liens relate;
(r) Liens on assets incurred in connection with a Receivables Facility; (s)
Liens securing Indebtedness and other obligations under a senior credit
agreement or other senior bank facility, including, without limitation, the
Senior Credit Facility, and related Hedging Obligations and Liens on assets of
Restricted Subsidiaries securing guarantees of Indebtedness and other
obligations under a senior credit agreement or other senior bank facility,
including, without limitation, the Senior Credit Facility, permitted to be
incurred under the Indenture; (t) Liens arising out of consignment or similar
arrangements for the sale of goods entered into by the Company or any Restricted
Subsidiary in the ordinary course of business; (u) Liens securing Indebtedness
permitted to be incurred pursuant to clause (m) of the second paragraph of
"--Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock;"
and (v) Liens created, incurred or existing in respect of unfunded pension
obligations or any similar obligations of the Company or any of its Restricted
Subsidiaries or any Guarantor.
"PERSON" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"PREFERRED STOCK" means any Equity Interest with preferential right of
payment of dividends or upon liquidation, dissolution, or winding up.
"RECEIVABLES FACILITY" means one or more receivables financing facilities,
as amended from time to time, pursuant to which the Company and/or any of its
Restricted Subsidiaries sells its accounts receivable to a Person that is not a
Restricted Subsidiary.
"RECEIVABLES FEES" means distributions or payments made directly or by
means of discounts with respect to any participation interests issued or sold in
connection with, and other fees paid to a Person that is not a Restricted
Subsidiary in connection with, any Receivables Facility.
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"RELATED PARTIES" means any Person controlled by a Permitted Holder,
including any partnership or limited liability company of which a Permitted
Holder or its Affiliates is the general partner or managing member, as the case
may be.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" means, at any time, any direct or indirect
Subsidiary of the Company that is not then an Unrestricted Subsidiary; PROVIDED,
HOWEVER, that upon the occurrence of an Unrestricted Subsidiary ceasing to be an
Unrestricted Subsidiary, such Subsidiary shall be included in the definition of
"Restricted Subsidiary."
"S&P" means Standard and Poor's Ratings Group.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"SENIOR CREDIT FACILITY" means that certain revolving credit facility
described in this Prospectus among the Company and the lenders from time to time
party thereto, including any collateral documents, instruments and agreements
executed in connection therewith, and any amendments, supplements,
modifications, extensions, renewals, restatements or refundings thereof and any
indentures or credit facilities or commercial paper facilities with banks or
other institutional lenders that replace, refund or refinance any part of the
loans, notes, other credit facilities or commitments thereunder, including any
such replacement, refunding or refinancing facility or indenture that increases
the amount borrowable thereunder or alters the maturity thereof; PROVIDED,
HOWEVER, that if at any time there is more than one facility which could
constitute the Senior Credit Facility, the Company will designate to the Trustee
which one of such facilities will be the Senior Credit Facility for purposes of
the subordination and acceleration provisions of the Indenture.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"SIMILAR BUSINESS" means a business, the majority of whose revenues are
derived from the design, manufacture, import and/or distribution of juvenile and
infant products, or any line of business engaged in by the Company or its
Subsidiaries on the Issuance Date, or any business or activity that is
reasonably similar thereto or a reasonable extension, development or expansion
thereof or ancillary thereto.
"SUBORDINATED INDEBTEDNESS" means (a) with respect to the Company, any
Indebtedness of the Company which is by its terms subordinated in right of
payment to the Notes and (b) with respect to any Guarantor, any Indebtedness of
such Guarantor which is by its terms subordinated in right of payment to the
Guarantee of such Guarantor.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association, or other business entity (other than a partnership, joint venture,
limited liability company or similar entity) of which more than 50.0% of the
total voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time of determination owned or controlled, directly
or indirectly, by such Person or one or more of the other Subsidiaries of that
Person or a combination thereof and (ii) any partnership, joint venture, limited
liability company or similar entity of which (x) more than 50.0% of the capital
accounts, distribution rights, total equity and voting interests or general or
limited partnership interests, as applicable, are owned or controlled, directly
or indirectly, by such Person or one or more of the other Subsidiaries of that
Person or a combination thereof whether in the form of membership, general,
special or limited partnership or otherwise and (y) such Person or any
Wholly-Owned Restricted Subsidiary of such Person is a controlling general
partner or otherwise controls such entity.
127
<PAGE>
"TOTAL ASSETS" means time total consolidated assets of the Company and its
Restricted Subsidiaries as shown on the most recent balance sheet (excluding the
footnotes thereto) of the Company.
"TRANSACTIONS" means (i) the transactions contemplated by the stock
purchase agreement dated August 20, 1998, between KKR 1996 Fund L.P. and Lisco,
Inc., pursuant to which KKR 1996 Fund L.P. will acquire 51% of the outstanding
common stock of the Company and 100% of the outstanding preferred stock of the
Company, including the distribution of such preferred stock by the Company to
Lisco, Inc., (ii) the transactions contemplated by the stock purchase agreement
dated August 20, 1998, between Great Star Corporation and Lisco, Inc., pursuant
to which Great Star Corporation will acquire 6.6% of the outstanding common
stock of the Company, (iii) the repayment by the Company of approximately $110.0
million of intercompany debt owed to Spalding & Evenflo Companies, Inc. and its
Affiliates, (iv) the offering of $110.0 million of Notes by the Company and (v)
the entering into of the Senior Credit Facility on the Issuance Date.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the Company which at
the time of determination is an Unrestricted Subsidiary (as designated by the
Board of Directors of the Company, as provided below) and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors of the Company may designate
any Subsidiary of the Company (including any existing Subsidiary and any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless
such Subsidiary or any of its Subsidiaries owns any Equity Interests of, or
owns, or holds any Lien on, any property of, the Company or any Subsidiary of
the Company (other than any Subsidiary of the Subsidiary to be so designated),
PROVIDED that (a) any Unrestricted Subsidiary must be an entity of which shares
of the capital stock or other equity interests (including partnership interests)
entitled to cast at least a majority of the votes that may be cast by all shares
or equity interests having ordinary voting power for the election of directors
or other governing body are owned, directly or indirectly, by the Company, (b)
the Company certifies that such designation complies with the covenants
described under "--Certain Covenants--Limitation on Restricted Payments" and (c)
each of (I) the Subsidiary to be designated and (II) its Subsidiaries has not at
the time of designation, and does not thereafter, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable with respect to any
Indebtedness pursuant to which the lender has recourse to any of the assets of
the Company or any of its Restricted Subsidiaries. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED
that, immediately after giving effect to such designation, (i) the Company could
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test described under "--Certain Covenants--Limitations on
Incurrence of Indebtedness and Issuance of Disqualified Stock" or (ii) the Fixed
Charge Coverage Ratio for the Company and its Restricted Subsidiaries would be
greater than such ratio for the Company and its Restricted Subsidiaries
immediately prior to such designation, in each case on a pro forma basis taking
into account such designation. Any such designation by the Board of Directors
shall be notified by the Company to the Trustee by promptly filing with the
Trustee a copy of the board resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
or Disqualified Stock, as the case may be, at any date, the quotient obtained by
dividing (i) the sum of the products of the number of years from the date of
determination to the date of each successive scheduled principal payment of such
Indebtedness or redemption or similar payment with respect to such Disqualified
Stock multiplied by the amount of such payment, by (ii) the sum of all such
payments.
"WHOLLY-OWNED RESTRICTED SUBSIDIARY" is any Wholly-Owned Subsidiary that is
a Restricted Subsidiary.
"WHOLLY-OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person
100% of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly-Owned Subsidiaries of such Person and one or
more Wholly-Owned Subsidiaries of such Person.
128
<PAGE>
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
EXCHANGE OF NOTES
The following describes the material United States federal income tax
consequences of the exchange of Old Notes for Exchange Notes pursuant to the
Exchange Offer. The following is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), and regulations, rulings and
judicial decisions thereunder as of the date hereof.
The exchange of Old Notes for Exchange Notes in the Exchange Offer will not
constitute a taxable event to holders. Consequently, no gain or loss will be
recognized by a holder upon receipt of an Exchange Note, the holding period of
the Exchange Note will include the holding period of the Old Note and the basis
of the Exchange Note will be the same as the basis of the Old Note immediately
before the exchange.
IN ANY EVENT, PERSONS CONSIDERING THE EXCHANGE OF OLD NOTES FOR EXCHANGE
NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following describes the material United States federal income tax
consequences of the ownership of Notes as of the date hereof by a Non-U.S.
Holder (as defined below). Except where noted it deals only with Notes held as
capital assets by Non-U.S. Holders. As used herein the term "Non-U.S. Holder"
means any person or entity that is not a United States Holder ("U.S. Holder"). A
U.S. Holder is any beneficial owner of a Note that is (i) a citizen or resident
of the United States, (ii) a corporation or partnership created or organized in
or under the laws of the United States or any political subdivision thereof,
(iii) an estate the income of which is subject to U.S. federal income taxation
regardless of its source or (iv) a trust that (x) is subject to the supervision
of a court within the United States and the control of one or more United Stated
persons as described in section 7701(a)(30) of the Internal Revenue Code of
1986, as amended (the "Code") or (y) has a valid election in effect under
applicable U.S. Treasury regulations to be treated as a U.S. person.
The discussion below is based upon the provisions of the Code, and
regulations, rulings and judicial decisions thereunder as of the date hereof,
and such authorities may be repealed, revoked or modified so as to result in
United States federal income tax consequences different from those discussed
below. PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF NOTES
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) no withholding of United States federal income tax will be required
with respect to the payment by the Company or any paying agent of principal
or interest on a Note owned by a Non-U.S. Holder, provided that (i) the
beneficial owner does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Company entitled
to vote within the meaning of section 871(h)(3) of the Code and the
regulations thereunder, (ii) the beneficial owner is not a controlled
foreign corporation that is related to the Company through stock ownership,
(iii) the beneficial owner is not a bank whose receipt of interest on a Note
is described in section 881(c)(3)(A) of the Code and (iv) the beneficial
owner satisfies the statement requirement (described generally below) set
forth in section 871(h) and section 881(c) of the Code and the regulations
thereunder;
(b) no withholding of United States federal income tax will be required
with respect to any gain or income realized by a Non-U.S. Holder upon the
sale, exchange or other disposition of a Note; and
129
<PAGE>
(c) a Note beneficially owned by an individual who at the time of death
is a Non-U.S. Holder will not be subject to United States federal estate tax
as a result of such individual's death, provided that such individual does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the company entitled to vote within the
meaning of section 871(h)(3) of the Code and provided that the interest
payments with respect to such Note would not have been, if received at the
time of such individual's death, effectively connected with the conduct of a
United States trade or business by such individual.
To satisfy the requirement referred to in (a)(iv) above, the beneficial
owner of such Note, or a financial institution holding the Note on behalf of
such owner, must provide, in accordance with specified procedures, a paying
agent of the Company with a statement to the effect that the beneficial owner is
not a U.S. Holder. Currently, these requirements will be met if (1) the
beneficial owner provides his or her name and address, and certifies, under
penalties of perjury, that he or she is not a United States Holder (which
certification may be made on an Internal Revenue Service ("IRS") Form W-8 (or
successor form)) or (2) a financial institution holding the Note on behalf of
the beneficial owner certifies, under penalties of perjury, that such statement
has been received by it and furnishes a paying agent with a copy thereof. Under
recently finalized Treasury regulations (the "Final Regulations"), the statement
requirement referred to in (a)(iv) above may also be satisfied with other
documentary evidence for interest paid after December 31, 1999 with respect to
an offshore account or through certain foreign intermediaries.
If a Non-U.S. Holder cannot satisfy the requirements of the "portfolio
interest" exception described in (a) above, payments of interest made to such
Non-U.S. Holder will be subject to a 30% withholding tax unless the beneficial
owner of the Note provides the Company or its paying agent, as the case may be,
with a properly executed (1) IRS Form 1001 (or successor form) claiming an
exemption from (or a reduction in) withholding under the benefit of an
applicable tax treaty or (2) IRS Form 4224 (or successor form) stating that
interest paid on the Note is not subject to withholding tax because it is
effectively connected with the beneficial owner's conduct of a trade or business
in the United States. Under the Final Regulations, Non-U.S. Holders will
generally be required to provide IRS Form W-8 in lieu of IRS Form 1001 and IRS
Form 4224, although alternative documentation may be applicable in certain
situations. Moreover, under the Final Regulations, the benefit of an applicable
tax treaty may, in certain circumstances, and subject to significant limitations
under the Code, be claimed by the foreign partners of a foreign partnership that
holds the Notes. Foreign partners are urged to consult their own tax advisors to
determine whether they are eligible to claim such benefits.
If a Non-U.S. Holder is engaged in a trade or business in the United States
and interest on the Note is effectively connected with the conduct of such trade
or business, the Non-U.S. Holder, although exempt from the withholding tax
discussed above, will be subject to United States federal income tax on such
interest on a net income basis in the same manner as if it were a U.S. Holder.
In addition, if such holder is a foreign corporation, it may be subject to a
branch profits tax equal to 30% (or lower applicable treaty rate) of its
effectively connected earnings and profits for the taxable year, subject to
adjustments. For this purpose, interest on a Note will be included in such
foreign corporation's earnings and profits.
Any gain or income realized upon the sale, exchange, retirement or other
disposition of a Note generally will not be subject to United States federal
income tax unless (i) such gain or income is effectively connected with the
conduct of a trade or business in the United States by the Non-U.S. Holder, or
(ii) in the case of a Non-U.S. Holder who is an individual, such individual is
present in the United States for 183 days or more in the taxable year of such
sale, exchange, retirement or other disposition, and certain other conditions
are met.
Special rules may apply to certain Non-U.S. Holders, such as "controlled
foreign corporations", "passive foreign investment companies" and "foreign
personal holding companies", that are subject to special treatment under the
Code. Such entities should consult their own tax advisors to determine the U.S.
federal, state, local and other tax consequences that may be relevant to them.
130
<PAGE>
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, no information reporting or backup withholding will be required
with respect to payments made by the Company or any paying agent to Non-U.S.
Holders if a statement described in (a)(iv) above has been received (and the
payor does not have actual knowledge that the beneficial owner is a U.S.
Holder).
In addition, backup withholding and information reporting may apply to the
proceeds of the sale of a Note within the United States or conducted through
certain U.S. related financial intermediaries unless the statement described in
(a)(iv) above has been received (and the payor does not have actual knowledge
that the beneficial owner is a U.S. Holder) or the holder otherwise establishes
an exemption.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Old Notes
where such Old Notes were acquired as a result of market-making activities or
other trading activities. A broker-dealer may not participate in the Exchange
Offer with respect to Old Notes acquired other than as a result of market-making
activities or other trading activities. To the extent any such broker-dealer
participates in the Exchange Offer and so notifies the Company, or causes the
Company to be so notified in writing, the Company has agreed for a period of 90
days after the date of this Prospectus, that it will make this Prospectus, as
amended or supplemented, available to such broker-dealer for use in connection
with any such resale, and will promptly send additional copies of this
Prospectus and any amendment or supplement to this Prospectus to any
broker-dealer that requests such documents in the Letter of Transmittal. In
addition, until , 1999 (90 days after the date of this Prospectus),
all dealers effecting transactions in the Exchange Notes may be required to
deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions or a
combination of such methods of resale, at prevailing market prices at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers or any such Exchange
Notes. Any broker-dealer that resells Exchange Notes that were received by it
for its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that, by acknowledging that it will
deliver and by delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Exchange Offer
(other than commissions and concessions of any broker-dealers), subject to
certain prescribed limitations, and will indemnify the holders of the Old Notes
against certain liabilities, including certain liabilities that may arise under
the Securities Act.
131
<PAGE>
By its acceptance of the Exchange Offer, any broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer hereby agrees to notify the
Company prior to using the Prospectus in connection with the sale or transfer of
Exchange Notes, and acknowledges and agrees that, upon receipt of notice from
the Company of the happening of any event which makes any statement in the
Prospectus untrue in any material respect or which requires the making of any
changes in the Prospectus in order to make the statements therein not misleading
or which may impose upon the Company disclosure obligations that may have a
material adverse effect on the Company (which notice the Company agrees to
deliver promptly to such broker-dealer), such broker-dealer will suspend use of
the Prospectus until the Company has notified such broker-dealer that delivery
of the Prospectus may resume and has furnished copies of any amendment or
supplement to the Prospectus to such broker-dealer.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Exchange Notes
offered hereby will be passed upon for the Company by Simpson Thacher &
Bartlett, New York, New York. Certain partners of Simpson Thacher & Bartlett,
members of their families, related persons and others, have an indirect
interest, through limited partnerships, through KKR 1996 Fund L.P., in less than
1% of the Common Stock.
EXPERTS
The consolidated balance sheets as of September 30, 1997 and 1998 and
December 31, 1998 and the related statements of consolidated earnings (loss) and
comprehensive earnings (loss), cash flows and shareholders' equity for each of
the three fiscal years in the period ended September 30, 1998 and the three
month period ended December 31, 1998, of Evenflo Company, Inc. included in the
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
The statements of revenues and direct costs for the years ended December 31,
1995 and 1996 of Gerry Baby Products included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
132
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Evenflo Company, Inc. and Subsidiaries Consolidated Financial Statements
Independent Auditors' Report............................................................................. F-2
Statements of Consolidated Earnings (Loss) and Comprehensive Earnings (Loss) for the years ended
September 30, 1996, 1997 and 1998 and for the three months ended December 31, 1997 (unaudited) and
1998................................................................................................... F-3
Consolidated Balance Sheets as of September 30, 1997 and 1998 and December 31, 1998...................... F-4
Statements of Consolidated Cash Flows for the years ended September 30, 1996, 1997 and 1998 and for the
three months ended December 31, 1997 (unaudited) and 1998.............................................. F-5
Statements of Consolidated Shareholders' Equity for the years ended September 30, 1996, 1997 and 1998 and
for the three months ended December 31, 1997 (unaudited) and 1998...................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
Gerry Baby Products Financial Statements
Independent Auditors' Report............................................................................. F-31
Statements of Revenues and Direct Costs for the years ended December 31, 1995 and 1996 and (unaudited)
for the three months ended March 31, 1997.............................................................. F-32
Notes to Statements of Revenues and Direct Costs......................................................... F-33
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Evenflo Company, Inc.:
We have audited the accompanying consolidated balance sheets of Evenflo Company,
Inc. and subsidiaries (the "Company") as of September 30, 1997 and 1998 and
December 31, 1998, and the related statements of consolidated earnings (loss)
and comprehensive earnings (loss), cash flows and shareholders' equity for each
of the three fiscal years in the period ended September 30, 1998 and for the
three month period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Evenflo Company Inc. and
subsidiaries as of September 30, 1997 and 1998 and as of December 31, 1998, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended September 30, 1998 and for the three month
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
As discussed in Note G to the consolidated financial statements, the Company's
consolidated balance sheet as of September 30, 1997 and the related statements
of consolidated earnings (loss) and comprehensive earnings (loss) for the years
ended September 30, 1997 and 1998 have been restated.
DELOITTE & TOUCHE LLP
Dayton, Ohio
February 19, 1999
(May 6, 1999, with respect to the Note to
the table in Note G)
F-2
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS (LOSS)
AND COMPREHENSIVE EARNINGS (LOSS)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
---------------------------------- -----------------------
1996 1997 1998 1997 1998
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(AS RESTATED, SEE NOTE
G) (UNAUDITED)
NET SALES........................................... $ 237,165 $ 296,743 $ 339,077 $ 69,650 $ 72,552
Cost of sales..................................... 178,733 235,925 270,708 58,070 66,811
---------- ---------- ---------- ----------- ----------
GROSS PROFIT........................................ 58,432 60,818 68,369 11,580 5,741
Selling, general and administrative expenses...... 42,801 52,232 63,133 13,203 16,071
Allocated Spalding expenses....................... 2,500 2,900 2,566 700 0
Restructuring costs............................... 0 8,371 2,666 60 0
1994 Management Stock Ownership Plan expense...... 2,621 0 0 0 0
---------- ---------- ---------- ----------- ----------
INCOME (LOSS) FROM OPERATIONS....................... 10,510 (2,685) 4 (2,383) (10,330)
Interest expense, net............................. 4,128 7,243 11,458 2,494 4,220
Currency (gain) loss, net......................... 204 47 1,076 77 (251)
---------- ---------- ---------- ----------- ----------
EARNINGS (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS................................ 6,178 (9,975) (12,530) (4,954) (14,299)
Income taxes (benefit)............................ 3,197 (4,364) (4,171) (1,255) (5,413)
---------- ---------- ---------- ----------- ----------
EARNINGS (LOSS) BEFORE EXTRAORDINARY LOSS........... 2,981 (5,611) (8,359) (3,699) (8,886)
Extraordinary loss on early extinguishment of
debt, net of income
tax benefit of $360 and $696.................... (560) 0 (1,304) 0 0
---------- ---------- ---------- ----------- ----------
NET EARNINGS (LOSS)................................. 2,421 (5,611) (9,663) (3,699) (8,886)
Other comprehensive earnings (loss)-- currency
translation adjustments......................... (260) (367) (1,720) (313) (1,175)
---------- ---------- ---------- ----------- ----------
COMPREHENSIVE EARNINGS (LOSS)....................... $ 2,161 $ (5,978) $ (11,383) $ (4,012) $ (10,061)
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND 1998
AND DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------- DECEMBER 31,
1998 1998
1997 ---------- ------------
-----------
(AS
RESTATED,
SEE NOTE G)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................................... $ 1,536 $ 7,142 $ 4,197
Receivables, less allowance of $1,407, $1,592 and $1,177.................. 67,705 88,512 79,605
Inventories............................................................... 60,721 53,132 52,542
Deferred income taxes..................................................... 10,594 9,513 11,397
Other..................................................................... 2,317 1,939 1,308
----------- ---------- ------------
TOTAL CURRENT ASSETS.................................................. 142,873 160,238 149,049
Property, plant and equipment, net........................................ 60,461 65,614 64,881
Intangible assets, net.................................................... 48,262 46,715 46,329
Deferred financing costs.................................................. 2,100 5,904 5,715
Deferred income taxes..................................................... 0 5,431 7,660
Other..................................................................... 1,509 1,459 1,819
----------- ---------- ------------
TOTAL ASSETS.......................................................... $ 255,205 $ 285,361 $ 275,453
----------- ---------- ------------
----------- ---------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bankers acceptances and letters of credit................................. $ 16,645 $ 28,823 $ 19,725
Accounts payable.......................................................... 39,608 31,364 32,260
Accrued expenses.......................................................... 34,312 35,868 36,652
Income taxes.............................................................. 82 (19) (411)
----------- ---------- ------------
TOTAL CURRENT LIABILITIES............................................. 90,647 96,036 88,226
Senior notes due 2006..................................................... 0 110,000 110,000
Revolving Credit Facility................................................. 0 0 7,800
Long-term debt to Spalding................................................ 92,120 0 0
Payable to Spalding....................................................... 3,846 0 0
Deferred income taxes..................................................... 463 0 0
Pension................................................................... 2,940 3,519 3,658
Post-retirement benefits.................................................. 1,470 1,359 1,383
----------- ---------- ------------
TOTAL LIABILITIES..................................................... 191,486 210,914 211,067
COMMITMENTS AND CONTINGENCIES (NOTES N AND Q)
SHAREHOLDERS' EQUITY:
Preferred stock--$.01 par value, 10,000,000 shares authorized; 400,000
shares outstanding (liquidation value of $40,000,000)................... 0 40,000 40,000
Common stock:
Class A--$1 par value, 20,000,000 shares authorized; 2,000, 10,000,000
and 10,000,000 shares outstanding, respectively....................... 2 10,000 10,000
Class B--$1 par value, 5,000,000 shares authorized; none outstanding.... 0 0 0
Paid-in capital........................................................... 88,906 61,387 61,387
Retained earnings (deficit)............................................... (23,914) (33,945) (42,831)
Accumulated other comprehensive earnings (loss)--currency translation
adjustments............................................................. (1,275) (2,995) (4,170)
----------- ---------- ------------
TOTAL SHAREHOLDERS' EQUITY............................................ 63,719 74,447 64,386
----------- ---------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ $ 255,205 $ 285,361 $ 275,453
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------------- ----------------------
INCREASE (DECREASE) IN CASH 1996 1997 1998 1998
- ------------------------------------------------------------ --------- --------- --------- 1997 ---------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) (as restated, see Note G)............... $ 2,421 $ (5,611) $ (9,663) $ (3,699) $ (8,886)
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Non-cash writedown of inventories......................... 0 3,100 0 0 7,883
Depreciation.............................................. 5,708 8,207 12,341 3,021 3,180
Intangibles amortization.................................. 794 1,106 1,528 388 388
Deferred income taxes..................................... 1,059 (4,093) (5,181) 845 (4,113)
Deferred financing cost amortization...................... 180 400 196 100 189
Expenses related to 1994 Management Stock Ownership
Plan.................................................... 2,621 0 0 0 0
Extraordinary loss on early extinquishment of debt........ 920 0 2,000 0 0
Other..................................................... 300 460 468 0 163
Changes in working capital components:
Receivables............................................. (1,625) (37) (20,807) 13,116 8,907
Inventories............................................. (3,510) (10,809) 7,589 (2,136) (7,293)
Current liabilities, excluding bank loans............... 15,632 8,556 5,389 (17,280) (7,812)
Other................................................... (213) (2,221) (649) (291) (951)
--------- --------- --------- ----------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES........ 24,287 (942) (6,789) (5,936) (8,345)
--------- --------- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................ (9,377) (20,927) (18,118) (4,228) (2,400)
Payment to purchase net assets of Gerry..................... 0 (68,652) 0 0 0
Acquisition of non-U.S. trademarks from affiliate........... (363) 0 0 0 0
--------- --------- --------- ----------- ---------
NET CASH FLOWS USED IN INVESTING ACTIVITIES............. (9,740) (89,579) (18,118) (4,228) (2,400)
--------- --------- --------- ----------- ---------
NET CASH PROVIDED (USED) BEFORE FINANCING ACTIVITIES.... 14,547 (90,521) (24,907) (10,164) (10,745)
--------- --------- --------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Senior Notes due 2006............. 0 0 110,000 0 0
Net borrowings from Revolving Credit Facility............... 0 0 10,000 0 7,800
Repayment of intercompany indebtedness to Spalding.......... 0 0 (110,000) 0 0
Deferred financing costs.................................... 0 0 (6,000) 0 0
Repayment of Revolving Credit Facility...................... 0 0 (10,000) 0 0
Note payable to Spalding.................................... 0 49,120 0 0 0
(Repayments) proceeds of non-U.S. debt...................... (4) (204) 0 154 0
Net change in long-term Spalding receivable/payable......... (5,046) 30,524 41,033 3,672 0
Net cash transfers from (to) Spalding....................... (7,557) 8,239 (4,520) 6,210 0
Dividend to Spalding........................................ 0 (367) 0 0 0
Additional capital contribution by Spalding................. 363 0 0 0 0
--------- --------- --------- ----------- ---------
NET CASH FLOWS PROVIDED (USED) BY FINANCING
ACTIVITIES............................................ (12,244) 87,312 30,513 10,036 7,800
--------- --------- --------- ----------- ---------
Cash--net change............................................ 2,303 (3,209) 5,606 (128) (2,945)
beginning of period................................... 2,442 4,745 1,536 1,536 7,142
--------- --------- --------- ----------- ---------
end of period......................................... $ 4,745 $ 1,536 $ 7,142 $ 1,408 $ 4,197
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
SUPPLEMENTAL CASH FLOW DATA
Interest paid............................................... $ 3,732 $ 6,763 $ 9,824 $ 2,537 $ 942
Income taxes paid (refunded)................................ 1,731 (266) (453) (2,318) (225)
Issuance of preferred stock................................. 0 0 40,000 0 0
Reduction of paid-in capital by preferred stock issuance.... 0 0 (40,000) 0 0
Additional capital contribution by Spalding resulting from
forgiveness of intercompany indebtedness.................. 0 0 26,999 0 0
Reduction of intercompany indebtedness...................... 0 0 (43,059) 0 0
Reduction of deferred tax asset due to IRS settlement....... 0 0 368 0 0
Reduction of retained earnings for IRS settlement........... 0 0 (368) 0 0
Allocation of portion of Spalding debt...................... 11,000 0 16,000 0 0
Allocation of Spalding deferred financing costs............. (2,500) 0 100 0 0
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
RETAINED OTHER
PREFERRED COMMON PAID-IN EARNINGS COMPREHENSIVE
STOCK STOCK CAPITAL (DEFICIT) EARNINGS (LOSS) TOTAL
----------- ----------- --------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
AUDITED
September 30, 1995............................ $ 0 $ 2 $ 87,861 $ (20,357) $ (648) $ 66,858
Net earnings (loss) for the year.............. 0 0 0 2,421 0 2,421
Net cash transfers to Spalding................ 0 0 (7,557) 0 0 (7,557)
Currency translation adjustments.............. 0 0 0 0 (260) (260)
Additional capital contribution by Spalding... 0 0 363 0 0 363
----------- ----------- --------- ----------- ------- ---------
September 30, 1996............................ 0 2 80,667 (17,936) (908) 61,825
Net earnings (loss) for the year (as restated,
see Note G)................................. 0 0 0 (5,611) 0 (5,611)
Net cash transfers from Spalding.............. 0 0 8,239 0 0 8,239
Currency translation adjustments.............. 0 0 0 0 (367) (367)
Dividend to Spalding.......................... 0 0 0 (367) 0 (367)
----------- ----------- --------- ----------- ------- ---------
September 30, 1997............................ 0 2 88,906 (23,914) (1,275) 63,719
Net earnings (loss) for the year (as restated,
see Note G)................................. 0 0 0 (9,663) 0 (9,663)
Common stock split............................ 0 9,998 (9,998) 0 0 0
Issuance of preferred stock................... 40,000 0 (40,000) 0 0 0
Additional capital contribution by Spalding... 0 0 26,999 0 0 26,999
Deferred tax adjustment on acquired
trademarks.................................. 0 0 0 (368) 0 (368)
Net cash transfers to Spalding................ 0 0 (4,520) 0 0 (4,520)
Currency translation adjustments.............. 0 0 0 0 (1,720) (1,720)
----------- ----------- --------- ----------- ------- ---------
September 30, 1998............................ 40,000 10,000 61,387 (33,945) (2,995) 74,447
Net earnings (loss)........................... 0 0 0 (8,886) 0 (8,886)
Currency translation adjustments.............. 0 0 0 0 (1,175) (1,175)
----------- ----------- --------- ----------- ------- ---------
December 31, 1998............................. $ 40,000 $ 10,000 $ 61,387 $ (42,831) $ (4,170) $ 64,386
----------- ----------- --------- ----------- ------- ---------
----------- ----------- --------- ----------- ------- ---------
UNAUDITED
September 30, 1997............................ $ 0 $ 2 $ 88,906 $ (23,914) $ (1,275) $ 63,719
Net earnings (loss)........................... 0 0 0 (3,699) 0 (3,699)
Net cash transfers from Spalding.............. 0 0 6,210 0 0 6,210
Currency translation adjustments.............. 0 0 0 0 (313) (313)
----------- ----------- --------- ----------- ------- ---------
December 31, 1997............................. $ 0 $ 2 $ 95,116 $ (27,613) $ (1,588) $ 65,917
----------- ----------- --------- ----------- ------- ---------
----------- ----------- --------- ----------- ------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A--ORGANIZATION
ORGANIZATION AND OPERATION. The accompanying consolidated financial
statements include the accounts of Evenflo Company, Inc. and its wholly-owned
subsidiaries (the "Company"). The Company manufactures and markets, under the
Evenflo, Gerry and Snugli trade names, specialty juvenile products, including
reusable and disposable baby bottle feeding systems, breast-feeding aids,
pacifiers and oral development items, baby bath, health and safety items,
monitors and baby care products and accessories, as well as juvenile car seats,
stationary activity products, strollers, high chairs, portable play yards,
cribs, dressers and changing tables, gates, soft carriers and frame carriers,
child carriers and mattresses. The Company sells its products in the United
States and other countries.
On May 20, 1998, Spalding Holdings Corporation ("Spalding") initiated a
reorganization (the "Reorganization") by realigning the ownership structure of
all of the entities included in the business segment known as Evenflo (the
"Evenflo Segment"). Prior to that date, the Evenflo Segment consisted of the
combined financial statements of Evenflo Company, Inc., a wholly-owned
subsidiary of Spalding, and the other wholly-owned Spalding subsidiaries and
divisions of subsidiaries that either sold infant and juvenile products or that
held the patents and trademarks for those products. In the Reorganization,
Spalding contributed its ownership investments in these other subsidiaries and
divisions of subsidiaries to Evenflo Company, Inc. As a result, Evenflo Company,
Inc. became the parent company of all the other entities included in the Evenflo
Segment. The realignment of these subsidiaries and divisions of subsidiaries was
accounted for as a reorganization of companies under the common control of
Spalding in a manner similar to a pooling of interests. Accordingly, the
financial statement accounts of Evenflo Company, Inc. and subsidiaries were
transferred by Spalding to the Company at Spalding's historical cost.
Prior to August 20, 1998, the Company was a wholly-owned subsidiary of
Spalding and was included in the consolidated financial statements of Spalding.
On August 20, 1998, Spalding completed the recapitalization of the Company (the
"Recapitalization") in which it became a stand-alone company. On that date,
Spalding sold a 51% ownership interest (5,100,000 shares) in the common stock of
the Company to KKR 1996 Fund L.P. ("KKR 1996 Fund"), a Spalding shareholder, for
a purchase price of $25,500 and a 6.6% ownership interest (660,000 shares) in
the common stock of the Company to Great Star Corporation, an affiliate of
Abarco N.V. ("Abarco"), another Spalding shareholder, for a purchase price of
$3,300. In addition KKR 1996 Fund purchased Spalding's investment (400,000
shares) in the Company's Cumulative Preferred Stock (see Note K) for a purchase
price of $40,000. Such preferred stock, having a face value of $40,000 and an
initial dividend rate of 14%, had been issued to Spalding prior to the
Reorganization. Spalding retained a 42.4% ownership interest (4,240,000 shares)
in the outstanding common stock of the Company. Since these transactions
occurred between existing Spalding shareholders, the transactions did not affect
the consolidated financial statements of the Company.
Also on August 20, 1998, as part of the Recapitalization, the Company issued
and sold $110,000 aggregate principal amount of senior notes in a private
offering and entered into a $100,000 revolving credit facility with a syndicate
of banks and other financial institutions, of which the Company borrowed
$10,000. The Company used the proceeds of $120,000 to repay intercompany
indebtedness to Spalding of $110,000 and to pay transaction fees and expenses of
$10,000, of which $6,000 related to the debt issues has been recorded as
deferred financing costs and $4,000 related to other professional services in
the Recapitalization has been expensed. The Company's intercompany payables to
Spalding were $136,999 as
F-7
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A--ORGANIZATION (CONTINUED)
of August 20, 1998, which included the long-term debt payable to Spalding (see
Note H). On that date Spalding made a contribution of capital to the Company in
the amount of $26,999, the amount of the Company's intercompany payables in
excess of the $110,000 repayment.
The Recapitalization and relating financings and transactions have been
accounted for as a recapitalization. Accordingly, the historical carrying values
of the Company's assets and liabilities have not been impacted by such
transactions.
ACQUISITION OF GERRY. On April 21, 1997, the Company acquired certain net
assets of Gerry Baby Products ("Gerry") for a purchase price of $68,652. Gerry
had manufacturing operations in Colorado and in Wisconsin and maintained its
administrative operations in Colorado. Gerry manufactured and/or marketed
specialty juvenile products under the GERRY and SNUGLI brand names. The net
assets acquired consisted of the following:
<TABLE>
<S> <C>
Receivables....................................................... $ 21,117
Inventories....................................................... 20,003
Other current assets.............................................. 11
Property, plant and equipment..................................... 14,324
Intangible assets................................................. 26,823
Other assets...................................................... 53
---------
Total........................................................... 82,331
Accounts payable.................................................. (10,230)
Accrued expenses.................................................. (3,449)
---------
Net assets purchased............................................ $ 68,652
---------
---------
</TABLE>
The intangible assets consist of U.S. trademarks of $16,900, foreign
trademarks of $1,600, non-compete agreements of $1,000 and goodwill of $7,323.
Based on the longevity of the Gerry name, the market penetration of the Gerry
products, and the expectations for the infant and juvenile business as a whole,
the Company believes that the trademarks and goodwill acquired have indefinite
lives; accordingly, the Company is amortizing the trademarks and goodwill over a
40-year period. The non-compete agreements are being amortized over the lives of
the agreements.
The Gerry acquisition was accounted for using the purchase method of
accounting; accordingly, the operating results of Gerry have been included in
the statements of consolidated earnings (loss) and comprehensive earnings (loss)
from the date of acquisition. In applying purchase accounting, inventory was
increased by $1,268, which is the amount of acquired profit related to the
expected future sale of the Gerry finished goods acquired. Accordingly, the
Company's cost of sales for 1997 was increased by $1,268 from selling, in the
ordinary course of business, inventory which was written up to fair value at the
date of acquisition. If the acquisition had taken place at October 1, 1995
rather than in April 1997, unaudited pro forma consolidated net sales and net
earnings (loss) would have been $361,192 and $2,298 for the year ended September
30, 1996 and $358,105 and $(7,296) for the year ended September 30, 1997.
F-8
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Evenflo Company, Inc. and its subsidiaries. All significant
accounts and transactions between the consolidated entities have been eliminated
in consolidation.
CHANGE IN FISCAL YEAR. On September 22, 1998, the Company changed its
fiscal year end from September 30 to December 31.
TRANSACTIONS WITH SPALDING. The Company was included in Spalding's U.S.
cash management system through August 20, 1998. The Company maintains separate
lockbox cash collection accounts and cash disbursement accounts. Each business
day cash was transferred to the Company's cash accounts from the collection
accounts to cover disbursements. If there was a shortfall after such transfer,
Spalding advanced sufficient cash to cover the shortfall. If there was excess
cash, Spalding used the cash to cover Spalding's disbursement needs or pay down
Spalding debt. Spalding maintained credit facilities to be used for the working
capital needs of its various operations including the Company. Interest was
neither credited for the benefit of positive cash flow nor charged for cash
requirements. The net cash transfers were treated as receivables and payables
with Spalding.
Certain Spalding administrative expenses through August 20, 1998 have been
allocated to the Company to reflect assistance provided in the areas of
accounting, auditing, employee relations, insurance, legal, planning, tax and
treasury. These allocations considered the Company's proportionate size as
indicated by net sales. In addition, Spalding allocated out-of-pocket expenses
relating to acquisition activity incurred by Spalding on behalf of the Company.
The Spalding expense allocation was recorded as a charge to operations with a
corresponding increase to the payable to Spalding. Management believes that the
methodology used to allocate the costs is reasonable, but may not necessarily be
indicative of the costs of such services had they been performed by the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The estimated fair value of amounts
reported in the consolidated financial statements have been determined by using
available market information and appropriate valuation methodologies. The fair
value of the note payable to Spalding, which carries a variable interest rate,
approximates the carrying value. The fair value of the Senior Notes at September
30, 1998 and December 31, 1998 was $106,700 and $113,300.
INVENTORIES. Inventories are valued at the lower of cost or market (net
realizable value). Cost for United States inventories has been determined by use
of the last-in, first-out method. Cost for non-U.S. inventories has been
determined by use of the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT. These assets are stated at cost and are
depreciated principally using the straight-line method over estimated useful
lives which range from 3 to 20 years. Certain assets are depreciated for income
tax purposes using accelerated methods. Assets that become fully depreciated are
removed from the asset and related accumulated depreciation accounts when they
are taken out of service.
INTANGIBLE ASSETS. Intangible assets are amortized on the straight-line
basis. The amortization period for trademarks and goodwill is 40 years and for
non-compete agreements is 10 years, the lives of the agreements.
F-9
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS. The carrying values of goodwill and other
intangible assets are reviewed if the facts and circumstances indicate potential
impairment of their carrying values. The Company evaluates the recoverability of
the net carrying value of its property, plant and equipment and its intangible
assets by comparing the carrying values to the estimated future undiscounted
cash flows. A deficiency in these cash flows relative to the carrying amounts is
an indication of the need for a write-down due to impairment. The impairment
write-down would be the difference between the carrying amounts and the fair
value of these assets.
INCOME TAXES. The Company accounts for income taxes under the asset and
liability method as required by Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS No. 109"). Under this method, deferred
income taxes are recognized for the tax consequences of "temporary differences"
by applying enacted statutory rates applicable to future years to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that the change in the rate is enacted.
Through August 20, 1998, Spalding and its United States subsidiaries,
including the Company, were parties to a tax sharing agreement which provided
that each member of the consolidated return group shall pay its share of the
consolidated tax liability based on the ratio of its separate liability to the
aggregate separate liabilities of all group members. A member made or received
compensatory payments to the extent its separate liability differed from its
share of the group's liability.
PRODUCT RECALLS AND SAFETY CAMPAIGNS. At the time a product recall or a
safety campaign becomes probable, the Company accrues the estimated recall costs
using the guidance of Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies," and charges those costs to income (loss) from
operations.
RETIREMENT PLANS AND POSTRETIREMENT BENEFITS. Current service costs of
retirement plans and post-retirement healthcare and life insurance benefits are
accrued annually. Prior service costs resulting from amendments to the plans are
amortized over the average remaining service period of employees expected to
receive benefits.
SPALDING EMPLOYEE STOCK OWNERSHIP PLAN. The Company does not currently have
an employee stock ownership plan; however, certain Company employees were
participants in the Spalding 1996 Employee Stock Ownership Plan. Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value.
Spalding chose to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), and related
interpretations. Spalding uses the intrinsic value method under APB No. 25.
Accordingly, compensation cost for the stock options included under the 1996
Employee Stock Ownership Plan for the Company's employees is measured as the
excess, if any, of the fair value of Spalding's common stock at the date of the
grant over the amount a Company employee must pay to acquire the stock.
F-10
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION. The Company recognizes revenue from product sales when
the goods are shipped and title passes to the customer.
ADVERTISING. Advertising costs are expensed as incurred and included in
selling, general and administrative expenses. Advertising expenses amounted to
$13,441, $17,239, $18,735, $4,531 and $5,142 in the years ended September 30,
1996, 1997 and 1998 and the three months ended December 31, 1997 and 1998.
CURRENCY TRANSLATION. Non-U.S. currency-denominated assets and liabilities
are translated into U.S. dollars at the exchange rates existing at the balance
sheet dates. Income and expense items are translated at the average exchange
rates during the respective periods. Translation adjustments resulting from
fluctuations in the exchange rates are recorded as a separate component of
common shareholders' equity.
USE OF ESTIMATES. The preparation of the accompanying consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingencies at the
date of the consolidated financial statements and of sales and expenses
recognized during the reporting period. Actual results could differ from these
estimates.
CASH FLOWS. The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"). SFAS No. 131 requires public entities to report certain information about
operating segments, their products and services, the geographic areas in which
they operate, and their major customers, in complete financial statements and in
condensed interim financial statements issued to shareholders. The Company
adopted SFAS No. 131 during the three months ended December 31, 1998. This
standard addresses disclosure issues and therefore did not affect the Company's
financial position or results of operations.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132
revises employers' disclosures about pension and other postretirement benefit
plans. SFAS No. 132 is effective for fiscal years beginning after December 15,
1997. This standard addresses disclosure issues and therefore will not affect
the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
these instruments at fair value. The accounting for changes in the fair value of
a derivative (that is, gains and losses) depends upon the intended use of the
derivative and resulting designation if used as a hedge. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning
F-11
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
after June 15, 1999. The Company has not evaluated whether this standard will
have a material effect on its financial position or results of operations.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1996 and
1997 financial statements to conform with the 1998 presentation.
NOTE C--INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------- ------------
1997 1998 1998
--------- --------- ------------
<S> <C> <C> <C>
Finished goods........................................... $ 28,392 $ 23,056 $ 27,698
Work in process.......................................... 9,800 9,824 11,240
Raw materials............................................ 22,529 20,252 13,604
--------- --------- ------------
Total inventories...................................... $ 60,721 $ 53,132 $ 52,542
--------- --------- ------------
--------- --------- ------------
</TABLE>
The cost of 94% of September 30, 1997 and 1998 and 92% of December 31, 1998,
inventories was computed using the last-in, first-out (LIFO) method of inventory
valuation. Use of the LIFO method decreased the September 30, 1997 and 1998 and
December 31, 1998 inventories by $1,123, $1,997 and $2,134, respectively.
NOTE D--PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------- ------------
1997 1998 1998
--------- --------- ------------
<S> <C> <C> <C>
Land..................................................... $ 1,735 $ 2,202 $ 2,202
Buildings and building improvements...................... 22,230 28,140 29,561
Machinery and equipment.................................. 71,309 80,886 81,917
--------- --------- ------------
95,274 111,228 113,680
Accumulated depreciation................................. (34,813) (45,614) (48,799)
--------- --------- ------------
Property, plant and equipment, net..................... $ 60,461 $ 65,614 $ 64,881
--------- --------- ------------
--------- --------- ------------
</TABLE>
F-12
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE E--INTANGIBLE ASSETS, NET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------- ------------
1997 1998 1998
--------- --------- ------------
<S> <C> <C> <C>
United States trademarks................................. $ 39,900 $ 39,900 $ 39,900
Non-U.S. trademarks...................................... 2,720 2,720 2,720
Goodwill................................................. 24,997 24,997 24,997
Non-compete agreements................................... 1,000 1,000 1,000
--------- --------- ------------
68,617 68,617 68,617
Accumulated amortization................................. (20,355) (21,902) (22,288)
--------- --------- ------------
Intangible assets, net................................. $ 48,262 $ 46,715 $ 46,329
--------- --------- ------------
--------- --------- ------------
</TABLE>
Goodwill consists of amounts representing purchase prices of businesses in
excess of the net assets acquired. When Spalding was originally acquired in 1984
from a financial seller, the amount of goodwill related to the Company was
$17,674. When the Company acquired Gerry in 1997 (see Note A), an additional
goodwill amount of $7,323 was recorded.
NOTE F--ACCRUED EXPENSES
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- DECEMBER 31,
1997 1998 1998
--------- --------- ------------
<S> <C> <C> <C>
Compensation and other employee benefits................. $ 5,084 $ 5,051 $ 5,375
Liability for self insurance............................. 10,787 10,832 10,940
Liability for restructuring costs (as restated, see Note
G)..................................................... 7,027 200 197
Other, principally operating expenses.................... 11,414 19,785 20,140
--------- --------- ------------
Total accrued expenses................................. $ 34,312 $ 35,868 $ 36,652
--------- --------- ------------
--------- --------- ------------
</TABLE>
The majority of the Company's employees are covered under insured group
health and workers' compensation insurance programs. Commercial and product
liability insurance coverages are high deductible insured programs. Commercial
liability deductibles are $250 per occurrence. Product liability deductibles are
$500 per occurrence and $3,000 in aggregate. As a supplement to these programs,
the Company carries $75,000 in umbrella coverage. The liability for self
insurance claims shown in the table above covers the deductibles and self
insurance programs and is based upon an annual review by the Company and its
independent actuary of claims filed and claims incurred but not yet reported. In
January 1999, the Company purchased product recall coverage for $525 per year,
with a deductible of $500 per occurrence and a limit of $10,000 per year.
See Note G for details of the liability for restructuring charges.
F-13
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE G--RESTRUCTURING, UNUSUAL AND NON-CASH CHARGES
RESTRUCTURING CHARGES. (as restated, see Note following the table below).
In July 1997, Company management initiated the development of a plan to
integrate the Gerry Colorado administrative and manufacturing operations into
Evenflo's Ohio and Georgia locations. As a result of this plan, the Company
recorded a charge of $8,371 for restructuring costs. At September 30, 1997, the
remaining accrual of $7,027, represented restructuring charges that meet the
definition of "exit costs" in accordance with EITF Issue No. 94-3. This accrual
included: severance and outplacement benefit costs for most of the personnel at
the Gerry Colorado location; shutdown of the facility and termination of the
lease; and other costs, principally asset impairment and costs to settle
supplier contractual obligations arising from, or affected by, the Colorado
shut-down.
The table below shows the components of 1997 and 1998 restructuring
provisions, which include a reserve balance of $7,027 as of September 30, 1997,
and the activity affecting the reserve balance through December 31, 1998, as
follows:
<TABLE>
<CAPTION>
1997 1998
1997 ACTIVITY BALANCE AT ACTIVITY 1998 BALANCE AT
RESTRUCTURING CHARGED TO SEPTEMBER 30, CHARGED TO RESTRUCTURING SEPTEMBER 30,
PROVISION RESERVE 1997 RESERVE PROVISION 1998
------------- ----------- --------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Severance costs................ $ 4,105 $ (163) $ 3,942 $ (3,681) $ (61) $ 200
Facility shutdown.............. 2,630 (201) 2,429 (4,005) 1,576 0
Other.......................... 1,619 (963) 656 (92) (564) 0
------------- ----------- ------- ----------- ------------- -----
Total reserve activity......... $ 8,354 $ (1,327) $ 7,027 $ (7,778) 951 $ 200
----------- ------- ----------- -----
----------- ------- ----------- -----
Additional relocation related
costs........................ 17 1,715
------------- -------------
Restructuring costs for fiscal
1997 and 1998 (see Note)..... $ 8,371 $ 2,666
------------- -------------
------------- -------------
<CAPTION>
BALANCE AT
ACTIVITY CHARGED DECEMBER 31,
TO RESERVE 1998
----------------- ---------------
<S> <C> <C>
Severance costs................ $ (3) $ 197
Facility shutdown.............. 0 0
Other.......................... 0 0
--- -----
Total reserve activity......... $ (3) $ 197
--- -----
--- -----
Additional relocation related
costs........................
Restructuring costs for fiscal
1997 and 1998 (see Note).....
</TABLE>
- ----------------------------------
Note-- On May 6, 1999, after discussion with the staff of the Securities and
Exchange Commission, the Company's management reconsidered its accrual
for computer conversion costs. Such costs were originally accrued as a
component of the Company's restructuring charges in fiscal 1997 and
were reversed in fiscal 1998 when the Company's management adopted a
different approach to resolve its computer conversion requirements. As
a result, restructuring charges in fiscal 1997 have been reduced by
$1,220, and restructuring charges in fiscal 1998 have been increased
by $1,220. The fiscal 1997 and fiscal 1998 financial statements have
been restated to reflect such changes together with the related income
tax benefits of $520.
Explanations of the amounts in the table above are summarized as follows:
- Severance costs of $4,105 were accrued for 176 salaried personnel and 241
collective bargaining unit personnel. Severance payments were made to 128
salaried personnel and 237 collective bargaining unit personnel from
December 1997 through April 1998. The lower number of terminated employees
resulted from individuals voluntarily leaving the Company before
qualifying for the full severance payment.
- Various sections of the facility were closed during the period from
December 1997 through April 1998 and the facility was turned over to the
landlord in July 1998. Costs for facility shutdown of $2,630 include
noncancelable lease obligations and costs to be incurred subsequent to
operations ceasing but prior to termination of the lease. These costs
include repairs to the facilities to meet the
F-14
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE G--RESTRUCTURING, UNUSUAL AND NON-CASH CHARGES (CONTINUED)
landlord's specifications, utilities during the facility closing and
salaries and benefits of employees retained to complete the closure of the
facilities. Actual costs of $1,576 in excess of the original restructuring
accrual were caused by the cessation of operations earlier than
anticipated, resulting in more of the facility costs being considered exit
costs as opposed to ongoing operating costs.
In the year ended September 30, 1998, the Company revised its estimate for
the 1997 restructuring costs and recorded the following: an additional charge of
$1,576 for the Gerry Colorado facility shutdown and a reversal of $625 of
severance and other costs. The Company incurred an additional $1,715 of
restructuring costs in 1998 that did not meet the criteria under EITF 94-3 for
accrual as of September 30, 1997. These costs, which were incurred and recorded
in the year ended September 30, 1998, consist of recruitment and training,
freight on transfer of inventory to Evenflo's Ohio and Georgia locations,
computer conversion costs and costs related to transferring molds and tooling.
The net of the additional 1998 charges and the above reversal of the 1997
restructuring provision are included in the restructuring costs of $2,666 for
the year ended September 30, 1998.
UNUSUAL AND NON-CASH CHARGES. As of December 31, 1998, the Company recorded
a non-cash charge of $7,883 to write down certain inventory to its net
realizable value as a result of management's decision in January 1999 to
discontinue certain products. This non-cash charge is included in cost of sales
for the three months ended December 31, 1998.
The Company incurred unusual costs in the year ended September 30, 1998,
consisting of (i) $235 included in cost of sales to rent warehouse space and
move inventory in order to receive inventory relocated from the Gerry Colorado
warehouse operations to Evenflo's Ohio and Georgia locations, (ii) $159 included
in cost of sales attributable to Project Discovery, a program to improve
productivity and increase capacity levels by reengineering its Piqua, Ohio,
assembly lines and reconfiguring its principal warehouse, (iii) $800 charged to
selling, general and administrative expenses relating to Year 2000 conversion
costs, and (iv) $4,000 charged to selling, general and administrative costs for
professional services related to the Recapitalization of the Company.
The Company incurred unusual costs in the year ended September 30, 1997,
consisting of (i) $2,761 included in cost of sales for Project Discovery, (ii)
$1,268 expensed to cost of sales, as a result of expensing the increase to fair
market value of Gerry's inventory as such inventory was sold, such increase
resulting from the application of purchase accounting in the Gerry acquisition,
(iii) $3,100 charged to cost of sales to write down discontinued Gerry products,
and (iv) $2,629 charged to selling, general and administrative expenses to
combine Evenflo's feeding and furniture operations which were previously managed
separately.
The Company incurred unusual costs in the year ended September 30, 1996,
consisting of (i) $2,310 expensed to selling, general and administrative due to
accounts receivable charge-offs as a result of the bankruptcy of two of its
customers and (ii) $1,302 charged to selling, general and adminstrative expenses
to combine Evenflo's feeding and furniture operations, which were previously
managed separately.
F-15
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE H--LONG-TERM DEBT TO SPALDING
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------- DECEMBER 31,
1997 1998 1998
---------- ---------- ------------
<S> <C> <C> <C>
Note payable to Spalding.......................................... $ 49,120 0 0
Allocated portion of Spalding debt................................ 43,000 0 0
---------- ---------- ------------
Total long-term debt to Spalding.............................. $ 92,120 0 0
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
In 1997 Spalding loaned the Company $49,120 for use in acquiring certain net
assets of Gerry. The note was due September 30, 1999 and carried a variable
interest rate equal to the Spalding weighted average interest rate under the
Spalding borrowings (9.46% at September 30, 1997). This loan was repaid in
connection with the payment of $110,000 to Spalding on August 20, 1998 (see Note
A under "Organization and Operation").
On September 30, 1996, Spalding completed a recapitalization (the "Spalding
Recapitalization"), which was financed in part with the proceeds from certain
bank borrowings by Spalding totaling $425,800. The shares of common stock of
certain of Spalding's domestic subsidiaries (including Evenflo Company, Inc.)
were pledged as collateral and certain of Spalding's subsidiaries (including
Evenflo Company, Inc.) guaranteed the indebtedness under the Spalding bank
borrowings. In connection with Spalding's debt agreements, the Company was
required to comply, along with Spalding, with certain restrictions which, among
others, include meeting or maintaining certain financial ratios and limiting
capital expenditures.
Prior to the Spalding Recapitalization, Evenflo Company, Inc. had guaranteed
the bank borrowings of Spalding (which were repaid from the proceeds of the
Spalding Recapitalization indebtedness) for the year ended September 30, 1996.
As a result of the Evenflo Company, Inc. guarantees, Spalding allocated to
the Company its portion of the Spalding guaranteed indebtedness in the amount of
$43,000 at September 30, 1996 and 1997, the Spalding related deferred financing
costs and the Spalding interest expense for each fiscal year based on respective
fair values at September 30, 1996. Interest expense, including the Company's
share of debt issue cost amortization, on such indebtedness was $3,200, $4,100
and $4,200 for the years ended September 30, 1996 and 1997 and the period from
October 1, 1997 to August 20, 1998. The Company's allocated portion of deferred
financing costs that remained unamortized on August 20, 1998 were $2,000. These
allocations were effected by charging the Company's intercompany indebtedness to
Spalding. Such amounts were included in the intercompany payables to Spalding
that was partially offset by the payment of $110,000 (see Note A). The
unamortized deferred financing costs of $2,000 were written off as an
extraordinary loss on the early extinguishment of debt. The loss is recorded net
of taxes of $696 in the determination of current net earnings (loss).
NOTE I--OTHER LONG-TERM DEBT ARRANGEMENTS
The Company's U.S. operations have certain debt arrangements to support
working capital needs and other general corporate requirements. These debt
arrangements are a secured credit facility (the "Credit Facility") of $100,000
and a borrowing of $110,000 under the 11 3/4% senior notes due 2006 ("Notes").
F-16
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE I--OTHER LONG-TERM DEBT ARRANGEMENTS (CONTINUED)
These debt arrangements are described in greater detail below. The balances of
these debt arrangements are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------- DECEMBER 31,
1997 1998 1998
--------- ---------- ------------
<S> <C> <C> <C>
Bankers' acceptances and letters of credits...................... $ 16,645 $ 28,823 $ 19,725
--------- ---------- ------------
--------- ---------- ------------
Revolving Credit Facility........................................ 0 0 $ 7,800
--------- ---------- ------------
--------- ---------- ------------
11 3/4% Senior Notes due 2006.................................... 0 $ 110,000 $ 110,000
--------- ---------- ------------
--------- ---------- ------------
</TABLE>
CREDIT FACILITY
On August 20, 1998, as part of the Recapitalization (see Note A), the
Company entered into a secured credit facility (the "Credit Facility") with a
syndicate of banks and other financial institutions. The Credit Facility
provides for a $100,000 of commitments for revolving credit loans (the
"Revolving Credit Loans"), which may be used for working capital needs and
general purposes, for special facility obligations (letters of credit and
bankers' acceptances) and for borrowings on same-day notice ("Swingline Loans").
Special facility obligations are limited to a maximum of $55,000, bankers'
acceptances are limited to a maximum of $30,000 and Swingline Loans are limited
to a maximum of $5,000. The Credit Facility terminates on August 19, 2005. On
August 20, 1998, the Company borrowed $10,000 as a Revolving Credit Loan that
was repaid prior to September 30, 1998. At December 31, 1998, the Company had
borrowing availability of approximately $61,033 under the Credit Facility
subject to certain conditions (after giving effect to $7,800 of revolving credit
loans and $31,167 of letters of credit and banker's acceptances, including
$11,442 of commitments for stand-by letters of credit and for letters of credit
that have not yet been executed).
The Revolving Credit Loans bear interest, at the Company's option, at
either: (a) a "base rate" equal to the higher of (i) the federal funds rate plus
0.50% per annum or (ii) the Administrative Agent's prime rate, plus, in each
case, an additional margin ranging from 1.25% to 0% per annum depending on the
then current ratio of total debt to EBITDA, or (b) a "eurodollar rate" plus an
additional margin ranging from 2.50% to 1.0% per annum depending on the then
current ratio of total debt to EBITDA (the "eurodollar margin"). Swingline Loans
may only be made as base rate loans.
The Company pays a commitment fee of 0.50% to 0.30% per annum depending on
the current ratio of total debt to EBITDA. Such fee will be payable quarterly in
arrears and upon termination of the Credit Facility.
The Company pays fees for letters of credit and bankers' acceptances at a
rate per annum equal to the applicable eurodollar margin less 0.125% on all
outstanding letters of credit and unmatured acceptances, plus a fronting fee of
0.125% per annum of the stated amount of each letter of credit. Such fees are
payable quarterly in arrears and will be payable upon termination of the Credit
Facility. In addition, the Company pays customary transaction charges in
connection with any letter of credit or bankers' acceptance.
F-17
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE I--OTHER LONG-TERM DEBT ARRANGEMENTS (CONTINUED)
The Credit Facility prohibits the Company from repurchasing any Notes or the
Company's outstanding preferred stock, subject to limited exceptions. The
Company's obligations under the Credit Facility are secured by a pledge of the
common stock of its material direct domestic subsidiaries and 65% of the common
stock of its material direct foreign subsidiaries, with certain exceptions, as
well as accounts receivable, inventory and certain intangible assets, including
intellectual property, with certain exceptions. In addition, indebtedness under
the Credit Facility is guaranteed by the domestic subsidiaries of the Company,
with certain exceptions.
The Credit Facility contains customary covenants and restrictions on the
Company's ability to engage in certain activities including (i) limitations on
liens, (ii) limitations on consolidations and mergers of the Company and sales
of the assets of the Company, (iii) restrictions on the purchase, redemption or
acquisition of any capital stock, equity interest or any other obligations or
other securities and restrictions on the advances, loans, extension of credit or
capital contributions to, or investment in, other entities, (iv) restrictions on
additional indebtedness to be incurred by the Company, (v) restrictions on
payments of dividends or other distribution of assets, (vi) limits on capital
expenditures, and (vii) compliance with certain financial covenants relating to
an interest coverage ratio and a leverage ratio.
The Credit Facility includes customary events of default.
11 3/4% SENIOR NOTES DUE 2006
In conjunction with the closing of the Reorganization on August 20, 1998
(see Note A), the Company issued $110,000 aggregate principal amount of the
Notes. The Notes will mature on August 15, 2006 and are senior unsecured
obligations of the Company. Interest on the Notes will be payable semiannually
August 15 and February 15 of each year, commencing on February 15, 1999.
The Notes are not redeemable at the option of the Company, in whole, at any
time prior to August 15, 2002. However, at any time on or prior to August 15,
2001, the Company may, at its option, redeem up to 35% of the aggregate
principal amount of the Notes at a redemption price equal to 111 3/4% of the
aggregate principal amount plus accrued interest thereon. Subsequent to August
15, 2002, the Company may redeem any or all of the Notes at decreasing annual
redemption prices ranging from approximately 106% to 100%.
The Company is not required to make mandatory redemptions or sinking fund
payments prior to maturity of the Notes, except if holders request that the
Company repurchase the Notes in the event of a change of control (as defined in
the indenture relating to the Notes) or upon the Company's receipt of the
proceeds of certain asset sales that are not reinvested or applied to reduce
indebtedness within a certain time period. However, the Company, in accordance
with an agreement with the holders of the Notes, is in the process of completing
a public debt offering which will result in the Company's offer to exchange its
Notes for new 11 3/4% Series B Senior Notes due 2006 (the "Exchange Notes"). The
terms of the Exchange Notes are identical in all material respects to the terms
of the Notes, except that the Exchange Notes would be freely transferable by the
holders thereof. If this offering is not completed, the Company may be required
to pay up to an additional 1% interest on the Notes.
F-18
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE I--OTHER LONG-TERM DEBT ARRANGEMENTS (CONTINUED)
The Notes contain customary covenants and restrictions on the Company's
ability to engage in certain activities, which include (i) limitations on
restricted payments for the payment of dividends, (ii) limitations on incurrence
of additional indebtedness and issuance of disqualified stock, (iii)
restrictions on the merger, consolidation, or sale of substantially all assets
of the Company, (iv) limitations on transactions with affiliates relating to the
sale, lease, transfer or disposition of any of its properties or assets in
excess of certain amounts, (v) limitations on guarantees of indebtedness by the
Company, and (vi) certain reporting requirements in accordance with Securities
and Exchange Commission rules.
The Notes include customary events of default.
NOTE J--INCOME TAXES
Earnings (loss) before income taxes and extraordinary loss in the United
States and outside the United States, along with the components of the income
tax provision, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------- ------------------------
1996 1997 1998 1997 1998
--------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Earnings (loss) before income taxes and extraordinary loss:
United States (as restated, see Note G)..................... $ 5,156 $ (12,735) $ (12,630) $ (5,065) $ (14,466)
Other nations............................................... 1,022 2,760 100 111 167
--------- --------- --------- ------------- ---------
Total................................................... $ 6,178 $ (9,975) $ (12,530) $ (4,954) $ (14,299)
--------- --------- --------- ------------- ---------
--------- --------- --------- ------------- ---------
Income tax provision:
Current taxes:
Federal taxes............................................. $ 2,135 $ (1,687) $ 0 $ (2,066) $ 0
State taxes............................................... (39) 83 87 (230) (240)
Other nations' taxes...................................... 403 289 283 128 110
--------- --------- --------- ------------- ---------
Total................................................... 2,499 (1,315) 370 (2,168) (130)
Deferred taxes:
Federal taxes............................................. 316 (2,800) (5,137) 822 (4,963)
State taxes............................................... 22 (249) (100) 91 (320)
--------- --------- --------- ------------- ---------
Total................................................... 338 (3,049) (5,237) 913 (5,283)
--------- --------- --------- ------------- ---------
Total income taxes (benefit)............................ $ 2,837 $ (4,364) $ (4,867) $ (1,255) $ (5,413)
--------- --------- --------- ------------- ---------
--------- --------- --------- ------------- ---------
Allocation of income taxes (benefit):
Income taxes (benefit).................................... $ 3,197 $ (4,364) $ (4,171) $ (1,255) $ (5,413)
Extraordinary loss........................................ (360) 0 (696) 0 0
--------- --------- --------- ------------- ---------
Total................................................... $ 2,837 $ (4,364) $ (4,867) $ (1,255) $ (5,413)
--------- --------- --------- ------------- ---------
--------- --------- --------- ------------- ---------
</TABLE>
F-19
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE J--INCOME TAXES (CONTINUED)
The differences between the effective income tax rate and the U.S. statutory
rate are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------------------- ----------------------------
1996 1997 1998 1997 1998
----- ----- ----- --------------- -----
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
U.S. statutory rate........................................ 35% (35)% (35 )% (35 )% (35 )%
State income taxes, net of federal benefit................. 0 (1 ) 0 0 (3)
Non-U.S. tax rate differences.............................. (1 ) (2 ) 0 0 0
Canada losses (earnings) for which no taxes were recorded
due to net operating loss carryforwards.................. 1 (5 ) 4 4 0
1994 Management Stock Ownership Plan expenses.............. 15 0 0 0 0
Interim underaccrual of benefit............................ 0 0 0 3 0
Other...................................................... 2 (1 ) (2) 3 0
--
--- --- --- ---
Effective tax rate..................................... 52% (44 )% (33)% (25 )% (38 )%
--
--
--- --- --- ---
--- --- --- ---
</TABLE>
Prior to July 31, 1998, a division of a Canadian subsidiary of Spalding was
included in the Evenflo Segment (see Note A). The losses (earnings) of this
division were not subject to income tax because of a net operating loss that was
available to this subsidiary. Accordingly, the Company has not recorded any tax
expense or benefit for the years ended September 30, 1996 and 1997 and for the
period from October 1, 1997 to July 31, 1998.
Under the asset and liability method prescribed by SFAS 109, deferred income
taxes, net of appropriate valuation allowances, are provided for the temporary
differences between the financial reporting and tax basis of assets and
liabilities at currently enacted tax rates. Temporary differences and
carryforwards are as follows:
<TABLE>
<CAPTION>
NONCURRENT NET
CURRENT NET DEFERRED TAX
DEFERRED TAX ASSET ASSET (LIABILITY)
----------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
-------------------- ------------- -------------------- -------------
1997 1998 1998 1997 1998 1998
--------- --------- ------------- --------- --------- -------------
Accrued liabilities............. $ 9,186 $ 8,752 $ 7,618 $ 0 $ 0 $ 0
Inventory....................... 0 689 3,735 0 0 0
Pension......................... 0 0 0 1,147 1,024 1,134
Post-retirement benefits........ 0 0 0 573 530 549
Depreciation.................... 0 0 0 (1,906) (2,834) (2,764)
Intangibles amortization........ 0 0 0 (1,087) (306) (3,144)
Net operating loss
carryforwards................. 0 0 0 438 6,899 12,579
Other........................... 1,408 72 44 810 788 (24)
--------- --------- ------------- --------- --------- -------------
Total deferred income taxes..... 10,594 9,513 11,397 (25) 6,101 8,330
Valuation allowance on state net
operating losses.............. 0 0 0 (438) (670) (670)
--------- --------- ------------- --------- --------- -------------
Net deferred income taxes....... $ 10,594 $ 9,513 $ 11,397 $ (463) $ 5,431 $ 7,660
--------- --------- ------------- --------- --------- -------------
--------- --------- ------------- --------- --------- -------------
</TABLE>
F-20
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE J--INCOME TAXES (CONTINUED)
On September 22, 1998, the Company along with Spalding entered into an
agreement with the Internal Revenue Service ("IRS") completing the audit of the
consolidated federal income tax returns for the years ended September 30, 1994
and 1995, and finally determining the Company's tax liability for those years.
The primary issue in that audit was the tax treatment accorded certain foreign
trademarks acquired from an affiliate. The settlement amount related to the
Company was not significant.
At September 30, 1997 and 1998 and December 31, 1998, undistributed earnings
of non-U.S. subsidiaries of the Company included in consolidated retained
earnings (deficit) amounted to $3,749, $3,493 and $3,694. The Company intends to
continue to indefinitely reinvest these earnings, which reflect full provision
for non-U.S. income taxes, to expand its international operations. Accordingly,
no provision has been made for U.S. income taxes that might be payable upon
repatriation of such earnings.
At December 31, 1998, the Company had $33,812 of federal net operating loss
carryforwards that expire through the year 2014.
NOTE K--SHAREHOLDERS' EQUITY
PREFERRED STOCK. Prior to August 20, 1998, the Company authorized the
issuance of up to 10,000,000 shares of preferred stock, par value of $.01, the
terms of which are to be decided by the Board of Directors of the Company. On
August 20, 1998, the Company issued 400,000 shares of nonvoting, cumulative,
variable rate preferred stock with a face value and liquidation value of $100 a
share (the "Cumulative Preferred Stock") to Spalding (see Note A). On August 20,
1998, Spalding sold the Cumulative Preferred Stock to KKR 1996 Fund for $40,000.
The holder of the Cumulative Preferred Stock is entitled to receive, when,
as and if declared by the Board of Directors, dividends on each outstanding
share of the Cumulative Preferred Stock, at a variable rate based on the
ten-year treasury rate, based on the then effective liquidation preference per
share of Cumulative Preferred Stock. Dividends on the Cumulative Preferred Stock
are payable quarterly in arrears on August 15, November 15, February 15 and May
15 of each year, commencing on November 15, 1998. The initial dividend rate with
respect to the Cumulative Preferred Stock is 14% per annum. The right to
dividends on the Cumulative Preferred Stock is cumulative and dividends accrue
(whether or not declared), without interest, from the date of issuance of the
Cumulative Preferred Stock. Because the Board of Directors has not declared any
preferred dividends through December 31, 1998, the amount of the Cumulative
Preferred Stock dividends in arrears as of that date is $2,041.
The Company at its option may, but shall not be required to, redeem, at any
time, for cash, in whole or in par, any or all of the shares of Cumulative
Preferred Stock at a redemption price equal to 100% of the aggregate liquidation
preference of such shares, together with all accumulated and unpaid dividends to
the redemption date. Upon the occurrence of a "change of control", as defined,
the Company will be required to make an offer to purchase the Cumulative
Preferred Stock for cash at a purchase price of 101% of the liquidation
preference thereof, together with all accumulated and unpaid dividends to the
date of purchase.
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, the holder of the Cumulative Preferred Stock will be entitled to be
paid out of the assets of the Company available for
F-21
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE K--SHAREHOLDERS' EQUITY (CONTINUED)
distribution $100 per share, plus an amount in cash equal to all accumulated and
unpaid dividends thereon to the date fixed for liquidation, dissolution or
winding-up of the Company.
COMMON STOCK. The certificate of incorporation of the Company authorizes
20,000,000 shares of common stock designated as the "Class A Common Stock" and
5,000,000 shares of non-voting common stock designated as the "Class B Common
Stock", each having a par value of $1 a share. As of December 31, 1998,
10,000,000 shares of Class A Common Stock were outstanding and no shares of
Class B Common Stock were outstanding. The holders of Class A Common Stock are
entitled to one vote per share for each share held of record on all matters
submitted to a vote of stockholders. The Class B Common Stock is identical in
all respects to the Class A Common Stock except that holders of Class B Common
Stock do not have any voting rights with the exception of certain special
privileges available under Delaware law.
On August 20, 1998, the Board of Directors authorized a 5,000 to 1 Class A
Common Stock split to be effected in the form of a dividend just prior to the
Recapitalization transactions (see Note A), which increased the shares held by
Spalding from 2,000 to 10,000,000. The par value difference between 2,000 shares
and 10,000,000 shares in the amount of $9,998 was reclassified from paid-in
capital to common stock.
SPALDING 1996 EMPLOYEE STOCK OWNERSHIP PLAN. The Company does not currently
have an employee stock ownership plan; however, certain Company employees were
participants in the Spalding 1996 Employee Stock Ownership Plan.
The Spalding 1996 Employee Stock Ownership Plan consists of an aggregate of
9,800,000 shares of common stock of Spalding, which were sold or granted as
options to key employees of Spalding, including employees of the Company prior
to August 20, 1998. The share issuance price and the option price must be at
least 50% of the fair market value of the common shares on the date of the sale
or grant and an option's maximum term is ten years. The option vests ratably
over a five-year period. Any outstanding options will become immediately
exercisable upon a change in control of Spalding. If an employee retires, any
shares owned may be put to Spalding or Spalding can call the shares based on a
fair market value formula, as defined. If an employee dies, becomes permanently
disabled or terminates employment, Spalding can call the shares based on a fair
market value formula, as defined.
In 1997 and 1998, employees of the Company purchased 385,579 and 74,441
Spalding shares for $1,928 and $372 and were granted 1,269,816 and 260,559
common share options at fair market value. As of September 30, 1998, the
Spalding 1996 Employee Stock Ownership Plan was canceled with respect to Evenflo
employees.
Spalding has elected the disclosure-only basis provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the options. Had
compensation cost been determined based on the fair market value at the grant
date consistent with the method provided by SFAS No. 123, the Company's net
earnings (loss) for the year ended September 30, 1997 on a pro forma basis would
have been $(5,837) as compared to the reported amount of $(5,611).
F-22
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE K--SHAREHOLDERS' EQUITY (CONTINUED)
The estimated fair value was determined using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
the grants to Company employees:
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Dividend yield..................................................... 0%
Expected volatility................................................ 0%
Risk-free interest rate............................................ 6.38%
Option Term........................................................ 5 years
Estimated fair value of granted options............................ $1.37
</TABLE>
NOTE L--PENSION PLANS
The Company's United States operations have noncontributory, defined benefit
pension plans covering substantially all employees. These plans provide
employees with pension benefits that either are based on age and compensation or
are based on stated amounts for each year of service. The Company's funding
policy is to contribute annually the minimum amounts permitted by the Internal
Revenue Code. Plan assets are invested in a broadly diversified portfolio
consisting primarily of common stock and fixed income securities.
Prior to August 20, 1998, Spalding maintained certain pension plans that
covered employees in both the Spalding and Evenflo Segments. Consistent with the
Reorganization, pension plans attributable to the Company have become a
liability to the Company and are included in the Company's balance sheet as of
September 30, 1998. The reorganization of the Spalding pension plans has been
treated as a "Separation of Funds" rather than a combined curtailment and
settlement as described under Statement of Financial Accounting Standards No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits" ("SFAS No. 88"). The net impact of
this accounting is that the Company retains the (accrued)/prepaid balance at
August 20, 1998 and amortizes any deferrals (gains/losses, prior service cost,
transition obligation, etc.) associated with the plans rather than immediately
recognizing them. Pension plan expenses attributable to the Company are included
in the accompanying statement of consolidated earnings (loss) and comprehensive
earnings (loss).
F-23
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE L--PENSION PLANS (CONTINUED)
The funded status of the Company's United States defined benefit pension
plans consists of the following:
<TABLE>
<CAPTION>
ASSETS EXCEED
ACCUMULATED
BENEFITS ACCUMULATED BENEFITS EXCEED ASSETS
------------- -------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
------------- ----------------------- DECEMBER 31,
1997 1997 1998 1998
------------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Actuarial present value of benefits based on service to
date and present pay levels:
Vested................................................... $13,944 $0 $14,800 $14,808
Non-vested............................................... 1,017 78 715 719
------------- ------------ --------- ------------
Accumulated benefit obligation............................. 14,961 78 15,515 15,527
Additional amounts related to projected pay increases...... 201 0 294 287
------------- ------------ --------- ------------
Total projected benefit obligation based on service to
date..................................................... 15,162 78 15,809 15,814
Plan assets at fair value.................................. 15,654 22 14,523 14,523
------------- ------------ --------- ------------
Projected benefit obligation in excess of (less than) plan
assets................................................... (492 ) 56 1,286 1,291
Unamortized net amount resulting from changes in plan
experience and actuarial assumptions..................... 2,241 (9 ) 769 954
Unrecognized net transition obligation..................... 406 0 80 77
Unamortized prior service cost............................. 787 0 1,403 1,362
------------- ------------ --------- ------------
Pension liability.......................................... $2,942 $47 $3,538 $3,684
------------- ------------ --------- ------------
------------- ------------ --------- ------------
</TABLE>
In 1998, there were no plans for which the assets exceeded the accumulated
benefits.
On September 30, 1997 and 1998 and December 31, 1998, the Company's United
States pension liability due currently was $49, $19 and $26, and the long-term
portion was $2,940, $3,519 and $3,658.
The pension expense of the Company's United States defined benefit plans
includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, THREE MONTHS ENDED
------------------------------- DECEMBER 31,
1996 1997 1998 1998
--------- --------- --------- ---------------------
<S> <C> <C> <C> <C>
Benefits earned during the period................................ $ 709 $ 927 $ 1,073 $ 245
Interest accrued on benefits earned in prior years............... 816 748 898 245
Return on plan assets............................................ (732) (789) 238 306
Net amortization................................................. (126) (108) (1,589) (526)
--------- --------- --------- -----
Pension expense of domestic defined benefit pension plans........ $ 667 $ 778 $ 620 $ 270
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>
F-24
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE L--PENSION PLANS (CONTINUED)
Pension expense for the three months ended December 31, 1997 was $443.
Assumptions used in the accounting for United States defined benefit pension
plans as of September 30, 1997 and 1998 and December 31, 1998 were:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- DECEMBER 31,
1997 1998 1998
--------- --------- ---------------
<S> <C> <C> <C>
Discount rate...................................................................... 7.00% 6.25% 6.25%
Rate of increase in compensation levels............................................ 4.50% 4.50% 4.50%
Expected long-term rate of return on assets........................................ 8.50% 8.50% 8.50%
</TABLE>
The Company's United States operations and most non-U.S. subsidiaries have
separate defined contribution plans. The purpose of these defined contribution
plans is generally to provide additional financial security during retirement by
providing employees with an incentive to make regular savings. Company
contributions to the plans are based on employee contributions or compensation.
The non-U.S. plans are integrated with the benefits required by the laws of the
various countries. The Company's defined contribution plans' expenses totaled
$257, $538, $647, $922 and $900 for the years ended September 30, 1996, 1997 and
1998 and the three months ended December 31, 1997 and 1998.
NOTE M--POSTRETIREMENT BENEFITS
The Company provides certain postretirement health care and life insurance
benefits for its domestic retired employees and their dependents. Substantially
all of the Company's United States employees may become eligible for those
benefits if they reach normal retirement age while working for the Company. Most
international employees are covered by government sponsored programs, and the
cost to the Company is not significant. The Company does not fund retiree health
care benefits in advance and has the right to modify these plans in the future.
Consistent with the Reorganization, postretirement benefits attributable to
the Company have become a liability to the Company and are included in the
Company's balance sheet as of September 30, 1998. The reorganization of the
Spalding postretirement benefits has been treated as a "Separation of Funds"
rather than a combined curtailment and settlement as described under SFAS No.
88. The net impact of this accounting is that the Company retains the
(accrued)/prepaid balance at August 20, 1998 and amortizes any deferrals
(gains/losses, prior service cost, transition obligation, etc.) associated with
the plans rather than immediately recognizing them. Postretirement benefit
expenses attributable to the Company are included in the accompanying statement
of consolidated earnings (loss) and comprehensive earnings (loss).
F-25
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M--POSTRETIREMENT BENEFITS (CONTINUED)
The status of the postretirement benefit plans consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- DECEMBER 31,
1997 1998 1998
--------- --------- -------------
<S> <C> <C> <C>
Actuarial present value of benefit obligation based on service to date:
Retirees...................................................................... $ 857 $ 983 $ 983
Fully eligible active participants............................................ 210 184 184
Other active participants..................................................... 341 461 461
--------- --------- ------
Accumulated postretirement benefit obligation................................... 1,408 1,628 1,628
Unamortized net amount resulting from changes in plan experience and actuarial
assumptions................................................................... 74 (269) (245)
--------- --------- ------
Postretirement benefit liability................................................ $ 1,482 $ 1,359 $ 1,383
--------- --------- ------
--------- --------- ------
</TABLE>
On September 30, 1997 and 1998 and December 31, 1998 the postretirement
benefit liability due currently was $12, $0 and $0 and the long-term portion was
$1,470, $1,359 and $1,383.
The 1996, 1997 and 1998 postretirement benefit expense includes the
following components:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, THREE MONTHS
------------------------------- ENDED DECEMBER 31,
1996 1997 1998 1998
--------- --------- --------- ---------------------
<S> <C> <C> <C> <C>
Benefits earned during the period..................................... $ 23 $ 25 $ 42 $ 13
Interest accrued on benefits earned in prior years.................... 94 95 101 25
Net amortization...................................................... 4 (3) (1) (6)
--------- --------- --------- ---
Postretirement benefit expense........................................ $ 121 $ 117 $ 142 $ 32
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
Postretirement benefit expense for the three months ended December 31, 1997
was $13.
F-26
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M--POSTRETIREMENT BENEFITS (CONTINUED)
Assumptions used in the accounting for postretirement benefit plans as of
September 30, 1997 and 1998 and December 31, 1998 were:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- DECEMBER 31,
1997 1998 1998
--------- --------- -------------
<S> <C> <C> <C>
Discount rate....................................................................... 7.00% 6.25% 6.25%
Rate of increase in compensation levels............................................. 4.50% 4.50% 4.50%
Assumed current year health care cost trend rate
Retirees under 65................................................................. 4.00% 7.50% 7.50%
Medicare eligible retirees........................................................ 5.00% 7.50% 7.50%
Assumed ultimate trend rate......................................................... 0.00% 5.00% 5.00%
Year ultimate health care cost rate will be achieved................................ 2003 2003 2003
Effect of 1% increase in health care cost trend rates
Accumulated postretirement benefit obligation..................................... $ 80 $ 144 $ 144
Annual aggregate benefit and interest costs....................................... 10 19 6
</TABLE>
NOTE N--LEASE COMMITMENTS
The Company leases certain manufacturing, warehousing and office facilities,
and equipment under various operating lease arrangements expiring periodically
through 2008. The Company has no material capital leases.
The following is a schedule by year of future minimum rental payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year at December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -------------------------------------------------------------------------------------
<S> <C>
1999................................................................................. $ 571
2000................................................................................. 522
2001................................................................................. 382
2002................................................................................. 311
2003................................................................................. 312
Thereafter........................................................................... 1,294
---------
Total minimum lease payments......................................................... $ 3,392
---------
---------
</TABLE>
Rental expense under operating leases was $531, $1,024, $1,588, $407 and
$156 for the years ended September 30, 1996, 1997 and 1998 and for the three
months ended December 31, 1997 and 1998.
NOTE O--CURRENCY EXCHANGE CONTRACTS
The Company may from time to time enter into forward currency exchange
contracts to protect inventory purchases and affiliated note activities against
changes in future currency exchange rates; however, for the years ended
September 30, 1997 and 1998 and the three months ended December 31, 1998, the
Company did not enter into any forward exchange contracts. A forward currency
exchange
F-27
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE O--CURRENCY EXCHANGE CONTRACTS (CONTINUED)
contract is an agreement between two parties to buy or sell currency at a set
price on a future date. The market value of the contract will fluctuate with
changes in currency exchange rates. The contract is marked-to-market using the
spot rate at the end of each accounting period and the change in market value is
recorded by the Company as currency gain or loss. Risk may arise upon entering
into these contracts from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar. As of September 30, 1997 and 1998 and
December 31, 1998, the Company had no currency contracts outstanding.
NOTE P--CONCENTRATION OF CREDIT RISK
During the years ended September 30, 1996, 1997 and 1998 and the three
months ended December 31, 1997 and 1998, the Company's sales to two U.S.
customers amounted to 34%, 37%, 42%, 35% and 42%, respectively, of net sales. No
other customer exceeded 10% during these periods.
NOTE Q--CONTINGENCIES
The Company is both a plaintiff and defendant in numerous lawsuits
incidental to its operations, some alleging substantial claims. In addition, the
Company's operations are subject to federal, state and local environmental laws
and regulations. The Company has entered into settlement agreements with the
U.S. Environmental Protection Agency and other parties on several sites and is
still negotiating on other sites. The settlement amounts and estimated
liabilities are not significant.
Management is of the opinion that, after taking into account the merits of
defenses, insurance coverage and established reserves, the ultimate resolution
of these matters will not have a material adverse effect in relation to the
Company's consolidated financial statements.
Under an indemnification agreement entered into on August 20, 1998, Spalding
agreed to indemnify the Company for all losses and liabilities of any kind
relating to any non-Company matters and the Company agreed to indemnify Spalding
for all losses and liabilities of any kind relating to the Company's business.
In addition, Spalding agreed to indemnify the Company for the expense of product
recalls and corrective actions relating to products manufactured by the Company
prior to August 20, 1998, the date that Spalding sold control of the Company to
another entity (see Note A). As of December 31, 1998, for active recalls or
corrective actions indemnified by Spalding, the Company has incurred actual
expenses of approximately $43 and recorded a product recall liability for
additional estimated costs of approximately $900. As a result of the
indemnification, the Company has also recorded a receivable from Spalding for
approximately $1,205, which included approximately $912 for the year ended
September 30, 1998 and $293 for the three months ended December 31, 1998. In
January 1999, the Company purchased product recall coverage for $525 per year,
with a deductible of $500 per occurrence and a limit of $10,000 per year.
NOTE R--RELATED PARTY TRANSACTIONS
See Note A--"Organization" for a description of the transactions with
Spalding in connection with the Reorganization.
See Note B--"Summary of Significant Accounting Policies" for transactions
with Spalding, a description of the tax sharing agreement between Spalding and
the Company, certain information concerning the
F-28
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE R--RELATED PARTY TRANSACTIONS (CONTINUED)
cancellation of Spalding's long-term incentive compensation plans and
descriptions of Spalding's employee stock ownership plans.
See Note G--"Long-Term Debt to Spalding" for a description of a note payable
to Spalding to enable the Company to purchase certain net assets of Gerry and of
the methodology used by Spalding in allocating to the Company certain guaranteed
bank debt and related deferred financing costs and interest.
See Note P--"Contingencies" for a description of the mutual indemnification
agreement between the Company and Spalding related to the Reorganization and
resulting separation of the companies.
Effective August 20, 1998, the Company and KKR, an affiliate of the Company,
entered into a management agreement providing for the performance by KKR of
certain management services for the Company for an annual fee of $300, plus
expenses. The Company expensed $33 in the year ended September 30, 1998 and $75
in the three months ended December 31, 1998, pursuant to such management
agreement with KKR.
NOTE S--SEGMENT REPORTING
The Company adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information", during the three months ended December 31, 1998. The adoption of
SFAS 131 resulted in no changes to the prior year segment
F-29
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE S--SEGMENT REPORTING (CONTINUED)
information presentation. The following schedule presents geographical
information about the Company's continuing operations in the infant and juvenile
product markets:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------------------- -----------------------
1996 1997 1998 1997 1998
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
GEOGRAPHIC LOCATION
Net sales
United States........................................ $ 206,421 $ 261,549 $ 304,173 $ 61,755 $ 64,088
Other nations........................................ 30,744 35,194 34,904 7,895 8,464
---------- ---------- ---------- ----------- ----------
Total net sales.................................... $ 237,165 $ 296,743 $ 339,077 $ 69,650 $ 72,552
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
Earnings (loss) before income taxes and extraordinary
loss:
United States (as restated, see Note G).............. $ 14,231 $ 6,903 $ 2,840 $ (1,811) $ (10,246)
Other nations........................................ 1,196 2,856 100 111 167
Allocated Spalding expenses.......................... (2,500) (2,900) (2,566) (700) 0
Restructuring costs.................................. 0 (9,591) (1,446) (60) 0
1994 Management Stock Ownership Plan expense......... (2,621) 0 0 0 0
Interest expense, net................................ (4,128) (7,243) (11,458) (2,494) (4,220)
---------- ---------- ---------- ----------- ----------
Earnings (loss) before income taxes and
extraordinary loss............................... $ 6,178 $ (9,975) $ (12,530) $ (4,954) $ (14,299)
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
Identifiable assets
United States........................................ $ 165,135 $ 240,459 $ 270,714 $ 228,829 $ 257,049
Other nations........................................ 12,256 14,746 14,647 15,177 18,404
---------- ---------- ---------- ----------- ----------
Total assets....................................... $ 177,391 $ 255,205 $ 285,361 $ 244,006 $ 275,453
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
</TABLE>
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Evenflo Company, Inc.:
We have audited the accompanying statements of revenues and direct costs of
Gerry Baby Products ("Gerry") for the years ended December 31, 1995 and 1996.
The statements of revenues and direct costs are the responsibility of Gerry's
management. Our responsibility is to express an opinion on the statements of
revenues and direct costs based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the statements of revenues and direct costs
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statements of revenues
and direct costs. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall statements of revenues and direct costs presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the statements of revenues and direct costs present fairly, in
all material respects, the revenues and direct costs of Gerry for the years
ended December 31, 1995 and 1996 in conformity with generally accepted
accounting principles.
As more fully described in Note B to the statements of revenues and direct
costs, Gerry has been operated as part of a subsidiary of Huffy Corporation
("Huffy") for the years ended December 31, 1995 and 1996. Historically, no
effort was made to quantify or record certain expense allocations and indirect
costs to the portion of the Huffy subsidiary purchased by the Company.
Accordingly, these expense allocations and indirect costs have not been included
in the accompanying statements of revenues and direct costs.
DELOITTE & TOUCHE LLP
Tampa, Florida
July 10, 1998
F-31
<PAGE>
GERRY BABY PRODUCTS
STATEMENTS OF REVENUES AND DIRECT COSTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
---------- ---------- 1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Net sales................................................................... $ 114,437 124,064 33,446
Cost of sales............................................................. 97,155 104,845 28,179
---------- ---------- -----------
Gross profit................................................................ 17,282 19,219 5,267
Direct selling, general and administrative expenses....................... 14,499 15,801 4,705
---------- ---------- -----------
Excess of revenues over direct costs........................................ $ 2,783 3,418 562
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying Notes to Statements of Revenues and Direct Costs.
F-32
<PAGE>
GERRY BABY PRODUCTS
NOTES TO STATEMENTS OF REVENUES AND DIRECT COSTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A--DESCRIPTION OF BUSINESS
On April 21, 1997, Evenflo Company, Inc. ("Evenflo"), acquired certain net
assets of Gerry Baby Products ("Gerry"), a part of a subsidiary of Huffy
Corporation ("Huffy") for $68,652. Gerry manufactures and/or markets specialty
juvenile products including baby bath, health and safety items, monitors and
other baby care products and accessories, as well as juvenile car seats,
strollers, high chairs, cribs, dressers and changing tables, gates and soft
carriers and frame carriers marketed under the GERRY and SNUGLI brand names.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The accompanying statements of revenues and direct
costs reflect the operations of Gerry, operating as a part of a wholly-owned
subsidiary of Huffy, and may not necessarily be indicative of the financial
results had Gerry been operating as a separate entity. Historically, no effort
was made to quantify or record certain expense allocations and indirect costs to
the portion of the Huffy subsidiary purchased by the Company. Allocations to
Gerry for certain expenses such as interest, portions of product liability
costs, legal, insurance, employee benefits, corporate overhead and income taxes
by Huffy are not included in these statements for the years ended December 31,
1995 and 1996 and the three months ended March 31, 1997. Accordingly, the
accompanying statements show only the revenues and direct costs for those
periods.
INVENTORIES. Inventories are valued at the lower of cost (first-in,
first-out) or market.
PROPERTY, PLANT AND EQUIPMENT. Depreciation expense was approximately
$3,200 and $3,600 for the years ended December 31, 1995 and 1996 and $849 for
the three months ended March 31, 1997.
REVENUE RECOGNITION. Gerry recognizes revenue from product sales when the
goods are shipped and title passes to the customer.
USE OF ESTIMATES. The preparation of the accompanying statements of
revenues and direct costs in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of revenues and direct costs during the reporting period.
Actual results could differ from those estimated.
NOTE C--COMMITMENTS AND CONTINGENCIES
Gerry leases certain Colorado manufacturing, warehousing, and office
facilities under a noncancelable lease agreement which expires October 21, 1998.
This lease generally contains a requirement for Gerry to pay taxes, insurance,
maintenance and other expenses in addition to the minimum base rentals. Rental
expense under the operating lease was approximately $1,500 and $1,400 for the
years ended December 31, 1995 and 1996 and $341 for the three months ended March
31, 1997.
In connection with the Evenflo purchase, the Gerry Colorado operations have
been relocated to the Evenflo Ohio and Georgia facilities and the Colorado lease
was cancelled on July 10, 1998.
F-33
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
EXCHANGE NOTES BY ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING THE
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................... 1
Summary Historical and Pro Forma Consolidated
Financial Data................................. 12
Risk Factors..................................... 15
Transactions..................................... 27
Use of Proceeds.................................. 30
Capitalization................................... 30
Pro Forma Condensed Consolidated Financial
Statement...................................... 31
Selected Consolidated Historical Financial
Data........................................... 35
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 38
Business......................................... 51
Management....................................... 64
Certain Relationships and Related Transactions... 70
Principal Shareholders........................... 73
Description of the Credit Facility............... 75
Description of Capital Stock..................... 77
The Exchange Offer............................... 80
Description of the Exchange Notes................ 91
United States Federal Income Tax Consequences.... 129
Plan of Distribution............................. 131
Legal Matters.................................... 132
Experts.......................................... 132
Index to Financial Statements.................... F-1
</TABLE>
EVENFLO COMPANY, INC.
OFFER TO EXCHANGE UP TO
$110,000,000 OF ITS 11 3/4%
SERIES B
SENIOR NOTES DUE 2006
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT,
FOR ANY AND ALL
OF ITS OUTSTANDING
11 3/4% SENIOR NOTES DUE 2006
-----------------
PROSPECTUS
-----------------
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers as well as other
employees and individuals against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative, or
investigative (other than action by or in the right of the corporation a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceedings, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to the corporation. The statute provides that it is not
exclusive of other indemnification that may be granted by a corporation's
charter, by-laws, desinterested director vote, stockholder vote, agreement or
otherwise. The Registrant's Restated Certificate of Incorporation provides that
the Registrant will indemnify directors and officers to the fullest extent
permitted by Delaware law for and against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement reasonably incurred in
connection with any threatened, pending or completed action, suit or proceeding
(brought in the right of the Registrant or otherwise) by a third party or by
such officer or director (in the latter case, only after authorization from the
Board of Directors of the Registrant). The Restated Certificate of Incorporation
also allows the Registrant to indemnify any person that is an employee or agent
to the fullest extent permitted by Delaware law for and against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
reasonably incurred in connection with any threatened, pending or completed
action, suit or proceeding (brought in the right of the Registrant or
otherwise). The Registrant has also obtained officers' and directors' liability
insurance which insures against liabilities that officers and directors of the
Registrant, in such capacities, may incur.
Such 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duties as a director, except for liability (i) for any
transaction from which the director derives an improper personal benefit, (ii)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) for improper payment of dividends or
redemptions of shares, or (iv) for any breach of a director's duty of loyalty to
the company or its stockholders. Article Sixth of the Registrant's Restated
Certificate of Incorporation includes such a provision.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
*2.1 Stock Purchase Agreement dated as of July 30, 1998, between KKR 1996 Fund L.P. and Lisco, Inc.
*2.2 Stock Purchase Agreement, dated as of August 19, 1998, between Great Star Corporation and Lisco, Inc.
*3.1 Restated Certificate of Incorporation of Evenflo Company, Inc. (the "Company").
*3.2 By-Laws of the Company.
*4.1 Indenture dated as of August 20, 1998, between the Company and HSBC Bank USA (formerly known as Marine
Midland Bank), as Trustee (the "Indenture").
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
*4.2 Form of 11 3/4% Senior Note due 2006 (included in Exhibit 4.1).
<C> <S>
*4.3 Form of 11 3/4% Series B Senior Note due 2006 (included in Exhibit 4.1).
*4.4 Registration Rights Agreement dated as of August 20, 1998, among the Company, Donaldson, Lufkin &
Jenrette Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and BancAmerica
Robertson Stephens.
**5 Opinion of Simpson Thacher & Bartlett.
*10.1 Credit Facility, dated as of August 20, 1998, among the Company, the several lenders from time to time
parties thereto, and Bank of America National Trust and Savings Association, as administrative agent.
*10.2 Stockholders' Agreement, dated as of August 20, 1998, among the Company, KKR 1996 Fund L.P. and Lisco,
Inc.
*10.3 Stockholders' Agreement, dated as of August 20, 1998, among the Company, KKR 1996 Fund L.P. and Great
Star Corporation.
*10.4 Registration Rights Agreement, dated as of August 20, 1998, between the Company and KKR 1996 Fund L.P.
*10.5 Indemnity Agreement, dated as of August 20, 1998, between the Company and Evenflo & Spalding Holdings
Corporation.
*10.6 Transition Services Agreement, dated as of August 20, 1998, between the Company and Evenflo & Spalding
Holdings Corporation.
*10.7 Tax Allocation and Indemnification Agreement, dated as of August 20, 1998, between the Company and
Evenflo & Spalding Holdings Corporation.
*10.8 Change in Control Severance Agreement dated as of January 4, 1999, between the Company and George A.
Harris.
*10.10 Management Fee Agreement dated as of August 20, 1998, between the Company and KKR.
**12 Computation of Ratio of Earnings to Fixed Charges.
*21 List of Subsidiaries.
**23.1 Consent of Simpson Thacher & Bartlett (included as part of its opinion filed as Exhibit 5 hereto).
**23.2 Consent of Deloitte & Touche LLP, independent auditors, with respect to the Company.
**23.3 Consent of Deloitte & Touche LLP, independent auditors, with respect to Gerry Baby Products.
*24 Powers of Attorney (included on page II-6).
*25 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of the Trustee.
**27.1 Amended Financial Data Schedule for the year ended September 30, 1997.
**27.2 Amended Financial Data Schedule for the year ended September 30, 1998.
*27.3 Financial Data Schedule for the three months ended December 31, 1998.
**99.1 Form of Letter of Transmittal.
**99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
- ------------------------
* Previously filed.
** Filed herewith.
(b) Financial Statement Schedules
Schedule II--Valuation Accounts and Reserves
II-2
<PAGE>
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereto), which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed to be underwriters, in addition to the information
called for by the other Items of the applicable form.
The Registrant undertakes that every prospectus: (i) that is filed pursuant
to the immediately preceding undertaking or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other
II-3
<PAGE>
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, on May 10, 1999.
<TABLE>
<S> <C> <C>
EVENFLO COMPANY, INC.
By: /s/ RONALD P. MORAN
-----------------------------------------
Vice President, General Counsel and
Secretary
</TABLE>
Pursuant to the requirements of the Securities Act, this Amendment to the
Registration Statement has been signed on the 10th day of May, 1999 by the
following persons in the capacities indicated:
SIGNATURE TITLE
- ------------------------------ ---------------------------
Chairman of the Board of
* Directors and Chief
- ------------------------------ Executive Officer
Richard W. Frank (Principal Executive
Office)
Senior Vice
* President--Finance
- ------------------------------ (Principal Financial and
Daryle A. Lovett Accounting Officer)
* Director
- ------------------------------
Henry R. Kravis
Director
- ------------------------------
George R. Roberts
* Director
- ------------------------------
Michael T. Tokarz
* Director
- ------------------------------
Marc S. Lipschultz
Director
- ------------------------------
Edwin L. Artzt
*By: /s/ RONALD P. MORAN
-------------------------
ATTORNEY-IN-FACT
II-5
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULES
SCHEDULE II - VALUATION ACCOUNTS AND RESERVES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
THREE MONTHS ENDED DECEMBER 31, 1998 9/30/98 ADDITIONS DEDUCTIONS 12/31/98
- ------------------------------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Doubtful accounts and allowances.................................. $ 1,592 $ 0 $ (415) $ 1,177
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
YEAR ENDED SEPTEMBER 30, 1998 9/30/97 ADDITIONS DEDUCTIONS 9/30/98
- ------------------------------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Doubtful accounts and allowances.................................. $ 1,407 $ 384 $ (199) $ 1,592
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
YEAR ENDED SEPTEMBER 30, 1997 9/30/96 ADDITIONS DEDUCTIONS 9/30/97
- ------------------------------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Doubtful accounts and allowances.................................. $ 1,108 $ 1,355 $ (1,056) $ 1,407
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
YEAR ENDED SEPTEMBER 30, 1996 9/30/95 ADDITIONS DEDUCTIONS 9/30/96
- ------------------------------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Doubtful accounts and allowances.................................. $ 1,166 $ 2,605 $ (2,663) $ 1,108
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ---------- ------------------------------------------------------------------------------------------- -------------
<C> <S> <C>
*2.1 Stock Purchase Agreement dated as of July 30, 1998, between KKR 1996 Fund L.P. and Lisco,
Inc.
*2.2 Stock Purchase Agreement, dated as of August 19, 1998, between Great Star Corporation and
Lisco, Inc.
*3.1 Restated Certificate of Incorporation of Evenflo Company, Inc. (the "Company").
*3.2 By-Laws of the Company.
*4.1 Indenture dated as of August 20, 1998, between the Company and HSBC Bank USA (formerly
known as Marine Midland Bank), as Trustee (the "Indenture").
*4.2 Form of 11 3/4% Senior Note due 2006 (included in Exhibit 4.1).
*4.3 Form of 11 3/4% Series B Senior Note due 2006 (included in Exhibit 4.1).
*4.4 Registration Rights Agreement dated as of August 20, 1998, among the Company, Donaldson,
Lufkin & Jenrette Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and BancAmerica Robertson Stephens.
**5 Opinion of Simpson Thacher & Bartlett.
*10.1 Credit Facility, dated as of August 20, 1998, among the Company, the several lenders from
time to time parties thereto, and Bank of America National Trust and Savings Association,
as administrative agent.
*10.2 Stockholders' Agreement, dated as of August 20, 1998, among the Company, KKR 1996 Fund L.P.
and Lisco, Inc.
*10.3 Stockholders' Agreement, dated as of August 20, 1998, among the Company, KKR 1996 Fund L.P.
and Great Star Corporation.
*10.4 Registration Rights Agreement, dated as of August 20, 1998, between the Company and KKR
1996 Fund L.P.
*10.5 Indemnity Agreement, dated as of August 20, 1998, between the Company and Evenflo &
Spalding Holdings Corporation.
*10.6 Transition Services Agreement, dated as of August 20, 1998, between the Company and Evenflo
& Spalding Holdings Corporation.
*10.7 Tax Allocation and Indemnification Agreement, dated as of August 20, 1998, between the
Company and Evenflo & Spalding Holdings Corporation.
*10.8 Change in Control Severance Agreement dated as of January 4, 1999, between Evenflo Company,
Inc. and George A. Harris.
*10.10 Management Fee Agreement dated as of August 20, 1998, between the Company and KKR.
**12 Computation of Ratio of Earnings to Fixed Charges.
*21 List of Subsidiaries.
**23.1 Consent of Simpson Thacher & Bartlett (included as part of its opinion filed as Exhibit 5
hereto).
**23.2 Consent of Deloitte & Touche LLP, independent auditors, with respect to the Company.
**23.3 Consent of Deloitte & Touche LLP, independent auditors, with respect to Gerry Baby
Products.
*24 Powers of Attorney (included on page II-6).
*25 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of the Trustee.
**27.1 Amended Financial Data Schedule for the year ended September 30, 1997.
**27.2 Amended Financial Data Schedule for the year ended September 30, 1998.
*27.3 Financial Data Schedule for the three months ended December 31, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ---------- ------------------------------------------------------------------------------------------- -------------
**99.1 Form of Letter of Transmittal.
<C> <S> <C>
**99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
- ------------------------
* Previously filed.
** Filed herewith.
<PAGE>
EXHIBIT 5
[LETTERHEAD OF SIMPSON THACHER & BARTLETT]
May 7, 1999
Evenflo Company, Inc.
Northwoods Business Center II
707 Crossroads Court
Vandalia, Ohio 45377
Ladies and Gentlemen:
We have acted as counsel to Evenflo Company, Inc., a Delaware corporation
(the "Company"), in connection with the Registration Statement on Form S-4 (the
"Registration Statement") filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended,
relating to the issuance by the Company of $110,000,000 aggregate principal
amount of its 11 3/4% Series B Senior Notes due 2006 (the "Exchange Notes"). The
Exchange Notes will be issued under an indenture (the "Indenture") between the
Company and HSBC Bank USA (formerly known as Marine Midland Bank), as Trustee.
The Exchange Notes will be offered by the Company in exchange for $110,000,000
aggregate principal amount of its outstanding 11 3/4% Senior Notes due 2006 (the
"Notes").
We have examined the Registration Statement and the form of the Indenture,
which has been filed with the Commission as an exhibit to the Registration
Statement. We have also examined the originals, or duplicates or certified or
conformed copies, of such records, agreements, instruments and other documents
and have made such other and further investigations as we have deemed relevant
and necessary in connection with the opinions expressed herein. As to questions
of fact material to this opinion, we have relied upon certificates of public
officials and of officers and representatives of the Company.
In such examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as duplicates or certified or conformed copies, and the
authenticity of the originals of such latter documents.
Based upon the foregoing, and subject to the qualifications and limitations
stated herein, we are of the opinion that, assuming the Indenture has been duly
authorized and validly executed and delivered by the parties thereto, when (a)
the Board of Directors of the Company, a duly constituted and acting committee
of such Board or duly authorized officers of the Company has or have taken all
necessary corporate action to approve the issuance and terms of the Exchange
Notes, the terms of the exchange and related matters, and (b) the Exchange Notes
have been duly executed, authenticated, issued and delivered in accordance with
the provisions of the Indenture upon the exchange, the Exchange Notes will
constitute binding obligations of the Company.
Our opinion set forth above is subject to the effects of bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other similar
laws relating to or affecting creditors' rights generally and general equitable
principles (whether considered in a proceeding in equity or at law).
We are members of the Bar of the State of New York and we do not express any
opinion herein concerning any law other than the law of the State of New York.
We hereby consent to the filing of this opinion letter as Exhibit 5 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus included in the Registration Statement.
Very truly yours,
/s/ SIMPSON THACHER & BARTLETT
SIMPSON THACHER & BARTLETT
<PAGE>
EXHIBIT 12
EVENFLO COMPANY, INC. AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED SEPTEMBER 30,
ENDED DECEMBER 31, -----------------------------------------------------
1998 1998 1997 1996 1995 1994
------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss) before income taxes..... (14,299) (12,530) (9,975) 6,178 3,197 7,579
-------- --------- --------- --------- --------- ---------
Fixed charges:
Rent expense (per supplemental P &
L).................................. 595 3,429 2,439 1,644 1,217 708
divided by 3.......................... 3 3 3 3 3 3
-------- --------- --------- --------- --------- ---------
1/3 of annual rental expense........ 198 1,143 813 548 406 236
Interest expense & deferred financing
costs (per statement of earnings)..... 4,220 11,458 7,243 4,128 4,273 1,203
-------- --------- --------- --------- --------- ---------
Total fixed charges............... 4,418 12,601 8,056 4,676 4,679 1,439
-------- --------- --------- --------- --------- ---------
Earnings (loss) before fixed
charges (see Note).............. (9,881) 71 (1,919) 10,854 7,876 9,018
Ratio of earnings to fixed charges...... N/A 0.01 N/A 2.32 1.68 6.27
If ratio < 1, value should be amount of
loss before income taxes.............. (14,299) (12,530) (9,975) 0 0 0
</TABLE>
Note--in years in which the earnings (loss) before income taxes is a loss, this
calculation is N/A.
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES
We consent to the use in this Amendment No. 3 to the Registration Statement (No.
333-64893) of Evenflo Company, Inc. on Form S-4 of our report dated February 19,
1999 (May 6, 1999, with respect to the Note to the table in Note G) appearing in
the Prospectus, which is a part of this Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the consolidated financial statement
schedules of Evenflo Company, Inc. and subsidiaries listed in Item 21 (b). These
consolidated financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Dayton, Ohio
May 6, 1999
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to the Registration Statement (No.
333-64893) of Evenflo Company, Inc. on Form S-4 of our report dated July 10,
1998, (relating to the statements of revenues and direct costs of Gerry Baby
Products) appearing in the Prospectus, which is a part of this Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Tampa, Florida
May 6, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,536
<SECURITIES> 0
<RECEIVABLES> 69,112
<ALLOWANCES> 1,407
<INVENTORY> 60,721
<CURRENT-ASSETS> 142,873
<PP&E> 95,274
<DEPRECIATION> 34,813
<TOTAL-ASSETS> 255,205
<CURRENT-LIABILITIES> 90,647
<BONDS> 95,966
0
0
<COMMON> 2
<OTHER-SE> 63,717
<TOTAL-LIABILITY-AND-EQUITY> 255,205
<SALES> 296,743
<TOTAL-REVENUES> 296,743
<CGS> 235,925
<TOTAL-COSTS> 235,925
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,243
<INCOME-PRETAX> (9,975)
<INCOME-TAX> (4,364)
<INCOME-CONTINUING> (5,611)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,611)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,142
<SECURITIES> 0
<RECEIVABLES> 90,104
<ALLOWANCES> 1,592
<INVENTORY> 53,132
<CURRENT-ASSETS> 160,238
<PP&E> 111,228
<DEPRECIATION> 45,614
<TOTAL-ASSETS> 285,361
<CURRENT-LIABILITIES> 98,036
<BONDS> 110,000
0
40,000
<COMMON> 10,000
<OTHER-SE> 24,447
<TOTAL-LIABILITY-AND-EQUITY> 285,361
<SALES> 339,077
<TOTAL-REVENUES> 339,077
<CGS> 270,708
<TOTAL-COSTS> 270,708
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,458
<INCOME-PRETAX> (12,530)
<INCOME-TAX> (4,171)
<INCOME-CONTINUING> (8,359)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,304)
<CHANGES> 0
<NET-INCOME> (9,663)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
LETTER OF TRANSMITTAL
FOR
11 3/4% SENIOR NOTES
DUE 2006
OF
EVENFLO COMPANY, INC.
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1999 (THE "EXPIRATION DATE") UNLESS EXTENDED BY EVENFLO
COMPANY, INC.
- --------------------------------------------------------------------------------
EXCHANGE AGENT:
HSBC Bank USA
<TABLE>
<S> <C> <C>
BY HAND: BY MAIL: BY OVERNIGHT EXPRESS:
HSBC Bank USA (Insured or Registered Recommended) HSBC Bank USA
140 Broadway, Level A HSBC Bank USA 140 Broadway, Level A
New York, New York 10005-1180 140 Broadway, Level A New York, New York 10005-1180
Attention: Paulette Shaw New York, New York 10005-1180 Attention: Paulette Shaw
Attention: Paulette Shaw
BY FACSIMILE:
(212) 658-2292
(For Eligible Institutions Only)
BY TELEPHONE:
(212) 658-5931
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER
THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges receipt of the Prospectus dated May , 1999
(the "Prospectus") of Evenflo Company, Inc. (the "Company"), and this Letter of
Transmittal (the "Letter of Transmittal"), which together describe the Company's
offer (the "Exchange Offer") to exchange $1,000 in principal amount of its new
11 3/4% Series B Senior Notes due 2006 (the "Exchange Notes") for each $1,000 in
principal amount of outstanding 11 3/4% Senior Notes due 2006 (the "Old Notes").
The terms of the Exchange Notes are identical in all material respects
(including principal amount, interest rate and maturity) to the terms of the Old
Notes for which they may be exchanged pursuant to the Exchange Offer, except
that the Exchange Notes are freely transferable by holders thereof (except as
provided herein or in the Prospectus) and are not subject to any covenant
regarding registration under the Securities Act of 1933, as amended (the
"Securities Act").
The undersigned has checked the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
<PAGE>
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS
CAREFULLY BEFORE CHECKING ANY BOX BELOW
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE INSTRUCTIONS
INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED. QUESTIONS AND
REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS
LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
List below the Old Notes to which this Letter of Transmittal relates. If the
space provided below is inadequate, the Certificate Numbers and Principal
Amounts should be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES TENDERED HEREWITH
- -----------------------------------------------------------------------------------------------------------------
AGGREGATE
NAME(S) AND ADDRESS(ES) PRINCIPAL AMOUNT PRINCIPAL
OF REGISTERED HOLDER(S) CERTIFICATE REPRESENTED AMOUNT
(PLEASE FILL IN) NUMBER(S)* BY OLD NOTES* TENDERED**
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
TOTAL
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry holders.
** Unless otherwise indicated, the holder will be deemed to have tendered the
full aggregate principal amount represented by such Old Notes. See
instruction 2.
This Letter of Transmittal is to be used either if certificates representing
Old Notes are to be forwarded herewith or if delivery of Old Notes is to be made
by book-entry transfer to an account maintained by the Exchange Agent at The
Depository Trust Company, pursuant to the procedures set forth in "The Exchange
Offer--Procedures for Tendering Old Notes" in the Prospectus. Delivery of
documents to the book-entry transfer facility does not constitute delivery to
the Exchange Agent.
Holders whose Old Notes are not immediately available or who cannot deliver
their Old Notes and all other documents required hereby to the Exchange Agent on
or prior to the Expiration Date must tender their Old Notes according to the
guaranteed delivery procedure set forth in the Prospectus under the caption "The
Exchange Offer--Procedures for Tendering Old Notes."
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution ______________________________________________
/ / The Depository Trust Company ______________________________________________
Account Number _____________________________________________________________
Transaction Code Number ____________________________________________________
<PAGE>
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s) _______________________________________________
Name of Eligible Institution that Guaranteed Delivery ______________________
Date of Execution of Notice of Guaranteed Delivery _________________________
If Delivered by Book-Entry Transfer:
Account Number _____________________________________________________________
/ / CHECK HERE IF EXCHANGE NOTES ARE TO BE DELIVERED TO PERSON OTHER THAN
PERSON SIGNING THE LETTER OF TRANSMITTAL:
Name _______________________________________________________________________
(PLEASE PRINT)
Address ____________________________________________________________________
________________________________________
________________________________________
(INCLUDING ZIP CODE)
/ / CHECK HERE IF EXCHANGE NOTES ARE TO BE DELIVERED TO ADDRESS DIFFERENT FROM
THAT LISTED ELSEWHERE IN THIS LETTER OF TRANSMITTAL:
Address ____________________________________________________________________
(INCLUDING ZIP CODE)
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THIS PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO:
Name _______________________________________________________________________
Address ____________________________________________________________________
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Old Notes that were acquired as result
of market-making activities or other trading activities, it acknowledges that it
will deliver a prospectus in connection with any resale of such Exchange Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. A broker-dealer may not participate in the Exchange Offer
with respect to Old Notes acquired other than as a result of market-making
activities or other trading activities. Any holder who is an "affiliate" of the
Company or who has an arrangement or understanding with respect to the
distribution of the Exchange Notes to be acquired pursuant to the Exchange
Offer, or any broker-dealer who purchased Old Notes from the Company to resell
pursuant to Rule 144A under the Securities Act or any other available exemption
under the Securities Act must comply with the registration and prospectus
delivery requirements under the Securities Act.
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the above-described principal amount
of the Old Notes indicated above. Subject to, and effective upon, the acceptance
for exchange of the Old Notes tendered herewith, the undersigned hereby
exchanges, assigns and transfers to, or upon the order of, the Company all
right, title and interest in and to such Old Notes. The undersigned hereby
irrevocably constitutes and appoints the Exchange Agent the true and lawful
agent and attorney-in-fact of the undersigned (with full knowledge that said
Exchange Agent acts as the agent of the Company, in connection with the Exchange
Offer) to cause the Old Notes to be assigned, transferred and exchanged. The
undersigned represents and warrants that it has full power and authority to
tender, exchange, assign and transfer the Old Notes and to acquire Exchange
Notes issuable upon the exchange of such tendered Old Notes, and that, when the
same are accepted for exchange, the Company will acquire good and unencumbered
title to the tendered Old Notes, free and clear of all liens, restrictions,
charges and encumbrances and not subject to any adverse claim. The undersigned
also warrants that it will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the exchange, assignment and transfer of tendered Old
Notes or transfer ownership of such Old Notes on the account books maintained by
the book-entry transfer facility. The undersigned further agrees that acceptance
of any and all validly tendered Old Notes by the Company and the issuance of
Exchange Notes in exchange therefor shall constitute performance in full by the
Company of its obligations under the Registration Rights Agreement (as defined
in the Prospectus) and that the Company shall have no further obligations or
liabilities thereunder except as provided in the first paragraph of Section 2 of
said agreement.
The Exchange Offer is subject to certain conditions as set forth in the
Prospectus under the caption "The Exchange Offer--Certain Conditions to the
Exchange Offer." The undersigned recognizes that as a result of these conditions
(which may be waived, in whole or in part, by the Company), as more particularly
set forth in the Prospectus, the Company may not be required to exchange any of
the Old Notes tendered hereby and, in such event, the Old Notes not exchanged
will be returned to the undersigned at the address shown above. In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date if
any of the conditions set forth under "The Exchange Offer--Certain Conditions to
the Exchange Offer" occur.
By tendering, each holder of Old Notes represents that the Exchange Notes
acquired in the exchange will be obtained in the ordinary course of such
holder's business, that such holder has no arrangement with any person to
participate in the distribution of such Exchange Notes, that such holder is not
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act and that such holder is not engaged in, and does not intend to
engage in, a distribution of the Exchange Notes. Any holder of Old Notes using
the Exchange Offer to participate in a distribution of the Exchange Notes (i)
cannot rely on the position of the staff of the Securities and Exchange
Commission (the "Commission") enunciated in its interpretive letter with respect
to Exxon Capital Holdings Corporation (available April 13, 1989) or similar
letters and (ii) must comply with the registration and prospectus requirements
of the Securities Act in connection with a secondary resale transaction.
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Old Notes that were acquired as a
result of market-making activities or other trading activities, it acknowledges
that it will deliver a prospectus in connection with any resale of such Exchange
Notes, however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. A broker-dealer may not participate in the
Exchange Offer with respect to Old Notes acquired other than as a result of
market-making activities or other trading activities.
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned. Tendered Old Notes may be withdrawn at any time
prior to the Expiration Date in accordance with the terms of this Letter of
Transmittal. See Instruction 2.
<PAGE>
Certificates for all Exchange Notes delivered in exchange for tendered Old
Notes and any Old Notes delivered herewith but not exchanged, and registered in
the name of the undersigned, shall be delivered to the undersigned at the
address shown below the signature of the undersigned.
TENDER HOLDER(S) SIGN HERE
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9)
______________________________________________________________________________
______________________________________________________________________________
SIGNATURE(S) OF HOLDER(S)
Dated ____________________ Area Code and Telephone Number ___________________
(MUST BE SIGNED BY REGISTERED HOLDER(S) EXACTLY AS NAME(S) APPEAR(S) ON
CERTIFICATE(S) FOR OLD NOTES. IF SIGNATURE IS BY A TRUSTEE, EXECUTOR,
ADMINISTRATOR, GUARDIAN, ATTORNEY-IN-FACT, OFFICER OF A CORPORATION OR OTHER
PERSON ACTING IN A FIDUCIARY OR REPRESENTATIVE CAPACITY, PLEASE SET FORTH THE
FULL TITLE OF SUCH PERSON.) SEE INSTRUCTION 3.
Name(s) ______________________________________________________________________
(PLEASE PRINT)
Capacity (full title) ________________________________________________________
Address ______________________________________________________________________
(INCLUDING ZIP CODE)
Area Code and Telephone No. __________________________________________________
Taxpayer Identification No. __________________________________________________
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED--SEE INSTRUCTION 3)
Authorized Signature _________________________________________________________
Name _________________________________________________________________________
Title ________________________________________________________________________
Address ______________________________________________________________________
Name of Firm _________________________________________________________________
Area Code and Telephone No. __________________________________________________
Dated ________________________________________________________________________
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES.
A holder of Old Notes may tender the same by (i) properly completing and
signing this Letter of Transmittal or a facsimile hereof (all references in the
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees
and any other document required by this Letter of Transmittal, to the Exchange
Agent at its address set forth above on or prior to the Expiration Date (or
complying with the procedure for book-entry transfer described below) or (ii)
complying with the guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE OLD NOTES AND ANY
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER, AND EXCEPT
AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, IT IS
SUGGESTED THAT REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED,
BE USED. IN ALL CASES SUFFICIENT TIME SHOULD BE ALLOWED TO PERMIT TIMELY
DELIVERY. NO OLD NOTES OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO THE COMPANY.
If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the Exchange Notes to be issued in exchange therefor are to
be issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in The Depository Trust Company (also referred to as a
"book-entry transfer facility") whose name appears on a security listing as the
owner of Old Notes), the signature of such signer need not be guaranteed. In any
other case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed by
the registered holder, and the signature on the endorsement or instrument of
transfer must be guaranteed by a bank, broker, dealer, credit union, savings
association, clearing agency or other institution (each an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Securities Exchange Act of
1934, as amended. If the Exchange Notes and/or Old Notes not exchanged are to be
delivered to an address other than that of the registered holder appearing on
the note register for the Old Notes, the signature on the Letter of Transmittal
must be guaranteed by an Eligible Institution.
The Exchange Agent will make a request within two business days after the
date of receipt of this Prospectus to establish accounts with respect to the Old
Notes at the book-entry transfer facility for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of Old Notes by causing such book-entry transfer
facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the book-entry transfer facility's
procedures for such transfer. Although delivery of Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the book-entry
transfer facility, an appropriate Letter of Transmittal with any required
signature guarantee and all other required documents must in each case be
transmitted to and received or confirmed by the Exchange Agent on or prior to
the Expiration Date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
<PAGE>
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received on
or prior to the Expiration Date, a letter, telegram or facsimile transmission
(receipt confirmed by telephone and an original delivered by guaranteed
overnight courier) from an Eligible Institution setting forth the name and
address of the tendering holder, the names in which the Old Notes are registered
and, if possible, the certificate numbers of the Old Notes to be tendered, and
stating that the tender is being made thereby and guaranteeing that within three
business days after the Expiration Date, the Old Notes in proper form for
transfer (or a confirmation of book-entry transfer of such Old Notes into the
Exchange Agent's account at the book-entry transfer facility), will be delivered
by such Eligible Institution together with a properly completed and duly
executed Letter of Transmittal (and any other required documents). Unless Old
Notes being tendered by the above-described method are deposited with the
Exchange Agent within the time period set forth above (accompanied or preceded
by a properly completed Letter of Transmittal and any other required documents),
the Company may, at its option, reject the tender. Copies of the notice of
guaranteed delivery ("Notice of Guaranteed Delivery") which may be used by
Eligible Institutions for the purposes described in this paragraph are available
from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the book-entry transfer facility)
is received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
from an Eligible Institution is received by the Exchange Agent. Issuances of
Exchange Notes in exchange for Old Notes tendered pursuant to a Notice of
Guaranteed Delivery or letter, telegram or facsimile transmission to similar
effect (as provided above) by an Eligible Institution will be made only against
deposit of the Letter of Transmittal (and any other required documents) and the
tendered Old Notes.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders appear on the Old Notes.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders, by execution of this Letter of Transmittal (or
facsimile thereof), shall waive any right to receive notice of the acceptance of
the Old Notes for exchange.
2. PARTIAL TENDERS; WITHDRAWALS.
If less than the entire principal amount of Old Notes evidenced by a
submitted certificate is tendered, the tendering holder should fill in the
principal amount tendered in the box entitled "Principal Amount Tendered." A
newly issued certificate for the principal amount of Old Notes submitted but not
tendered will be sent to such holder as soon as practicable after the Expiration
Date. All Old Notes delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise clearly indicated.
<PAGE>
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter must
be received by the Exchange Agent at the address set forth herein prior to the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) specify the principal
amount of Old Notes to be withdrawn, (iv) include a statement that such holder
is withdrawing his election to have such Old Notes exchanged, (v) be signed by
the holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered or as otherwise described
above (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee under the Indenture
register the transfer of such Old Notes into the name of the person withdrawing
the tender and (vi) specify the name in which any such Old Notes are to be
registered, if different from that of the Depositor. The Exchange Agent will
return the properly withdrawn Old Notes promptly following receipt of notice of
withdrawal. If Old Notes have been tendered pursuant to the procedure for
book-entry transfer, any notice of withdrawal must specify the name and number
of the account at the book-entry transfer facility to be credited with the
withdrawn Old Notes or otherwise comply with the book-entry transfer facility
procedure. All questions as to the validity of notices of withdrawals, including
time of receipt, will be determined by the Company and such determination will
be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account with such
book-entry transfer facility specified by the holder) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described under the caption "Procedures for Tendering Old Notes" in
the Prospectus at any time on or prior to the Expiration Date.
3. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES.
If this Letter of Transmittal is signed by the registered holder(s) of the
Old Notes tendered hereby, the signature must correspond with the name(s) as
written on the face of the certificates without alteration, enlargement or any
change whatsoever.
If any of the Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If a number of Old Notes registered in different names are tendered, it will
be necessary to complete, sign and submit as many separate copies of this Letter
of Transmittal as there are different registrations of Old Notes.
When this Letter of Transmittal is signed by the registered holder or
holders (which term, for the purposes described herein, shall include the
book-entry transfer facility whose name appears on a security listing as the
owner of the Old Notes) of Old Notes listed and tendered hereby, no endorsements
of certificates or separate written instruments of transfer or exchange are
required.
<PAGE>
If this Letter of Transmittal is signed by a person other than the
registered holder or holder of the Old Notes listed, such Old Notes must be
endorsed or accompanied by separate written instruments of transfer or exchange
in form satisfactory to the Company and duly executed by the registered holder,
in either case signed exactly as the name or names of the registered holder or
holders appear(s) on the Old Notes.
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
Endorsements on certificates or signatures on separate written instruments
of transfer or exchange required by this Instruction 3 must be guaranteed by an
Eligible Institution.
Signatures on this Letter of Transmittal need not be guaranteed by an
Eligible Institution, provided the Old Notes are tendered: (i) by a registered
holder of such Old Notes, for the holder of such Old Notes; or (ii) for the
account of an Eligible Institution.
4. TRANSFER TAXES.
The Company shall pay all transfer taxes, if any, applicable to the transfer
and exchange of Old Notes to it or its order pursuant to the Exchange Offer. If,
however, certificates representing Exchange Notes or Old Notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or are to
be issued in the name of, any person other than the registered holder of the Old
Notes tendered, or if tendered Old Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a transfer
tax is imposed for any reason other than the exchange of Old Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exception therefrom
is not submitted herewith the amount of such transfer taxes will be billed
directly to such tendering holder.
Except as provided in this Instruction 4, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
5. WAIVER OF CONDITIONS.
The Company reserves the right to waive in its reasonable judgment, in whole
or in part, any of the conditions to the Exchange Offer set forth in the
Prospectus.
6. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed,
should contact the Exchange Agent at the address indicated above for further
instructions.
<PAGE>
7. SUBSTITUTE FORM W-9.
Each holder of Old Notes whose Old Notes are accepted for exchange (or other
payee) is required to provide a correct taxpayer identification number ("TIN"),
generally the holder's Social Security or federal employer identification
number, and with certain other information, on Substitute Form W-9, which is
provided under "Important Tax Information" below, and to certify that the holder
(or other payee) is not subject to backup withholding. Failure to provide the
information on the Substitute Form W-9 may subject the holder (or other payee)
to a $50 penalty imposed by the Internal Revenue Service and 31% federal income
tax backup withholding on payments made in connection with the Exchange Notes.
The box in Part 3 of the Substitute Form W-9 may be checked if the holder (or
other payee) has not been issued a TIN and has applied for a TIN or intends to
apply for a TIN in the near future. If the box in Part 3 is checked and a TIN is
not provided by the time any payment is made in connection with the Exchange
Notes, 31% of all such payments will be withheld until a TIN is provided.
8. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent at the address and telephone number set forth
above. In addition, all questions relating to the Exchange Offer, as well as
requests for assistance or additional copies of the Prospectus and this Letter
of Transmittal, may be directed to Evenflo Company, Inc., Northwoods Business
Center II, 707 Crossroads Court, Vandalia, Ohio 45377, Attention: Secretary
(telephone: (937) 415-3300).
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF (TOGETHER WITH
CERTIFICATES FOR OLD NOTES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER
REQUIRED DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE
EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
<PAGE>
IMPORTANT TAX INFORMATION
Under U.S. Federal income tax law, a holder of Old Notes whose Old Notes are
accepted for exchange may be subject to backup withholding unless the holder
provides Marine Midland Bank (as payor) (the "Paying Agent"), through the
Exchange Agent, with either (i) such holder's correct taxpayer identification
number ("TIN") on Substitute Form W-9 attached hereto, certifying that the TIN
provided on Substitute Form W-9 is correct (or that such holder of Old Notes is
awaiting a TIN) and that (A) the holder of Old Notes has not been notified by
the Internal Revenue Service that he or she is subject to backup withholding as
a result of a failure to report all interest or dividends or (B) the Internal
Revenue Service has notified the holder of Old Notes that he or she is no longer
subject to backup withholding; or (ii) an adequate basis for exemption from
backup withholding. If such holder of Old Notes is an individual, the TIN is
such holder's social security number. If the Paying Agent is not provided with
the correct taxpayer identification number, the holder of Old Notes may be
subject to certain penalties imposed by the Internal Revenue Service.
Certain holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. Exempt holders of Old Notes should indicate their exempt
status on Substitute Form W-9. In order for a foreign individual to qualify as
an exempt recipient, the holder must submit a Form W-8, signed under penalties
of perjury, attesting to that individual's exempt status. A Form W-8 can be
obtained from the Paying Agent. See the enclosed "Guidelines for Certification
of Taxpayer Identification Number on Substitute Form W-9" for more instructions.
If backup withholding applies, the Paying Agent is required to withhold 31%
of any such payments made to the holder of Old Notes or other payee. Backup
withholding is not an additional tax. Rather, the tax liability of persons
subject to backup withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be obtained from
the Internal Revenue Service.
The box in Part 3 of the Substitute Form W-9 may be checked if the
surrendering holder of Old Notes has not been issued a TIN and has applied for a
TIN or intends to apply for a TIN in the near future. If the box in Part 3 is
checked, the holder of Old Notes or other payee must also complete the
Certificate of Awaiting Taxpayer Identification Number below in order to avoid
backup withholding. Notwithstanding that the box in Part 3 is checked and the
Certificate of Awaiting Taxpayer Identification Number is completed, the Paying
Agent will withhold 31% of all payments made prior to the time a properly
certified TIN is provided to the Paying Agent.
The holder of Old Notes is required to give the Paying Agent the TIN (e.g.,
social security number or employer identification number) of the record owner of
the Old Notes. If the Old Notes are in more than one name or are not in the name
of the actual owner, consult the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional guidance
on which number to report.
<PAGE>
/GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER FOR THE PAYEE (YOU)
TO GIVE THE PAYER.--Social security numbers have nine digits separated by two
hyphens: i.e., 000-00-0000. Employee identification numbers have nine digits
separated by only one hyphen: i.e., 00-0000000. The table below will help
determine the number to give the payer. All "Section" references are to the
Internal Revenue Code of 1986, as amended. "IRS" is the Internal Revenue
Service.
<TABLE>
<CAPTION>
GIVE THE SOCIAL SECURITY
FOR THIS TYPE OF ACCOUNT: NUMBER OF--
- --------------------------- ---------------------------
<S> <C>
1. Individual The individual
2. Two or more individuals The actual owner of the
(joint account) account or, if combined
funds, the first individual
on the account(1)
3. Custodian account of a The minor(2)
minor (Uniform Gift to
Minors Act)
4. a. The usual revocable The grantor-trustee(1)
savings trust account
(grantor is also
trustee)
b. So-called trust The actual owner(1)
account that is not a
legal or valid trust
under state law
5. Sole proprietorship The owner(3)
<CAPTION>
GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT: IDENTIFICATION NUMBER OF--
- --------------------------- ---------------------------
<S> <C>
6. Sole proprietorship The owner(3)
7. A valid trust, estate, The legal entity(4)
or pension trust
8. Corporate The corporation
9. Association, club, The organization
religious, charitable,
educational, or other
tax-exempt organization
account
10. Partnership The partnership
11. A broker or registered The broker or nominee
nominee
12. Account with the The public entity
Department of
Agriculture in the name
of a public entity
(such as a state or
local government,
school district, or
prison) that receives
agricultural program
payments
</TABLE>
- ------------------------------
(1) List first and circle the name of the person whose number you furnish. If
only one person on a joint account has a social security number, that
person's number must be furnished.
(2) Circle the minor's name and furnish the minor's social security number.
(3) You must show your individual name, but you may also enter your business or
"doing business as" name. You may use either your social security number or
your employer identification number (if you have one).
(4) List first and circle the name of the legal trust, estate, or pension trust.
(Do not furnish the taxpayer identification number of the personal
representative or trustee unless the legal entity itself is not designated
in the account title.)
NOTE: IF NO NAME IS CIRCLED WHEN THERE IS MORE THAN ONE NAME, THE NUMBER WILL BE
CONSIDERED TO BE THAT OF THE FIRST NAME LISTED.
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5. Application for a Social Security Card, at the local
Social Administration office, or Form SS-4, Application for Employer
Identification Number, by calling 1 (800) TAX-FORM, and apply for a number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
PAYEES SPECIFICALLY EXEMPTED FROM WITHHOLDING INCLUDE:
- - An organization exempt from tax under Section 501(a), an individual retirement
account (IRA), or a custodial account under Section 403(b)(7), if the account
satisfies the requirements of Section 401(f)(2).
- - The United States or a state thereof, the District of Columbia, a possession
of the United States, or a political subdivision or wholly-owned agency or
instrumentality of any one or more of the foregoing.
- - An international organization or any agency or instrumentality thereof.
- - A foreign government and any political subdivision, agency or instrumentality
thereof.
PAYEES THAT MAY BE EXEMPT FROM BACKUP WITHHOLDING INCLUDE:
- - A corporation.
- - A financial institution.
- - A dealer in securities or commodities required to register in the United
States, the District of Columbia, or a possession of the United States.
- - A real estate investment trust.
- - A common trust fund operated by a bank under Section 584(a).
- - An entity registered at all times during the tax year under the Investment
Company Act of 1940.
- - A middleman known in the investment community as a nominee or who is listed in
the most recent publication of the American Society of Corporate Secretaries,
Inc., Nominee List.
- - A futures commission merchant registered with the Commodity Futures Trading
Commission.
- - A foreign central bank of issue.
PAYMENTS OF DIVIDENDS AND PATRONAGE DIVIDENDS GENERALLY EXEMPT FROM BACKUP
WITHHOLDING INCLUDE:
- - Payments to nonresident aliens subject to withholding under Section 1441.
- - Payments to partnerships not engaged in a trade or business in the United
States and that have at least one nonresident alien partner.
- - Payments of patronage dividends not paid in money.
- - Payments made by certain foreign organizations.
- - Section 404(k) payments made by an ESOP.
PAYMENTS OF INTEREST GENERALLY EXEMPT FROM BACKUP WITHHOLDING INCLUDE:
- - Payments of interest on obligations issued by individuals. NOTE: You may be
subject to backup withholding if this interest is $600 or more and you have
not provided your correct taxpayer identification number to the payer.
- - Payments of tax-exempt interest (including exempt-interest dividends under
Section 852).
- - Payments described in Section 6049(b)(5) to nonresident aliens.
<PAGE>
- - Payments on tax-free covenant bonds under Section 1451.
- - Payments made by certain foreign organizations.
- - Mortgage interest paid to you.
Certain payments, other than payments of interest, dividends, and patronage
dividends, that are exempt from information reporting are also exempt from
backup withholding. For details, see the regulations under sections 6041, 6041A,
6042, 6044, 6045, 6049, 6050A and 6050N.
EXEMPT PAYEES DESCRIBED ABOVE MUST FILE FORM W-9 OR A SUBSTITUTE FORM W-9 TO
AVOID POSSIBLE ERRONEOUS BACKUP WITHHOLDING. FILE THIS FORM WITH THE PAYER,
FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" IN PART II OF THE
FORM, AND RETURN IT TO THE PAYER. IF THE PAYMENTS ARE OF INTEREST, DIVIDENDS, OR
PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM.
PRIVACY ACT NOTICE.--Section 6109 requires you to provide your correct taxpayer
identification number to payers, who must report the payments to tje IRS. The
IRS uses the number for identification purposes and may also provide this
information to various government agencies for tax enforcement or litigation
purposes. Payers must be given the numbers whether or not recipients are
required to file tax returns. Payers must generally withhold 31% of taxable
interest, dividend, and certain other payments to a payee who does not furnish a
taxpayer identification number to payer. Certain penalties may also apply.
PENALTIES
(1) FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail to furnish
your taxpayer identification number to a payer, you are subject to a penalty of
$50 for each such failure unless your failure is due to reasonable cause and not
to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis that results in no backup
withholding, you are subject to a $500 penalty.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Willfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX
CONSULTANT OR THE INTERNAL REVENUE SERVICE.
<PAGE>
PAYER'S NAME:
<TABLE>
<C> <S> <C>
- ---------------------------------------------------------------------------------------------------------
SUBSTITUTE Part 1--PLEASE PROVIDE YOUR TIN IN THE BOX AT RIGHT AND Social Security Number(s)
FORM W-9 CERTIFY BY SIGNING AND DATING BELOW or
Department of the -------------------------
Treasury Employer Identification
Internal Revenue Number(s)
Service
-------------------------------------------------------------------------------------
Payer's Request for Part 2--CERTIFICATION--Under penalty of perjury, I Part 3--Awaiting TIN / /
Taxpayer certify that:
Identification (1) The number shown on this form is my correct taxpayer
Number ("TIN") identification number (or I am waiting for a number to
be issued for me), and
(2) I am not subject to backup withholding because (a) I
am exempt from backup withholding, or (b) I have not
been notified by the Internal Revenue Service (the
"IRS") that I am subject to backup withholding as a
result of a failure to report all interest or
dividends, or (c) the IRS has notified me that I am
no longer subject to backup withholding.
-------------------------------------------------------------------------------------
CERTIFICATION INSTRUCTIONS--You must cross out item (2) above if you have been
notified by the IRS that you are currently subject to backup withholding because of
under reporting interest or dividends on your tax return. However, if after being
notified by the IRS that you were subject to backup withholding you received another
notification from the IRS that you are no longer subject to backup withholding, do
not cross out such item (2).
SIGNATURE
--------------------------------------------------------
DATE
--------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
NOTE: NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY
PAYMENTS MADE TO YOU PURSUANT TO THE OFFER, PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION
OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has not been issued to me,
and either (1) I have mailed or delivered an application to receive a taxpayer identification number to
the appropriate Internal Revenue Service Center or Social Security Administration Office or (2) I intend
to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer
identification number by the time of payment, 31% of all reportable cash payments made to me will be
withheld.
Signature ------------------------------------------------- Date----------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF ALL OUTSTANDING
11 3/4% SENIOR NOTES
DUE 2006
IN EXCHANGE FOR NEW
11 3/4% SERIES B SENIOR NOTES DUE 2006
OF
EVENFLO COMPANY, INC.
Registered holders of outstanding 11 3/4% Senior Notes due 2006 (the "Old
Notes") who wish to tender their Old Notes in exchange for a like principal
amount of new 11 3/4% Series B Senior Notes due 2006 (the "Exchange Notes") and
whose Old Notes are not immediately available or who cannot deliver their Old
Notes and Letter of Transmittal (and any other documents required by the Letter
of Transmittal) to HSBC Bank USA (formerly known as Marine Midland Bank) (the
"Exchange Agent") prior to the Expiration Date, may use this Notice of
Guaranteed Delivery or one substantially equivalent hereto. This Notice of
Guaranteed Delivery may be delivered by hand or sent by facisimile transmission
(receipt confirmed by telephone and an original delivered by guaranteed
overnight courier) or mail to the Exchange Agent. See "The Exchange
Offer--Procedure for Tendering Old Notes" in the Prospectus.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
MARINE MIDLAND BANK
<TABLE>
<CAPTION>
BY HAND: BY MAIL:
<S> <C>
HSBC Bank USA (INSURED OR REGISTERED RECOMMENDED)
140 Broadway, Level A HSBC Bank USA
New York, New York 10005-1180 140 Broadway, Level A
Attention: Paulette Shaw New York, New York 10005-1180
Attention: Paulette Shaw
</TABLE>
BY OVERNIGHT EXPRESS:
HSBC Bank USA
140 Broadway, Level A
New York, New York 10005-1180
Attention: Paulette Shaw
BY FACSIMILE:
(212) 658-2292
(For Eligible Institutions Only)
BY TELEPHONE:
(212) 658-5931
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER
THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an Eligible Institution (as defined in the Prospectus), such
signature guarantee must appear in the applicable space provided on the Letter
of Transmittal for Guarantee of Signatures.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders the principal amount of Old Notes indicated
below, upon the terms and subject to the conditions contained in the Prospectus
dated May , 1999 of Evenflo Company, Inc. (the "Prospectus"), receipt of which
is hereby acknowledged.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
DESCRIPTION OF SECURITIES TENDERED
-------------------------------------------------------------------------------------------
NAME AND
ADDRESS OF
REGISTERED
HOLDER AS IT CERTIFICATE PRINCIPAL
APPEARS ON THE NUMBER(S) AMOUNT
OLD NOTES OF OLD NOTES OF OLD NOTES
NAME OF TENDERING HOLDER (PLEASE PRINT) TENDERED TENDERED
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
THE FOLLOWING GUARANTEE MUST BE COMPLETED
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Securities Exchange Act of
1934, as amended, hereby guarantees to deliver to the Exchange Agent at one of
its addresses set forth above, the certificates representing the Old Notes (or a
confirmation of book-entry transfer of such Old Notes into the Exchange Agent's
account at the book-entry transfer facility), together with a properly completed
and duly executed Letter of Transmittal (or facsimile thereof), with any
required signature guarantees, and any other documents required by the Letter of
Transmittal within three business days after the Expiration Date (as defined in
the Prospectus and the Letter of Transmittal).
<TABLE>
<S> <C>
Name of Firm: (Authorized Signature)
Address: Title:
(Zip Code) Name:
Area Code and Telephone No.: Date: (Please type or print)
</TABLE>
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY. OLD
NOTES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL.
