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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________
Commission File No.: 333-64893
EVENFLO COMPANY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1360477
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
707 Crossroads Court, Vandalia, Ohio 45377
(Address of principal executive offices, Zip Code)
(937) 415-3300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. /X/
The number of shares of common stock outstanding of the registrant's common
stock, par value $1.00 per share, at December 31, 1999 was 10,000,000.
DOCUMENTS INCORPORATED BY REFERENCE : None
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EVENFLO COMPANY, INC. AND SUBSIDIARIES
1999 FORM 10-K
TABLE OF CONTENTS
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Pages
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Part I
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Item 1. Business 3 - 10
Item 2. Properties 11
Item 3. Legal Proceedings 12 -15
Item 4. Submission of Matters to a Vote of Security Holders 15
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18 - 24
Item 7A Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data 26 - 50
Item 9. Changes in and Disagreements with Accountants on Accounting 51
and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant 51 - 53
Item 11. Executive Compensation 54 - 56
Item 12. Security Ownership of Certain Beneficial Owners and
Management 56 - 57
Item 13. Certain Relationships and Related Transactions 58 - 59
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 60 - 61
Signatures 62
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PART I
ITEM 1. BUSINESS
THE COMPANY
Evenflo Company, Inc. ("Evenflo" or the "Company") is one of the
largest manufacturers and marketers of specialty juvenile products, including
juvenile travel systems, car seats, strollers, child carriers - soft carriers
and frame carriers, stationary activity products, gates, reusable and
disposable baby bottle feeding systems, breast-feeding aids, as well as,
pacifiers and oral development items, monitors and baby care products and
accessories, high chairs, portable play yards, cribs and mattresses, dressers
and changing tables. 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 retailers as Toys "R" Us, Wal-Mart, Kmart, Target and Sears. The Company
sells its products in the United States and many international markets.
The Company reports all financial information contained in this
report in United States Dollars ("$") in thousands.
ORGANIZATION
Evenflo Company, Inc. became a stand-alone company as a result of
the following series of transactions:
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 know 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 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 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, (the "Closing Date") 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) of the common stock of the Company to KKR 1996 Fund L.P.,
("KKR 1996 Fund"), a Delaware limited partnership affiliated with Kohlberg
Kravis Roberts & Co. L.P. ("KKR"), a Spalding shareholder, for a purchase
price of $25,500 and a 6.6% ownership interest (660,000 shares)
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in the common stock of the Company to Great Star Corporation ("Great Star"),
an affiliate of Abarco N.V. ("Abarco"), another Spalding shareholder, for a
purchase price of $3,300 (collectively, the "Stock Acquisitions"). In
addition KKR 1996 Fund purchased Spalding's investment (400,000 shares) in
the Company's Cumulative preferred Stock for a purchase price of $40,000 (the
"Preferred Stock Investment"). Such preferred stock, having a face value of
$40,000 and an initial dividend of 14%, had been issued to Spalding prior to
the Reorganization. Spalding 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"). 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 (other than the Preferred
Stock Distribution described above) did not affect the consolidated financial
statements of the Company. KKR is a private equity firm specializing in
management buyouts.
On the Closing Date, the Company (i) issued and sold $110,000
aggregate principal amount of senior notes (the "Notes") in a notes offering
(the "Offering") and (ii) entered into a $100,000 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 $10,000 under the Credit Facility (with an additional $42,000 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 document as the
"Financings".
The Company applied the proceeds of the Financings to repay
approximately $110,000 of indebtedness owed to Spalding as part of the Stock
Acquisitions, as described above, and pay transaction fees and expenses of
approximately $10,000.
The Financings, the Preferred Stock Distribution, the Preferred
Stock Investment, the Stock Acquisitions and the repayment of approximately
$110,000 of indebtedness, which was owed to Spalding, are collectively
referred to in this document as the "Transactions".
In December 1999, KKR 1996 Fund L.P. purchased the 4,240,000 shares
of Common Stock owned by Spalding. After this purchase, KKR 1996 Fund owns
93.4% of the Company's outstanding Common Stock.
CHANGE IN FISCAL YEAR.
In 1998, the Company changed its fiscal year end from September 30
to December 31.
GENERAL
Evenflo distinguishes itself from its competitors by developing
innovative, high quality products, which have sometimes redefined their
product categories. 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-.
The Company operates under one operating segment. (See Note R to
Financial Statements). The Company's products fall into four principal
categories, representing the daily activities in which
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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 $108,000 to improve its operations, expand its product lines
and support the growth of its base business. For the three months ending
December 31, 1998, the Company invested $1,219 on new products and facilities
maintenance. During 1999 the Company spent $3,573 on new products and $2,919
on maintenance, replacement and expansion. In 1999, the Company completed an
$11,563 project to upgrade the Company's computer systems, spending $6,809
during 1999 and $4,754 in 1998. In March 1998, Evenflo completed a $15,900
capital expenditure program ($12,800 of which was invested in fiscal 1997 and
fiscal 1998) ("Project Discover") 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
$68,652 (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 $7,400 to integrate the Gerry
operations into the Company's Piqua, Ohio and Canton, Georgia plants. The
Company realized significant production efficiencies 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
had 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 $7,883 non-cash charge in the
three months ended December 31, 1998 to eliminate certain items of inventory
that were not to be carried forward. During 1999, the Company refined the
inventory control process with the implementation of a tightly controlled SKU
add/drop ("SKAD") process. As of December 31, 1999, the Company had disposed
of $5,294 of such inventory, leaving $2,589 to be scrapped or sold. The
Company believes the remaining items will be eliminated during 2000 and this
effort will contribute to a reduction in inventory levels and an improvement
in margins.
CUSTOMERS
The five largest customers of Evenflo represented approximately 74%
of Evenflo's gross U.S. sales for the year ended December 31, 1999. For 1999,
the five largest customers were Toys"R"Us, Wal-Mart, K-Mart, Target and Sears
representing 35%, 13%, 10%, 9% and 7%, respectively, of gross U.S. sales for
such period. For fiscal 1998, the five largest customers of Evenflo
represented approximately 72% of Evenflo's gross sales with Toys"R"Us,
Wal-Mart, Target, Sears and K-Mart representing 30%, 17%, 9%, 8% and 7%,
respectively, of gross U.S. sales for such period. No other customer
accounted for more than 10% of Evenflo's worldwide gross 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
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Company's products are sold in the United States and in 61 foreign countries.
The Company's sales organization in the United States is divided into
national accounts, non-national accounts and food and drug accounts. Customer
business teams provide service to each of Evenflo's five largest customers;
Toys'R'Us, Wal-Mart, Sears, Target and Kmart. For other U.S. accounts, the
Company's selling efforts are conducted through 12 independent manufacturer's
representatives. Food and drug accounts are sold through 8 food brokers that
carry Evenflo's merchandise.
GROWTH OUTSIDE THE UNITED STATES
Evenflo believes that the 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 61 foreign
countries, with established operations in Canada, Mexico and the Philippines.
International sales represented $42,411 or 13% of Evenflo's net sales in
1999. For the years ended September 30, 1997 and 1998 international sales
totaled $35,194 and $34,904 respectively. For the 1998 three months ended
December 31, 1998 international sales were $8,464.
The Company's international sales have historically been made
primarily through its Canadian, Mexican and Philippine operations and
independent distributors selling to customers in 61 foreign countries.
Recently, the Company has begun to develop additional sales and marketing
capabilities in targeted markets. 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.
MARKETING
Evenflo's marketing efforts are focused on building brand preference
by developing products that meet consumer needs, and communicating this
through targeted web site efforts, advertising, packaging and point of sale
programs. The Company conducts extensive research on juvenile products
industry trends, including consumer buying habits, consumer interests and
focus-group research with parents. The Company utilizes 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, and OshKosh in
co-branded product offerings such as new infant mattresses by
SERTA-Registered Trademark-, and Feeding Time products decorated with DISNEY
BABIES-Registered Trademark- characters. As part of its co-branding
strategy, Evenflo 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
olok 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 in-store promotional displays for
products, including new
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product introductions. Advertising and promotion expenditures amounted to
approximately 6% of Evenflo's net sales in 1999, 1998 and 1997.
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 SAFE KIDS CAMPAIGN-Registered
Trademark-. Marketing is supported at the consumer level through the
Company's Internet site (www.evenflo.com), Parent Link-TM-, and through a
toll-free consumer hotline staffed by Evenflo Parent Link-TM- Resource
Center service representatives to address questions on products and safety.
ENGINEERING AND PRODUCT DEVELOPMENT
Evenflo dedicates substantial resources to its product development
efforts. In 1999, the Company spent $2,669 on new product research and
development. As of December 31, 1999, Evenflo's research and development
group has developed 212 U.S. patents and 63 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 introduced a higher-end travel
system in 1999. Each new product Evenflo develops is subjected to extensive
evaluation for quality and safety. At December 31, 1999, Evenflo had 41
patents pending at the U.S. Patent and Trademark Office.
SUPPLY CHAIN
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 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 good manufacturing feeder plant for the final assembly
operations in Ohio. Evenflo's cribs are manufactured and assembled at a
facility in Tijuana, Mexico, while other wood products (primarily gates) are
produced at its plant in Suring, Wisconsin. In 1998, the Company 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 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 Discover, Evenflo believes
it is the only major U.S. juvenile products manufacturer with ISO 9000
registration status.
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Evenflo's sourced products are manufactured according to its
specifications by third-party manufacturers 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
and 1999 net sales. For the three months ended December 31, 1998 and twelve
months ended December 31, 1999, sales of products which were manufactured in
foreign countries represented approximately 41% of the Company's net sales.
Lerado China Limited, Hong Kong , China, accounted for products representing
approximately 14% and 22% of Evenflo's fiscal 1998 and 1999 net sales
respectively. 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.
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. 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.
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
Newell/Rubbermaid Inc.(owner of Century/Graco,) Cosco Division of Doral,
First Years, Fisher-Price Division of Mattel, Gerber, Johnson & Johnson,
Kolcraft, Playtex and 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 and the number of points of distribution are key
factors in determining retail sales of juvenile care products. A competitor
that is able to maintain or increase points of distribution and the amount of
retail space allocated to its product may gain a competitive advantage for
that product. The allocation of retail points of distribution and shelf 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
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competitive factors varies from customer to customer and from product to
product. 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.
PATENTS AND TRADEMARKS
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- characters on many of its products in the United States and
certain international markets, exclusive licenses to use the OSH KOSH
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 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, 1999,
Evenflo owned 212 U.S. patents, 63 Foreign Patents, and 227 trademarks and had
41 patent applications and 74 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 filed an answer and counterclaim
alleging infringement by Evenflo for 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 compartment and base of certain of the
Company's car seats. On May 26, 1999, a Settlement Agreement was executed
between and among the Company, Spalding, Grace and Century settling the
Company's patent infringement suit. The terms of the Settlement Agreement are
confidential. Century's suit that was filed on August 7, 1998 was dismissed
with prejudice.
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.
SEASONALITY
The Company's business is seasonal based on the juvenile product
buying patterns of Evenflo's major customers. For 1999, quarterly net sales
as a percentage of total sales were
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approximately 28%, 21%, 28% and 23%, respectively, for the first through the
fourth quarters of the 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.
EMPLOYEES
As of December 31, 1999, the Company has 2,275 employees of whom
1,522 were located in the U.S and 753 located in other countries. The
Company's success is dependent upon its ability to attract and retain
qualified employees.
At the Company's facilities, approximately 446 of the Company's
employees are represented under collective bargaining agreements, which
agreements expire from June 2000 through September 2001. 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.
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ITEM 2. 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.
The following table sets forth information as of December 31, 1999 with
respect to the manufacturing, warehousing and office facilities used by the
Company in its businesses:
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Owned/ Square
Location Description Leased Footage
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Canton, Georgia Manufacturing/Warehousing/Office Owned 380,500
Jasper, Alabama Manufacturing/Office Owned 103,000
Rogers, AR Sales Office Leased 2,000
Paramus, NJ Sales Office Leased 2,100
Troy, MI Sales Office Leased 2,200
Minneapolis, MN Sales Office Leased 1,800
Piqua, Ohio Manufacturing/Warehousing/Office Owned 347,400
Piqua, Ohio Warehousing Leased 87,800
Piqua, Ohio Warehousing Owned 155,000
Sidney, Ohio Warehousing Leased 110,000
Vandalia, Ohio Offices Leased 34,210
Suring, Wisconsin Manufacturing/Warehousing/Office Owned 139,984
Suring, Wisconsin Warehousing Leased 3,200
Suring, Wisconsin Warehousing Leased 7,000
Suring, Wisconsin Warehousing Leased 3,600
Mexico City, Mexico Manufacturing/Warehousing/Office Owned 76,308
Tijuana, Mexico Manufacturing Owned 50,061
Oakville, Ontario, Canada Warehousing/Office Leased 26,780
Pasig City, Philippines Office Leased 2,422
Kowloon, Hong Kong Office Leased 1,730
Paris, France Office Leased 900
Taipei, Taiwan Office Leased 700
Kuala Lumpur, Malaysia Office Leased 700
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ITEM 3. LEGAL PROCEEDINGS
PRODUCT REGULATION; PRODUCT RECALLS
The Company's products are subject to the provisions of the Federal
Consumer Product Safety Act; the Federal Hazardous Substances Act, and 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.
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 January 1999, the Company purchased an insurance policy to cover
the costs of recalls and corrective actions. The policy had a premium for
calendar 1999 of $500 and a deductible of $500 per occurrence and coverage of
up to $10,000 per year.
On August 20, 1998, 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 August 20, 1998.
In the past five and one-half years, Evenflo had three 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 three years, the
Company executed three 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 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
aggregated cost of recalls and other corrective actions was $4,400 and $5,200,
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 industry wide corrective action for play yards
with protruding rivets. The Company anticipates that this recall will cost
approximately $100 in the aggregate. The Company is indemnified by Spalding
12.
<PAGE>
for the costs of the recall of the HOUDINI play yards under the terms of the
Indemnification Agreement. Expenditures during the three months ended December
31, 1998 were less that $100. The Company expects that recalls had an effect on
fiscal 1998 net sales but the effect has diminished in calendar 1990. In June
of 1999 Evenflo recalled its SMUGLI FRONT AND BACK PACK soft infant carrier
affecting approximately 325,000 units due to the potential of an infant
slipping through the leg opening. Cost for this campaign is estimated at $800
and cost through the twelve months ended December 31, 1999 was $268. The
Company believes it is indemnified by Spalding and Huffy for 61% and 37% of the
cost respectively. Expenses relating to all product recalls and corrective
actions for the twelve months ended December 31, 1999 were $762 of which $538
for the premium for recall insurance purchased in January 1999. 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 the 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.
PRODUCT LIABILITY LITIGATION
Due to the nature of the 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 expense. From April 1, 1988 to December 31, 1999, approximately
314 product liability claims have been brought against the company, 218 of
which related to juvenile car seats.
Since 1990, 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 $1,600 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 $2,000 per year, on a
similar basis. From fiscal 1993 through 1999, 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 $2,700 per year when allocated to the policy when the related
injuries occurred. The increase in average costs for product liability claims
from $2,000 per year for the ten-year average to $2,700 per year for the
five-year average is due to an increase in the Company's insurance policy
deductibles. Prior to the Transactions, the Company's insurance was purchased
on a consolidated basis by
13.
<PAGE>
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 deductibles. The Company anticipates that it will continue to incur average
product liability claims of levels similar to the five-year average for 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.
Prior to the Recapitalization, 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 $1,300. 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 $2,000 and
the corresponding policy aggregate deductible was $4,500. Spalding purchased
separate additional indemnity insurance to effectively reduce the per
occurrence deductible from $2,000 to $500 and to reduce the policy aggregate
deductible from $4,500 to $3,000. Spalding's lead umbrella insurance carrier
provided for $5,000 of insurance coverage above the deductible amount of $2,000
per occurrence and $4,500 in the aggregate. Commencing in 1992, Spalding
purchased a total of $75,000 in umbrella coverage for each policy year. The
Company believes that, for periods prior to the Recapitalization, its reserve
levels for out-of-pocket indemnities and expenses for product liability claims
are adequate. The Company currently maintains an insurance program with
substantially the same coverage and deductibles at increased premiums.
The Gerry Acquisition did not impact insurance coverage or materially
impact product liability premium costs. The Company is indemnified by Huffy
Corporation ("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.
IMPACT OF ENVIRONMENTAL REGULATIONS
The Company's operations are subject to federal, state, local and
non-U.S. environmental laws and regulations that impose limitations on the
discharge of pollution into the environment and establish standards for
handling, generation, emission, release, discharge, treatment, storage and
disposal of certain materials, substances and wastes and remediation of
environmental contamination
14.
<PAGE>
(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 such 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 with out
regard to whether the generator knew of, or was responsible for, the presence
of such hazardous substances. The Company estimates its liability with respect
to the Miami Site is approximately $86 in the aggregate, $55 of which was paid
through December 31, 1999, and with respect to the Mid-State Site is $105 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 the estimate. Prior to the consummation of the
Transactions, Spalding and its subsidiaries were identified as PRPs at 14
sites, including the Miami Site and Mid-State Site. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's Common Stock is privately held and therefore is not
traded or listed on any Stock Exchange.
(b) SHAREHOLDER INFORMATION
Beneficial ownership of 93.4% of the shares of the Class A Common
Stock and Cumulative Preferred Stock are owned by KKR 1996 GP LLC and 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. Great Star holds 6.6% of
the shares of the Class A Common Stock.
As of March 28, 2000, there were 10,000,000 shares of Class A Common
Stock outstanding and held of record by 2 shareholders and 400,000 shares of
non voting Cumulative Preferred Stock outstanding and held of record by one
shareholder.
(c) DIVIDENDS
The declaration and payment of cash dividends is subject to
restrictions imposed by the instruments governing the Company's bank debt. The
Company has not declared or paid cash dividends on its Common or its Cumulative
Preferred Stock. The Company currently intends to retain earnings to finance
the growth and development of its business and does not anticipate paying cash
dividends in the foreseeable future. Any cash dividends in the future will
depend upon the financial condition, capital requirements and earnings of the
Company as well as other factors the Board of Directors may deem relevant.
16.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE
MONTHS
YEARS ENDED SEPTEMBER 30, ENDED YEAR ENDED
--------------------------------------------------- DECEMBER DECEMBER
31, 31,
(dollar amounts in thousands) 1995 1996 1997 1998 1998 1999
----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA
Net Sales $210,039 $237,165 $296,743 $339,077 $72,552 $335,053
Cost of Sales 157,611 178,733 235,925 270,708 66,811 253,680
---------- ----------- ---------- ---------- ---------- ---------
Gross profit 52,428 58,432 60,818 68,369 5,741 81,373
Selling, general and administrative
expenses 41,518 42,801 52,232 63,133 16,071 71,693
Allocated Spalding expenses 2,500 2,500 2,900 2,566 0 0
Restructuring costs 0 0 8,371 2,666 0 0
1994 Management Stock Ownership Plan exp 107 2,621 0 0 0 0
---------- ----------- ---------- ---------- ---------- ---------
Income (loss) from operations 8,303 10,510 (2,685) 4 (10,330) 9,680
Interest expense, net 4,273 4,128 7,243 11,458 4,220 16,696
Currency (gain) loss, net 833 204 47 1,076 (251) (357)
---------- ----------- ---------- ---------- ---------- ---------
Earnings (loss) before income taxes and
extraordinary loss 3,197 6,178 (9,975) (12,530) (14,299) (6,659)
Income taxes (benefit) 1,052 3,197 (4,364) (4,171) (5,413) (2,329)
---------- ----------- ---------- ---------- ---------- ---------
Earnings (loss) before extraordinary loss 2,145 2,981 (5,611) (8,359) (8,886) (4,330)
Extraordinary (loss) on early
extinguishment of debt, net of tax benefit
of $360 and $696 0 (560) 0 (1,304) 0 0
---------- ----------- ---------- ---------- ---------- ---------
Net earnings (loss) $2,145 $2,421 $(5,611) $(9,663) $(8,886) $(4,330)
====== ====== ======== ======== ======== ========
----------- ------------ ----------- ----------- ----------- -----------
OTHER DATA
EBITDA and Adjusted EBITDA:
Net earnings (loss) $2,145 $2,421 $(5,611) $(9,663) $(8,886) $ (4,330)
Income taxes (benefit) 1,052 3,197 (4,364) (4,171) (5,413) (2,329)
Interest expense 4,273 4,128 7,243 11,458 4,220 16,696
Depreciation and amortization 5,518 6,502 9,313 13,869 3,568 16,034
Restructuring costs 0 0 8,371 2,666 0 0
Extraordinary loss 0 560 0 1,304 0 0
---------- ----------- ---------- ---------- ---------- ---------
EBITDA 12,988 16,808 14,952 15,463 (6511) 26,071
Unusual costs 0 3,642 9,758 5,194 7,883 0
---------- ----------- ---------- ---------- ---------- ---------
Adjusted EBITDA $12,988 $20,450 $24,710 $20,657 $ 1,372 $ 26,071
======= ======= ======= ======= ======= =========
Statements of cash flows:
Operating activities $1,419 $24,287 $(942) $(6,789) $(8,345) $ (486)
Investing activities (6,531) (9,740) (89,579) (18,118) (2,400) (13,301)
Financing activities 5,613 (12,244) 87,312 30,513 7,800 12,700
BALANCE SHEET DATA
Working Capital $ 31,750 $ 21,819 $ 52,226 $64,202 $ 60,823 $ 66,293
Total assets 155,496 177,391 255,205 285,361 275,864 276,623
Total debt 32,000 43,000 95,966 110,000 117,800 130,500
Shareholder's equity 66,858 61,825 63,719 74,447 64,386 60,176
</TABLE>
17.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND SEPTEMBER 30, 1998
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1999 ("1999 TWELVE MONTHS") COMPARED TO THE
TWELVE MONTHS ENDED SEPTEMBER 30, 1998 ("1998 TWELVE MONTHS").
NET SALES. The Company's 1999 twelve months net sales of $335,053
compare to $339,077 in the 1998 twelve months, a decrease of $4,024 or 1.2%.
U.S. net sales, including export sales, of $292,642 for the 1999 twelve months
declined $11,531 or 3.8% from the 1998 twelve months of $304,173. U.S. sales
declined due primarily to a reduction in sales of juvenile car seats due to
strong competitive pressures. International net sales increased 21.5% to
$ 42,411 in the 1999 twelve months, from $34,904 for the 1998 twelve months.
International net sales increased principally due to increased sales in Mexico,
Asia and Europe, partially offset by lower net sales in Canada.
GROSS PROFIT. The Company's gross profit increased to $81,373 in the
1999 twelve months from $68,369 in the 1998 twelve months. As a percentage of
net sales, gross profit increased to 24.3% in the 1999 twelve months from 20.2%
in the 1998 twelve months. The increase was due to (i) improved operating
margins resulting from improved manufacturing efficiencies, (ii) favorable
purchase prices and volume rebates from major suppliers, and (iii) increased
overhead absorption.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. For the 1999
twelve months SG&A expenses were $71,693, an increase of $8,560 or 13.6% over
the $63,133 reported for the 1998 twelve months. The 1999 twelve months
increase was due to (i) increased outside services to aid in the re-engineering
of certain business processes, (ii) increased expense associated with expanding
international operations, (iii) higher customer marketing promotional costs,
implementation of customer business teams, (iv) additional recruitment
expenses, (v) new product engineering and design.
RESTRUCTURING COSTS. In the 1999 twelve months the Company incurred no
restructuring expense. In the 1998 twelve months the Company incurred $2,666 of
restructuring costs to relocate the Gerry Baby Products', Thornton, Colorado
administrative and manufacturing operations to the Company's Piqua, Ohio, and
Canton, Georgia plants.
INTEREST EXPENSE. Interest expense increased to $16,696 in the 1999
twelve months from $11,458 in the 1998 twelve months. The increase for the 1999
twelve months over the respective period last year was due to (i) the issuance
of the $110,000, 11.75% Senior Notes due 2006, which bear a higher interest
rate than the debt refinanced, (ii) an increased amount outstanding under our
revolving credit facility, and (iii) higher short term interest rates.
CURRENCY (GAIN) LOSS. The $357 currency gain in the 1999 twelve months
compares to a $1,076 loss for the 1998 twelve months. The currency improvement
for 1999 twelve months over the 1998 twelve months is due primarily to the
currency effect of a U.S. dollar denominated note payable
18.
<PAGE>
of non-U.S. subsidiaries and the translation of our Mexican subsidiary's
operating results into U.S. dollars.
INCOME TAXES (BENEFIT). The Company recorded a $2,329 tax benefit in
the 1999 twelve months associated with the loss from U.S. operations, which is
offset in part by income from international operations. During the 1998 twelve
months, the Company recorded a $4,171 benefit associated with the loss from
U.S. operations and included a benefit from the allocation of administrative
expense from Spalding.
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 $72,552 for the 1998
three months from $69,650 for the 1997 three months, an increase of $2,902 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 $5,741 in the
1998 three months from $11,580 in the 1997 three months, a decrease of $5,839.
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 $7,883 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 Discover.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. The Company's
SG&A expenses increased to $16,071 in the 1998 three months from $13,203 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 $2,868 increase in SG&A expenses was principally due to (i) a $1,200
royalty income settlement on play yards and strollers that offset SG&A expenses
in 1997 and was not repeated in 1998, (ii) $700 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 $300 increase in product liability expense. A decrease in
expense of $400 resulted from lower product safety campaign expenses.
RESTRUCTURING COSTS. In the 1998 three months and the 1997 three
months, the Company incurred no expenses and $60, respectively.
INTEREST EXPENSE. Interest expense increased to $4,220 in the 1998
three months from $2,494 in the 1997 three months. The increase was due
primarily to the issuance of the Notes.
CURRENCY (GAIN) LOSS. The currency gain of $251 in the 1998 three
months compares to the currency loss of $77 in the 1997 three months.
19.
<PAGE>
YEAR ENDED SEPTEMBER 30, 1998 ("FISCAL 1998") COMPARED TO THE YEAR ENDED
SEPTEMBER 30, 1997 ("FISCAL 1997").
NET SALES. The Company's net sales increased to $339,077 for fiscal
1998 from $296,743 for fiscal 1997, an increase of $42,334 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.
GROSS PROFIT. The Company's gross profit increased to $68,369 in
fiscal 1998 from $60,818 in fiscal 1997, an increase of $7,551 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
associated with integration of Gerry into the Company, partially offset by
operating efficiencies attributable to Project Discover, (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 EXPENSE. The Company's expenses increased to $63,133 in fiscal
1998 from $52,232 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
$10,901 increase in SG&A expenses was principally due to (i) an increased
number of selling and administrative personnel during the Gerry integration,
(ii) $1,700 in increased product development and engineering costs relating to
a number of the Company's product lines, (iii) $800 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 $2,700 and (vi) $4,000 in transaction related expenses
including legal fees, accounting fees and other charges, partially offset by
(i) reduced sales commissions of $1,300, (ii) $1,200 of royalty income
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 $2,666, and $8,371, respectively, of restructuring costs to relocate
the Gerry Colorado administrative and manufacturing operations to Evenflo's
Ohio and Georgia locations.
20.
<PAGE>
ALLOCATED SPALDING EXPENSES. In fiscal 1998, allocated Spalding
expenses were $2,566, compared to $2,900 in fiscal 1997.
INTEREST EXPENSE. Interest expenses increased to $11,458 in fiscal
1998 from $7,243 in fiscal 1997, an increase of $4,215. The increase was
primarily due to the Company's issuance of a $49,120 note to Spalding as a
result of the Gerry Acquisition.
CURRENCY LOSS. The currency loss of $1,076 was $1,029 higher in fiscal
1998 than in fiscal 1997.
INCOME TAXES. Evenflo had a tax benefit of $4,171 for fiscal 1998,
which represents an effective tax rate of 33% in relation to a loss before
income taxes of $12,530. The effective tax rate for fiscal 1997 was 44%.
EXTRAORDINARY LOSS. The extraordinary loss on early extinguishment of
debt relates to a $2,000 pre-tax (and $1,304 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 $9,663 for fiscal 1998
compared to a net loss of $5,611 for fiscal 1997. The $4,052 decrease in
earnings was the result of a $4,215 higher interest expense, $1,029 higher
currency loss, $1,304 extraordinary loss, and a $193 lower income tax benefit,
offset by a $2,689 increase in income from operations.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company's principal sources of liquidity are from cash
balances, cash flows generated from operations and from borrowings under the
Company's $100,000 revolving credit facility. The Company's principal uses of
liquidity are to provide working capital, meet debt service requirements and
finance the Company's strategic investments. At December 31, 1999, the Company
had $3,110 of cash, compared to $4,197 at December 31, 1998. The revolving
credit facility subjects the Company to certain restrictions and covenants
related to, among other things, minimum interest coverage, maximum leverage
ratio restrictions on capital expenditures, and no dividend payments. At
December 31, 1999, the Company had $20,500 in borrowings outstanding under the
revolving credit facility and utilized $31,489 for banker's acceptances and
letters of credit. The Company had $48,011 in available borrowing capacity
under its revolving credit facility. In addition, the Company has outstanding
$110,000 of 11 3/4% Series B Senior Notes due 2006, issued on August 20, 1998
and $40,000 liquidation preference of Cumulative Preferred Stock that bears a
variable rate of interest indexed to the ten-year U.S. Treasury Rate. For the
twelve-months ended December 31, 1999, the dividend rate on the Cumulative
Preferred Stock was approximately 14%.
The Company anticipates cash outlays of approximately $13,500 during
2000 for capital expenditures for new products, cost reduction and replacement
of assets, which it expects to be paid out of existing cash balances, cash
generated from operations and borrowings.
21.
<PAGE>
The Company currently believes that cash flow from operating
activities, together with borrowings available under its revolving credit
facility, and cash on hand will be sufficient to fund the Company's currently
anticipated working capital, capital expenditures, interest payments and
other liquidity needs for the Company's 2000 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, meet the
Company's increasingly restrictive debt covenants 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, to sell
assets or to obtain additional financing. There can be no assurances that any
such refinancings would be possible or that any such sales of assets or
additional financing could be achieved on terms reasonably favorable to the
Company.
CASH FLOWS
1999 TWELVE MONTHS COMPARED TO THE 1998 TWELVE MONTHS. For the 1999
twelve months, the Company used $486 in cash for operating activities, and
invested $13,301 in capital expenditures. In addition, the Company borrowed
$12,700 under the revolving credit facility.
During the 1998 twelve months the Company used $6,789 in operating
activities. The $6,303 improvement in cash provided by operations for the 1999
twelve months compared to the 1998 twelve months was primarily due to improved
earnings and changes in working capital components.
Capital expenditures of $13,301 during the 1999 twelve months relate
primarily to U.S. and international information system upgrades.
1998 THREE MONTHS COMPARED TO 1997 THREE MONTHS. For the 1998 three
months, the company used $10,745 in cash before financing activities to fund
$8,345 in operating activities and invest $2,400 in capital expenditures. Cash
used in operating activities and investing activities in the 1998 three months
was funded from $7,800 of financing activities, resulting in a $2,945 decrease
in cash.
Net cash flow used in operating activities in the 1998 three months
was $8,345 compared to $5,936 in the 1997 three months. The $2,409 higher use
of cash for operating activities when compared to the 1997 three months was due
to a $5,187 decrease in net earnings, a $3,400 decrease in deferred taxes and
other non-cash items, and a $660 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 $400 increase in current liabilities
and other items and a $5,157 increase in inventories, partially offset by a
$4,209 decrease in receivables.
FISCAL 1998 COMPARED TO FISCAL 1997. For fiscal 1998, the Company used
$24,907 in cash before financing activities to fund $6,789 in operating
activities and invest $18,118 in capital expenditures. Cash used in operating
and investing activities in fiscal 1998 was funded from $30,513 of financing
activities, resulting in a $5,606 increase in cash.
22.
<PAGE>
Net cash flow used in operating activities in fiscal 1998 was $6,789
compared to $942 for fiscal 1997. The $5,847 higher use of cash for operating
activities when compared to fiscal 1997 was due to a $4,052 decrease in net
earnings, a $2,372 increase in the use of cash for working capital and a $1,080
increase in deferred taxes and other non-cash items, partially offset by $4,556
higher depreciation and amortization and a $2,000 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 $20,770 increase in
the use of cash for receivables and a $1,595 decrease in cash provided from
current liabilities and other items, partially offset by a $18,398 decrease in
the use of cash for inventories.
Capital expenditures were $18,118 for fiscal 1998 compared to $20,927
in fiscal 1997. Capital expenditures for fiscal 1998 were $2,809 lower than
fiscal 1997, with the Company investing $600 to complete Project Discovery,
$7,300 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 $3,600 on computer
hardware and software to unify and upgrade its management information systems
to achieve Year 2000 compliance. The Company also incurred $6,600 in other
capital expenditures for fiscal 1998.
EBITDA AND ADJUSTED EBITDA
EBITDA is defined as earnings before interest expense, income taxes,
depreciation, amortization, extraordinary items and restructuring costs.
Adjusted EBITDA is defined as EBITDA and adjusted for unusual costs. EBITDA and
Adjusted EBITDA are included because the Company believes they provide useful
information regarding its ability to service its debt and because the Company
understands that such information is considered to be an additional basis for
evaluating the Company's ability to pay interest and repay debt. EBITDA and
Adjusted 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. Because EBITDA
and Adjusted EBITDA are not calculated identically by all companies, the
presentation herein may not be comparable to similarly titled measures of other
companies.
The Company's Adjusted EBITDA increased from $20,657 in the 1998
twelve months, to $26,071 in the 1999 twelve months, as indicated in the table
in Item 6.
YEAR 2000 COMPLIANCE
During 1998 and 1999 twelve months, the Company made capital
investments of approximately $11,563 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.
The upgrades required for Year 2000 compliance to the primary, mission critical
system were completed in June 1999. Certain ancillary, non-critical systems
were upgraded to Year 2000 readiness prior to December 31,1999. To date, the
Company has assessed 100% of its systems and has identified a few minor Year
2000 problems that were corrected in early January 2000.
23.
<PAGE>
All costs associated with Year 2000 compliance are expensed as
incurred, other than acquisition of new software or hardware, which will be
capitalized. During the 1999 twelve months the Company capitalized $6,819 and
expensed $149.
The Company's significant suppliers, customers and third party
service providers have, to date, experienced few problems with Year 2000
readiness. However, the Company is currently unable to forecast with
certainty the magnitude of the operational or financial impact on the Company
of any lingering Year 2000 compliance issues with its suppliers, customers,
or third party service providers.
FORWARD LOOKING STATEMENTS
Certain statements made in this Management's Discussion and Analysis
of the Condensed Consolidated Financial Statements and in the Notes to
Condensed Consolidated Financial Statements reflect management's estimates and
beliefs and are intended to be, and are hereby identified as, "forward-looking
statements" for purposes of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Such forward-looking terminology,
includes but is not limited to words 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 are forward looking statements.
Although the Company believes that the assumptions on which
forward-looking statements contained herein are based are reasonable, any of
those assumptions could be incorrect and the inclusion of a forward-looking
statement herein should not be regarded as a representation by the Company that
its plans and objectives will be achieved. Therefore, the Company cautions
readers that such forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially from those currently
expected by management, including as a consequence of the Company's significant
leverage and dividend requirements; the restrictive covenants included in its
debt arrangements; the highly competitive nature of the juvenile products
industry; the potential inability of the Company to implement its business
strategy; the Company's dependence on a small number of customers and risks
arising as a consequence of continued consolidation in the retail industry;
risks involved in relying on increasing foreign sales and international
suppliers; the intense regulation of juvenile products and the potential for
product recalls, and product liability litigation; the need for product
innovation to remain competitive; the availability of materials used in the
Company's operations; the effect of environmental regulations; dependence on
management and a small unionized workforce.
24.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company is exposed to market risks associated primarily to changes
in foreign currency exchange rates and changes in interest rates.
CURRENCY RISK
The Company conducts business in all parts of the world. As a general
rule, the Company's revenue contracts are denominated in U.S. dollars. Thus,
any decline in the value of local foreign currencies against the U.S. dollar
will result in the Company's products and services being more expensive to a
potential foreign buyer, and in those instances where the Company's goods and
services have already been sold, will result in the receivables being more
difficult to collect. The Company does also enter into revenue contracts that
are denominated in the currency of the country in which it has substantial
operations, principally Canada, Mexico and the Philippines. This practice
serves as a natural hedge to finance the expenses incurred in those locations.
The Company purchases significant amounts of product from China.
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's cost could be adversely affected if the Chinese Renminbi appreciates
significantly relative to the U.S. dollar. In addition, the Company is exposed
to the impact of changes in foreign currency exchange rates on its 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 $1,100, $800 and
$1,500 based on intercompany balances as of September 30, 1998, December 31,
1998 and 1999 respectively.
In the 1998 twelve months and the 1999 twelve months, approximately
10% and 13%, respectively, 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 has not entered into, nor does it currently anticipate
entering into, any foreign currency hedging transactions.
INTEREST RATE RISK
The Company is subject to market risk from exposure to changes in
interest rates based on its financing, investing and cash management
activities. The Company utilizes a 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.
The Company does not purchase or hold any derivative financial
instruments for the purpose of speculation or arbitrage.
25.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report 27
Consolidated Statements of Operations for the Years Ended September 30, 1997 and
1998, for the Three Months Ended December 31, 1998 and for the
Year Ended December 31, 1999 28
Consolidated Balance Sheets as of December 31, 1998 and 1999 29
Consolidated Statements of Cash Flows for the Years Ended September 30, 1997 and
1998, for the Three Months Ended December 31, 1998 and for the
Year Ended December 31, 1999 30
Consolidated Statements of Shareholders' Equity for the Years Ended
September 30, 1997 and 1998, for the Three Months Ended
December 31, 1998 and for the Year Ended December 31, 1999 31
Notes to Consolidated Financial Statements 32 - 50
</TABLE>
26.
<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 December 31, 1998 and
1999, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years ended September 30, 1997 and 1998, for the
three-month period ended December 31, 1998 and for the year ended December 31,
1999. Our audits also included the financial statement schedule listed in the
Index at Item 14. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 December 31, 1998 and 1999, and the results of their
operations and their cash flows for the years ended September 30, 1997 and
1998, for the three-month period ended December 31, 1998 and for the year ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Dayton, Ohio
February 18, 2000
27
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1998, FOR THE THREE MONTHS ENDED
DECEMBER 31, 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
---------------------- ------------- ------------
1997 1998 1998 1999
<S> <C> <C> <C> <C>
NET SALES $296,743 $339,077 $72,552 $335,053
Cost of sales 235,925 270,708 66,811 253,680
--------- -------- -------- --------
GROSS PROFIT 60,818 68,369 5,741 81,373
Selling, general and administrative expenses 52,232 63,133 16,071 71,693
Allocated Spalding expenses 2,900 2,566 0 0
Restructuring costs 8,371 2,666 0 0
--------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS (2,685) 4 (10,330) 9,680
Interest expense, net 7,243 11,458 4,220 16,696
Currency (gain) loss, net 47 1,076 (251) (357)
--------- -------- -------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS (9,975) (12,530) (14,299) (6,659)
Income taxes (benefit) (4,364) (4,171) (5,413) (2,329)
--------- -------- -------- ---------
EARNINGS (LOSS) BEFORE EXTRAORDINARY
LOSS (5,611) (8,359) (8,886) (4,330)
Extraordinary loss on early extinguishment of
debt, net of income tax benefit of $696 0 (1,304) 0 0
--------- -------- -------- ---------
NET EARNINGS (LOSS) $(5,611) $(9,663) $(8,886) $(4,330)
========= ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1999
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
ASSETS 1998 1999
<S> <C> <C>
Current assets:
Cash $ 4,197 $ 3,110
Receivables, less allowance of $1,177 and $1,050 79,605 70,772
Inventories 52,542 63,896
Deferred income taxes 11,808 8,066
Other 1,308 654
--------- ---------
Total current assets 149,460 146,498
Property, plant and equipment, net 64,881 64,423
Intangible assets, net 46,329 44,779
Deferred financing costs 5,715 4,965
Deferred income taxes 7,660 14,429
Other 1,819 1,529
--------- ---------
Total assets $ 275,864 $ 276,623
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bankers acceptances and letters of credit $ 19,725 $ 18,431
Accounts payable 32,260 29,706
Accrued expenses 36,652 32,068
--------- ---------
Total current liabilities 88,637 80,205
Senior notes due 2006 110,000 110,000
Revolving Credit Facility 7,800 20,500
Pension 3,658 4,238
Postretirement benefits 1,383 1,504
--------- ---------
Total liabilities 211,478 216,447
--------- ---------
Commitments and Contingencies (Notes M and O)
Shareholders' equity:
Preferred stock - $.01 par value, 10,000,000 shares authorized; 400,000 shares outstanding
(liquidation value of $40,000) 40,000 40,000
Common stock:
Class A -$1 par value, 20,000,000 shares authorized; 10,000,000 shares outstanding 10,000 10,000
Class B - $1 par value, 5,000,000 shares authorized; none outstanding 0 0
Paid-in capital 61,387 61,387
Retained earnings (deficit) (42,831) (47,161)
Accumulated other comprehensive earnings (loss) - currency translation adjustments (4,170) (4,050)
--------- ---------
Total shareholders' equity 64,386 60,176
--------- ---------
Total liabilities and shareholders' equity $ 275,864 $ 276,623
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1998, FOR THE THREE MONTHS ENDED
DECEMBER 31, 1998 AND FOR THE YEAR ENDED
DECEMBER 31, 1999 (DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE
YEAR ENDED MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
---------------------------- -------------- ------------
INCREASE (DECREASE) IN CASH 1997 1998 1998 1999
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (5,611) $ (9,663) $ (8,886) $ (4,330)
Adjustments to reconcile net earnings (loss) to net
cash used in operating activities:
Non-cash writedown of inventories 3,100 0 7,883 0
Depreciation 8,207 12,341 3,180 13,628
Intangibles amortization 1,106 1,528 388 1,550
Deferred income taxes (4,093) (5,181) (4,113) (3,027)
Deferred financing cost amortization 400 196 189 750
Extraordinary loss on early extinguishment of debt 0 2,000 0 0
Other 460 468 163 701
Changes in working capital components:
Receivables (37) (20,807) 8,907 8,833
Inventories (10,809) 7,589 (7,293) (11,354)
Current liabilities 8,556 5,389 (7,812) (8,432)
Other (2,221) (649) (951) 1,195
--------- --------- --------- ---------
Net cash flows used in operating activities (942) (6,789) (8,345) (486)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (20,927) (18,118) (2,400) (13,301)
Payment to purchase net assets of Gerry Baby Products (68,652) 0 0 0
--------- --------- --------- ---------
Net cash flows used in investing activities (89,579) (18,118) (2,400) (13,301)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Senior Notes due 2006 0 110,000 0 0
Borrowings from Revolving Credit Facility 0 10,000 7,800 12,700
Repayment of intercompany indebtedness to Spalding 0 (110,000) 0 0
Deferred financing costs 0 (6,000) 0 0
Repayment of Revolving Credit Facility 0 (10,000) 0 0
Note payable to Spalding 49,120 0 0 0
Repayments of non-U.S. debt (204) 0 0 0
Net change in long-term Spalding receivable/payable 30,524 41,033 0 0
Net cash transfers from (to) Spalding 8,239 (4,520) 0 0
Dividend to Spalding (367) 0 0 0
--------- --------- --------- ---------
Net cash flows provided by financing activities 87,312 30,513 7,800 12,700
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH (3,209) 5,606 (2,945) (1,087)
CASH :
Beginning of period 4,745 1,536 7,142 4,197
--------- --------- --------- ---------
End of period $ 1,536 $ 7,142 $ 4,197 $ 3,110
========= ========= ========= =========
SUPPLEMENTAL CASH FLOW DATA:
Interest paid $ 6,763 $ 9,824 $ 942 $ 16,344
Income taxes paid (refunded) (266) (453) (225) 698
Issuance of preferred stock 0 40,000 0 0
Additional capital contribution by Spalding resulting
from forgiveness of intercompany indebtedness 0 26,999 0 0
Reduction of intercompany indebtedness 0 (43,059) 0 0
Reduction of deferred tax asset due to IRS settlement 0 368 0 0
Allocation of portion of Spalding debt 0 16,000 0 0
Allocation of Spalding deferred financing costs 0 100 0 0
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1998, FOR THE THREE MONTHS
ENDED DECEMBER 31, 1998 AND FOR THE YEAR
ENDED DECEMBER 31, 1999 (DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
RETAINED OTHER COMPREHENSIVE
PREFERRED COMMON PAID-IN EARNINGS COMPREHENSIVE EARNINGS
STOCK STOCK CAPITAL (DEFICIT) EARNINGS (LOSS) (LOSS)
----------- -------- --------- ----------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - SEPTEMBER 30, 1996 $ 0 $ 2 $ 80,667 $(17,936) $ (908)
Net earnings (loss) 0 0 0 (5,611) 0 $ (5,611)
Net cash transfers from Spalding 0 0 8,239 0 0 0
Currency translation adjustments 0 0 0 0 (367) (367)
Dividend to Spalding 0 0 0 (367) 0 0
-------- -------- -------- -------- -------- ---------
BALANCE - SEPTEMBER 30, 1997 0 2 88,906 (23,914) (1,275) $ (5,978)
=========
Net earnings (loss) 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 0
Deferred tax adjustment on acquired
trademarks 0 0 0 (368) 0 0
Net cash transfers to Spalding 0 0 (4,520) 0 0 0
Currency translation adjustments 0 0 0 0 (1,720) (1,720)
-------- -------- -------- -------- -------- ---------
BALANCE - SEPTEMBER 30, 1998 40,000 10,000 61,387 (33,945) (2,995) $(11,383)
=========
Net earnings (loss) 0 0 0 (8,886) 0 $ (8,886)
Currency translation adjustments 0 0 0 0 (1,175) (1,175)
-------- -------- -------- -------- -------- ---------
BALANCE - DECEMBER 31, 1998 40,000 10,000 61,387 (42,831) (4,170) $(10,061)
=========
Net earnings (loss) 0 0 0 (4,330) 0 $ (4,330)
Currency translation adjustments 0 0 0 0 120 120
-------- -------- -------- -------- -------- ---------
BALANCE - DECEMBER 31, 1999 $ 40,000 $ 10,000 $ 61,387 $(47,161) $ (4,050) $ (4,210)
======== ======== ======== ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
EVENFLO COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1998, FOR THE THREE MONTHS ENDED
DECEMBER 31, 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
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 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 for no consideration 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.
32
<PAGE>
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
of August 20, 1998, which included the long-term debt payable to Spalding.
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.
In December 1999, KKR 1996 Fund purchased Spalding's remaining 42.4%
common stock interest.
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 - In 1998, the Company changed its fiscal year end
from September 30 to December 31. See Note Q for unaudited interim
financial information for the three months ended December 31, 1997.
TRANSACTIONS WITH SPALDING - The Company was included in Spalding's U.S.
cash management system through August 20, 1998. The Company maintained
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 senior notes at December 31, 1998 and
1999 was $113,300 and $108,350, respectively. The carrying amount of the
bankers' acceptances and letters of credit and revolving credit facility
are reasonable estimates of their fair values.
33
<PAGE>
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. Assets that become fully
depreciated are removed from the asset and related accumulated
depreciation accounts when they are removed from 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.
IMPAIRMENT OF LONG-LIVED ASSETS - The carrying values of goodwill and
other long-lived 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 the
impaired assets.
INCOME TAXES - 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.
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
("SFAS") No. 5, ACCOUNTING FOR CONTINGENCIES, and charges those costs to
operations.
STOCK OPTIONS - The Company measures compensation cost for stock options
issued to employees using the intrinsic value based method of accounting
in accordance with Accounting Principles Board Opinion No. 25.
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 $17,239, $18,735, $5,142 and $20,027 in the years ended
September 30, 1997 and 1998, the three months ended December 31, 1998 and
the year ended December 31, 1999, respectively.
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.
34
<PAGE>
USE OF ESTIMATES - The preparation of the accompanying consolidated
financial statements in conformity with accounting principles generally
accepted in the United States of America 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 1998, SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES was issued. 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. The Company has not evaluated
whether this standard will have a material effect on its financial
position or results of operations. In June 1999, SFAS No. 137, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133 - AN AMENDMENT OF FASB STATEMENT
NO 133, was issued which delayed the effective date of SFAS No. 133 to
fiscal years beginning after June 15, 2000.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1997
and 1998 financial statements to conform with the 1999 presentation.
C. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
<S> <C> <C>
1998 1999
Finished goods $ 27,698 $ 29,892
Work in process 11,240 13,232
Raw materials 13,604 20,772
------- ------
Total inventories $ 52,542 $ 63,896
======= =======
</TABLE>
The cost of 92% and 90% of December 31, 1998 and 1999, inventories was
computed using the last-in, first-out (LIFO) method of inventory
valuation. Use of the LIFO method decreased the December 31, 1998 and
1999, inventories by $2,134 and $1,144, respectively.
35
<PAGE>
D. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1998 1999
Land $ 2,202 $ 2,199
Buildings and building improvements 29,561 29,007
Machinery and equipment 81,917 95,040
------- ------
113,680 126,246
Accumulated depreciation (48,799) (61,823)
--------- --------
Property, plant and equipment, net $ 64,881 $ 64,423
======== ========
</TABLE>
E. INTANGIBLE ASSETS, NET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
<S> <C> <C>
1998 1999
United States trademarks $ 39,900 $ 39,900
Non-U.S. trademarks 2,720 2,720
Goodwill 24,997 24,997
Non-compete agreements 1,000 1,000
------- -------
68,617 68,617
Accumulated amortization (22,288) (23,838)
--------- --------
Intangible assets, net $ 46,329 $ 44,779
========= ========
</TABLE>
F. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
<S> <C> <C>
1998 1999
Compensation and other employee benefits $ 5,375 $ 4,860
Liability for self insurance 10,940 12,197
Interest 5,116 5,468
Other 15,221 9,543
-------- -----
Total accrued expenses $ 36,652 $ 32,068
======== ========
</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.
36
<PAGE>
G. RESTRUCTURING, UNUSUAL AND NON-CASH CHARGES
RESTRUCTURING CHARGES - 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 in the year ended September 30, 1997. This charge
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; other costs, principally asset impairment and
settlements of supplier contractual obligations arising from, or affected
by, the Colorado shut-down.
The table below shows the components of the 1997 and 1998 restructuring
provisions, and the activity affecting the reserve balance through
December 31, 1998, as follows:
<TABLE>
<CAPTION>
RESTRUCTURING
PROVISION ACTIVITY CHARGED TO RESERVE
-------------------------- -------------------------------------------
1997 1998 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Severance costs $ 4,105 $ (61) $ (163) $ (3,684) $ (154)
Facility shutdown 2,630 1,576 (201) (4,005) 0
Additional relocation related costs 17 1,715 0 0 0
Other 1,619 (564) (963) (92) 0
-------- --------- ---------- ------------ ---------
Total $ 8,371 $ 2,666 $ (1,327) $ (7,781) $ (154)
======== ========= ========== ============ =========
</TABLE>
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 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.
The remaining accrual for severance costs at December 31, 1998 and 1999,
was $197 and $43.
37
<PAGE>
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 to
discontinue certain products. This non-cash charge is included in cost of
sales for the three months ended December 31, 1998. The remaining reserve
at December 31, 1999, was $2,589.
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.
H. 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"). These debt arrangements are described in greater detail
below. The balances of these debt arrangements are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1999
<S> <C> <C>
Bankers' acceptances and letters of credits $ 19,725 $ 18,431
========== ==========
Revolving Credit Facility $ 7,800 $ 20,500
========== ==========
11-3/4% Senior Notes due 2006 $ 110,000 $ 110,000
========== ==========
</TABLE>
38
<PAGE>
CREDIT FACILITY
On August 20, 1998, as part of the Recapitalization, 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
$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. At December 31, 1999, the Company had borrowing availability of
approximately $48,011 under the Credit Facility subject to certain
conditions (after giving effect to $20,500 of revolving credit loans and
$31,489 of letters of credit and banker's acceptances, including $13,058
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 on the unused portion of the Credit
Facility 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.
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, events of default, 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.
39
<PAGE>
11-3/4% SENIOR NOTES DUE 2006
In conjunction with the closing of the Reorganization on August 20, 1998,
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.
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
111.75% 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.
The Notes contain customary covenants, events of default, 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.
ALLOCATED BANK BORROWINGS
As a result of the Company's guarantees of certain Spalding bank
borrowings in prior years, Spalding allocated to the Company deferred
financing costs and the interest expense for each fiscal period. Interest
expense, including the Company's share of debt issue cost amortization, on
such indebtedness was $4,100 and $4,200 for the year ended September 30,
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. 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).
40
<PAGE>
I. 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
YEAR ENDED MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
-------------------------------- ------------- -------------
1997 1998 1998 1999
<S> <C> <C> <C> <C>
Earnings (loss) before income
taxes and extraordinary loss:
United States $(12,735) $(12,630) $(14,466) $ (8,898)
Other nations 2,760 100 167 2,239
-------- -------- -------- --------
Total $ (9,975) $(12,530) $(14,299) $ (6,659)
======== ======== ======== ========
Income tax provision:
Current taxes:
Federal taxes $ (1,687) $ 0 $ 0 $ 0
State taxes 83 87 (240) 0
Other nations' taxes 289 283 110 1,020
-------- -------- -------- --------
Total (1,315) 370 (130) 1,020
Deferred taxes:
Federal taxes (2,800) (5,137) (4,963) (3,860)
State taxes (249) (100) (320) (456)
Other nations' taxes 0 0 0 967
-------- -------- -------- --------
Total (3,049) (5,237) (5,283) (3,349)
-------- -------- -------- --------
Total income taxes (benefit) $ (4,364) $ (4,867) $ (5,413) $ (2,329)
======== ======== ======== ========
Allocation of income taxes (benefit):
Income taxes (benefit) $ (4,364) $ (4,171) $ (5,413) $ (2,329)
Extraordinary loss 0 (696) 0 0
-------- -------- -------- --------
Total $ (4,364) $ (4,867) $ (5,413) $ (2,329)
======== ======== ======== ========
</TABLE>
The differences between the effective income tax rate and the U.S.
statutory rate are as follows:
<TABLE>
<CAPTION>
THREE
YEAR ENDED MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
--------------------------- -------------------- ------------------
1997 1998 1998 1999
<S> <C> <C> <C> <C>
U.S. statutory rate 35 % 35 % 35 % 35 %
State income taxes, net of federal benefit 1 0 3 6
Non-U.S. tax rate differences 2 0 0 (6)
Canada (losses) earnings for which no taxes
were recorded due to net operating loss
carryforwards 5 (4) 0 0
Other 1 2 0 0
----- ----- ----- -----
Effective tax rate 44 % 33 % 38 % 35 %
===== ===== ===== ======
</TABLE>
41
<PAGE>
Prior to July 31, 1998, a division of a Canadian subsidiary of Spalding
was included in the Evenflo Segment. 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 year ended September 30, 1997
and for the period from October 1, 1997 to July 31, 1998.
Under the asset and liability method prescribed by SFAS No. 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
CURRENT NET NET DEFERRED
DEFERRED TAX ASSET TAX ASSET
--------------------------- -----------------------------
DECEMBER 31, DECEMBER 31,
--------------------------- -----------------------------
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Accrued liabilities $ 7,618 $ 6,847 $ 0 $ 0
Inventory 3,735 1,020 0 0
Pension 0 0 1,134 1,496
Postretirement benefits 0 0 549 617
Depreciation 0 0 (2,764) (3,144)
Intangibles amortization 0 0 (3,144) (3,922)
Net operating loss carryforwards 0 0 12,579 19,295
Other 455 199 (24) 87
------ ------ ------- ------
Total deferred income taxes 11,808 8,066 8,330 14,429
Valuation allowance on state net operating losses 0 0 (670) 0
------ ------ ------- ------
Net deferred income taxes $ 11,808 $ 8,066 $ 7,660 $ 14,429
======== ======= ======= =========
</TABLE>
At December 31, 1999, undistributed earnings of non-U.S. subsidiaries of
the Company included in consolidated retained earnings (deficit) amounted
to $3,723. 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. The aggregate amount of unrecognized deferred tax liability is
approximately $575 at December 31, 1999.
At December 31, 1999, the Company had $50,748 of federal net operating
loss carryforwards that expire through the year 2019.
J. SHAREHOLDERS' EQUITY
PREFERRED STOCK - The Company has 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. The
Company has issued and outstanding 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").
42
<PAGE>
The holder of the Cumulative Preferred Stock is entitled to receive, when,
as and if declared by the Board of Directors, dividends at a variable rate
based on the ten-year treasury rate, based on the then effective
liquidation preference per share (14% at December 31, 1999). Dividends are
payable quarterly in arrears on August 15, November 15, February 15 and
May 15 of each year. The right to dividends is cumulative and dividends
accrue (whether or not declared), without interest, from the date of
issuance. Because the Board of Directors has not declared any preferred
dividends through December 31, 1999, the amount of the dividends in
arrears as of that date is $7,667.
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
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 Company has authorized 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.
EVENFLO OWNERSHIP PLAN - Officers and key employees have been granted
stock options under the Evenflo Ownership Plan, which was approved in
1999. The options and rights have a maximum term of 10 years and vest
ratably over a five-year period. There are 1,850,000 shares reserved for
issuance under this plan. During 1999, the Company granted 1,544,448
shares at an exercise price of $5.00 per share. There were 1,544,448
options outstanding at December 31, 1999, with a weighted-average
remaining contractual life of 9 years. There were 433,421 options
exercisable at December 31, 1999.
Had compensation costs been determined based on the fair value method of
SFAS No. 123, the Company's net loss for the year ended December 31, 1999,
on a pro forma basis would have been $(4,668) as compared to the reported
amount of $(4,330). The estimated fair value of stock options granted in
1999 was $2.08 and was determined using the Black-Scholes option-pricing
model with the following assumptions: expected dividend yield of 0%;
expected volatility of 0%; risk-free interest of 5.45%; and expected life
of options of 10 years.
43
<PAGE>
K. 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.
The funded status of the Company's United States defined benefit pension
plans consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1999
<S> <C> <C>
Changes in the projected benefit obligation:
Projected benefit obligation at beginning of period
(September 30, 1998 for 1998) $ 15,809 $ 15,821
Service cost 245 973
Interest cost 245 957
Actuarial gain (490) (1,907)
Benefits paid 0 (1,068)
Plan amendments 12 12
-------- -------
Projected benefit obligation at end of period 15,821 14,788
-------- -------
Change in the plan assets:
Fair value of plan assets at beginning of period (September 30, 1998
for 1998) 14,523 14,523
Actual return on plan assets 0 2,242
Employer contributions 0 67
Benefits paid 0 (1,068)
-------- -------
Fair value of plan assets at end of period 14,523 15,764
-------- -------
Projected benefit obligation in excess of (less than) plan assets 1,291 (976)
Reconciliation of financial status of plan to amounts recorded
in the balance sheets:
Unamortized prior service cost 1,362 1,232
Unrecorded effect of net (loss) gain arising from differences between
actuarial assumptions used to determine periodic pension expense
and actual experience 954 3,916
Unrecognized net transition asset 77 66
-------- -------
Pension liability $ 3,684 $ 4,238
======== ========
Amounts recorded in the balance sheets consist of:
Current liability $ 26 $ 0
Long-term liability 3,658 4,238
</TABLE>
44
<PAGE>
The pension expense of the Company's United States defined benefit plans
includes the following components:
<TABLE>
<CAPTION>
THREE
MONTHS YEAR
YEAR ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
----------------------- ------------ -------------
1997 1998 1998 1999
<S> <C> <C> <C> <C>
Service cost, benefits earned during the year 927 1,073 245 $ 973
Interest cost on projected benefits obligations 748 898 245 957
Expected return on plan assets (789) (1,172) (306) (1,192)
Amortization of prior service cost (98) (101) (29) (117)
Amortization of unrecognized net (gain) loss 0 (61) 1 3
Amortization of unrecognized transition asset (10) (17) (3) (11)
------- ------- ------- -------
Net pension expense 778 $ 620 153 $ 613
======= ======= ======= =======
</TABLE>
Assumptions used in the accounting for United States defined benefit
pension plans were:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
<S> <C> <C>
Discount rate 6.25 % 7.25 %
Rate of increase in compensation levels 4.50 % 4.50 %
Expected long-term rate of return on assets 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 $538, $647, $900, and $740
for the years ended September 30, 1997 and 1998, for the three months
ended December 31, 1998 and for the year ended December 31, 1999.
L. 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.
45
<PAGE>
The status of the postretirement benefit plans consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
<S> <C> <C>
Change in the accumulated postretirement benefit obligation:
Accumulated postretirement benefit obligation at beginning of year $ 1,628 $ 1,628
Service cost 13 52
Interest cost 25 102
Actuarial gain (22) (234)
Benefits paid (16) (42)
------- -------
Accumulated postretirement benefit obligation at end of year 1,628 1,506
Reconciliation of financial status of plans to amounts recorded in the balance
sheets:
Unamortized prior service cost 25 22
Unrecorded effect of net loss (gain) arising from differences between
actuarial assumptions used to determine periodic postretirement
expense and actual experience 220 (20)
------- -------
Postretirement benefit liability $ 1,383 $ 1,504
======= =======
</TABLE>
The components of net postretirement benefit expense for all plans are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS YEAR
YEAR ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
---------------------- ---------------- ------------------
1997 1998 1998 1999
<S> <C> <C> <C> <C>
Service cost, benefits earned
during the year $ 25 $ 42 $ 13 $ 52
Interest cost on accumulated
postretirement benefit obligation 95 101 25 102
Amortization of prior service cost 3 3 1 3
Amortization of unrecognized net
(gain) loss (6) (4) 2 5
----- ----- ----- -----
Net postretirement benefit expense $ 117 $ 142 $ 41 $ 162
===== ===== ===== =====
</TABLE>
46
<PAGE>
Assumptions used in the accounting for postretirement benefit:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
<S> <C> <C>
Discount rate 6.25 % 7.25 %
Assumed current year health care cost trend rate:
Retirees under 65 7.50 % 7.50 %
Medicare eligible retirees 7.50 % 7.50 %
Assumed ultimate trend rate 5.00 % 5.00 %
Year ultimate health care cost rate will be achieved 2003 2003
Effect of 1% increase in health care cost trend rates:
Accumulated postretirement benefit obligation $ 144 $ 133
Annual aggregate benefit and interest costs 6 22
Effect of 1% decrease in health care cost trend rates:
Accumulated postretirement benefit obligation (129) (119)
Annual aggregate benefit and interest costs (5) (19)
</TABLE>
M. LEASE COMMITMENTS
The Company leases certain manufacturing, warehousing and office facilities,
and equipment under various operating lease arrangements expiring
periodically through 2008.
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, 1999:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
2000 $ 969
2001 795
2002 656
2003 600
2004 590
Thereafter 1,522
-------
Total minimum lease payments $ 5,132
=======
</TABLE>
Rental expense under operating leases was $1,024, $1,588, $156 and $1,543 for
the years ended September 30, 1997 and 1998, for the three months ended
December 31, 1998 and for the year ended December 31, 1999, respectively.
N. CONCENTRATION OF CREDIT RISK
During the years ended September 30, 1997 and 1998, the three months ended
December 31, 1998 and the year ended December 31, 1999, the Company's sales
to two U.S. customers amounted to 37%, 42%, 42% and 44%, respectively, of net
sales. No other customer exceeded 10% of net sales during these periods.
47
<PAGE>
O. 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. For the year
ended December 31, 1999, the Company has incurred expenses of
approximately $762 related to product recall and corrective actions. As a
result of the indemnification, the Company has recorded a receivable from
Spalding for approximately $657 at December 31, 1999. In January 1999, the
Company purchased product recall coverage with a deductible of $500 per
occurrence and a limit of $10,000 per year.
P. 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 and description of the tax sharing agreement between
Spalding and the Company.
See Note H - "Long-Term Debt Agreements" for a description 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 O - "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, $75 and $300 in the year
ended September 30, 1998, the three months ended December 31, 1998 and the
year ended December 31, 1999, respectively, pursuant to such management
agreement with KKR.
48
<PAGE>
Q. UNAUDITED INTERIM FINANCIAL INFORMATION
Financial information for the three months ended December 31, 1997 is as
follows:
Net sales $ 69,650
========
Gross profit $ 11,580
========
Income taxes (benefit) $ (1,255)
========
Earnings (loss) before extraordinary loss $ (3,699)
========
Net earnings (loss) $ (3,699)
========
R. SEGMENT REPORTING
The following schedule presents geographical information about the
Company's continuing operations in the infant and juvenile product
markets:
<TABLE>
<CAPTION>
THREE
YEAR ENDED MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
----------------------------- ---------------- -------------
1997 1998 1998 1999
<S> <C> <C> <C> <C>
Geographic location
Net sales:
United States $ 261,549 $ 304,173 $ 64,088 $ 292,642
Other nations 35,194 34,904 8,464 42,411
--------- --------- --------- ---------
Total net sales $ 296,743 $ 339,077 $ 72,552 $ 335,053
========= ========= ========= =========
Earnings (loss) before income taxes
and extraordinary loss:
United States $ 6,903 $ 2,840 $ (10,246) $ 7,798
Other nations 2,856 100 167 2,239
Allocated Spalding expenses (2,900) (2,566) 0 0
Restructuring costs (9,591) (1,446) 0 0
Interest expense, net (7,243) (11,458) (4,220) (16,696)
--------- --------- --------- ---------
Earnings (loss) before income
taxes and extraordinary loss $ (9,975) $ (12,530) $ (14,299) $ (6,659)
========= ========= ========= =========
Identifiable assets:
United States $ 240,459 $ 270,714 $ 257,049 $ 254,227
Other nations 14,746 14,647 18,404 22,967
--------- --------- --------- ---------
Total assets $ 255,205 $ 285,361 $ 275,453 $ 277,194
========= ========= ========= =========
</TABLE>
49
<PAGE>
The following schedule presents net sales by product category (in
millions):
<TABLE>
<CAPTION>
THREE MONTHS YEAR
YEAR ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
-------------------------- --------------- -------------------
1997 1998 1998 1999
<S> <C> <C> <C> <C>
On The Go $ 131.3 $ 159.8 $ 32.5 $ 148.6
Play Time 48.1 57.6 14.4 67.5
Bed and Bath 42.5 46.2 10.9 48.5
Feeding Time 74.8 75.5 14.8 70.5
------ ------ ------ ------
$ 296.7 $ 339.1 $ 72.6 $ 335.1
======= ======= ====== =======
</TABLE>
* * * * * *
50
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
(as of March 27, 2000)
<TABLE>
<CAPTION>
NAME AGE
- --------------------------- ---
<S> <C>
Richard W. Frank 56
Henry R. Kravis 56
George R. Roberts 56
Michael T. Tokarz 50
Marc S. Lipschultz 31
Edwin L. Artzt 69
</TABLE>
RICHARD W. FRANK - Mr. Frank has been Chairman of the Board of Directors of
the Company 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.
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 Air Line, Inc. and Barilla G.eR.F.lli S.p.A. 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., The Gillette Company, IDEX Corporation, KinderCare Learning Centers, Inc.,
KSL Recreation Corporation, Owens-Illinois, Inc., Owens-Illinois Group, Inc.,
PRIMEDIA, 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.,
IDEX Corporation, KinderCare Learning Centers, Inc., KSL Recreation Corporation,
Owens-Illinois, Inc., Owens-Illinois Group, Inc., PRIMEDIA, Inc., Safeway Inc.,
and Spalding.
51.
<PAGE>
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 annual fee of $25,000, payable
in quarterly installments. Directors who are employees of the Company receive no
remuneration for serving as directors.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the name, age and principal position
with the Company of each of its executive officers:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------- --- -------------------------------
<S> <C> <C>
Richard W. Frank 56 Chairman of the Board and Chief
Executive Officer
Daryle A. Lovett 50 Executive Vice President and Chief
Financial Officer
David J. Bimschleger 44 Senior Vice President - Sales
William C. Murphy 50 Senior Vice President - Operations
James G. Ruehlmann 43 Senior Vice President - Marketing
John D. Dupps 43 Vice President - Human Resources
Bachar El Zein 43 Vice President - International Operations
Daniel A. Jackson 38 Vice President - Customer Operations
and Planning
Ronald P. Moran 59 Vice President - General Counsel
and Secretary
</TABLE>
52.
<PAGE>
DARYLE A. LOVETT - Mr. Lovett has been Executive Vice President and Chief
Financial Officer since he joined the Company in April 1997. From January 1995
to April 1997 Mr. Lovett served as President of Gerry Baby Products, which
Evenflo acquired in April 1997. From 1981 to January 1995, he served in the
capacities of Vice President - Operations and Vice President - Finance for Gerry
Baby Products.
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 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.
WILLIAM C. MURPHY - Mr. Murphy joined the Company in December 1999, as Senior
Vice President of Operations. Prior to joining the Company Mr. Murphy worked for
Brunswick Bicycle Company as Operations Consultant from November 1998 to October
1999. From June 1997 to October 1998 Mr. Murphy served as Vice President
Operations for Huffy Corporation's Bicycle Division. Mr. Murphy was Vice
President Operations for Sanford (a Newell Company) from July 1991 to July 1996.
JAMES G. RUEHLMANN - Mr. Ruehlmann joined the Company in May 1999 as Senior Vice
President Marketing. Formerly Vice President - Marketing Sealy Inc. from 1993
through April 1999. Prior to joining Sealy, Mr. Ruehlmann worked at Chiquita
Brands, as Group Vice President (Processed Meats Department) from 1991 to 1993.
Prior to 1991, Mr. Ruehlmann held various management positions during his
11-year tenure at Procter & Gamble.
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.
DANIEL A. JACKSON - Mr. Jackson has been Vice President, Customer Operation and
Planning since 1999. Prior to this he served as Vice President - Ohio
Operations. Mr. Jackson has been with the Company since 1987.
RONALD P. MORAN - Mr. Moran has been Vice President, General Counsel and
Secretary of the Company since September 1998. Prior to joining the Company, Mr.
Moran was Vice President, General Counsel and Secretary of Borden/Meadow Gold
Dairies, Inc. since 1995. He was Assistant General Counsel of Borden, Inc. prior
to 1995. Mr. Moran also held a variety of legal positions with the Consumer
Products Division of Borden, Inc.
53.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses compensation paid, accrued or awarded
by the Company for the account of each of the chief executive officer and
four most highly compensated executive officers (the "Named Executive
Officers") for their services in all capacities to the Company during the
fiscal years ending September 30, 1997 and 1998 and December 31, 1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
(amounts in this table in dollars ("$") )
- ------------------------------- ------- ------------------------------------------ ------------------------- ---------------
NAME AND YEAR
PRINCIPAL POSITION (1) (2) ANNUAL COMPENSATION LONG-TERM COMPENSATION
- ------------------------------- ------- ------------------------------------------ -------------------------
AWARDS PAYOUTS
OTHER ANNUAL ------------------------- ALL OTHER
COMPENSATION SECURITIES LTIP COMPENSATION
SALARY BONUS (3a) (4) UNDERLYING PAYOUTS (8)
($) ($) ($) OPTIONS (6) ($) ($)
- ------------------------------- ------- ------------ ------------- --------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
RICHARD W. FRANK 1999 392,192 246,255 13,955 - - 1,416
Chairman of the Board and 1998 115,384 125,000 - - - -
Chief Executive Officer (5a) (3b)
1997 - - - - - -
DARYLE A. LOVETT 1999 233,270 60,682 5,000 - - 528
Executive Vice President 1998 161,742 - 4,918 - - -
and Chief Financial Officer 1997 169,000 14,870 4,750 - - -
DAVID J. BIMSCHLEGER 1999 165,000 31,289 2,475 - - 324
Senior Vice President - 1998 - - - - - -
Sales 1997 - - - - - -
JAMES G. RUEHLMANN 1999 127,500 96,978 101,514 - - 154
Senior Vice 1998 (5b) (3c) - - - -
President-Marketing 1997 - - - - - -
RONALD P. MORAN 1999 133,790 26,170 124,589 - - 1,416
Vice President, General 1998 - - - - - -
Counsel and Secretary 1997 - - - - - -
GEORGE A. HARRIS 1999 121,800 - 3,132 - - 248,675
President (5c) (7)
1998 304,411 - 5,000 - 134,150 1,152
1997 288,110 - 4,940 - - 696
MICHAEL L. JOHNSON 1999 202,403 - 5,000 - - 264
Executive Vice President - (5d)
Operations 1998 167,423 - 4,850 - 110,780 238
1997 122,230 - 3,670 - 110,780 -
- ------------------------------- ------- ------------ ------------- --------------- ------------ ------------ ---------------
</TABLE>
Footnotes
(1) Includes those who in fiscal 1999 were the Chief Executive Officer or
President, and the four most highly compensated executive officers other
than the CEO who were serving as such at the end of fiscal 1999 as measured
by salary and bonus. Mr. Johnson's last day of employment with the company
was December 3, 1999. He is included in the table as he would have been one
of the four most highly compensated executive officers but not for his
departure.
(2) The years reported are the twelve months ended December 31, 1999,
September 30, 1998, and September 30, 1997.
(3) (a) Except as noted in (3)(b) and (c), the bonuses are those awarded under
the Management Incentive Bonus Plan. (b) Bonus awarded as a starting
incentive. (c) Includes $60,000 awarded as a starting incentive.
54.
<PAGE>
(4) Includes (a) Company matching contributions to the Savings Plus Plan, (b)
tax reimbursement payments and (c) certain fringe benefits. In 1999, Mr.
Moran received $68,063 for reimbursement of relocation expenses. In 1999,
Mr. Ruehlmann received $55,044 for reimbursement of relocation expenses.
(5) (a) Represents compensation from June 15, 1998, Mr. Frank's first date of
employment with the Company. (b) Represents compensations from Mr.
Ruehlmann's first date of employment with the Company. (c) Represents
compensation to April 30, 1999, Mr. Harris's final date of employment with
the Company. (d) Represents compensation to December 3, 1999, Mr. Johnson's
final date of employment with the Company.
(6) The Company adopted the Evenflo Ownership Plan in 1999. During 1999, the
Company decided to grant 1,544,448 options under the Plan to officers and
key employees, but definitive agreements were not completed by the end of
1999.
(7) The amount shown consist of $50,254 lump sum distribution from the Evenflo
Retirement Plan, $27,320 lump sum distribution from the Supplemental
Retirement Plan and $207,101 of severance pay from May 1, 1999.
(8) Except where noted, represents dollar value of insurance premiums paid by
the Company with respect to group term life insurance for the benefit of
the named executive officer.
RETIREMENT PLANS
Evenflo Retirement Account Plan ("ERA") is a cash balance defined
pension benefit 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. ERA 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.
As a supplement to the ERA, the Company sponsors the non-qualified
Supplemental Retirement Plan ("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 the ERA and SRP upon
retirement at normal retirement age for each of the Named Executive Officers
at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Estimated Annual Benefit at
Name Year Attains Age 65 Normal Retirement Age (1)
- ---- ------------------- -------------------------
<S> <C> <C>
Richard W. Frank 2009 $33,987
Daryle A. Lovett 2015 45,251
David J. Bimschleger 2020 37,630
James G. Ruehlmann 2021 47,761
Ronald P. Moran 2005 7,614
</TABLE>
55.
<PAGE>
(1) Under ERA 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 projected cash balance account. Benefits have been
determined assuming no increase in 1999 compensation levels and an annual
interest credit of 6.07% was used for 1999 and future years. Benefits are
computed without reference to limitations on compensation and benefits to
which the ERA is subject under the Code because any benefits for the Named
Executive Officers that are affected by such limitations are made up under
the Company's SRP.
The Company sponsors a defined contribution plan qualified under the
Code, commonly referred to as a 401(k) plan, for substantially all U.S.
salaried employees. This plan includes all U.S. Evenflo employees except
employees covered by 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. The
Company makes a 50% matching contribution on the first 6% of participant
contributions. The Company does not match participant contributions in excess
of 6%.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information concerning
beneficial ownership of shares of Common Stock as of March 27, 2000 by: (1)
persons known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock; (2) each person who is a director of the
Company; (3) each person who is a Named Executive Officer; and (4) all
directors and executive officers of the Company as a group. Except as
otherwise noted, the named individual or family members had sole voting and
investment power with respect to such securities.
<TABLE>
<CAPTION>
Beneficial Ownership Percentage of class
Name of Beneficial Owner of Common Stock Outstanding (a)
- ------------------------ -------------------- -------------------
<S> <C> <C>
KKR 1996 GP LLC (b) 9,340,000 93.4%
c/o Kohlberg Kravis Roberts & Co. L.P.
9 West 57th Street
New York, NY 10019
Henry R. Kravis (b)
George R. Roberts (b)
Michael T. Tokarz (b)
Marc S. Lipschultz (b)
Great Star Corporation (c) 660,000 6.6%
c/o ABN Trustcompany
(Cuaracao N. V.)
P.O. Box 224
15 Pietermaai
Curacao, Netherlands Antilles
Edwin L. Artzt
Richard W. Frank (d)
Daryle A. Lovett (d)
</TABLE>
56.
<PAGE>
All directors and executive officers as group (b)(c)(d)
- --------------------------------------------------------------------------------
(a) The amounts and percentage of Common Stock beneficially owned are reported
on the basis of regulation of the Commission governing the determination of
beneficial ownership of securities. Under the rules of 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.
(b) Shares of Common Stock shown as beneficially owned KKR 1996 Fund L.P. 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, 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, 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 individual 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) 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 of Great Star. The trustees of both
trusts are Dr. Peter Marxer and Protec Trust Management Establishment, each
with the address Postfach 484, Heiligkreuz 6, L1 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 deemd 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.
(d) The Company has adopted the Evenflo Ownership Plan in 1999. During 1999,
the Company decided to grant 1,544,448 options under the Plan , but
definitive agreements were not completed as of March 27, 2000.
57.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
KKR 1996 GP LLC beneficially owns 93.4% (9,340,000 shares) of the
Company's outstanding shares of 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.
Great Star holds 6.6% of the outstanding Common Stock and an
affiliate, Abarco, holds approximately 7% of the outstanding shares of
Spalding. 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."
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 Agreements 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 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
58.
<PAGE>
Great Star Stockholders Agreement also provides Great Star certain
"piggyback" registration rights and provides for certain restriction 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.
59.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS
ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ------------------------------------------------------------
<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.
*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 Evenflo & Spalding Holdings
Corporation.
*10.5 Indemnity Agreement, dated as of August 20, 1998, between
the Company and Evenflo & Spalding Holdings Corporation.
*10.6 Transition 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.
*21 List of Subsidiaries.
23 Consent of Deloitte & Touche LLP, independent auditors, with
respect to the Company.
27 Financial Data Schedule for the year ended December 31,
1999.
99.1 Evenflo Ownership Plan incorporated by reference from Form
S-8, filed on March 20, 2000, File No. 333-31528
</TABLE>
60.
<PAGE>
* Previously filed and incorporated by reference from Amendment No. 3 to Form
S-4 filed May 10, 1999, Registration No. 333-64893.
(b) Financial Statement Schedules
Schedule II - Valuation Accounts and Reserves
EVENFLO COMPANY, INC. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULES
SCHEDULE II - VALUATION ACCOUNTS AND RESERVES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
YEAR ENDED DECEMBER 31, 1999 12/31/98 ADDITIONS DEDUCTIONS 12/31/99
- --------------------------------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Doubtful accounts and allowances $ 1,177 $ 525 $ (652) $ 1,050
BALANCE AT BALANCE AT
THREE MONTHS ENDED DECEMBER 31, 1998 9/30/98 ADDITIONS DEDUCTIONS 12/31/98
- --------------------------------------------- ---------------- ---------------- ---------------- ----------------
Doubtful accounts and allowances $ 1,592 $ 0 $ (415) $ 1,177
BALANCE AT BALANCE AT
YEAR ENDED SEPTEMBER 30, 1998 9/30/97 ADDITIONS DEDUCTIONS 9/30/98
- --------------------------------------------- ---------------- ---------------- ---------------- ----------------
Doubtful accounts and allowances $ 1,407 $ 384 $ (199) $ 1,592
BALANCE AT BALANCE AT
YEAR ENDED SEPTEMBER 30, 1997 9/30/96 ADDITIONS DEDUCTIONS 9/30/97
- --------------------------------------------- ---------------- ---------------- ---------------- ----------------
Doubtful accounts and allowances $ 1,108 $ 1,355 $ (1,056) $ 1,407
</TABLE>
61.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 27, 2000 EVENFLO COMPANY, INC.
By: /s/ Richard W. Frank
-------------------------------------
Richard W. Frank
Chairman of the Board of Directors and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
March 27, 2000 /s/ Richard W. Frank
-------------------------------------
Richard W. Frank
Chairman of the Board of Directors and
Chief Executive Officer (Principal
Executive Officer)
March 27, 2000 /s/ Daryle A. Lovett
-------------------------------------
Daryle A. Lovett
Executive Vice President and Chief
Financial Officer
(Principal Accounting & Financial
Officer)
March 27, 2000 /s/ Henry R. Kravis
-------------------------------------
Henry R. Kravis
Director
March 27, 2000 /s/ George R. Roberts
-------------------------------------
George R. Roberts
Director
March 27, 2000 /s/ Michael T. Tokarz
-------------------------------------
Michael T. Tokarz
Director
March 27, 2000 /s/ Marc S. Lipschultz
-------------------------------------
Marc S. Lipschultz
Director
March 27, 2000 /s/ Edwin L. Artzt
-------------------------------------
Edwin L. Artzt
Director
62.
<PAGE>
INDEPENDENT AUDITOR'S CONSENT Exhibit 23
We consent to the incorporation by reference in Registration Statement No.
333-31528 of Evenflo Company, Inc. on Form S-8 of our report dated February
18, 2000, appearing in this Annual Report on Form 10-K of Evenflo Company,
Inc. for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Dayton, Ohio
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,110
<SECURITIES> 0
<RECEIVABLES> 71,822
<ALLOWANCES> 1,050
<INVENTORY> 63,896
<CURRENT-ASSETS> 146,498
<PP&E> 126,246
<DEPRECIATION> 61,823
<TOTAL-ASSETS> 276,623
<CURRENT-LIABILITIES> 80,205
<BONDS> 130,500
0
40,000
<COMMON> 10,000
<OTHER-SE> 10,176
<TOTAL-LIABILITY-AND-EQUITY> 276,623
<SALES> 335,053
<TOTAL-REVENUES> 335,053
<CGS> 253,680
<TOTAL-COSTS> 253,680
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,696
<INCOME-PRETAX> (6,659)
<INCOME-TAX> (2,329)
<INCOME-CONTINUING> (4,330)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,330)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
