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                       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 SEPTEMBER 30, 1998
 
                                        OR
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
             FOR THE TRANSITION PERIOD FROM             TO
 
                          COMMISSION FILE NUMBER 333-14569
 
                           SPALDING HOLDINGS CORPORATION
                 (FORMERLY EVENFLO & SPALDING HOLDINGS CORPORATION
               (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
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                   DELAWARE                                      59-2439656
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)
  425 MEADOW STREET, CHICOPEE, MASSACHUSETTS                       01013
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
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      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (413) 536-1200
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
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                                                           NAME OF EACH EXCHANGE
             TITLE OF EACH CLASS                            ON WHICH REGISTERED
             -------------------                           ---------------------
<S>                                            <C>
                     NONE                                           NONE
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       SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:  NONE
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.  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
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 the registrant's Common stock, par value $.01 per
share, outstanding at December 21, 1998, was 96,933,963 shares.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
                                     None.
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                         SPALDING HOLDINGS CORPORATION
 
                            FORM 10-K ANNUAL REPORT
 
                               TABLE OF CONTENTS
 
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<S>      <C>                                                             <C>
Part I
  Item   Business....................................................      2
     1
  Item   Properties..................................................     12
     2
  Item   Legal Proceedings...........................................     13
     3
  Item   Submission of Matters to a Vote of Security Holders.........     14
     4
 
Part II
  Item   Market for Registrant's Common Equity and Related
     5   Stockholder Matters.........................................     14
  Item   Selected Financial Data.....................................     14
     6
  Item   Management's Discussion and Analysis of Financial Condition
     7   and Results of Operations...................................     18
  Item   Quantitative and Qualitative Disclosures About Market
     7A  Risk........................................................     30
  Item   Financial Statements and Supplementary Data.................     30
     8
  Item   Changes in and Disagreements with Accountants on Accounting
     9   and Financial Disclosure....................................     60
 
Part
  III
  Item   Directors and Executive Officers of the Company.............     60
     10
  Item   Executive Compensation......................................     62
     11
  Item   Security Ownership of Certain Beneficial Owners and
     12  Management..................................................     66
  Item   Certain Relationships and Related Transactions..............     67
     13
 
Part IV
  Item   Exhibits, Financial Statement Schedules and Reports on Form
     14  8-K.........................................................     70
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                                     PART I
 
ITEM 1:  BUSINESS
 
     Spalding Holdings Corporation (formerly Evenflo & Spalding Holdings
Corporation) and subsidiaries (the "Company") is a global manufacturer and
marketer of branded consumer products serving the sporting goods markets under
the primary trade names Spalding(R), Top-Flite(R), Etonic(R), Strata(R), Ben
Hogan(R) and Dudley(R). The primary subsidiary of the Company is Spalding Sports
Worldwide, Inc. (formerly Spalding & Evenflo Companies, Inc.), ("Spalding"). The
Company markets and licenses a variety of recreational and athletic products
such as golf balls, golf clubs, golf shoes, golf bags and accessories,
basketballs, volleyballs, footballs, soccer balls, softball and baseball bats,
balls and gloves, handballs, rackets and balls for tennis and racquetball, and
clothing, shoes and equipment for many other sports.
 
     Prior to August 20, 1998, Evenflo Company, Inc. ("Evenflo") was also a
subsidiary of the Company. Evenflo markets under the Evenflo(R), Gerry(R) and
Snugli(R) 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 other baby
care products and accessories, as well as juvenile car seats, stationary
activity products, strollers, high chairs, portable play yards, cribs, dressers
and changing tables, gates, soft carriers and frame carriers, child carriers and
mattresses.
 
     On August 20, 1998, the Company separated its two businesses, Spalding and
Evenflo, into two stand-alone companies (the "Reorganization"). Following
completion of the Reorganization, the Company's headquarters in Tampa, Florida
was closed and its functions transferred to the separate Spalding and Evenflo
operations. After giving effect to the Reorganization, Spalding continues to own
42.4% of the common stock of Evenflo.
 
     All references to fiscal year in this Form 10-K refer to the fiscal year
ending on September 30th of each year. All references to market share and
demographic data in this Form 10-K are based on industry publications and
Company data. For periods prior to the date of the Reorganization, references to
the Company include Spalding and Evenflo on a consolidated basis. After August
20, 1998, references to the Company means the operations of Spalding and its
equity investment in Evenflo. References to fiscal 1998 include the operations
of Spalding for the entire fiscal year, the operations of Evenflo for the period
from October 1, 1997 to August 20, 1998 and Spalding's 42.4% equity in Evenflo
from August 21, 1998 to September 30, 1998.
 
FORWARD-LOOKING STATEMENTS
 
     This Form 10-K contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 concerning the
Company's operations, economic performance, and financial condition, including,
in particular, the likelihood of the Company's success in developing and
expanding its business. These statements are based upon a number of assumptions
and estimates which are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company, and reflect
future business decisions which are subject to change. Some of these assumptions
inevitably will not materialize, and unanticipated events will occur which will
affect the Company's results.
 
GENERAL
 
     Spalding is one of the most recognized consumer product companies serving
the sporting goods industry, and in 1997, sold more golf balls, basketballs and
softballs than any other company in the U.S. Evenflo is one of the largest
manufacturers in the juvenile products industry and is widely recognized by new
mothers for high quality, safety-tested infant and juvenile products. In 1997
(based on pro forma net sales for the acquisition of Gerry Baby Products
("Gerry")), Evenflo held the number one market share in a number of juvenile
product categories, including car seats, stationary activity products,
breastfeeding products, gates, baths, soft and frame carriers and car
seat/stroller travel systems. The Company markets its products in over 100
countries and had net sales of $803 million in fiscal 1998.
 
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     Spalding was founded in 1876 by Hall of Fame baseball pitcher Albert G.
Spalding and is one of the oldest, largest and best-known sporting goods
companies in the world. Spalding produced the first official major league
baseball in 1876 and the first basketballs and volleyballs in the 1890's.
Additional early achievements were the first U.S.-made footballs, golf clubs,
golf balls, tennis rackets and tennis balls. Spalding introduced the first
"dimpled" golf ball in the United States in 1908; the first two-piece, solid
core golf ball in 1966, which today is the most commonly played type of ball;
and the Surlyn cut-resistant golf ball cover in 1971. Spalding continues to
focus on creating innovative new products and Spalding's products are endorsed
by numerous leagues and players.
 
     Evenflo was established in 1920, and its early successes came from the
development in 1935 of the modern nursing bottle nipple, which is held in place
with a screw-on bottle cap, versus the then-standard nipples that were stretched
over the bottle top. Evenflo has since developed a large number of innovative
infant feeding products, including the first fully transparent baby bottle, the
first decorated nursers, the first convertible (infant to toddler) car seat to
pass applicable federal testing standards and the first juvenile stationary
activity product. Evenflo seeks to distinguish itself from its competitors by
continually developing innovative, high quality products and offering them at
competitive prices.
 
     In July 1996, the Company acquired certain net assets of Etonic (the
"Etonic Acquisition"), which manufactures and/or markets golf shoes, gloves and
other golf accessories, as well as an established line of running and walking
shoes.
 
     On September 30, 1996, the Company underwent a recapitalization (the
"Recapitalization") under the Recapitalization and Stock Purchase Agreement (the
"Recapitalization Agreement") whereby Strata Associates L.P. ("Strata"), an
entity organized by Kohlberg Kravis Roberts & Co., L.P. ("KKR"), acquired
control of the Company from Abarco N.V. ("Abarco"), the prior parent of the
Company. For additional information on the Recapitalization, see Note A of the
Notes to the Consolidated Financial Statements appearing elsewhere in this Form
10-K.
 
     In April 1997, the Company acquired the net assets of Gerry (the "Gerry
Acquisition"), which manufactures and/or markets specialty juvenile products
including baby baths, health and safety items, monitors and other baby care
products and accessories, as well as juvenile car seats, strollers, high chairs,
cribs, dressers and changing tables, gates, and soft and frame carriers marketed
under the Gerry(R) and Snugli(R) brand names.
 
     In November 1997, the Company acquired certain assets of the Ben Hogan Co.
("Hogan"), which manufactures and/or markets golf clubs, golf balls and golf
accessories.
 
     In August 1998, the Company separated its two businesses Evenflo and
Spalding, into two stand-alone companies. As part of the Reorganization, KKR
1996 Fund L.P., an affiliate of the Company, acquired 51% of the outstanding
shares of common stock of Evenflo from Spalding for a purchase price of $25.5
million and preferred stock of Evenflo from Spalding for a purchase price of
$40.0 million. In addition, Great Star Corporation, an affiliate of Abarco N.V.
and a shareholder of the Company, acquired 6.6% of the outstanding shares of
Evenflo from Spalding for a purchase price $3.3 million. Following completion of
the Reorganization, the Company's headquarters in Tampa, Florida was closed and
its functions transferred to the separate Spalding and Evenflo operations.
 
SPALDING
 
     Spalding, with net sales of $512.5 million in fiscal 1998, is a leader in
the $2.8 billion U.S. wholesale golf industry and in the $60 billion U.S.
wholesale sporting goods industry, with some of the most widely recognized
branded consumer product names such as Spalding(R), Top-Flite(R), Etonic(R),
Strata(R), Dudley(R) and Ben Hogan(R). Spalding's brand names are currently
featured on over 2,000 products with an emphasis on three primary categories:
(i) golf products, (ii) sporting goods products, and (iii) licensed athletic
products, including apparel and footwear. To broaden Spalding's line of golf
products, in July 1996 the Company acquired Etonic's line of golf accessories
and in November 1997 the Company acquired Hogan's line of golf clubs, balls and
accessories.
 
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     For information on sales by industry segment and foreign and domestic
operations and export sales, see Note R of the Notes to the Consolidated
Financial Statements appearing elsewhere in this Form 10-K.
 
  Golf Products
 
     GENERAL.  Golf products are Spalding's largest product category, generating
worldwide net sales of $394 million in fiscal 1998, or approximately 77% of
Spalding's total net sales. Spalding is the U.S. market share leader in the
manufacture and marketing of golf balls, primarily under its Hogan(R),
Top-Flite(R) and Strata(R) brand names, as well as an industry leader in
introducing innovative new golf products. Spalding offers a comprehensive array
of golf clubs, golf bags, golf shoes and other golf accessories. Spalding's golf
products are endorsed by leading golf professionals including Lee Trevino, Payne
Stewart, Justin Leonard, Craig Stadler, Mark O'Meara, Jim Furyk, Brandi Burton,
and Chris Johnson. Spalding golf products are played worldwide by over 250
touring golf professionals and many PGA club professionals.
 
     GOLF BALLS.  Spalding was the leading manufacturer of golf balls in the
$669 million U.S. wholesale market, with worldwide net sales of $210 million,
$218 million and $218 million in fiscal 1998, 1997 and 1996, respectively.
Spalding currently markets its line of golf balls under numerous names including
Top-Flite(R) Strata Tour(TM) and Top-Flite(R) Strata Advance(TM), Top-Flite(R)
Aero(R), Top-Flite(R) Z-Balata(R), Top-Flite Magna(TM), and Top-Flite XL(R).
Spalding believes that its family of Top-Flite(R) golf balls has sold more golf
balls than any other family of golf balls in the world. Spalding focuses its
marketing efforts on pro shops, off-course golf specialty shops, sporting goods
stores and other retail outlets where the Top-Flite(R) name is widely
recognized. In addition, the Company seeks to increase sales to women, who
represent one of the fastest growing segments of the golf market.
 
     Spalding believes that the golf ball market is highly receptive to new
product development, and therefore, Spalding seeks to lead the industry in
product innovation. Through its research and development efforts, Spalding has
successfully introduced new lines of advanced performance golf balls in each of
the last five years. Spalding also customizes its golf balls with customers'
names or logos (a market which management believes to represent approximately
20% of the U.S. golf ball market).
 
     GOLF CLUBS.  Sales of Spalding golf clubs generated $108 million, $96
million and $71 million in worldwide net sales for the fiscal years 1998, 1997
and 1996, respectively. In 1997, U.S. wholesale sales of golf clubs were
estimated at $1.5 billion. Spalding's strategy is to design golf clubs for men,
women and seniors of all ability levels. Spalding pursues a pricing strategy
that covers all price points, using its Hogan(R), Top-Flite(R) and Spalding(R)
brand names to satisfy the high performance and recreational/value segments of
the market (Hogan was purchased during fiscal 1998). Top-Flite Tour(R) irons
have been widely used on the Senior Tour and the Company believes that the
increased exposure of Top-Flite(R) golf products on professional tours has
resulted in an increase in demand for Top-Flite(R) golf club products.
 
     Spalding irons incorporate technological and design features, such as
perimeter weighting, graphite shafts under the Muscle(TM) trademark, titanium
head inserts and Top-Flite's(R) patented stabilizer bar design. Through the use
of computer-aided design and modeling software, Spalding is continually
developing new golf club features. In 1997, Spalding announced the addition to
its club line of the Top-Flite(R) Intimidator 400(R) fairway woods with a
patented Spoiler(TM) sole. This followed the earlier introduction of the
Top-Flite(R) Micro Groove(TM) putter to fill out the Top-Flite(R) golf club
line.
 
     GOLF SHOES AND ACCESSORIES.  Spalding also designs and markets golf shoes
and accessories, including golf bags, club covers, tees, towels, sports luggage
and hats. By acquiring Etonic in 1996, Spalding expanded and upgraded its line
of golf products with Etonic golf shoes and Etonic golf gloves. Spalding had
fiscal 1998 net sales of $76 million of golf shoes and accessories. In 1997, the
U.S. wholesale market for golf shoes and accessories was approximately $550
million.
 
     SPORTING GOODS PRODUCTS.  The sporting goods products segment includes
basketballs, a broad line of softball and baseball products, volleyballs, soccer
balls and other sports products. Spalding's sporting goods products (other than
golf) accounted for $98 million, or 19% of total Spalding's fiscal 1998 net
sales.
 
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     BASKETBALLS.  Spalding produced the first basketball in 1894 and is the
market share leader in the estimated $154 million (1997) U.S. market for
basketballs and basketball accessories with $36 million of U.S. net sales of
basketballs in fiscal 1998. Spalding's worldwide net sales of basketballs in
fiscal 1998 were $48 million. Spalding is the exclusive official basketball of
the NBA and WNBA and has used these endorsements, as well as the endorsement of
other leagues and professional players, to gain worldwide market share in this
product category. Spalding's NBA license extends through July 2001, while its
WNBA license extends through September 1999. Internationally, the Spalding
basketball is the official basketball of professional leagues and national teams
in more than 25 basketball markets. There can be no assurances that the current
labor dispute in the NBA will not have a material adverse effect on the
Company's sales of basketballs.
 
     Spalding continues to develop its leadership in the basketball market
through innovative product designs such as the ZK-Composite(R) basketball and
the Zi/O(R) indoor/outdoor basketball. Introduced in 1991, the ZK-Composite(R)
basketball utilizes composite materials technology to offer excellent
performance characteristics at lower price points than leather balls.
 
     OTHER SPORTS PRODUCTS.  Spalding markets a number of other sporting goods
and sports related products serving baseball, softball, volleyball, soccer,
football, tennis, racquetball, handball and other sports activities. Net sales
of such items totaled $50 million in fiscal 1998, although no single product
area accounted for more than 10% of the Company's revenues.
 
     Spalding's Dudley(R) brand is the leading supplier of softballs in the
world. Spalding also sells a broad line of baseball products worldwide under the
Spalding(R) name. In both softball and baseball, Spalding has focused resources
on growing its share of the glove and high performance bat markets.
 
     Spalding produced the first volleyball in 1895 and today is a leading
provider of volleyballs in the U.S. Spalding has the endorsement for volleyballs
of the NCAA and the American Volleyball Association (AVA). Spalding's tennis
racquets are endorsed by the Association of Tennis Professionals (ATP).
 
     LICENSING.  Spalding is one of the leading general sports brand licensors
with over 100 licensees and sub-licensees worldwide. In exchange for royalty
fees, Spalding grants licensees the exclusive right to use specified Spalding
trademarks in product categories and geographical areas where Spalding does not
enjoy competitive advantages as a manufacturer of sporting goods. The
Spalding(R), Top-Flite(R) Etonic(R) and Ben Hogan(R) brand names are licensed in
over 259 product categories, including the Hakeem Olajuwon shoe line by Mercury
International Trading Corp., one of the largest shoe companies in the world, and
apparel lines by Mitsubishi Corporation in Japan, Sara Lee Corporation and
others in the U.S. Other Spalding licensed products include sport bags and other
accessories. Sales of licensed Spalding products totaled approximately $259
million in fiscal 1998, $113 million of which was in international markets.
 
     Spalding maintains quality control by inspecting licensed products to
maintain compliance with Spalding's quality standards. Spalding believes that
selectively licensing its brand names for use on quality products promotes
greater consumer awareness of its name and increases its visibility in the
marketplace. Spalding expects continued growth and market penetration through
licensing of footwear, active apparel and accessories for all sports.
 
     INTERNATIONAL.  Spalding sells or licenses its products in over 95
countries through approximately 100 independent distributors and 6 wholly-owned
foreign subsidiaries in Australia, Canada, Japan, New Zealand, Sweden and the
United Kingdom. Spalding's international sales were $120.1 million, or 23% of
Spalding's net sales in fiscal 1998, due in large part to the popularity of golf
and basketball outside the United States.
 
     RESTRUCTURING.  In fiscal 1997, the Company implemented a plan to
restructure the Spalding domestic and international operations to focus on core
line golf and sporting goods products. In 1998, this plan was expanded to reduce
the infrastructure needed to support international operations, by closing the
Mexico operation, consolidating European operations with the closure of Germany,
France, Italy and Spain operations, and significantly downsizing the Company's
operations in Japan. As a result, sales activities in Mexico, the closed
European operations and Japan will be channeled through distributors. The U.S.
operations recognized
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certain management severance costs and closed the headquarters in Tampa,
Florida. See Note F of the Notes to the Consolidated Financial Statements
appearing elsewhere in this Form 10-K.
 
     SALES, MARKETING AND DISTRIBUTION.  Spalding sells its products directly to
approximately 20,000 retailers, including pro shops and ranges, off-course golf
specialty shops, sporting goods stores and mass merchants. The Company also
markets to corporations for special events, the military and warehouse clubs and
generates sales from catalogs. In fiscal 1998, one U.S. customer (Wal-Mart)
amounted to 13% of net sales. During fiscal 1997 and 1996, no single customer
accounted for more than 10% of Spalding's worldwide net sales.
 
     Marketing for Spalding's golf and sporting goods products utilizes the
endorsements of professional and amateur leagues and players. Spalding believes
that endorsements by professional athletes and affiliations with sports
organizations enhance Spalding's image and improve sales of its products.
 
     Spalding's golf marketing campaign incorporates all of its golf products
and is intended to develop Strata(R) and Top-Flite(R) as global "megabrands" for
performance grade golf products. In 1998 Spalding expanded its advertising
campaign for premium golf products including the Top-Flite(R) Strata Tour(TM)
golf ball, the Hogan(R) club line and the Top-Flite(R) club line. Advertising,
promotion and endorsement expenditures amounted to 16%, 14%, and 12% of
Spalding's net sales in fiscal 1998, 1997 and 1996, respectively.
 
     MANUFACTURING, PRODUCT PROCUREMENT AND RAW MATERIALS.  The manufacture of
Spalding products involves a number of highly specialized processes. Spalding
manufactures golf balls, finishes custom golf balls and assembles most of its
golf clubs at its own facilities. Spalding's primary manufacturing facility is
located in Chicopee, Massachusetts and comprises approximately 830,000 square
feet of manufacturing, office and distribution space. Additionally, Etonic
produces a portion of its shoes at its facility in Richmond, Maine. Spalding
believes that it is one of the lowest cost producers of golf balls in the world.
 
     Spalding utilizes third-party manufacturers, located primarily in China,
Thailand, Taiwan and other countries in Southeast Asia, to produce most of its
non-golf ball products. Products and components representing approximately 58%
of Spalding's net sales in fiscal 1998 were produced by such third-party
manufacturers. No supplier accounted for products representing more than 10% of
Spalding's fiscal 1997 net sales. Spalding believes it has alternative sources
of supply for substantially all of the products currently produced by third
party manufacturers.
 
     Sourced products are manufactured according to Spalding's strict quality
control specification. To assure the quality of its sourced products, the
Company works closely with third-party manufacturers, emphasizing product
reliability and performance standards and strict quality controls to which all
producers must adhere. Spalding continually monitors its sourced products to
improve quality. Certain of Spalding's third-party manufacturers produce only
Spalding products. In addition, Spalding jointly develops new products with
certain of its suppliers as part of Spalding's increasingly global product
development efforts. Spalding maintains a liaison office in Taiwan to assist in
order-expediting and quality control.
 
     The principal raw materials used by Spalding in the manufacture of its
products include synthetic rubber, ionomers, metals, synthetic leathers,
composite materials and other chemical compounds, as well as plastic, paper and
cardboard in packaging. While all raw materials are purchased from outside
sources, Spalding 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 the Company. Spalding has not experienced, and does
not anticipate, any material shortages of sourced products or supplies used in
manufacturing. Certain materials used in the production of golf balls are
petroleum derivatives and are therefore sensitive to fluctuations in the price
of oil.
 
     TRADEMARKS AND PATENTS.  Spalding has proprietary rights to a number of
trademarks that are important to its business, including Spalding(R),
Top-Flite(R), Etonic(R), Strata(R), Dudley(R) and Ben Hogan(R). The Company
actively guards against trademark infringement through legal and other measures.
 
     The policy of the Company is to protect proprietary products by obtaining
patents for such products when practicable. At September 30, 1998, Spalding
owned 200 patents and had 171 applications 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. Although the Company believes that,
collectively, its patents are important to its
 
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business, the loss of any one patent would not have a material adverse effect on
the Company's business and results of operations.
 
     SEASONALITY.  Spalding's business is seasonal, as many sporting goods
marketed by Spalding, especially golf products, experience higher levels of
sales in the spring and summer months. For fiscal 1998, Spalding's quarterly net
sales as a percentage of its total net sales were approximately 20%, 29%, 30%
and 21%, respectively, for the first through the fourth quarters of the 1998
fiscal year. In addition, for fiscal 1998, Spalding's quarterly income from
operations as a percentage of its total income from operations was approximately
(23%), 3%, (23%) and (57%), respectively, for the first through fourth quarters
of such fiscal year. Unusual and restructuring costs in the fourth quarter for
fiscal 1998 totalled $26.4 million principally consisting of: (a) $7.2 million
increase in bad debt allowance because of concerns about the collectibility of a
receivable from one customer, (b) $5.3 to close the corporate office in Tampa,
(c) $4.0 of expenses related to the Reorganization transaction and (d) $2.8
write off related to accumulated foreign currency translation adjustments.
 
     COMPETITION.  The sporting goods industry is highly competitive. Spalding
competes primarily on the basis of product features, brand recognition, quality
and price. Spalding competes with numerous national and international companies
that manufacture and distribute sporting goods and related equipment and sports
apparel. Certain of Spalding's competitors offer types of sports equipment not
sold by Spalding. Some of Spalding's competitors are larger and have
substantially greater financial and other resources than the Company. Spalding
competes in one or several individual market segments against competitors such
as Acushnet Company (a subsidiary of Fortune Brands, Inc. the producer of
Titleist, Footjoy and Cobra golf products), Callaway Golf Co., Karsten
Manufacturing Corp. (producers of Ping golf products), Nike, Inc., Rawlings
Sporting Goods Company, Inc., Taylor Made (a subsidiary of Adidas AG) and Wilson
Sporting Goods Co. (a subsidiary of Amer Group Ltd.). Additionally, Spalding
anticipates that certain manufacturers (Nike, Inc., Callaway Golf Co. and Taylor
Made) will soon enter the premium golf ball market.
 
EVENFLO
 
     Evenflo, with net sales of $291 million through the date of the
Reorganization (August 20, 1998), is a leader in the $2.0 billion U.S. market
for juvenile and infant hardgood products, as well as a market leader in such
products in several international markets. Evenflo is one of the largest
manufactures and marketers of juvenile products in the United States as well as
a leader in several international markets based on net sales in 1997.
Established in 1920, Evenflo is one of the oldest and most recognized names in
the juvenile products industry, with a 97% brand awareness for infant feeding
products among new mothers in the United States. Evenflo believes it is a
leading supplier of juvenile products to such key national retailers as Toys "R"
Us, Inc., Wal-Mart Stores, Inc., Sears, Roebuck & Co., Kmart Corporation and
Target (a division of Dayton Hudson Corporation).
 
     Evenflo distinguishes itself from its competitors by developing innovative,
high quality products which have sometimes redefined their product categories.
For example, the 1994 introduction of the Exersaucer(R) redefined the activity
product category. Evenflo followed this success with the introduction of the On
My Way Travel System(R) in 1996, which was, according to NPD Group, Inc., the
single largest selling product in the juvenile products industry by dollar
volume in 1997. Evenflo further distinguishes itself from its competitors
through it co-branded products offerings with other national brands such as
OshKosh B'Gosh(R) and Serta(R).
 
     Evenflo products fall into four principal categories, representing the
daily activities in which the products are used: (i) "On The Go" products,
including car seats, strollers, travel systems and carriers, (ii) "Play Time"
products, including stationary activity products, swings gates and doorway
jumpers, (iii) "Bed and Bath" products including cribs, portable play yards,
monitors, mattresses, bath items and toilet trainers and (iv) "Feeding Time"
products, including reusable and disposable nurser systems, breastfeeding aids,
high chairs, oral development items such as teethers and pacifiers, bibs and
other feeding accessories.
 
     INTERNATIONAL.  Evenflo believes that higher birth rates, the adoption of
mandatory automobile child restraint laws, increasing income levels, the
lowering of trade barriers and the standardization of regulation in certain
world markets present significant growth opportunities. Evenflo has had an
international presence for
                                        7
<PAGE>   9
 
over 50 years, selling its products in 63 foreign countries, with established
operations in Canada, Mexico and the Philippines. International sales
represented $37.0 million, or approximately 13% of Evenflo's net sales through
the date of the Reorganization.
 
     SALES, MARKETING AND DISTRIBUTION.  For fiscal 1998, the five largest
customers of Evenflo represented approximately 65% of Evenflo's net sales with
Toys "R" Us, Wal-Mart, Target and Sears representing 25%, 17%, 8% and 8%,
respectively, of net sales. No other customer accounts for more than 10% of
Evenflo's worldwide net sales. As is customary in the industry, the Company's
products are generally purchased by means of purchase orders. Evenflo's sales
organization in the United States is divided into national accounts,
non-national accounts and food and drug accounts.
 
     MARKETING.  Evenflo's marketing efforts are focused on building brand
identity through broad advertising and packaging programs as well as emphasizing
product innovation and customer service. Evenflo conducts extensive research on
juvenile product industry trends, including consumer buying trends and
focus-group research with parents and children. Evenflo uses this data in making
determinations with respect to product offerings and new product introductions
to respond to consumer demands.
 
     Marketing programs are national in scope and primarily consist of print
advertising, trade and consumer promotions and targeted sampling. Evenflo
collaborates with significant accounts to develop shelf space allocations for
their products in upcoming selling seasons. For key accounts, Evenflo also
designs and sets up in-store promotional displays for products, including new
product introductions. Advertising and promotion expenditures amounted to
approximately 5% of Evenflo's net sales in fiscal 1998, 1997, and 1996.
 
     RESEARCH AND DEVELOPMENT.  Evenflo dedicates substantial resources to its
product development efforts, including 22 professionals in research and
development. Evenflo's research and development group has in effect over 231
U.S. patents and 121 foreign patents. Evenflo has developed a number of
innovative infant and juvenile products, including the first fully transparent
baby bottle, the first decorated nurser, the first convertible (infant to
toddler) car seat to pass applicable federal testing standards and the first
juvenile stationary activity product. Evenflo has approximately 52 patents
pending at the U.S. Patent and Trademark Office.
 
     MANUFACTURING, PROCUREMENT AND RAW MATERIALS.  Evenflo maintains six
manufacturing and assembly plants located in Ohio, Georgia, Alabama, Wisconsin
and two in Mexico. Evenflo also operates distribution centers in Canada and the
Philippines and has entered into a joint manufacturing arrangement with a French
corporation for the manufacture and distribution of On My Way(R) car seats and
the Exersaucer(R) in European markets. Evenflo manufactures bottles and nipples
and assembles certain infant feeding and baby care products primarily at its
facilities in Canton, Georgia and Mexico City. Car seats, high chairs,
mattresses and stationary activity products are assembled at Evenflo's plant in
Piqua, Ohio. Jasper, Alabama serves as a soft goods manufacturing feeder plant
for the final assembly operations in Ohio. Evenflo's cribs are manufactured and
assembled at a facility in Tijuana, Mexico, while wood products (primarily
gates) are produced at its plant in Suring, Wisconsin. Evenflo recently
completed the elimination of Gerry's manufacturing and distribution operations
at Thornton, Colorado and the integration of those operations into the Piqua,
Ohio and Canton, Georgia facilities and closed the Thornton facility. In
addition to the integration of Gerry into Evenflo's operations, Evenflo recently
completed the reengineering of the Piqua assembly lines to improve productivity
and capacity, including the installation of injection molding equipment. Evenflo
also redesigned the Piqua and Canton warehouses, installed computer-controlled
fabric cutting systems in Jasper and during fiscal 1998, the Company made
additional investments to expand warehousing and distribution in Piquoa and
Canton and to move administrative offices to Vandalia, Ohio. Evenflo is the only
major U.S. juvenile product manufacturer with ISO 9000 registration status.
 
     Evenflo's sourced products are manufactured according to its specifications
by third-party manufacturers located within the U.S. and abroad, primarily in
China, Thailand, Taiwan, Hong Kong and other Southeast Asian countries. Products
representing approximately 27% of Evenflo's net sales in fiscal 1998 were
produced by such third party manufacturers and only one supplier accounted for
products representing more than 10% of Evenflo's fiscal 1998 net sales (Lordship
Industrial Co. accounted for products representing approximately 14% of
Evenflo's fiscal 1998 net sales). Evenflo continually monitors its sourced
products with a staff
                                        8
<PAGE>   10
 
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 Evenflo'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, textiles
and corrugated paper, all of which are normally readily available. While all raw
materials are purchased from outside sources, Evenflo is not dependent upon a
single supplier in any of its operations for any material essential to its
business or not otherwise commercially available to Evenflo. Evenflo does not
anticipate any significant material shortages or price movements in its inputs.
Plastic resins prices may fluctuate as a result of changes in natural gas and
crude oil prices and the capacity, supply and demand for resins and the
petrochemical intermediates from which they are produced.
 
     COMPETITION.  The juvenile product industry is highly competitive and is
characterized by frequent introductions of new products, often accompanied by
advertising and promotional programs. Evenflo competes with numerous national
and international companies which manufacture and distribute infant and juvenile
products, a number of which have greater financial and other resources at their
disposal. Evenflo's principal competitors include Century Products Company, Inc.
(a subsidiary of Rubbermaid, Inc.) ("Century"), Graco Children's Products, Inc.
(a subsidiary of Rubbermaid, Inc.) ("Graco"), Cosco, Inc. (a subsidiary of Dorel
Industries, Inc.), The First Years, Inc., Fisher-Price (a division of Mattel,
Inc.), Gerber Products Company (a subsidiary of Sandaz, Ltd.), Johnson &
Johnson, Kolcraft Enterprises, Inc., Playtex Products, Inc. and Safety 1st, Inc.
Newell Co. recently acquired Rubbermaid, Inc.
 
     A number of factors affect competition in the juvenile products
manufactured and/or sold by the Company, including quality, price competition
from competitors and price points parameters established by the Company's
customers. Shelf space is a key factor in determining retail sales of juvenile
care products. A competitor that is able to maintain or increase the amount of
retail space allocated to its product may gain a competitive advantage for that
product. The allocation of retail space is influenced by many factors, including
brand name recognition, quality and price of the product, level of service by
the manufacturer and promotions.
 
     In addition, new product introductions are an important factor in the
categories in which the Company's products compete. Other important competitive
factors are brand identification, style, design, packaging and the level of
service provided to customers. The importance of these competitive factors
varies from customer to customer and from product to product. There can be no
assurance that the Company will be able to compete successfully against current
and future sources of competition or that the current and future competitive
pressures faced by the Company will not adversely affect its profitability or
financial performance.
 
     In the On The Go product category, Graco has recently entered the monitor
and travel system markets, which has resulted in an increase in competition in
these markets.
 
     TRADEMARKS AND PATENTS.  Evenflo has proprietary rights to a number of
trademarks that are important to its business including Evenflo(R), Gerry(R) and
Snugli(R). Evenflo's policy is to protect proprietary products by obtain patents
for such products when practicable. Evenflo owns approximately 231 patents and
196 trademarks and had approximately 52 patent applications and approximately 86
trademarks pending at the U.S. Patent and Trademark Office. In addition, Evenflo
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, Evenflo possesses a wide array of unpatented
proprietary technology and know-how. Evenflo 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, Evenflo 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
Evenflo or its licensors, to protect trade secrets, know-how or other
intellectual property rights owned, or to determine the scope and validity of
the proprietary rights of Evenflo or of third parties. On April 22, 1998,
Evenflo sued Graco for patent infringement relating to Evenflo's Carry Right(R)
patent. Graco has filed an answer and a counterclaim alleging infringement by
Evenflo of three different patents relating to stroller technology. In addition,
on August 7, 1998, Century filed suit against both Evenflo and Spalding alleging
the infringement of
                                        9
<PAGE>   11
 
two patents relating to the design of the storage compartment and base of
certain of Evenflo's car seats. Evenflo and Spalding intend to vigorously defend
this action and believe that an adverse outcome would not materially adversely
affect them. There can be no assurance that Evenflo and Spalding will prevail in
either of these suits or in similar litigation. See "-- Legal Proceedings."
Although Evenflo believes that, collectively, its patents are important to its
business, the loss of any one patent would not have a material adverse effect on
Evenflo's business and results of operations.
 
     PRODUCT REGULATION.  Evenflo's products are subject to the provisions of
the Federal Consumer Product Safety Act and the Federal Hazardous Substances
Act, the Highway Safety Act of 1970 (collectively, the "Safety Acts") and the
regulations promulgated thereunder. The Safety Acts authorized the Consumer
Products Safety Commission ("CPSC") to protect the public from products that
present a substantial risk of injury. The Highway Safety Act of 1970 authorizes
the National Highway Traffic Safety Administration ("NHTSA") to protect the
public from risk 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 or 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 Evenflo markets its products. Any
recall of its products could have a material adverse effect on Evenflo.
 
     In the past five years, Evenflo had three product recalls and took ten
corrective actions with respect to recalled and other products. Corrective
actions are steps taken by Evenflo 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 two calendar years, Evenflo has
executed three recalls and five corrective actions, including: the offer of a
repair kit for the On My Way(R) car seat in March 1998 affecting approximately
800,000 units due to the potential for slippage of the handle lock when used as
a carrier; and the provision of a retrofit plastic reinforcing sleeve for the
Happy Camper(R) 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 Evenflo's expenditures for recalls and corrective actions in fiscal 1997 and
fiscal 1998. In fiscal 1997 and fiscal 1998 (through 10 1/2 months), the
aggregate cost of recalls and other corrective actions was $4.4 million and $4.9
million through August 20, 1998 (with an additional $0.2 million through
September 30, 1998), respectively (including costs related to the 1998 recall of
the Two-In-One(R) booster car seat affecting approximately 32,000 units due to
cracking and breakage during testing). In addition, Evenflo has instituted a
voluntary recall of its Houdini(R) play yards affecting approximately 200,000
units as part of an industry-wide recall of play yards with protruding rivets.
Evenflo anticipates that this recall will cost approximately $0.1 million in the
aggregate. Evenflo believes that it is indemnified by Spalding for the costs of
the recall of the Houdini(R) play yards under the terms of the Indemnification
Agreement entered into on the date of the Reorganization. See "Certain
Relationships and Related Transaction". Evenflo believes that recalls had an
effect on fiscal 1998 net sales and will continue to have such an effect in
fiscal 1999. See "Management's Discussion and Analysis of financial Condition
and Results of Operations." In addition to product recalls and corrective
actions required by the CPSC or the NHTSA, Consumer 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.
 
RESEARCH AND DEVELOPMENT
 
     The Spalding research and development department consists of more than 70
scientists, engineers and technicians. Spalding introduced the first dimpled
golf ball in the U.S., invented the first two-piece golf ball, and developed and
patented the blended Surlyn cut-resistant golf ball cover. Spalding has also
introduced a number of golf club innovations, including one of the first
titanium irons in the market. In addition, the popularity of Spalding's patented
ZK-Composite(R) materials for basketballs has contributed to the number one
market share in that market. Research and development expenditures amounted to
1.6%, 1.6% and 1.3% of Spalding's net sales in fiscal 1998, 1997 and 1996,
respectively.
 
                                       10
<PAGE>   12
 
     Evenflo dedicates substantial resources to its product development efforts,
including over 22 professionals in research and development. In addition to
Evenflo's in-house professionals, outside sources are used for research and
development, including individual designers/inventors, design houses,
universities and engineering services. Each new product Evenflo develops is
subjected to extensive evaluation to improve quality. Research and development
expenditures amounted to approximately 1% of Evenflo's net sales in each of
fiscal 1998, 1997 and 1996.
 
ENVIRONMENTAL MATTERS
 
     The Company's operations are subject to federal, state, and local
environmental laws and regulations that impose limitations on the discharge of
pollutants into the environment and establish standards for the handling,
generation, emission, release, discharge, treatment, storage, and disposal of
certain materials, substances, and wastes and the remediation of environmental
contaminants ("Environmental Laws") that continue to be adopted and amended.
These Environmental Laws regulate, among other things, air and water emissions
and discharges at the Company's manufacturing facilities; the generation,
storage, treatment, transportation and disposal of solid and hazardous waste by
the Company; the remediation of environmental contamination; the release of
toxic substances, pollutants and contaminants into the environment at properties
operated by the Company and at other sites; and, in some circumstances, the
environmental condition of property prior to a transfer or sale (including
certain facilities previously owned or operated by the Company). Risks of
significant costs and liabilities are inherent in the Company's operations and
facilities, as they are with other companies engaged in like businesses. The
Company believes, however, that its operations are in substantial compliance
with all applicable Environmental Laws.
 
     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. The Company expects that future
regulations and changes in the text or interpretation of existing Environmental
Laws may subject its operations to increasingly stringent standards. 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 16 sites under
the federal "Superfund" statute and/or certain analogous state statutes.
Pursuant to various federal, state and local laws and regulations, PRPs can
become liable for the costs of removal and/or remediation of those hazardous
substances disposed on, in or about such properties. The liability imposed by
the Superfund statute and analogous state statutes generally is joint and
several and imposed without regard to whether the generator knew of, or was
responsible for, the presence of such hazardous substances. The Company
estimates its liabilities with respect to such sites are less than $1 million in
the aggregate.
 
     Regulations resulting from the 1990 Amendments to the Clean Air Act (the
"1990 Amendments") that will pertain to the Company's manufacturing operations
are currently not expected to be promulgated for 3 to 5 years. The Company
cannot predict the level of required capital expenditures resulting from future
environmental regulations such as those forthcoming as a result of the 1990
Amendments; however, the Company does not anticipate expenditures that will be
required by such regulations to be material.
 
EMPLOYEES
 
     The Company's worldwide workforce consisted of approximately 1,900
employees (Spalding) as of September 30, 1998.
 
     At the Company's facilities, approximately 500 of the Company's employees
are represented under collective bargaining agreements, which agreement expires
2001. The Company does not anticipate any difficulty in extending or negotiating
this agreement when it expires. The Company believes that its labor
 
                                       11
<PAGE>   13
 
relations are good and no material labor cost increases, other than in the
ordinary course of business, are anticipated.
 
ITEM 2:  PROPERTIES
 
     The Company's manufacturing and distribution facilities and U.S. sales
operations are generally located on owned premises or leased premises. The
Company conducts a significant portion of its international sales operations on
leased premises, which have remaining terms generally ranging from one to ten
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 following table sets forth information as of September 30, 1998 with
respect to the manufacturing, warehousing and office facilities used by the
Company in its businesses:
 
<TABLE>
<CAPTION>
                                                                             OWNED/    SQUARE
LOCATION                                           DESCRIPTION               LEASED    FOOTAGE
--------                                 --------------------------------    ------    -------
<S>                                      <C>                                 <C>       <C>
Spalding
  Chicopee, MA.........................  Manufacturing/Warehousing/Office    Owned     560,500
  Chicopee, MA.........................  Warehousing/Office                  Owned     166,650
  Chicopee, MA.........................  Manufacturing/Warehousing/Office    Owned     110,725
  Gloversville, NY.....................  Manufacturing/Warehousing/Office    Leased     80,000
  Gloversville, NY.....................  Manufacturing/Warehousing/Office    Owned      65,225
  Gloversville, NY.....................  Manufacturing/Warehousing/Office    Leased     40,000
  Reno, NV.............................  Warehousing/Office                  Leased    157,000
  Reno, NV.............................  Warehousing/Office                  Leased    100,000
  Reno, NV.............................  Warehousing/Office                  Leased     48,000
  Richmond, ME.........................  Manufacturing                       Owned      61,000
  Clinton, CT..........................  Retail Outlet Store                 Leased      3,254
  Sellersville, PA.....................  Office                              Leased      1,200
  West Palm Beach, FL..................  Golf equipment test site            Leased        625
  Woodbridge, Ontario..................  Manufacturing/Warehousing/Office    Leased     93,649
  Australia............................  Manufacturing/Warehousing/Office    Owned      59,493
  Australia............................  Warehousing/Office                  Leased     10,000
  Australia............................  Warehousing/Office                  Leased      3,875
  Australia............................  Warehousing/Office                  Leased      2,820
  Australia............................  Warehousing/Office                  Leased      2,260
  France...............................  Warehousing/Office                  Leased     10,549
  Germany..............................  Warehousing/Office                  Leased      3,546
  Italy................................  Warehousing/Office                  Leased      8,396
  Japan................................  Warehousing                         Leased     14,203
  Japan................................  Office                              Leased      5,578
  New Zealand..........................  Warehousing/Office                  Leased      9,297
  Spain................................  Office                              Leased      2,690
  Sweden...............................  Warehousing/Office                  Leased     15,424
  Taiwan...............................  Office                              Leased      3,744
  United Kingdom.......................  Warehousing/Office                  Leased     25,860
</TABLE>
 
Substantially all of the assets of Spalding are encumbered by liens securing the
Company's senior credit facilities. The Company's corporate headquarters located
in Tampa Florida was shut down effective
 
                                       12
<PAGE>   14
 
September 30, 1998. In addition, on August 20, 1998, the Company sold a
controlling interest in Evenflo, which has been omitted from the above listing.
 
ITEM 3:  LEGAL PROCEEDINGS
 
     In February 1998, Callaway Golf Company and Callaway Golf Ball Company,
Inc. sued the Company for false advertising and trademark infringement arising
from the introduction of the Company's System C golf ball which was designed to
maximize performance when used with the Callaway Great Big Bertha(R) Driver. The
U.S. District Court in Santa Ana, California refused to grant the plaintiff's
motion for a temporary restraining order as well as its motion for expedited
discovery. The case is in pre-trial discovery with a trial expected in 1999. The
Company believes any decision against it would not have a material adverse
effect on its consolidated financial position, results of operations or cash
flows.
 
     Due to the nature of Evenflo's products, the Company has been engaged in
the defense of product liability claims related to its products, particularly
with respect to juvenile car seats and play yards. Such claims have caused the
Company to incur material litigation and insurance expenses. Since 1988,
approximately 280 product liability claims have been brought against Evenflo,
188 of which related to juvenile car seats. Evenflo had a reserve for product
liability claims at September 30, 1997 of $8.9 million and at the date of the
Reorganization, August 20, 1998, of $ 10.1 million. Spalding's reserve for
product liability claims at September 30, 1998 was $0.6 million.
 
     In addition to the defense of product liability claims, Evenflo has
recalled certain of its products, in response to consumer complaints and
following internal company testing and identified product safety problems or
manufacturing defects. Product recalls have been primarily in the juvenile car
seat and play yard categories. Remedial measures have included increasing
notices to consumers on the product itself and improving design. See
"Evenflo -- Product Regulation." As part of the Reorganization, the Company
retained the liability for recalls of all Evenflo products manufactured prior to
August 20, 1998. See "Certain Relationships and Related Transactions." Within
the last two calendar years, Evenflo has executed three product recalls and five
corrective actions. Over their life, these claims have resulted in $6.8 million
in liabilities of which $0.2 million was incurred subsequent to August 20, 1998
but prior to the 1998 fiscal year end. The Company estimates the Company's
accrued liability, including the $0.2 million mentioned above, related to these
open cases is $1.1 million and has recorded this amount at September 30, 1998.
 
     From time to time the Company also is involved in patent infringement
actions. The Company believes that it is not presently a defendant or plaintiff
in any patent infringement actions, the outcome of which would have a material
adverse effect on its consolidated financial position, results of operations or
cash flows. Evenflo filed a patent infringement action on April 22, 1998 in the
U.S. District Court of the Northern District of Ohio against Graco relating to
Evenflo's Carry Right handle used on Evenflo's line of car seats. On May 6,
1998, Graco filed an answer and counterclaim alleging infringement by Evenflo of
three different patents relating to stroller technology. In addition, on August
7, 1998, Century filed suit in U.S. District Court for the Northern District of
Ohio against both Evenflo and Spalding alleging the infringement of two patents
relating to the design of the storage compartment and base of certain Evenflo
car seats. There can be no assurance as to the outcome of either of such
litigations.
 
     In 1989, Evenflo entered into a license agreement for the design of the
Happy Camper(R) play yard. The license agreement was cancelled in April 1997 by
the licensor, and on July 18, 1997 Evenflo filed suit for breach of contract.
The licensor has filed a claim charging Evenflo with patent infringement and
breach of contract. It is anticipated that the consolidated case will go to
trial in early 1999. There can be no assurances as to the outcome of such
litigation. The loss of the license required Evenflo to design a new play yard,
which interrupted shipments to customers for a nine-month period. However,
Evenflo has recently re-entered the play yard product category with the Play
Crib(R).
 
     In addition to the foregoing matters, the Company is a party to various
lawsuits arising in the ordinary course of business. None of those other
lawsuits are believed to be material with respect to the business assets and
continuing operations of the Company
 
                                       13
<PAGE>   15
 
ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matters were submitted to a vote of the Company's security holders
(through the solicitation of proxies or otherwise) during the last quarter of
the fiscal year ended September 30, 1998.
 
                                    PART II
 
ITEM 5:  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The Company's common stock is not registered under the Securities Exchange
Act of 1934, as amended, and no trading market exists for such common stock. No
dividends were paid on the Company's common stock in fiscal 1998. As of December
21, 1998, there were 82 holders of the Company's common stock.
 
ITEM 6:  SELECTED FINANCIAL DATA
 
     The following table sets forth certain selected historical consolidated
financial data of the Company. The historical consolidated financial statements
of the Company for the five fiscal years ended September 30, 1998 have been
audited. The historical consolidated financial data for the three fiscal years
ended September 30, 1998 have been derived from, and should be read in
conjunction with, the audited consolidated financial statements of the Company
and the related notes thereto included elsewhere in this Form 10-K. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K. The operating results of
Evenflo Company, Inc. are included for the entire year in all years below except
for 1998, in which the Company sold a controlling interest in Evenflo on August
20, 1998.
 
                                       14
<PAGE>   16
 
<TABLE>
<CAPTION>
                                                     YEAR ENDED SEPTEMBER 30,
                                     ---------------------------------------------------------
                                       1998         1997         1996       1995        1994
                                     ---------    ---------    --------    -------    --------
                                                      (DOLLARS IN THOUSANDS)
<S>                                  <C>          <C>          <C>         <C>        <C>
OPERATING STATEMENT DATA
Spalding net sales(1)..............  $ 512,521      530,448     451,915    424,118     411,574
Evenflo net sales..................    290,791      296,743     237,165    210,039     171,533
                                     ---------    ---------    --------    -------    --------
Total net sales....................    803,312      827,191     689,080    634,157     583,107
Cost of sales(2)...................    564,645      565,959     452,037    407,334     370,328
                                     ---------    ---------    --------    -------    --------
Gross profit.......................    238,667      261,232     237,043    226,823     212,779
Selling, general and administrative
  expenses(3)......................    263,271      229,313     196,741    178,637     178,678
Royalty income, net................    (13,509)     (14,109)    (14,339)   (13,514)    (12,789)
Restructuring costs(4).............     21,563       12,001           0          0           0
1994 Management Stock Ownership
  Plan expense(5)..................          0            0      20,828      1,130           0
Recapitalization costs(6)..........          0            0       7,700          0           0
Litigation settlement expense(7)...          0            0           0      2,400           0
                                     ---------    ---------    --------    -------    --------
Income (loss) from operations......    (32,658)      34,027      26,113     58,170      46,890
Interest expense, net..............     78,041       71,326      37,718     38,108      17,073
Currency loss (gain), net..........      2,936        1,236         775        381        (144)
Equity in net earnings of Evenflo
  Company, Inc.(8).................     (1,476)           0           0          0           0
                                     ---------    ---------    --------    -------    --------
Earnings (loss) before income
  taxes............................   (112,159)     (38,535)    (12,380)    19,681      29,961
Income taxes (benefit).............    (33,196)      (8,500)      9,300      8,683      11,938
                                     ---------    ---------    --------    -------    --------
Earnings (loss) before
  extraordinary loss...............    (78,963)     (30,035)    (21,680)    10,998      18,023
Extraordinary loss on early
  extinguishment of debt, net of
  income tax benefit of $3,182, $0,
  $3,200, $0 and $0................     (5,909)           0      (5,987)         0           0
                                     ---------    ---------    --------    -------    --------
Net earnings (loss)................    (84,872)     (30,035)    (27,667)    10,998      18,023
Other comprehensive earnings
  (loss) -- currency translation
  adjustments net of income tax
  (expense) benefits of $(400),
  $285, $239, $662, and ($59)......      2,405         (819)        (43)    (1,269)        587
                                     ---------    ---------    --------    -------    --------
Comprehensive earnings (loss)......  $ (82,467)     (30,854)    (27,710)     9,729      18,610
                                     =========    =========    ========    =======    ========
Ratio of earnings to fixed
  charges(9)(10)...................         --           --          --       1.49x       2.61x
BALANCE SHEET DATA
Working capital (deficiency).......  $ 129,059      130,076     169,551     88,124    (110,193)
Total assets.......................    535,964      761,231     690,761    536,261     508,022
Long-term debt (net of current
  portion).........................    503,074      609,900     625,800    313,073     129,788
Shareholders' equity
  (deficiency)(11).................   (137,149)    (170,631)   (348,596)   (12,360)    (22,730)
Redeemable Preferred stock.........          0            0     150,000          0           0
</TABLE>
 
---------------
 (1) Included in net sales for fiscal 1998 are $0.4 million of unusual cash
     discount expenses resulting from a decision to close certain non-U.S.
     affiliates.
 
 (2) Included in cost of sales are unusual charges of (i) $1.6 million in 1996
     as a result of expensing the increase to fair value of the Etonic
     inventories as of the date of the Etonic Acquisition, and (ii) $8.7 million
     in 1997 for the following items: (a) $2.7 million attributable to Evenflo
     manufacturing and
 
                                       15
<PAGE>   17
 
warehouse reconfiguration, (b) $3.1 million inventory write-down resulting from
a decision to discontinue the sale of certain Gerry products, (c) $1.3 million
as a result of expensing the increase to fair value of the Gerry inventories as
     of the date of the Gerry Acquisition, and (d) $1.6 million inventory
     write-down resulting from a decision to discontinue the sale of certain
     products by certain Spalding international affiliates and (iii) $4.2
     million in 1998 for the following items (a) $0.9 million to write down of
     inventory from a Spalding decision to discontinue the sale of certain
     products by U.S. operations, (b) $2.9 million to write down inventory and
     other costs resulting from a Spalding decision to close certain non-U.S.
     affiliates, (c) $0.2 million from Evenflo related manufacturing/warehouse
     reconfiguration and (d) $0.2 million to relocate Gerry Colorado operations
     to Evenflo's Ohio and Georgia facilities.
 
 (3) In fiscal 1996, SG&A expenses included $17.6 million of the following
     unusual items: (i) $5.4 million in transaction bonus payments arising in
     connection with the Recapitalization, (ii) $5.6 million of expenses related
     to the completion of the Etonic Acquisition and consolidating the
     operations of Etonic with those of Spalding, (iii) $2.8 million of expenses
     incurred by the Company on behalf of its former parent, (iv) $2.3 million
     of accounts receivable charge-offs, as a result of the bankruptcy of two of
     its customers, (v) $1.2 million of costs to consolidate Evenflo's feeding
     and furniture operations, which were separately managed, into one entity,
     and (vi) $0.3 million of costs related to the relocation of the corporate
     office. In fiscal 1997, SG&A expenses included $3.2 million of the
     following unusual items: (i) $2.6 million of costs to consolidate Evenflo's
     feeding and furniture operations, (ii) $0.8 million to purchase the Etonic
     Canadian distribution rights, (iii) $0.1 million accounts receivable
     write-offs, and (iv) a partially offsetting $0.4 million from settlement of
     a 1996 Etonic computer software dispute. In fiscal 1998, SG&A expenses
     included $21.1 million of the following unusual items: (a) $5.7 million to
     write-off of funds advanced to Spalding's freight bill processor, (b) $1.3
     million of receivables write-off resulting from a decision to close certain
     non-U.S. Spalding affiliates, (c) $7.2 million increase in bad debt
     allowance because of concerns about the collectibility of a receivable from
     one customer, (d) $2.9 million in other costs and (e) $4.0 million of
     expenses related to the Reorganization transaction.
 
 (4) In fiscal 1997, the Company had $12.0 million of restructuring costs
     comprised of $9.6 million to relocate the Gerry Colorado administrative and
     manufacturing operations to Evenflo's Ohio and Georgia locations and $2.4
     million to restructure Spalding international operations. In fiscal 1998,
     the Company had restructuring costs associated with Spalding totaling $20.1
     million and with Evenflo totaling $1.4 million. The Spalding costs
     included: (i) $5.3 million of expenses related to the closure of the Tampa
     headquarters, (ii) $8.1 million of severance and related expenses at
     Spalding, (iii) $3.5 million of expense related to the termination of
     service contracts and other expenses associated with the closing of the
     Spalding affiliates in Japan, Mexico, Spain, France, Germany, and Italy,
     (iv) $2.8 million of write-offs related to accumulated foreign currency
     translation adjustments and (v) $0.4 million in consolidations of expenses
     related primarily to lease terminations. The costs related to Evenflo are
     comprised of expenses related to the integration of Gerry into the Evenflo
     facilities. See Note F of the Notes to the Consolidated Financial
     Statements appearing elsewhere in this Form 10-K.
 
 (5) Represents compensation expense related to the increase in the estimated
     fair value of common stock of certain members of senior management through
     the 1994 Management Stock Ownership Plan which were redeemed in the
     Recapitalization.
 
 (6) Represents non-capitalized expenses, such as legal, printing costs, and
     other professional fees and costs incurred in connection with the
     Recapitalization.
 
 (7) In 1995 the Company settled an indemnification dispute involving an
     environmental matter of a former operation for $2.4 million.
 
 (8) Represents the Company's share (42.4%) of the net earnings of Evenflo
     Company, Inc. for the period from August 20, 1998 (date of Reorganization)
     to September 30,1998.
 
 (9) For purposes of determining the ratio of earnings to fixed charges,
     earnings are defined as earnings (loss) before income taxes, extraordinary
     loss, cumulative effect of accounting changes, and other
 
                                       16
<PAGE>   18
 
comprehensive earnings (loss) plus "fixed charges" (except that capitalized
interest is to be excluded). "Fixed charges" consist of interest on all
indebtedness, whether expensed or capitalized, amortization of deferred
     financing costs, and one-third of rental expense on operating leases,
     representing that portion of rental expense deemed by the Company to be
     attributable to interest.
 
(10) The deficiency of earnings to "fixed charges" for fiscal 1998, 1997 and
     1996 was approximately $112.2 million, $38.5 million and $12.4 million,
     respectively.
 
(11) Shareholders' equity (deficiency) as of September 30, 1994 reflects the
     acquisition of the Acquired Trademarks in May 1994 . Shareholders' equity
     (deficiency) as of September 30, 1996 reflects the Recapitalization of the
     Company as of that date. Shareholders' equity (deficiency) as of September
     30, 1997 includes the effects of the exchange of all the Company's
     outstanding Preferred Stock for the Company's common stock (see Note L to
     the Consolidated Financial Statements). Shareholder's equity (deficiency)
     as of September 30, 1998 includes $100 million of Preferred Stock.
 
                                       17
<PAGE>   19
 
ITEM 7:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
 
RESULTS OF OPERATIONS
 
     The following table sets forth operating results of the Company for the
periods indicated.
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED SEPTEMBER 30,
                                                              ------------------------------
                                                                  (DOLLARS IN THOUSANDS)
                                                                1998       1997       1996
                                                              --------    -------    -------
<S>                                                           <C>         <C>        <C>
Spalding net sales..........................................  $512,521    530,448    451,915
Evenflo net sales...........................................   290,791    296,743    237,165
                                                              --------    -------    -------
     Total net sales........................................   803,312    827,191    689,080
Cost of sales...............................................   564,645    565,959    452,037
                                                              --------    -------    -------
Gross profit................................................   238,667    261,232    237,043
Selling, general and administrative expenses................   263,271    229,313    196,741
Royalty income, net.........................................   (13,509)   (14,109)   (14,339)
Restructuring costs.........................................    21,563     12,001          0
1994 Management Stock Ownership Plan expense................         0          0     20,828
Recapitalization costs......................................         0          0      7,700
                                                              --------    -------    -------
Income (loss) from operations...............................   (32,658)    34,027     26,113
Interest expense, net.......................................    78,041     71,326     37,718
Currency loss, net..........................................     2,936      1,236        775
Equity in net earnings of Evenflo Company, Inc..............    (1,476)         0          0
                                                              --------    -------    -------
Earnings (loss) before income taxes and extraordinary
  loss......................................................  (112,159)   (38,535)   (12,380)
Income taxes (benefit)......................................   (33,196)    (8,500)     9,300
                                                              --------    -------    -------
Earnings (loss) before extraordinary loss...................   (78,963)   (30,035)   (21,680)
Extraordinary loss on early extinguishment of debt, net of
  income tax benefit of $3,182, $0 and $3,200,
  respectively..............................................    (5,909)         0     (5,987)
                                                              --------    -------    -------
Net earnings (loss).........................................   (84,872)   (30,035)   (27,667)
Other comprehensive earnings (loss) -- currency translation
  adjustment net of income tax (expense) benefits of $(400),
  $285, and $239............................................     2,405       (819)       (43)
                                                              --------    -------    -------
Comprehensive earnings (loss)...............................  $(82,467)   (30,854)   (27,710)
                                                              ========    =======    =======
</TABLE>
 
                                       18
<PAGE>   20
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED SEPTEMBER 30,
                                                              --------------------------------
                                                              (PERCENTAGE OF TOTAL NET SALES)
                                                                1998        1997        1996
                                                              --------    --------    --------
<S>                                                           <C>         <C>         <C>
Spalding net sales..........................................     63.8%       64.1%       65.6%
Evenflo net sales...........................................     36.2        35.9        34.4
                                                                -----       -----       -----
     Total net sales........................................    100.0%      100.0%      100.0%
Cost of sales...............................................     70.3        68.4        65.6
                                                                -----       -----       -----
Gross profit................................................     29.7        31.6        34.4
Selling, general and administrative expenses................     32.8        27.7        28.6
Royalty income, net.........................................     (1.7)       (1.7)       (2.1)
Restructuring costs.........................................      2.7         1.5         0.0
1994 Management Stock Ownership Plan expense................      0.0         0.0         3.0
Recapitalization costs......................................      0.0         0.0         1.1
                                                                -----       -----       -----
Income (loss) from operations...............................     (4.1)        4.1         3.8
Interest expense, net.......................................      9.7         8.6         5.5
Currency loss, net..........................................      0.4         0.2         0.1
Equity in net earnings of Evenflo Company, Inc..............     (0.2)        0.0         0.0
                                                                -----       -----       -----
Earnings (loss) before income taxes and extraordinary
  loss......................................................    (14.0)       (4.7)       (1.8)
Income taxes (benefits).....................................     (4.1)       (1.1)        1.3
                                                                -----       -----       -----
Earnings (loss) before extraordinary loss...................     (9.9)       (3.6)       (3.1)
Extraordinary loss on early extinguishment of debt..........     (0.7)        0.0        (0.9)
                                                                -----       -----       -----
Net earnings (loss).........................................    (10.6)       (3.6)       (4.0)
Other comprehensive earnings (loss) -- currency translation
  adjustment net of income (tax) benefits...................      0.3        (0.1)        0.0
                                                                -----       -----       -----
Comprehensive earnings (loss)...............................    (10.3)%      (3.7)%      (4.0)%
                                                                =====       =====       =====
</TABLE>
 
FORWARD LOOKING STATEMENTS
 
     With the exception of historical information (information relating to the
Company's financial condition and results of operations at historical dates or
for historical periods), the matters discussed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations ("MD&A") are
forward-looking statements that necessarily are based on certain assumptions and
are subject to certain risks and uncertainties. The forward-looking statements
are based on management's expectations as of the date hereof. Actual future
performance and results could differ from that contained in or suggested by
these forward-looking statements as a result of the factors set forth in this
MD&A and elsewhere in the Current Report on Form 8-K dated July 31, 1998 and
related filings with the Securities and Exchange Commission. The Company assumes
no obligation to update any such forward looking statements.
 
     For all periods presented, the amounts included in the MD&A include the
effects of "Push-down" accounting that resulted from the separation of the
Spalding and Evenflo segments.
 
  YEAR ENDED SEPTEMBER 30, 1998 ("FISCAL 1998")
  COMPARED TO YEAR ENDED SEPTEMBER 30, 1997 ("FISCAL 1997")
 
     NET SALES.  Net sales are gross sales net of returns, allowances, trade
discounts, freight on goods sold and royalties paid on third-party trademarks
used on the Company's products. The Company's net sales decreased to $803.3
million in fiscal 1998 from $827.2 million in fiscal 1997, a decrease of $23.9
million or 2.9%.
 
     Spalding's net sales decreased to $512.5 million for fiscal 1998 from
$530.4 million for fiscal 1997, a decrease of $17.9 million or 3.4%.
International affiliate operations in Japan, Mexico, Spain, France, Germany, and
Italy underwent restructuring activities (see "Restructuring Costs") and
accounted for $20.9
 
                                       19
<PAGE>   21
 
million of the net sales reduction. Sales in these countries are now being
handled through independent distributors. Additional declines in Australia and
Southeast Asia are attributable to weaker currencies compared to the U.S.
dollar, the elimination of certain unprofitable product lines in Australia, and
economic conditions in Southeast Asia. These net sales declines were partially
offset by record sales in Canada. Total international net sales declined $24.6
million in fiscal 1998.
 
     Net sales in the U.S. operations increased by $7.0 million due to an
increase in sales of golf products compared to fiscal 1997 of $25.7 million, or
9.3%. The growth in U.S. sales of golf products was led by a strong demand for
Spalding(R) branded golf clubs, such as the Spalding Executive(R) model, which
achieved sales increases of 32.2% compared to fiscal 1997, as well as a 48%
increase in premium golf ball products, such as Strata(R), to the on and off
course channels. Mark O'Meara's two wins in 1998, the Masters and the British
Open, and his being named Golfer of the Year, contributed to the ongoing Strata
success. The market for premium golf clubs is currently saturated with inventory
as manufacturers, including Spalding, built product in anticipation of demand
that did not materialize. As a result, the aggregate net sales of premium grade
Top-Flite(R) Tour irons and Intimidator(TM) metal woods were flat compared to
fiscal 1997 levels. Net sales of Etonic golf shoes and golf accessories grew by
9% to $57.2 million on the continuing success of The Difference(R) spikeless
golf shoe, now the number one selling model in the off-course channel of
distribution, as well as improved sales of golf gloves and golf bags. Increases
in golf products were partially offset by declines in sporting goods and
athletic shoes totaling $18.7 million, or 17%, when compared to fiscal 1997 net
sales. The declines in sales of sporting goods were primarily attributable to
declines in sales of basketballs, athletic shoes and product lines that are
being discontinued.
 
     Net sales for Evenflo that are included in the consolidation were $290.8
million for the ten and one-half month period ended August 20, 1998, a decrease
of $5.9 million, or 2%, from the fiscal 1997 twelve month period amount of
$296.7 million. Subsequent to August 20, 1998, Evenflo's results of operations
are being accounted for under the equity method of accounting. The net sales
decrease was due to (i) the difference in the length of the periods (10 1/2
months for fiscal 1998 versus 12 months for fiscal 1997) that Evenflo's
operations were consolidated into the Company's financial statements (ii)
discontinue certain Gerry products that did not fit with Evenflo's product line
strategies and (iii) the withdrawal of certain Gerry products from the market
place in order to re-engineer such products to meet Evenflo's standards. Net
sales were also negatively impacted by (a) an increased level of returns of
breast pumps, monitors and strollers, (b) 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, Evenflo's newest entrant in the play
yard category, which began to be shipped to retailers in February 1998, and (c)
the effects of certain product safety campaigns. Evenflo's fiscal 1998
international net sales were down $6.0 million compared to the fiscal 1997
levels due primarily to 10 1/2 month period versus the full 12 month fiscal
year.
 
     GROSS PROFIT.  Gross profit is net sales less cost of sales which includes
the costs necessary to make the Company's products, including the costs of raw
materials, production, warehousing and procurement. The Company's gross profit
decreased to $238.7 million in fiscal 1998 from $261.2 million for fiscal 1997,
a decrease of $22.5 million or 8.6%. Gross profit as a percentage of net sales
declined to 29.7% in fiscal 1998 from 31.6% in fiscal 1997. Spalding's gross
profit decreased to $182.5 million in fiscal 1998 from $200.4 million in fiscal
1997, a decrease of $17.9 million or 8.9%. Spalding's gross margin declined to
35.6% in fiscal 1998 from 37.8% in fiscal 1997. Evenflo's gross profit decreased
to $56.2 million in fiscal 1998 (ten and one-half months) from $60.8 million in
fiscal 1997 (twelve months), a decrease of $4.6 million or 7.6% and is primarily
attributable to the sale of 57.6% of the Company's investment in Evenflo on
August 20, 1998 and the accounting for Evenflo's results of operations
subsequent to August 20, 1998 under the equity method of accounting.
 
     The decline in Spalding's gross profit is principally due to (i) increased
sales of products with lower margins, such as Spalding Executive(R) clubs, (ii)
close-out sales activity of spiked golf shoes as the market transitioned to
spikeless shoes, (iii) $3.5 million in inventory write-downs resulting from a
decision to close certain international affiliates and to discontinue certain
U.S. product lines, (iv) close out activity on certain U.S. sporting goods
products, (v) price competition in the premium golf club market, (vi) declines
in
 
                                       20
<PAGE>   22
 
international sales, and (vii) declines in sales of sporting goods. Spalding's
gross margin declined due to price compression on golf clubs resulting from
excessive inventory in the retail channels and from price compression on golf
shoes, the result of the transitions from spiked shoes to spikeless shoes. Gross
margin on sporting goods also decreased as a result of lost product placements
in key accounts.
 
     Evenflo's gross profit dollars that are included in the consolidation are
$56.2 million for the ten and one-half month period ended August 20, 1998, a
decrease of $4.6 million from the fiscal 1997 twelve month period amount of
$60.8 million, or a 7.6% decline. Evenflo's gross margins decreased to 19.3% of
net sales in fiscal 1998 from 20.5% of net sales 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 higher costs associated with the process of integrating Gerry's
operations with those of Evenflo, (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 compensating increase in
selling price. The dollar decline is principally due to the difference in the
length of the periods (10 1/2 months for fiscal 1998 versus 12 months for fiscal
1997).
 
     SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES.  SG&A expenses
include the costs necessary to sell the Company's products and the general and
administrative costs of managing the business, including salaries and related
benefits, commissions, advertising and promotion expenses, bad debts, travel,
amortization of intangible assets, insurance and product liability costs,
consumer corrective action campaign costs and professional fees. The Company's
SG&A expenses increased to $263.3 million for fiscal 1998 from $229.3 million
for fiscal 1997, an increase of $34.0 million or 14.8%.
 
     Spalding's SG&A expenses increased $26.5 million during fiscal 1998 as
compared with fiscal 1997. As a percentage of net sales, SG&A expenses increased
to 37.9% for fiscal 1998 from 31.9% for fiscal 1997. The increase in fiscal 1998
is principally due to (i) $8.2 million in higher domestic advertising,
promotion, and endorsement costs (including the NBA contractual increases), (ii)
$5.7 million in a write-off of funds advanced to a freight bill processor, (iii)
$3.5 million in unusual costs primarily associated with closing affiliate
operations in Japan, Mexico, Spain, France, Germany, and Italy, (iv) $2.9
million in higher U.S. selling expenses principally for salaries and related
benefits, (v) $2.0 million increase in legal expenses to protect the Company's
intellectual property, (vi) $7.2 million increase in bad debt allowance because
of concerns about the collectibility of a receivable from one customer and (vii)
$0.4 million in recovery from the settlement of a 1996 Etonic computer software
dispute that occurred in fiscal 1997 and did not repeat itself in fiscal 1998,
which increase in SG&A is partially offset by a $3.4 million aggregate decrease
in spending by the Company's international affiliate operations that were
transitioned to independent distributors.
 
     SG&A for Evenflo that are included in the consolidation is $61.9 million
for the ten and one-half month period ended August 20, 1998, an increase of $5.8
million from the fiscal 1997 twelve month period. As a percentage of net sales,
SG&A expenses increased to 21.3% in fiscal 1998 from 18.9% in fiscal 1997.
Evenflo's $6.0 million increase in SG&A expenses was principally due to (i) an
increase in the number of selling and administrative personnel during the Gerry
integration, (ii) increased product development and engineering efforts related
to a number of the product lines, (iii) higher advertising and promotional
costs, and (iv) $4.0 million in expenses related to the Reorganization
transaction, partially offset by (a) lower product liability expenses compared
to fiscal 1997, and (b) lower costs from the elimination of certain redundant
functions as part of the Gerry integration.
 
     The corporate office SG&A expenses decreased $0.1 million to $5.3 million
during fiscal 1998 as compared with a fiscal 1997 amount of $5.4 million. The
decrease is attributable to closing the Tampa office and fiscal 1997 transaction
costs that did not recur in fiscal 1998.
 
     ROYALTY INCOME.  Royalty income is primarily from licensing Spalding's
worldwide trademarks. Royalty income decreased to $13.5 million in fiscal 1998
from $14.1 million in fiscal 1997. The $0.6 million decrease was principally due
to (i) the weaker Japanese yen compared to the U.S. dollar and (ii) elimination
of licensees that were inconsistent with the strategic direction of the Company.
 
                                       21
<PAGE>   23
 
     RESTRUCTURING COSTS.  In fiscal 1998, the Company had $21.5 million of
restructuring costs comprised of (i) $5.3 million of expenses related to the
closure of the Tampa headquarters, (ii) $8.1 million of severance and related
expenses at Spalding, (iii) $3.5 million of other expenses associated with the
closing of the Spalding affiliates in Japan, Mexico, Spain, France, Germany, and
Italy, (iv) $2.8 million of write-offs related to accumulated foreign currency
translation adjustments, (v) $0.4 million in consolidations of expenses related
primarily to lease terminations, and (vi) $1.4 million in expenses related to
Evenflo integrating Gerry operations into its facilities.
 
     INTEREST EXPENSE.  Interest expense increased $6.7 million to $78.0 million
in fiscal 1998 from $71.3 million for fiscal 1997. The increase is principally
due to the Company's weighted average outstanding balances for fiscal 1998 of
$704.8 million compared to $679.0 million under the Company's borrowing
arrangements then in effect for fiscal 1997. The increase in the Company's
weighted average outstanding balances for fiscal 1998 were partially offset by
lower interest rates as the Company's average U.S. borrowing rate decreased to
9.1% from 9.8% in fiscal 1997.
 
     CURRENCY LOSS.  For fiscal 1998, the Company's currency loss of $2.9
million was $1.7 million higher than the currency loss for fiscal 1997. See
"Liquidity and Capital Resources."
 
     INCOME TAXES.  In fiscal 1998, the Company recorded a $33.2 million tax
benefit which represents an effective income tax rate of 30% in relation to a
loss before income taxes and extraordinary item of $112.2 million. The inability
to assure a tax benefit on losses from non-U.S. operations, coupled with
payments of certain non-U.S. withholding taxes, resulted in a lower effective
tax rate.
 
     NET LOSS.  The Company recorded a net loss of $84.9 million for fiscal 1998
compared to a $30.0 million net loss for fiscal 1997. The primary variances
included in the decreases to earnings were: (i) $22.6 million decrease in gross
profit of which $4.3 million relates to unusual costs (see Restructuring and
Unusual Costs) and the remainder relates to volume, mix and close-out activity
(ii) $6.7 million relates to increased interest on higher debt levels, (iii)
$8.2 million in higher domestic advertising, promotion, and endorsement costs,
(iv) $5.7 million in a write-off of funds advanced to freight bill processor,
(v) $3.5 million in unusual costs primarily associated with closing affiliate
operations in Japan, Mexico, Spain, France, Germany, and Italy, (vi) $2.9
million in higher U.S. selling expenses, (vii) $2.0 million increase in legal
expenses (viii) $0.4 million in recovery from settlement of 1996 Etonic computer
software dispute that occurred in fiscal 1997 and did not repeat itself in
fiscal 1998, (ix) $4.0 million in expenses related to the Reorganization
transaction, (x) $5.9 million in extraordinary losses related to the write-off
of deferred financing expense on the early extinguishment of debt, (xi) $0.6
million of lower royalty income, (xii) $9.6 million increase in restructuring
costs and (xiii) $1.7 million in higher currency losses, (xiv) $7.2 million
increase in bad debt allowance because of concerns about the collectibility of a
receivable from one customer, offset by (i) $3.2 million aggregate decrease of
spending in affiliate operations that were transitioned to independent
distributors (ii) the Company's equity in net earnings of Evenflo (August 21,
1998 through September 30, 1998) totaling $1.5 million and (iii) income tax
benefit of $24.7 million.
 
     RESTRUCTURING AND UNUSUAL COSTS.  The Company's fiscal 1998 net loss
includes $46.8 million of restructuring and unusual costs compared to $23.9
million of restructuring and unusual costs in fiscal 1997. The $46.8 million of
restructuring and unusual costs in fiscal 1998 consists of (i) $21.5 million of
restructuring costs, (ii) $4.2 million of unusual expenses in gross profit
(primarily in cost of sales due to write-downs of inventory), and (iii) $21.1
million of unusual expenses in SG&A expenses due to (a) $5.7 million write off
of funds advanced to freight bill processor, (b) $7.2 million increase in bad
debt allowance for customer attempting to re-organize, (c) $1.3 million
receivable write-off in non-U.S. affiliate operations, (d) $4.0 million in
expenses related to the Reorganization transaction and (e) $2.9 million of other
closing expenses. See other items affecting historical EBITDA in "Liquidity and
Capital Resources". The Company's fiscal 1997 restructuring and unusual costs of
$23.9 million included (i) $12.0 million of restructuring costs, (ii) $8.7
million of unusual expenses in cost of sales and (iii) $3.2 million of unusual
expenses in SG&A. See Note F to the Consolidated Financial Statements.
 
                                       22
<PAGE>   24
 
 YEAR ENDED SEPTEMBER 30, 1997
 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996 ("FISCAL 1996")
 
     NET SALES.  Net sales are gross sales net of returns, allowances, trade
discounts, freight on goods sold and royalties paid on third-party trademarks
used on the Company's products. The Company's net sales increased to $827.2
million in fiscal 1997 from $689.1 million for fiscal 1996, an increase of
$138.1 million or 20.0%.
 
     Spalding's net sales increased to $530.4 million for fiscal 1997 from
$451.9 million for fiscal 1996, an increase of $78.5 million or 17.4%. Etonic,
which was acquired in July 1996, contributed $57.4 million of the Spalding
fiscal 1997 net sales increase. Results for fiscal 1997 include a full year of
Etonic net sales while fiscal 1996 includes three months. On a pro forma basis,
Etonic net sales increased 25.0% in fiscal 1997 over fiscal 1996. The Etonic
growth is driven by innovative new product introductions of The Difference(R)
and Dri-Lite(R) Softspikes(TM) golf shoes. Golf ball net sales were up 3%
overall from fiscal 1996 led by a 48% increase in Top-Flite(R) Strata Tour(TM),
Top-Flite(R) Strata Advance(TM) and Top-Flite(R) Aero(R) net sales to the
premium on and off course channels, a 20% increase in custom balls, and a 17%
increase in range balls; partially offset by decreases in net sales to off
course channels where numerous retailers changed inventory management practices
and reduced inventory levels. Golf club net sales accelerated in fiscal 1997, up
35% from continued strong demand for Spalding clubs, Top-Flite Tour(R) irons
with titanium inserts and Muscle(TM) shafts, and Intimidator(TM) drivers.
Basketball net sales were down 4% in fiscal 1997 principally due to the success
of Space Jam(TM) basketball promotions in fiscal 1996. International net sales
at Spalding declined 5.8% or $8.8 million in fiscal 1997 compared to fiscal
1996. The decrease resulted from lower net sales of golf products in Japan and
Europe, and lower net sales in Australia from the discontinuation of the NBA
clothing line by the Company's Australian subsidiary; the decrease is partially
offset by increases of golf product net sales in Mexico, Southeast Asia, and
Canada. Weaker currencies compared to the U.S. dollar negatively impacted fiscal
1997 net sales approximately $5.8 million compared to fiscal 1996. Management
anticipates Japan fiscal 1998 net sales to be below fiscal 1997 net sales due to
weak Japanese economic conditions, competitive conditions, and restructuring
programs (see "Restructuring Costs").
 
     Evenflo's net sales increased to $296.7 million for fiscal 1997 from $237.2
million for fiscal 1996, an increase of $59.5 million or 25.1%. When compared to
fiscal 1996, Evenflo net sales were flat after excluding the April 1997 Gerry
Acquisition that contributed $60.3 million in net sales for the five months of
fiscal 1997. Evenflo's net sales of car seats, play yards, and activity products
decreased from fiscal 1996 levels, principally from supplier product shortages,
the expiration of a patent license, safety campaigns, and competitive pricing.
Offsetting the decreases were 1997 net sales of strollers and high chairs which
were up 74% and 27%, respectively, over the fiscal 1996 comparable period.
Evenflo's international net sales were up $4.7 million compared to fiscal 1996
due primarily to higher net sales in Canada, Mexico and certain other export
markets.
 
     GROSS PROFIT.  Gross profit is net sales less cost of sales, which includes
the costs necessary to make the Company's products, including the costs of raw
materials, production, warehousing and procurement. The Company's gross profit
increased to $261.2 million in fiscal 1997 from $237.0 million for fiscal 1996,
an increase of $24.2 million or 10.2%. Gross margin declined to 31.6% in fiscal
1997 from 34.4% in fiscal 1996. Spalding's gross profit increased to $200.4
million in fiscal 1997 from $178.6 million in fiscal 1996, an increase of $21.8
million or 12.2%. Evenflo's gross profit increased to $60.8 million in fiscal
1997 from $58.4 million in fiscal 1996, an increase of $2.4 million or 4.1%.
 
     Spalding's gross margin declined to 37.8% in fiscal 1997 from 39.5% in
fiscal 1996 principally due to (i) increased sales of products with lower
margins such as golf clubs, golf bags, and golf shoes (as compared to golf
balls), (ii) lower international net sales, (iii) $1.6 million in inventory
write-downs resulting from a decision to discontinue the sale of certain
products by certain international affiliates, (iv) increased manufacturing cycle
time for multi-layer golf balls (Strata(TM)), and (v) higher wages, utility,
shipping and freight costs.
 
     Evenflo's gross profit grew to $60.8 million in fiscal 1997 from $58.4
million in fiscal 1996. Evenflo's gross margin declined to 20.5% in fiscal 1997
from 24.6% in fiscal 1996 principally due to (i) the addition of lower margin
Gerry products, such as gates, booster car seats, bath products, monitors and
toilet trainers (as compared to car seats), (ii) $2.8 million in unusual costs
associated with the manufacturing and warehouse
                                       23
<PAGE>   25
 
reconfiguration at Piqua, Ohio operations, (iii) $3.1 million in inventory
write-downs resulting from a decision to discontinue the sale of certain Gerry
products as a result of the integration of Gerry into Evenflo, and (iv) $1.3
million in purchase accounting effects of Gerry's inventory turnover.
 
     SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES.  SG&A expenses
include the costs necessary to sell the Company's products and the general and
administrative costs of managing the business, including salaries and related
benefits, commissions, advertising and promotion expenses, bad debts, travel,
amortization of intangible assets, insurance and product liability costs,
consumer corrective action campaign costs, and professional fees. The Company's
SG&A expenses increased to $229.3 million for fiscal 1997 from $196.7 million
for fiscal 1996, an increase of $32.6 million or 16.6%. As a percentage of net
sales, SG&A expenses decreased to 27.7% for fiscal 1997 from 28.6% for fiscal
1996.
 
     Spalding's SG&A expenses increased $28.0 million during fiscal 1997 as
compared with fiscal 1996. As a percentage of net sales, SG&A expenses increased
to 31.9% for fiscal 1997 from 31.3% for fiscal 1996. The increase in fiscal 1997
is principally due to (i) $9.0 million from the inclusion of Etonic for the full
1997 fiscal year compared to three months in fiscal 1996 (excluding advertising,
promotion and endorsement costs), (ii) $23.0 million in higher advertising,
promotion, and endorsement costs, (iii) $0.8 million of unusual costs associated
with obtaining the Etonic Canadian distribution rights, and (iv) $2.0 million in
higher research and development costs; the increase is partially offset by (i)
$5.2 million in fiscal 1996 expenses related to the completion of the Etonic
acquisition which did not recur in fiscal 1997, (ii) $0.4 million in recovery
from settlement of a 1996 Etonic computer software dispute, and (iii) $1.2
million in lower bad debts and other costs.
 
     Evenflo's SG&A expenses increased $9.4 million during fiscal 1997 as
compared with fiscal 1996. However, as a percentage of net sales, SG&A expenses
decreased to 17.6% for fiscal 1997 from 18.0% for fiscal 1996. The fiscal 1997
increase is principally due to (i) $6.5 million for five months of Gerry
expenses (excluding promotion costs) in fiscal 1997, (ii) $3.6 million in higher
consumer corrective action campaign costs (in fiscal 1997, Evenflo incurred $4.4
million on four consumer corrective action campaigns on certain car seats and
play yards), (iii) $1.3 million in higher unusual costs to consolidate certain
operations that were previously managed separately and (iv) $2.9 million in
higher promotion costs; partially offset by (i) $2.7 million lower product
liability expenses from a lower number of claims and (ii) $1.6 million in
transaction bonuses from the 1996 Recapitalization and (iii) $0.6 million in
other costs.
 
     The corporate office had $4.8 million lower general, administrative and
unusual costs from (i) $3.9 million in unusual fiscal 1996 transaction costs
which did not recur in fiscal 1997, (ii) $1.1 million in lower compensation, net
of recruiting expenses, (iii) $0.4 million Etonic acquisition costs and (iv)
$0.6 million in lower other costs; partially offset by (i) $1.0 million in
acquisition costs related to Gerry and other potential acquisition candidates
and (ii) $0.2 million in costs related to new equity investments in the Company
 
     ROYALTY INCOME.  Royalty income is primarily from licensing Spalding's
worldwide trademarks. Royalty income decreased to $14.1 million in fiscal 1997
from $14.3 million in fiscal 1996. The $0.2 million decrease was principally due
to the weaker Japanese yen compared to the U.S. dollar.
 
     RESTRUCTURING COSTS.  In fiscal 1997, the Company had $12.0 million of
restructuring costs comprised of $9.6 million in Gerry restructuring costs and
$2.4 million in Spalding international restructuring costs.
 
     In July 1997, Company management adopted a plan to relocate the Gerry
Colorado administrative and manufacturing operations to Evenflo's Ohio and
Georgia locations. As a result, the Company accrued $9.6 million of
restructuring costs consisting of (i) $4.1 million of severance costs for the
Colorado employees, (ii) $2.6 million in shut-down costs of the Colorado
facility, (iii) $1.3 million of computer conversion costs to preserve prior
manufacturing information and (iv) $1.6 million of other costs. The Company
funded $1.3 million of the restructuring costs, leaving an accrual of $8.3
million as of September 30, 1997. The Company estimated that it would incur
approximately $1.8 million of additional unusual expenses in fiscal 1998 to
complete its Gerry integration.
 
     In fiscal 1997, the Company implemented a plan to restructure Spalding
international operations. As a result, the Company accrued $2.4 million of
restructuring costs consisting of (i) $0.8 million of warehouse
                                       24
<PAGE>   26
 
studies, consolidations and lease terminations, (ii) $0.9 million of severance
costs, and (iii) $0.7 million of other costs. The Company funded $1.3 million of
the restructuring costs, leaving an accrual of $1.1 million as of September 30,
1997.
 
     INTEREST EXPENSE.  Interest expense increased $33.6 million to $71.3
million in fiscal 1997 from $37.7 million for fiscal 1996. The increase is due
principally to the issuance of $200 million of senior subordinated notes and
higher levels of borrowings under the Credit Facility (as defined in "Liquidity
and Capital Resources") in fiscal 1997 versus fiscal 1996. The Company's
weighted average outstanding balances for fiscal 1997 was $679.0 million
compared to $363.7 million under the Company's borrowing arrangements then in
effect during fiscal 1996. Additionally, the Company's increased interest
expense in fiscal 1997 over fiscal 1996 is attributable to $2.4 million in
higher deferred financing costs amortization and an increase in the Company's
average U.S. borrowing rate to 9.8% from 9.1% in fiscal 1996.
 
     CURRENCY LOSS.  Currency loss of $1.2 million was $0.4 million higher in
fiscal 1997 than fiscal 1996. See "Liquidity and Capital Resources."
 
     INCOME TAXES.  Fiscal 1997 had an $8.5 million tax benefit which represents
an effective income tax rate of 22% in relation to a loss before income taxes of
$38.5 million. The inability to assure a tax benefit on losses from non-U.S.
operations, coupled with payments of certain non-U.S. withholding taxes,
resulted in a lower effective tax rate.
 
     NET LOSS.  The Company recorded a net loss of $30.0 million for fiscal 1997
compared to a $27.7 million net loss for fiscal 1996. The primary variances were
increases to earnings of (i) a $24.2 million increase in gross profit as a
result of having a full year of Etonic net sales and five months of Gerry net
sales, (ii) $20.8 million of 1996 expenses related to the 1994 Management Stock
Ownership Plan, (iii) a $17.8 million increase in income tax benefits, (iv) $7.7
million of 1996 recapitalization costs, (v) $6.0 million of 1996 extraordinary
loss on early extinguishment of debt, and offsetting decreases to earnings of
(i) a $33.6 million increase in interest expense from higher debt levels due to
the Recapitalization, (ii) a $32.6 million increase in SG&A expenses principally
from higher advertising, promotion and endorsement expenses, (iii) $12.0 million
of 1997 restructuring costs, and (iv) a net increase of $0.6 million from a
higher currency loss and lower royalty income.
 
     UNUSUAL COSTS.  The Company's fiscal 1997 net loss includes $23.9 million
of restructuring and unusual costs compared to $45.5 million of unusual costs in
fiscal 1996. The $23.9 million unusual costs in fiscal 1997 consist of (i) $12.0
million of restructuring costs, (ii) $8.7 million of unusual expenses in cost of
sales and (iii) $3.2 million of unusual expenses in SG&A expenses. See other
items affecting historical EBITDA in "Liquidity and Capital Resources". The
Company's fiscal 1996 unusual costs of $45.5 million includes (i) $20.8 million
of 1994 Management Stock Ownership Plan expense, (ii) $11.0 million of unusual
expenses in SG&A expenses, (iii) $7.7 million of Recapitalization expenses, and
(iv) $6.0 million related to the extraordinary loss on early extinguishment of
debt.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     HISTORICAL.  Historically, the Company's primary sources of liquidity have
been cash from operations, borrowings under various credit facilities, and
periodically, proceeds from the issuance of common stock and proceeds from the
issuance of preferred stock. For fiscal 1998, quarterly net sales as a
percentage of total sales were approximately 20%, 29%, 30%, and 21%,
respectively, for the first through the fourth quarters of the fiscal year. In
addition, for fiscal 1998 quarterly income from operations as a percentage of
total (loss) from operations was approximately (23)%, 3%,(23)%, and (57)%,
respectively for the first through the fourth quarters of the fiscal year. Many
sporting goods marketed by Spalding, especially golf products, experience higher
levels of sales in the spring and summer months. The Company's need for cash
historically has been greater in its first and second quarters when cash
generated from operating activities coupled with drawdowns from bank lines have
been invested in receivables and inventories.
 
     In fiscal 1998, operating activities used $96.2 million of net cash,
compared to usage of $31.5 million in fiscal 1997. In fiscal 1996, the Company's
operating activities generated $32.0 million of cash flow. The 1998
 
                                       25
<PAGE>   27
 
decrease is principally attributable to a $54.9 million increase in net loss.
Other factors affecting cash flow were changes in working capital due to: (i) a
decline in receivables on lower fourth quarter sales, (ii) higher golf inventory
resulting from slower sales in the golf club market as well as the purchase of
the assets of Hogan and (iii) lower payables (primarily associated with lower
bankers acceptances). The 1998 cash flows include $25.2 million of unusual
one-time costs. Unusual and restructuring costs in the fourth quarter for fiscal
1998 totalled $26.4 million principally consisting of: (a) $7.2 million increase
in bad debt allowance because of concerns about the collectibility of a
receivable from one customer, (b) $5.3 to close the corporate office in Tampa,
(c) $4.0 of expenses related to the Reorganization transaction and (d) $2.8
write off related to accumulated foreign currency translation adjustments.
 
     In fiscal 1997, the Company's operating activities used $31.5 million of
net cash compared to cash flow from operating activities of $32.0 million in
fiscal 1996. The reduction in cash flow from operating activities in the 1997
fiscal year compared to the 1996 fiscal year was $30.2 million excluding $33.3
million in unusual one-time fiscal 1996 non-cash items ($20.8 million relating
to 1994 Management Stock Ownership Plan expense, a $3.3 million write-off of
Etonic assets and $9.2 million of extraordinary loss on early extinguishment of
debt). The $30.2 million decrease was due to $6.5 million in lower net earnings
(as adjusted for depreciation and other non-cash items) and a $23.7 million
increase in working capital attributable principally to (i) higher receivables
from increased sales of golf products in the fourth quarter of 1997 and a U.S.
federal income tax receivable from a net operating loss carryback, and (ii)
higher golf product inventory levels at Spalding and component product inventory
at Evenflo; the increase was reduced by higher trade payables and banker
acceptances from increased imported inventory levels as well as increased
accruals from restructuring costs.
 
     Capital expenditures for fiscal 1998 were $26.6 million compared with $35.1
million in fiscal 1997 and $19.5 million in 1996. Capital expenditures were used
primarily for new product introductions and new distribution facilities. Capital
expenditure for fiscal 1999 is estimated to be $15.0 million and will be
primarily used to upgrade the Company's computer system and maintenance of
factory equipment.
 
     On November 26, 1997, the Company acquired certain assets and assumed
certain liabilities of Hogan for a purchase price of $14.7 million, consisting
of $10.0 million in Company common stock (2 million shares), $3.0 million in a
10 1/2% note due November 25, 2000, and $1.6 million in cash. Hogan manufactures
and/or markets gold clubs, golf balls and golf accessories under the Hogan brand
name.
 
     On April 21, 1997, Evenflo acquired the net assets of Gerry for a purchase
price of $68.7 million.
 
     The Company's principal sources of liquidity will come from cash flow
generated from operations, borrowings under the Company's $250 million revolving
credit facility and by non-U.S. subsidiaries (the majority of which non-U.S.
borrowings are guaranteed by the Company). The Company's principal uses of
liquidity will be to provide working capital, meet debt service requirements and
finance the Company's strategic plans. At September 30, 1998, the Company had an
available borrowing capacity of $58.2 million (net of $69.6 million of
outstanding letters of credit and bankers' acceptances) under the revolving
credit facility. The Company does not have any required amortization of Term
Loans in fiscal 1999.
 
     EBITDA (earnings before interest, taxes, depreciation and amortization) is
included as a basis upon which the Company assesses its financial performance,
and certain covenants in the Company's borrowing arrangements are tied to
similar measures. The following table sets forth certain information regarding
the Company's EBITDA (excluding earnings from equity investment in Evenflo) and
other net cash flow items for fiscal 1998 (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                           OTHER ITEMS
                                         HISTORICAL    AFFECTING HISTORICAL    ADJUSTED
                                           EBITDA             EBITDA            EBITDA
                                         ----------    --------------------    --------
<S>                                      <C>           <C>                     <C>
Spalding...............................   $(10,162)           40,276            30,114
Evenflo................................      6,809             6,525            13,334
Corporate..............................     (5,993)                0            (5,993)
                                          --------            ------            ------
Consolidated...........................   $ (9,346)           46,801            37,455
                                          ========            ======            ======
</TABLE>
 
                                       26
<PAGE>   28
 
     SPALDING.  Spalding's historical EBITDA for fiscal 1998 includes $40.3
million of restructuring ($20.1 million) and unusual costs ($20.2 million).
Restructuring costs are comprised of (i) $5.3 million of expenses related to the
closure of the Tampa headquarters, (ii) $8.1 million of severance and related
expenses at Spalding, (iii) $3.5 million of collection and other expenses
associated with the closing of the Spalding affiliates in Japan, Mexico, Spain,
France, Germany, and Italy, (iv) $2.8 million of write-offs related to
accumulated foreign currency translation adjustments, (v) $0.4 million in
consolidation of expenses related primarily to lease terminations. The $20.2
million of unusual costs are comprised of (i) $5.7 million write-off of funds
advanced to a freight bill processor (ii) $3.8 million in unusual costs
primarily associated with closing affiliate operations in Japan, Mexico, Spain,
France, Germany, and Italy, (iii) $3.5 million in inventory write-downs
resulting from a decision to close certain international affiliates and to
discontinue certain U.S. product lines and (iv) $7.2 million of expense
associated with an increased bad debt allowance because of concerns about the
collectability of a receivable from one customer. The Company estimates it will
incur approximately $11.0 million of additional unusual expenses in fiscal 1999
to complete the restructuring programs and to upgrade computer systems.
 
     EVENFLO.  Evenflo's historical EBITDA was adversely affected by $1.4
million of restructuring costs and $5.1 million of unusual costs (including $4.0
million of expenses related to the Reorganization transaction). Evenflo also
incurred $1.3 million of extraordinary losses related to the early
extinguishment of debt.
 
     CORPORATE.  Corporate incurred $4.6 million of extraordinary losses related
to the early extinguishment of debt.
 
     The Company's ability to fund its operations, make capital expenditures and
make scheduled payments or to refinance its indebtedness will depend upon its
future financial and operating performance, which will be affected by prevailing
economic conditions and financial, business and other factors, some of which are
beyond its control. There can be no assurance that the Company's results of
operations, cash flow and capital resources will be sufficient to fund its
operations, capital expenditures, or its debt service obligations. In the
absence of improved operating results, the Company may face liquidity problems
and might be required to dispose of material assets or operations to fund its
operations and capital expenditures and to meet its debt service and other
obligations, and there can be no assurances as to the timing of such sales or
the proceeds that the Company could realize therefrom.
 
     FINANCING.  The financing entered into in connection with the 1996
Recapitalization included, (i) $650 million under the credit facilities
comprised of a $400 million term loan facility and a $250 million revolving
credit facility (the "Credit Facilities"), (ii) $200 million of 10 3/8% senior
subordinated notes due 2006, (iii) $150 million of preferred stock which was
exchanged for common shares on June 25, 1997 and (iv) a $221 million equity
investment. The proceeds from the Credit Facilities, senior subordinated notes,
preferred stock and equity investment were used to effect the Recapitalization
and pay fees and expenses in connection therewith.
 
     On June 25, 1997, Strata exchanged all the Company's outstanding preferred
stock (liquidation value of $164.2 million) for 32,834,840 additional shares of
the Company's common stock at an exchange price of $5.00 per common share.
 
     The Stock Purchase and Option Plan for key employees of Evenflo & Spalding
Holdings Corporation and Subsidiaries ("1996 Employee Stock Ownership Plan")
provides for the issuance of up to an aggregate of 9,800,000 shares of Common
Stock, which may be sold or granted as options to Key Employees of the Company.
In fiscal 1998 the Company sold 278,885 shares for proceeds of $1.4 million and
granted 295,559 common share options at $5.00 per share. As of September 30,
1998 there were 1,906,676 aggregate unissued shares and options and 1,023,729
options were exercisable; additionally, options for 3,252,558 common share
became exercisable on October 1, 1998. In fiscal 1997 the Company sold 2,020,238
shares for proceeds of $10.1 million and granted 6,431,146 common share options
at $5.00 per share.
 
     On July 15, 1997, an affiliate of Strata L.L.C. invested $45.6 million and
Abarco N.V. invested $3.4 million for 9,800,000 additional shares of the
Company's common stock at a price of $5.00 per common share.
 
                                       27
<PAGE>   29
 
This additional equity investment was made to partially fund the acquisition of
Gerry on April 21, 1997, and the proceeds were used to pay down revolver
borrowings incurred in connection with such acquisition.
 
     On August 20, 1998, the Company effectively completed the separation of
Spalding and Evenflo into two stand-alone companies. The Company initiated the
Reorganization by contributing the Spalding Sports Worldwide investments in the
common stocks of the Company's Evenflo subsidiaries to Evenflo Company, Inc. and
simultaneously received cumulative preferred stock of Evenflo Company, Inc. (the
"Evenflo Preferred Stock") with an aggregate liquidation preference of $40.0
million and a cumulative dividend rate of 14%. As a result of these
transactions, Evenflo Company, Inc. became the parent company of the other
subsidiaries and divisions of subsidiaries included in the Evenflo segment of
the Company. The realignment of the Company's two businesses was accounted for
as a reorganization of these companies under common control in a manner similar
to a pooling of interests.
 
     To complete the Reorganization on August 20, 1998, KKR 1996 Fund L.P. ("KKR
1996 Fund"), a limited partnership affiliated with Kohlberg Kravis Roberts &
Co., L.P. ("KKR"), acquired from the Company 51% (5,100,000 shares) of the
outstanding common shares of Evenflo Company, Inc. for a purchase price of $25.5
million and the Evenflo Preferred Stock (400,000 shares) for a purchase price of
$40.0 million. Great Star Corporation, an affiliate of Abarco N.V. ("Abarco"),
acquired from the Company 6.6% (660,000 shares) of the outstanding common shares
of Evenflo Company, Inc. for a purchase price of $3.3 million. Strata LLC, an
affiliate of KKR 1996 Fund, KKR 1996 Fund and Abarco are currently shareholders
of the Company. After these sales of common stock, the Company retained
ownership of 42.4% (4,240,000 shares) of the outstanding shares of common stock
of Evenflo Company, Inc. Also on August 20, 1998 Evenflo (i) issued and sold
$110.0 million aggregate principal amount of 11 3/4% Senior Notes due 2006 in a
private offering, and (ii) entered into a $100.0 million revolving credit
facility with a syndicate of banks and other financial institutions and borrowed
$10.0 million under such credit facility. Evenflo Company, Inc. paid the net
proceeds of these two financing transactions, $110.0 million, to the Company as
a partial payment of intercompany indebtedness. The remainder of the
intercompany indebtedness due to the Company by Evenflo Company, Inc. was
treated as a contribution of capital by the Company to Evenflo Company, Inc.
 
     CURRENCY HEDGING.  In fiscal 1998, approximately 16.6% 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, in its discretion, uses forward
exchange contracts to hedge up to six month transaction exposures from U.S.
dollar purchases made by its non-U.S. operations. As of September 30, 1998,
outstanding forward exchange contracts totaled $3.5 million.
 
     INFLATION.  Inflation has not been material to the Company's operations
within the periods presented.
 
     YEAR 2000.  The Company has been conducting a comprehensive review of its
computer systems to identify those that could be adversely affected by the "Year
2000 issue" (which refers to the inability of many computer systems to process
accurately dates later than December 31, 1999), and has been executing a plan to
remediate or replace affected systems that use microchips or other embedded
technology. (For example, robotic systems at the Company's manufacturing
center.)
 
     The Company's Year 2000 compliance project includes four phases: (1)
evaluation of the Company's owned or leased systems and equipment to identify
potential Year 2000 compliance issues; (2) remediation or replacement of Company
systems and equipment determined to be non-compliant (and testing of remediated
systems before returning them to production); (3) inquiry regarding Year 2000
readiness of material business partners and other third parties on whom the
Company's business is dependent; and (4) development of contingency plans, where
feasible, to address potential third party non-compliance or failure of material
Company systems.
 
     The initial phase of the Company's Year 2000 compliance project was the
evaluation of all software, hardware and equipment owned or licensed by the
Company, and identification of those systems and equipment requiring Year 2000
remediation. Analysis of all material software and hardware has been completed.
Of those software systems requiring remediation or replacement, approximately
75% of all material systems have already been remediated or replaced by Year
2000 compliant software. The Company
 
                                       28
<PAGE>   30
 
anticipates that approximately 90% of all material systems will have been
remediated or replaced by December 31, 1998, and that all remaining material
systems will be remediated or replaced by March 31, 1999. In addition, all
computer hardware in the Company's home offices, manufacturing center and
distribution center that was not Year 2000 compliant has been remediated or
scheduled to be remediated or replaced by the end of March 31, 1999; and
hardware and software unique to the Company's offices located outside the United
States are scheduled to be evaluated and remediated or replaced by June 30,
1999.
 
     The Company has engaged a consultant to assist in the evaluation of the
equipment used in the Company's manufacturing center (other than computer
software and hardware, which were included in the analysis and remediation
efforts described in the preceding paragraph). The equipment evaluation is
expected to be completed by the end of December 1998, and remediation or
replacement of manufacturing center equipment found not be Year 2000 compliant
is scheduled to be completed by the end of the first quarter of fiscal 1999.
 
     The costs and timing for replacement of certain of the Company's systems
that were not Year 2000 compliant have been anticipated as part of the Company's
planned information systems spending. The total cost to the Company specifically
associated with addressing the Year 2000 issue with respect to its systems and
equipment has not been, and is not anticipated to be, material to the Company's
financial position or results of operations in any given year. The Company
estimates that the total additional cost of managing its Year 2000 project,
remediating existing systems and replacing non-compliant systems, is
approximately $1.3 million of which approximately $0.6 million has been or will
be expensed as incurred, and $0.7 million has been or will be capitalized. Of
these amounts $0.15 million was expensed and $0 was capitalized in fiscal 1997,
and $0.45 million was expensed and $0.7 million was capitalized through
September 30, 1998. Although the Company believes its Year 2000 compliance
efforts with respect to its systems will be successful, any failure or delay
could result in actual costs and timing differing materially from that presently
contemplated, and in a disruption of business. The Company intends to develop a
contingency plan to permit its primary operations to continue if the Company's
modifications and conversions of its systems are not successfully completed on a
timely basis, but the foregoing cost estimates do not take into account any
expenditures associated with such contingencies. The Company's cost estimates
also do not include time or costs that may be incurred as a result of third
parties' becoming Year 2000 compliant on a timely basis.
 
     The Company is communicating with its business partners, including key
manufacturers, vendors, banks and other third parties with whom it does
business, to obtain information regarding their state of readiness with respect
to the Year 2000 issue. Failure of third parties to remediate Year 2000 issues
affecting their respective businesses on a timely basis, or to implement
contingency plans sufficient to permit uninterrupted continuation of their
businesses in the event of a failure of their systems, could have a material
adverse effect on the Company's business and results of operations. Assessment
of third party Year 2000 readiness is expected to be substantially completed by
the end of June 1999. The Company will not be able to determine its most
reasonably likely worst case scenarios until the assessment of third parties'
Year 2000 compliance is completed.
 
     The Company's Year 2000 compliance project included development of a
contingency plan designed to support critical business operations in the event
of the occurrence of systems failures or the occurrence of reasonably likely
worst case scenarios. The Company anticipates that contingency plans will be
substantially developed by March 31, 1999.
 
     The Company may not be able to compensate adequately for business
interruption caused by certain third parties. Potential risks include suspension
or significant curtailment of service or significant delays by banks, utilities
or common carriers, or at U.S. ports of entry. The Company's business also could
be materially adversely affected by the failure of governmental agencies to
address Year 2000 issues affecting the Company's operations. For example, a
significant amount of the Company's merchandise is manufactured outside the
United States, and the Company is dependent upon the issuance by foreign
governmental agencies of export visas for, and upon the U.S. Customs Service to
process and permit entry into the United States of, such merchandise. If
failures in government systems result in the suspension or delay of these
agencies' services, the Company could experience significant interruption or
delays in its inventory flow.
 
                                       29
<PAGE>   31
 
     The costs and the timing for management's completion of Year 2000
compliance, modification and testing processes are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, the success of third
parties' Year 2000 compliance efforts and other factors. There can be no
assurance that these assumptions will be realized or that actual results will
not vary materially.
 
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
DISCLOSURE ABOUT FOREIGN CURRENCY RISK
 
     Although the majority of the Company's transactions are in U.S. Dollars,
affiliates operate in their local currency with certain transactions for
inventory and royalties being denominated in U.S. Dollars. The Company may
purchase short-term forward exchange contracts to hedge payments that require
conversion to U.S. Dollars. The purpose of entering these hedge contracts is to
minimize the impact of foreign currency fluctuation on the results of
operations. Certain increases or decreases in the affiliate U.S. dollar payments
are offset by gains and losses on the hedges. The contracts have maturity dates
that do not exceed twelve months. The Company does not purchase short-term
forward exchange contracts for trading purposes.
 
     As of September 30, 1998, the Company had outstanding the following
purchased foreign exchange forward contracts (in thousands of U.S. dollars):
 
<TABLE>
<CAPTION>
                                                                         WEIGHTED
                                                           CONTRACT       AVERAGE       UNREALIZED
                                                            AMOUNT     CONTRACT RATE    GAIN (LOSS)
                                                           --------    -------------    -----------
<S>                                                        <C>         <C>              <C>
Foreign Currency Forward Contracts:
  Australian dollar......................................   $  975        .6164            $ 36
  Canadian dollar........................................    2,550        .7008             175
                                                            ------                         ----
Total....................................................   $3,525                         $211
                                                            ======                         ====
</TABLE>
 
DISCLOSURE ABOUT INTEREST RATE RISK
 
     The Company is subject to market risk from exposure to changes in interest
rates based on its financing, investing, and cash management activities. The
Company utilizes a balanced mix of debt maturities along with both fixed-rate
and variable-rate debt to manage its exposures to changes in interest rates.
(See Notes G and H to the Consolidated Financial Statements appearing elsewhere
in this Form 10-K.) The Company does not expect changes in interest rates to
have a material effect on income or cash flows in fiscal 1999, although there
can be no assurances that interest rates will not significantly change.
 
ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent Auditors' Report................................   31
Statements of Consolidated Earnings (Loss) and Comprehensive
  Earnings (Loss) for the years ended September 30, 1998,
  1997, and 1996............................................   32
Consolidated Balance Sheets as of September 30, 1998 and
  1997......................................................   33
Statements of Consolidated Cash Flows for the years ended
  September 30, 1998, 1997, and 1996........................   34
Statements of Consolidated Shareholders' Equity (Deficiency)
  for the years ended September 30, 1998, 1997, and 1996....   36
Notes to Consolidated Financial Statements..................   37
</TABLE>
 
                                       30
<PAGE>   32
 
INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
Spalding Holdings Corporation:
 
We have audited the accompanying consolidated balance sheets of Spalding
Holdings Corporation (formerly Evenflo & Spalding Holdings Corporation) and
subsidiaries (the "Company") as of September 30, 1998 and 1997, and the related
statements of consolidated earnings (loss) and comprehensive earnings (loss), of
cash flows and of shareholders' equity (deficiency) for each of the three fiscal
years in the period ended September 30, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
1998 and 1997, and the results of its operations and its cash flows for each of
the three fiscal years in the period ended September 30, 1998 in conformity with
generally accepted accounting principles.
 
DELOITTE & TOUCHE LLP
 
Tampa, Florida
November 12, 1998
 
                                       31
<PAGE>   33
 
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
                   STATEMENTS OF CONSOLIDATED EARNINGS (LOSS)
                       AND COMPREHENSIVE EARNINGS (LOSS)
             FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
                         (DOLLAR AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                1998        1997       1996
                                                              ---------    -------    -------
<S>                                                           <C>          <C>        <C>
NET SALES...................................................  $ 803,312    827,191    689,080
 
  Cost of sales.............................................    564,645    565,959    452,037
                                                              ---------    -------    -------
 
GROSS PROFIT................................................    238,667    261,232    237,043
 
  Selling, general and administrative expenses..............    263,271    229,313    196,741
  Royalty income, net.......................................    (13,509)   (14,109)   (14,339)
  Restructuring costs.......................................     21,563     12,001          0
  1994 Management Stock Ownership Plan expense..............          0          0     20,828
  Recapitalization costs....................................          0          0      7,700
                                                              ---------    -------    -------
 
INCOME (LOSS) FROM OPERATIONS...............................    (32,658)    34,027     26,113
 
  Interest expense, net.....................................     78,041     71,326     37,718
  Currency loss, net........................................      2,936      1,236        775
  Equity in net earnings of Evenflo Company, Inc............     (1,476)         0          0
                                                              ---------    -------    -------
 
EARNINGS (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY
  LOSS......................................................   (112,159)   (38,535)   (12,380)
 
  Income taxes (benefit)....................................    (33,196)    (8,500)     9,300
                                                              ---------    -------    -------
 
EARNINGS (LOSS) BEFORE EXTRAORDINARY LOSS...................    (78,963)   (30,035)   (21,680)
 
  Extraordinary loss on early extinguishment of debt, net of
     income tax benefit of $3,182, $0 and $3,200,
     respectively...........................................     (5,909)         0     (5,987)
                                                              ---------    -------    -------
 
NET EARNINGS (LOSS).........................................    (84,872)   (30,035)   (27,667)
 
  Other comprehensive earnings (loss) -- currency
     translation adjustments net of income (tax) benefits of
     $(400), $285 and $239, respectively....................      2,405       (819)       (43)
                                                              ---------    -------    -------
 
COMPREHENSIVE EARNINGS (LOSS)...............................  $ (82,467)   (30,854)   (27,710)
                                                              =========    =======    =======
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
                                       32
<PAGE>   34
 
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                          SEPTEMBER 30, 1998 AND 1997
            (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                1998         1997
                                                              ---------    --------
<S>                                                           <C>          <C>
                                      ASSETS
CURRENT ASSETS
Cash........................................................  $  10,695       5,168
Receivables, less allowance of $10,539 and $3,941,
  respectively..............................................    135,524     243,571
Inventories.................................................    118,826     157,512
Deferred income taxes.......................................     13,309      13,860
Other.......................................................      4,225       8,955
                                                              ---------    --------
          TOTAL CURRENT ASSETS..............................    282,579     429,066
Property, plant and equipment, net..........................     51,891     110,195
Intangible assets, net......................................    113,748     154,123
Deferred income taxes.......................................     51,899      34,904
Deferred financing costs....................................     20,213      29,594
Investment in Evenflo Company, Inc..........................     14,606           0
Other.......................................................      1,028       3,349
                                                              ---------    --------
          TOTAL ASSETS......................................  $ 535,964     761,231
                                                              =========    ========
                 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Non-U.S. bank loans.........................................  $   6,744      17,674
Current maturities of long-term debt........................          0      17,500
Accounts payable............................................     85,902     183,657
Accrued expenses............................................     60,432      79,348
Income taxes................................................        442         811
                                                              ---------    --------
          TOTAL CURRENT LIABILITIES.........................    153,520     298,990
Long-term debt..............................................    503,074     609,900
Pension.....................................................      7,820      12,327
Postretirement benefits.....................................      7,420       8,910
Other.......................................................      1,279       1,735
                                                              ---------    --------
          TOTAL LIABILITIES.................................    673,113     931,862
COMMITMENTS AND CONTINGENCIES (NOTES M, N, O, P, AND Q)
SHAREHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock, $.01 par value, 50,000,000 shares
  authorized; 1,000,000 outstanding (liquidation value $100
  million and related Common Stock Warrants)................    100,000           0
Common stock, $.01 par value, 150,000,000 shares authorized
  96,933,963 and 94,655,078 shares issued, respectively.....        969         947
Paid-in capital.............................................    452,434     431,780
Retained earnings (deficit).................................   (690,209)   (599,067)
Treasury stock 17,222 and 0 shares, respectively, at cost...        (77)          0
Accumulated other comprehensive earnings (loss) -- currency
  translation adjustments...................................       (266)     (4,291)
                                                              ---------    --------
          TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY)...........   (137,149)   (170,631)
                                                              ---------    --------
          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
            (DEFICIENCY)....................................  $ 535,964     761,231
                                                              =========    ========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
                                       33
<PAGE>   35
 
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
                     STATEMENTS OF CONSOLIDATED CASH FLOWS
             FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
                         (DOLLAR AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               1998        1997        1996
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)........................................  $(84,872)    (30,035)    (27,667)
Adjustments to reconcile net earnings (loss) to net cash
  provided (used) by operating activities:
  Depreciation.............................................    20,471      16,884      13,904
  Equity in earnings of Evenflo Company, Inc. .............    (1,476)          0           0
  Intangibles amortization.................................     5,776       4,885       6,423
  Bad debt expense.........................................    12,591       4,284       6,527
  Deferred income taxes....................................   (33,196)     (3,719)      4,550
  Deferred financing cost amortization.....................     5,206       4,637       2,266
  1994 Management Stock Ownership Plan expense.............         0           0      20,828
  Write-off of Etonic assets...............................         0           0       3,300
  Extraordinary loss on early extinguishment of debt.......     9,091           0       9,187
  Other....................................................     2,159         734         443
                                                             --------    --------    --------
          Subtotal.........................................   (64,250)     (2,330)     39,761
Changes in assets and liabilities -- net of effects of the
  sale of Evenflo
  Receivables..............................................    16,534     (33,739)    (31,320)
  Inventories..............................................   (23,882)    (28,338)     (4,747)
  Other assets.............................................     3,467           0           0
  Current liabilities, excluding bank loans................   (27,071)     38,592      30,818
  Other....................................................    (1,042)     (5,658)     (2,488)
                                                             --------    --------    --------
          NET CASH PROVIDED (USED) BY OPERATING
            ACTIVITIES.....................................   (96,244)    (31,473)     32,024
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................   (26,649)    (35,070)    (19,546)
Payment to purchase net assets of Gerry....................         0     (68,652)          0
Acquisition of non-U.S. trademarks from affiliate..........         0           0      (5,135)
Acquisition of Hogan.......................................    (1,641)          0           0
Sale of Evenflo and settlement of intercompany balances:
  Sale of 57.6% of Evenflo Common Stock....................    28,800           0           0
  Sale of Evenflo Preferred Stock..........................    40,000           0           0
  Repayment of intercompany debt by Evenflo................   110,000           0           0
  Effect of cash on sale of Evenflo........................    (6,739)          0           0
                                                             --------    --------    --------
          NET CASH FLOWS PROVIDED (USED) IN INVESTING
            ACTIVITIES.....................................   143,771    (103,722)    (24,681)
                                                             --------    --------    --------
          Net cash provided (used) before financing
            activities.....................................    47,527    (135,195)      7,343
                                                             --------    --------    --------
</TABLE>
 
                                       34
<PAGE>   36
 
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
                     STATEMENTS OF CONSOLIDATED CASH FLOWS
             FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
                         (DOLLAR AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               1998        1997        1996
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit agreements.........................  $      0           0     600,000
Repayment under credit agreement...........................  (228,800)          0           0
Net borrowings under revolving credit loan.................    94,800       1,600      25,800
Repayments under prior credit agreements...................         0           0    (320,000)
Net borrowings (repayments) of other indebtedness..........    (4,430)      4,646      (2,414)
Repayment of Etonic notes..................................         0           0     (54,043)
Payment of new credit agreement financing costs............         0           0     (34,231)
Proceeds from issuance of preferred stock and in 1998,
  warrants.................................................   100,000           0     150,000
Proceeds from issuance of common stock.....................     1,422      59,102     221,000
Repurchase of common stock.................................       (77)       (283)   (524,150)
Payments of deferred financing costs.......................    (4,915)          0           0
1994 Management Stock Ownership Plan:
  Repurchase of shares outstanding.........................         0           0     (28,219)
  Collection of management notes receivable................         0           0       6,889
Additional capital contribution............................         0           0       1,219
                                                             --------    --------    --------
          NET CASH FLOWS PROVIDED (USED) BY FINANCING
            ACTIVITIES.....................................   (42,000)     65,065      41,851
                                                             --------    --------    --------
          Net increase (decrease) in cash..................     5,527     (70,130)     49,194
          Cash balance, beginning of period................     5,168      75,298      26,104
                                                             --------    --------    --------
          Cash balance, end of period......................  $ 10,695       5,168      75,298
                                                             ========    ========    ========
SUPPLEMENTAL CASH FLOW DATA:
Interest paid..............................................  $ 80,667      53,163      35,677
Income taxes paid..........................................       170       2,332       3,385
Non-cash exchange of preferred stock for common stock......         0     164,174           0
Non-cash preferred stock dividend..........................         0      14,174           0
Issuance of $10,000 of common stock and a $3,025 note in
  the acquisition of Hogan.................................    13,025           0           0
Non-cash acquisition of Etonic net assets..................         0           0      54,043
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
                                       35
<PAGE>   37
 
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
          STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIENCY)
             FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
                         (DOLLAR AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                       ACCUMULATED
                                                                                          OTHER
                                                               RETAINED               COMPREHENSIVE
                                PREFERRED   COMMON   PAID-IN   EARNINGS    TREASURY     EARNINGS
                                  STOCK     STOCK    CAPITAL   (DEFICIT)    STOCK        (LOSS)        TOTAL
                                ---------   ------   -------   ---------   --------   -------------   --------
<S>                             <C>         <C>      <C>       <C>         <C>        <C>             <C>
September 30, 1995............  $      0        2     53,898    (63,065)       0         (3,195)       (12,360)
Net earnings (loss) from the
  year........................         0        0          0    (27,667)       0              0        (27,667)
Issuance of common stock......         0        1    220,999          0        0              0        221,000
Repurchase of common stock:
  Cash and initial purchase
     price adjustment.........         0       (2)   (52,492)  (471,656)       0              0       (524,150)
  Realco promissory note
     carrying value...........         0        0          0     (8,388)       0              0         (8,388)
  Realco common stock carrying
     value....................         0        0          0      1,711        0              0          1,711
Common stock split............         0      499       (499)         0        0              0              0
Additional capital
  contribution................         0        0      1,219          0        0              0          1,219
Currency translation
  adjustments.................         0        0          0          0        0            (43)           (43)
Other.........................         0        0          0        316        0           (234)            82
                                --------     ----    -------   --------      ---         ------       --------
September 30, 1996............         0      500    223,125   (568,749)       0         (3,472)      (348,596)
Net earnings (loss) for the
  year........................         0        0          0    (30,035)       0              0        (30,035)
Cash proceeds from issuance of
  common stock................         0      118     58,984          0        0              0         59,102
Exchange of common stock for
  preferred stock.............         0      329    163,845          0        0              0        164,174
Preferred stock dividend......         0        0    (14,174)         0        0              0        (14,174)
Currency translation
  adjustments.................         0        0          0          0        0           (819)          (819)
Repurchase of common stock --
  final purchase price
  adjustment..................         0        0          0       (283)       0              0           (283)
                                --------     ----    -------   --------      ---         ------       --------
September 30, 1997............         0      947    431,780   (599,067)       0         (4,291)      (170,631)
Net earnings (loss) for the
  year........................         0        0          0    (84,872)       0              0        (84,872)
Cash proceeds from issuance of
  common stock................         0        2      1,420          0        0              0          1,422
Stock issued in Hogan
  acquisition.................         0       20      9,980          0        0              0         10,000
Repurchase of treasury
  stock.......................         0        0          0          0      (77)             0            (77)
Issuance of preferred stock
  and warrants................   100,000        0          0          0        0              0        100,000
Sale price of 57.6% of Evenflo
  in excess of related net
  book value..................         0        0      9,254          0        0          1,620         10,874
Deferred tax adjustment on
  acquired trademarks.........         0        0          0     (6,270)       0              0         (6,270)
Currency translation
  adjustments.................         0        0          0          0        0          2,405          2,405
                                --------     ----    -------   --------      ---         ------       --------
September 30, 1998............  $100,000      969    452,434   (690,209)     (77)          (266)      (137,149)
                                ========     ====    =======   ========      ===         ======       ========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
                                       36
<PAGE>   38
 
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
             FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
            (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
NOTE A -- ORGANIZATION
 
     BUSINESS AND REORGANIZATION.  Spalding Holdings Corporation (formerly
Evenflo & Spalding Holdings Corporation) and subsidiaries (the "Company") is a
global manufacturer and marketer of branded consumer products serving the
sporting goods markets under the primary trade names Spalding, Top-Flite,
Etonic, Strata, Ben Hogan and Dudley. The primary subsidiary of the Company is
Spalding Sports Worldwide, Inc. ("SSW"), formerly named Spalding & Evenflo
Companies, Inc. The Company markets and licenses a variety of recreational and
athletic products such as golf balls, golf clubs, golf shoes, golf bags and
accessories, basketballs, volleyballs, footballs, soccer balls, softball and
baseball bats, balls and gloves, handballs, rackets and balls for tennis and
racquetball, and clothing, shoes and equipment for many other sports. In the
Company's 1997 consolidated financial statements, this business segment was
identified as Spalding.
 
     Prior to August 20, 1998, the Company operated in a second business segment
known as Evenflo ("Evenflo Segment"), which serves the infant and juvenile
product market. The Evenflo Segment consisted of Evenflo Company, Inc., a SSW
wholly-owned subsidiary, and certain other wholly-owned SSW subsidiaries and
divisions of subsidiaries that sell infant and juvenile products in other
countries and that hold the Evenflo Segment patents and trademarks. The Evenflo
Segment 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 other baby care products and
accessories, as well as juvenile car seats, stationary activity products,
strollers, high chairs, portable play yards, cribs, dressers and changing
tables, gates, soft carriers and frame carriers, child carriers and mattresses.
 
     On August 20, 1998, the Company effectively completed the separation of
these two businesses, the Spalding and the Evenflo Segments, into two
stand-alone companies (the "Reorganization"). The Company initiated the
Reorganization on May 20, 1998 by contributing the SSW investments in its other
subsidiaries included in the Evenflo Segment to Evenflo Company, Inc. and
receiving newly issued cumulative, variable rate, preferred stock (400,000
shares) of Evenflo Company, Inc. (the "Evenflo Preferred Stock") with a face
value of $40,000 and an initial dividend rate of 14%. As a result of these
transactions, Evenflo Company, Inc. became the parent company of all the other
subsidiaries and divisions of subsidiaries formerly included in the Evenflo
Segment. The realignment of the Company's two businesses was accounted for as a
reorganization of companies under common control in a manner similar to a
pooling of interests.
 
     On August 20, 1998, KKR 1996 Fund L.P. ("KKR 1996 Fund"), a limited
partnership affiliated with Kohlberg Kravis Roberts & Co., L.P. ("KKR"),
acquired from the Company (i) 51% (5,100,000 shares) of the outstanding common
shares of Evenflo Company, Inc. for a purchase price of $25,500 and (ii) the
Evenflo Preferred Stock for a purchase price of $40,000. Prior to such KKR 1996
Fund stock purchases, Great Star Corporation, an affiliate of Abarco N.V.
("Abarco"), acquired from the Company 6.6% (660,000 shares) of the outstanding
common shares of Evenflo Company, Inc. for a purchase price of $3,300. An
affiliate of KKR 1996 Fund and Abarco are currently shareholders of the Company;
both Abarco and Great Star are owned by the same entity (see "Recapitalization
and Stock Purchase Agreement below)." After these sales of common stock, the
Company retained ownership of 42.4% (4,240,000 shares) of the outstanding common
stock of Evenflo Company, Inc. Also on August 20, 1998 Evenflo Company, Inc. (i)
issued and sold $110,000 aggregate principal amount of senior notes in a private
offering, and (ii) entered into a $100,000 revolving credit facility with a
syndicate of banks and other financial institutions and borrowed $10,000 under
the credit facility. Evenflo Company, Inc. paid the net proceeds of these two
borrowing transactions, $110,000, to the Company as a partial payment of
intercompany indebtedness. The remainder of the intercompany indebtedness of
Evenflo Company, Inc. was treated as a contribution of capital by the Company to
Evenflo Company,
 
                                       37
<PAGE>   39
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Inc. The Company has no guaranty or other obligations with respect to the debt
of Evenflo Company, Inc., and Evenflo Company, Inc. has no such obligations with
respect to the Company's debt.
 
     Also on August 20, 1998, KKR 1996 Fund invested $100,000 in the Company to
acquire cumulative, variable rate, preferred stock of the Company together with
44,100,000 Warrants to purchase common stock of the Company. (see Note L). The
Company used the proceeds from the issuance of its preferred stock, from the
Evenflo Company, Inc. stock sales, and from the repayment of intercompany
indebtedness by Evenflo Company, Inc. to repay $278,800 of the Company's senior
credit facilities and Revolver. (see Note H)
 
     ACQUISITION OF BEN HOGAN.  On November 26, 1997, the Company acquired
certain assets and assumed certain liabilities of the Ben Hogan Co. ("Hogan")
for a purchase price of $14,666, consisting of $10,000 in Company common stock
(2 million shares), $3,025 in a 10 1/2% note due November 25, 2000, and $1,641
in cash. Hogan manufactures and/or markets golf clubs, golf balls, and golf
accessories under the Hogan brand name. The purchased assets and assumed
liabilities consist of the following:
 
<TABLE>
<S>                                                             <C>
Inventories.................................................    $ 3,383
Fixed assets................................................        162
Intangibles (primarily trademarks)..........................     12,221
                                                                -------
Total.......................................................     15,766
Accrued liabilities.........................................     (1,100)
                                                                -------
  Net assets purchased......................................    $14,666
                                                                =======
</TABLE>
 
     The Hogan acquisition was accounted for using the purchase method;
accordingly, the operating results of Hogan have been included in the statement
of consolidated earnings (loss) and comprehensive earnings (loss) from the date
of acquisition. If the acquisition had taken place on October 1, 1996 rather
than on November 26, 1997, consolidated pro forma net sales and net loss would
not have been materially different from the Company's reported amounts for 1998
and 1997.
 
     ACQUISITION OF GERRY.  On April 21, 1997, the Company, through its
wholly-owned subsidiary, Evenflo Company, Inc., acquired the net assets of Gerry
Baby Products Company ("Gerry") for a purchase price of $68,652. Gerry had
manufacturing operations in Colorado and in Wisconsin and maintained its
administrative operations in Colorado. Gerry manufactured and/or marketed
specialty juvenile products under the Gerry and Snugli brand names. The
purchased net assets consisted of the following:
 
<TABLE>
<S>                                                             <C>
Receivables.................................................    $ 21,117
Inventories.................................................      20,003
Other current assets........................................          11
Property, plant and equipment...............................      14,324
Intangible assets (primarily trademarks and goodwill).......      26,823
Other assets................................................          53
                                                                --------
  Total.....................................................    $ 82,331
Accounts payable............................................     (10,230)
Accrued expenses............................................      (3,449)
                                                                --------
  Net assets purchased......................................    $ 68,652
                                                                ========
</TABLE>
 
     The Gerry acquisition was accounted for using the purchase method of
accounting; accordingly, the operating results of Gerry have been included in
the statements of consolidated earnings (loss) and comprehensive earnings (loss)
from the date of acquisition. In applying purchase accounting, inventories were
increased by $1,268, which is the amount of acquired profit related to the
expected future sale of the Gerry
 
                                       38
<PAGE>   40
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
finished goods acquired. Accordingly, the Company's loss for 1997 was increased
by $1,268 from selling, in the ordinary course of business, inventory which was
written up to fair value at date of acquisition. If the acquisition had taken
place at October 1, 1995 rather than in April 1997, Gerry's unaudited results of
operations would have changed pro forma consolidated net sales and net earnings
(loss) by $61,362 and $(1,735) for the year ended September 30, 1997 and
$124,027 and $(110) for the year ended September 30, 1996.
 
     RECAPITALIZATION AND STOCK PURCHASE AGREEMENT.  Prior to September 30,
1996, the Company was a wholly-owned subsidiary of Abarco. On August 15, 1996,
Abarco and Strata Associates L.P. ("Strata"), an affiliate of KKR, entered into
a Recapitalization and Stock Purchase Agreement (the "Recapitalization
Agreement") pursuant to which Strata acquired control of the Company (the
"Recapitalization"). The closing of the Recapitalization took place on September
30, 1996 (the "Closing"). In connection with the Recapitalization a portion of
the common stock owned by Abarco was redeemed for total consideration of
$581,933 in 1996 (see details below) plus an adjustment to the redemption price
of $283 in 1997. After the Recapitalization Strata and its affiliate owned
approximately 88% of the Company's common stock and Abarco retained
approximately 12% of the Company's common stock.
 
     The Recapitalization was financed with $221,000 cash proceeds of newly
issued common stock to Strata, $150,000 proceeds of non-voting redeemable
preferred stock issued to Strata (of which $50,000 was issued immediately after
the Closing), proceeds of $625,800 from certain borrowings (see Note H) and
$2,209 of the Company's cash balances. These funds were used to (i) redeem a
portion of the common stock held by Abarco for $524,150 in cash plus the fair
value of the Company's investments in an affiliate promissory note of $49,395
and in the E&S Realco, Inc. ("Realco") common stock and note receivable of
$8,388; (ii) repay principal and interest of $367,894 for existing indebtedness,
including the promissory notes issued to acquire Etonic; (iii) redeem, for a net
payment of $21,330 all of the remaining subsidiary shares issued under the 1994
Management Stock Ownership Plan (see Note L); (iv) pay $31,471 in transaction
fees and expenses; (v) purchase certain non-U.S. trademarks and assignment
rights from an affiliate of Abarco for $5,135; (vi) pay a transaction bonus of
$5,375 to certain members of management of SSW; and (vii) provide working
capital of $45,654 (of this amount $25,800 was used to repay borrowings under
the revolving credit loan on October 1, 1996).
 
     ACQUISITION OF ETONIC.  In July 1996, the Company acquired the net assets
of Etonic, which manufactures and/or markets golf shoes, gloves and other golf
accessories, as well as an established line of running and walking shoes. To
effect the acquisition of Etonic, the Company issued promissory notes of $54,043
to the seller in exchange for the following:
 
<TABLE>
<S>                                                             <C>
Receivables.................................................    $22,556
Inventories.................................................     15,642
Other current assets........................................      3,388
Property, plant and equipment...............................      4,129
Intangible assets (primarily trademarks and goodwill).......     13,905
                                                                -------
  Total.....................................................     59,620
Accounts payable............................................     (4,115)
Accrued expenses............................................     (1,462)
                                                                -------
  Promissory notes payable..................................    $54,043
                                                                =======
</TABLE>
 
     The Etonic acquisition was accounted for using the purchase method.
 
     The operating results of Etonic have been included in the statements of
consolidated earnings (loss) and comprehensive earnings (loss) from the date of
acquisition. If the acquisition had taken place at October 1,
 
                                       39
<PAGE>   41
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
1995 rather than in July 1996, Etonic's unaudited results of operations would
have changed pro forma consolidated net sales by $42,942 for the year ended
September 30, 1996. Consolidated pro forma net earnings (loss) would not have
been materially different from the Company's reported amounts for 1996.
 
     The promissory notes payable above plus accrued interest totaling $54,935
were paid as part of the Recapitalization described above. Subsequent to the
Etonic acquisition and prior to September 30, 1996, Company management decided
to relocate the Etonic administrative operations to one of the Company's other
administrative locations. As a result, the Company charged $5,600 to expense in
the year ended September 30, 1996 for (i) a $1,400 write-off of prepaid rent as
a result of the subsequent decision to consolidate the Etonic administrative
function with an existing Company facility; (ii) a $1,900 write-off of computer
software costs which had a reduced future value as a result of the subsequent
decision to discontinue the use of Etonic's computer system; and (iii) a charge
of $2,300 for moving and other costs related to Etonic and its acquisition.
 
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     PRINCIPLES OF CONSOLIDATION.  The consolidated financial statements include
the accounts of Spalding Holdings Corporation and its subsidiaries, all of
which, including Evenflo Company, Inc. and subsidiaries until August 20, 1998,
are wholly-owned. All significant intercompany accounts and transactions have
been eliminated in consolidation.
 
     INVESTMENT IN AFFILIATED COMPANY.  The Company's continuing investment in
Evenflo Company, Inc., subsequent to the August 20, 1998 sale described in Note
A (a 42.4% common stock ownership interest), is accounted for using the equity
method of accounting.
 
     FAIR VALUE OF FINANCIAL INSTRUMENTS.  The estimated fair value of amounts
reported in the consolidated financial statements has been determined by using
available market information and appropriate valuation methodologies. The
carrying value of all current assets and current liabilities approximates fair
value because of their short-term nature. The fair value of long-term debt
approximates the carrying value, based on market prices.
 
     INVENTORIES.  Inventories are valued at the lower of cost or market (net
realizable value). Costs for the majority of United States inventories and
certain non-U.S. inventories have been determined by use of the last-in,
first-out method. Cost for the majority of non-U.S. inventories have been
determined by use of the first-in, first-out method.
 
     PROPERTY, PLANT AND EQUIPMENT.  These assets are stated at cost and are
depreciated principally using the straight-line method over estimated useful
lives which range from 3 to 20 years. Certain assets are depreciated for income
tax purposes using accelerated methods. Assets that become fully depreciated are
removed from the asset and related accumulated depreciation accounts.
 
     INTANGIBLE ASSETS.  All material intangible assets are amortized on the
straight-line basis using a 40 year life.
 
     IMPAIRMENT OF LONG-LIVED ASSETS.  Periodically, the Company evaluates the
recoverability of the net carrying value of its property, plant and equipment
and its intangible assets by comparing the carrying values to the estimated
future undiscounted cash flows. A deficiency in these cash flows relative to the
carrying amounts is an indication of the need for a write-down due to
impairment. The impairment write-down would be the difference between the
carrying amounts and the fair value of these assets as determined by using
estimated future undiscounted cash flows. A loss on impairment would be
recognized by a charge to earnings.
 
     DEFERRED FINANCING COSTS.  The costs incurred to obtain financing under the
various financing agreements have been capitalized and are amortized to interest
expense over the lives of the agreements, using the interest method for term
facilities and the straight-line method for revolving credit facilities.
                                       40
<PAGE>   42
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     INCOME TAXES.  Income tax expense is based on reported earnings before
income taxes. Deferred income taxes reflect the impact of temporary differences
between the amounts of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. In accordance with
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years the temporary differences are expected to reverse.
The effect on deferred taxes of a change in tax rates is recognized in income in
the period that the change in rate is enacted.
 
     The Company and its United States subsidiaries, including Evenflo Company,
Inc. and subsidiaries through August 20, 1998 (see Note A), are parties to a tax
sharing agreement which provides that each member of the consolidated return
group shall pay its share of the consolidated tax liability based on the ratio
of its separate liability to the aggregate separate liabilities of all group
members. A member shall make or receive compensatory payments to the extent its
separate liability differs from its share of the group's liability.
 
     PRODUCT RECALLS AND SAFETY CAMPAIGNS.  At the time a product recall or
Safety Campaign becomes probable, the Company accrues the estimated recall costs
using the guidance of Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies" and charges those costs to operating income
(loss) (see Note Q).
 
     RETIREMENT PLANS AND POSTRETIREMENT BENEFITS.  Current service costs of
retirement plans and post-retirement healthcare and life insurance benefits are
accrued annually. Prior service costs resulting from amendments to the plans are
amortized over the average remaining service period of employees expected to
receive benefits.
 
     EMPLOYEE STOCK OWNERSHIP PLANS.  Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
encourages, but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25"), and related interpretations.
Accordingly, compensation cost for the stock options included under the
Company's 1996 Stock Purchase and Option Plan for Key Employees of Spalding
Holdings Corporation and Subsidiaries (the "1996 Employee Stock Ownership Plan")
is measured as the excess, if any, of the fair value of the Company's stock at
the date of the grant over the amount an employee must pay to acquire the stock.
 
     Prior to September 30, 1996 compensation cost for the shares covered under
the Company's 1994 Management Stock Ownership Plan was recorded in the amount of
any increase in value as determined by a formula. The per share valuation was
determined once a year by the executive committee, using a specified multiple of
EBITDA (earnings before interest, income taxes, depreciation and amortization)
less outstanding Company debt.
 
     ADVERTISING.  Advertising costs are expensed as incurred and included in
selling, general and administrative expenses. Advertising expenses amounted to
$99,013, $91,982 and $66,079 in 1998, 1997 and 1996, 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 (deficiency).
 
     CURRENCY EXCHANGE CONTRACTS.  Open forward currency exchange contracts are
marked-to-market using the spot rates at each balance sheet date and the change
in market value is recorded by the Company as a currency gain or loss.
 
                                       41
<PAGE>   43
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     USE OF ESTIMATES.  The preparation of the accompanying consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of sales and expenses during the reported period. Actual
results could differ from these estimates.
 
     CASH FLOWS.  For purposes of the statements of consolidated cash flows, the
Company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
 
     NEW ACCOUNTING PRONOUNCEMENTS.  In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"). SFAS No. 131 requires public entities to report certain information about
operating segments, their products and services, the geographic areas in which
they operate, and their major customers, in complete financial statements and in
condensed interim financial statements issued to shareholders. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. This standard
addresses disclosure issues and therefore will not affect the Company's
financial position or results of operations.
 
     In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132
revises employers' disclosures about pension and other post-retirement benefit
plans. SFAS No. 132 is effective for fiscal years beginning after December 15,
1997. This standard addresses disclosure issues and therefore will not affect
the Company's financial position or results of operations.
 
     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative (that is, gains and losses) depends upon the intended use of the
derivative and resulting designation if used as a hedge. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The adoption of SFAS No. 133 is not expected to have a material effect on the
Company's consolidated financial statements.
 
     RECLASSIFICATIONS.  Certain reclassifications have been made to prior year
amounts to conform with current year presentations.
 
NOTE C -- INVENTORIES
 
<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------    -------
<S>                                                           <C>         <C>
Finished goods..............................................  $ 94,142     99,733
Work in process.............................................    18,706     28,031
Raw materials...............................................     5,978     29,748
                                                              --------    -------
  Total inventories.........................................  $118,826    157,512
                                                              ========    =======
</TABLE>
 
     The cost of 90% of 1998 and 87% of 1997 inventories was computed using the
last-in, first-out (LIFO) method of inventory valuation. Use of the LIFO method
increased the 1998 and 1997 year end inventories by $5,120 and $1,050,
respectively.
 
                                       42
<PAGE>   44
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE D -- PROPERTY, PLANT AND EQUIPMENT, NET
 
<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------    -------
<S>                                                           <C>         <C>
Land........................................................  $  2,562      3,390
Buildings and building improvements.........................    35,905     55,192
Machinery and equipment.....................................    66,209    131,821
                                                              --------    -------
                                                               104,676    190,403
Accumulated depreciation....................................   (52,785)   (80,208)
                                                              --------    -------
  Property, plant and equipment, net........................  $ 51,891    110,195
                                                              ========    =======
</TABLE>
 
NOTE E -- INTANGIBLE ASSETS, NET
 
<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------    -------
<S>                                                           <C>         <C>
United States trademarks....................................  $ 71,703    102,203
Non-U.S. trademarks.........................................    13,378     15,052
Goodwill....................................................    75,832    100,040
                                                              --------    -------
                                                               160,913    217,295
Accumulated amortization....................................   (47,165)   (63,172)
                                                              --------    -------
  Intangible assets, net....................................  $113,748    154,123
                                                              ========    =======
</TABLE>
 
NOTE F -- ACCRUED EXPENSES
 
<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------    -------
<S>                                                           <C>         <C>
Compensation and other employee benefits....................  $  8,367     13,281
Liability for self insurance................................     1,921     12,276
Liability for restructuring costs:
  Corporate headquarters and Spalding.......................    11,367      1,088
  Gerry.....................................................         0      8,247
Other, principally operating expenses.......................    38,777     44,456
                                                              --------    -------
  Total accrued expenses....................................  $ 60,432     79,348
                                                              ========    =======
</TABLE>
 
     LIABILITY FOR SELF INSURANCE.  The Company has both insured and self
insured group health plans. Substantially all employees of the Company are
covered under an insured medical program and all employees are covered by
insured workers' compensation programs.
 
     Commercial and product liability insurance coverages are high deductible
insured programs. Commercial liability deductibles are $250 thousand per
occurrence. Product liability deductibles are $500 thousand per occurrence and
$3.0 million in aggregate. As a supplement to these programs, the Company
carries $75.0 million in umbrella coverage.
 
     The liability for self insurance claims shown in the table above, which in
1997 was primarily related to Evenflo Company, Inc., 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. Evenflo's portion of the liability for self-insurance as of September
30, 1997 consisted of $8,887 for products liability claims and $1,850 for self
insured workers compensation claims.
 
     SPALDING RESTRUCTURING AND OTHER UNUSUAL COSTS.  In 1997, the Company
implemented a plan to restructure the Spalding domestic and international
operations to focus on core line golf and sporting goods
 
                                       43
<PAGE>   45
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
products. In 1998 this plan was expanded to reduce the infrastructure needed to
support the international operations, close the Mexico operations, consolidate
European operations with the closure of France, Germany, Italy and Spain
operations, and to significantly down-size the Japan operation. These facility
closures resulted in the elimination of approximately 116 international
positions at various levels. As a result, sales activities in Mexico, and the
closed European operations will be channeled through distributors. Additionally,
the U.S. operations recognized certain management severance costs associated
with the elimination of approximately 100 domestic positions and closed the
headquarters in Tampa, Florida. As a result, the Company recorded restructuring
costs, as follows:
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              -------    -----
<S>                                                           <C>        <C>
Tampa headquarters closing costs............................  $ 5,347        0
International severance costs and related expense...........    3,010      923
U.S. severance costs and related expense....................    5,118        0
Write-off of accumulated foreign currency translation
  adjustment................................................    2,761        0
Lease terminations..........................................      409      758
Termination of service contracts............................    1,237        0
Other costs.................................................    2,238      729
                                                              -------    -----
  Total.....................................................  $20,120    2,410
                                                              =======    =====
</TABLE>
 
     The Company aggressively continues its plan to close and consolidate its
operations and sublease space. Additionally, severance and other costs were paid
in connection with the consolidation and downsizing. The Company has paid $7,080
of these restructuring costs in 1998 and $1,322 in 1997 and charged $2,761 in
1998 and $0 in 1997 of non-cash write-offs against the accruals and currently
anticipates that the remaining restructuring actions will be substantially
completed by the end of fiscal 1999.
 
     In addition, the Company incurred other unusual expenses, which have been
charged to net sales, cost of sales, and selling, general and administrative
expenses ("SG&A"), related to:
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              -------    -----
<S>                                                           <C>        <C>
Write-off of funds advanced to freight bill processor
  (SG&A)....................................................  $ 5,703        0
Increase in bad debt allowance for customer attempting to
  re-organize (SG&A)........................................    7,200        0
Impairment of fixed assets due to discontinuance of product
  line (SG&A)...............................................      309        0
Receivable cash discounts resulting from a decision to close
  certain non-U.S. affiliates (net sales)...................      367        0
Inventory write-down resulting from a decision to
  discontinue the sale of certain products by U.S.
  operations (cost of sales)................................      870        0
Inventory write-down resulting from a decision to close
  certain non-U.S. affiliates (cost of sales)...............    2,601    1,602
Receivable write-off resulting from a decision to close
  certain non-U.S. affiliates (SG&A)........................    1,334      100
Recovery from a 1996 Etonic computer software dispute
  (SG&A)....................................................        0    (400)
Shut down costs associated with international operations
  (SG&A)....................................................    1,550        0
Other (SG&A)................................................      217      833
                                                              -------    -----
  Total.....................................................  $20,151    2,135
                                                              =======    =====
</TABLE>
 
     EVENFLO RESTRUCTURING AND OTHER UNUSUAL COSTS.  In July 1997, Company
management adopted a plan to relocate the Gerry Colorado administrative and
manufacturing operations to Evenflo's Ohio and Georgia
 
                                       44
<PAGE>   46
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
locations. As a result, the Company recorded restructuring costs for the period
from October 1, 1997 to August 20, 1998 and for the year ended September 30,
1997, as follows:
 
<TABLE>
<CAPTION>
                                                               1998     1997
                                                              ------    -----
<S>                                                           <C>       <C>
Severance costs for the Colorado employees..................  $    0    4,105
Shut-down costs of the Colorado facility....................       0    2,630
Computer conversion costs to preserve prior manufacturing
  information for future purposes...........................       0    1,237
Other costs.................................................   1,443    1,619
                                                              ------    -----
  Total.....................................................  $1,443    9,591
                                                              ======    =====
</TABLE>
 
     The Company has funded restructuring costs of $9,490 in 1998 and $1,344 in
1997 leaving an accrual of $200 as of September 30, 1998 and of $8,247 as of
September 30, 1997.
 
     In addition, the Company incurred other unusual expenses, which have been
charged to cost of sales and selling, general and administrative expenses
("SG&A"), related to:
 
<TABLE>
<CAPTION>
                                                               1998     1997
                                                              ------    -----
<S>                                                           <C>       <C>
Manufacturing and warehouse reconfiguration costs (cost of
  sales)....................................................  $  159    2,761
Inventory write-down resulting from a decision to
  discontinue the sale of certain Gerry products (cost of
  sales)....................................................     235    3,100
Write up of Gerry inventory at date of acquisition for
  purchase accounting (cost of sales).......................       0    1,268
Costs to consolidate certain of its operations that were
  previously managed separately (SG&A)......................       0    2,629
Reorganization transaction expenses (SG&A)..................   4,000        0
Year 2000 conversion costs (SG&A)...........................     685        0
                                                              ------    -----
  Total.....................................................  $5,079    9,758
                                                              ======    =====
</TABLE>
 
NOTE G -- NON-U.S. DEBT
 
     The Company's non-U.S. subsidiaries have short-term bank financing
arrangements to support international working capital requirements. The
subsidiaries utilized these arrangements by use of direct bank borrowings,
discounting receivables and letters of credit as follows:
 
<TABLE>
<CAPTION>
                                                               1998       1997
                                                              -------    ------
<S>                                                           <C>        <C>
As of September 30:
Available lines of credit...................................  $15,375    42,800
                                                              =======    ======
Amounts outstanding:
  Direct bank borrowings....................................  $ 6,744    17,674
  Discounted receivables (netted against accounts
     receivable)............................................    1,802     5,850
                                                              -------    ------
  Borrowings................................................    8,546    23,524
  Letters of credit not yet funded..........................      590     3,376
                                                              -------    ------
                                                              $ 9,136    26,900
                                                              =======    ======
</TABLE>
 
                                       45
<PAGE>   47
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                           1998       1997      1996
                                                          -------    ------    ------
<S>                                                       <C>        <C>       <C>
For the years ended September 30:
Maximum borrowings......................................  $14,368    27,900    31,800
Weighted average outstanding balances...................   13,737    25,800    25,700
Weighted average interest rates.........................     4.84%     4.74%     4.60%
</TABLE>
 
     At September 30, 1998, the borrowings are mainly comprised of $5,756 in
Australian dollars, and $958 in British pound sterling.
 
NOTE H -- UNITED STATES DEBT
 
     The Company's U.S. operations have long-term bank financing arrangements to
support working capital needs and other general corporate requirements. The
operations utilized these arrangements primarily by use of direct bank
borrowings, acceptances and letters of credit. The Company's borrowing
activities are as follows:
 
<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------    -------
<S>                                                           <C>         <C>
As of September 30:
Available lines of credit...................................  $630,874    850,000
                                                              ========    =======
  Direct borrowings.........................................  $503,074    627,400
  Acceptances (included in accounts payable)................    58,800     92,500
                                                              --------    -------
  Borrowings................................................   561,874    719,900
  Letters of credit not yet funded..........................    10,800     28,600
                                                              --------    -------
                                                              $572,674    748,500
                                                              ========    =======
Direct borrowings consist of:
Secured Credit Facility
  Revolving credit loan.....................................  $122,200     27,400
  Term Loans................................................   171,200    400,000
Senior Subordinated Notes...................................   200,000    200,000
Other indebtedness..........................................     9,674          0
                                                              --------    -------
  Total debt................................................   503,074    627,400
Current maturities of debt..................................         0     17,500
                                                              --------    -------
  Long-term debt............................................  $503,074    609,900
                                                              ========    =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                       1998        1997        1996
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
For the years ended September 30:
Maximum borrowings (1996 prior to the
  Recapitalization)................................  $794,874    $735,800    $366,700
Weighted average outstanding balances..............   704,800     653,200     338,000
Weighted average interest rates....................      9.11%       9.82%       9.14%
</TABLE>
 
     SECURED CREDIT FACILITY.  On September 30, 1996, the Company entered into a
secured credit facility (the "Credit Facility") with a syndicate of banks and
other financial institutions. The Credit Facility provided for a $650,000
maximum credit commitment (however, see below for a description of the reduction
of this commitment on August 20, 1998), consisting of a seven year $250,000
revolving credit loan ("Revolving Credit Loan") and $400,000 in term loans
("Term Loans"). Term Loans consist of (i) $175,000 seven year Term Loan A, (ii)
$87,500 eight year Term Loan B, (iii) $87,500 nine year Term Loan C and (iv)
$50,000 nine and one half year Term Loan D. Revolving Credit Loans may be used
for working capital needs, special
 
                                       46
<PAGE>   48
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
facility obligations (letters of credit and acceptances), general corporate
purposes and for borrowings on same-day notice ("Swingline Loans"). Special
facility obligations are limited to a maximum of $180,000 and Swingline Loans
are limited to a maximum of $30,000. Each of the Term Loans required annual
amortization beginning September 30, 1998 and each subsequent September 30
thereafter until maturity as well as certain mandatory prepayments, among
others, with the proceeds of certain asset sales.
 
     In conjunction with the receipt of the $278,800 in proceeds from the
Reorganization (see Note A), the Company was required to prepay portions of its
Term Loans as follows:
 
<TABLE>
<CAPTION>
                                              BALANCE PRIOR                    BALANCE AFTER
                                              TO PREPAYMENTS    PREPAYMENTS     PREPAYMENTS
                                              --------------    -----------    -------------
<S>                                           <C>               <C>            <C>
Term Loan A.................................     $175,000        $136,208        $ 38,792
Term Loan B.................................       87,500          36,094          51,406
Term Loan C.................................       87,500          36,094          51,406
Term Loan D.................................       50,000          20,404          29,596
                                                 --------        --------        --------
Total.......................................     $400,000        $228,800        $171,200
                                                 ========        ========        ========
</TABLE>
 
The Company also prepaid $25,000 of the Revolving Credit Loan and $25,000 of a
seasonal credit facility that was opened during 1998 (see Note S).
 
     All Term Loans and Revolving Credit Loans will 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 (a) in the case of Term Loan A, a debt to EBITDA-dependent rate
ranging from 0.00% to 1.50% per annum, (b) in the case of Term Loan B, 1.75% to
2.00% per annum, (c) in the case of Term Loan C, 2.25% to 2.50% per annum, (d)
in the case of Term Loan D, 2.75% to 3.00% per annum, (e) in the case of a
Revolving Credit Loan and Swingline Loans, a debt to EBITDA-dependent rate
ranging from 0.00% to 1.50% per annum or (B) a "eurodollar rate" plus (i) in the
case of Term Loan A, a debt to EBITDA-dependent rate ranging from 0.625% to
2.50% per annum, (ii) in the case of Term Loan B, 2.75% to 3.00% per annum,
(iii) in the case of Term Loan C, 3.25% to 3.50% per annum, (iv) in the case of
Term Loan D, 3.75% to 4.00% per annum or (v) in the case of Revolving Credit
Loans, a debt to EBITDA-dependent rate ranging from 0.625% to 2.50% per annum.
Swingline Loans may only be "base rate" loans.
 
     The Company pays a commitment fee calculated at a debt to EBITDA-dependent
rate ranging from 0.20% to 0.50% per annum of the available unused commitment
under the Revolving Credit Loan in effect on each day. Such fee is payable
quarterly in arrears and upon termination of the Revolving Credit Loan. In
addition, the Company pays a fee to the administrative agent of $100 per annum,
payable quarterly in arrears.
 
     The Company pays a letter of credit fee calculated at a debt to
EBITDA-dependent rate ranging from 0.50% to 2.375% per annum of the face amount
of each letter of credit and a fronting fee calculated at a rate equal to 0.125%
per annum of the face amount of each letter of credit. Such fees, except
fronting fee, are payable quarterly in arrears and upon the termination of the
Revolving Credit Loan. In addition, the Company pays customary transaction
charges in connection with any letters of credit.
 
     The Term Loans are subject to mandatory prepayments (i) with the proceeds
of certain asset sales and certain debt offerings (excluding the Senior
Subordinated Notes) and (ii) on an annual basis with 50% of the Company's excess
cash flow (as defined in the Credit Facility) for so long as the ratio of the
Company's total debt (as defined in the Credit Facility) to EBITDA (as defined
in the Credit Facility) is greater than 4.0 to 1.0. The Credit Facility
prohibits the Company from repurchasing any Senior Subordinated Notes subject to
limited exceptions. The Company's obligations under the Credit Facility are
secured by a pledge of the stock of certain of its subsidiaries. In addition,
indebtedness under the Credit Facility is guaranteed by the principal
subsidiaries of the Company.
 
                                       47
<PAGE>   49
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Credit Facility contains customary covenants and restrictions on the
Company's ability to engage in certain activities including (i) limitations on
liens, (ii) limitations on consolidations and mergers of the Company and sales
of the assets of the Company, (iii) restrictions on the purchase, redemption or
acquisition of any capital stock, equity interest or any other obligations or
other securities and restrictions on the advances, loans, extension of credit or
capital contributions to, or investments 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, and (vi) compliance with
certain financial covenants relating to certain interest coverage, fixed charge
ratios, and a leverage ratio. In connection with the Reorganization (see Note
A), the Company reached agreement with its bank syndicate to amend its Credit
Facility to remove certain financial ratio requirements until December 31, 1999
and to amend other covenants.
 
     The Credit Facility includes customary events of default.
 
     Scheduled maturities of the Term Loans are as follows:
 
<TABLE>
<CAPTION>
                                                  TERM       TERM      TERM      TERM
           YEAR ENDING SEPTEMBER 30              LOAN A     LOAN B    LOAN C    LOAN D
           ------------------------              -------    ------    ------    ------
<S>                                              <C>        <C>       <C>       <C>
2002...........................................  $ 7,637         0         0         0
2003...........................................   31,155       623       623       309
2004...........................................        0    50,783       623       312
2005...........................................        0         0    50,160       312
2006 (March 31, 2006)..........................        0         0         0    28,663
                                                 -------    ------    ------    ------
  Total........................................  $38,792    51,406    51,406    29,596
                                                 =======    ======    ======    ======
</TABLE>
 
     SENIOR SUBORDINATED NOTES.  In conjunction with the closing of the
Recapitalization of September 30, 1996 (see Note A), the Company issued $200
million aggregate principal amount of 10 3/8% Senior Subordinated Notes. In
January 1997, the Company completed a public debt offering which resulted in the
Company exchanging its 10 3/8% Senior Subordinated Notes for new 10 3/8% Series
B Senior Subordinated Notes (the "Senior Subordinated Notes"). The Senior
Subordinated Notes will mature on October 1, 2006 and are unsecured senior
subordinated obligations of the Company. Interest on the Senior Subordinated
Notes is payable semiannually April 1 and October 1 of each year.
 
     The Senior Subordinated Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after October 1, 2001. In
addition, at any time prior to October 1, 1999, the Company may, at its option,
redeem up to 40% of the aggregate principal amount of the Senior Subordinated
Notes at a redemption price equal to 110% of the aggregate principal amount
thereof, plus accrued interest thereon, with the proceeds of equity offerings.
 
     The Company will not be required to make mandatory redemptions or sinking
fund payments prior to maturity of the Senior Subordinated Notes, except if
holders request that the Company repurchase the Senior Subordinated Notes in the
event of a change of control (as defined in the indenture relating to the Senior
Subordinated 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 Senior Subordinated Notes contain customary covenants and restrictions
on the Company's ability to engage in certain activities, which include (i)
limitations on restricted payments for the payment of dividends, (ii)
limitations on incurrence of additional indebtedness and issuance of
disqualified stock, (iii) restrictions on the merger, consolidation, or sale of
substantially all assets of the Company, (iv) limitations on transactions with
affiliates relating to the sale, lease, transfer or disposition of any of its
properties or assets in excess of certain amounts, (v) limitations on guarantees
of indebtedness by the Company, (vi) limitations on incurrence of other
subordinated indebtedness by the Company and (vii) certain reporting
requirements in accordance with Securities and Exchange Commission rules.
                                       48
<PAGE>   50
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Senior Subordinated Notes include customary events of default.
 
     OTHER INDEBTEDNESS.  The other indebtedness consists of the 10 1/2% note in
the amount of $3,025 due November 25, 2000 incurred in connection with the
purchase of Ben Hogan (see Note A) and the 5% note in the amount of $6,500,
incurred in 1998 in connection with the construction of a new warehouse located
in Chicopee, MA., due in monthly installments through February 2013. The Company
financed this new 150,000 square foot warehouse with the Massachusetts
Development Finance Agency. The $6,500 twenty-year loan is at 5% annual interest
for the first five years and converts to 300 basis points over one-year U.S.
Treasury for years six through twenty. In order to maintain the 5% interest rate
for the first five years, Spalding is required to maintain a certain number of
new full-time positions. There are no amortization requirements for the first
five years of the loan, the sixth through fifteenth year requires $27 monthly
amortization payments, and the years sixteen through twenty require $54 monthly
amortization payments. Massachusetts Development Finance Agency has been granted
a security interest in the warehouse.
 
NOTE 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>
                                                       1998         1997       1996
                                                     ---------    --------    -------
<S>                                                  <C>          <C>         <C>
Earnings (loss) before income taxes and
  extraordinary loss:
  United States....................................  $(101,356)   $(32,957)    (9,331)
  Other nations....................................    (10,803)     (5,578)    (3,049)
                                                     ---------    --------    -------
          Total....................................  $(112,159)    (38,535)   (12,380)
                                                     =========    ========    =======
Income tax provision:
  Current taxes:
     Federal taxes.................................        129      (7,136)     3,145
     State taxes...................................        489         565        400
     Other nations' taxes..........................        945       1,790      1,205
                                                     ---------    --------    -------
          Total....................................      1,563      (4,781)     4,750
                                                     ---------    --------    -------
  Deferred taxes:
     Federal taxes.................................    (34,796)     (3,712)     1,471
     Other nations' taxes..........................         37          (7)     3,079
                                                     ---------    --------    -------
          Total....................................    (34,759)     (3,719)     4,550
                                                     ---------    --------    -------
          Total income taxes (benefit).............  $ (33,196)     (8,500)     9,300
                                                     =========    ========    =======
</TABLE>
 
                                       49
<PAGE>   51
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The differences between the effective income tax rate and the U.S.
statutory rate are as follows:
 
<TABLE>
<CAPTION>
                                                              1998    1997    1996
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
U.S. statutory rate.........................................  (35)%   (35)%   (35)%
State income taxes, net of federal benefit..................    0       1       6
Non-U.S. tax rate differences...............................    0       2       5
Non-U.S. losses (earnings) for which no taxes were
  recorded..................................................    4       7      15
Increase in valuation allowances on non-U.S. net operating
  loss carryforwards........................................    0       0      20
1994 Management Stock Ownership Plan expense................    0       0      59
Recapitalization costs......................................    0       0      18
Other.......................................................    1       3     (13)
                                                              ---     ---     ---
  Effective tax rate........................................  (30)%   (22)%    75%
                                                              ===     ===     ===
</TABLE>
 
     Under the asset and liability method prescribed by SFAS 109, deferred
income taxes, net of appropriate valuation allowances, are provided for the
temporary differences between the financial reporting and tax basis of assets
and liabilities using enacted tax rates expected to apply to taxable income in
the years the temporary differences are expected to reverse. Temporary
differences and carryforwards, are as follows:
 
<TABLE>
<CAPTION>
                                                       NET DEFERRED TAX ASSET
                                              ----------------------------------------
                                                   CURRENT              NONCURRENT
                                              ------------------    ------------------
                                               1998       1997       1998       1997
                                              -------    -------    -------    -------
<S>                                           <C>        <C>        <C>        <C>
Acquired non-U.S. trademarks................  $     0          0     33,892     45,518
Intangibles amortization....................        0          0    (22,833)   (24,756)
Depreciation................................        0          0     (1,348)      (491)
Accrued liabilities.........................    8,866    $11,925          0          0
Pension.....................................        0          0      3,362      4,458
Post-retirement benefits....................        0          0      2,902      3,475
Net operating loss carryforwards............        0          0     57,605     20,290
Capital loss carryforward...................        0          0      8,179      8,198
Other.......................................    4,443      1,935       (875)       418
                                              -------    -------    -------    -------
  Total deferred income taxes...............   13,309     13,860     80,884     57,110
Valuation allowance on net operating losses
  and capital loss..........................        0          0    (28,985)   (22,206)
                                              -------    -------    -------    -------
Net deferred income taxes...................  $13,309     13,860     51,899     34,904
                                              =======    =======    =======    =======
</TABLE>
 
     On September 30, 1998, the Company had net operating loss carryforwards of
$135,645 consisting of $100,588 from U.S. operations and $35,057 in non-U.S.
subsidiaries. Deferred tax benefits of $57,605 have been established on these
losses and a 1998 valuation allowance in the amount of $20,806 has been provided
on the entire state and non-U.S. portions of the deferred tax benefits. On
September 30, 1998, the Company had capital loss carryforward of $20,972 for
which a 1998 valuation allowance in the amount of $8,179 has been provided on
the entire deferred tax benefits. Subsequent recognition of the tax benefits, if
any, relating to the capital loss carryforward will be credited to retained
earnings.
 
     As part of the Recapitalization Agreement, Abarco has indemnified the
Company for any potential income tax obligations through September 30, 1996. The
Company's federal income tax returns through September 30, 1995 have been
examined by, and settled with, the Internal Revenue Service.
 
                                       50
<PAGE>   52
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     On September 22, 1998, the Company entered into an agreement with the
Internal Revenue Service (IRS) completing the audit of the September 30, 1994
and 1995 consolidated federal income tax returns, and finally determining the
Company's tax liability for those years. The primary issue in that audit was the
tax treatment accorded the 1994 acquisition of the Acquired Trademarks from
Abarco. Under the agreement with the IRS, the trademarks were determined to have
a fair market value of $155,000 on the date of purchase, and the difference
between that value and the $176,000 transferred to Abarco was determined to be a
dividend to shareholders. As a result of that settlement, withholding and income
tax in the amount of $6,856 and interest in the amount of $2,534 were paid to
the IRS. Under the Recapitalization Agreement, Abarco indemnified the Company
for this liability.
 
     Under generally accepted accounting principles the 1994 acquisition of the
Acquired Trademarks from an affiliate of Abarco for $176,000 was not revalued to
fair market value but was recorded at the affiliate's net book value. The $8,250
carrying value of the Acquired Trademarks is being amortized over 40 years for
book purposes while the $176,000 fair market value ($155,000 after the IRS
settlement discussed in the preceding paragraph) is being amortized over 15
years for income tax purposes. The $58,712 deferred income tax effect at the
date the trademarks were acquired is reduced as the Company recognizes the tax
benefit of the difference between the carrying value of $8,250 and the tax basis
of $176,000. The carrying value of the deferred tax asset at September 30, 1998
and 1997 was $33,892 (after giving effect to the settlement with the IRS) and
$45,518, respectively.
 
     On September 30, 1998, 1997 and 1996 undistributed earnings of non-U.S.
subsidiaries included in consolidated retained earnings (deficit) amounted to
$1,900, $6,500 and $8,100. The Company intends to continue to indefinitely
reinvest these earnings, which reflect full provision for non-U.S. income taxes,
to expand its continuing international operations. Accordingly, no provision has
been made for U.S. income taxes that might be payable upon repatriation of such
earnings.
 
NOTE J -- PENSION PLANS
 
     The Company's United States operations have noncontributory, defined
benefit pension plans covering substantially all employees. These plans provide
employees with pension benefits that either are based on age and compensation or
are based on stated amounts for each year of service. The Company's funding
policy is to contribute annually the minimum amounts permitted by the Internal
Revenue Code. Plan assets are invested in a broadly diversified portfolio
consisting primarily of common stock and fixed income securities.
 
     Prior to August 20, 1998, the Company maintained certain pension plans that
covered employees in both the Spalding and Evenflo Segments. Consistent with the
Reorganization, pension plans attributable to Evenflo Company, Inc. are no
longer a liability to the Company and have been excluded from the September 30,
1998 balances. The reorganization of the pension plans has been treated as a
"Separation of Funds" rather than a combined curtailment and settlement as
described under Statement of Financial Accounting Standards No. 88 "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits" ("SFAS No. 88"). The net impact of this decision is
that Evenflo Company, Inc. retains the (accrued)/prepaid balance at August 20,
1998 and amortizes any deferrals (gains/losses, prior service cost, transition
obligation, etc.) associated with the plans rather than immediately recognizing
them. Pension plan expenses attributable to Evenflo Company, Inc. are included
in the Company's consolidated financial statements through August 20, 1998.
 
                                       51
<PAGE>   53
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The September 30, 1998 and 1997 funded status of the Company's United
States defined benefit pension plans consists of the following:
 
<TABLE>
<CAPTION>
                                                     ASSETS EXCEED      ACCUMULATED
                                                      ACCUMULATED         BENEFITS
                                                        BENEFITS       EXCEED ASSETS
                                                     --------------    --------------
                                                     1998     1997      1998     1997
                                                     ----    ------    ------    ----
<S>                                                  <C>     <C>       <C>       <C>
Actuarial present value of benefits based on
  service to date and present pay levels:
  Vested...........................................  $  0    57,316    51,307     44
  Nonvested........................................     0     3,861       820     80
                                                     ----    ------    ------    ---
Accumulated benefit obligation.....................     0    61,177    52,127    124
Additional amounts related to projected pay
  increases........................................     0       550       761      0
                                                     ----    ------    ------    ---
Total projected benefit obligation based on service
  to
  date.............................................     0    61,727    52,888    124
Plan assets at fair value..........................     0    66,572    47,813     42
                                                     ----    ------    ------    ---
Projected benefit obligation in excess of (less
  than) plan assets................................     0    (4,845)    5,075     82
Unamortized net amount resulting from changes in
  plan experience and actuarial assumptions........     0    13,471     2,246    (13)
Unrecognized net transition obligation.............     0       666       445      0
Unamortized prior service cost.....................     0     3,168        94     (8)
                                                     ----    ------    ------    ---
Pension liability (asset)..........................  $  0    12,460     7,860     61
                                                     ====    ======    ======    ===
</TABLE>
 
     On September 30, 1998 and 1997 the Company's United States pension
liability due currently was $40 and $72 and the long-term portion was $7,820 and
$12,327.
 
     The 1998, 1997 and 1996 pension expense of the Company's United States
defined benefit plans includes the following components:
 
<TABLE>
<CAPTION>
                                                           1998       1997      1996
                                                          -------    ------    ------
<S>                                                       <C>        <C>       <C>
Benefits earned during the period.......................  $ 3,124     2,814     2,236
Interest accrued on benefits earned in prior years......    3,963     3,942     4,005
Return on plan assets...................................     (622)   (4,243)   (3,775)
Net amortization and deferral...........................   (5,526)     (445)     (534)
                                                          -------    ------    ------
Pension expense of domestic defined benefit pension
  plans.................................................  $   939     2,068     1,932
                                                          =======    ======    ======
</TABLE>
 
     Assumptions used in the accounting for United States defined benefit
pension plans as of September 30, 1998, 1997 and 1996 were:
 
<TABLE>
<CAPTION>
                                                              1998    1997    1996
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Discount rate...............................................  6.25%   7.0%    7.5%
Rate of increase in compensation levels.....................  4.50%   4.5%    4.5%
Expected long-term rate of return on assets.................  8.50%   8.5%    8.5%
</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
 
                                       52
<PAGE>   54
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
integrated with the benefits required by the laws of the various countries. The
Company's defined contribution plans' expenses totaled $600 in 1998, $2,210 in
1997 and $1,739 in 1996.
 
NOTE K -- POSTRETIREMENT BENEFITS
 
     The Company provides certain post-retirement health care and life insurance
benefits for its domestic retired employees and their dependents. Substantially
all of the Company's United States employees may become eligible for those
benefits if they reach normal retirement age while working for the Company. Most
international employees are covered by government sponsored programs and the
cost to the Company is not significant. The Company does not fund retiree health
care benefits in advance and has the right to modify these plans in the future.
 
     Consistent with the Reorganization, post-retirement benefits attributable
to Evenflo Company, Inc. are no longer a liability to the Company and have been
excluded from the September 30, 1998 balances. The reorganization of the
post-retirement benefits has been treated as a "Separation of Plans" rather than
a combined curtailment and settlement as described under SFAS No. 88. The net
impact of this decision is that Evenflo Company, Inc. retains the
(accrued)/prepaid balance at August 20, 1998 and amortizes any deferrals
(gains/losses, prior service cost, transition obligation, etc.) associated with
the plans rather than immediately recognizing them. Postretirement benefit
expenses attributable to Evenflo Company, Inc. are included in the Company's
consolidated financial statements through August 20, 1998.
 
     The September 30, 1998 and 1997 status of the post-retirement benefit plans
consists of the following:
 
<TABLE>
<CAPTION>
                                                               1998     1997
                                                              ------    -----
<S>                                                           <C>       <C>
Actuarial present value of benefit obligation based on
  service to date:
  Retirees..................................................  $3,402    4,947
  Fully eligible active participants........................   1,731    1,403
  Other active participants.................................   3,055    2,707
                                                              ------    -----
Accumulated post-retirement benefit obligation..............   8,188    9,057
Unamortized net amount resulting from changes in plan
  experience and actuarial assumptions......................    (707)      (9)
                                                              ------    -----
Postretirement benefit liability............................  $7,481    9,048
                                                              ======    =====
</TABLE>
 
     On September 30, 1998 and 1997, the post-retirement benefit liability due
currently was $61 and $138 and the long-term portion was $7,420 and $8,910.
 
     The 1998, 1997 and 1996 post-retirement benefit expense includes the
following components:
 
<TABLE>
<CAPTION>
                                                              1998    1997    1996
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Benefits earned during the period...........................  $230    147     136
Interest accrued on benefits earned in prior years..........   599    608     595
Net amortization............................................   (69)   (41)    (17)
                                                              ----    ---     ---
Postretirement benefit expense..............................  $760    714     714
                                                              ====    ===     ===
</TABLE>
 
                                       53
<PAGE>   55
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Assumptions used in the accounting for post-retirement benefit plans as of
September 30, 1998, 1997 and 1996 were:
 
<TABLE>
<CAPTION>
                                                              1998     1997    1996
                                                              -----    ----    ----
<S>                                                           <C>      <C>     <C>
Discount rate...............................................   6.25%    7.0%    7.5%
Rate of increase in compensation levels.....................   4.50%    4.5%    4.5%
Assumed current year health care cost trend rate
  Retirees under 65.........................................   6.80%    6.8%    7.8%
  Medicare eligible retirees................................   5.90%    5.9%    6.5%
Assumed ultimate trend rate.................................   5.00%    2.8%    2.8%
Year ultimate health care cost rate will be achieved........   2003    2002    2002
Effect of 1% increase in health care cost trend rates
  Accumulated post-retirement benefit obligation............  $ 727     680     570
  Annual aggregate benefit and interest costs...............  $  90      60      50
</TABLE>
 
NOTE L -- SHAREHOLDERS' EQUITY
 
     PREFERRED STOCK.  On September 27, 1996 the Company's certificate of
incorporation was amended to establish and authorize 50,000,000 shares of
preferred stock, $.01 par value, with other preferences and attributes to be
determined by the Board of Directors at the time of each issuance of preferred
stock.
 
     On August 20, 1998, the Company and KKR 1996 Fund entered into an
investment agreement whereby the Company agreed to sell to KKR 1996 Fund
1,000,000 shares of nonvoting, cumulative, variable rate preferred stock with a
face value and liquidation value of $100 a share (the "Cumulative Preferred
Stock") together with detachable stock purchase warrants (the "Warrants") for
$100,000. The Warrants will allow KKR 1996 Fund to purchase 44,100,000 shares of
the Company's common stock, par value $0.01 at an exercise price of $2.00 per
share. The term of the Warrants is eight years and the expiration date is August
20, 2006. The separate fair value of the Warrants is not significant. If KKR
1996 Fund decides to purchase common shares by exercising the Warrants, KKR 1996
Fund could elect to pay for those shares by exchanging a portion of the
Cumulative Preferred Stock.
 
     The holder of the Cumulative Preferred Stock is entitled to receive, when,
as and if declared by the Board of Directors, dividends on each outstanding
share of the Cumulative Preferred Stock, at a variable rate based on the
ten-year treasury rate, based on the then effective liquidation preference per
share of Cumulative Preferred Stock. Dividends on the Cumulative Preferred Stock
are payable quarterly in arrears on March 31, June 30, September 30 and December
31 of each year. The initial dividend rate with respect to the Cumulative
Preferred Stock is 14% per annum. The right to dividends on the Cumulative
Preferred Stock is cumulative and dividends accrue (whether or not declared),
without interest, from the date of issuance of the Cumulative Preferred Stock.
Since the Board of Directors has not declared any preferred dividends as of
September 30, 1998, the amount of the Cumulative Preferred Stock dividends in
arrears as of that date is $1,572.
 
     The Company at its option may, but shall not be required to, redeem, at any
time, for cash, in whole or in part, any or all of the shares of Cumulative
Preferred Stock at a redemption price equal to 100% of the aggregate liquidation
preference of such shares, together with all accumulated and unpaid dividends to
the redemption date.
 
     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.
 
                                       54
<PAGE>   56
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     On September 30, 1996 in connection with the Recapitalization (see Note A),
the Company authorized the issuance of 1,500,000 shares of 12 1/2%, nonvoting,
redeemable preferred stock, $.01 par value, with a liquidation value of $100 a
share ("Preferred Stock"). These shares were acquired by Strata. In addition,
the Company authorized additional shares of preferred stock which were used to
pay dividends on the preferred stock. On June 25, 1997, Strata exchanged all the
Company's outstanding Preferred Stock (liquidation value of $164,174) for
32,834,840 additional shares of the Company's common stock at an exchange price
of $5.00 per common share.
 
     COMMON STOCK.  The certificate of incorporation of the Company authorizes
150,000,000 shares of common stock with a par value of $.01 a share. Immediately
after the Recapitalization (see Note A), the Company declared a stock split in
the form of a stock dividend of approximately 60,892 shares for each common
share then outstanding. The par value difference between 821 shares and
50,000,000 shares outstanding in the amount of $499 was reclassified from
paid-in capital to common stock.
 
     As disclosed above, Strata exchanged the Company's Preferred Stock for
common shares. In addition, on July 15, 1997, a Strata affiliate invested
$45,600 and Abarco invested $3,400 for 9,800,000 additional shares of the
Company's common stock at a price of $5.00 per common share. See below for
employee common stock purchases.
 
     1996 EMPLOYEE STOCK OWNERSHIP PLAN.  The 1996 Employee Stock Ownership Plan
consists of an aggregate of 9,800,000 shares of common stock, which may be sold
or granted as options to key employees of the Company. The share issuance price
and the option price must be at least 50% of the fair market value of the common
shares on the date of the sale or grant and an option's maximum term is ten
years. The options vest ratably over a five-year period. Any outstanding options
will become immediately exercisable upon a change in control of the Company. If
an employee retires, any shares owned may be put to the Company or the Company
can call the shares based on a fair market value formula, as defined. If an
employee dies, becomes permanently disabled or terminates employment, the
Company can call the shares based on a fair market value formula, as defined.
 
     Transactions involving common share options are as follows:
 
<TABLE>
<CAPTION>
                                                                           WEIGHTED
                                                                           AVERAGE
                                                               NUMBER      EXERCISE
                                                              OF SHARES     PRICE
OPTION SHARES                                                 ---------    --------
<S>                                                           <C>          <C>
Outstanding September 30, 1996..............................          0
Granted in 1997.............................................  6,431,146     $5.00
Canceled in 1997............................................          0     $5.00
Exercised in 1997...........................................          0     $5.00
                                                              ---------     -----
Outstanding September 30, 1997 (none exercisable) (1,023,729
  became exercisable October 1, 1997).......................  6,431,146     $5.00
Granted in 1998.............................................    295,559     $5.00
Canceled in 1998............................................   (935,504)    $5.00
Exercised in 1998...........................................          0     $5.00
                                                              ---------     -----
Outstanding September 30, 1998 (1,023,729 exercisable and
  3,252,558 became exercisable October 1, 1998).............  5,791,201     $5.00
Aggregate unissued shares and options September 30, 1998....  1,909,676     $5.00
</TABLE>
 
     In 1998 the Company sold 278,885 shares for proceeds of $1,422 (2,020,238
shares for proceeds of $10,102 in 1997).
 
                                       55
<PAGE>   57
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     DISCLOSURES UNDER SFAS NO. 123.  The Company has elected the
disclosure-only basis provisions of SFAS No. 123. Accordingly, no compensation
cost has been recognized for the options. Had compensation cost been determined
based on the fair market value at the grant date consistent with the method
provided by SFAS No. 123, the Company's pro forma net earnings (loss) would have
been $(85,829) for 1998 and $(30,947) for 1997 as compared to the reported
amounts of $(84,872) and $(30,035), respectively.
 
     The estimated fair value was determined using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1998 and 1997:
 
<TABLE>
<CAPTION>
                                                               1998       1997
                                                              -------    -------
<S>                                                           <C>        <C>
Dividend yield..............................................        0%         0%
Expected volatility.........................................        0%         0%
Risk-free interest rate.....................................     5.62%      6.38%
Weighted average expected life..............................  5 years    5 years
Weighted average fair value of options granted..............    $1.19      $1.37
</TABLE>
 
     1994 MANAGEMENT STOCK OWNERSHIP PLAN.  On September 30, 1996 the 1994
Management Stock Ownership Plan was cancelled and all shares were purchased by
the Company pursuant to the Recapitalization Agreement (see Note A). The 1994
Management Stock Ownership Plan authorized 19,000 shares of S&E Class A common
stock to be available for issuance to a select number of the most senior
officers of the Company at a per share value as determined by a Company formula
based on earnings, as defined.
 
     Compensation expense and an accrued liability to be paid upon termination
of the officers were recorded in the amount of any increase in value as
determined by the formula. As a result of the Recapitalization (see Note A), the
redemption price of the remaining shares covered by this plan totaled $28,219.
The outstanding balance of the Management Notes used to finance the acquisition
of the shares by the officers plus the accrued interest totaled $6,889 at
September 30, 1996. Compensation expense related to this plan was $20,828 in
1996.
 
NOTE M -- LEASE COMMITMENTS
 
     The Company leases certain manufacturing, warehousing and office
facilities, and equipment under various operating lease arrangements expiring
periodically through 2014. The Company has no material capital leases.
 
     The following is a schedule by year of future minimum rental payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year at September 30, 1998:
 
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30
------------------------
<S>                                                             <C>
1999........................................................    $1,453
2000........................................................     1,040
2001........................................................     1,035
2002........................................................       654
2003........................................................       617
Thereafter..................................................       833
                                                                ------
Total minimum lease payments................................    $5,632
                                                                ======
</TABLE>
 
     Rental expense under operating leases was $5,756 in 1998, $5,185 in 1997
and $3,455 in 1996.
 
                                       56
<PAGE>   58
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE N -- CURRENCY EXCHANGE CONTRACTS
 
     The Company may from time to time enter into forward currency exchange
contracts to protect inventory purchases and affiliated note activities against
changes in future currency exchange rates. A forward currency exchange contract
is an agreement between two parties to buy or sell currency at a set price on a
future date. The market value of the contract will fluctuate with changes in
currency exchange rates. The contract is marked-to-market using the spot rate at
the end of each accounting period and the change in market value is recorded by
the Company as currency gain or loss. Risk may arise upon entering into these
contracts from unanticipated movements in the value of a foreign currency
relative to the U.S. dollar. As of September 30, 1998 and 1997, the Company had
approximately $3,525 and $9,367 of currency contracts outstanding, with
unrealized currency gains of approximately $211 in 1998 and unrealized currency
losses of approximately $2 in 1997. These contracts mature within twelve months.
 
NOTE O -- CONCENTRATION OF CREDIT RISK
 
     The Company sells a broad range of consumer products in North and South
America, Europe and the Pacific Rim. Concentrations of credit risk with respect
to trade receivables are limited due to the large number of customers comprising
the Company's customer base. Ongoing credit evaluations of customers' financial
condition are performed and, generally no collateral is required. The Company
maintains reserves for potential credit losses and such losses, in the
aggregate, have not exceeded management's expectations. During 1998, 1997 and
1996 the Company's sales to one U.S. customer amounted to 15%, 12% and 11% of
net sales. No other customer exceeded 10% in the years ended September 30, 1998,
1997 and 1996.
 
NOTE P -- CONTINGENCIES
 
     The Company is both a plaintiff and defendant in numerous lawsuits
incidental to its current and former operations, some alleging substantial
claims. In addition, the Company's operations are subject to federal, state and
local environmental laws and regulations. The Company has entered into
settlement agreements with the U.S. Environmental Protection Agency and other
parties on several sites and is still negotiating on other sites. The settlement
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.
 
NOTE Q -- RELATED PARTY TRANSACTIONS
 
     See Note A for a description of the transactions related to the
Reorganization of the Company.
 
     Effective with the Reorganization on August 20, 1998, the Company and
Evenflo Company, Inc. entered into an Indemnity Agreement whereby the Company
and Evenflo Company, Inc. indemnified the other against liability or obligation
related to their respective operations or business whether arising prior to or
after the Reorganization. Additionally, the Company indemnified Evenflo Company,
Inc. against damages, as defined in the agreement, incurred or sustained as a
result of any recall (voluntary or involuntary), safety advisory or other
corrective action relating to any products manufactured by Evenflo Company, Inc.
prior to the close of business on August 20, 1998. The estimated liability as of
September 30, 1998 recorded by the Company related to these matters is
approximately $1,100.
 
     Effective with the Reorganization on August 20, 1998, the Company and
Evenflo entered into a Transition Services Agreement whereby the Company agreed
to provide insurance, tax and other related financial systems/accounting
services to Evenflo Company, Inc. through February 20, 1999, or as otherwise
agreed upon.
 
                                       57
<PAGE>   59
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     See Note A for a description of the Recapitalization Agreement, which
resulted in the redemption of a portion of the common stock owned by Abarco.
 
     See Note L for a description of the Company's 1996 Employee Stock Ownership
Plan and the Company's 1994 Management Stock Ownership Plan.
 
     Effective October 1, 1996, 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. The Company expensed $966 in
1998 and $1,000 in 1997 pursuant to such management agreement with KKR.
 
NOTE R -- SEGMENT REPORTING
 
     The following schedule presents information about the Company's continuing
operations in different industry segments and geographic locations (Evenflo 1998
operations are included for the period from October 1, 1997 to August 20, 1998):
 
<TABLE>
<CAPTION>
                                                        1998        1997       1996
                                                      ---------    -------    -------
<S>                                                   <C>          <C>        <C>
INDUSTRY SEGMENT
Net Sales
  Spalding..........................................  $ 512,521    530,448    451,915
  Evenflo...........................................    290,791    296,743    237,165
                                                      ---------    -------    -------
          Total net sales...........................  $ 803,312    827,191    689,080
                                                      =========    =======    =======
Earnings (loss) before income taxes and
  extraordinary loss:
  Spalding..........................................  $ (20,278)    41,133     50,274
  Evenflo...........................................     (6,330)    (3,952)    10,306
  General Corporate expenses........................     (7,510)    (4,390)   (35,242)
  Interest expense, net.............................    (78,041)   (71,326)   (37,718)
                                                      ---------    -------    -------
     Earnings (loss) before income taxes and
       extraordinary loss...........................  $(112,159)   (38,535)   (12,380)
                                                      =========    =======    =======
Identifiable Assets
  Spalding..........................................  $ 460,787    445,011    404,800
  Evenflo...........................................          0    255,725    177,391
  General Corporate.................................     75,177     60,495    108,570
                                                      ---------    -------    -------
          Total assets..............................  $ 535,964    761,231    690,761
                                                      =========    =======    =======
Capital Expenditures
  Spalding..........................................  $  11,788     14,143     10,169
  Evenflo...........................................     14,861     20,927      9,377
                                                      ---------    -------    -------
          Total capital expenditures................  $  26,649     35,070     19,546
                                                      =========    =======    =======
Depreciation and Amortization
  Spalding..........................................  $  13,091     12,439     13,418
  Evenflo...........................................     13,139      9,313      6,502
  General Corporate.................................         17         17        407
                                                      ---------    -------    -------
          Total depreciation and amortization.......  $  26,247     21,769     20,327
                                                      =========    =======    =======
</TABLE>
 
                                       58
<PAGE>   60
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The geographic locations of the Company are summarized as follows:
 
<TABLE>
<CAPTION>
                                                        1998        1997       1996
                                                      ---------    -------    -------
<S>                                                   <C>          <C>        <C>
GEOGRAPHIC LOCATION
Net Sales
  United States.....................................  $ 669,622    672,703    530,882
  Other nations.....................................    133,690    154,488    158,198
                                                      ---------    -------    -------
          Total net sales...........................  $ 803,312    827,191    689,080
                                                      =========    =======    =======
Earnings (loss) before income taxes and
  extraordinary loss:
  United States.....................................  $ (18,157)    33,608     57,777
  Other nations.....................................     (8,451)     3,573      2,803
  General Corporate expenses........................     (7,510)    (4,390)   (35,242)
  Interest expense, net.............................    (78,041)   (71,326)   (37,718)
                                                      ---------    -------    -------
     Earnings (loss) before income taxes and
       extraordinary loss...........................  $(112,159)   (38,535)   (12,380)
                                                      =========    =======    =======
Identifiable Assets
  United States.....................................  $ 410,046    619,762    505,227
  Other nations.....................................     50,741     80,974     76,964
  General Corporate.................................     75,177     60,495    108,570
                                                      ---------    -------    -------
          Total assets..............................  $ 535,964    761,231    690,761
                                                      =========    =======    =======
</TABLE>
 
NOTE S -- EXTRAORDINARY LOSS
 
     The extraordinary loss on early extinguishment of debt in 1998 relates to a
$9,091 pretax ($5,909 after-tax) write-off of the deferred financing costs made
in conjunction with a mandatory prepayment of $228,800 against the Term Loans
under the Credit Facility (see Note H).
 
     The extraordinary loss on early extinguishment of debt in 1996 related to a
$9,187 pretax ($5,987 after-tax) write-off of the deferred financing costs
remaining at September 30, 1996, on which date a secured credit agreement was
paid off.
 
                                       59
<PAGE>   61
 
ITEM 9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
 
     None.
 
                                    PART III
 
ITEM 10:  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
 
     Set forth below are names, ages and positions with the Company of the
persons who will serve as directors and executive officers of the Company,
together with certain other key personnel. The terms of the directors and
executive officers of the Company expire annually upon the election and
qualification of successors at the annual meetings of shareholders.
 
<TABLE>
<CAPTION>
NAME                                                   AGE                    POSITION
----                                                   ---                    --------
<S>                                                    <C>   <C>
Edwin L. Artzt.......................................  68    Chairman of the Board of Directors
James R. Craigie.....................................  45    President and Chief Executive Officer
Scott H. Creelman....................................  55    Executive Vice President
G. Wade Lewis........................................  51    Chief Financial Officer
Robert K. Adikes.....................................  59    Vice President, Secretary and General
                                                             Counsel
William K. Breaden...................................  39    Corporate Controller, Assistant Secretary
Henry R. Kravis......................................  54    Director
George R. Roberts....................................  55    Director
Michael T. Tokarz....................................  49    Director
Marc S. Lipschultz...................................  29    Director
Gustavo A. Cisneros..................................  53    Director
David W. Checketts...................................  42    Director
</TABLE>
 
     Kevin T. Martin resigned from his positions as President and Chief
Executive Officer on December 2, 1998.
 
     James R. Craigie joined the Company as President and Chief Executive
Officer on December 7, 1998. Prior to that he had been employed since 1983 by
Kraft, Inc., now a subsidiary of Phillip Morris Companies, Inc. He became
Executive Vice President of Kraft, Inc. in 1994. From 1997 he served as
President of its Beverage and Desserts Division. From 1994 to 1997 he was
General Manager of the Beverage Division after serving as General Manager of the
Dinners and Enhancers Division earlier in 1994. From 1993 to 1994, he served as
Vice President and General Manager of Kraft's Polly-O Dairy Products
 
     Scott H. Creelman became Executive Vice President on September 20, 1998. He
joined the Company in 1973 as Business Manager of the tennis group. Over the
years he has held various positions in the Spalding operation, including
Managing Director, International; Vice President, International from 1985 to
1995. Vice President Golf Products Worldwide from 1995 to 1997 and Executive
Vice President, Spalding division from 1997 to present.
 
     G. Wade Lewis has been Chief Financial Officer since June 1998 when he
joined the Company. From 1987 to 1997, he served as Chief Financial Officer of
Duracell International, Inc.
 
     Robert K. Adikes has been a Vice President of the Company since January
1990 and its Secretary since January 1986. He has been General Counsel since he
joined the Company in 1985.
 
     William K. Breaden became Corporate Controller in July 1998. He joined the
Company in January 1990 as U.S. Controller and has held various positions
including North American Controller and International Controller. From 1981 to
1990 he served on the audit staff of Deloitte & Touche LLP.
 
                                       60
<PAGE>   62
 
     Henry R. Kravis is a managing member of KKR & Co. L.L.C., the limited
liability company which serves as the general partner of KKR. He is also a
director of Accuride Corporation, Amphenol Corporation, Borden, Inc., The Boyds
Collection, Ltd., Bruno's, Inc., The Gillette Company, Evenflo, IDEX
Corporation, KinderCare Learning Centers, Inc., KSL Recreation Group, Inc.,
Owens-Illinois, Inc., Owens-Illinois Group, Inc., PRIMEDIA, Inc., Randall's Food
Markets, Inc., Regal Cinemas, Inc. Safeway Inc. and Union Texas Petroleum
Holdings, Inc.
 
     George G. Roberts is a managing member of KKR & Co. L.L.C., a limited
liability company which serves as the general partner of KKR. He is also a
director of Accuride Corporation, Amphenol Corporation, Borden, Inc. The Boyds
Collection, Ltd., Bruno's, Inc., Evenflo, IDEX Corporation, KinderCare Learning
Centers, Inc., KSL Recreation Group, Inc., Owens-Illinois, Inc., Owens-Illinois
Group, Inc., PRIMEDIA, Inc., Randall's Food Markets, Inc., Regal Cinemas, Inc.,
Safeway Inc., and Union Texas Petroleum Holdings, Inc.
 
     Michael T. Tokarz is a member of KKR & Co. L.L.C., a limited liability
company which serves as the general partner of KKR. He is also a director of
Evenflo, IDEX Corporation, KSL Recreation Group, Inc., PRIMEDIA, Inc., Safeway
Inc., and Walter Industries, Inc.
 
     Marc S. Lipschultz 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 Evenflo.
 
     Gustavo A. Cisneros has been a director of the Company since 1984. Since
1990 he has been a direct or indirect investor in and a director of certain
companies forming part of a group with indirect beneficial ownership interests
in a number of diverse commercial enterprises in Venezuela and elsewhere. Mr.
Cisneros is also a director of Pueblo Xtra International, Inc., Univision
Communications, Inc., Panamerican Beverages, Inc. and RSL Communications, Ltd.
 
     Edwin L. Artzt has been a director of the Company since September 1997 and
Chairman of the Board of Directors since August 1998. Mr. Artzt is the former
Chairman and Chief Executive Officer of The Procter & Gamble Company (P&G), and
is currently a Director and Chairman of the Executive Committee of the Board of
Directors of P&G. In addition to P&G, Mr. Artzt is a director of American
Express Company, GTE Corporation, Delta Airlines and the Barilla Company of
Parma, Italy. He is also a member of the boards of University of Pennsylvania's
Wharton School of Business, UCLA's Anderson 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.
 
     David W. Checketts has been a Director of the Company since September 1998.
He has been the President and Chief Executive Officer of Madison Square Garden
since 1994. He was President of the New York Knicks Basketball Club from 1991 to
1994. From September 1990 through March 1991 he was Vice President, Development
of the National Basketball Association. From 1984 until 1990 he was President of
the Utah Jazz Basketball Club. Prior to that, he was with Bain and Company, a
management consulting firm. In addition, he is a board member of the Multiple
Sclerosis Society and the Children's Blood Foundation.
 
     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. The business address of Mr. Cisneros is
Final Av. La Salle, EdF. Venevision 5to. Piso, Colina Los Caobos, Caracas,
Venezuela. The business address of Mr. Artzt is 1 Proctor & Gamble Plaza,
Cincinnati, Ohio 45202.
 
     On September 20, 1998, Paul L. Whiting, Chairman and Chief Executive
Officer, W. Michael Kipphut, Vice President and Treasurer, and Stephen J. Dryer
(on September 30, 1998), Vice President and Controller, exercised their rights
to resign and receive certain benefits under their Change In Control Agreements
with the Company, all dated May 1, 1996.
 
                                       61
<PAGE>   63
 
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 also employees of the Company
receive no remuneration for serving as directors.
 
ITEM 11:  EXECUTIVE COMPENSATION
 
SUMMARY COMPENSATION TABLE
 
     The following table sets forth the compensation paid, accrued or awarded by
the Company for the account of each of the chief executive officer at the end of
the 1998 fiscal year and the most highly compensated executive officers
receiving compensation on an annualized basis from the Company in excess of
$100,000 compensation (the "Named Executive Officers") for their services in all
capacities to the Company during the fiscal years ended September 30, 1998, 1997
and 1996.
 
<TABLE>
<CAPTION>
                                                                              LONG-TERM COMPENSATION
                                                                              -----------------------
                                                                                AWARDS       PAYOUTS
                                              ANNUAL COMPENSATION             -----------   ---------
                                    ---------------------------------------   SECURITIES
                                                             OTHER ANNUAL     UNDERLYING      LTIP         ALL OTHER
NAME AND PRINCIPAL POSITION  YEAR    SALARY    BONUSES(1)   COMPENSATION(2)    OPTIONS #     PAYOUTS    COMPENSATION(3)
---------------------------  ----   --------   ----------   ---------------   -----------   ---------   ---------------
<S>                          <C>    <C>        <C>          <C>               <C>           <C>         <C>
Scott H. Creelman.......     1998   $276,476           0             0                 0           0        $5,000
  Executive Vice             1997    235,008           0             0           138,250    $176,836         4,750
  President                  1996    197,600    $314,656             0                 0           0         4,750
Kevin T. Martin(4)......     1998    525,000           0             0                 0           0         6,250
  President and Chief        1997     70,417           0             0         1,312,500           0             0
  Executive Officer          1996          0           0             0                 0           0             0
Bruce Riccio(5).........     1998     82,653      15,000             0                 0           0             0
  Vice President Sales       1997          0           0             0                 0           0             0
                             1996          0           0             0                 0           0             0
Robert K. Adikes........     1998    139,750           0             0                 0           0             0
  Vice President,            1997    132,400           0             0            65,058     155,500         3,970
  Secretary And              1996    127,300     199,220        $7,170                 0      57,170         3,820
  General Counsel
William K. Breaden......     1998    135,799           0             0                 0           0        $4,082
  Corporate Controller       1997    128,173           0             0                 0           0         3,825
  And Assistant              1996    116,365     117,250             0                 0           0         3,863
  Secretary
G. Wade Lewis(6)........     1998          0           0             0                 0           0             0
                             1997          0           0             0                 0           0             0
                             1996          0           0             0                 0           0             0
</TABLE>
 
---------------
(1) Includes the following 1996 transaction bonuses received in connection with
    the Recapitalization: Mr. Adikes ($126,740), Mr. Breaden ($40,000) and Mr.
    Creelman ($230,856). The remainder of the bonus for the Named Executive
    Officers was awarded under the Management Incentive Bonus Plan. Bruce Riccio
    began his employment with the Company on May 11, 1998 and received a hiring
    bonus.
 
(2) Amounts represent above market return paid on deferred cash awards under the
    Company's Long-Term Incentive Plan. See "Long-Term Incentive Plan" for Mr.
    Adikes.
 
(3) Company matching contributions to the Savings Plus Plan.
 
(4) Mr. Martin resigned his position with the Company on December 2, 1998. In
    conjunction with the terms of his separation from the Company, Mr. Martin
    will receive his salary in the amount of $500,000
 
                                       62
<PAGE>   64
 
annually for a 24 month period. Additionally, Mr. Martin will continue to
receive other benefits through December 3, 2001. James R. Craigie was hired
December 7, 1998 as President and Chief Executive Officer. Mr. Craigie's
     employment arrangements are currently being negotiated.
 
(5) Under the terms of Mr. Riccio's employment arrangement, he will receive
    annual compensation of $210,000 as well as other benefits and allowances.
    Mr. Riccio will receive benefits should he be involuntarily terminated prior
    to April 2003.
 
(6) Mr. Lewis' compensation is still being negotiated.
 
STOCK OPTION GRANTS IN 1998
 
<TABLE>
<CAPTION>
                                                                                   POTENTIAL REALIZABLE VALUE AT
                                          INDIVIDUAL GRANTS                           ASSUMED ANNUAL RATES OF
                       --------------------------------------------------------     STOCK PRICE APPRECIATION FOR
                       NUMBER OF      PERCENT OF                                           OPTION TERM(2)
                       SECURITIES    TOTAL OPTIONS                                 ------------------------------
                       UNDERLYING     GRANTED TO      EXERCISE OR                   IF STOCK AT      IF STOCK AT
                        OPTIONS        EMPLOYEES      BASE PRICE     EXPIRATION        $8.14           $12.97
NAME                   GRANTED(1)       IN 1997        ($/SHARE)        DATE            5%               10%
----                   ----------    -------------    -----------    ----------    -------------    -------------
<S>                    <C>           <C>              <C>            <C>           <C>              <C>
Scott H. Creelman....    138,250          2.4%           5.00         2/11/07        $1,125,355       $1,793,103
                           6,028          0.1%           5.00         2/11/07            49,068           78,813
Kevin T. Martin......  1,312,500         22.7%           5.00         9/29/07        10,683,750       17,023,125
Bruce Riccio(3)......          0          0.0%           5.00               0                 0                0
Robert K. Adikes.....     62,222          1.0%           5.00         2/11/07           506,487          807,019
                           2,836          0.0%           5.00         2/11/07            23,085           36,783
William K. Breaden...     20,330          0.4%           5.00         2/11/07           165,486          263,680
                             886          0.0%           5.00         2/11/07             7,212           11,491
</TABLE>
 
---------------
(1) All of these options, which were granted pursuant to the 1996 Stock Purchase
    and Option Plan for Key Employees of Evenflo & Spalding Holdings Corporation
    and Subsidiaries, were non-qualified, were granted at fair market value on
    the date of grant, vest ratably over a five-year period and have a term of
    ten years. Any outstanding options will become immediately exercisable upon
    a change in control of the Company. If an employee retires, any shares owned
    may be put to the Company or the Company can call the shares based on a fair
    market value formula, as defined. If an employee dies, becomes permanently
    disabled or terminates employment, the Company can call the shares based on
    a fair market formula, as defined.
 
(2) We recommend caution in interpreting the financial significance of these
    figures. They are calculated by multiplying the number of options granted by
    the difference between a future hypothetical stock price and the option
    exercise price and are shown pursuant to rules of the Securities and
    Exchange Commission. They assume the value of Company stock appreciates 5%
    or 10% each year, compounded annually, for ten years (the life of each
    option). They are not intended to forecast possible future appreciation, if
    any, of such stock price or to establish a present value of options. Also,
    if appreciation does occur at the 5% or 10% per year rate, the amounts shown
    would not be realized by the recipients until the year 2008. Depending on
    inflation rates, these amounts may be worth significantly less in 2008, in
    real terms, than their value today (Assumes that the market price of shares
    of common stock equals the exercise price).
 
(3) The Company is in the process of determining the size of an option grant and
    the opportunity to purchase shares of common stock for Mr. Riccio.
 
     No stock options were exercised in fiscal 1998 and no value can be
presently ascribed to previous grants of stock options.
 
MANAGEMENT INCENTIVE BONUS PLAN
 
     The Company maintains a Management Incentive Bonus Plan ("MIBP") for
certain identified key executives of the Company, including department managers
and executives senior thereto, including the Named Executive Officers, pursuant
to which eligible employees are awarded bonuses based on the Company's annual
operating profit (as determined in accordance with general accepted accounting
 
                                       63
<PAGE>   65
 
principles), as compared with a target established prior to the beginning of the
year. Awards under the MIBP range within a guideline of 15% to 80% of annual
salary payments, depending upon a participant's position and commensurate
responsibility related to consolidated operations. If the annual results do not
meet the pre-established objectives, no bonus is earned. If annual results
exceed the pre-established objectives, the bonus paid is increased
proportionally, up to an additional bonus of no more than 100% of the employee's
guideline bonus percentage.
 
1996 EMPLOYEE STOCK OWNERSHIP PLAN
 
     The 1996 Stock Purchase and Option Plan for Key Employees of Evenflo &
Spalding Holdings Corporation and Subsidiaries (the "1996 Employee Stock
Ownership Plan") provides for the issuance of shares of authorized but unissued
or reacquired shares of common stock, subject to adjustment to reflect certain
events such as stock dividends, stock splits, recapitalizations, mergers or
reorganizations of or by the Company. The 1996 Employee Stock Ownership Plan is
intended to assist the Company in attracting and retaining employees of
outstanding ability and to promote the identification of their interests with
those of the stockholders of the Company. The 1996 Employee Stock Ownership Plan
permits the issuance of common stock (the "Purchase Stock") and the grant of
non-qualified stock options and incentive stock options (the "Options") to
purchase shares of common stock and other stock-based awards (the issuance of
Purchase Stock and the grant of Options and other stock-based awards pursuant to
the 1996 Employee Stock Ownership Plan being a "Grant"). Unless sooner
terminated by the Company's Board of Directors, the 1996 Employee Stock
Ownership Plan will expire ten years after its inception. Such termination will
not affect the validity of any Grant outstanding on the date of termination.
 
     The Compensation Committee of the Board of Directors administers the 1996
Employee Stock Ownership Plan, including, without limitation, the determination
of the employees to whom Grants will be made, the number of shares of common
stock subject to each Grant, and the various terms of such Grants. The
Compensation Committee of the Board of Directors may from time to time amend the
terms of any Grant, but, except for adjustments made upon a change in the common
stock of the Company by reason of a stock split, spin-off, stock dividend, stock
combination or reclassification, recapitalization, reorganization,
consolidation, change of control, or similar event, such action shall not
adversely affect the rights of any participant under the 1996 Employee Stock
Ownership Plan with respect to the Purchase Stock and the Options without such
participant's consent. The Board of Directors retains the right to amend,
suspend or terminate the 1996 Employee Stock Ownership Plan.
 
LONG-TERM INCENTIVE PLAN
 
     In connection with the 1996 Employee Stock Ownership Plan, the Company
cancelled the Long-Term Incentive Plan ("LTIP") and paid the total outstanding
awards in the 1997 fiscal year.
 
     The LTIP's provided certain key employees with cash awards based upon the
attainment of established financial goals for a predefined period, generally
three years. Each participant made an election at the beginning of each program
period to receive full payments upon vesting or to defer partial or total
payment up to seven years. This cash payout was based upon the value of a unit,
which was determined by a net earnings formula set forth in the LTIP and
calculated as of the September 30 preceding the payment. The LTIP had been in
effect since 1985. Most participants elected to defer all or a portion of their
cash award at the end of each cycle. The value of units for which payment was
deferred was based on the net earnings formula set forth in the LTIP.
 
RETIREMENT PLANS
 
     Spalding & Evenflo Retirement Account Plan ("SERA"). The Company sponsors
SERA, a cash balance defined benefit pension plan qualified under Section 401(a)
of the Internal Revenue Code of 1986, as amended (the "Code"), for substantially
all U.S. salaried employees and the non-union Piqua, Ohio hourly employees. SERA
covers all eligible full-time employees who are over age 20 and have at least
one year of service. Annually, an addition is made to each participant's account
based on a percentage of the participant's salary for that year up to a maximum
salary of $160,000. The percentage ranges from 2% of pay for employees
 
                                       64
<PAGE>   66
 
under age 25 to 9% of pay for employees 60 and over. The accounts are credited
with interest at a rate determined annually based on an average of 30 year
Treasury Bonds.
 
     Supplemental Retirement Plan ("SRP"). As a supplement to the SERA, the
Company sponsors the non-qualified SRP which covers highly compensated employees
whose benefits are limited by compensation and benefit limitations under the
Code. For employees with a salary in excess of $160,000, an addition is made to
each participant's account based on a percentage of the participant's salary for
that year. The percentage ranges from 2% of pay for employees under age 25 to 9%
of pay for employees 60 and over. The accounts are credited with interest at a
rate determined annually based on an average of 30 year Treasury Bonds.
 
     The estimated annual benefits payable under SERA and SRP upon retirement at
normal retirement age for each of the Named Executive Officers is as follows:
 
<TABLE>
<CAPTION>
                                                                               ESTIMATED ANNUAL
                                                                              BENEFIT IF RETIRES
                                                              YEAR ATTAINS        AT NORMAL
                                                                 AGE 65       RETIREMENT AGE(1)
                                                              ------------    ------------------
<S>                                                           <C>             <C>
Scott H. Creelman...........................................      2010             $62,767
Bruce Riccio................................................      2011              25,548
Robert K. Adikes............................................      2004              20,897
William K. Breaden..........................................      2024              61,858
</TABLE>
 
---------------
(1) Under SERA and SRP the normal retirement age is 65. The plans allow benefits
    to be paid as a lump sum payment. The estimated annual benefits shown above
    are in the form of a single life annuity which is the equivalent of the
    individual's projected cash balance account. Benefits have been determined
    assuming no increase in 1998 compensation levels and an annual interest
    credit of 6.5%, which is the 1998 rate for the interest credit. Benefits are
    computed without reference to limitations on compensation and benefits to
    which the SERA is subject under the Code because any benefits for the Named
    Executive Officers that are affected by such limitations are made up under
    the Company's SRP.
 
     Savings Plus Plan. 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 and the non-union Canton, Georgia and
Gloversville, New York hourly employees (the "Savings Plus Plan"). 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%.
 
CHANGE IN CONTROL SEVERANCE AGREEMENTS
 
     The Company maintains Change In Control Severance Agreements (the
"Severance Contracts") for certain executives of the Company pursuant to which
these employees could be compensated and could receive severance payments when a
change in control or potential change in control of the Company occurs. The
September 30, 1996 Recapitalization was a change in control under the provisions
of the Severance Contracts.
 
     The Severance Contracts generally permit an eligible employee to receive
severance payments for a period of 12, 24 or 35 months, as the case may be, or
until the employee reaches the age of 65 whichever comes first consisting of (a)
monthly payments of a combination of 1/12 of such person's highest annual base
salary and bonus, and (b) continued life, disability, accident and health
insurance benefits offset by such person's COBRA benefits. In addition, selected
senior and top management will receive an additional lump-sum payment of 50% and
100%, respectively, of the amount by which the employee's benefit under their
tax-qualified retirement plans maintained by the Company or one of its
subsidiaries would have been increased if contributions and/or benefit accruals
under such plans had continued during the period of continued benefits. During
fiscal 1998, Messrs. Dickerman, Senecal and Doleva from Spalding (the "Spalding
Severance Contracts") and Messrs. Paul Whiting, Chairman and Chief Executive
Officer, Mr. Kipphut, Vice President and Treasurer, and on September 30, 1998,
Mr. Stephen Dryer, Vice President and Controller from the Tampa corporate office
(the "Tampa Severance Contracts"), exercised their rights to resign. At
September 30, 1998, all remaining Severance Contracts were either exercised or
expired.
                                       65
<PAGE>   67
 
     The compensation under the terms of the Severance Contracts is expected to
be paid subsequent to September 30, 1998 will be funded in the amounts of $0.9
million and $0.8 million, in fiscal 1999 and 2000, respectively. The
compensation under the terms of the Tampa Severance Contracts is expected to be
paid subsequent to September 30, 1998 and will be funded in the amounts of $1.1
million, $0.9 million and $0.3 million in fiscal 1999, 2000 and 2001,
respectively.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     The Compensation Committee of the Board of Directors (the "Committee")
consists entirely of non-employee Directors. The Committee establishes and
regularly reviews executive compensation levels and policies, and authorizes
short- and long-term awards in the form of cash or stock.
 
     Compensation for executives is based on the principles that compensation
must (a) be competitive with other quality companies in order to help attract,
motivate and retain the talent needed to lead and grow the company's business,
(b) provide a strong incentive for key managers to achieve the Company's goals,
and (c) make prudent use of the Company's resources.
 
     No person who served during fiscal 1998 as an executive officer of the
Company serves or has served on the Committee or as a director of another
company, one of whose executive officers serves as a director of the Company.
 
ITEM 12:  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table, as of December 15, 1998, sets forth certain
information regarding the beneficial owners of the Company's Common Stock by (i)
all persons known to the Company to own beneficially more than 5% of the Common
Stock, (ii) each Director, (iii) each of the Named Executive Officers (as
defined) and (iv) all directors and Named Executive Officers as a group.
 
<TABLE>
<CAPTION>
                                                                 NUMBER OF
                            NAME                              SHARES OWNED(1)    PERCENTAGE
                            ----                              ---------------    ----------
<S>                                                           <C>                <C>
Strata L.L.C.(1)............................................    77,034,840          79.5
  c/o Kohlberg Kravis Roberts & Co. L.P.
  9 West 57th Street
  New York, NY 10019
KKR 1996 GP LLC(2)..........................................     9,120,000           9.4
  c/o Kohlberg Kravis Roberts & Co. L.P.
  9 West 57th Street
  New York, NY 10019
Abarco N.V.(3)..............................................     6,480,000           6.7
  c/o ABN Trust Company
  (Curacao N.V.)
  P.O. Box 224, 15 Pietermaai
  Curacao, Netherlands Antilles
L.F. Loree, III and Norwood H. Davis, Jr., Trustees (for
  various trusts)...........................................     2,000,000           2.1
Henry R. Kravis(1)(2).......................................            --             *
George R. Roberts(1)(2).....................................            --             *
Michael T. Tokarz(1)(2).....................................            --             *
Marc S. Lipschultz(1)(2)....................................            --             *
Gustavo A. Cisneros(3)......................................            --             *
Edwin L. Artzt..............................................       200,000             *
Kevin T. Martin(4)..........................................       637,500             *
Robert K. Adikes(4).........................................        43,233             *
Scott H. Creelman(4)........................................        91,872             *
G. Wade Lewis...............................................            --             *
David W. Checketts..........................................            --             *
William K. Breaden (4)......................................        13,511             *
All named officers and directors as a group(4)..............       995,561           1.0
</TABLE>
 
---------------
 *  Beneficial ownership does not exceed 1.0% of the respective class of
    securities.
 
                                       66
<PAGE>   68
 
(1) Shares of Common Stock shown as beneficially owned by Strata L.L.C. are held
    by Strata Associates L.P. Strata L.L.C. is the sole general partner of KKR
    Associates (Strata). KKR Associates (Strata), L.P., is the sole general
    partner of Strata Associates L.P. and possesses sole voting and investment
    power with respect to such shares. Strata L.L.C. is a limited liability
    company, the members of which are Messrs. Henry R. Kravis, George R.
    Roberts, Robert I. MacDonnell, Paul E. Raether, Michael W. Michelson,
    Michael T. Tokarz, James H. Greene, Jr., Perry Golkin, Clifton S. Robbins,
    Scott M. Stuart and Edward A. Gilhuly. Messrs. Kravis and Roberts are
    members of the Executive Committee of Strata L.L.C. Messrs. Kravis, Roberts
    and Tokarz are also directors of the Company. Mr. Marc S. Lipschultz is a
    limited partner of KKR Associates (Strata), a director of the Company and an
    executive of KKR. Each of such individuals may be deemed to share beneficial
    ownership of the shares shown as beneficially owned by Strata L.L.C. Each of
    such individuals disclaim beneficial ownership of such shares.
 
(2) Shares of Common Stock shown as beneficially owned by KKR 1996 GP LLC are
    held by KKR 1996 Fund L.P. KKR 1996 GP LLC is the sole general partner of
    KKR Associates 1996 L.P., a Delaware limited partnership. KKR Associates
    1996 L.P. is the sole general partner of KKR 1996 Fund L.P. KKR 1996 GP LLC
    is a Delaware limited liability company, the managing members of which are
    Messrs. Henry R. Kravis and George R. Roberts and the other members of which
    are Messrs. Robert I. MacDonnell, Paul E. Raether, Michael W. Michelson,
    Michael T. Tokarz, James H. Greene, Jr., Perry Golkin, Clifton S. Robbins,
    Scott M. Stuart and Edward A. Gilhuly, Messrs. Kravis, Roberts and Tokarz
    are directors of the Company. Each of Messrs. Kravis, Roberts, MacDonnell,
    Raether, Michelson, Tokarz, Greene, Golkin, Robbins, Stuart and Gilhuly may
    be deemed to share beneficial ownership of the shares shown as beneficially
    owned by KKR 1996 GP LLC. Each of such individuals disclaims beneficial
    ownership of such shares. Mr. Marc S. Lipschultz is a director of the
    Company 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.
 
(3) A trust for the benefit of relatives of Gustavo A. Cisneros and a trust for
    the benefit of Ricardo J. Cisneros and relatives of Ricardo J. Cisneros each
    owns a 50% indirect beneficial ownership interest in the equity of Abarco.
    The trustees of both trusts are Dr. Peter Marxer and Protec Trust Management
    Establishment, each with the address Postfach 484, Heiligkreuz 6, F1 9490
    Vaduz, Liechtenstein. Mr. Gustavo A. Cisneros is also a director of the
    Company. Mr. Gustavo A. Cisneros may be deemed to have beneficial ownership
    of the shares beneficially owned by the trusts created by him. Mr. Gustavo
    A. Cisneros disclaims beneficial ownership of such shares.
 
(4) Pursuant to Rule 13d-3, stock options that are presently exercisable or
    exercisable within 60 days after December 15, 1998, which are owned by each
    individual are deemed to be outstanding for purposes of computing the
    percentage of shares owned by that individual. Therefore, each percentage is
    computed based on the sum of (i) the shares actually outstanding as of
    December 15, 1998 and (ii) the number of stock options exercisable within 60
    days of December 15, 1998, owned by that individual or entity whose
    percentage of share ownership is being computed, but not taking account of
    the exercise of stock options by any other person or entity.
 
     In addition, an affiliate of Strata L.L.C. acquired, on the date of the
Reorganization, 1,000,000 shares of preferred stock, par value $0.01 per share,
and warrants to purchase 44,100,000 shares of Common Stock (exercise price of $2
per share) for a cash purchase price of $100 million.
 
ITEM 13:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     See Note A of the Notes to the Consolidated Financial Statements appearing
elsewhere on this Form 10-K for a description of the Recapitalization Agreement,
which resulted in the redemption of a portion of the common stock owned by
Abarco.
 
     See Note L of the Notes to the Consolidated Financial Statements appearing
elsewhere on this Form 10-K for a description of the Company's 1996 Employee
Stock Ownership Plan and the Company's 1994 Management Stock Ownership Plan.
 
                                       67
<PAGE>   69
 
     See Notes A and Q of the Notes to the Consolidated Financial Statements
appearing elsewhere on this Form 10-K for a description of the sale of Evenflo
and the related indemnity agreement.
 
     Effective October 1, 1996, 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. The Company expensed $976
thousand in fiscal 1998 pursuant to such management agreement with KKR.
 
     On August 20, 1998 (the "Closing Date"), KKR 1996 Fund L.P., a Delaware
limited partnership affiliated with Kohlberg Kravis Roberts & Co., L.P. ("KKR"),
entered into a stock purchase agreement pursuant to which KKR 1996 Fund L.P.
acquired from Lisco, Inc., a wholly-owned subsidiary of Spalding ("Lisco"), (i)
51% (5,100,000 shares) of the outstanding shares of common stock, par value
$1.00 per share, of Evenflo (the "Evenflo Common Stock"), for a purchase price
of $25.5 million and (ii) 400,000 shares of variable rate cumulative preferred
stock with a liquidation preference of $100.00 per share (the "Cumulative
Preferred Stock") for a purchase price of $40.0 million, representing 100% of
the outstanding shares of Cumulative Preferred Stock. Lisco received the 400,000
shares of newly-authorized Cumulative Preferred Stock as a distribution from
Evenflo (the "Preferred Stock Distribution"). KKR 1996 Fund L.P. also entered
into an agreement on August 18, 1998, with the Company through which KKR 1996
Fund L.P. purchased 1,000,000 shares of preferred stock, par value of $0.01 per
share, and acquired warrants to purchase 44,100,000 shares of common stock, par
value $0.01 per share, for a purchase price of $100.0 million, payable in cash.
In addition, on the Closing Date, Great Star Corporation ("Great Star"), an
affiliate of Abarco N.V., entered into a stock purchase agreement pursuant to
which, prior to the acquisition of Common Stock by KKR 1996 Fund L.P., Great
Star acquired 6.6% (660,000 shares) of the outstanding shares of Common Stock
from Lisco for a purchase price of $3.3 million.
 
     On the Closing Date, Spalding and Evenflo entered into a Transition
Services Agreement (the "Transition Services Agreement"). Pursuant to the
Transition Services Agreement, for a period of up to six months, Spalding will
provide certain financial, accounting and other corporate related services to
Evenflo for the costs associated with providing such services. Evenflo will also
reimburse Spalding for its out-of-pocket expenses incurred in rendering such
services. The Transition Services Agreement terminated with respect to the
majority of such services on September 30, 1998.
 
     On the Closing Date, Evenflo, KKR 1996 Fund L.P. and Lisco entered into a
stockholders agreement (the "KKR Stockholders Agreement"). Pursuant to the KKR
Stockholders Agreement, Lisco has the right to participate pro rata in certain
sales of Common Stock by KKR 1996 Fund L.P. and affiliates (a "Tag Along"), and
KKR 1996 Fund L.P. has the right to require Lisco to participate pro rata in
certain sales of Common Stock by KKR 1996 Fund L.P. and affiliates ( a "Drag
Along"). The KKR Stockholders Agreement provides Lisco with "piggyback"
registration rights and two demand registrations 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
Evenflo's Board of Directors, subject to maintaining specified ownership
thresholds.
 
     On the Closing Date, Spalding and Evenflo entered into an indemnification
agreement (the "Indemnification Agreement") pursuant to which Spalding agreed to
indemnify Evenflo for all losses and liabilities of any kind relating to any
non-Evenflo related matters, and Evenflo agreed to indemnify Spalding for all
losses and liabilities of any kind relating to the Evenflo business. In
addition, Spalding agreed to indemnify Evenflo for the expense of product
recalls and corrective actions relating to products manufactured by Evenflo
prior to the Closing Date.
 
     Spalding and Evenflo entered into an Employee Matters Agreement, dated
August 20, 1998, to allocate assets and liabilities with respect to labor,
employment and employee benefit matters. The Employee Matter Agreement provides
that Evenflo will retain all employment-related responsibility no matter when
incurred for current and former employees of Evenflo. Evenflo will provide, for
at least one year following the Closing Date, employee benefits that are, in the
aggregate, no less favorable than those maintained for the Evenflo employees
immediately prior to the closing of the Reorganization. Furthermore, Evenflo
will establish plans that are substantially similar to the SERA Plan, the
Spalding & Evenflo Savings Plus Plan, the Spalding &
                                       68
<PAGE>   70
 
Evenflo Supplemental Retirement Plan and Spalding's postretirement health and
life insurance benefits, and assets for the Evenflo employees will be
transferred from the Spalding plans, except in the case of postretirement
benefits for which Spalding will cause to be accrued on the books of Evenflo a
pro-rata portion of the funding contribution due in 1998. Evenflo will also
establish a stock option plan to provide for the issuance of stock-based awards.
Evenflo will continue to honor its obligations under and maintain certain
deferred compensation and change in control agreements with individual
executives, retirement plans, welfare plans and collective bargaining
agreements.
 
     Prior to the Closing Date, Evenflo and its subsidiaries filed a
consolidated United States federal income tax return together with Spalding and
its other subsidiaries (collectively, the Spalding Consolidated Group). As of
the Closing Date, Evenflo and its subsidiaries (collectively, the Evenflo Group)
will no longer be eligible to file United States federal income tax returns on a
consolidated basis with Spalding and its subsidiaries (other than members of the
Evenflo Group) (collectively, the Spalding Group). Consequently, on the Closing
Date, Spalding and Evenflo entered into a tax allocation and indemnity agreement
(the "Tax Allocation Agreement").
 
     See Notes A and Q of the Notes to the Consolidated Financial Statements
appearing elsewhere on this Form 10-K for a description of the sale of Evenflo
and the related indemnity agreement.
 
     Pursuant to the Tax Allocation Agreement, (i) the tax attributes of the
Spalding consolidated group (e.g., net operating losses, net capital losses and
tax credits) will be allocated and apportioned among the members of the Evenflo
Group and the members of the Spalding Group in accordance with the applicable
Treasury regulations, (ii) Spalding will be responsible for (x) preparing and
filing all consolidated United States federal income tax returns (including any
amended returns) for the taxable years during which Evenflo and its subsidiaries
were members of the Spalding consolidated group and (y) paying all taxes shown
as due and owning on such consolidated returns, and (iii) Spalding will have the
sole right to represent Evenflo's and its subsidiaries' interests in any audit
or other administrative or judicial proceeding related to such consolidated
returns.
 
     Under the Tax Allocation Agreement, Evenflo and its subsidiaries are
required to pay to Spalding the amount of United States federal income taxes
that are attributable to Evenflo and its subsidiaries (as determined in
accordance with the provisions of the Consolidated Federal Income Tax Liability
Allocation Agreement among Spalding and its Subsidiaries, dated as of September
30, 1993 (the "Old Tax Sharing Agreement")) for all taxable years during which
Evenflo and its subsidiaries were members of the Spalding consolidated group
(including, without limitation, any such taxes that are imposed as a result of
an audit or other adjustment). Evenflo and its subsidiaries will be entitled to
any refunds of such taxes and Spalding is required to pay Evenflo and its
subsidiaries the amount of any tax refund attributable to such parties. In
addition, under the Tax Allocation Agreement, the members of the Evenflo Group
will be required to reimburse the Spalding Group for any tax attributes of the
Spalding Group that are utilized by the Evenflo Group (or any member thereof) to
reduce its tax liability and Spalding and the other members of the Spalding
Group will have similar obligation to reimburse the Evenflo Group for any tax
attributes of the Evenflo Group that are utilized by the Spalding Group (or any
member thereof).
 
     Spalding and the other members of the Spalding Group will jointly and
severally indemnify and hold harmless Evenflo and its subsidiaries for any taxes
imposed on Spalding or other members of the Spalding Group other than taxes that
are attributable to Evenflo and its subsidiaries.
 
     Pursuant to the terms of the Tax Allocation Agreement, the principles
described herein also will govern the filing of any state, local or foreign tax
returns required to be filed by Spalding or other members of the Spalding Group
on a consolidated, combined or unitary basis with the Company or any of its
subsidiaries and the allocation of the liability for any taxes with respect
thereto.
 
                                       69
<PAGE>   71
 
                                    PART IV
 
ITEM 14:  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
(a) 1.  FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent Auditors' Report................................   31
Statements of Consolidated Earnings (Loss) and Comprehensive
  Earnings (Loss) for the years ended September 30, 1998,
  1997, and 1996............................................   32
Consolidated Balance Sheets as of September 30, 1998 and
  1997......................................................   33
Statements of Consolidated Cash Flows for the years ended
  September 30, 1998, 1997, and 1996........................   34
Statements of Consolidated Shareholders' Equity (Deficiency)
  for the years ended
  September 30, 1998, 1997, and 1996........................   36
Notes to Consolidated Financial Statements..................   37
</TABLE>
 
2.  FINANCIAL STATEMENT SCHEDULE
 
<TABLE>
<CAPTION>
                          SCHEDULE                            PAGE
                          --------                            ----
<S>                                                           <C>
Independent Auditors' Report on Schedule....................   73
II -- Valuation and Qualifying Accounts.....................   74
</TABLE>
 
     SCHEDULES OTHER THAN THE ABOVE HAVE BEEN OMITTED BECAUSE THEY ARE EITHER
NOT APPLICABLE OR THE REQUIRED INFORMATION HAS BEEN DISCLOSED IN THE
CONSOLIDATED FINANCIAL STATEMENTS OR NOTES THERETO.
 
3.  EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)
 
<TABLE>
<CAPTION>
EXHIBIT                           DESCRIPTION
-------                           -----------
<C>       <S>
  2.1     Recapitalization and Stock Purchase Agreement, dated August
          15, 1996, by and among Strata Holdings L. P., E&S Holdings
          Corporation and Abarco N.V. (incorporated by reference from
          Exhibit 2.1 to Registration Statement No. 333-14569 filed by
          the Company on January 9, 1997).
  2.2     Amendment No. 1 to the Recapitalization and Stock Purchase
          Agreement, dated September 30, 1996, by and among Strata
          Holdings L.P., E&S Holdings Corporation and Abarco N.V.
          (incorporated by reference from Exhibit 2.2 to Registration
          Statement No. 333-14569 filed by the Company on January 9,
          1997).
  3.1     Restated Certificate of Incorporation of E&S Holdings
          Corporation (incorporated by reference from Exhibit 3.1 to
          Registration Statement No. 333-14569 filed by the Company on
          January 9, 1997).
  3.2     Bylaws of E&S Holdings Corporation (incorporated by
          reference from Exhibit 3.2 to Registration Statement No.
          333-14569 filed by the Company on January 9, 1997).
  4.1     Indenture between E&S Holdings Corporation and Marine
          Midland Bank, as Trustee (incorporated by reference from
          Exhibit 4.1 to Registration Statement No. 333-14569 filed by
          the Company on January 9, 1997).
  4.2     Form of 10 3/8% Series B Senior Subordinated Notes due 2006
          (incorporated by reference from Exhibit 4.3 to Registration
          Statement No. 333-14569 filed by the Company on January 9,
          1997).
  4.3     1996 Employee Stock Ownership Plan (incorporated by
          reference from Exhibit 4.7 to Registration Statement No.
          333-20463 filed by the Company on January 27, 1997).
  4.4     Stock Purchase Warrants, dated August 20, 1998, by and among
          Evenflo & Spalding Holdings Corporation and KKR 1996 Fund
          L.P., relating to the purchase of 44,100,000 shares of
          Common Stock of the Company granted to KKR 1996 Fund L.P.
</TABLE>
 
                                       70
<PAGE>   72
 
<TABLE>
<CAPTION>
EXHIBIT                           DESCRIPTION
-------                           -----------
<C>       <S>
  4.5     Stockholders' Agreement dated August 20, 1998, by and among
          Evenflo Company, Inc. KKR 1996 Fund L.P. and Lisco, Inc.
  4.6     Certificate of Designations of Variable Rate Cumulative
          Preferred Stock of Evenflo & Spalding Holdings Corporation,
          dated August 19, 1998.
 10.1     $650,000,000 Credit Agreement dated as of September 30,
          1996, among E&S Holdings Corporation, as the Borrower, Bank
          of America National Trust and Savings Association, as Swing
          Line Lender, as Fronting Lender and as Administrative Agent,
          Merrill Lynch Capital Corporation, as Documentation Agent,
          NationsBank, N.A. (South), as Syndication Agent, and lenders
          (incorporated by reference from Exhibit 10.1 to Registration
          Statement No. 333-14569 filed by the Company on January 9,
          1997).
 10.2     Guaranty dated as of September 30, 1996, made by Spalding &
          Evenflo Companies, Inc., Evenflo Company, Inc., Etonic
          Worldwide Corporation, S&E Finance Co., Inc., Lisco, Inc.,
          Lisco Sports, Inc., Lisco Feeding, Inc., Lisco Furniture,
          Inc., and EWW Lisco, Inc. in favor of Bank of America
          National Trust and Savings Association (incorporated by
          reference from Exhibit 10.2 to Registration Statement No.
          333-14569 filed by the Company on January 9, 1997).
 10.3     Pledge Agreement dated as of September 30, 1996, made by E&S
          Holdings Corporation in favor of Bank of America National
          Trust and Savings Association (incorporated by reference
          from Exhibit 10.3 to Registration Statement No. 333-14569
          filed by the Company on January 9, 1997).
 10.4     Credit Agreement Amendment No.1, dated December 11, 1996, by
          and among Evenflo & Spalding Holdings Corporation (the
          "Borrower") and the financial institutions that are or may
          become parties to the Credit Agreement dated as of September
          30, 1996.
 10.5     Credit Agreement Amendment No. 2, dated March 31, 1998, by
          and Among Evenflo & Spalding Holdings Corporation (the
          "Borrower") and the financial institutions that are or may
          become parties to the Credit Agreement dated as of September
          30, 1996.
 10.6     Credit Agreement Amendment No. 3, dated July 30, 1998, by
          and Among Evenflo & Spalding Holdings Corporation (the
          "Borrower") and the financial institutions that are or may
          become parties to the Credit Agreement dated as of September
          30, 1996.
 10.7     Registration Rights Agreement dated as of September 30, 1996
          by and among E&S Holdings Corporation, Strata Associates, L.
          P., and KKR Partners II, L.P. (incorporated by reference
          from Exhibit 10.4 to Registration Statement No. 333-14569
          filed by the Company on January 9, 1997).
 10.8     Form of Change of Control Agreement (Senior Managers)
          (incorporated by reference from Exhibit 10.8 to Registration
          Statement No. 333-14569 filed by the Company on January 9,
          1997).
 10.9     Form of Change of Control Agreement (Top Managers)
          (incorporated by reference from Exhibit 10.9 to Registration
          Statement No. 333-14569 filed by the Company on January 9,
          1997).
 10.10    Form of Change of Control Agreement (Other Managers)
          (incorporated by reference from Exhibit 10.10 to
          Registration Statement No. 333-14569 filed by the Company on
          January 9, 1997).
 10.11    Form of Letter of Agreement between the Company and Kohlberg
          Kravis Roberts & Co., L.P. (incorporated by reference from
          Exhibit 10.11 to Registration Statement No. 333-14569 filed
          by the Company on January 9, 1997).
 10.12    Agreement dated as of February 3, 1997, by and between NBA
          Properties, Inc. and Spalding & Evenflo Companies, Inc.
          (incorporated by reference from Exhibit 10 to the Company's
          Quarterly Report 10-Q for the fiscal quarter ended December
          31, 1996, filed by the Company on February 14, 1997).
</TABLE>
 
                                       71
<PAGE>   73
 
<TABLE>
<CAPTION>
EXHIBIT                           DESCRIPTION
-------                           -----------
<C>       <S>
 10.13    Asset Purchase Agreement dated as of March 7, 1997, by and
          among Gerry Baby Products Company, Gerry Wood Products
          Company, Huffy Corporation, as sellers and Evenflo Company,
          Inc. as purchaser (incorporated by reference from Exhibit
          10.1 to the Company's Quarterly Report 10-Q for the fiscal
          quarter ended June 30, 1997, filed by the Company on August
          7, 1997).
 10.14    Asset Purchase Agreement among Ben Hogan Co., the Trusts for
          the Benefit of William Goodwin's Children, and Evenflo &
          Spalding Holdings Corporation dated as of November 26, 1997.
 10.15    Tax Allocation and Indemnification Agreement, dated August
          20, 1998 by and among Evenflo & Spalding Holdings
          Corporation and Evenflo Company, Inc.
 10.16    Employee Matters Agreement, dated August 20, 1998, by and
          among Evenflo & Spalding Holdings Corporation and Evenflo
          Company, Inc.
 10.17    Transition Services Agreement, dated August 20, 1998, by and
          among Evenflo & Spalding Holdings Corporation and Evenflo
          Company, Inc.
 10.18    Evenflo & Spalding Holdings Corporation Management Incentive
          Bonus Plan dated January 15, 1997 (incorporated by reference
          from Exhibit 99 to the Company's Quarterly Report 10-Q for
          the fiscal quarter ended December 31, 1996, filed by the
          Company on February 14, 1997).
 12       Computation of Ratio of Earnings to Fixed Charges.
 21       List of Subsidiaries.
 23       Consent of DELOITTE & TOUCHE LLP, independent certified
          public accountants.
 27       Financial Data Schedule.
</TABLE>
 
(b) REPORTS ON FORM 8-K
 
     The Company filed a Current Report on Form 8-K with the Securities and
Exchange commission dated July 31, 1998 relating to certain customary statements
in connection with the Private Securities Litigation Reform Act of 1995.
 
     The Company filed a Current Report on Form 8-K dated August 21, 1998
relating to the Reorganization.
 
     The Company filed a report on Form 8-K with the Commission subsequent to
the last quarter of the period covered by this report. The Report was filed on
December 11, 1998 to report that Kevin T. Martin, President and Chief Operating
Officer of Spalding Holdings Corporation had resigned and that the Company had
named James Craigie as his successor.
 
                                       72
<PAGE>   74
 
INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
Spalding Holdings Corporation
 
We have audited the consolidated financial statements of Spalding Holdings
Corporation (formerly Evenflo & Spalding Holdings Corporation) and subsidiaries
(the "Company") as of September 30, 1998 and 1997, and for each of the three
fiscal years in the period ended September 30, 1998, and have issued our report
thereon dated November 12, 1998 (included elsewhere in this Annual Report on
Form 10-K). Our audits also included the financial statement schedule listed in
Item 14 of this Annual Report on Form 10-K. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
 
DELOITTE & TOUCHE LLP
 
Tampa, Florida
November 12, 1998
 
                                       73
<PAGE>   75
 
                                  SCHEDULE II
 
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
                       VALUATION AND QUALIFYING ACCOUNTS
                 YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                    CHARGED
                            BALANCE AT        CHARGED TO COSTS     TO OTHER                       BALANCE AT
DESCRIPTION              BEGINNING OF YEAR      AND EXPENSES      ACCOUNTS(A)    DEDUCTIONS(B)    END OF YEAR
-----------              -----------------    ----------------    -----------    -------------    -----------
<S>                      <C>                  <C>                 <C>            <C>              <C>
1998-Allowance for
  doubtful accounts....       $3,941               12,591               --          (5,993)         10,539
1997-Allowance for
  doubtful accounts....        4,373                4,284              646          (5,362)          3,941
1996-Allowance for
  doubtful accounts....        3,247                6,527            1,158          (6,559)          4,373
</TABLE>
 
---------------
Notes:
 
(A) Recoveries on accounts previously charged off. The amount for 1997 includes
    $386 for the beginning allowance from the Gerry Acquisition. The amount for
    1996 includes $824 for the beginning allowance from the Etonic Acquisition.
 
(B) Uncollectible accounts written off. In 1998, amount includes $1,594 of
    Evenflo balance sold in the Reorganization transaction.
 
                                       74
<PAGE>   76
 
                                                                      EXHIBIT 12
 
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
                       RATIO OF EARNINGS TO FIXED CHARGES
           YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                             1998        1997       1996       1995      1994
                                           ---------    -------    -------    ------    ------
<S>                                        <C>          <C>        <C>        <C>       <C>
Earnings:
Earnings (loss) before income taxes and
  extraordinary item.....................  $(112,159)   (38,535)   (12,380)   19,681    29,961
Interest expense.........................     78,041     71,326     37,718    38,108    17,073
Rent expense.............................      1,918      2,912      1,994     1,692     1,591
                                           ---------    -------    -------    ------    ------
                                           $ (32,200)    35,703     27,332    59,481    48,625
                                           =========    =======    =======    ======    ======
Fixed charges:
Interest expense.........................  $  78,041     71,326     37,718    38,108    17,073
Rent expense.............................      1,918      2,912      1,994     1,692     1,591
                                           ---------    -------    -------    ------    ------
                                           $  79,959     74,238     39,712    39,800    18,664
                                           =========    =======    =======    ======    ======
Ratio of earnings to fixed charges.......         --         --         --      1.49      2.61
                                           =========    =======    =======    ======    ======
Deficiency of earnings to fixed
  charges................................    112,159     38,535     12,380
                                           =========    =======    =======
</TABLE>
 
                                       75
<PAGE>   77
 
                                   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.
 
                                          SPALDING HOLDINGS CORPORATION
 
                                          By: /s/   JAMES R. CRAIGIE
 
                                            ------------------------------------
                                                      James R. Craigie
                                               President and Chief Executive
                                                           Officer
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been duly signed by the following persons in the
capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
SIGNATURE                                                       TITLE                      DATE
---------                                                       -----                      ----
<C>                                                  <S>                             <C>
 
                /s/ EDWIN L. ARTZT                   Chairman of Board of            December 24, 1998
---------------------------------------------------  Directors
                  Edwin L. Artzt
 
               /s/ JAMES R. CRAIGIE                  President and Chief             December 24, 1998
---------------------------------------------------  Executive Officer
                 James R. Craigie
 
               /s/ SCOTT H. CREELMAN                 Executive Vice President        December 24, 1998
---------------------------------------------------
                 Scott H. Creelman
 
                 /s/ G. WADE LEWIS                   Chief Financial Officer         December 24, 1998
---------------------------------------------------  (Principal Financial
                   G. Wade Lewis                     Officer)
 
              /s/ WILLIAM K. BREADEN                 Corporate Controller            December 24, 1998
---------------------------------------------------  (Principal Accounting
                William K. Breaden                   Officer)
 
               /s/ ROBERT K. ADIKAS                  Vice President, Secretary       December 24, 1998
---------------------------------------------------  and General Counsel
                 Robert K. Adikas
 
                /s/ HENRY R. KRAVIS                  Director                        December 24, 1998
---------------------------------------------------
                  Henry R. Kravis
 
               /s/ GEORGE R. ROBERTS                 Director                        December 24, 1998
---------------------------------------------------
                 George R. Roberts
 
               /s/ MICHAEL T. TOKARZ                 Director                        December 24, 1998
---------------------------------------------------
                 Michael T. Tokarz
 
              /s/ MARC S. LIPSCHULTZ                 Director                        December 24, 1998
---------------------------------------------------
                Marc S. Lipschultz
 
              /s/ GUSTAVO A. CISNEROS                Director                        December 24, 1998
---------------------------------------------------
                Gustavo A. Cisneros
 
              /s/ DAVID W. CHECKETTS                 Director                        December 24, 1998
---------------------------------------------------
                David W. Checketts
</TABLE>