<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                 ---------------

                                    FORM 10-K

                                   (MARK ONE)

[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

                                       OR

[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

       FOR THE TRANSITION PERIOD FROM OCTOBER 1, 1998 TO DECEMBER 31, 1998

                        COMMISSION FILE NUMBER 333-14569

                          SPALDING HOLDINGS CORPORATION
               (FORMERLY EVENFLO & SPALDING HOLDINGS CORPORATION)
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                 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)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (413) 536-1200

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                                     NAME OF EACH EXCHANGE
          TITLE OF EACH CLASS                         ON WHICH REGISTERED
                 NONE                                        NONE

        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

     Indicate by check mark whether the registrant (1) has filed all reports
required 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 March 19, 1999, 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

                                                                      PAGE
Part I                                                                
  Item 1     Business............................................       3

  Item 2     Properties..........................................      12

  Item 3     Legal Proceedings...................................      13

  Item 4     Submission of Matters to a Vote of Security Holders.      14

Part II                                                               
  Item 5     Market for Registrant's Common Equity and Related        
             Stockholder Matters.................................      14

  Item 6     Selected Financial Data.............................      15

  Item 7     Management's Discussion and Analysis of Financial        
             Condition and Results of Operations.................      16

  Item 7A    Quantitative and Qualitative Disclosures About Market    
             Risk................................................      28

  Item 8     Financial Statements and Supplementary Data.........      29

  Item 9     Changes in and Disagreements with Accountants on         
             Accounting and Financial Disclosure.................      54

Part III                                                              

  Item 10    Directors and Executive Officers of the Company.....      54

  Item 11    Executive Compensation..............................      56

  Item 12    Security Ownership of Certain Beneficial Owners and      
             Management..........................................      60

  Item 13    Certain Relationships and Related Transactions......      61

Part IV                                                               
  Item 14    Exhibits, Financial Statement Schedules and Reports      
             on Form 8-K.........................................      63


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<PAGE>   3
                                     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, the Company continues to
own 42.4% of the common stock of Evenflo.

      Subsequent to the realignment of the businesses, the Company elected Edwin
L. Artzt (former Chairman and Chief Executive Officer of Proctor & Gamble
Company) in October 1998 as Chairman of the Board of Directors and hired James
R. Craigie (formerly an Executive Vice President of Kraft, Inc.) in December
1998 as President and Chief Executive Officer. Under this new leadership, the
management of the Company has formulated new brand strategies for its key
product lines and repositioned its businesses to improve earnings and cash flow
and grow market share. The Company is initiating the final phases of a plan 
that is designed to reposition the Spalding(R), Top-Flite(R), Etonic(R), 
Strata(R), Ben Hogan(R) and Dudley(R) brands within the sporting
goods industry.

      In concert with its new brand strategy, the Company has repositioned its 
golf ball line under the brand names Strata(TM) and Top-Flite XL 2000(TM) and
realigned the golf club brands of Ben Hogan(R), Top-Flite(R) and Spalding(R) to
more clearly define their target audience. In recognition of continuing golf
club market softness and competitive pricing pressures as well as the Company's
new strategic direction, the Company implemented pricing and other actions that
contributed to writing down the value of those products that are inconsistent
with the repositioned brands by $20.6 million. The inventory writedown will
allow the Company to execute its new strategies without the burden of
discontinued products. Additionally, the Company has implemented actions to
rebuild infrastructure through a 9-month implementation of the Systems
Applications Processes ("SAP") integrated computer software that began in
January 1999. The new computer software is expected to support the Company's
efforts to incorporate industry best practices and improve efficiencies.

      On January 19, 1999 the Company filed Form 8-K electing to change its year
end from September 30 to December 31. The financial statements included in this
Form 10-K include those for the consolidated balance sheet as of December 31,
1998 and the statements of consolidated earnings (loss), statement of
consolidated cash flows, and statements of consolidated shareholders' equity
(deficiency), for the period from October 1, 1998 through December 31, 1998 (the
"Transition Period"). Additional financial statements, as required, for the
fiscal years ended September 30, 1998, 1997 and 1996 are also included.

    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 mean the operations of Spalding and its
equity investment in Evenflo. References to fiscal 1998 include the operations
of Spalding for the entire fiscal year ending September 30, 1998, the operations
of Evenflo for the period from October 1, 1997 to August 20, 1998 and the
Company's 42.4% equity investment in Evenflo from August 21, 1998 to September
30, 1998.


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<PAGE>   4
FORWARD-LOOKING STATEMENTS

         Sections of this Form 10-K, including Management's Discussion and
Analysis of Financial Conditions and Results of Operations, contain various
forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995, with respect to the financial condition, results
of operation and business of the Company. Examples of forward-looking statements
are statements that use the words "expect", "anticipate", "plan", "intend",
"project", "believe" and similar expressions. These forward-looking statements
involve certain risks and uncertainties, and no assurance can be given that any
of such matters will be realized. Actual results may differ materially from
those contemplated by such forward looking statements as a result of, among
other things, failure by the Company to predict accurately customer preferences;
a decline in the demand for merchandise offered by the Company; competitive
influences; changes in levels of consumer spending habits; effectiveness of the
Company's brand awareness and marketing programs; general economic conditions
that are less favorable than expected or a downturn in the consumer products
industry; a significant change in the regulatory environment applicable to the
Company's business; an increase in the rate of import duties or export quotas
with respect to the Company's merchandise; any material adverse effects of the
Year 2000 issue on the business of the Company or third parties with which the
Company does business; or an adverse outcome of the litigation referred to in
"Legal Proceedings" that materially and adversely affects the Company's
financial condition. The Company assumes no obligation to update or revise any
such forward looking statements, which speak only as of their date, even if
experience or future events or changes make it clear that any projected
financial or operating results implied by such forward-looking statements will
not be realized.

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 $56.8 million in the Transition Period.

    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 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. See Note A of the Notes to the Consolidated Financial Statements
appearing elsewhere in this Form 10-K.


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<PAGE>   5
    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.
(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 were closed and
its functions transferred to the separate Spalding and Evenflo operations.

SPALDING

    Spalding, with net sales of $56.8 million during the Transition Period and
$536.9 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), Ben Hogan(R) and Dudley(R).
Spalding's brand names are currently featured on over 2,000 products with an
emphasis on two primary categories: (i) golf products and (ii) sporting goods
products. Spalding also licenses the brand names on an assortment of 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. Golf products include golf balls sold under the Strata(R),
Top-Flite(R) and Spalding(R) brand names; golf clubs sold under the Ben
Hogan(R), Top-Flite(R) and Spalding(R) brand names; golf shoes sold under the
Etonic(R) brand name and accessories sold under the Ben Hogan(R), Top-Flite(R)
and Spalding(R) brand names. Sporting goods products (other than golf) and
licensed products are sold primarily under the Spalding(R) brand.

    For information on sales by industry segment and foreign and domestic
operations and export sales, see Note P 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 $30 million during the Transition Period and $407 million
in fiscal 1998, or approximately 52% and 76% of Spalding's total net sales, in
these respective periods. Spalding is the U.S. market share leader in the
manufacture and marketing of golf equipment, primarily under its Top-Flite (R),
Strata(R) and Ben Hogan(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,
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 in 1997, with worldwide net sales of $22 million
during the Transition Period and $218 million, $219 million and $215 million in
fiscal 1998, 1997 and 1996, respectively. Spalding currently markets its line of
golf balls under numerous names including Strata(R) Tour(TM), Strata(R) ML(TM)
Balata, Top Flite(R) XL 2000(TM) and Top Flite(R) XL(TM). 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 Strata(R) and Top-Flite(R) names are widely
recognized.

    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 golf clubs generated $2 million during the Transition
Period and $112 million, $99 million and $73 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. Ben Hogan(R)
branded clubs are premium forgings, designed for the world's most discriminating
players, played on the professional tours and sold exclusively in pro shops.
Top-Flite(R) clubs are premium metal castings that utilize design features such
as perimeter weighting, graphite shafts, titanium head inserts and the Company's
patented stabilizer bar design. Top-Flite(R) branded clubs are played on the
professional tours and are primarily sold in the better pro shops, off-course
shops and sporting goods stores. Spalding(R) branded clubs satisfy the
recreational/value segments of the market. Spalding (R) clubs are primarily sold
in the off-course golf shops, sporting goods stores, mass merchants and
warehouse clubs. The Company periodically updates all of the club products
through computer-aided design and modeling software and technical advances in
head, shaft and grip designs available in the market.


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<PAGE>   6
    GOLF SHOES AND ACCESSORIES. Spalding is a leading designer and marketer of
professional grade spikeless golf shoes and premium golf gloves under the Etonic
brand (acquired in 1996). Etonic golf shoes and gloves are marketed under
several brand names including the Difference Tour(TM) and the Difference(TM),
both of which are premium grade products played by touring professionals.
Premium golf accessories, including golf bags, hats, club covers, tees, towels,
and sports luggage are sold under the Ben Hogan(R) and Top-Flite(R) brand
names. In the golf shoe and accessories category, Spalding generated net sales
during the Transition Period totaling $6 million and $78 million during fiscal
1998. In 1997, the U.S. wholesale market for golf shoes and accessories was
approximately $550 million.

Sporting Goods Products

    GENERAL. The sporting goods products segment includes basketballs, a broad
line of softball and baseball products, volleyballs, soccer balls, athletic
shoes and other sports products. Spalding's sporting goods products (other than
golf) accounted for $27 million of Transition Period net sales and $130 million
of net sales for fiscal 1998, or 48% and 24%, respectively.

    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 $10 million of Transition Period
U.S. net sales and $42 million of U.S. net sales of basketballs in fiscal 1998.
Spalding's worldwide net sales of basketballs in the Transition Period and
fiscal 1998 were $13 million and $58 million, respectively. 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.

    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 $14 million and $72 million during the Transition Period
and fiscal 1998, respectively. No single sporting good product accounted for
more than 10% of the Company's total revenues in the Transition Period or fiscal
1998. 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.

    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 approximately 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 $48 million during the Transition Period (of which $21 million
were in international markets) and $259 million in fiscal 1998 (of which $113
million were in international markets). The loss of any single licensee would 
not be material to the Company.

    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 six wholly-owned foreign
subsidiaries in Australia, Canada, Japan, New Zealand, Sweden and the United
Kingdom. Spalding's international sales were $15 million for the Transition
Period, or 27%, and $127.5 million, or 24%, in fiscal 1998, due in large part to
the popularity of golf and basketball outside the United States.


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<PAGE>   7
    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 certain management severance costs and closed the
headquarters in Tampa, Florida. During the Transition Period, $3.0 million of
restructuring expenses was incurred to complete the international restructuring
and to reduce overhead in the U.S. See Note F of the Notes to the Consolidated
Financial Statements appearing elsewhere in this Form 10-K.

    SALES, MARKETING AND DISTRIBUTION. In the U.S., Spalding sells its products
through four sales teams, 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. Outside of the
U.S., Spalding maintains direct sales, marketing and distribution activities in
Canada, Australia, United Kingdom, Sweden, and New Zealand. Liaison offices in
Japan and Italy assist in the co-ordination of the regional distributors in the
Japanese/Southeast Asian markets and European markets, respectfully, as well as
assist in the development activity in the respective regions. During the
Transition Period and in Fiscal 1998, one U.S. customer (Wal-Mart) amounted to
24% and 13%, respectively, 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 enhances Spalding's image and improves sales of its products.

    Spalding's golf marketing campaign incorporates all of its golf products and
is intended to develop the Ben Hogan(R), Strata(R) and Etonic (R) brands as
ultra-premium products, designed for the world's most discriminating players and
played on the professional tours. In addition, the marketing campaign is
designed to develop Top-Flite (R) as a global "megabrand" for performance grade
golf products. In 1998 Spalding expanded its advertising campaign for premium
golf products including Ben Hogan(R) forged golf clubs, Strata(R) golf balls,
Etonic(R) Difference(TM) Shoes and the Top-Flite(R) golf club line.

    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 838,000 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. Such third-party manufacturers produced products and
components representing approximately 62% and 58% of Spalding's net sales in the
Transition Period and fiscal 1998, respectively. No supplier accounted for
products representing more than 10% of Spalding's Transition Period or fiscal
1998 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 specifications. 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 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.


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<PAGE>   8
    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 December 31, 1998, Spalding owned
227 patents and had 143 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 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 (loss)
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 totaled $26.4.

    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, Nike, Inc.,
and Taylor Made have recently entered the premium golf ball market. Spalding
anticipates that Callaway Golf Co. will also enter the golf ball market in the
near future.

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
manufacturers 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 that 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 its 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 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.


                                       8
<PAGE>   9
    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. At September 30, 1998 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 Piqua 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 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.


                                       9
<PAGE>   10
    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. At September 30, 1998 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 obtaining 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 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 two product recalls and took twelve
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 eighteen months, Evenflo has executed
 


                                       10
<PAGE>   11
two 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 $0.3 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 netsales 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
3.5%, 1.6%, 1.6% and 1.3% of Spalding's net sales in the Transition Period and
fiscal 1998, 1997 and 1996, respectively.

    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.


                                       11
<PAGE>   12
    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 1,745 employees
(Spalding) as of December 31, 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 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.


                                       12
<PAGE>   13
The following table sets forth information as of December 31, 1998 with respect
to the manufacturing, warehousing and office facilities used by the Company in
its businesses:

<TABLE>
<CAPTION>
                                                           OWNED/       SQUARE
LOCATION                           DESCRIPTION             LEASED       FOOTAGE
--------                           -----------             ------       -------
<S>                      <C>                               <C>          <C>
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 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
case is in pre-trial discovery with a trial scheduled for October 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, Evenflo 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 293 product liability claims have been brought against Evenflo,
201 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. As of August 20, 1998,
Evenflo is solely responsible for its product liability exposure.

    Spalding's reserve for sporting good product liability claims at December
31, 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. 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 design revisions. 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 
eighteen months, Evenflo has executed two product recalls and five corrective
actions. Over their life, these claims have resulted in $9.6 million in
liabilities of which $0.3 million was incurred during the period August 21, 1998
to December 31, 1998. At December 31, 1998, the Company has accrued $1.5 million
related to its Evenflo indemnification agreement. During the Transition Period,
the Company purchased insurance to protect against a catastrophic liability.


                                       13
<PAGE>   14
    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

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 Transition Period
ended December 31, 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. As
of March 19, 1999, there were 86 holders of the Company's common stock.

    The Company has never paid dividends on the common stock and does not intend
to pay dividends in the foreseeable future. As a holding company, the ability
of the Company to pay dividends is dependent upon the receipt of dividends or
other payments from Spalding Sports Worldwide. The payment of dividends by
Spalding Sports Worldwide to the Company is subject to certain restrictions
under the Company's credit facility. Any determination to pay cash dividends in
the future will be at the discretion of the Company's Board of Directors and
will be dependent upon the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant at that time by the
Company's Board.

                                       14
<PAGE>   15
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 Transition Period and the five fiscal years ended
September 30, 1998 have been audited. The historical consolidated financial data
for the Transition Period and 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.

<TABLE>
<CAPTION>
                                        OCTOBER 1,
                                           1998
                                         THROUGH                              YEARS ENDED SEPTEMBER 30,
                                       DECEMBER 31,   ---------------------------------------------------------------------
                                         1998 (4)        1998           1997           1996           1995           1994
                                       ------------   -------------  -------------  -------------  -------------  ---------
<S>                                    <C>            <C>            <C>            <C>            <C>            <C>    
(DOLLARS IN THOUSANDS)

OPERATING STATEMENT DATA
Spalding net sales(3) .............     $  56,774        536,901        553,436        471,338        441,777        434,341
Evenflo net sales .................             0        290,791        296,743        237,165        210,039        171,533
                  --                    ---------        -------        -------        -------        -------        -------

Total net sales ...................        56,774        827,692        850,179        708,503        651,816        605,874
Cost of sales (3) .................        77,420        554,496        560,171        446,157        400,234        362,476
                  --                    ---------        -------        -------        -------        -------        -------

Gross profit ......................       (20,646)       273,196        290,008        262,346        251,582        243,398
Selling, general and administrative
  expenses (3) ....................        61,354        297,800        258,089        222,044        203,396        209,297

Royalty income, net ...............        (2,039)       (13,509)       (14,109)       (14,339)       (13,514)       (12,789)
Restructuring costs(1) ............         2,969         21,563         12,001              0              0              0
1994 Management Stock Ownership
  Plan expense ....................             0              0              0         20,828          1,130              0
Recapitalization costs ............             0              0              0          7,700              0              0
Litigation settlement expense .....             0              0              0              0          2,400              0
                  --                    ---------        -------        -------        -------        -------        -------

Income (loss) from operations .....       (82,930)       (32,658)        34,027         26,113         58,170         46,890
Interest expense, net .............        13,911         78,041         71,326         37,718         38,108         17,073
Currency loss (gain), net .........        (2,595)         2,936          1,236            775            381           (144)
Equity in net (earnings) loss
of Evenflo Company, Inc. ..........         3,768         (1,476)             0              0              0              0
                  --                    ---------        -------        -------        -------        -------        -------

Earnings (loss) before income
  Taxes ...........................       (98,014)      (112,159)       (38,535)       (12,380)        19,681         29,961
Income taxes (benefit) ............       (30,193)       (33,196)        (8,500)         9,300          8,683         11,938
                  --                    ---------        -------        -------        -------        -------        -------

Earnings (loss) before
  Extraordinary loss ..............       (67,821)       (78,963)       (30,035)       (21,680)        10,998         18,023
Extraordinary loss on early
  Extinguishment of debt, net of
  Income tax benefit of $0,
$3,182, $0,  $3,200, $0 and $0 ....             0         (5,909)             0         (5,987)             0              0
                  --                    ---------        -------        -------        -------        -------        -------
Net earnings (loss) ...............     $ (67,821)       (84,872)       (30,035)       (27,667)        10,998         18,023
                                        =========      =========      =========      =========      =========      =========
Ratio of earnings to fixed
  charges(2) ......................          --             --             --             --            1.49x          2.61x
BALANCE SHEET DATA
Working capital (deficiency) ......     $  54,085        129,059        130,076        169,551         88,124       (110,193)
Total assets ......................     $ 479,505        535,964        761,231        690,761        536,261        508,022
Long-term debt (net of current
  portion) ........................     $ 524,519        503,074        609,900        625,800        313,073        129,788
Shareholders' equity
  (deficiency) ....................     $(208,113)      (137,149)      (170,631)      (348,596)       (12,360)       (22,730)
Redeemable Preferred stock ........     $       0              0              0        150,000              0              0
</TABLE>

------------------


                                       15
<PAGE>   16
(1)      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. In the
         Transition Period, the Company had $3.0 million of restructuring costs
         comprised of (i) $2.3 million in severance, (ii) $0.4 million of
         closing expenses related to the former France, Italy, Spain and German
         affiliates and (iii) $0.3 million of foreign exchange losses on closed
         affiliates. See Note F of the Notes to the Consolidated Financial
         Statements appearing elsewhere in this Form 10-K.

(2)      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
         comprehensive earnings (loss) plus "fixed charges" (except that
         capitalized interest is 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. The deficiency of earnings to
         "fixed Charges" for the Transition Period and for fiscal 1998, 1997,
         and 1996 was approximately $98.0 million, $112.2 million, $38.5 million
         and $12.4 million, respectively.

(3)      Certain reclassifications have been made to prior year amounts to
         conform with current year presentations.

(4)      The Company has elected to change its year-end from September 30 to
         December 31. Unaudited financial information for the period October 1,
         1997 through December 31, 1997 is as follows: Net Sales $162,209; gross
         profit $50,710; income (loss) from operations ($7,461); income tax
         expense (benefit) ($9,102); and net earnings (loss) $(17,544).


ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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 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.

PERIOD OF OCTOBER 1, 1998 THROUGH DECEMBER 31, 1998 ("TRANSITION PERIOD")
COMPARED TO OCTOBER 1, 1997 THROUGH DECEMBER 31, 1997 ("1997 PERIOD")

KEY EVENTS DURING THE TRANSITION PERIOD. During October 1998 of the Transition
Period, Edwin L. Artzt (former Chairman and Chief Executive Officer of Proctor &
Gamble Company) was named Chairman of Spalding Holdings Corporation. Mr. Artzt
subsequently hired James R. Craigie (former Executive Vice President of Kraft,
Inc.) as President and Chief Executive Officer in December 1998. Under this new
leadership, the management of the Company has formulated revised brand
strategies for its key product lines to reposition the businesses to improve
earnings and cash flow and grow market share.


                                       16
<PAGE>   17
This new strategy will include repositioning the Spalding(R), Top-Flite(R),
Etonic(R), Strata(R), Ben Hogan(R) and Dudley(R) brands to make the Company a
premier competitor in the sporting goods industry. It will also include the
hiring of key personnel in the marketing department, a review of the Company's
distribution and manufacturing infrastructure and a 9-month implementation of
the SAP integrated computer software. The new software will support the
Company's efforts to incorporate industry best practices and increase
efficiencies.

To implement the new brand strategy, the Company made the strategic decision to
clear the market of certain products by (i) incurring the cost of repositioning
Top-Flite golf clubs to reflect pricing pressures and continued softness in the
club market (including price adjustments and acceptance of higher than normal
returns rates), (ii) eliminating discontinued golf and sporting goods products
through close-out sales, write-downs and write-offs and (iii) reducing SKU's in
all product categories. As a result of these actions during the Transition
Period, the Company incurred price adjustments of $10.6 million, made inventory
write-downs or write-offs totaling $20.6 million and accepted returns of $11.2
million. Restructuring costs of $3.0 million during the Transition Period are
comprised primarily of closing expenses for international affiliates in central
Europe and severance expense. In addition, the Company sold closed-out
merchandise of $22.2 million (at negative margins).

To achieve these objectives, golf balls have been separately positioned and
re-launched under the Strata(TM) and Top-Flite XL 2000(TM) brands. New golf
ball products were introduced under the Strata and Top-Flite XL 2000 brands that
focus on key attributes that a golfer may want to improve in their game. The new
products include Strata(R) Tour Professional(TM), Strata(R) ML(TM) Balata,
Strata(R) Distance, Top-Flite XL 2000 Exceptional Spin, Top-Flite XL 2000 Super
Titanium, Top-Flite XL 2000 Extra Long, and Top-Flite XL 2000 Magna Extra
Control. The Strata family of products will continue to be manufactured under
the Company's patented three-piece technology. Top-Flite XL 2000 products
provide golfers the ability to increase distance, accuracy, or control. All of
the new Top-Flite XL 2000 products are manufactured with tungsten in the core
for softness and feel and titanium in the cover for enhanced distance.
Traditional Top-Flite XL products, already considered by the Company to be the
largest selling family of golf balls, will continue to be sold in key channels
of distribution.

The Company's golf club brands have been aligned under the Ben Hogan (R),
Top-Flite (R) and Spalding (R) trademarks to more clearly define their target
audiences. All of the golf club brands will continue to be marketed by the
Company. Etonic golf as well as basketball and the other sporting goods products
have also undergone a similar SKU rationalization and brand repositioning which
will emphasize quality and image versus price.

NET SALES. Net sales are gross sales net of returns, allowances and trade
discounts. The Company's net sales decreased to $56.8 million during the
Transition Period from $162.2 million in the 1997 Period, a decrease of $105.4
million. The decrease of $105.4 million is primarily attributable to the sales
of Evenflo totaling $69.7 million in the 1997 Period that did not recur in the
Transition Period because Evenflo was sold in August of 1998, price adjustments
of $10.6 million (primarily golf products), accepted returns totaling $11.2
million, decline in sales revenues of $6.3 million in international markets
(particularly in Mexico, Italy, France, Germany, Spain and Japan) and less
aggressive sales programs while the brands were being repositioned. While the
fourth calendar quarter is seasonally the slowest quarter, as a result of
pursuing the brand repositioning, the Company's revenues of declined to $56.8
million.

Golf sales decreased to $29.7 million for the Transition Period from $69.2
million for the 1997 Period, a decrease of $39.5 million or 57.1%. Core line
full margin product sales amounted to $36.2 million while sales of golf products
being rationalized as part of the new brand strategy totaled $14.0 million and
were sold at a margin loss. The decrease of $39.5 million is primarily
attributable to adjustments to customer inventory for changes in golf club and
other golf product pricing totaled $10.1 million and returns of $10.4 million
suppressed the net sales of golf products to an even greater extent. The
remaining difference is attributable to less aggressive sales programs during
the Transition Period resulting from the repositioning of the brands. In
addition, as the golf ball line was being overhauled for a January 1999
introduction, sales programs were not as aggressive as in previous years.

Sporting goods sales were $22.7 million for the Transition Period in comparison
to $19.6 million for the 1997 Period, an increase of $3.1 million or 15.8%.
Despite the league lockout for the National Basketball Association ("NBA") U.S.
basketball sales increased 28.4% primarily the result of sales of discontinued
items.

International sales decreased $6.3 million to $15.1 million during the
Transition Period in comparison to the 1997 Period. The decrease is primarily
attributable to the closing of the Mexico, Spain, Italy, France and Germany
operations that occurred during fiscal 1998 as part of the restructuring
activities. These operations were closed during fiscal 1998 and the sales
responsibilities transitioned to third party distributors. The Japan operation
was downsized significantly and the sales responsibility was transitioned to
third party 


                                       17
<PAGE>   18
distributors. These six closed operations accounted for $4.7 million of the
decrease. Weak economic conditions in Pacific Rim markets made up the remainder
of the shortfall.

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 and production. The Company's gross profit decreased to a negative
($20.6) million during the Transition Period from $50.7 million for the 1997
Period or a difference of $71.3 million. The sale of Evenflo represents $11.6
million of the decline. The remainder is comprised of $7.6 million of lost
margin on product discontinued as part of the brand rationalization, $5.2
million in higher sales returns, $10.6 million in adjustments to customer
inventory for changes in golf club prices, and $20.6 million in inventory
writedowns or write-offs related to products discontinued as part of the new
brand strategies. Additionally, lower sales in the Transition Period accounted
for the remainder of the difference.

U.S. golf and sporting goods products represented 95% of the margin variance.
International gross profit was lower than the comparable period in 1997 as a
result of actions similar to those undertaken in the U.S. However, the volume of
product that was necessary to be discontinued in international markets was a
much smaller percentage of the total inventory on hand.

     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, promotion expenses, bad debts, travel,
distribution, customer service, amortization of intangible assets, insurance and
product liability costs, consumer corrective action campaign costs and
professional fees. The Company's SG&A expenses decreased to $61.4 million for
the Transition Period from $61.8 million for the 1997 Period, a decrease of $0.4
million or 0.6%. Evenflo represented $15.2 million of the 1997 Period amount and
zero of the Transition Period total as Evenflo was sold in August 1998. Giving 
effect to the Evenflo sale, Spalding's SG&A increased by $14.8 million. The
increase is primarily attributable to higher advertising and general and
administrative expenses in the U.S. Advertising increased by $3.8 million due to
(i) pro golf tour expenses totaling $2.1 million, (ii) expenses related to the
NBA contract totaling $1.2 million and (iii) other advertising expenses totaling
$0.4 million. The general and administrative increases relate to (i)
professional and consulting services related expenses totaling $2.0 million,
(ii) insurance and accruals related to Evenflo product recall claims totaling
$2.8 million, (iii) $1.3 million in expenses related to the sale of Evenflo
(primarily legal and professional services related) and (iv) $1.4 million of
selling expenses related to changing from a commission based salesforce to a
salaried salesforce.

    ROYALTY INCOME. Royalty income is primarily from licensing Spalding's
worldwide trademarks. Royalty income decreased to $2.0 million during the
Transition Period versus $4.0 million of earned royalties during the 1997
Period. The decrease of $2.0 million is attributable to the following: (i) $1.3
million of the decline is attributable to the sale of Evenflo, (ii) $0.2 million
lower clothing royalties in the U.S. as a result of a reorganization of the
product category and (iii) $0.5 million primarily resulting from the
discontinuance of licensees that no longer matched the brand strategies.

    RESTRUCTURING COSTS. In the Transition Period, the Company had $3.0 million
of restructuring costs comprised primarily of (i) severance and related expenses
totaling $2.3 million and (ii) expenses related to closing the international
operations in France, Spain, Italy and Germany totaling $0.4 million and foreign
exchange losses totaling $0.3 million.

     INTEREST EXPENSE. Interest expense decreased $4.3 million to $13.9 million
in the Transition Period from $18.2 million for 1997 Period. The decrease is
principally due to the sale of Evenflo and the repayment of the $278.8 million
of debt on August 20, 1998. The Company's weighted average outstanding balances
for the Transition Period of $518.7 million compared to $673.2 million under the
Company's borrowing arrangements the 1997 Period. The decrease in the Company's
weighted average outstanding balances for Transition Period were partially
offset by higher interest rates agreed to in an amendment to the Company's
senior credit facility. The Company's average U.S. borrowing rate increased to
10.2% from 9.9% in the 1997 Period.

    CURRENCY GAIN (LOSS). For the Transition Period, the Company's currency gain
of $2.6 million was $3.5 million higher than the currency loss for the 1997
Period. See "Liquidity and Capital Resources."

    INCOME TAXES. In the Transition Period, the Company recorded a $30.2 million
tax benefit, which represents an effective income tax rate of 31% in relation to
its loss before income taxes. The inability to utilize the tax benefit of the
losses from non-U.S. operations, coupled with payments of certain non-U.S.
withholding taxes, resulted in a lower than statutory effective tax rate.

    NET LOSS. The Company recorded a net loss of $67.8 million for the
Transition Period compared to a $17.5 million net loss for the 1997 Period or a
variance of $50.3 million. The primary variances included in the decreases to
earnings were: (i) $5.2 million loss on higher than normal sales returns that
were a result of the lower sales due to a change in the Company's branding
strategies and market pressures in golf club, (ii) $20.6 million in inventory
writedowns and write-offs related to products discontinued as part of the 


                                       18
<PAGE>   19
new brand strategies and (iii) $10.6 million for a one time price adjustment to
customers field inventories of golf clubs to reflect market pricing pressures.
In addition, the Company did not aggressively execute its previous marketing
strategy during the period it was developing its new brand strategy.

    RESTRUCTURING AND UNUSUAL COSTS. The Company's Transition Period net loss of
$67.8 million includes $3.0 million of restructuring costs and $37.8 million of
unusual expenses. The $3.0 million of restructuring expenses are related
primarily to (i) $2.3 million in severance, (ii) $0.4 million of closing
expenses related to the former France, Italy, Spain and German operations and
(iii) $0.3 million of foreign exchange losses on closed operations. Unusual
costs totaled $37.8 million and were comprised of (i) $20.6 million of inventory
writedowns and write-offs related to the change in brand strategy, (ii) $10.6
million of price adjustments for customer owned inventory, (iii) $5.2 million in
losses related to increased returns that resulted from the change in product
positioning and pricing, (iv)$1.1 million of computer software and consulting
services related to implementation of the SAP integrated computer system and (v)
$0.3 million of other transitional costs related to the certain international
operations being closed.


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 and trade
discounts. The Company's net sales decreased to $827.7 million in fiscal 1998
from $850.2 million in fiscal 1997, a decrease of $22.5 million or 2.6%.

    Spalding's net sales decreased to $536.9 million for fiscal 1998 from $553.4
million for fiscal 1997, a decrease of $16.5 million or 3.0%. International
affiliate operations in Japan, Mexico, Spain, France, Germany, and Italy
underwent restructuring activities (see "Restructuring Costs") and accounted for
$20.9 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 $25.3
million in fiscal 1998.

    Net sales in the U.S. operations increased by $8.8 million due to an
increase in sales of U.S. golf products compared to fiscal 1997 of $27.1
million, or 9.5%. 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 9.6% to $57.9 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 $29.3 million, or 18.6%, 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 the 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 and production. The Company's gross profit decreased to $273.2 million
in fiscal 1998 from $290.0 million for fiscal 1997, a decrease of $16.8 million
or 5.8%. Gross profit as a percentage of net sales declined to 33.0% in 


                                       19
<PAGE>   20
fiscal 1998 from 34.1% in fiscal 1997. Spalding's gross profit decreased to
$217.0 million in fiscal 1998 from $229.2 million in fiscal 1997, a decrease of
$12.2 million or 5.3%. 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 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 $297.8 million for fiscal 1998 from $258.1 million
for fiscal 1997, an increase of $39.7 million or 15.4%.

    Spalding's SG&A expenses increased $32.3 million during fiscal 1998 as
compared with fiscal 1997. As a percentage of net sales, SG&A expenses increased
to 39.9% for fiscal 1998 from 35.7% for fiscal 1997. The increase in fiscal 1998
is principally due to (i) $9.6 million in higher domestic advertising,
promotion, royalties 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 (vii) $1.0 increase of costs to secure orders and distribute product
and (viii) $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.

    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 


                                       20
<PAGE>   21
Company.

    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) $16.8 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, (xv) $6.7 increase in customer service,
distribution and freight costs, 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.

    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 and trade
discounts. The Company's net sales increased to $850.2 million in fiscal 1997
from $708.5 million for fiscal 1996, an increase of $141.7 million or 20.0%.

    Spalding's net sales increased to $553.4 million for fiscal 1997 from $471.3
million for fiscal 1996, an increase of $82.1 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 


                                       21
<PAGE>   22
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.
U.S. Golf ball net sales were up 6% 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 3.0% in fiscal 1997
principally due to the success of Space Jam(TM) basketball promotions in fiscal
1996. International net sales at Spalding declined 3.6% or $5.7 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 and production. The Company's gross profit increased to $290.0 million
in fiscal 1997 from $262.3 million for fiscal 1996, an increase of $27.7 million
or 10.6%. Gross margin declined to 34.1% in fiscal 1997 from 37.0% in fiscal
1996. Spalding's gross profit increased to $230.8 million in fiscal 1997 from
$203.9 million in fiscal 1996, an increase of $26.9 million or 13.2%. 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 41.7% in fiscal 1997 from 43.3% 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, 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 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 $258.1 million for fiscal 1997 from $222.0 million
for fiscal 1996, an increase of $36.1 million or 16.3%. As a percentage of net
sales, SG&A expenses decreased to 30.4% for fiscal 1997 from 31.3% for fiscal
1996.

    Spalding's SG&A expenses increased $31.5 million during fiscal 1997 as
compared with fiscal 1996. As a percentage of net sales, SG&A expenses increased
to 35.7% for fiscal 1997 from 34.2% 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, (iv) $3.5 million in
higher distribution expenses and 


                                       22
<PAGE>   23
(v) $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 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 $27.7 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


                                       23
<PAGE>   24
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 $36.1 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 (loss) 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. Based on a
calendar year, the Company's need for cash historically has been greater in its
first and fourth quarters when cash generated from operating activities coupled
with drawdowns from bank lines have been invested in receivables and
inventories.

    In the Transition Period, the Company's operating activities used $20.3
million of net cash, compared to usage of $33.3 million in the 1997 Period. The
decrease is primarily attributable to the sale of Evenflo offset by net loss
totaling $67.8 million. Other factors affecting cash flow were changes in
working capital due to (i) a $24.5 million decline in receivables on lower sales
and strong cash collections; (ii) lower inventory resulting from close out of
merchandise costing $26.7 million at negative margins partially offset by
inventory build of the new golf products and (iii) funding of the reserves
established during fiscal 1998 for restructuring and unusual items totaling $4.1
million. The Transition Period cash flows include $3.0 million of restructuring
costs that are related primarily to severance costs and related expenses.

    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 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
totaled $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 the Transition Period were $3.5 million compared
with $6.5 million during the 1997 Period. Capital expenditures were used
primarily for golf ball plant expansion. Capital expenditures for calendar 1999
are estimated to be $12.1 


                                       24
<PAGE>   25
million and will be primarily used to upgrade the Company's computer systems and
maintenance of factory equipment. 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.

    On November 26, 1997, the Company acquired certain assets and assumed
certain liabilities of Ben Hogan Co. for a purchase price of $14.6 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 golf 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 December 31, 1998, the Company had an
available borrowing capacity of $57.5 million (net of $48.8 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 calendar 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 the Transition Period (dollars in thousands):

<TABLE>
<CAPTION>
                                                 OTHER ITEMS          
                            HISTORICAL      AFFECTING HISTORICAL       ADJUSTED
                              EBITDA               EBITDA               EBITDA
                              ------               ------               ------
<S>                         <C>             <C>                        <C>
          Consolidated       $(80,834)             40,837              (39,997)
</TABLE>

    SPALDING. Spalding's historical EBITDA for the Transition period includes
$3.0 million of restructuring and $37.8 million of unusual costs. The
restructuring costs are comprised primarily of $2.3 million of severance and
related expenses and expenses related to closing of operations in France,
Germany, Italy and Spain totaling $0.4 million and $0.3 million of currency
losses. The unusual costs are expenses related to the development and
implementation of the revised brand strategies and are comprised of the
following: (i) $20.6 million of expenses related to the write-off or write-down
of product that no longer fits the brand strategies, (ii) $5.2 million of losses
associated with product returns as a result of the change in strategy, (iii)
$1.1 million of computer software and consulting services related to the
implementation of the SAP integrated computer system, (iv) $10.6 million of
price adjustments, primarily golf club related, related to continued softness of
the club market and the repositioning of Top-Flite clubs and (v) $0.3 million of
expenses related to the closing of international operations.

    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


                                       25
<PAGE>   26
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.
As of December 31, 1998 there were 4,180,007 aggregate unissued shares and
options and 1,955,238 options were exercisable. No shares were sold during the
Transition Period. 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. 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. 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 stock 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 the Transition Period and in fiscal 1998, approximately
20.4% and 17.1%, respectively, of the total Company net sales were generated in
non-U.S. currencies. Fluctuations in the value of these currencies relative to
the U.S. dollar could have a material effect on the Company's results of
operations. The Company, in its discretion, uses forward exchange contracts to
hedge up to one year- transaction exposures from U.S. dollar purchases made by
its non-U.S. operations. As of December 31, 1998, outstanding forward exchange
contracts totaled $8.2 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


                                       26
<PAGE>   27
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 anticipates that approximately 90% of all
material systems were remediated or replaced by December 31, 1998, and that all
remaining material systems will be remediated or replaced by June 30, 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 June 30,
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 was
completed in 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 $0.6 million was expensed and $0.7 million was capitalized through December
31, 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' not
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 June 30, 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.

    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.


                                       27
<PAGE>   28
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 December 31, 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:
             Japanese yen..................      $ 1,702           117.5400          $ (19)
            Canadian dollar................        6,534             1.4921            185
                                                 -------                             -----
          Total............................      $ 8,236                             $ 166
                                                 =======                             =====
</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 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 1999, although there can be no
assurances that interest rates will not significantly change.


                                       28
<PAGE>   29
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

             INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                         PAGE
             Independent Auditors' Report...........................      30
             Statements of Consolidated Earnings (Loss) for the
             period October 1, 1998 through December 31, 1998 and for
             the fiscal years ended September 30, 1998, 1997, and 1996    31
             Consolidated Balance Sheets as of December 31, 1998 and
             September 30, 1998 .....................................     32
             Statements of Consolidated Cash Flows for the period
             October 1, 1998 through December 31, 1998 and for  the
             fiscal years ended September 30, 1998, 1997, and 1996...     33
             Statements of Consolidated Shareholders' Equity
             (Deficiency) for the period October 1, 1998 through
             December 31, 1998 and for the fiscal  years ended
             September 30, 1998, 1997, and 1996.....................      35
             Notes to Consolidated Financial Statements.............      36







                                       29
<PAGE>   30
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Spalding Holdings Corporation

We have audited the accompanying consolidated balance sheets of Spalding
Holdings Corporation and subsidiaries (the "Company") as of December 31, 1998
and September 30, 1998, and the related statements of consolidated earnings
(loss), cash flows and shareholders' equity (deficiency) for the period October
1, 1998 through December 31, 1998 and 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 December 31, 1998
and September 30, 1998, and the results of its operations and its cash flows for
the period October 1, 1998 through December 31, 1998 and for each of the three
fiscal years in the period ended September 30, 1998 in conformity with generally
accepted accounting principles.


DELOITTE & TOUCHE LLP


Hartford, Connecticut
March 19, 1999


                                       30
<PAGE>   31
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES

                   STATEMENTS OF CONSOLIDATED EARNINGS (LOSS)
          FOR THE PERIOD OCTOBER 1, 1998 THROUGH DECEMBER 31. 1998 AND
          FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
                          (DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 OCTOBER 1
                                                                  THROUGH             YEARS ENDED SEPTEMBER 30
                                                                DECEMBER 31,   ------------------------------------
                                                                   1998          1998          1997          1996
                                                                 --------      --------      --------      --------
<S>                                                             <C>            <C>           <C>           <C>    
NET SALES ..................................................     $ 56,774       827,692       850,179       708,503

  Cost of sales ............................................       77,420       554,496       560,171       446,157
                                                                 --------       -------       -------       -------

GROSS PROFIT ...............................................      (20,646)      273,196       290,008       262,346

  Selling, general and administrative expenses .............       61,354       297,800       258,089       222.044
  Royalty income, net ......................................       (2,039)      (13,509)      (14,109)      (14,339)
  Restructuring costs ......................................        2,969        21,563        12,001             0
  1994 Management Stock Ownership Plan expense .............            0             0             0        20,828
  Recapitalization costs ...................................            0             0             0         7,700
                                                                 --------       -------       -------       -------

INCOME (LOSS) FROM OPERATIONS ..............................      (82,930)      (32,658)       34,027        26,113

  Interest expense, net ....................................       13,911        78,041        71,326        37,718
  Currency (gain) loss, net ................................       (2,595)        2,936         1,236           775
  Equity in net (earnings) loss of Evenflo Company, Inc. ...        3,768        (1,476)            0             0
                                                                 --------       -------       -------       -------
EARNINGS (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY
  LOSS .....................................................      (98,014)     (112,159)      (38,535)      (12,380)

  Income taxes (benefit) ...................................      (30,193)      (33,196)       (8,500)        9,300
                                                                 --------       -------       -------       -------

EARNINGS (LOSS) BEFORE EXTRAORDINARY LOSS ..................      (67,821)      (78,963)      (30,035)      (21,680)

  Extraordinary loss on early extinguishment of debt, net of
     income tax benefit of  $0, $3,182, $0 and $3,200,
     respectively ..........................................            0        (5,909)            0        (5,987)
                                                                 --------       -------       -------       -------
NET EARNINGS (LOSS) ........................................     $(67,821)      (84,872)      (30,035)      (27,667)
                                                                 ========       =======       =======       =======
</TABLE>


          See accompanying Notes to Consolidated Financial Statements.


                                       31
<PAGE>   32
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                    DECEMBER 31, 1998 AND SEPTEMBER 30, 1998
               (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,   SEPTEMBER 30,
                                                                          1998           1998
                                                                       ---------      ---------
<S>                                                                   <C>            <C>   
                           ASSETS
CURRENT ASSETS
Cash .............................................................     $   8,036         10,695
Receivables, less allowance of $3,491 and $10,539,
  respectively ...................................................        86,196        135,524
Inventories ......................................................        94,286        118,826
Deferred income taxes ............................................        11,592         13,309
Other ............................................................         1,098          4,225
                                                                       ---------      ---------
          TOTAL CURRENT ASSETS ...................................       201,208        282,579

Property, plant and equipment, net ...............................        51,660         51,891
Intangible assets, net ...........................................       112,662        113,748
Deferred income taxes ............................................        84,046         51,899
Deferred financing costs .........................................        19,395         20,213
Investment in Evenflo Company, Inc. ..............................        10,340         14,606
Other ............................................................           194          1,028
                                                                       ---------      ---------
          TOTAL ASSETS ...........................................     $ 479,505        535,964
                                                                       =========      --=======

                 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Non-U.S. bank loans ..............................................     $   6,531          6,744
Accounts payable .................................................        85,198         85,902
Accrued expenses .................................................        55,045         60,432
Income taxes .....................................................           349            442
                                                                       ---------      ---------
          TOTAL CURRENT LIABILITIES ..............................       147,123        153,520

Long-term debt ...................................................       524,519        503,074
Pension ..........................................................         8,360          7,820
Postretirement benefits ..........................................         7,549          7,420
Other ............................................................            67          1,279
                                                                       ---------      ---------
          TOTAL LIABILITIES ......................................       687,618        673,113

COMMITMENTS AND CONTINGENCIES (NOTES K, L, M, N, AND O)

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        100,000
Common stock, $.01 par value, 150,000,000 shares authorized
  96,933,963 issued ..............................................           969            969
Paid-in capital ..................................................       452,434        452,434
Retained earnings (deficit) ......................................      (758,030)      (690,209)
Treasury stock 17,222 shares, at cost ............................           (77)           (77)
Accumulated other comprehensive earnings (loss) -- currency
  translation adjustments ........................................        (3,409)          (266)
                                                                       ---------      ---------

          TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) ................      (208,113)      (137,149)
                                                                       ---------      ---------
          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
            (DEFICIENCY) .........................................     $ 479,505        535,964
                                                                       =========      =========
</TABLE>


          See accompanying Notes to Consolidated Financial Statements.


                                       32
<PAGE>   33
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
                      STATEMENTS OF CONSOLIDATED CASH FLOWS
            FOR THE PERIOD OCTOBER 1, 1998 THROUGH DECEMBER 31, 1998
        AND FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
                          (DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                OCTOBER 1,
                                                                 THROUGH            YEARS ENDED SEPTEMBER 30
                                                                DECEMBER 31,  ------------------------------------
                                                                    1998          1998          1997          1996
                                                                --------      --------      --------      --------
<S>                                                             <C>           <C>           <C>           <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) .......................................     $(67,821)      (84,872)      (30,035)      (27,667)
Adjustments to reconcile net earnings (loss) to net cash
  provided (used) by operating activities:
  Depreciation ............................................        2,183        20,471        16,884        13,904
  Equity in (earnings) loss of Evenflo Company, Inc. ......        3,768        (1,476)            0             0
  Intangibles amortization ................................        1,086         5,776         4,885         6,423
  Bad debt expense ........................................          880        12,591         4,284         6,527
  Deferred income taxes ...................................      (30,430)      (34,759)       (3,719)        4,550
  Deferred financing cost amortization ....................          818         5,206         4,637         2,266
  1994 Management Stock Ownership Plan expense ............            0             0             0        20,828
  Write-off of fixed assets ...............................        1,591             0             0         3,300
  Extraordinary loss on early extinguishment of debt ......            0         9,091             0         9,187
  Other ...................................................          498         3,722           734           443
Changes in assets and liabilities -- net of effects of the
  sale of Evenflo
  Receivables .............................................       48,448        16,534       (33,739)      (31,320)
  Inventories .............................................       24,540       (23,882)      (28,338)       (4,747)
  Other assets ............................................          834         3,467             0             0
  Current liabilities, excluding bank loans ...............       (6,024)      (27,071)       38,592        30,818
  Other ...................................................         (719)       (1,042)       (5,658)       (2,488)
                                                                --------       -------       -------       ------- 
          NET CASH PROVIDED BY (USED IN) OPERATING
            ACTIVITIES ....................................      (20,348)      (96,244)      (31,473)       32,024
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ......................................       (3,543)      (26,649)      (35,070)      (19,546)
Payment to purchase net assets of Gerry ...................            0             0       (68,652)            0
Acquisition of non-U.S. trademarks from affiliate .........            0             0             0        (5,135)
Acquisition of Hogan ......................................            0        (1,641)            0             0
Sale of Evenflo and settlement of intercompany balances:
  Sale of 57.6% of Evenflo Common Stock ...................            0        28,800             0             0
  Sale of Evenflo Preferred Stock .........................            0        40,000             0             0
  Repayment of intercompany debt by Evenflo ...............            0       110,000             0             0
  Effect of cash on sale of Evenflo .......................            0        (6,739)            0             0
                                                                --------       -------       -------       ------- 
          NET CASH FLOWS PROVIDED BY (USED IN) INVESTING
            ACTIVITIES ....................................       (3,543)      143,771      (103,722)      (24,681)
                                                                --------      --------      --------      --------
</TABLE>


                                       33
<PAGE>   34
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
                      STATEMENTS OF CONSOLIDATED CASH FLOWS
            FOR THE PERIOD OCTOBER 1, 1998 THROUGH DECEMBER 31, 1998
        AND FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
                          (DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                OCTOBER 1,
                                                                 THROUGH            YEARS ENDED SEPTEMBER 30
                                                               DECEMBER 31,   ------------------------------------
                                                                    1998          1998          1997          1996
                                                                --------      --------      --------      --------
<S>                                                            <C>            <C>           <C>           <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit agreements ........................     $      0             0             0       600,000
Repayment under credit agreement ..........................            0      (228,800)            0             0
Net borrowings under revolving credit loan ................       21,445        94,800         1,600        25,800
Repayments under prior credit agreements ..................            0             0             0      (320,000)
Net borrowings (repayments) of other indebtedness .........         (213)       (4,430)        4,646        (2,414)
Repayment of Etonic notes .................................            0             0             0       (54,043)
Payment of  credit agreement financing costs ..............            0             0             0       (34,231)
Proceeds from issuance of preferred stock and in 1998,
  warrants ................................................            0       100,000             0       150,000
Proceeds from issuance of common stock ....................            0         1,422        59,102       221,000
Repurchase of common stock ................................            0           (77)         (283)     (524,150)
Payments of deferred financing costs ......................            0        (4,915)            0             0
1994 Management Stock Ownership Plan:
  Repurchase of shares outstanding ........................            0             0             0       (28,219)
  Collection of management notes receivable ...............            0             0             0         6,889
Additional capital contribution ...........................            0             0             0         1,219
                                                                --------        ------        ------        ------
          NET CASH FLOWS PROVIDED BY (USED IN) BY FINANCING
            ACTIVITIES ....................................       21,232       (42,000)       65,065        41,851
                                                                --------        ------        ------        ------
          Net increase (decrease) in cash .................       (2,659)        5,527       (70,130)       49,194
          Cash balance, beginning of period ...............       10,695         5,168        75,298        26,104
                                                                --------        ------        ------        ------
          Cash balance, end of period .....................     $  8,036        10,695         5,168        75,298
                                                                ========        ======         =====        ======
SUPPLEMENTAL CASH FLOW DATA:
Interest paid .............................................     $ 17,685        80,667        53,163        35,677
Income taxes paid .........................................           72           170         2,332         3,385
Non-cash exchange of preferred stock for common stock .....            0             0       164,174             0
Non-cash preferred stock dividend .........................            0             0        14,174             0
Issuance of  common stock and  note in Hogan acquisition ..            0        13,025             0             0
Non-cash acquisition of Etonic net assets .................            0             0             0        54,043
</TABLE>


          See accompanying Notes to Consolidated Financial Statements.


                                       34
<PAGE>   35
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
          STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIENCY)
            FOR THE PERIOD OCTOBER 1, 1998 THROUGH DECEMBER 31, 1998
        AND FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
                          (DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                           ACCUMULATED
                                                                                             OTHER
                                                                              RETAINED    COMPREHENSIVE COMPREHENSIVE 
                              PREFERRED    COMMON     PAID-IN     TREASURY    EARNINGS      EARNINGS      EARNINGS
                                STOCK       STOCK     CAPITAL       STOCK     (DEFICIT)      (LOSS)        (LOSS)         TOTAL
                             ----------    -------   ---------      ------   ----------      -------     ----------      -------
<S>                          <C>           <C>       <C>          <C>        <C>          <C>           <C>             <C>      
September 30, 1995 .....     $       0         2       53,898           0      (63,065)     (3,195)                      (12,360)
Net earnings (loss)
  from the year ........             0         0            0           0      (27,667)          0        (27,667)       (27,667)
Currency translation
  adjustments ..........             0         0            0           0            0         (43)           (43)           (43)
                                                                                                          -------
Comprehensive Earnings
  (loss) ...............                                                                                  (27,710)
                                                                                                          =======
Issuance of common stock             0         1      220,999           0            0           0                       221,000
Repurchase of common
  stock:
 Cash and initial
  purchase price .......             0        (2)     (52,492)          0     (471,656)          0                      (524,150)
  adjustment
  Realco promissory
  note carrying value ..             0         0            0           0       (8,388)          0                        (8,388)
  Realco common stock
  carrying value .......             0         0            0           0        1,711           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
Other ..................             0         0            0           0          316        (234)                           82
                             ---------       ---      -------         ---     --------        ----                      -------- 
September 30, 1996 .....             0       500      223,125           0     (568,749)     (3,472)                     (348,596)
Net earnings (loss) for
  the year .............             0         0            0           0      (30,035)          0        (30,035)       (30,035)
Currency translation
  adjustments ..........             0         0            0           0            0        (819)          (819)          (819)
                                                                                                          -------
Comprehensive Earnings
  (loss) ...............                                                                                  (30,854)
                                                                                                          =======
Cash proceeds from
  issuance of common
  stock ................             0       118       58,984           0            0           0                        59,102
Exchange of common
  stock for preferred ..             0       329      163,845           0            0           0                       164,174
  stock
Preferred stock dividend             0         0      (14,174)          0            0           0                       (14,174)
Repurchase of common
  stock - final
  purchase price adjustment          0         0            0           0         (283)          0                          (283)
                             ---------       ---      -------         ---     --------        ----                      -------- 
September 30, 1997 .....             0       947      431,780           0     (599,067)     (4,291)                     (170,631)
Net earnings (loss) for
  the year .............             0         0            0           0      (84,872)          0        (84,872)       (84,872)
Currency translation
  adjustments ..........             0         0            0           0            0       2,405          2,405          2,405
                                                                                                          -------
Comprehensive Earnings
  (loss) ...............                                                                                  (82,467)
                                                                                                          =======
Cash proceeds from issu-
ance 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         (77)           0           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           0       (6,270)          0                        (6,270)
                             ---------       ---      -------         ---     --------        ----                      -------- 
September 30, 1998 .....     $ 100,000       969      452,434         (77)    (690,209)       (266)                      (137,149)
                                                                                                          
Net earnings (loss) for
  the Transition  Period             0         0            0           0      (67,821)          0        (67,821)       (67,821)
Currency translation
  adjustments ..........             0         0            0           0            0      (3,143)        (3,143)        (3,143)
                             ---------       ---      -------         ---     --------        ----        -------       -------- 
Comprehensive Earnings
(loss) .................                                                                                  (70,964)
                                                                                                          ========
December 31, 1998 ......     $ 100,000       969      452,434         (77)    (758,030)     (3,409)                     (208,113)
                             =========       ===      =======         ===     ========      ======                      ======== 
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.


                                       35

<PAGE>   36
                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE PERIOD OCTOBER 1, 1998 THROUGH DECEMBER 31, 1998
        AND FOR THE FISCAL 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(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. ("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 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, 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, 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 J). 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 G).


                                       36
<PAGE>   37
    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) 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.

    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) 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
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(R) 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 G) 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 J); (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).

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.


                                       37
<PAGE>   38
    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.

    YEAR-END. The Company has elected to change its year-end from September 30
to December 31. Included herein are Consolidated Balance Sheets as of December
31, 1998 and September 30, 1998 and the Statement of Consolidated Earnings
(loss), Statements of Consolidated Cash Flows and Statements of Consolidated
Shareholders' Equity (deficiency) for the period October 1, 1998 through
December 31, 1998 (the "Transition Period") and for each of the three fiscal
years in the period ended September 30, 1998. Unaudited financial information
for the period October 1, 1997 through December 31, 1997 is as follows: Net
Sales $162,209; gross profit $50,710; income (loss) from operations ($7,461);
income tax expense (benefit) ($9,102); and net earnings (loss) $(17,544).

    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.

    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. See Note C.

    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.

    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 an Evenflo 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 O).

    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.


                                       38
<PAGE>   39
    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
$20,142, $99,013, $91,982 and $66,079 in the Transition Period, 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
shareholders' equity (deficiency) as accumulated other comprehensive income
(loss).

    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.

    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 the Company in 1999. 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 2000. 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.


                                       39
<PAGE>   40
NOTE C -- INVENTORIES

<TABLE>
<CAPTION>
                                                      DECEMBER 31,   SEPTEMBER 30,
                                                         1998           1998
                                                         ----           ----
<S>                                                   <C>             <C>     
             Finished goods ....                      $ 73,138        $ 94,142
             Work in process ...                         3,385          18,706
             Raw materials .....                        17,763           5,978
                                                      --------        --------
               Total inventories                      $ 94,286        $118,826
                                                      ========        ========
</TABLE>

     The cost of 88% of the Transition Period and 90% of September 30, 1998
inventories was computed using the last-in, first-out (LIFO) method of inventory
valuation. Use of the LIFO method increased the December 31, 1998 and September
30, 1998 ending inventories by approximately $5 million. See Note S - Subsequent
Events. In connection with branding strategy decisions, product line
rationalization and golf club market saturation, the Company wrote-down or
wrote-off $20,570 of inventory during the Transition Period.

NOTE D -- PROPERTY, PLANT AND EQUIPMENT, NET

<TABLE>
<CAPTION>
                                                      DECEMBER 31,   SEPTEMBER 30,
                                                         1998            1998
                                                         ----            ----
<S>                                                   <C>            <C>      
             Land ...............................     $   2,583      $   2,562
             Buildings and building improvements         35,950         35,905
             Machinery and equipment ............        57,799         66,209
                                                      ---------      ---------
                                                         96,332        104,676
             Accumulated depreciation ...........       (44,672)       (52,785)
                                                      ---------      ---------
               Property, plant and equipment, net     $  51,660      $  51,891
                                                      =========      =========
</TABLE>

NOTE E -- INTANGIBLE ASSETS, NET

<TABLE>
<CAPTION>
                                                      DECEMBER 31,   SEPTEMBER 30,
                                                         1998           1998
                                                         ----           ----
<S>                                                   <C>             <C>      
             United States trademarks                 $  71,703       $  71,703
             Non-U.S. trademarks ....                    13,378          13,378
             Goodwill ...............                    75,817          75,832
                                                      ---------       ---------
                                                        160,898         160,913
             Accumulated amortization                   (48,236)        (47,165)
                                                      ---------       ---------
               Intangible assets, net                 $ 112,662       $ 113,748
                                                      =========       =========
</TABLE>

NOTE F -- ACCRUED EXPENSES

<TABLE>
<CAPTION>
                                                      DECEMBER 31,   SEPTEMBER 30,
                                                        1998            1998
                                                       -------         -------
<S>                                                   <C>             <C>
             Compensation and other employee
               benefits ..........................    $ 6,251          $ 8,367
             Liability for restructuring costs ...     11,369           11,367
             Other, principally operating expenses     37,425           40,698
                                                      -------          -------
               Total accrued expenses ............    $55,045          $60,432
                                                      =======          =======
</TABLE>

    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 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:


                                       40
<PAGE>   41
<TABLE>
<CAPTION>
                                                                             OCTOBER 1,    FOR THE YEAR ENDED
                                                                            1998 THROUGH      SEPTEMBER 30,
                                                                            DECEMBER 31,    1998       1997
                                                                               1998      --------------------
                                                                               ----
<S>                                                                         <C>          <C>         <C>
                       Tampa headquarters closing costs ................     $     0     $ 5,347           0
                       International severance costs and related expense         596       3,010         923
                       U.S. severance costs and related expense ........       1,717       5,118           0
                       Write-off of accumulated foreign currency
                       translation
                         adjustment ....................................         342       2,761           0
                       Lease terminations ..............................           0         409         758
                       Termination of service contracts ................           0       1,237           0
                       Other costs .....................................         314       2,238         729
                                                                             -------      ------       -----
                         Total .........................................     $ 2,969      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 $4,061
of these restructuring costs in the Transition Period and $7,080 in fiscal 1998
and $1,322 in fiscal 1997, and charged $1,441 in the Transition Period and
$2,761 in fiscal 1998 and $0 in fiscal 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 1999.

    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 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>
                                                                                       FOR THE PERIOD ENDED
                                                                                           SEPTEMBER 30, 
                                                                                    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.

NOTE G -- 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 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. The Company's borrowing activities are as follows:


                                       41
<PAGE>   42
<TABLE>
<CAPTION>
                                                    DECEMBER 31,  SEPTEMBER 30,
                                                       1998          1998
                                                       ----          ----
<S>                                                 <C>           <C>    
Available lines of Credit:
United States ..................................     $630,874       630,874
International ..................................       14,218        15,375
                                                     --------       -------
  Total ........................................     $645,092       646,249
                                                     ========       =======
Amount Outstanding
Direct Borrowings
United States ..................................     $524,519       503,074
International ..................................        6,531         6,744
                                                     --------       -------
  Total direct borrowings ......................      531,050       509,818
Acceptances (included in accounts payable) .....       35,705        58,800
Discounted  receivables (netted against accounts
receivable) ....................................        4,879         1,802
                                                     --------       -------
  Total borrowings .............................     $571,634       570,420
                                                     ========       =======
Letters of credit not yet funded ...............     $ 13,083        11,390
                                                     ========        ======
United States direct
borrowings consist of:
Secured Credit Facility:
  Revolving credit Loans .......................      143,645       122,200
  Term Loans ...................................      171,200       171,200
Senior Subordinated Notes ......................      200,000       200,000
Other indebtedness .............................        9,674         9,674
                                                     --------       -------
  Total United States Debt .....................      524,519       503,074
Current maturities of debt .....................            0             0
                                                     --------       -------
Long-term Debt .................................     $524,519       503,074
                                                     ========       =======

Maximum borrowings .............................     $537,205       809,242
Weighted average outstanding balances ..........     $518,691       718,537
Weighted average interest rates ................        10.02%         9.03%
</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 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 Q).


                                       42
<PAGE>   43
    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 carrying value of the Term
Loans and Revolving Credit Loans approximates fair value.

    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. The Company's
obligations under the Credit Facility are secured by a pledge of the stock of
certain of its subsidiaries and a security interest in substantially all other
tangible and intangible assets, including accounts receivable, inventory,
equipment and contracts.

    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 DECEMBER 31,               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.


                                       43
<PAGE>   44
    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.
At December 31, 1998, the estimated fair value of the Senior Subordinated Notes
was favorable 50% based on dealer quotes.

    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. The
Senior Subordinated Notes include customary events of default.

    OTHER INDEBTEDNESS. The other indebtedness primarily 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 H -- 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 (benefit), are as follows:

<TABLE>
<CAPTION>
                                            OCTOBER 1,
                                             THROUGH              FOR THE YEARS ENDED 
                                           DECEMBER 31,               SEPTEMBER 30,
                                              1998          1998          1997          1996
                                              ----          ----          ----          ----
<S>                                        <C>            <C>            <C>           <C>    
Earnings (loss) before income taxes and
  extraordinary loss:
  United States .......................     $(90,539)     (101,356)      (32,957)       (9,331)
  Other nations .......................       (7,475)      (10,803)       (5,578)       (3,049)
                                            --------      --------       -------        ------ 
          Total .......................     $(98,014)     (112,159)      (38,535)      (12,380)
                                            ========      ========       =======       ======= 
Income tax provision (benefit):
  Current taxes:
     Federal taxes ....................            0           129        (7,136)        3,145
     State taxes ......................          237           489           565           400
     Other nations' taxes .............            0           945         1,790         1,205
                                            --------      --------       -------        ------ 
          Total .......................          237         1,563        (4,781)        4,750
                                            --------      --------       -------        ------ 
  Deferred taxes:
     Federal taxes ....................      (30,428)      (34,796)       (3,712)        1,471
     Other nations' taxes .............           (2)           37            (7)        3,079
                                            --------      --------       -------        ------ 
          Total .......................      (30,430)      (34,759)       (3,719)        4,550
                                            --------      --------       -------        ------ 
          Total income taxes (benefit)      $(30,193)      (33,196)       (8,500)        9,300
                                            ========       =======        ======         =====
</TABLE>


                                       44
<PAGE>   45
    The differences between the effective income tax rate and the U.S. statutory
rate are as follows:

<TABLE>
<CAPTION>
                                                    OCTOBER 1,
                                                     THROUGH           FOR THE YEARS
                                                   DECEMBER 31,     ENDED SEPTEMBER 30,
                                                       1998      1998      1997      1996
                                                       ----      ----      ----      ----
<S>                                                <C>           <C>       <C>       <C>  
U.S. statutory rate (benefit) ....................     (35)%     (35)%     (35)%     (35)%
State income taxes, net of federal benefit .......       0         0         1         6
Non-U.S. tax rate differences ....................       0         0         2         5
Non-U.S. losses (earnings) for which no taxes were
  recorded .......................................       3         4         7        15
Increase in valuation allowances on non-U.S. net
operating ........................................       0         0         0        20
  loss carryforwards
1994 Management Stock Ownership Plan expense .....       0         0         0        59
Recapitalization costs ...........................       0         0         0        18
Other ............................................       1         1         3       (13)
                                                       ---       ---       ---       ---
  Effective tax rate .............................     (31)%     (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
                                              ---------------------------  -----------------------------
                                              DECEMBER 31,  SEPTEMBER 30,  DECEMBER 31,    SEPTEMBER 30,
                                                 1998           1998           1998            1998
                                                 ----           ----           ----            ----
<S>                                          <C>            <C>            <C>             <C>   
  Acquired non-U.S. trademarks .......       $      0              0         33,051          33,892
  Intangibles amortization ...........              0              0        (20,394)        (22,833)
  Depreciation .......................              0              0          1,324          (1,348)
  Accrued liabilities ................          8,292          8,866              0               0
  Pension ............................              0              0          2,724           3,362
  Post-retirement benefits ...........              0              0          3,024           2,902
  Net operating loss carryforwards ...              0              0         89,733          57,605
  Capital loss carryforward ..........              0              0          8,179           8,179
  Other ..............................          3,300          4,443             32            (875)
                                               ------         ------        -------          ------
    Total deferred income taxes ......         11,592         13,309        117,673          80,884
  Valuation allowance on net operating
  losses and capital loss ............              0              0        (33,627)        (28,985)
                                               ------         ------        -------          ------
  Net deferred income taxes ..........       $ 11,592         13,309         84,046          51,899
                                             ========         ======         ======          ======
</TABLE>

    On December 31, 1998, the Company had net operating loss carryforwards of
$220,250 consisting of $180,275 from U.S. operations and $39,975 in non-U.S.
subsidiaries. Deferred tax benefits of $89,733 have been established on these
losses and a 1998 valuation allowance in the amount of $25,448 has been provided
on the entire state and non-U.S. portions of the deferred tax benefits. On
December 31, 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.

    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


                                       45
<PAGE>   46
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 December 31, 1998
and September 30, 1998 was $33,051 and $33,892 (after giving effect to the
settlement with the IRS), respectively.

    On December 31, 1998 undistributed earnings of non-U.S. subsidiaries
included in consolidated retained earnings amounted to $700. 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 I -- PENSION PLANS AND POST RETIREMENT BENEFITS

    The Company's United States operations have noncontributory, defined benefit
pension plans covering substantially all employees. These plans provide
employees with pension benefits that either are based on age and compensation or
are based on stated amounts for each year of service. The Company's funding
policy is to contribute annually the minimum amounts permitted by the Internal
Revenue Code. Plan assets are invested in a broadly diversified portfolio
consisting primarily of common stock and fixed income securities.

    The Company also 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.

    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.

    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.


                                       46
<PAGE>   47
The December 31, 1998 and September 30, 1998 funded status of the Company's
United States defined benefit pension plans consists of the following:

<TABLE>
<CAPTION>
                                                  PENSION BENEFITS             POSTRETIREMENT BENEFITS
                                                  ----------------             -----------------------
                                               DECEMBER 31,  SEPTEMBER 30,    DECEMBER 31,     SEPTEMBER 30
                                                  1998           1998             1998             1998
                                                  ----           ----             ----             ----
<S>                                            <C>           <C>              <C>              <C>    
CHANGES IN BENEFIT OBLIGATION
Benefit obligation at beginning of period       $(52,888)        (61,851)       $ (8,188)         (9,057)
Service Costs ...........................           (712)         (3,124)            (60)           (230)
Interest Cost ...........................           (814)         (3,963)           (127)           (599)
Plan Amendments .........................              0          (1,457)              0             (74)
Actuarial Gain/(Loss) ...................          2,870          (3,800)            453             116
Benefits Paid ...........................          1,282           5,591             125              33
Administrative Expenses Paid ............             14              67               0               0
Spin-off of Evenflo Company, Inc. .......              0          15,649               0           1,623
                                                --------          ------        --------          ------ 
Benefit obligation at end of period .....        (50,248)        (52,888)         (7,797)         (8,188)
                                                --------          ------        --------          ------ 
CHANGE IN PLAN ASSETS
Market Value of Assets at beginning
         of Period ......................         47,813          66,614               0               0
Actual Return on Assets .................          6,879             622               0               0
Employer contributions Received
         during Period ..................              9           1,249               0               0
Benefits Paid during Period .............         (1,282)         (5,591)              0               0
Spin-off of Evenflo Company, Inc. .......              0         (15,014)              0               0
Administrative Expenses Paid during
         Period .........................            (14)            (67)              0               0
                                                --------          ------        --------          ------ 
Market Value of Assets as End of
         Period .........................         53,405          47,813               0               0
                                                --------          ------        --------          ------ 
Funded Status ...........................          3,157          (5,075)         (7,797)         (8,188)
Unrecognized Net Transition (Asset)/
         Obligation .....................           (413)           (445)              0               0
Unrecognized Prior Service Cost .........           (102)            (94)            138             142
Unrecognized Net (Gain)/ Loss ...........        (11,002)         (2,246)            110             565
                                                --------          ------        --------          ------ 
(Accrued)/Prepaid Pension Costs .........       $ (8,360)         (7,860)       $ (7,549)         (7,481)
                                                ========          ======        ========          ====== 
</TABLE>


Assumptions used in accounting for United States defined benefit pension plans
as of December 31, 1998 and September 30, 1998, 1997 and 1996 were:

WEIGHTED-AVERAGE ASSUMPTIONS AT
         END OF PERIOD

<TABLE>
<CAPTION>
                                    DECEMBER 31,                           SEPTEMBER 30,
                                    ------------                ----------------------------------
                                        1998                    1998           1997           1996
                                        ----                    ----           ----           ----
<S>                                     <C>                     <C>            <C>            <C>  
Discount Rate ................          6.75%                   6.25%          7.00%          7.50%
Expected Return on Plan Assets          8.50%                   8.50%          8.50%          8.50%
Rate of Compensation Increase           4.50%                   4.50%          4.50%          4.50%
</TABLE>


<TABLE>
<CAPTION>
                                                 PENSION BENEFITS                          POSTRETIREMENT BENEFITS
                                               FOR THE PERIODS ENDED                        FOR THE PERIODS ENDED
                                       DECEMBER 31,         SEPTEMBER 30,           DECEMBER 31,       SEPTEMBER 30,
                                       ------------         -------------           ------------   ------------------------
                                           1998      1998       1997       1996         1998       1998     1997       1996
                                           ----      ----       ----       ----         ----       ----     ----       ----
<S>                                    <C>         <C>        <C>        <C>        <C>            <C>      <C>       <C>
COMPONENTS OF NET PERIODIC BENEFIT
         COSTS
Service costs ........................  $   712     3,124      2,814      2,236      $    60        230      147       136
Interest Costs .......................      814     3,963      3,942      4,005          127        599      608       595
Expected Return on Assets ............   (1,000)   (5,286)    (4,243)    (3,775)           0          0        0         0
Amortization on Unrecognized
         Transition (Asset)/Obligation      (32)     (139)      (445)      (534)           0         16        0         0
Amortization of Unrecognized Prior
         Service Costs ...............        7      (193)         0          0            4          0        0         0
Amortization of Unrecognized Net
         (Gain)/ Loss ................        7      (530)         0          0            2        (85)     (41)      (17)
                                        -------     -----      -----      -----      -------        ---      ---       ---
Net Periodic Pension Costs ...........      508       939      2,068      1,932      $   193        760      714       714
                                        =======     =====      =====      =====      =======        ===      ===       ===
</TABLE>


                                       47
<PAGE>   48
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:

<TABLE>
<CAPTION>
                                              1-Percentage-      1-Percentage
                                              Point Increase    Point Decrease
                                              --------------    --------------
<S>                                           <C>               <C> 
Effect on Total of Service and Interest
         Cost Components                           $ 20           $  (18)
Effect on Postretirement Benefit
         Obligation                                $700           $ (629)

</TABLE>

    The Company's United States operations and most non-U.S. subsidiaries have
separate defined contribution plans. The purpose of these defined contribution
plans is generally to provide additional financial security during retirement by
providing employees with an incentive to make regular savings. Company
contributions to the plans are based on employee contributions or compensation.
The non-U.S. plans are integrated with the benefits required by the laws of the
various countries. The Company's defined contribution plans' expenses totaled
$581 in the Transition Period, $600 in 1998, $2,210 in 1997 and $1,739 in 1996.

NOTE J -- 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
December 31, 1998, the amount of the Cumulative Preferred Stock dividends in
arrears as of that date was $5,101.

    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.

    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.


                                       48
<PAGE>   49
    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 
                                                                     ---------        ----- 
<S>                                                                <C>              <C>
OPTION SHARES
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
Granted October 1, 1998 through December 31, 1998 ..........                 0        $5.00
Cancelled October 1, 1998 through December 31, 1998 ........        (2,270,331)       $5.00
Exercised October 1, 1998 through December 31, 1998 ........                 0        $5.00
                                                                     ---------
Outstanding December 31, 1998 (1,955,238 exercisable) ......         3,520,870        $5.00
Aggregate unissued shares and options December 31, 1998 ....         4,180,007        $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).

    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 $(67,892)
for the Transition Period, $(85,829) for 1998, and $(30,947) for 1997 as
compared to the reported amounts of $(67,821), $(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 September 30, 1998 and 1997 (there were no new grants in the
Transition Period):

<TABLE>
<CAPTION>
                                                          SEPTEMBER 30,
                                                    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


                                       49
<PAGE>   50
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 K -- 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 December 31, 1998:

<TABLE>
<CAPTION>
                 YEAR ENDING
<S>                                                   <C>
                 1999.............................    $1,123
                 2000.............................       886
                 2001.............................       695
                 2002.............................       389
                 2003.............................       389
                 Thereafter.......................     3,404
                                                      ------
                 Total minimum lease payments.....    $6,886
                                                      ======
</TABLE>

    Rental expense under operating leases was $326 in the Transition Period,
$5,756 in 1998, $5,185 in 1997 and $3,455 in 1996.

NOTE L -- 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 December 31, 1998 and September 30, 1998, the
Company had approximately $8,236 and $3,525 of currency contracts outstanding,
with unrealized currency gains of approximately $166 in the Transition Period
and $211 in fiscal 1998. These contracts mature within twelve months.

NOTE M -- 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 the Transition
Period, and fiscal 1998, 1997 and 1996 the Company's sales to one U.S. customer
amounted to 24%, 13%, 12% and 11% of net sales. No other customer exceeded 10%
in the Transition Period ended December 31, 1998 and the fiscal years ended
September 30, 1998, 1997 and 1996.

NOTE N -- 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, 


                                       50
<PAGE>   51
the ultimate resolution of these matters will not have a material adverse effect
in relation to the Company's consolidated financial statements.

NOTE O -- 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
December 31, 1998 recorded by the Company related to these matters is
approximately $1,500.

    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. During the Transition Period, Spalding billed Evenflo for $303 in
expenses related to bills paid or expenses incurred on their behalf. These
amounts were offset against expenses totaling $305 incurred under the
Indemnification Agreement.

    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 J 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 $392 in the
Transition Period, $966 in 1998 and $1,000 in 1997 pursuant to such management
agreement with KKR.

NOTE P -- SEGMENT REPORTING

    The following schedule presents information about the Company's continuing
operations in different industry segments and geographic locations (Evenflo
fiscal 1998 operations are included for the period from October 1, 1997 to
August 20, 1998). For the Transition Period, Evenflo earnings are reported on
the equity basis of accounting.


                                       51
<PAGE>   52
<TABLE>
<CAPTION>
                                                                    
                                                                    AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30,
                                                    DECEMBER 31,    ---------------------------------------------
                                                         1998             1998             1997             1996
                                                         ----             ----             ----             ----
<S>                                                 <C>            <C>                 <C>              <C>    
INDUSTRY SEGMENT
Net Sales
  Spalding ..................................       $  56,774        $ 536,901          553,436          471,338
  Evenflo ...................................               0          290,791          296,743          237,165
                                                    ---------        ---------          -------          -------
          Total net sales ...................       $  56,774          827,692          850,179          708,503
                                                    =========          =======          =======          =======
Earnings (loss) before income taxes and
  extraordinary loss:
  Spalding ..................................       $ (80,335)         (20,278)          41,133           50,274
  Evenflo ...................................          (3,768)          (6,330)          (3,952)          10,306
  General Corporate expenses ................               0           (7,510)          (4,390)         (35,242)
  Interest expense, net .....................         (13,911)         (78,041)         (71,326)         (37,718)
                                                    ---------        ---------          -------          -------
     Earnings (loss) before income
taxes and extraordinary loss ................       $ (98,014)        (112,159)         (38,535)         (12,380)
                                                    =========         ========          =======          ======= 
Identifiable Assets
  Spalding ..................................       $ 469,165          460,787          445,011          404,800
  Evenflo ...................................          10,340                0          255,725          177,391
  General Corporate .........................               0           75,177           60,495          108,570
                                                    ---------        ---------          -------          -------
          Total assets ......................       $ 479,505          535,964          761,231          690,761
                                                    =========          =======          =======          =======
Capital Expenditures
  Spalding ..................................       $   3,543           11,788           14,143           10,169
  Evenflo ...................................               0           14,861           20,927            9,377
                                                    ---------        ---------          -------          -------
          Total capital expenditures ........       $   3,543           26,649           35,070           19,546
                                                    =========           ======           ======           ======
Depreciation and Amortization
  Spalding ..................................       $   2,183           13,091           12,439           13,418
  Evenflo ...................................               0           13,139            9,313            6,502
  General Corporate .........................               0               17               17              407
                                                    ---------        ---------          -------          -------
          Total depreciation and amortization       $   2,183           26,247           21,769           20,327
                                                    =========           ======           ======           ======
</TABLE>

    The geographic locations of the Company are summarized as follows:

<TABLE>
<CAPTION>
                                                                    AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30,
                                                                    ---------------------------------------------  
                                                    DECEMBER 31,                    
                                                         1998          1998               1997             1996
                                                         ----          ----               ----             ----
<S>                                                 <C>              <C>                <C>              <C>    
GEOGRAPHIC LOCATION
Net Sales
  United States .......................             $  45,207          686,360          687,659          543,136
  Other nations .......................                11,567          141,332          162,520          165,367
                                                    ---------        ---------        ---------        ---------
          Total net sales .............             $  56,774          827,692          850,179          708,503
                                                    =========        =========        =========        =========
Earnings (loss) before income taxes and
  extraordinary loss:
  United States .......................             $ (76,678)         (18,157)          33,608           57,777
  Other nations .......................                (7,425)          (8,451)           3,573            2,803
  General Corporate expenses ..........                     0           (7,510)          (4,390)         (35,242)
  Interest expense, net ...............               (13,911)         (78,041)         (71,326)         (37,718)
                                                    ---------        ---------        ---------        ---------
     Earnings (loss) before income
taxes and .............................             $ (98,014)        (112,159)         (38,535)         (12,380)
                                                    =========        =========        =========        =========
       extraordinary loss
Identifiable Assets
  United States .......................             $ 439,430          410,046          619,762          505,227
  Other nations .......................                40,075           50,741           80,974           76,964
  General Corporate ...................                     0           75,177           60,495          108,570
                                                    ---------        ---------        ---------        ---------
          Total assets ................             $ 479,505          535,964          761,231          690,761
                                                    =========        =========        =========        =========
</TABLE>

NOTE Q -- 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 G).

    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.


                                       52
<PAGE>   53
NOTE R - INVESTMENT IN AFFILIATE

On August 20, 1998, the Company effectively completed the separation of Spalding
and Evenflo segment, into two stand - alone companies (see note A). Evenflo's
financial statements for October 1, 1997 through August 20, 1998 have been
consolidated with those of the Company. The financial statements for the periods
subsequent to the sale include the portion of Evenflo's results attributable to
the Company's ownership on an equity accounting basis.

Summarized financial information of Evenflo for the Transition Period is set
forth below.

<TABLE>
<CAPTION>
CONDENSED INCOME STATEMENT INFORMATION              OCTOBER 1, 1998                     
                                                        THROUGH                         
                                                    DECEMBER 31, 1998                   
                                                         -----                          
<S>                                                 <C>                                 
Net Sales                                               $ 72,552                        
                                                        ========                        
Gross Profit                                               5,741                        
                                                        ========                        
Earnings (loss) before income tax and                                                   
         extraordinary items                            $(14,299)                       
                                                        ========                        
Net earnings                                            $ (8,886)                       
                                                        ========                        
Company's Proportionate share (42.4%)                   $ (3,768)                       
                                                        ========                        
</TABLE>

<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET INFORMATION                  DECEMBER 31, 1998                          
                                                     -----------------                          
<S>                                                  <C>                                        
Current Assets                                           $149,049                               
                                                         ========                               
Non-current Assets                                        126,404                               
                                                         ========                               
Current Liabilities                                        88,226                               
                                                         ========                               
Non-current Liabilities                                   122,841                               
                                                         ========                               
Total Stockholder's equity                               $ 64,386                               
                                                         ========                               
Common Stockholder's equity                              $ 24,386                               
                                                         ========                               
Company's Proportionate share (42.4%)                    $ 10,340                               
                                                         ========                               
</TABLE>


As of December 31, 1998, Evenflo recorded a non-cash reserve of $7,883 to write
down certain inventory to its net realizable value as a result of management's
decision to discontinue certain products. This change is included in cost of
sales for the three months ended December 31, 1998.

NOTE S- SUBSEQUENT EVENTS

On January 1, 1999, the Company elected to change its method of valuing the U.S.
inventories from Last-in, First-out ("LIFO") to First-in, First-out ("FIFO") to
more properly reflect the method of product consumption. LIFO reserves were
$5,120, at December 31, 1998.


                                       53
<PAGE>   54
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.     30   Director
       Gustavo A. Cisneros     53   Director
       David W. Checketts.     43   Director
</TABLE>


     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.

    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.


                                       54
<PAGE>   55
    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., Pan American Beverages Company, 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. Kevin T. Martin resigned from his
position as President and Chief Executive Officer on December 2, 1998.

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.


                                       55
<PAGE>   56
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 Transition Period 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 Transition Period and the fiscal years
ended September 30, 1998, 1997 and 1996.


<TABLE>
<CAPTION>

                                                                                       LONG-TERM  COMPENSATION
                                                      ANNUAL COMPENSATION              AWARDS           PAYOUTS
NAME AND                                                                             SECURITIES
PRINCIPAL                                                           OTHER ANNUAL      UNDERLYING         LTIP           ALL OTHER
POSITION                     YEAR           SALARY   BONUSES(1)    COMPENSATION(2)     OPTIONS #        PAYOUTS      COMPENSATION(3)
--------                     ----           ------   ----------    ---------------     ---------        -------      ---------------
<S>                    <C>                 <C>       <C>           <C>                <C>             <C>            <C>
James R. Craigie (7)   Transition Period    31,250     215,000            0                  0              0                0
President and                1998                0           0            0                  0              0                0
Chief Executive              1997                0           0            0                  0              0                0
Officer                      1996                0           0            0                  0              0                0


Scott H. Creelman      Transition Period    79,898           0            0                  0              0                0
Executive Vice               1998          276,476           0            0                  0              0            5,000
President                    1997          235,008           0            0            138,250        176,836            4,750
                             1996          197,600     314,656            0                  0              0            4,750



Bruce Riccio(5)        Transition Period    52,500      24,796            0                  0              0              263
Vice President Sales         1998           82,653      15,000            0                  0              0                0
                             1997                0           0            0                  0              0                0
                             1996                0           0            0                  0              0                0


Robert K. Adikes       Transition Period    41,252           0       11,652                  0              0            1,238
Vice President               1998          139,750           0            0                  0              0                0
Secretary and                1997          132,400           0            0             65,058        155,500            3,970
General Counsel              1996          127,300     199,220        7,170                  0         57,170            3,820


William K. Breaden     Transition Period    37,500           0            0                  0              0            1,125
Corporate Controller         1998          135,799           0            0                  0              0            4,082
and Assistant                1997          128,173           0            0                  0              0            3,825
Secretary                    1996          116,365     117,250            0                  0              0            3,865


G. Wade Lewis(6)       Transition.Period         0           0            0                  0              0                0
Chief Financial              1998                0           0            0                  0              0                0
Officer                      1997                0           0            0                  0              0                0
                             1996                0           0            0                  0              0                0


Kevin Martin (2)       Transition Period   130,209           0       98,982                  0              0                0
President and Chief          1998          525,000           0            0                  0              0            6,250
Executive Officer            1997           70,417           0            0          1,312,500              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 and a guaranteed bonus for year one.

(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 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.


                                       56
<PAGE>   57
(6) Mr. Lewis' compensation is still being negotiated.

(7) James Craigie began his employment with the Company on December 7, 1998 and
    received a hiring bonus. Final compensation arrangements with Mr. Craigie
    are still being negotiated.


STOCK OPTION GRANTS IN TRANSITION PERIOD AND IN 1998.

None.

AGGREGATE OPTIONS EXERCISED IN TRANSITION PERIOD AND IN 1998 AND DECEMBER 31,
1998 OPTION VALUES.

No stock options were exercised in the Transition Period and 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
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.


                                       57
<PAGE>   58
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 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>
James R. Craigie                   2018             $  69,054
Scott H. Creelman                  2008                52,785
Bruce Riccio                       2011                20,439
Robert K. Adikes                   2005                17,786
William K. Breaden                 2024                45,316
</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 5.2% 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%.




                                       58
<PAGE>   59


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.

    The compensation under the terms of the Severance Contracts is expected to
be paid subsequent to December 31, 1998 will be funded in the amounts of $0.9
million and $0.8 million, in 1999 and 2000, respectively. The compensation under
the terms of the Tampa Severance Contracts is expected to be paid subsequent to
December 31, 1998 and will be funded in the amounts of $1.1 million, $0.9
million and $0.3 million in 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.


                                       59
<PAGE>   60
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The following table, as of March 20, 1999, 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)...            986,116             1.0
</TABLE>

------------

*   Beneficial ownership does not exceed 1.0% of the respective class of
    securities.

(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


                                       60
<PAGE>   61
    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 J 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.

    See Notes A and O 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 $343 thousand
during the Transition Period and $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 


                                       61
<PAGE>   62
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 & 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 O 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.


                                       62
<PAGE>   63
    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.


                                     PART IV

ITEM 14:  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)      1.  FINANCIAL STATEMENTS

                                                                         PAGE
             Independent Auditors' Report...........................      30
             Statements of Consolidated Earnings (Loss) for the
             period October 1, 1998 through December 31, 1998 and for
             the fiscal years ended September 30, 1998,  1997, and    
             1996...................................................      31
             Consolidated Balance Sheets as of December 31, 1998 and
             September 30, 1998.....................................      32
             Statements of Consolidated Cash Flows for the period
             October 1, 1998 through December 31, 1998 and for the   
             fiscal years ended
               September 30, 1998, 1997, and 1996...................      33
             Statements of Consolidated Shareholders' Equity
             (Deficiency) for the period October 1, 1998 through 
             December 31,1998 and for the fiscal years ended 
             September 30, 1998, 1997, and 1996.....................      35
             Notes to Consolidated Financial Statements.............      36



2.       FINANCIAL STATEMENT SCHEDULE

                          SCHEDULE                                       PAGE
                          --------                                      -----
           Independent Auditors' Report on  Schedule..................    66
           II -- Valuation and Qualifying Accounts                        67

    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)

       EXHIBIT                        DESCRIPTION
       -------                        -----------

         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).


                                       63
<PAGE>   64


         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.

         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).


                                       64
<PAGE>   65

         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.


(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.

    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
January 19, 1999 to report that the Company had changed its year end from
September 30 to December 31.


                                       65
<PAGE>   66
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Spalding Holdings Corporation

We have audited the consolidated financial statements of Spalding Holdings
Corporation and subsidiaries (the "Company") as of December 31, 1998 and
September 30, 1998 and for the period October 1, 1998 through December 31, 1998
and for each of the three fiscal years in the period ended September 30, 1998,
and have issued our report thereon dated March 19, 1999 (included elsewhere in
this Transition Report on Form 10-K). Our audits also included the financial
statement schedule listed in Item 14 of this Transition 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

Hartford, Connecticut
March 19, 1999


                                       66
<PAGE>   67
                                   SCHEDULE II

                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
            FOR THE PERIOD OCTOBER 1, 1998 THROUGH DECEMBER 31, 1998
        AND FOR THE FISCAL 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 PERIOD         AND EXPENSES         ACCOUNTS(A)      DEDUCTIONS(B)      END OF PERIOD
  -----------                    -------------------         ------------         -----------      -------------      -------------
<S>                              <C>                         <C>                  <C>              <C>                <C>
December 31, 1998 Allowance
 for doubtful accounts ....            $10,539                   1,761                 --             (8,809)              3,491
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.


                                       67
<PAGE>   68
                                                                      EXHIBIT 12

                 SPALDING HOLDINGS CORPORATION AND SUBSIDIARIES
                       RATIO OF EARNINGS TO FIXED CHARGES
                     FOR THE PERIOD OCTOBER 1, 1998 THROUGH
                DECEMBER 31, 1998 AND FOR THE FISCAL YEARS ENDED
                  SEPTEMBER 30, 1998, 1997, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                            DECEMBER 31,
                                                1998        1998       1997       1996       1995      1994
                                             ---------   ---------    -------   -------     ------    -----
<S>                                         <C>          <C>          <C>       <C>         <C>       <C>
 Earnings:
 Earnings (loss) before income taxes
 and extraordinary item.............         $( 98,014)    (112,159)  (38,535)   (12,380)   19,681    29,961
 Interest expense...................         $  13,911       78,041    71,326     37,718    38,108    17,073
 Rent expense.......................         $     108        1,918     2,912      1,994     1,692     1,591
                                             ---------   ----------   -------    -------    ------     -----
                                             $( 83,995)     (32,200)   35,703     27,332    59,481    48,625
                                             =========   ==========   =======    =======    ======    ======
 Fixed charges:
 Interest expense...................         $  13,911       78,041    71,326     37,718    38,108    17,073
 Rent expense.......................         $     108        1,918     2,912      1,994     1,692     1,591
                                             ----------  ----------   -------    -------    ------     -----
                                             $  14,019       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..........................         $  98,014      112,159    38,535     12,380
                                             =========   ==========   =======    =======
</TABLE>


                                       68
<PAGE>   69
                                   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
---------                                        -----                ----
<S>                                      <C>                    <C>

    /s/ EDWIN L. ARTZT                   Chairman of Board of   March 24, 1999
---------------------------------        Directors
Edwin L. Artzt                           

    /s/ JAMES R. CRAIGIE                 President and Chief    March 24, 1999
---------------------------------        Executive Officer
James R. Craigie                         

    /s/ SCOTT H. CREELMAN                Executive Vice         March 24, 1999
---------------------------------        President
Scott H. Creelman


    /s/ G. WADE LEWIS                    Chief Financial        March 24, 1999
---------------------------------        Officer
G. Wade Lewis                            (Principal Financial
                                         Officer)


    /s/ WILLIAM K. BREADEN               Corporate Controller   March 24, 1999
---------------------------------        (Principal Accounting
William K. Breaden                       Officer)
                                         

    /s/ ROBERT K. ADIKES                 Vice President,        March 24, 1999
---------------------------------        Secretary
Robert K. Adikes                         and General Counsel
                         

    /s/ HENRY R. KRAVIS                  Director               March 24, 1999
---------------------------------
Henry R. Kravis

    /s/ GEORGE R. ROBERTS                Director               March 24, 1999
---------------------------------
George R. Roberts

    /s/ MICHAEL T. TOKARZ                Director               March 24, 1999
---------------------------------
Michael T. Tokarz

    /s/ MARC S. LIPSCHULTZ               Director               March 24, 1999
---------------------------------
Marc S. Lipschultz

    /s/ GUSTAVO A. CISNEROS              Director               March 24, 1999
---------------------------------
Gustavo A. Cisneros

    /s/ DAVID W. CHECKETTS               Director               March 24, 1999
---------------------------------
David W. Checketts
</TABLE>


                                       69