PROSPECTUS Filed Pursuant to Rule 424(b)4
Registration No. 333-49281
5,750,000 Shares
RAYOVAC(R)
Common Stock
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All of the 5,750,000 shares of Common Stock of Rayovac Corporation
("Rayovac" or the "Company") offered hereby are being sold by certain
shareholders (the "Selling Shareholders") of the Company. See "Principal and
Selling Shareholders." The Company is not selling any shares of Common Stock in
this Offering and will not receive any of the proceeds from the sale of shares
of Common Stock offered hereby.
Of the 5,750,000 shares of Common Stock offered hereby, 4,600,000 shares
are being offered for sale initially in the United States and Canada by the
U.S. Underwriters and 1,150,000 shares are being offered for sale initially in
a concurrent offering outside the United States and Canada by the International
Managers. The initial public offering price and the underwriting discount per
share will be identical for both Offerings. See "Underwriting."
The Common Stock is listed on the New York Stock Exchange under the symbol
"ROV." On May 28, 1998, the last sale price of the Common Stock as reported on
the New York Stock Exchange was $21-1/4 per share. See "Price Range of Common
Stock and Dividend Policy."
See "Risk Factors" beginning on page 12 for a discussion of certain
factors that should be considered by prospective purchasers of the Common Stock
offered hereby.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================
Proceeds to
Price to Underwriting Selling
Public Discount (1) Shareholders (2)
---------------- -------------- -----------------
<S> <C> <C> <C>
Per Share ................. $21.00 $1.00 $20.00
- --------------------------------------------------------------------------------
Total(3) .................. $120,750,000 $5,750,000 $115,000,000
================================================================================
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) The Company has agreed to pay certain expenses of the Offerings estimated
at $800,000.
(3) The Selling Shareholders have granted the U.S. Underwriters and the
International Managers options to purchase up to an additional 690,000
shares and 172,500 shares of Common Stock, respectively, in each case
exercisable within 30 days after the date hereof, solely to cover
over-allotments, if any. If such options are exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to the Selling
Shareholders will be $138,862,500, $6,612,500 and $132,250,000,
respectively. See "Underwriting."
----------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about June 3, 1998.
----------------
Merrill Lynch & Co.
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
Securities Corporation
Salomon Smith Barney
----------------
The date of this Prospectus is May 28, 1998.
<PAGE>
[Inside Front Cover]
[RAYOVAC Logo](R)
[Picture of Five Rayovac [Picture of Michael Jordan
Maximum Alkaline Battery holding a Rayovac Maximum
Packs on Gray Background] Alkaline Battery Pack]
[Picture of Six Rayovac [Picture of Rayovac [Picture of Arnold Palmer
Rechargeable Battery Battery Store Display Advertisement for Rayovac
Products on Gray Background] on Gray Background] Hearing Aid Batteries]
----------------
RAYOVAC[RegTM], RENEWAL[RegTM], LOUD'N CLEAR[RegTM], POWER STATION[RegTM],
PROLINE[RegTM], WORKHORSE[RegTM], ROUGHNECK[RegTM], SMART PACK[RegTM], BEST
LABS[RegTM], ULTRACELL[RegTM], XCELL[RegTM] and AIRPOWER[RegTM] are registered
trademarks of the Company. MAXIMUM[TM], LIFEX[TM] and SMART[TM] STRIP are
trademarks of the Company. All other trademarks or tradenames referred to in
this Prospectus are the property of their respective owners.
----------------
Certain persons participating in the Offerings may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Such transactions may include stabilizing and the purchase of Common Stock to
cover syndicate short positions. For a description of these activities, see
"Underwriting."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by
reference to the more detailed information and financial statements, including
the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus assumes that the Underwriters'
over-allotment options have not been exercised. Upon consummation of the
Recapitalization (as defined herein) on September 12, 1996, the Company changed
its fiscal year end from June 30 to September 30. For clarity of presentation
and comparison, references to fiscal 1995 and fiscal 1996 are to the Company's
fiscal years ended June 30, 1995 and June 30, 1996, respectively, references to
the "Transition Period ended September 30, 1996" and the "Transition Period"
are to the period from July 1, 1996 to September 30, 1996 and references to
fiscal 1997 are to the Company's fiscal year ended September 30, 1997.
The Company
The Company is the leading value brand and the third largest domestic
manufacturer of general batteries, and is the leading worldwide manufacturer of
hearing aid batteries. The Company is also the leading domestic manufacturer of
rechargeable household batteries and certain other specialty batteries,
including lantern batteries. In addition, the Company is a leading marketer of
heavy duty batteries and battery-powered lighting products and also markets
rechargeable batteries for cellular phones and video camcorders. The Rayovac
brand name was first used as a trademark for batteries in 1921 and is a well
recognized name in the battery industry. The Company attributes the longevity
and strength of its brand name to its high-quality products and to the success
of its marketing and merchandising initiatives.
The Company has established its position as the leading value brand in the
U.S. general alkaline battery market by focusing on the mass merchandiser
channel. The Company achieved this position by (i) offering batteries with
quality and performance substantially equivalent to batteries offered by its
principal competitors at a lower price, (ii) emphasizing innovative in-store
merchandising programs, and (iii) offering retailers attractive margins. The
Company has established its position as the leader in various specialty battery
niche markets through (i) continuous technological advances, (ii) creative
distribution and marketing, and (iii) strong relationships with industry
professionals and manufacturers. The Company sells and distributes its products
in several channels, including mass merchandisers and warehouse clubs; food,
drug and convenience stores; electronics specialty stores and department
stores; hardware and automotive centers; specialty retailers; hearing aid
professionals; and industrial and government/OEM. The Company markets all of
its branded products under the Rayovac[RegTM] name and selected products under
sub-brand names such as MAXIMUM[TM], Renewal[RegTM], Loud'n Clear[RegTM],
ProLine[RegTM], Lifex[TM], Power Station[RegTM], Workhorse[RegTM],
Roughneck[RegTM], Best Labs[RegTM], Ultracell[RegTM], XCell[RegTM] and
AIRPOWER[RegTM].
Business Strategy
In September 1996, the Company and the shareholders of the Company
completed the Recapitalization pursuant to which, among other things,
affiliates of Thomas H. Lee Company acquired for cash approximately 80% of the
outstanding Common Stock of Rayovac. David A. Jones was hired as Chief
Executive Officer of the Company to implement a new business strategy focused
on (i) reinvigorating the Rayovac brand name by raising consumer brand
awareness through, among other things, focused marketing and advertising, (ii)
growing Rayovac's market share by expanding distribution into new channels,
increasing sales to under-penetrated channels and customers, launching new
products, and selectively pursuing acquisitions and alliances, (iii) reducing
costs by rationalizing manufacturing and distribution, better utilizing
existing plant capacity, outsourcing products where appropriate, reducing
working capital, and downsizing corporate overhead, and (iv) improving employee
productivity by increasing training and education, upgrading information
systems and implementing a pay-for-performance culture.
To implement its new strategy, the Company has undergone a significant
transformation since the Recapitalization.
Strengthened Senior Management Team. In addition to Mr. Jones, experienced
senior managers have been recruited to fill key positions: Kent J. Hussey, who
joined the Company as Executive Vice President of Finance and Administration
and Chief Financial Officer following the Recapitalization and was recently
promoted to the position of President and Chief Operating Officer; Merrell M.
Tomlin, Senior Vice President of Sales; Stephen P.
3
<PAGE>
Shanesy, Executive Vice President and General Manager of General Batteries and
Lights; and Randall J. Steward, Senior Vice President of Finance and Chief
Financial Officer. The new senior managers have over 75 years of collective
experience in the consumer products industry. In addition, the current
management team includes several key members who served the Company prior to
the Recapitalization, providing continuity and retaining significant battery
industry expertise. After giving effect to the Offerings, the nine executive
officers of the Company will beneficially own 10.2% of the outstanding Common
Stock (without giving effect to the Underwriters' over-allotment options) on a
fully diluted basis.
Restructured Operations. In March 1998, the Company announced
restructuring plans for its domestic and international operations designed to
maximize production and capacity efficiencies, reduce fixed costs, upgrade
existing technology and equipment, and improve customer service. Major elements
of the restructuring include (i) consolidating the Company's packaging
operations, (ii) outsourcing manufacturing of heavy duty batteries, and (iii)
closing certain of the Company's existing manufacturing, packaging and
distribution facilities. The Company recorded a charge of $7.5 million in the
second quarter of the current fiscal year in connection with the restructuring
program and expects to record an additional $2.0 million of costs in subsequent
periods. The Company currently anticipates annual aggregate cost savings of the
restructuring program, after full implementation (currently expected in early
1999), to be approximately $5.0 million. The restructuring is in addition to
prior actions taken by the Company following the Recapitalization to
rationalize manufacturing and other costs, which the Company estimates have an
annual aggregate cost savings of approximately $8.6 million. Such savings may
not be indicative of actual savings in future periods because of the likelihood
of additional overhead or other costs in future periods in support of business
growth objectives. The Company believes that its current manufacturing capacity
remains sufficient to meet its production requirements for the foreseeable
future.
Reorganized Sales, Marketing and Administration by Distribution
Channel. Rayovac has realigned its marketing department, sales organization,
supply chain and support functions to better serve the diverse customer needs
within major distribution channels. Customer-focused teams are now organized to
serve the following distribution channels: mass merchandisers and warehouse
clubs; food, drug and convenience stores; electronics specialty stores and
department stores; hardware and automotive centers; specialty retailers;
hearing aid professionals; and industrial and government/OEM. The Company
believes that sales to under-penetrated channels should increase as the
dedicated teams focus on implementing channel-specific marketing strategies,
sales promotions and customer service initiatives.
Launched New Sales and Marketing Programs. Rayovac has developed and
continues to implement broad new marketing initiatives designed to reinvigorate
the Rayovac brand name. Major steps completed to date include (i) selecting
Young & Rubicam as the Company's new advertising agency and developing its
first major national advertising campaign for its full line of general
batteries, (ii) launching a new and improved alkaline product line under the
MAXIMUM[TM] sub-brand, (iii) redesigning all product graphics and packaging to
convey a high-quality image and emphasize the Rayovac brand name, (iv)
extending the Company's existing contract with Michael Jordan to include his
representation for all Rayovac products, and (v) restructuring the Company's
sales representative network along distribution channels.
Reorganized Information Systems. The Company has completed an initial
overhaul of its information systems by (i) hiring an experienced Chief
Information Officer, (ii) outsourcing mainframe computer operations, (iii)
completing an enterprise software system analysis, and (iv) retaining outside
consultants to upgrade its data processing and telecommunications
infrastructure. The Company has purchased from SAP and begun implementing an
enterprise-wide, integrated information system to upgrade its business
operations, the majority of which is expected to be substantially completed by
mid-1999. When fully implemented, this system, along with efforts by the
Company's internal project team, is expected to reduce cycle times, lower
manufacturing and administrative costs, improve both asset and employee
productivity and substantially address the Year 2000 issue.
Growth Strategy
Rayovac believes it has significant growth opportunities in its businesses
and has developed strategies to increase sales, profits and market share. Key
elements of the Company's growth strategy are as follows:
4
<PAGE>
Reinvigorate the Rayovac Brand Name. The Company is committed to
reinvigorating the Rayovac brand name after many years of underdevelopment. The
brand, originally introduced in 1921, has wide recognition in all markets where
the Company competes, but has lower awareness than the more highly advertised
Duracell and Energizer brands. The Company has initiated an integrated
advertising campaign using significantly higher levels of TV and print media.
In 1997, the Company launched a reformulated alkaline battery, Rayovac
MAXIMUM[TM], supported by new graphics, new packaging, a new advertising
campaign, and aggressive introductory retail promotions. The Company's
marketing and advertising initiatives are designed to increase awareness of the
Rayovac brand and to increase retail sales by heightening customers'
perceptions of the quality, performance and value of Rayovac products.
Leverage Value Brand Position. Rayovac believes it has a unique position
in the general battery market as the value brand in an industry in which the
leading three brands (Duracell, Energizer and Rayovac) account for
approximately 90% of sales. The Company's strategy is to provide products of
quality and performance equal to its major competitors in the general battery
market at a lower price to appeal to a large segment of the population desiring
a value brand. To demonstrate its value positioning, Rayovac offers comparable
battery packages at a lower price or, in some cases, more batteries for the
same price.
Expand Retail Distribution. Historically, the Company had focused its
sales and marketing efforts on the mass merchandiser channel which accounted
for 44% of industry sales growth in the domestic alkaline battery market on a
unit basis over the past five years and has achieved a 19% unit share. The
Company believes its value brand positioned products and innovative
merchandising programs also make it an attractive supplier to other retail
channels, which represent a market of $1.7 billion or 69% of the general
battery market. The Company has reorganized its marketing, sales, and sales
representative organizations by channel in order to grow market share by (i)
gaining new customers, (ii) penetrating existing customers with a larger
assortment of products, (iii) offering a selection of products with high
sell-through, and (iv) utilizing more aggressive and channel specific
promotional programs. The Company believes that these initiatives have resulted
in significant success over the past fiscal year in gaining access to new
accounts and expanding product offerings to existing accounts and the Company
intends to continue to pursue these strategies.
Further Capitalize on Worldwide Leadership in Hearing Aid Batteries. The
Company seeks to increase its 52% worldwide market share in the hearing aid
battery segment, as it has done consistently for the past 10 years, by
leveraging its leading technology and dedicated sales and marketing
organizations. Rayovac is the only hearing aid battery manufacturer to
advertise its products and plans to continue to utilize Arnold Palmer as its
spokesperson in its print media campaign. Rayovac also markets large
multi-packs of hearing aid batteries which have rapidly gained consumer favor.
In November 1997, the Company acquired Brisco GmbH in Germany and Brisco B.V.
in Holland (collectively, "Brisco"). Brisco packages and distributes hearing
aid batteries in customized packaging to hearing health care professionals in
Germany and Holland as well as other European countries. In March 1998, the
Company acquired the battery distribution portion of Best Labs in St.
Petersburg, Florida, a distributor of hearing aid batteries in customized
packaging and a manufacturer of hearing instruments. The Company believes that
these acquisitions will enable the Company to further penetrate markets for
hearing aid batteries.
Develop New Markets. The Company intends to expand its business into new
markets for batteries and related products both domestically and
internationally by developing new products internally or through selective
acquisitions. These acquisitions may focus on expansion into new technologies,
product lines or geographic markets and may be of significant size. In March
1998, the Company acquired the retail portion of the business of Direct Power
Plus of New York (the business acquired being referred to herein as "DPP"), a
full line marketer of rechargeable batteries and accessories for cellular
phones and video camcorders. In conjunction with the acquisition of DPP, the
Company has announced the launch of a new line of rechargeable batteries for
cordless telephones. The Company may also pursue joint ventures or other
strategic marketing opportunities where appropriate to expand its markets or
product offerings. See "Risk Factors--Risks Associated with Future
Acquisitions."
Introduce New Niche Products. The Company has developed leading positions
in several important niche markets, including those for lantern batteries and
lithium coin cells. The Company intends to continue selectively pursuing
opportunities to exploit under-served niche markets and to enter high-growth
specialty battery markets. In 1997, the Company entered the market for photo
and keyless entry batteries and recently introduced a line of
5
<PAGE>
products to serve the medical instrument and health services markets. In the
lighting products segment, where market share is driven by new product
introductions, the Company is introducing a number of attractively designed new
products over the next twelve months and intends to bring new products to the
market in the future on a six-month cycle.
Reposition the Renewal Rechargeable Alkaline Battery. The Company's
Renewal rechargeable battery is the only rechargeable alkaline battery in the
U.S. market, commanding a 68% market share of the rechargeable household
battery market through mass merchandisers, food and drug stores for the 52
weeks ended March 14, 1998. Since the Recapitalization, the Company has lowered
the price of Renewal rechargers by 33% to encourage consumers to purchase the
system and promoted Renewal's money-saving benefits. Renewal batteries present
a value proposition to consumers because Renewal batteries can be recharged
over 25 times, providing 10 times the energy of disposable alkaline batteries
at only twice the retail price. In addition, alkaline rechargeables are
superior to nickel cadmium rechargeables (the primary competing technology)
because they provide more energy between charges, are sold fully charged,
retain their charge longer and are environmentally safer. The Company has
focused sales efforts for Renewal on distribution channels which the Company
believes to be more suited for this product, such as electronics specialty
stores, and has recently begun shipments to Radio Shack.
Recent Developments
Restructuring of Domestic and International Operations. In March 1998, the
Company announced restructuring plans for its domestic and international
operations designed to maximize production and capacity efficiencies, reduce
fixed costs, upgrade existing technology and equipment and improve customer
service. Major elements of the restructuring include (i) consolidating the
Company's packaging operations at its Madison, Wisconsin plant, (ii)
outsourcing the manufacture of heavy duty batteries, (iii) closing the
Company's Appleton, Wisconsin plant and relocating the affected manufacturing
operations for lithium batteries to the Company's Portage, Wisconsin facility,
and (iv) closing the Company's Newton Aycliffe, United Kingdom packaging and
distribution facility. The Company recorded a charge of $7.5 million in the
second quarter of the current fiscal year in connection with the restructuring
program and expects to record an additional $2.0 million of costs in subsequent
periods. The Company anticipates annual aggregate cost savings of the
restructuring program, after full implementation (currently expected in early
1999), to be approximately $5.0 million.
Sale of Idled Facility. In March 1998, the Company sold its Kinston, North
Carolina facility and recorded a gain of $2.4 million in the second fiscal
quarter.
Acquisitions. In November 1997, the Company acquired Brisco which packages
and distributes hearing aid batteries in customized packaging to hearing health
care professionals in Germany, Holland and several other European countries.
Brisco had sales of $4.5 million in calendar year 1997. In March 1998, the
Company acquired DPP, a full line marketer of rechargeable batteries and
accessories for cellular phones and video camcorders, with retail sales of $14
million in calendar year 1997. Also in March 1998, the Company acquired the
hearing aid battery distribution portion of Best Labs, a St. Petersburg,
Florida distributor of hearing aid batteries and a manufacturer of hearing
instruments. The battery distribution portion of Best Labs had net sales of
$2.6 million in 1997.
Amended Credit Agreement. On December 30, 1997, the Company entered into
an Amended and Restated Credit Agreement (the "Amended Credit Agreement") which
includes a five-year reducing revolver facility of $90 million (the "Revolver
Facility"), and a five-year amortizing acquisition facility of $70 million (the
"Acquisition Facility"). The Revolver Facility is reduced by $10.0, $15.0 and
$15.0 million, respectively, on December 31, 1999, 2000 and 2001, and expires
on December 31, 2002. The Acquisition Facility provides up to $70.0 million in
loans for qualifying acquisitions during a one-year commitment period expiring
December 31, 1998. Debt obtained under the Acquisition Facility is subject to
quarterly amortization commencing March 31, 1999 through December 31, 2002. As
of March 28, 1998, $56.1 million was outstanding on the Revolver Facility, with
approximately $5.8 million utilized for outstanding letters of credit, and $4.2
million was outstanding under the Acquisition Facility. See "Description of
Certain Indebtedness."
Extension of Technology Agreement; New Manufacturing Line. In March 1998,
the Company announced the extension of its existing alkaline battery technology
agreement with Matsushita Battery Industrial Co., Ltd. of Japan ("Matsushita"),
pursuant to which the Company is entitled to license Matsushita's highly
advanced designs, technology and manufacturing equipment, including all
developments and innovations thereto, through 2003.
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Thereafter, the Company is entitled to license such technology existing as of
such date through 2023. The Company has also agreed to purchase from Matsushita
a new high speed alkaline battery manufacturing production line for its
Fennimore, Wisconsin plant and to source certain finished products, battery
parts and material from Matsushita to continue to supplement the Company's
existing domestic production capacity. This new high speed manufacturing line
is anticipated to increase capacity for production of AA size batteries by up
to 50%.
Further Strengthening of Senior Management Team. In April 1998, the
Company named Kent J. Hussey President and Chief Operating Officer of the
Company. Previously, Mr. Hussey served as Executive Vice President of Finance
and Administration and Chief Financial Officer. The Company also at such time
named Randall J. Steward, formerly Senior Vice President of Corporate
Development, as Senior Vice President of Finance and Chief Financial Officer
and Stephen P. Shanesy, formerly Senior Vice President of Marketing and the
General Manager of General Batteries and Lights of the Company, as Executive
Vice President and General Manager of General Batteries and Lights of the
Company. In addition, David A. Jones, Chairman and Chief Executive Officer of
the Company, and Kent J. Hussey signed three-year employment contracts
effective until May 1, 2001.
The Offerings
The offering of 4,600,000 shares of the Company's Common Stock in the
United States and Canada (the "U.S. Offering") and the offering of 1,150,000
shares of the Common Stock outside the United States and Canada (the
"International Offering") are collectively referred to herein as the
"Offerings."
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<S> <C>
Common Stock offered by the Selling
Shareholders .......................... 5,750,000 shares
Common Stock to be outstanding after the
Offerings(1) .......................... 27,441,097 shares
Use of proceeds ........................ The Company will not receive any proceeds from the sale
of Common Stock by the Selling Shareholders.
New York Stock Exchange symbol ......... "ROV"
</TABLE>
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(1) Excludes 5,259,268 shares of Common Stock reserved for sale or issuance
under the Company's employee benefit plans, of which options to purchase
2,497,321 shares have been granted and 2,761,947 shares remain available
for issuance or sale.
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<PAGE>
Industry Market Data
External market information in this Prospectus is provided by the Company,
based on data licensed from A.C. Nielsen. The two primary sources of market
data are Nielsen Scanner Data (obtained from checkout scanners in selected food
stores, drug stores and mass merchandisers) and Nielsen Consumer Panel Data
(obtained from a group of representative households selected by A.C. Nielsen
equipped with in-home scanners). Except as set forth below, specific market
share references are based on Nielsen Scanner Data. Specific hearing aid
battery market share references are obtained from Nielsen Scanner Data, as
supplemented by National Family Opinion Purchase Diary Data. Information
regarding the size (in terms of both dollars and unit sales) of the total U.S.
retail battery market is based upon Nielsen Scanner Data, as supplemented by
Nielsen Consumer Panel Data. The Company has derived worldwide hearing aid
market share data and specialty battery market share data based on data from
the above noted sources, together with information relating to the Company's
sales of hearing aid batteries in Europe, the Company's estimates of
manufacturers' production levels of hearing aid products or other devices which
utilize specialty batteries and market price data.
Other industry data used throughout this Prospectus has been obtained from
a variety of industry surveys (including surveys forming a part of primary
research studies conducted by the Company) and publications but has not been
independently verified by the Company. The Company believes that information
contained in such surveys and publications has been obtained from reliable
sources, but there can be no assurance as to the accuracy and completeness of
such information.
Unless otherwise indicated, all market share estimates are Company
estimates based on the foregoing, are for the U.S. market and reflect units
sold.
Risk Factors
Purchasers of Common Stock in the Offerings should carefully consider the
risk factors set forth under the caption "Risk Factors" and the other
information included in this Prospectus prior to making an investment decision.
See "Risk Factors."
Forward-Looking Statements
This Prospectus contains certain forward-looking statements relating to,
among other things, future results of operations, growth plans, sales, capital
requirements and general industry and business conditions applicable to the
Company. These forward-looking statements are based largely on the Company's
current expectations and are subject to a number of risks and uncertainties.
Actual results could differ materially from those implied by these
forward-looking statements. Important factors to consider in evaluating such
forward-looking statements include changes in external competitive market
factors, changes in the Company's business strategy or an inability to execute
its strategy due to unanticipated changes in the Company's industry or the
economy in general and various competitive factors that may prevent the Company
from competing successfully in existing or new markets. In light of these risks
and uncertainties, many of which are described in further detail under the
caption "Risk Factors," there can be no assurance that the forward-looking
statements contained in this Prospectus will in fact be realized.
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Established in 1906, the Company is a Wisconsin corporation with its
principal executive offices at 601 Rayovac Drive, Madison, Wisconsin,
53711-2497. The Company's telephone number is (608) 275-3340.
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SUMMARY FINANCIAL DATA
The following summary historical financial data for the two fiscal years
ended June 30, 1996, the Transition Period ended September 30, 1996 and the
fiscal year ended September 30, 1997 is derived from the audited consolidated
financial statements of the Company, together with the notes thereto, included
elsewhere in this Prospectus. The summary historical financial data for the six
months ended March 29, 1997 and as of and for the six months ended March 28,
1998, included elsewhere in this Prospectus, and for the twelve months ended
September 30, 1996, not included herein, is derived from the unaudited
condensed consolidated financial statements of the Company and, in the opinion
of management, includes all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of financial position and results
of operations as of the date and for the period indicated. The summary
historical financial data of the Company for the fiscal years ended June 30,
1993 and June 30, 1994 is derived from audited consolidated financial
statements of the Company which are not included herein. The following summary
financial data should be read in conjunction with the Company's consolidated
financial statements and the related notes thereto and the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein.
This financial data, as well as all other financial data set forth herein,
gives effect to the reclassification by the Company of certain promotional
expenses, previously reported as a reduction of net sales, to selling expense,
which policy was adopted as of September 30, 1997. The amounts which have been
reclassified are $19.0 million, $17.5 million, $24.2 million, and $24.0 million
for the fiscal years ended June 30, 1993, 1994, 1995, and 1996, respectively,
$6.9 million for the Transition Period ended September 30, 1996, $24.1 million
for the twelve months ended September 30, 1996, and $15.4 million for the six
months ended March 29, 1997. The Company believes that this reclassification is
consistent with the method used by other consumer products companies.
<TABLE>
<CAPTION>
Transition Twelve Fiscal Six Months
Period Months Year Ended
Fiscal Year Ended June 30, Ended Ended Ended --------------------
------------------------------------ September September September March March
1993 1994 1995 1996 30, 1996 30, 1996 30, 1997 29, 1997 28, 1998
------- ------ ------ ------- -------- -------- --------- -------- --------
(In millions)
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Statement of Operations
Data:
Net sales .................... $372.4 $403.7 $415.2 $423.4 $101.9 $417.9 $432.6 $225.6 $246.1
Gross Profit ................. 171.0 168.8 178.1 184.0 42.6 180.0 198.0 99.4 118.2
Income (loss) from
operations (1)(2)(3)(4)..... 31.2 10.9 31.5 30.3 (23.7) (1.4) 34.5 14.7 20.1
Interest expense ............. 6.0 7.7 8.6 8.4 4.4 10.5 24.5 13.4 8.3
Net income (loss)(5) ......... 15.0 4.4 16.4 14.3 (20.9) (10.2) 6.2 0.7 5.6
Other Financial Data:
Depreciation ................. $ 7.4 $ 10.3 $ 11.0 $ 11.9 $ 3.3 $ 12.1 $ 11.3 $ 5.9 $ 5.8
Capital expenditures(6) ...... 30.3 12.5 16.9 6.6 1.2 8.4 10.9 2.6 6.7
Cash flows from operating
activities ................. 15.8 (18.7) 35.5 17.8 (1.1) 26.0 35.7 35.2 4.4
Cash flows from investing
activities ................. (30.1) (12.4) (16.8) (6.3) 0.0 (7.3) (10.8) (2.8) (10.9)
Cash flows from financing
activities ................. 13.7 30.8 (18.3) (12.0) 3.2 (16.8) (28.0) (27.5) 9.1
Income from operations
before non-recurring
charges (7) ................ 31.2 21.9 31.5 30.3 4.7 27.0 37.5 19.4 24.1
EBITDA(8) .................... 39.3 21.2 41.3 42.2 (20.4) 10.7 45.8 20.7 26.1
</TABLE>
<TABLE>
<CAPTION>
March 28, 1998
(in millions)
--------------
<S> <C>
Balance Sheet Data:
Working capital .................................................................................................. $ 55.3
Total assets ..................................................................................................... 241.4
Total debt ....................................................................................................... 129.5
Shareholders' equity ............................................................................................. 12.2
</TABLE>
(footnotes on following page)
9
<PAGE>
- ----------------
(1) Income from operations in fiscal 1994 was impacted by increased selling
expenses due to higher advertising and promotion expenses related to the
Renewal Introduction (as defined herein). In addition, income from
operations was impacted by non-recurring costs of $9.5 million in
connection with the Fennimore Expansion, including $8.4 million of
increased cost of goods sold and $1.1 million of increased general and
administrative expenses, and other special charges of approximately $1.5
million related to a plan to reduce the Company's cost structure and to
improve productivity through an approximate 2.5% reduction in headcount on
a worldwide basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Introduction."
(2) During the Transition Period, the Company recorded charges of $12.3 million
directly related to the Recapitalization and other special charges of $16.1
million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(3) In the fiscal year ended September 30, 1997, the Company recorded other
special charges of $5.9 million offset by a special credit of $2.9 million
which was related to the curtailment of the Company's defined benefit
pension plan covering all domestic non-union employees. The special charges
related to organizational restructuring in the United States, the
discontinuation of certain manufacturing operations at the Company's Newton
Aycliffe, United Kingdom facility and the discontinuation of operations at
the Company's facility in Kinston, North Carolina.
(4) In the six months ended March 28, 1998, the Company recorded net charges of
$4.0 million including (i) $1.7 million associated with consolidating
domestic battery packaging operations and outsourcing the manufacture of
heavy duty batteries, (ii) $2.0 million associated with closing the
Company's Appleton, Wisconsin manufacturing plant and consolidating it into
its Portage, Wisconsin manufacturing plant, (iii) $3.9 million associated
with closing the Company's Newton Aycliffe, United Kingdom facility,
phasing out direct distribution in the United Kingdom and closing one of
the Company's German sales offices, (iv) a $2.4 million gain on the sale of
the Company's previously closed Kingston, North Carolina facility, and (v)
income of $1.2 million in connection with the buyout of deferred
compensation agreements with certain former employees.
(5) The Recapitalization of the Company included repayment of certain
outstanding indebtedness, including prepayment fees and penalties. Such
prepayment fees and penalties of $2.4 million, net of income tax benefit of
$0.8 million, has been recorded as an extraordinary item in the Combined
Consolidated Statement of Operations for the Transition Period and the
twelve months ended September 30, 1996. In the six months ended March 28,
1998, the Company recorded extraordinary expense of $2.0 million net of
income taxes for the premium on the repurchase or redemption of the Notes
from the proceeds of the IPO.
(6) From fiscal 1993 through fiscal 1995 the Company invested an aggregate of
$32.7 million in connection with the Fennimore Expansion, including $19.7
million incurred in fiscal 1993. In addition, income from operations was
impacted by non-recurring costs of $9.5 million in connection with the
Fennimore Expansion, including $8.4 million of increased cost of goods sold
and $1.1 million of increased general and administrative expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Introduction."
(7) Income (loss) from operations includes expenses incurred during the
Fennimore Expansion (as defined herein) and the Recapitalization and other
special charges in fiscal 1994, the Transition Period ended September 30,
1996, the fiscal year ended September 30, 1997 and the six months ended
March 29, 1997 and March 28, 1998. Income from operations before these
non-recurring charges was as follows:
<TABLE>
<CAPTION>
Transition Twelve Fiscal Six Months
Fiscal Year Ended June 30, Period Months Year Ended
---------------------------------- Ended Ended Ended -------------------
September September September March March
1993 1994 1995 1996 30, 1996 30, 1996 30, 1997 29, 1997 28, 1998
----- ----- ----- ----- ---------- ---------- --------- -------- --------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from operations ..... $31.2 $10.9 $31.5 $30.3 $(23.7) $(1.4) $34.5 $14.7 $20.1
Fennimore Expansion ............... -- 9.5 -- -- -- -- -- -- --
Recapitalization and other
special charges .................. -- 1.5 -- -- 28.4 28.4 3.0 4.7 4.0
----- ----- ----- ----- ------ ----- ------ ----- -----
Income from operations before
non-recurring charges ............ $31.2 $21.9 $31.5 $30.3 $ 4.7 $27.0 $37.5 $19.4 $24.1
===== ===== ===== ===== ====== ===== ====== ===== =====
</TABLE>
(8) EBITDA represents income from operations plus depreciation and amortization
(excluding amortization of debt issuance costs) and reflects an adjustment
of income from operations to eliminate the establishment and subsequent
reversal of two reserves ($0.7 million established in fiscal 1993 and
reversed in fiscal 1995, and $0.5 million established in fiscal 1992 and
reversed in fiscal 1995). The Company believes that EBITDA and related
measures are commonly used by certain investors and analysts to analyze and
compare, and provide useful information regarding, the Company's ability to
service its indebtedness. However, the following factors should be
considered in evaluating such measures: EBITDA and related measures (i)
should not be considered in isolation, (ii) are not measures of performance
calculated in accordance with generally accepted accounting principles
("GAAP"), (iii) should not be construed as alternatives or substitutes for
income from operations, net income or cash flows from operating activities
in analyzing the Company's operating performance, financial position or
cash flows (in each case, as determined in accordance with GAAP) and (iv)
should not be used as indicators of the Company's operating performance or
measures of its liquidity. Additionally, because all companies do not
calculate EBITDA and related measures in a uniform fashion, the
calculations presented in this Prospectus may not be comparable to other
similarly titled measures of other companies.
(footnote continued on following page)
10
<PAGE>
EBITDA includes expenses incurred during the Fennimore Expansion (as
defined herein) and the Recapitalization and other special charges in
fiscal 1994, the Transition Period ended September 30, 1996, the fiscal
year ended September 30, 1997 and the six months ended March 29, 1997 and
March 28, 1998. EBITDA before these non-recurring charges was as follows:
<TABLE>
<CAPTION>
Transition Twelve Fiscal Six Months
Fiscal Year Ended June 30, Period Months Year Ended
------------------------------------ Ended Ended Ended -------------------
September September September March March
1993 1994 1995 1996 30, 1996 30, 1996 30, 1997 29, 1997 28, 1998
----- ------ ----- ----- ------ ------ -------- -------- --------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA ....................... $39.3 $21.2 $41.3 $42.2 $(20.4) $10.7 $45.8 $20.7 $26.1
Fennimore Expansion .......... -- 9.5 -- -- -- -- -- -- --
Recapitalization and other
special charges ............. -- 1.5 -- -- 28.4 28.4 3.0 4.7 4.0
----- ----- ----- ----- ------ ----- ----- ----- -----
EBITDA before non-
recurring charges ........... $39.3 $32.2 $41.3 $42.2 $ 8.0 $39.1 $48.8 $25.4 $30.1
===== ===== ===== ===== ====== ===== ===== ===== =====
</TABLE>
11
<PAGE>
RISK FACTORS
Prospective investors should carefully consider all of the information set
forth in this Prospectus, including the risk factors set forth below.
Competition
The industries in which the Company participates are very competitive.
Competition is based upon brand name recognition, perceived quality, price,
performance, product packaging and product innovation, as well as creative
marketing, promotion and distribution strategies. In the U.S. battery industry,
the Company competes primarily with two well established companies, Duracell
International Inc. ("Duracell"), a subsidiary of The Gillette Company, and
Eveready Battery Company, Inc., a subsidiary of Ralston Purina Company and
producer of Energizer brand batteries ("Energizer"), each of which has
substantially greater financial and other resources and greater overall market
share than the Company. In addition, the Company believes that Duracell and
Energizer may have lower costs of production and higher profit margins in
certain key product lines than the Company. The Company competes with these
competitors for the limited shelf space that retailers allot to battery
products and for the promotional efforts of such retailers.
In February 1998, Duracell announced the introduction of a new line of
alkaline batteries under the name Duracell Ultra in the AA and AAA size
category which is being marketed as providing increased performance in certain
high-tech devices, including cellular phones, digital cameras and palm-sized
computers. Duracell has indicated that this new line of alkaline battery will
begin shipping to retailers in May 1998. In May 1998 Energizer announced the
introduction of Energizer Advanced Formula alkaline batteries, available in all
cell sizes, which Energizer claims will provide superior performance in high
drain devices and improved performance in all other device categories. The
Energizer Advanced Formula alkaline batteries are expected to be available in
the summer of 1998. There can be no assurance that there will not be a
reduction in purchases of the Company's products by consumers or certain key
customers of the Company as a result of competition from these new alkaline
battery lines, which could have a material adverse effect on the Company's
business, financial condition or results of operations.
Although foreign battery manufacturers historically have not been
successful in penetrating the U.S. retail market to any significant extent,
they have, from time to time, attempted to establish a significant presence in
the U.S. battery market. There can be no assurance that these attempts will not
be successful in the future or that the Company will be able to compete
effectively with current or prospective participants in the U.S. battery
industry. In addition, the battery-powered lighting device industry is highly
competitive and includes a greater number of competitors than the U.S. battery
industry, some of which have greater financial and other resources than the
Company. See "Business--Competition."
Dependence on Key Customers
Wal-Mart Stores, Inc. ("Wal-Mart"), the Company's largest retailer
customer, accounted for 20% of the Company's net sales in fiscal 1997. In
addition, the Company's three largest retailer customers, including Wal-Mart,
together accounted for 29% of the Company's net sales in fiscal 1997. The
Company does not have long-term agreements with any of its major customers, and
sales are generally made to them through the use of individual purchase orders,
consistent with industry practice. There can be no assurance that there will
not be a significant reduction in purchases by any of the Company's three
largest retailer customers, which could have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Business--Sales and Distribution."
Risks Associated with Future Acquisitions
An element of the Company's growth strategy is to pursue increased market
penetration through strategic acquisitions, which could be of significant size
and involve either domestic or international parties. The diversion of
management attention required by the acquisition and integration of a separate
organization, including integration of information systems, as well as other
difficulties which may be encountered in the transition and integration
process, including but not limited to the integration of Brisco, DPP and Best
Labs, could have a material adverse effect on the revenue and operating results
of the Company. There can be no assurance that the Company will identify
suitable acquisition candidates, that acquisitions will be consummated on
acceptable terms or that the Company will be able to successfully integrate the
operations of any acquisition. In addition, the Company may incur
12
<PAGE>
additional indebtedness in connection with acquisitions, which might not be
available on terms as favorable to the Company as current terms and which would
increase the leveraged position of the Company. See "--Substantial Leverage."
Further, acquisitions utilizing equity may be dilutive to shareholders.
Environmental Matters
The Company's facilities are subject to a broad range of federal, state,
local and foreign laws and regulations relating to the environment, including
those governing discharges to the air and water and land, the handling and
disposal of solid and hazardous substances and wastes and the remediation of
contamination associated with releases of hazardous substances at Company
facilities and at off-site disposal locations. Risk of environmental liability
is inherent in the Company's business, however, and there can be no assurance
that material environmental costs will not arise in the future. In particular,
the Company might incur capital and other costs to comply with increasingly
stringent environmental laws and enforcement policies. Based on currently
available information, the Company believes that it is substantially in
compliance with applicable environmental regulations at its facilities,
although no assurance can be provided with respect to such compliance in the
future.
The Company has been identified as a potentially responsible party ("PRP")
under the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") or similar state laws with respect to the past disposal of waste at
the Refuse Hideaway Site in Middleton, Wisconsin. Such laws may impose
liability on certain statutory classes of persons that are considered jointly
and severally liable for the costs of investigation and remediation of
contaminated properties, regardless of fault or the legality of the original
disposal. These persons include the present or former owner or operator of a
facility and companies that generated, disposed or arranged for the disposal of
hazardous substances found at the facility. The Company presently estimates
that its liability with respect to the Middleton, Wisconsin site should not
exceed $100,000. The Company may be named as a PRP at additional sites in the
future, and the costs associated with such additional or existing sites may be
material. In addition, certain of the Company's battery manufacturing
facilities have been in operation for decades and, over such time, the Company
and other prior operators of such facilities have generated and disposed of
wastes such as manganese, cadmium and mercury which are or may be considered
hazardous. The Company has not conducted invasive testing to identify all
potential risks, and given the age of the Company's facilities and the nature
of the Company's operations, there can be no assurance that material
liabilities will not arise in the future in connection with its current or
former facilities. The discovery of previously unknown contamination of
property underlying or in the vicinity of the Company's manufacturing
facilities could require the Company to incur material unforeseen expenses.
Occurrences of any such events may have a material adverse effect on the
Company's financial condition.
In addition, the Company has applied to the Tennessee Department of
Environment and Conservation ("TDEC") for participation in TDEC's Voluntary
Cleanup Oversight and Assistance Program with respect to the Company's former
manganese processing facility in Covington, Tennessee. Pursuant to this
program, TDEC will conduct a site investigation to determine the extent of the
cleanup required at the Covington facility, however, there can be no assurance
that participation in this program will preclude this site from being added to
the National Priorities List as a Superfund site. Groundwater monitoring at the
site conducted pursuant to the post-closure maintenance of solid waste lagoons
on site, and recent groundwater testing beneath former process areas on site,
indicate that there are elevated levels of certain inorganic contaminants,
particularly (but not exclusively) manganese, in the groundwater underneath the
site. The Company cannot predict the outcome of TDEC's investigation of the
site. See "Business--Environmental Matters."
The Company has been and is subject to several proceedings related to its
disposal of industrial and hazardous material at off-site disposal locations
under CERCLA or analogous state laws that hold persons who "arranged for" the
disposal or treatment of such substances strictly liable for the costs incurred
in responding to the release or threatened release of hazardous substances from
such sites. Except for the Velsicol Chemical and Morton International
proceedings described below (as to which there is insufficient information to
make a judgment as to their impact on the Company at this time), the Company
does not believe that any of its pending CERCLA or analogous state matters,
either individually or in the aggregate, will have a material impact on the
Company's operations, financial condition or liquidity.
The Company has been named as a defendant in two lawsuits in connection
with a Superfund site located in Bergen County, New Jersey (Velsicol Chemical
Corporation, et al. v. A.E. Staley Manufacturing Company, et al., and Morton
International, Inc. v. A.E. Staley Manufacturing Company, et al., United States
District Court for the
13
<PAGE>
District of New Jersey, filed July 29, 1996). These lawsuits involve
contamination at a former mercury processing facility and the watershed of a
nearby creek (the "Bergen County Site"). The Company is one of approximately 50
defendants named in these lawsuits. The cost to remediate the Bergen County
Site has not been determined and the Company cannot predict the outcome of
these proceedings. See "Business--Environmental Matters."
Substantial Leverage
As of March 28, 1998, the Company had total indebtedness of $129.5 million
and total shareholders' equity of $12.2 million. Subject to the restrictions
contained in the Company's Amended Credit Agreement and the indenture (the
"Indenture") relating to the Company's 10-1/4% Series B Senior Subordinated
Notes due 2006 (the "Notes"), the Company may incur additional indebtedness
from time to time to finance acquisitions or capital expenditures or for other
corporate purposes. A significant portion of cash flow from operations must be
dedicated to the payment of principal of and interest on the Company's
indebtedness, thereby reducing the amount of funds available for working
capital, capital expenditures and other purposes. The Company's ability to make
scheduled payments on its outstanding indebtedness will depend on its future
operating performance which, in turn, will be affected by prevailing economic
conditions and financial, competitive, regulatory and similar factors. The
Amended Credit Agreement and the Indenture impose operational and financial
restrictions on the Company. See "Description of Certain Indebtedness."
Although the Company believes that, based on current levels of operations, its
cash flow from operations, together with external sources of liquidity, will be
adequate to make required payments on its debt, whether at or prior to
maturity, finance anticipated capital expenditures and fund working capital
requirements, there can be no assurance in this regard.
Battery Technology
The battery industry generally involves continually evolving technology
with individual advances typically resulting in modest increases in product
life. There can be no assurance that, as existing battery products and
technologies improve and new, more advanced products and technologies are
introduced, the Company's products will be able to compete effectively in any
of its targeted market segments. The development and successful introduction of
new and enhanced products and other competing technologies that may outperform
the Company's batteries and technological developments by competitors or
consumer perceptions as to improved product offerings of competitors may have a
material adverse effect on the Company's business, financial condition or
results of operations, particularly in the context of the substantially greater
resources of the Company's two principal competitors in the general battery
market, Duracell and Energizer. See "-- Competition." Similarly, in those
market segments where the Company's battery products currently have
technological advantages there can be no assurance that the Company's products
will maintain such advantages.
The general battery industry historically has sustained unit sales growth
even as battery life has increased with innovation (largely due to expansion in
the use of and the number of applications for batteries); however, there can be
no assurance that continued enhancements of battery performance (including
rechargeable battery performance) will not have an adverse effect on unit
sales.
Risks of Foreign Sales; Exchange Rate Fluctuations
The Company's foreign sales and certain expenses are transacted in foreign
currencies. In fiscal 1997, approximately 19% of the Company's revenues and 18%
of the Company's expenses were denominated in currencies other than U.S.
dollars. International operations and exports and imports to and from foreign
markets are subject to a number of special risks including, but not limited to,
risks with respect to currency exchange rates, economic and political
destabilization, restrictive actions by foreign governments (e.g. duties and
quotas and restrictions on transfer of funds), changes in United States and
foreign laws regarding trade and investment and difficulty in obtaining
distribution and support. Significant increases in the value of the U.S. dollar
relative to certain foreign currencies could have a material adverse effect on
the Company's results of operations. The Company generally hedges a portion of
its foreign currency exposure and will, in the future, be vulnerable to the
effects of currency exchange rate fluctuations. For a description of the
Company's operations in different geographic areas, including the Company's
sales, revenue and profit or loss and identifiable assets attributable to each
of the Company's geographic areas, see Note 12 of Notes to Consolidated
Financial Statements.
14
<PAGE>
Raw Materials
The Company's principal raw material for the production of its battery
products is zinc and the Company expects to spend approximately $7.5 million
for zinc in fiscal 1998. Prices for zinc are subject to market forces beyond
the control of the Company. The Company regularly engages in forward purchases
and hedging transactions to effectively manage raw material costs and inventory
relative to anticipated production requirements for the next six to twelve
months. However, the Company's future profitability may be materially adversely
affected by increased zinc prices to the extent it is unable to pass on higher
raw material costs to its customers. See Note 2.o. of Notes to Consolidated
Financial Statements and Note 1 to the Unaudited Condensed Consolidated
Financial Statements for the six months ended March 29, 1997 and March 28,
1998, included elsewhere herein.
Limited Intellectual Property Protection
The Company relies upon a combination of patent, trademark and trade
secret laws, together with licenses, confidentiality agreements and other
contractual covenants, to establish and protect its technology and other
intellectual property rights. There can be no assurance that the steps taken by
the Company or its licensors will be adequate to prevent misappropriation of
their technology or other intellectual property or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's or its licensors technology. Moreover,
although the Company believes that its current products do not infringe upon
the valid proprietary rights of others, there can be no assurance that third
parties will not assert infringement claims against the Company or its
licensors and that, in the event of an unfavorable ruling on any such claim, a
license or similar agreement will be available to the Company on reasonable
terms. Moreover, the laws of certain foreign countries do not protect
intellectual property rights to the same extent as do the laws of the United
States.
Certain technology underlying the Company's rechargeable line of alkaline
batteries is the subject of a non-exclusive license from a third party and
could be made available to the Company's competitors. The licensing of that
technology to a competitor could have an adverse effect on the Company's
business, financial condition or results of operations. The Company does not
believe, however, that this effect would be material to the Company because
revenues from sales of the Company's rechargeable alkaline batteries and
rechargers account for less than 10% of the Company's total revenues.
The Company does not have any right to the trademark "Rayovac" in Brazil,
where the mark is owned by an independent third-party battery manufacturer. In
addition, ROV Limited, a third party unaffiliated with the Company, has an
exclusive, perpetual, royalty-free license for the use on general batteries
(but not hearing aid or other specialty batteries) and lighting devices of the
Rayovac trademark in a number of countries, including in Latin America. See
"Business--Patents, Licenses and Trademarks."
Seasonality
Sales of the Company's products are seasonal, with the highest sales
occurring in the fiscal quarter ending on or about December 31, during the
holiday season. During the past four fiscal years, the Company's sales in the
quarter ending on or about December 31 have represented an average of 33% of
annual net sales. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality."
Control by Existing Shareholders
Upon completion of the Offerings, Thomas H. Lee Equity Fund III, L.P.
("THL Fund") and certain other affiliates of Thomas H. Lee Company ("THL Co.";
the THL Fund and such other affiliates being referred to herein as "THL Group")
will beneficially own 43.9% of the Company's outstanding Common Stock (41.5% if
the Underwriters' over-allotment options are exercised in full). Consequently,
THL Group will exercise significant control over the Company and in electing
the board of directors of the Company (the "Board of Directors") and approving
any action requiring shareholder approval, including the adoption of amendments
to the Company's Amended and Restated Articles of Incorporation and the
approval of mergers or sales of all or substantially all of the Company's
assets. See "Principal and Selling Shareholders." The Company's ability to take
certain of these actions is limited by certain terms of its outstanding
indebtedness. See "Description of Certain Indebtedness."
15
<PAGE>
Shares Eligible for Future Sale; Potential for Adverse Effect on Stock Price;
Registration Rights
Sales of a substantial number of shares of Common Stock in the public
market or the perception that such sales could occur could materially adversely
affect prevailing market prices for the Common Stock. Upon completion of the
Offerings, the Company will have outstanding 27,441,097 shares of Common Stock,
excluding 2,497,321 shares of Common Stock which have been granted under the
Company's stock incentive plans. Of these shares, the 7,827,507 shares of
Common Stock previously sold in the Company's initial public offering of Common
Stock in November 1997 (the "IPO") and the 5,750,000 shares of Common Stock to
be sold in the Offerings will be freely tradable without restriction under the
Securities Act of 1933, as amended (the "Securities Act"), except for any such
shares which may be acquired by an "affiliate" of the Company. In connection
with the Offerings, the Selling Shareholders, certain existing shareholders,
the Company, its executive officers and directors and the THL Group (holding an
aggregate of approximately 14.3 million shares of Common Stock upon
consummation of the Offerings) have agreed, subject to certain exceptions, not
to dispose of any shares of Common Stock for a period of 90 days from the date
of the Offerings (the "Lockup Period") without the consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") on behalf of the
Underwriters. Upon expiration of the Lockup Period, substantially all of such
shares will be eligible for sale in the public market subject to compliance
with the volume limitations and other restrictions of Rule 144 under the
Securities Act.
Following the consummation of the Offerings, the THL Group will hold
approximately 12.1 million shares of Common Stock (without giving effect to the
Underwriters' over-allotment options) and will be entitled to certain
registration rights with respect to the registration of such shares under the
Securities Act. Under the terms of a shareholders agreement between the Company
and certain shareholders, dated as of September 12, 1996, as amended as of
August 1, 1997 (the "Shareholders Agreement"), at any time when the THL Group
and their permitted transferees own in the aggregate at least 10% of the shares
acquired in the Recapitalization, the THL Group has the right to require the
Company to file a registration statement under the Securities Act in order to
register the sale of all or any part of its shares of Common Stock. These
Offerings are made pursuant to the provisions of the Shareholders Agreement.
Following these Offerings, the THL Group is entitled to demand that the Company
register their shares of Common Stock on three occasions at the Company's
expense; provided, however, that if the THL Group owns at least 10%, but not
more than 25%, of the shares acquired in the Recapitalization, then the Company
shall be obligated to effect only one such registration. Additionally, the THL
Group and shareholders party to the Shareholders Agreement have the right,
subject to certain limitations, to include their shares in certain offerings
initiated by the Company whether for its own account or for other shareholders.
The Company may in certain circumstances defer such registrations, and the
underwriters with respect to such sale have the right, subject to certain
limitations, to limit the number of shares included in such registrations. In
the event that the Company proposes to register the sale of any of its
securities under the Securities Act, the Company is required to promptly give
such shareholders written notice no later than 10 days before the effective
date of the registration statement, at which point such shareholders will have
five days to make a written request of the Company to include their shares of
Common Stock in such registration, subject to the underwriters' right to limit
such shares and certain other limitations. In general, the Company is required
to bear the expense of all such registrations except for transfer taxes. The
sale of such shares could have an adverse effect on the Company's ability to
raise equity capital in the public markets. The shares held by the THL Group
are subject to the Lockup Period referred to in the preceding paragraph. See
"Shares Eligible for Future Sale."
Anti-Takeover and Other Provisions of Wisconsin Law
Certain provisions of the Company's Amended and Restated Articles of
Incorporation, the Amended and Restated By-laws (the "By-laws") and of
Wisconsin corporation law may have the effect of discouraging, delaying or
preventing a change in control of the Company or unsolicited acquisition
proposals. In certain circumstances under provisions of Wisconsin law,
shareholders may be liable for liabilities of the Company with respect to
unpaid wages.
16
<PAGE>
THE RECAPITALIZATION
Effective as of September 12, 1996, the Company, all of the shareholders
of the Company, the THL Fund and other affiliates of THL Co. completed a
recapitalization (the "Recapitalization") pursuant to which, among other
things: (i) the Company obtained senior financing under a Credit Agreement
dated as of September 12, 1996 by and among the Company, Bank of America
National Trust and Savings Association and DLJ Capital Funding, Inc. (the
"Credit Agreement") in an aggregate amount of $170.0 million, of which $131.0
million was borrowed at the closing of the Recapitalization, including $26.0
million under the Revolving Credit Facility; (ii) the Company obtained $100.0
million in financing through the issuance of bridge notes (the "Bridge Notes");
(iii) the Company redeemed a portion of the shares of Common Stock held by
Thomas F. Pyle, Jr., the former President and Chief Executive Officer of the
Company; (iv) the THL Group purchased for cash shares of Common Stock owned by
shareholders of the Company (a group consisting of current and former directors
and management of the Company and the Thomas Pyle and Judith Pyle Charitable
Remainder Trust) which resulted in a change of control of the Company; and (v)
the Company repaid certain of its outstanding indebtedness, including
prepayment fees and penalties. The Bridge Notes were subsequently repaid with
the proceeds of the sale of 10-1/4% Senior Subordinated Notes Due 2006 (the
"Senior Subordinated Notes"), which were later exchanged for a like principal
amount of the Notes.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of shares of
Common Stock by the Selling Shareholders.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "ROV." The Common Stock commenced public trading on November 21,
1997. On April 29, 1998, the outstanding shares of Common Stock were held of
record by 285 shareholders based upon data provided by the transfer agent for
the Common Stock. The following table sets forth the reported high and low
prices per share of the Common Stock as reported on the New York Stock Exchange
Composite Transaction Tape for the fiscal periods indicated:
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
Fiscal 1998
- ------------------------------------------------------------------
Quarter ended December 27, 1997 (from November 21, 1997) ......... $17-3/4 $15-1/2
Quarter ended March 28, 1998 ..................................... $24-1/2 $16-3/4
Current quarter (to May 28, 1998) ................................ $24-1/2 $21-1/4
</TABLE>
On May 28, 1998, the closing price of the Common Stock on the New York
Stock Exchange Composite Transaction Tape was $21-1/4 per share.
The Company has not declared or paid and does not anticipate paying cash
dividends in the foreseeable future, but intends to retain any future earnings
for reinvestment in its business. In addition, the Amended Credit Agreement and
the Notes restrict the Company's ability to pay dividends to its shareholders.
Any future determination to pay cash dividends will be at the discretion of the
Board of Directors and will be dependent upon the Company's financial
condition, results of operations, capital requirements, contractual
restrictions and such other factors as the Board of Directors deems relevant.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 28, 1998. This table should be read in conjunction with the Company's
consolidated financial statements and the related notes thereto and the
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
As of March 28, 1998
----------------------
(Dollars in millions)
<S> <C>
Debt:
Revolver Facility ........................................... $ 56.1
Acquisition Facility ........................................ 4.2
Bankers' acceptances(1) ..................................... 1.5
Notes ....................................................... 65.0
Capitalized leases and foreign currency borrowings .......... 2.7
-------
Total debt ................................................. 129.5
-------
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares issued and outstanding .......................... --
Common stock, $.01 par value, 150,000,000 shares authorized;
27,432,238 shares outstanding ............................. 0.6
Additional paid in capital .................................. 103.2
Foreign currency translation ................................ 2.3
Notes receivable from officers/shareholders ................. (1.4)
Retained earnings ........................................... 36.9
Less stock held in trust .................................... (1.0)
Less treasury stock, at cost, 29,440,269 shares ............. (128.4)
-------
Total shareholders' equity ................................. 12.2
-------
Total capitalization ...................................... $141.7
=======
</TABLE>
- ----------------
(1) In connection with the acquisition of DPP, the Company assumed $1.5 million
of bankers' acceptances.
18
<PAGE>
SELECTED FINANCIAL DATA
The following selected historical financial data as of and for the two
fiscal years ended June 30, 1996, the Transition Period ended September 30,
1996 and the fiscal year ended September 30, 1997 is derived from the audited
consolidated financial statements of the Company, together with the notes
thereto, included elsewhere in this Prospectus. The selected historical
financial data as of and for the six months ended March 29, 1997 and March 28,
1998, included elsewhere in this Prospectus, and as of and for the twelve
months ended September 30, 1996, not included herein, is derived from the
unaudited condensed consolidated financial statements of the Company and, in
the opinion of management, includes all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of financial position and
results of operations as of the date and for the period indicated. The selected
historical financial data of the Company as of and for the two fiscal years
ended June 30, 1993 and June 30, 1994 is derived from audited consolidated
financial statements of the Company which are not included herein. The
following selected financial data should be read in conjunction with the
Company's consolidated financial statements and the related notes thereto and
the information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
This financial data, as well as all other financial data set forth herein,
gives effect to the reclassification by the Company of certain promotional
expenses, previously reported as a reduction of net sales, to selling expense,
which policy was adopted as of September 30, 1997. The amounts which have been
reclassified are $19.0 million, $17.5 million, $24.2 million, and $24.0 million
for the fiscal years ended June 30, 1993, 1994, 1995, and 1996, respectively,
$6.9 million for the Transition Period ended September 30, 1996, $24.1 million
for the twelve months ended September 30, 1996, and $15.4 million for the six
months ended March 29, 1997. The Company believes that this reclassification is
consistent with the method used by other consumer products companies.
19
<PAGE>
<TABLE>
<CAPTION>
Transition Twelve Fiscal Six Months
Period Months Year Ended
Fiscal Year Ended June 30, Ended Ended Ended -------------------
-------------------------------------- September September September March March
1993 1994 1995 1996 30, 1996 30, 1996 30, 1997 29, 1997 28, 1998
------- ------- ------- ------ --------- --------- --------- -------- --------
(In millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ....................... $372.4 $403.7 $415.2 $423.4 $101.9 $417.9 $432.6 $225.6 $246.1
Cost of goods sold .............. 201.4 234.9 237.1 239.4 59.3 237.9 234.6 126.2 127.9
------ ------ ------ ------ ------ ------ ------- ------ ------
Gross profit .................... 171.0 168.8 178.1 184.0 42.6 180.0 198.0 99.4 118.2
Selling expense ................. 98.8 121.3 108.7 116.5 27.8 114.4 122.1 61.3 73.7
General and administrative
expense ........................ 35.4 29.4 32.9 31.8 8.6 33.0 32.2 15.3 17.4
Research and development
expense ........................ 5.6 5.7 5.0 5.4 1.5 5.6 6.2 3.4 3.0
Recapitalization and other
special charges(1)(2)(3) ....... -- 1.5 -- -- 28.4 28.4 3.0 4.7 4.0
------- ------ ------- ------- ------ ------ ------- ------ ------
Income (loss) from
operations(4)(5) ............... 31.2 10.9 31.5 30.3 (23.7) (1.4) 34.5 14.7 20.1
Interest expense ................ 6.0 7.7 8.6 8.4 4.4 10.5 24.5 13.4 8.3
Other expense (income), net ..... 1.2 (0.6) 0.3 0.6 0.1 0.5 0.4 0.3 (0.3)
------- ------- ------- ------- ------- ------- ------- ------ ------
Income (loss) before income
taxes and extraordinary item.... 24.0 3.8 22.6 21.3 (28.2) (12.4) 9.6 1.0 12.1
Income tax expense (benefit) .... 9.0 (0.6) 6.2 7.0 (8.9) (3.8) 3.4 0.3 4.5
------- ------- ------- ------- ------- ------- ------- ------ ------
Income (loss) before
extraordinary item ............. 15.0 4.4 16.4 14.3 (19.3) (8.6) 6.2 0.7 7.6
Extraordinary item(6) ........... -- -- -- -- (1.6) (1.6) -- -- 2.0
------- ------- ------- ------- ------- ------- -------- ------ ------
Net income (loss) ............... $ 15.0 $ 4.4 $ 16.4 $ 14.3 $(20.9) $(10.2) $ 6.2 $ 0.7 $ 5.6
======= ======= ======= ======= ======= ======= ======== ====== ======
Basic net income (loss) per
common share before
extraordinary item ............. $ 0.30 $ 0.09 $ 0.33 $ 0.29 $(0.44) $(0.18) $0.30 $ 0.03 $ 0.30
======= ======= ======= ======= ======== ======== ======== ====== ======
Diluted net income (loss) per
common share before
extraordinary item ............. $ 0.30 $ 0.09 $ 0.33 $ 0.29 $(0.44) $(0.18) $0.30 $ 0.03 $ 0.28
======= ======= ======= ======= ======== ======== ======== ====== ======
Basic net income (loss) per
common share ................... $ 0.30 $ 0.09 $ 0.33 $ 0.29 $(0.48) $(0.21) $0.30 $ 0.03 $ 0.22
======= ======= ======= ======= ======== ======== ======== ====== ======
Diluted net income (loss) per
common share ................... $ 0.30 $ 0.09 $ 0.33 $ 0.29 $(0.48) $(0.21) $0.30 $ 0.03 $ 0.21
======= ======= ======= ======= ======== ======== ======== ====== ======
Weighted average common
shares ......................... 50.0 50.0 50.0 49.6 43.8 48.1 20.5 20.5 25.5
Weighted average common and
common equivalent shares ....... 50.0 50.0 50.0 49.6 43.8 48.1 20.6 20.5 27.0
Other Financial Data:
Depreciation .................... $ 7.4 $ 10.3 $ 11.0 $ 11.9 $ 3.3 $ 12.1 $ 11.3 $ 5.9 $ 5.8
Capital expenditures(7) ......... 30.3 12.5 16.9 6.6 1.2 8.4 10.9 2.6 6.7
Cash flows from operating
activities ..................... 15.8 (18.7) 35.5 17.8 (1.1) 26.0 35.7 35.2 4.4
Cash flows from investing
activities ..................... (30.1) (12.4) (16.8) (6.3) 0.0 (7.3) (10.8) (2.8) (10.9)
Cash flows from financing
activities ..................... 13.7 30.8 (18.3) (12.0) 3.2 (16.8) (28.0) (27.5) 9.1
EBITDA(8) ....................... 39.3 21.2 41.3 42.2 (20.4) 10.7 45.8 20.7 26.1
Balance Sheet Data:
Working capital ................. $ 31.6 $ 63.6 $ 55.9 $ 63.2 $ 64.6 $ 64.6 $ 33.8 $ 48.3 $ 55.3
Total assets .................... 189.0 222.4 220.6 221.1 243.7 243.7 236.9 211.3 241.4
Total debt ...................... 74.1 109.0 88.3 81.3 233.7 233.7 207.3 206.5 129.5
Shareholders' equity (deficit) .. 36.7 37.9 53.6 61.6 (85.7) (85.7) (80.6) (84.1) 12.2
</TABLE>
(footnotes on following page)
20
<PAGE>
- ------------
(1) During the Transition Period, the Company recorded charges of $12.3 million
directly related to the Recapitalization and other special charges of $16.1
million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(2) In the fiscal year ended September 30, 1997, the Company recorded other
special charges of $5.9 million offset by a special credit of $2.9 million
which was related to the curtailment of the Company's defined benefit
pension plan covering all domestic non-union employees. The special charges
related to organizational restructuring in the United States, the
discontinuation of certain manufacturing operations at the Company's Newton
Aycliffe, United Kingdom facility and the discontinuation of operations at
the Company's facility in Kinston, North Carolina.
(3) In the six months ended March 28, 1998, the Company recorded net charges of
$4.0 million including (i) $1.7 million associated with consolidating
domestic battery packaging operations and outsourcing the manufacture of
heavy duty batteries, (ii) $2.0 million associated with closing the
Company's Appleton, Wisconsin manufacturing plant and consolidating it into
its Portage, Wisconsin manufacturing plant, (iii) $3.9 million associated
with closing the Company's Newton Aycliffe, United Kingdom facility,
phasing out direct distribution in the United Kingdom and closing one of
the Company's German sales offices, (iv) a $2.4 million gain on the sale of
the Company's previously closed Kinston, North Carolina facility, and (v)
income of $1.2 million in connection with the buyout of deferred
compensation agreements with certain former employees.
(4) Income (loss) from operations includes expenses incurred during the
Fennimore Expansion and the Recapitalization and other special charges in
fiscal 1994, the Transition Period ended September 30, 1996, the fiscal
year ended September 30, 1997 and the six months ended March 29, 1997 and
March 28, 1998. Income from operations before these non-recurring charges
was as follows:
<TABLE>
<CAPTION>
Transition Twelve Fiscal Six Months
Fiscal Year Ended June 30, Period Months Year Ended
------------------------------------ Ended Ended Ended ------------------
September September September March March
1993 1994 1995 1996 30, 1996 30, 1996 30, 1997 29,1997 28, 1998
----- ------ ------ ------ --------- -------- ----------- --------- --------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from
operations .................. $31.2 $10.9 $31.5 $30.3 $(23.7) $(1.4) $34.5 $14.7 $20.1
Fennimore Expansion .......... -- 9.5 -- -- -- -- -- -- --
Recapitalization and other
special charges ............. -- 1.5 -- -- 28.4 28.4 3.0 4.7 4.0
----- ----- ----- ----- ------ ----- ----- ----- -----
Income from operations
before non-recurring
charges ..................... $31.2 $21.9 $31.5 $30.3 $ 4.7 $27.0 $37.5 $19.4 $24.1
===== ===== ===== ===== ====== ===== ===== ===== =====
</TABLE>
(5) Income from operations in fiscal 1994 was impacted by increased selling
expenses due to higher advertising and promotion expenses related to the
Renewal Introduction. In addition, income from operations was impacted by
non-recurring costs of $9.5 million in connection with the Fennimore
Expansion including $8.4 million of increased cost of goods sold and $1.1
million of increased general and administrative expenses, and other special
charges of approximately $1.5 million related to a plan to reduce the
Company's cost structure and to improve productivity through an approximate
2.5% reduction in headcount on a worldwide basis. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Introduction."
(6) The Recapitalization of the Company included repayment of certain
outstanding indebtedness, including prepayment fees and penalties. Such
prepayment fees and penalties of $2.4 million, net of income tax benefit of
$0.8 million, has been recorded as an extraordinary item in the
Consolidated Statement of Operations for the Transition Period ended
September 30, 1996. In the six months ended March 28, 1998, the Company
recorded extraordinary expense of $2.0 million net of income taxes for the
premium on the repurchase or redemption of the senior term notes in
connection with the IPO.
(7) From fiscal 1993 through fiscal 1995 the Company invested an aggregate of
$32.7 million in connection with the Fennimore Expansion, including $19.7
million incurred in fiscal 1993. In addition, income from operations was
impacted by non-recurring costs of $9.5 million in connection with the
Fennimore Expansion including $8.4 million of increased cost of goods sold
and $1.1 million of increased general and administrative expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Introduction."
(footnotes continued on following page)
21
<PAGE>
- ------------
(8) EBITDA represents income from operations plus depreciation and amortization
(excluding amortization of debt issuance costs) and reflects an adjustment
of income from operations to eliminate the establishment and subsequent
reversal of two reserves ($0.7 million established in fiscal 1993 and
reversed in fiscal 1995, and $0.5 million established in fiscal 1992 and
reversed in fiscal 1995). The Company believes that EBITDA and related
measures are commonly used by certain investors and analysts to analyze and
compare, and provide useful information regarding, the Company's ability to
service its indebtedness. However, the following factors should be
considered in evaluating such measures: EBITDA and related measures (i)
should not be considered in isolation, (ii) are not measures of performance
calculated in accordance with GAAP, (iii) should not be construed as
alternatives or substitutes for income from operations, net income or cash
flows from operating activities in analyzing the Company's operating
performance, financial position or cash flows (in each case, as determined
in accordance with GAAP) and (iv) should not be used as indicators of the
Company's operating performance or measures of its liquidity. Additionally,
because all companies do not calculate EBITDA and related measures in a
uniform fashion, the calculations presented in this Prospectus may not be
comparable to other similarly titled measures of other companies.
EBITDA includes expenses incurred during the Fennimore Expansion (as
defined herein) and the Recapitalization and other special charges in
fiscal 1994, the Transition Period ended September 30, 1996, the fiscal
year ended September 30, 1997 and the six months ended March 29, 1997 and
March 28, 1998. EBITDA before these non-recurring charges was as follows:
<TABLE>
<CAPTION>
Transition Twelve Fiscal Six Months
Fiscal Year Ended June 30, Period Months Year Ended
---------------------------------- Ended Ended Ended --------------------
September September September March 29, March 28,
1993 1994 1995 1996 30, 1996 30, 1996 30, 1997 1997 1998
------ ------ ------ ------ --------- --------- -------- ------- ---------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA ....................... $39.3 $21.2 $41.3 $42.2 $(20.4) $10.7 $45.8 $20.7 $26.1
Fennimore Expansion .......... -- 9.5 -- -- -- -- -- -- --
Recapitalization and other
special charges ............. -- 1.5 -- -- 28.4 28.4 3.0 4.7 4.0
----- ----- ----- ----- ------ ----- ----- ----- -----
EBITDA before non-
recurring charges ........... $39.3 $32.2 $41.3 $42.2 $ 8.0 $39.1 $48.8 $25.4 $30.1
===== ===== ===== ===== ====== ===== ===== ===== =====
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Company's consolidated financial statements and the
related notes thereto, included elsewhere herein.
Introduction
Upon completion of the Recapitalization, the Company changed its fiscal
year end from June 30 to September 30. For clarity of presentation and
comparison, references herein to fiscal 1994, fiscal 1995 and fiscal 1996 are
to the Company's fiscal years ended June 30, 1994, June 30, 1995 and June 30,
1996, respectively, and references to the "Transition Period ended September
30, 1996" and the "Transition Period" are to the period from July 1, 1996 to
September 30, 1996. References to fiscal 1997 are to the Company's fiscal year
ended September 30, 1997.
The Company's operating performance depends on a number of factors, the
most important of which are (i) general retailing trends, especially in the
mass merchandise segment of the retail market, (ii) the Company's overall
product mix among various specialty and general household batteries and
battery-powered lighting devices, which sell at different price points and
profit margins, (iii) the Company's overall competitive position, which is
affected by both the introduction of new products and promotions by the Company
and its competitors and the Company's relative pricing and battery performance,
and (iv) changes in operating expenses. Set forth below are specific
developments that have affected and may continue to affect the Company's
performance.
Restructuring of Operations and Other Cost Rationalization Initiatives. In
March 1998, the Company announced restructuring plans for its domestic and
international operations designed to maximize production and capacity
efficiencies, reduce fixed costs, upgrade existing technology and equipment and
improve customer service. Major elements of the restructuring include (i)
consolidating the Company's packaging operations, (ii) outsourcing the
manufacture of heavy duty batteries, and (iii) closing certain of the Company's
existing manufacturing, packaging and distribution facilities. The Company
recorded a charge of $7.5 million in the second quarter of the current fiscal
year in connection with the restructuring program and expects to record an
additional $2.0 million of costs in subsequent periods. The Company anticipates
annual aggregate cost savings of the restructuring program, after full
implementation (currently expected in early 1999), to be approximately $5.0
million.
The 1998 restructuring is in addition to the significant measures taken in
fiscal 1997 following the Recapitalization to rationalize the Company's
manufacturing, distribution, and general overhead costs. The initiatives
relating to manufacturing activities included discontinuing certain
manufacturing operations at the Company's Newton, Aycliffe, United Kingdom
facility and closing the Company's Kinston, North Carolina facility. In
addition, the Company implemented a significant organizational restructuring in
the United States and the United Kingdom. The Company recorded charges totaling
$5.9 million in fiscal 1997 in connection with the restructuring (see note 15
to the Consolidated Financial Statements) and expects annual savings of
approximately $8.6 million. Such savings may not be indicative of actual
savings in future periods because of the likelihood of additional overhead or
other costs in future periods in support of business growth objectives.
Investment in Future Growth Opportunities. Since the Recapitalization, the
Company has undertaken significant measures to pursue growth opportunities and
increase the Company's market share for its products. These measures include
(i) introducing the Company's existing hearing aid products into new markets,
including through the acquisition of Brisco and Best Labs; (ii) broadening the
Company's offering of specialty products, including through the acquisition of
DPP; (iii) expanding distribution into new channels such as electronics
specialty stores; (iv) further penetrating existing distribution channels such
as warehouse clubs and food and convenience stores; and (v) evaluating
opportunities for expansion of the Company's core business into international
markets, whether through acquisitions, joint ventures or other strategic
marketing opportunities. See "Business--Growth Strategy."
Expansion of Production Capacity. In March 1998, the Company agreed to
purchase from Matsushita for $10.0 million a new high speed alkaline battery
manufacturing production line for its Fennimore, Wisconsin plant, at which the
Company manufactures all of its alkaline products. The Company estimates costs
associated with the implementation of this new manufacturing line to be
approximately $1.0 million. The new high speed manufacturing line is
anticipated to increase the Company's production capacity for AA size batteries
by up to 50%. The recent investment in manufacturing technology and production
capacity follows the Fennimore Expansion (as defined herein), pursuant to
which, from fiscal 1993 through fiscal 1995 the Company invested an aggregate
of $32.7 million in the modernization and expansion of its production lines at
its Fennimore plant (the "Fennimore Expansion").
23
<PAGE>
As a result of the Fennimore Expansion, the Company replaced substantially all
of its alkaline battery manufacturing equipment with state-of-the-art
technology which more than doubled the Company's aggregate capacity for AA and
AAA size alkaline batteries. This investment also resulted in a reformulation
of the Company's alkaline batteries so as to be mercury-free, better performing
and higher quality. The Fennimore Expansion resulted in $9.5 million of
non-recurring costs in fiscal 1994. Such costs included increased raw material
costs incurred pursuant to the terms of equipment purchase agreements entered
into in connection with the Fennimore Expansion which required the Company to
source material from specified foreign vendors at an increased cost. These
incremental costs decreased in fiscal 1996 as a result of the increased use of
lower-cost domestic raw material sources to replace the foreign vendor
sourcing, which replacement was substantially completed in fiscal 1997.
Effect of Recapitalization. The Recapitalization of the Company, which was
completed on September 12, 1996, resulted in non-recurring charges of $12.3
million which were recognized in the Transition Period, including (i) $5.0
million of advisory, legal and consulting fees and (ii) $7.3 million of stock
option compensation, severance payments and employment contract settlements for
the benefit of certain current and former officers, directors and management of
the Company. In connection with the Recapitalization, the Company incurred
other non-recurring special charges of $16.1 million recognized in the
Transition Period, including (i) $2.7 million of charges related to the
discontinuation of certain manufacturing operations at the Company's Newton
Aycliffe, United Kingdom facility; (ii) $1.7 million of charges for deferred
compensation plan obligations to former officers of the Company resulting from
the curtailment of the plan; (iii) $1.5 million of charges reflecting the
present value of lease payments for land which new management determined would
not be used for any future productive purpose; (iv) $5.6 million in costs and
asset writedowns principally related to changes in pricing strategies for Power
Station, the Renewal recharging system; and (v) $4.6 million of termination
benefits and other charges. See "The Recapitalization."
Renewal Product Line. In fiscal 1994, the Company introduced the Renewal
rechargeable battery, the first alkaline rechargeable battery sold in the
United States (the "Renewal Introduction"). The Company incurred significant
advertising and promotional expense related to Renewal of $26.0 million in
fiscal 1994, $15.7 million in fiscal 1995 and $20.3 million in fiscal 1996,
with the fiscal 1996 increase largely due to the Company's new promotional
campaign featuring basketball superstar Michael Jordan.
Since the Recapitalization, the Company has significantly revised its
marketing and advertising strategies for the Renewal product line. Management
believes that continued improvement in consumer awareness of the value and
money-saving benefits of Renewal over conventional disposable alkaline
batteries will be necessary to further expand the Company's market for Renewal.
Although the percentage of the Company's advertising budget allocated to the
Renewal product line has decreased, the Company has begun aggressively
marketing Renewal's money-saving benefit over disposable alkaline batteries and
performance advantage over rechargeable nickel cadmium batteries and has
lowered the prices of the recharger system for Renewal. In addition, the
Company is focused on growing Renewal's market share by expanding distribution
into new channels such as electronics specialty stores and other speciality
retailers in the domestic market.
Seasonality
The Company's sales are seasonal, with the highest sales occurring in the
fiscal quarter ending on or about December 31, during the holiday season and
the lowest sales occurring in the fiscal quarter ending on or about March 30.
During the past four completed fiscal years, the Company's sales in the quarter
ended on or about December 31 have represented an average of 33% of annual net
sales. As a result of this seasonality, the Company's working capital
requirements and revolving credit borrowings are typically higher in the third
and fourth calendar quarters of each year. The following table sets forth the
Company's net sales for each of the periods presented.
<TABLE>
<CAPTION>
Fiscal Quarter Ended
----------------------------------------------- ------------------------------------------------------------------------
December 30, March 30, June 30, September 30, December 28, March 29, June 29, September 30, December 27, March 28,
1995 1996 1996 1996 1996 1997 1997 1997 1997 1998
----------- -------- -------- ------------- ------------ -------- -------- ------------ ----------- ---------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 140.9 $ 80.5 $ 94.6 $ 101.9 $ 141.9 $ 83.6 $ 95.5 $ 111.5 $ 150.0 $ 96.1
</TABLE>
24
<PAGE>
Results of Operations
This financial data, as well as all other data set forth herein, gives
effect to the reclassification by the Company of certain promotional expenses,
previously reported as a reduction of net sales, to selling expense, which
policy was adopted as of September 30, 1997. The amounts which have been
reclassified are $19.0 million, $17.5 million, $24.2 million and $24.0 million
for the years ended June 30, 1993, 1994, 1995 and 1996, respectively, $6.7
million for the three months ended September 30, 1995, $6.9 million for the
Transition Period ended September 30, 1996, $24.1 million for the twelve months
ended September 30, 1996, and $15.4 million for the six months ended March 29,
1997. The Company believes that this reclassification is consistent with the
method used by other consumer products companies.
The following table sets forth the percentage relationship of certain
items in the Company's statement of operations to net sales for the periods
presented:
<TABLE>
<CAPTION>
Fiscal Year
Ended Transition Six Months
--------------------- Three Months Period Twelve Months Fiscal Year Ended
Ended Ended Ended Ended ----------------------
June 30, June 30, September September September September March March
1995 1996 30, 1995 30, 1996 30, 1996 30, 1997 29, 1997 28, 1998
---------- ---------- ------------- ----------- -------------------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales .................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ........... 57.1 56.5 59.7 58.2 56.9 54.2 55.9 52.0
----- ----- ----- ------ ------ ----- ----- -----
Gross profit ................. 42.9 43.5 40.3 41.8 43.1 45.8 44.1 48.0
Selling expense .............. 26.2 27.5 27.9 27.3 27.4 28.2 27.2 29.9
General and
administrative expense....... 7.9 7.5 6.9 8.4 7.9 7.5 6.8 7.1
Research and
development expense ......... 1.2 1.3 1.2 1.5 1.3 1.4 1.5 1.2
Recapitalization and other
special charges ............. -- -- -- 27.9 6.8 0.7 2.1 1.6
----- ----- ----- ------ ------ ----- ----- -----
Income (loss) from
operations .................. 7.6% 7.2% 4.3% (23.3%) ( 0.3%) 8.0% 6.5% 8.2%
</TABLE>
Six Months Ended March 28, 1998 Compared to Six Months Ended March 29, 1997
Net Sales. Net sales were $246.1 million for the six months ended March
28, 1998 (the "1998 Six Month Period"), an increase of $20.5 million, or 9.1%,
from $225.6 million for the six months ended March 29, 1997 (the "1997 Six
Month Period"). Increased sales of alkaline batteries, hearing aid batteries,
and specialty batteries were somewhat offset by the continuing decline in the
domestic market for heavy duty batteries.
Alkaline general battery sales for the 1998 Six Month Period exceeded
alkaline general battery sales for the 1997 Six Month Period by approximately
26%, or $25.1 million, as a result of strong promotional programs, a price
increase implemented in the summer of 1997, sales to new customers, and
increased volume with existing customers, all of which increased market share.
Within specialty battery products, hearing aid battery sales increased
approximately 9% due primarily to growth in the market and the November 1997
acquisition of Brisco. In addition, net sales in the 1998 Six Month Period
included $2.2 million of specialty battery sales related to the DPP
acquisition.
Gross Profit. Gross profit increased $18.8 million, or 18.9%, to $118.2
million for the 1998 Six Month Period, from $99.4 million for the 1997 Six
Month Period, primarily as a result of increased sales of higher margin
alkaline batteries and decreased sales of lower margin heavy duty batteries.
Gross profit margins increased to 48.0% in the 1998 Six Month Period from 44.1%
in the 1997 Six Month Period due primarily to the change in sales mix toward
alkaline and away from heavy duty batteries, the alkaline price increase
implemented in the summer of 1997, and alkaline manufacturing cost
improvements.
Selling Expense. Selling expense increased $12.4 million, or 20.2%, to
$73.7 million for the 1998 Six Month Period from $61.3 million for the 1997 Six
Month Period. Selling expense as a percent of net sales increased to 29.9% in
the 1998 Six Month Period from 27.2% in the 1997 Six Month Period. The increase
in dollars and as a percent of sales was due primarily to increased advertising
and promotional spending which resulted in the increased alkaline general
battery sales. In addition, selling expense was lower during the 1997 Six Month
Period while a new advertising agency and promotional strategies were under
review.
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General and Administrative Expense. General and administrative expense
increased $2.1 million, or 13.7%, to $17.4 million for the 1998 Six Month
Period from $15.3 million for the 1997 Six Month Period primarily as a result
of higher costs associated with information system improvements worldwide and
increased expenses associated with being a publicly held company.
Research and Development Expense. Research and development expense
decreased $0.4 million to $3.0 million for the 1998 Six Month Period from $3.4
million for the 1997 Six Month Period primarily as a result of the increased
resources assigned to the development of an on-the-label battery tester in 1997
which management decided not to implement.
Other Special Charges. In March 1998, the Company recorded net charges of
$5.2 million including (i) a $1.7 million charge associated with consolidating
domestic battery packaging operations and outsourcing the manufacture of heavy
duty batteries, (ii) a $2.0 million charge associated with closing the
Company's Appleton, Wisconsin manufacturing plant and consolidating it into its
Portage, Wisconsin manufacturing plant, (iii) a $3.9 million charge associated
with closing the Company's Newton Aycliffe, United Kingdom facility, phasing
out direct distribution in the United Kingdom and closing one of the Company's
German sales offices, and (iv) a $2.4 million gain on the sale of the Company's
previously closed Kinston, North Carolina, facility. The Company expects to
record an additional $2.0 million of costs in subsequent periods related to
these restructuring and cost rationalization initiatives.
For the 1998 Six Month Period, the Company recorded net charges of $4.0
million. This includes the $5.2 million charge recorded in March offset by
income of $1.2 million in connection with the buy-out of deferred compensation
agreements with certain former employees recorded earlier in the fiscal year.
For the 1997 Six Month Period, the Company recorded charges of $4.7 million for
organizational restructuring in the U.S., the discontinuation of certain
manufacturing operations in the United Kingdom, and the closing of its Kinston,
North Carolina, facility. At September 30, 1997, the balance of these 1997
reserves was $1.9 million of which the Company expended $1.1 million in the
1998 Six Month Period and currently expects the balance to be expended by the
end of fiscal 1998.
Income From Operations. Income from operations increased $5.4 million, or
36.7%, to $20.1 million from $14.7 million for the 1997 Six Month Period. This
increase was due primarily to increased sales and gross profit offset by
increased selling and general and administrative expense. Income from
operations before special charges increased $4.7 million, or 24.2%, to $24.1
million from $19.4 million for the 1997 Six Month Period. As a percentage of
sales income from operations for the 1998 Six Month Period increased to 8.2%
from 6.5% for the 1997 Six Month Period.
Interest Expense. Interest expense decreased $5.1 million, or 38.1%, to
$8.3 million for the 1998 Six Month Period from $13.4 million for the 1997 Six
Month Period. This decrease was primarily as a result of decreased indebtedness
due to the application of proceeds of the Company's IPO in November 1997. In
addition to the effects of the IPO on the 1998 Six Month Period, the 1997 Six
Month Period interest expense included a $2.0 million write-off of unamortized
debt issuance costs.
Other Expense (Income). For the 1998 Six Month Period, interest income and
foreign exchange gain totaled $(0.4) million compared to $0.3 million of net
expense in the 1997 Six Month Period, attributed to foreign exchange losses
somewhat offset by interest income.
Income Tax Expense. The Company's effective tax rate was 37.7% for the
1998 Six Month Period, compared to 31.9% for the 1997 Six Month Period. This
more favorable tax rate in 1997 was due primarily to the Company's Foreign
Sales Corporation ("FSC") benefiting 1997 more than 1998.
Extraordinary Item. In the 1998 Six Month Period, the Company recorded
extraordinary expense of $2.0 million net of income taxes for the premium
payment on the redemption of a portion of the Company's Senior Subordinated
Notes.
Net Income. For the 1998 Six Month Period, net income was $5.6 million
compared to $0.7 million in the 1997 Six Month Period.
26
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Fiscal Year Ended September 30, 1997 Compared to Twelve Months Ended
September 30, 1996
Net Sales. The Company's net sales increased $14.7 million, or 3.5%, to
$432.6 million in fiscal 1997 from $417.9 million in the twelve months ended
September 30, 1996, primarily due to higher sales of alkaline batteries and
lithium batteries, offset in part by decreases in sales of heavy duty
batteries, lantern batteries and Renewal rechargeables. In the last quarter of
fiscal 1997, net sales increased $9.6 million, or 9.4%, to $111.5 million from
$101.9 million in the Transition Period, primarily due to higher sales of
alkaline batteries attributed to the introduction of a 4% price increase on
alkaline batteries in the U.S. phased in beginning May 1997, significant
promotional programs, and sales to new accounts.
Sales of alkaline batteries increased as a result of the launch of a new
integrated advertising campaign emphasizing the alkaline brand, new product
graphics and packaging (designed to build brand awareness and the Company's
value brand position), and strong promotional programs in the Company's fourth
fiscal quarter. The Company also gained significant new distribution on the
strength of this program.
Lithium sales increased primarily due to increased sales of computer clock
and memory back-up batteries to Compaq Computers and SGS Thomson, two of the
Company's larger OEM (Original Equipment Manufacturers) customers.
Sales of heavy duty and lantern batteries decreased primarily due to
declines in the market as consumers move toward alkaline batteries away from
heavy duty batteries. Lantern battery volume was also adversely impacted by the
migration to reflective tape in place of flashing lights on construction
barricades.
Hearing aid battery sales increased as a result of continued growth in the
overall hearing aid battery market. The Company's market leadership position in
this product line has resulted in new distribution gains in the retail channel,
the fastest growing channel for hearing aid batteries as consumers shift their
purchases toward this channel.
Net sales of lighting products increased slightly over the prior twelve
months due primarily to growth in key mass merchandiser accounts and wholesale
clubs.
Dollar sales of Renewal rechargeables were down approximately 12% due
primarily to the Company's decision to decrease prices of the chargers by 33%
in the first quarter of fiscal 1997 to reposition the product and encourage
consumers to purchase the system. Unit sales of chargers and batteries combined
were approximately 7% higher than the prior twelve months.
Gross Profit. Gross profit increased $18.0 million, or 10.0%, to $198.0
million in fiscal 1997 from $180.0 million for the twelve months ended
September 30, 1996. Gross profit as a percentage of net sales increased to
45.8% in fiscal 1997 from 43.1% in the prior twelve months. These increases are
attributed to increased sales of higher margin alkaline batteries, the
introduction of a 4% price increase on alkaline batteries in the U.S. phased in
beginning May 1997, and lower manufacturing costs as a result of cost
rationalization initiatives. Gross profit increased $12.7 million, or 29.8%, to
$55.3 million in the three months ended September 30, 1997 from $42.6 million
in the Transition Period, for these same reasons.
Selling Expense. Selling expense increased $7.7 million, or 6.7%, to
$122.1 million in fiscal 1997 from $114.4 million in the twelve months ended
September 30, 1996 due primarily to increased marketing expense to support the
launch of the Company's new graphics and packaging and increased consumer
promotions on the old graphics and packaging to help retailers promote this
product. These increases were partially offset by reduced advertising expense
while the Company developed its new advertising program. Selling expense
increased as a percentage of net sales to 28.2% in fiscal 1997 from 27.4% in
the prior twelve months because of increased marketing expenses.
General and Administrative Expense. General and administrative expense
decreased $0.8 million, or 2.4%, to $32.2 million in fiscal 1997 from $33.0
million in the twelve months ended September 30, 1996 due in part to cost
rationalization initiatives which included the elimination of the use of a
corporate aircraft. These decreases were partially offset by the expense
related to a new management incentive program implemented for fiscal 1997.
There were no management incentives earned during the twelve months ended
September 30, 1996. As a percentage of net sales, general and administrative
expense decreased to 7.5% in fiscal 1997 from 7.9% in the prior twelve months.
27
<PAGE>
Research and Development Expense. Research and development expense
increased $0.6 million, or 10.7%, to $6.2 million for fiscal 1997 from $5.6
million for the twelve months ended September 30, 1996 due primarily to the
development of an on-the-label battery tester which the Company decided not to
introduce.
Recapitalization and Other Special Charges. During fiscal 1997, the
Company recorded special charges of $3.0 million compared to $28.4 million
recorded in the twelve months ended September 30, 1996 as discussed above under
"Effect of Recapitalization." The current year amount represents the net
charges for organizational restructuring in the United States, the
discontinuation of certain manufacturing operations at the Company's Newton
Aycliffe, United Kingdom facility and the discontinuation of certain
manufacturing operations at the Company's facility in Kinston, North Carolina
partially offset by a credit of $2.9 million related to the curtailment of the
Company's defined benefit pension plan covering all domestic non-union
employees.
Income from Operations. Income from operations increased $35.9 million to
$34.5 million in fiscal 1997 from a loss of $(1.4) million for the twelve
months ended September 30, 1996. The Company's Recapitalization and other
special charges decrease of $25.4 million in combination with increased gross
profits were partially offset by increased operating expenses related to the
new marketing and advertising programs discussed above.
Interest Expense. Interest expense increased $14.0 million to $24.5
million in fiscal 1997 from $10.5 million in the prior twelve months due
primarily to increased indebtedness associated with the Recapitalization and a
write-off of $2.0 million of unamortized debt issuance costs related to the
Bridge Notes the Company issued in September 1996 which were refinanced in
fiscal 1997.
Net Income. Net income increased $16.4 million to $6.2 million in fiscal
1997 from a net loss of $(10.2) million in the twelve months ended September
30, 1996 primarily due to increased income from operations as discussed above
partially offset by increased interest expense due to the Recapitalization. The
Company's effective tax rate for fiscal 1997 was 35.6% compared to an effective
tax benefit rate of 31.0% for the prior twelve months due primarily to some of
the Recapitalization expenses in the prior twelve months being non-tax
deductible and the tax benefits of Rayovac International Corporation, a
domestic international sales corporation ("DISC") owned by the shareholders in
the prior twelve months. The DISC was terminated in August 1996 and replaced
with Rayovac Foreign Sales Corporation, a foreign sales corporation, in fiscal
1997 which generated fewer tax benefits in fiscal 1997.
Net income for the prior twelve months also decreased $1.6 million
resulting from an extraordinary loss on the early retirement of debt related to
the Recapitalization.
Fiscal Year Ended September 30, 1997 Compared to Transition Period Ended
September 30, 1996
Results of operations for fiscal 1997 include amounts for a twelve-month
period, while results for the Transition Period include amounts for a
three-month period. Results (in terms of dollars) for these periods are not
directly comparable. Accordingly, management's discussion and analysis for
these periods is generally based upon a comparison of specified results as a
percentage of net sales.
Net Sales. The Company's net sales increased $330.7 million to $432.6
million in fiscal 1997 from $101.9 million in the Transition Period due
primarily to fiscal 1997 including twelve months compared to three months in
the Transition Period. Sales during the Transition Period were unfavorably
impacted by the diversion of management attention and other Company resources
on matters associated with the pending Recapitalization.
Gross Profit. Gross profit increased $155.4 million to $198.0 million in
fiscal 1997 from $42.6 million in the Transition Period. As a percentage of net
sales, gross profit increased to 45.8% in fiscal 1997 from 41.8% in the
Transition Period due to selling more higher margin products like alkaline and
hearing aid batteries in fiscal 1997, the alkaline price increase discussed
above, and lower manufacturing costs attributed to cost rationalization
initiatives.
Selling Expense. Selling expense increased $94.3 million to $122.1 million
in fiscal 1997 from $27.8 million in the Transition Period. As a percentage of
net sales, selling expense increased to 28.2% in fiscal 1997 from 27.3% in the
Transition Period due to increased promotional spending to support the new
alkaline battery graphics and packaging, the new advertising program to build
brand awareness and increased spending to gain new distribution.
General and Administrative Expense. General and administrative expense
increased $23.6 million to $32.2 million in fiscal 1997 from $8.6 million in
the Transition Period. As a percentage of net sales, general and
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<PAGE>
administrative expense decreased to 7.5% in fiscal 1997 from 8.4% in the
Transition Period attributed to the effects of cost rationalization
initiatives.
Research and Development Expense. Research and development expense
increased $4.7 million to $6.2 million in fiscal 1997 from $1.5 million in the
Transition Period. As a percentage of net sales, research and development
expense decreased slightly to 1.4% in fiscal 1997 from 1.5% in the Transition
Period due primarily to the effects of the cost rationalization initiatives.
Recapitalization and Other Special Charges. Recapitalization and other
special charges decreased by $25.4 million, or 89.4%, to $3.0 million in fiscal
1997 from $28.4 million in the Transition Period which is explained above in
the discussion of fiscal 1997 compared to the twelve months ended September 30,
1996.
Income (loss) from Operations. Income (loss) from operations increased
$58.2 million to $34.5 million in fiscal 1997 from $(23.7) million in the
Transition Period. As a percentage of net sales, income (loss) from operations
increased to 8.0% in fiscal 1997 from (23.3)% in the Transition Period for the
reasons discussed above.
Net Income (loss). Net income (loss) for fiscal 1997 increased $27.1
million to $6.2 million from $(20.9) million in the Transition Period. As a
percentage of net sales, net income (loss) increased to 1.4% in fiscal 1997
from (20.5)% in the Transition Period primarily due to significant
Recapitalization and other special charges in the Transition Period. In
addition, an extraordinary loss on the early retirement of debt decreased net
income in the Transition Period by $1.6 million, net of income taxes. The
effective tax rate for fiscal 1997 was 35.6% compared to 31.6% in the
Transition Period due primarily to some of the Recapitalization expenses being
non-tax deductible in the Transition Period.
Transition Period Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
Net Sales. The Company's net sales decreased $5.4 million, or 5.0%, to
$101.9 million in the Transition Period from $107.3 million in the three months
ended September 30, 1995 (the "Prior Fiscal Year Period") primarily due to
decreased sales to the food and drug store retail channels and the Company
having made sales to certain retail customers in connection with promotional
orders after the Transition Period which were made during the Prior Fiscal Year
Period.
Gross Profit. Gross profit decreased $0.6 million, or 1.4%, to $42.6
million in the Transition Period from $43.2 million in the Prior Fiscal Year
Period, primarily as a result of decreased sales in the Transition Period, as
discussed above. Gross profit increased as a percentage of net sales to 41.8%
in the Transition Period from 40.3% in the Prior Fiscal Year Period due
primarily to a lower proportion of promotion sales as discussed above.
Selling Expense. Selling expense decreased $2.1 million, or 7.0%, to $27.8
million in the Transition Period from $29.9 million in the Prior Fiscal Year
Period, primarily due to decreased advertising expense in the Transition
Period.
General and Administrative Expense. General and administrative expense
increased $1.2 million, or 16.2%, to $8.6 million in the Transition Period from
$7.4 million in the Prior Fiscal Year Period, primarily as a result of the
Company having incurred certain expenditures during the Transition Period which
were incurred subsequent to the Prior Fiscal Year Period.
Research and Development Expense. Research and development expense
increased $0.2 million, or 15.4%, to $1.5 million in the Transition Period from
$1.3 million in the Prior Fiscal Year Period, primarily as a result of
increased product development efforts.
Recapitalization and Other Special Charges. During the Transition Period,
the Company recorded charges of $28.4 million, including non-recurring charges
related to the Recapitalization and other special charges.
Non-recurring charges of $12.3 million related to the Recapitalization
include (i) $5.0 million of advisory, legal and consulting fees and (ii) $7.3
million of stock option compensation, severance payments and employment
contract settlements for the benefit of certain present and former officers,
directors and management of the Company.
Other special charges of $16.1 million include (i) $2.7 million of charges
related to the discontinuation of certain manufacturing operations at the
Company's Newton Aycliffe, United Kingdom facility; (ii) $1.7 million of
charges for deferred compensation plan obligations to former officers of the
Company resulting from the curtailment of the plan; (iii) $1.5 million of
charges reflecting the present value of lease payments for land which new
29
<PAGE>
management determined would not be used for any future productive purpose; (iv)
$5.6 million in costs and asset writedowns principally related to changes in
Renewal Power Station pricing strategies adopted by new management subsequent
to the Recapitalization and prior to September 30, 1996; and (v) $4.6 million
of termination benefits and other charges.
Income (loss) from Operations. Income (loss) from operations decreased
$28.3 million to $(23.7) million in the Transition Period from $4.6 million in
the Prior Fiscal Year Period for the reasons discussed above.
Net Income (loss). Net income (loss) for the Transition Period decreased
$22.3 million to $(20.9) million from $1.4 million in the Prior Fiscal Year
Period, primarily because of non-recurring charges related to the
Recapitalization and other special charges discussed above. In addition,
amortization of deferred finance charges related to the Bridge Notes and an
extraordinary loss on the early retirement of debt decreased net income in the
Transition Period by $2.6 million, net of income taxes.
Transition Period Ended September 30, 1996 Compared to Fiscal Year Ended June
30, 1996
Results of operations for the Transition Period Ended September 30, 1996
include amounts for a three-month period, while results for the fiscal year
ended June 30, 1996 include amounts for a twelve-month period. Results (in
terms of dollar amounts) for these periods are not directly comparable.
Accordingly, management's discussion and analysis for these periods is
generally based upon a comparison of specified results as a percentage of net
sales.
Net Sales. The Company's net sales decreased $321.5 million, or 75.9%, to
$101.9 million in the Transition Period from $423.4 million in fiscal 1996
because the Transition Period included only three months of net sales as
compared to twelve months in fiscal 1996. Overall pricing was relatively
constant between the two periods.
Gross Profit. Gross profit decreased $141.4 million, or 76.8%, to $42.6
million in the Transition Period from $184.0 million in fiscal 1996. As a
percentage of net sales, gross profit decreased to 41.8% in the Transition
Period from 43.5% in fiscal 1996, primarily because the products sold during
the Transition Period carried a higher average unit cost than the overall
average unit cost of products sold in fiscal 1996 due to seasonal sales trends.
Selling Expense. Selling expense decreased $88.7 million, or 76.1%, to
$27.8 million in the Transition Period from $116.5 million in fiscal 1996. As a
percentage of net sales, selling expenses decreased to 27.3% in the Transition
Period from 27.5% in fiscal 1996, primarily as a result of decreased
advertising expense in the Transition Period.
General and Administrative Expense. General and administrative expense
decreased $23.2 million, or 73.0%, to $8.6 million in the Transition Period
from $31.8 million in fiscal 1996. As a percentage of net sales, general and
administrative expense increased to 8.4% in the Transition Period from 7.5% in
fiscal 1996, primarily as a result of the effects of seasonal sales trends in
the Transition Period.
Research and Development Expense. Research and development expense
decreased $3.9 million, or 72.2%, to $1.5 million in the Transition Period from
$5.4 million in fiscal 1996. As a percentage of net sales, research and
development expense increased to 1.5% in the Transition Period from 1.3% in
fiscal 1996, primarily as a result of increased support for ongoing product
development efforts.
Recapitalization and Other Special Charges. During the Transition Period
ended September 30, 1996, the Company recorded charges totaling $28.4 million,
including non-recurring charges related to the Recapitalization and other
special charges. Non-recurring charges of $12.3 million related to the
Recapitalization include (i) $5.0 million of advisory, legal and consulting
fees and (ii) $7.3 million of stock option compensation, severance payments and
employment contract settlements for the benefit of certain present and former
officers, directors and management of the Company.
Other special charges of $16.1 million include (i) $2.7 million of charges
related to the discontinuation of certain manufacturing operations at the
Company's Newton Aycliffe, United Kingdom facility; (ii) $1.7 million of
charges for deferred compensation plan obligations to former officers of the
Company resulting from the curtailment of the plan; (iii) $1.5 million of
charges reflecting the present value of lease payments for land which new
management determined would not be used for any future productive purpose; (iv)
$5.6 million in costs and asset writedowns principally related to changes in
Renewal Power Station pricing strategies adopted by new management subsequent
to the Recapitalization and prior to September 30, 1996; and (v) $4.6 million
of termination benefits and other charges.
30
<PAGE>
Income (loss) from Operations. Income (loss) from operations decreased
$54.0 million, or 178.2%, to $(23.7) million in the Transition Period from
$30.3 million in fiscal 1996. As a percentage of net sales, income (loss) from
operations decreased to (23.3)% in the Transition Period from 7.2% in fiscal
1996 for the reasons discussed above.
Net Income (loss). Net income (loss) decreased $35.2 million, or 246.2%,
to $(20.9) million for the Transition Period from $14.3 million in fiscal 1996.
As a percentage of net sales, net income (loss) decreased to (20.5)% in the
Transition Period from 3.4% in fiscal 1996, primarily because of non-recurring
charges related to the Recapitalization and other special charges discussed
above. In addition, amortization of deferred finance charges related to the
Bridge Notes and an extraordinary loss on the early retirement of debt
decreased net income in the Transition Period by $2.6 million, net of income
taxes.
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
Net Sales. The Company's net sales increased $8.2 million, or 2.0%, to
$423.4 million in fiscal 1996 from $415.2 million in fiscal 1995, primarily due
to higher unit sales of hearing aid batteries, Renewal rechargeable batteries
and alkaline batteries, offset in part by decreases in unit sales of heavy duty
and lantern batteries. Overall pricing was relatively constant between the two
periods. Sales of hearing aid batteries increased as a result of unit sales
growth in the overall hearing aid battery market as well as increased
penetration by the Company's Loud'n Clear line of hearing aid batteries and the
introduction of a new miniature size battery, used in hearing aids that fit
completely in the ear. Unit sales of Renewal rechargeable alkaline batteries
increased as a result of increased consumer awareness of the benefits of
Renewal over nickel-cadmium household rechargeable batteries and disposable
batteries and as replacement sales increased to retailers who had sold through
their high levels of fiscal 1995 Renewal inventory. The Company's unit sales of
alkaline batteries increased as the Company participated to a certain extent in
the continued overall growth in the market for alkaline batteries. Unit sales
of heavy duty batteries decreased due to the continued worldwide migration away
from heavy duty batteries and toward alkaline batteries while unit sales of
lantern batteries also decreased due to an overall decline in the lantern
battery market.
Gross Profit. Gross profit increased $5.9 million, or 3.3%, to $184.0
million in fiscal 1996 from $178.1 million in fiscal 1995. Gross profit
increased as a percentage of net sales to 43.5% in fiscal 1996 from 42.9% in
fiscal 1995. These increases are primarily attributable to increased sales of
higher margin products such as Renewal rechargeable batteries and hearing aid
batteries. In addition, the Company experienced manufacturing cost
improvements, particularly for alkaline battery raw materials related to the
Fennimore Expansion as discussed above.
Selling Expense. Selling expense increased $7.8 million, or 7.2%, to
$116.5 million in fiscal 1996 from $108.7 million in fiscal 1995. Selling
expense as a percentage of net sales increased to 27.5% in 1996 from 26.2% in
1995. These increases are primarily attributable to increased advertising costs
to promote the Renewal product line as discussed above.
General and Administrative Expense. General and administrative expense
decreased $1.1 million, or 3.3%, to $31.8 million in fiscal 1996 from $32.9
million in fiscal 1995. General and administrative expense as a percentage of
net sales decreased from 7.9% in fiscal 1995 to 7.5% in fiscal 1996. These
decreases occurred primarily because the $4.0 million payment of management
incentives in 1995 was not repeated in fiscal 1996.
Research and Development Expense. Research and development expense
increased $0.4 million, or 8.0%, to $5.4 million in fiscal 1996 from $5.0
million in fiscal 1995 as a result of continued support for ongoing product
development efforts.
Income from Operations. Income from operations decreased $1.2 million, or
3.8%, to $30.3 million, or 7.2% of net sales in fiscal 1996, from $31.5
million, or 7.6% of net sales, in fiscal 1995 for the reasons discussed above.
Net Income. Net income decreased $2.1 million, or 12.8%, to $14.3 million
for fiscal 1996 from $16.4 million in fiscal 1995, principally as a result of
decreased income from operations and higher effective tax rates, which
increased from 27.4% in 1995 to 32.9% in 1996. The Company's effective income
tax rates in fiscal 1996 and fiscal 1995 were impacted by the income tax
benefits of Rayovac International Corporation, a domestic international sales
corporation ("DISC") owned by the Company's shareholders, and fiscal 1995 was
also impacted by the utilization of a foreign net operating loss carryforward.
31
<PAGE>
Liquidity and Capital Resources
For the 1998 Six Month Period, net cash provided by operating activities
decreased $30.8 million to $4.4 million from $35.2 million for the 1997 Six
Month Period. The decrease was due primarily to increased inventory levels in
the current year to support the growth in the business whereas a significant
reduction in excess inventory was experienced in the prior year. Costs
associated with the 1997 restructuring initiatives were funded from cash
provided from operating activities and the Company currently expects to
similarly fund the 1998 restructuring initiatives with cash provided from
operating activities.
Capital expenditures for the 1998 Six Month Period were $6.7 million, an
increase of $4.1 million from $2.6 million in the 1997 Six Month Period. This
increase reflects continued spending on the implementation of new computer
systems in fiscal 1998 and the down payment on a new alkaline production line
for one of the Company's manufacturing facilities.
In March 1998, the Company sold its Kinston, North Carolina, facility for
approximately $3.3 million. The Company also acquired DPP for $4.7 million plus
incentive payments over four years which are anticipated to total approximately
$2.7 million. The initial $4.7 million acquisition price consisted of $3.2
million in cash (of which $0.5 million is to be paid in cash after a specified
time period for resolution of acquisition related claims), and $1.5 million of
assumed bankers' acceptances. In November 1997, the Company acquired Brisco for
approximately $4.9 million.
Capital expenditures for fiscal 1997 were $10.9 million, an increase of
$2.5 million from the prior twelve months, due primarily to new computer
information systems purchased in September 1997. Capital expenditures for
fiscal 1996 and the Transition Period reflected maintenance level spending.
Spending will continue on the implementation of the new computer systems in
fiscal 1998 which is expected to be substantially completed by mid-1999.
The Company currently expects an increase in capital expenditures to
approximately $18.0 million in fiscal 1998 (including the $6.7 million expended
in the first six months of the fiscal year) due to alkaline capacity expansion,
alkaline vertical integration programs, and continued spending on new computer
information systems. The Company believes that cash flow from operating
activities and periodic borrowings under its existing credit facilities will be
adequate to meet the Company's short-term and long-term liquidity requirements
prior to the maturity of those credit facilities, although no assurance can be
given in this regard. On December 30, 1997, the Credit Agreement dated
September 12, 1996, was amended. The Amended Credit Agreement provides for more
favorable borrowing costs and covenants consistent with the Company's improved
credit position resulting from the paydown of debt with the net proceeds of the
IPO. The Amended Credit Agreement includes a five-year reducing Revolver
Facility of $90.0 million and a five-year amortizing Acquisition Facility of
$70.0 million. The Revolver Facility is reduced by $10.0, $15.0 and $15.0
million respectively on December 31, 1999, 2000 and 2001 and expires on
December 31, 2002. The Acquisition Facility provides up to $70.0 million in
loans for qualifying acquisitions during a one-year commitment period expiring
December 31, 1998. Debt obtained under the Acquisition Facility is subject to
quarterly amortization commencing March 31, 1999 through December 31, 2002. As
of March 28, 1998, $56.1 million was outstanding on the Revolver Facility, with
approximately $5.8 million utilized for outstanding letters of credit, and $4.2
million was outstanding under the Acquisition Facility. See "Description of
Certain Indebtedness."
The Amended Credit Agreement contains financial covenants customary and
usual for credit facilities of this type, including those involving limitations
on liens, limitations on the disposition of assets, limitations on loans and
investments, limitations on lease obligations, maintenance of minimum interest
coverage, maximum leverage ratios, restrictions on dividend payments,
distribution of assets and redemption of subordinated debt, limitations on sale
and leaseback transactions and limitations on issuance of guaranty obligations.
In particular, the Company may not permit to occur (i) an interest coverage
ratio for any computation period which is less than 3.0 to 1.0 or (ii) a
leverage ratio for the computation periods from December 31, 1997 through
September 30, 1999 which exceeds 3.75 to 1.0, for the computation periods from
December 31, 1999 through September 30, 2000 which exceeds 3.50 to 1.0 and for
the computation periods from December 31, 2000 and thereafter which exceeds
3.25 to 1.0. The Company also may not and may not permit any subsidiary to
create, incur, assume, suffer to exist or otherwise become or remain directly
or indirectly liable with respect to any additional indebtedness, except as
specifically contemplated by the Amended Credit Agreement. As of the date
hereof, the Company is in compliance with all covenants contained in the
Amended Credit Agreement.
32
<PAGE>
In addition, the Indenture also restricts, in some instances, the
Company's ability to incur additional indebtedness. Pursuant to the terms of
the Indenture, there is no limit on the additional amount of indebtedness the
Company may incur if the Fixed Charge Coverage Ratio (as defined in the
Indenture) for the Company's most recently ended four full fiscal quarters for
which internal financial statements are available immediately preceding the
date on which such additional indebtedness has been incurred would have been at
least 2.0 to 1.0, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional indebtedness
had been incurred at the beginning of such four-quarter period. In addition,
the Company may be able to incur additional indebtedness in certain
circumstances even if it does not satisfy the 2.0 to 1.0 test described above,
as set forth in the Indenture.
The Company is subject to various federal, state, local and foreign
environmental laws and regulations in the jurisdictions in which it operates,
including laws and regulations relating to discharges to air, water and land,
the handling and disposal of solid and hazardous waste and the cleanup of
properties affected by hazardous substances. Except for liabilities related to
the Velsicol Chemical and Morton International proceedings described under
"Business--Environmental Matters" as to which the Company cannot predict the
impact of such liabilities, the Company does not currently anticipate any
material adverse effect on its operations or financial condition or any
material capital expenditure as a result of its efforts to comply with
environmental laws and as of March 28, 1998 had reserved $1.6 million for known
on-site and off-site environmental liabilities. See Note 4 to Notes to
Condensed Consolidated Financial Statements for the six months ended March 28,
1998. Some risk of environmental liability is inherent in the Company's
business, however, and there can be no assurance that material environmental
costs will not arise in the future. The Company has been identified as a PRP
under CERCLA or similar state laws with respect to the past disposal of waste
and is a party to two lawsuits as to which there is insufficient information to
make a judgment as to the likelihood of a material impact on the Company's
operations, financial condition or liquidity at this time. The Company may be
named as a PRP at additional sites in the future, and the costs associated with
such additional or existing sites may be material. In addition, certain of the
Company's facilities have been in operation for decades and, over such time,
the Company and other prior operators of such facilities have generated and
disposed of wastes which are or may be considered hazardous such as cadmium and
mercury utilized in the battery manufacturing process. See "Risk
Factors--Environmental Matters" and "Business--Environmental Matters." The
Company engages in hedging transactions in the ordinary course of its business.
See Note 2.o. to Notes to the Company's Audited Consolidated Financial
Statements and Note 1 to Notes to Condensed Consolidated Financial Statements
for the six months ended March 28, 1998.
Computer Systems Upgrade
The Company is in the process of implementing its enterprise-wide,
integrated information system upgrade. The SAP system is also expected to
substantially address the Year 2000 issue. Management currently expects to
substantially complete implementation of the upgrade in mid-1999 and to spend
an estimated additional $1.0 million on Year 2000 issues. The Company presently
believes that with modifications to existing software and converting to new
software, the Year 2000 issue will not pose significant operational problems
for the Company's computer systems. However, there can be no assurance that
unforeseen difficulties will not arise for any of the Company, its customers or
vendors and that related costs will not thereby be incurred.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("FAS 130"), which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported
in a financial statement that is displayed with the same prominence as other
financial statements. FAS 130 requires that an enterprise (i) classify items of
other comprehensive income by their nature in a financial statement and (ii)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in-capital in the equity section of the
balance sheet. FAS 130 is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. The Company is evaluating the effect of
this pronouncement on its consolidated financial statements.
33
<PAGE>
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("FAS 131"), which is effective for financial statements for periods beginning
after December 15, 1997. FAS 131 establishes standards for the way public
business enterprises are to report information about operating segments in
annual financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The Company is evaluating the effect of this pronouncement on its
consolidated financial statements.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits ("FAS No. 132"), which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable. FAS No. 132 is effective for fiscal years beginning after December
15, 1997. Restatement of disclosures for earlier periods provided for
comparative purposes is required unless the information is not readily
available. The Company is evaluating the effect of this pronouncement on its
consolidated financial statements.
34
<PAGE>
BUSINESS
General
The Company is the leading value brand and the third largest domestic
manufacturer of general batteries, and is the leading worldwide manufacturer of
hearing aid batteries. The Company is also the leading domestic manufacturer of
rechargeable household batteries and certain other specialty batteries,
including lantern batteries. In addition, the Company is a leading marketer of
heavy duty batteries and battery-powered lighting products and also markets
rechargeable batteries for cellular phones and video camcorders. The Rayovac
brand name was first used as a trademark for batteries in 1921 and is a well
recognized name in the battery industry. The Company attributes the longevity
and strength of its brand name to its high-quality products and to the success
of its marketing and merchandising initiatives.
The Company has established its position as the leading value brand in the
U.S. general alkaline battery market by focusing on the mass merchandiser
channel. The Company achieved this position by (i) offering batteries with
quality and performance substantially equivalent to batteries offered by its
principal competitors at a lower price, (ii) emphasizing innovative in-store
merchandising programs, and (iii) offering retailers attractive margins. The
Company has established its position as the leader in various specialty battery
niche markets through (i) continuous technological advances, (ii) creative
distribution and marketing, and (iii) strong relationships with industry
professionals and manufacturers. The Company sells and distributes its products
in several channels, including mass merchandisers and warehouse clubs; food,
drug and convenience stores; electronics specialty stores and department
stores; hardware and automotive centers; specialty retailers; hearing aid
professionals; and industrial and government/OEM. The Company markets all of
its branded products under the Rayovac[RegTM] name and selected products under
sub-brand names such as MAXIMUM[TM], Renewal[RegTM], Loud'n Clear[RegTM],
ProLine[RegTM], Lifex[TM], Power Station[RegTM], Workhorse[RegTM],
Roughneck[RegTM], Best Labs[RegTM], Ultracell[RegTM], XCell[RegTM] and
AIRPOWER[RegTM].
Business Strategy
In September 1996, the Company and the shareholders of the Company
completed the Recapitalization pursuant to which, among other things,
affiliates of Thomas H. Lee Company acquired for cash approximately 80% of the
outstanding Common Stock of Rayovac. David A. Jones was hired as Chief
Executive Officer of the Company to implement a new business strategy focused
on (i) reinvigorating the Rayovac brand name by raising consumer brand
awareness through, among other things, focused marketing and advertising, (ii)
growing Rayovac's market share by expanding distribution into new channels,
increasing sales to under-penetrated channels and customers, launching new
products, and selectively pursuing acquisitions and alliances, (iii) reducing
costs by rationalizing manufacturing and distribution, better utilizing
existing plant capacity, outsourcing products where appropriate, reducing
working capital, and downsizing corporate overhead, and (iv) improving employee
productivity by increasing training and education, upgrading information
systems, and implementing a pay-for-performance culture.
To implement its new strategy, the Company has undergone a significant
transformation since the Recapitalization.
Strengthened Senior Management Team. In addition to Mr. Jones, experienced
senior managers have been recruited to fill key positions: Kent J. Hussey, who
joined the Company as Executive Vice President of Finance and Administration
and Chief Financial Officer and was recently promoted to the position of
President and Chief Operating Officer; Merrell M. Tomlin, Senior Vice President
of Sales; Stephen P. Shanesy, Executive Vice President and General Manager of
General Batteries and Lights; and Randall J. Steward, Senior Vice President of
Finance and Chief Financial Officer. The new senior managers have over 75 years
of collective experience in the consumer products industry. In addition, the
current management team includes several key members who served the Company
prior to the Recapitalization, providing continuity and retaining significant
battery industry expertise. After giving effect to the Offerings, the nine
executive officers of the Company will beneficially own 10.2% of the
outstanding Common Stock (without giving effect to the Underwriters'
over-allotment options) on a fully diluted basis.
Restructured Operations. In March 1998, the Company announced
restructuring plans for its domestic and international operations designed to
maximize production and capacity efficiencies, reduce fixed costs, upgrade
existing technology and equipment, and improve customer service. Major elements
of the restructuring include (i) consolidating the Company's packaging
operations, (ii) outsourcing manufacturing of heavy duty batteries, and (iii)
35
<PAGE>
closing certain of the Company's existing manufacturing, packaging and
distribution facilities. The Company recorded a charge of $7.5 million in the
second quarter of the current fiscal year in connection with the restructuring
program and expects to record an additional $2.0 million of costs in subsequent
periods. The Company currently anticipates annual aggregate cost savings of the
restructuring program, after full implementation (currently expected in early
1999), to be approximately $5.0 million.
The restructuring further implements actions taken by the Company
following the Recapitalization to rationalize manufacturing and other costs,
including (i) consolidating certain manufacturing operations at the Company's
facilities and closing other facilities; (ii) sourcing some products previously
manufactured by the Company; (iii) implementing a significant organizational
restructuring and additional measures to rationalize manufacturing,
distribution and overhead costs; and (iv) eliminating costs associated with the
use of a corporate aircraft. The Company estimates the annual aggregate cost
savings associated with these earlier actions at approximately $8.6 million.
Such savings may not be indicative of actual savings in future periods because
of the likelihood of additional overhead or other costs in future periods in
support of business growth objectives. The Company believes that its current
manufacturing capacity remains sufficient to meet its anticipated production
requirements for the foreseeable future.
Reorganized Sales, Marketing and Administration by Distribution
Channel. Rayovac has realigned its marketing department, sales organization,
supply chain and support functions to better serve the diverse customer needs
within major distribution channels. Customer-focused teams are now organized to
serve the following distribution channels: mass merchandisers and warehouse
clubs; food, drug and convenience stores; electronics specialty stores and
department stores; hardware and automotive centers; specialty retailers;
hearing aid professionals; industrial and government/OEM. The Company believes
that sales to under-penetrated channels should increase as the dedicated teams
focus on implementing channel-specific marketing strategies, sales promotions
and customer service initiatives.
Launched New Sales and Marketing Programs. Rayovac has developed and
continues to implement broad new marketing initiatives designed to reinvigorate
the Rayovac brand name. Major steps completed to date include (i) selecting
Young & Rubicam as the Company's new advertising agency and developing its
first major national advertising campaign for its full line of general
batteries, (ii) launching a new and improved alkaline product line under the
MAXIMUM[TM] sub-brand, (iii) redesigning all product graphics and packaging to
convey a high-quality image and emphasize the Rayovac brand name, (iv)
extending the Company's existing contract with Michael Jordan to include his
representation for all Rayovac products, and (v) restructuring the Company's
sales representative network along distribution channels.
Reorganized Information Systems. The Company has completed an initial
overhaul of its information systems by (i) hiring an experienced Chief
Information Officer, (ii) outsourcing mainframe computer operations, (iii)
completing an enterprise software system analysis, and (iv) retaining outside
consultants to modernize and upgrade its data processing and telecommunications
infrastructure. The Company has purchased from SAP and begun implementing an
enterprise-wide, integrated information system to upgrade and modernize its
business operations, the majority of which is expected to be substantially
completed by mid-1999. When fully implemented, this system, along with efforts
by the Company's internal project team, is expected to reduce cycle times,
lower manufacturing and administrative costs, improve both asset and employee
productivity and substantially address the Year 2000 issue.
Growth Strategy
Rayovac believes it has significant growth opportunities in its businesses
and has developed strategies to increase sales, profits and market share. Key
elements of the Company's growth strategy are as follows:
Reinvigorate the Rayovac Brand Name. The Company is committed to
reinvigorating the Rayovac brand name after many years of underdevelopment. The
brand, originally introduced in 1921, has wide recognition in all markets where
the Company competes, but has lower awareness than the more highly advertised
Duracell and Energizer brands. The Company has initiated an integrated
advertising campaign using significantly higher levels of TV and print media.
In 1997, the Company launched a reformulated alkaline battery, Rayovac
MAXIMUM[TM], supported by new graphics, new packaging, a new advertising
campaign, and aggressive introductory retail promotions. The Company's
marketing and advertising initiatives are designed to increase awareness of the
Rayovac
36
<PAGE>
brand and to increase retail sales by heightening customers' perceptions of the
quality, performance and value of Rayovac products.
Leverage Value Brand Position. Rayovac believes it has a unique position
in the general battery market as the value brand in an industry in which the
leading three brands (Duracell, Energizer and Rayovac) account for
approximately 90% of sales. The Company's strategy is to provide products of
quality and performance equal to its major competitors in the general battery
market at a lower price to appeal to a large segment of the population desiring
a value brand. To demonstrate its value positioning, Rayovac offers comparable
battery packages at a lower price or, in some cases, more batteries for the
same price.
Expand Retail Distribution. Historically the Company had focused its sales
and marketing efforts on the mass merchandiser channel which accounted for 44%
of industry sales growth in the domestic alkaline battery market on a unit
basis over the past five years and has achieved a 19% unit share. The Company
believes its value brand positioned products and innovative merchandising
programs also make it an attractive supplier to other retail channels, which
represent a market of $1.7 billion or 69% of the general battery market. The
Company has reorganized its marketing, sales, and sales representative
organizations by channel in order to grow market share by (i) gaining new
customers, (ii) penetrating existing customers with a larger assortment of
products, (iii) offering a selection of products with high sell-through, and
(iv) utilizing more aggressive and channel specific promotional programs. The
Company believes that these initiatives have resulted in significant success
over the past fiscal year in gaining access to new accounts and expanding
product offerings to existing accounts and the Company intends to continue to
pursue these strategies.
Further Capitalize on Worldwide Leadership in Hearing Aid Batteries. The
Company seeks to increase its 52% worldwide market share in the hearing aid
battery segment, as it has done consistently for the past 10 years, by
leveraging its leading technology and dedicated sales and marketing
organizations. Rayovac is the only hearing aid battery manufacturer to
advertise its products and plans to continue to utilize Arnold Palmer as its
spokesperson in its print media campaign. Rayovac also markets large
multi-packs of hearing aid batteries which have rapidly gained consumer favor.
In November 1997, the Company acquired Brisco, which packages and distributes
hearing aid batteries in customized packaging to hearing health care
professionals in Germany and Holland as well as other European countries. In
March 1998, the Company acquired the battery distribution portion of Best Labs
in St. Petersburg, Florida, a distributor of hearing aid batteries in
customized packaging and a manufacturer of hearing instruments. The Company
believes that these acquisitions will enable the Company to further penetrate
markets for hearing aid batteries.
Develop New Markets. The Company intends to expand its business into new
markets for batteries and related products both domestically and
internationally by developing new products internally or selective
acquisitions. These acquisitions may focus on expansion into new technologies,
product lines or geographic markets and may be of significant size. In March
1998, the Company acquired the retail portion of the business of DPP, a full
line marketer of rechargeable batteries and accessories for cellular phones and
video camcorders. In conjunction with the acquisition of DPP, the Company has
announced the launch of a new line of rechargeable batteries for cordless
telephones. The Company may also pursue joint ventures or other strategic
marketing opportunities where appropriate to expand its markets or product
offerings. See "Risk Factors--Risks Associated with Future Acquisitions."
Introduce New Niche Products. The Company has developed leading positions
in several important niche markets, including those for lantern batteries and
lithium coin cells. The Company intends to continue selectively pursuing
opportunities to exploit under-served niche markets and to enter high-growth
specialty battery markets. In 1997, the Company entered the market for photo
and keyless entry batteries and recently introduced a line of products to
service the medical instrument and health services markets. In the lighting
products segment, where market share is driven by new product introductions,
the Company is introducing a number of attractively designed new products over
the next twelve months and intends to bring new products to the market in the
future on a six-month cycle.
Reposition the Renewal Rechargeable Alkaline Battery. The Company's
Renewal rechargeable battery is the only rechargeable alkaline battery in the
U.S. market, commanding a 68% market share of the rechargeable household
battery market through mass merchandisers, food and drug stores for the 52
weeks ended March 14, 1998. Since the Recapitalization, the Company has lowered
the price of Renewal rechargers by 33% to encourage consumers to purchase the
system and promoted Renewal's money-saving benefits. Renewal batteries present
a
37
<PAGE>
value proposition to consumers because Renewal batteries can be recharged over
25 times, providing 10 times the energy of disposable alkaline batteries at
only twice the retail price. In addition, alkaline rechargeables are superior
to nickel cadmium rechargeables (the primary competing technology) because they
provide more energy between charges, are sold fully charged, retain their
charge longer and are environmentally safer. The Company has focused sales
efforts for Renewal on distribution channels which the Company believes to be
more suited for this product, such as electronics specialty stores, and has
recently begun shipments to Radio Shack.
Battery Industry
The U.S. battery industry had aggregate sales in 1997 of approximately
$4.3 billion as set forth below.
<TABLE>
<CAPTION>
1997 U.S. Battery Industry Sales (In billions)
<S> <C>
Retail:
General ................................ $ 2.4
Hearing aid ............................ 0.2
Other specialty ........................ 0.9
Industrial, OEM and Government ......... 0.8
------
Total .................................. $ 4.3
======
</TABLE>
As set forth below, this segment has experienced steady growth, with
compound annual unit sales growth since 1990 of 4%.
RETAIL GENERAL BATTERY MARKET
Total Retail General Batteries
------------------------------
[LINE CHART DATA]
Dollars Units
(Millions) (Millions)
1990 1834 2225
1991 1912 2358
1992 2003 2543
1993 2099 2715
1994 2192 2910
1995 2316 3071
1996 2395 3156
1997 2431 3246
Source: A.C. Nielsen Scanner Data,
A.C. Nielsen Consumer Panel Data and Company estimates.
The U.S. battery industry is dominated by three manufacturers, (Duracell,
Energizer and Rayovac) each of which manufactures and markets a wide variety of
batteries. Together, these three accounted for approximately 90% of the U.S.
retail general battery market in calendar 1997. Retail sales of general and
specialty batteries represent the largest portion of the U.S. battery industry,
accounting for approximately 80% of sales in 1997. Batteries are popular with
many retailers because they provide attractive profit margins. As batteries are
an impulse purchase item, increasing display locations in stores tends to
generate increased sales.
The growth in retail sales of general batteries in the U.S. is largely due
to (i) the popularity and proliferation of battery-powered devices (such as
remote controls, personal radios and cassette players, pagers, portable compact
disc players, electronic and video games and battery-powered toys), (ii) the
miniaturization of battery-powered devices, which has resulted in consumption
of a larger number of smaller batteries, and (iii) increased purchases of
multiple-battery packages for household "pantry" inventory. These factors have
increased the average household usage of batteries from an estimated 23
batteries per year in 1986 to an estimated 36 batteries per year in 1997.
Similar to general retailing trends, increased battery sales through mass
merchandisers and warehouse clubs have driven the overall growth of retail
battery sales. Mass merchandisers accounted for 66% of the total increase in
general battery retail dollar sales from 1993 through 1997 and, together with
warehouse clubs, accounted for 41% of total retail battery sales in 1997.
In 1997, U.S. and worldwide retail sales of hearing aid batteries were
approximately $219 million and $565 million, respectively, and have grown at a
compound annual growth rate of 7% and 5%, respectively, over the last five
years. Growth in the hearing aid battery market has been driven by an aging
population; increases in hearing
38
<PAGE>
instrument device sales driven by technological advances, including
miniaturization, which provides higher cosmetic appeal and improved
amplification; and the higher replacement rates of smaller hearing instruments.
Other markets in which the Company operates include those for replacement
watch and calculator batteries, which had worldwide sales of approximately $924
million in 1997, photo batteries, which had worldwide sales of approximately
$660 million in 1997 and lithium coin cells, which had worldwide sales of
approximately $56 million in 1997.
Products
Rayovac develops, manufactures and markets a wide variety of batteries and
battery-powered lighting devices. The Company's broad line of products includes
(i) general batteries (including alkaline, heavy duty and rechargeable alkaline
batteries) and specialty batteries (including hearing aid, watch, photo,
keyless entry, and personal computer clock, memory back-up batteries,
rechargeable batteries for cordless telephones and rechargeable batteries,
battery chargers and accessories for cellular phones and camcorders) and (ii)
lighting products and lantern batteries. General batteries (D, C, AA, AAA and
9-volt sizes) are used in devices such as radios, remote controls, personal
radios and cassette players, pagers, portable compact disc players, electronic
and video games and battery-powered toys, as well as a variety of
battery-powered industrial applications. Of the Company's specialty batteries,
button cells are used in smaller devices (such as hearing aids and watches),
lithium coin cells are used in cameras, calculators, communication equipment,
medical instrumentation and personal computer clocks and memory back-up
systems, and lantern batteries are used almost exclusively in battery-powered
lanterns. The Company's lighting products include flashlights, lanterns and
similar portable products.
Net sales data for the Company's products as a percentage of net sales for
fiscal 1995, fiscal 1996, the Transition Period, fiscal 1997 and six months
ended March 29, 1997 and March 28, 1998 are set forth below.
<TABLE>
<CAPTION>
Percentage of Company Net Sales
--------------------------------------------------------------------------------------
Transition
Period Fiscal Year
Fiscal Year Ended Ended
Ended June 30, September 30, September 30, Six Months Ended
--------------------- --------------- --------------- --------------------------------
1995 1996 1996 1997 March 29, 1997 March 28, 1998
Product Type ---------- ---------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Battery Products:
Alkaline .......................... 43.4% 43.6% 41.4% 45.0% 43.7% 50.2%
Heavy Duty ........................ 14.1 12.2 12.7 10.4 11.3 8.3
Rechargeable Batteries ............ 5.6 7.1 5.1 5.5 6.3 5.6
Hearing Aid ....................... 12.7 14.6 14.3 14.8 14.2 14.2
Other Specialty Batteries ......... 10.0 8.6 10.1 9.8 9.6 8.0
----- ----- ----- ----- ----- -----
Total ........................... 85.8 86.1 83.6 85.5 85.1 86.3
Lighting Products and
Lantern Batteries ................ 14.2 13.9 16.4 14.5 14.9 13.7
----- ----- ----- ----- ----- -----
Total ........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
39
<PAGE>
Battery Products
A description of the Company's major battery products including their
typical uses is set forth below.
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
General Batteries Hearing Aid
Batteries
- --------------------------------------------------------------------------------
Technology Alkaline Zinc Zinc Air
- --------------------------------------------------------------------------------
Types/ - Disposable Heavy Duty --
Common - Rechargeable (Zinc Chloride)
Name:
- --------------------------------------------------------------------------------
Brand; Rayovac; Rayovac Rayovac; Loud'n
Sub-brand MAXIMUM, Clear, ProLine,
Names(1): Renewal, Best Labs,
Power Ultracell
Station XCell and
AIRPOWER
- --------------------------------------------------------------------------------
Sizes: D, C, AA, AAA, 9-volt(2) 5 sizes
for both Alkaline and Zinc
- --------------------------------------------------------------------------------
Typical Uses: All standard household Hearing
applications including aids
pagers, personal radios
and cassette players,
remote controls and a
wide variety of
industrial applications
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Other Specialty Batteries Lantern
Batteries
- --------------------------------------------------------------------------------
Technology Lithium Silver Lithium Ion, Zinc
Nickel Metal
Hydride, Nickel
Cadmium and
Sealed Lead
Acid
- --------------------------------------------------------------------------------
Types/ -- -- Rechargeable Lantern
Common (Alkaline, Zinc
Name: Chloride and
Zinc Carbon)
- --------------------------------------------------------------------------------
Brand; Rayovac; Rayovac Rayovac Rayovac
Sub-brand Lifex
Names(1):
- --------------------------------------------------------------------------------
Sizes: 5 primary 10 primary 35 sizes Standard
sizes sizes lantern
- --------------------------------------------------------------------------------
Typical Uses: Personal Watches Cellular phones, Beam lanterns,
computer camcorders and Camping
clocks and cordless phones Lanterns
memory
back-up
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company also produces and supplies private label brands in selected
categories.
(2) The Company does not produce 9-volt rechargeable batteries.
Products
Alkaline Batteries. Alkaline batteries are based on technology which first
gained widespread application during the 1980s. Alkaline batteries provide
greater average energy per cell and considerably longer service life than
traditional zinc chloride (heavy duty) or zinc carbon (general purpose)
batteries, the dominant battery types throughout the world until the 1980s.
Alkaline performance superiority has resulted in alkaline batteries steadily
displacing zinc chloride and zinc carbon batteries. In the domestic retail
general battery market, for instance, alkaline batteries represented
approximately 87% of total battery unit sales in calendar 1997, despite higher
per battery prices than zinc batteries.
Rayovac produces a full line of alkaline batteries including D, C, AA, AAA
and 9-volt size batteries for both consumers and industrial customers. The
Company's alkaline batteries are marketed and sold primarily under the Rayovac
MAXIMUM brand, although the Company also engages in limited private label
manufacture of alkaline batteries. AA and AAA size batteries are often used
with smaller electronic devices such as remote controls, photography equipment,
personal radios and cassette players, pagers, portable compact disc players and
electronic and video games. C and D size batteries are generally used in
devices such as flashlights, lanterns, radios, cassette players and battery-
powered toys. 9-volt size batteries are generally used in fire alarms, smoke
detectors and communication devices.
The Company regularly tests the performance of its alkaline batteries
against those of its competitors across a number of applications and battery
sizes using American National Standards Institute ("ANSI") testing criteria,
the standardized testing criteria generally used by industry participants to
evaluate battery performance, as well as its own specific product device
testing, which the Company believes may provide more relevant information to
consumers. Although relative performance varies based on battery size and
device tests, the average performance of the Company's alkaline batteries and
those of its competitors are substantially equivalent. The Company's
performance comparison results are corroborated by published independent test
results.
40
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For calendar 1997 the Company had an 11% overall alkaline battery unit
market share and a 19% alkaline battery unit market share within the mass
merchandiser retail channel.
Heavy Duty Batteries. Heavy duty batteries include zinc chloride batteries
designed for low and medium-drain devices such as lanterns, flashlights, radios
and remote controls. In March 1998, the Company announced a restructuring of
operations, including the outsourcing of the manufacturing of heavy duty
batteries. In fiscal 1997, the Company produced a full line of heavy duty
batteries, although AA, C and D size heavy duty batteries together accounted
for 90% of the Company's heavy duty battery unit sales in fiscal 1997.
The Company had a 35% unit market share in the heavy duty battery market
through mass merchandisers, food and drug stores for the 52 weeks ended March
14, 1998. Generally, the size of the heavy duty battery market has been
decreasing because of increased sales of alkaline batteries for uses
traditionally served by non-alkaline batteries.
Rechargeable Batteries. The Company's Renewal rechargeable battery is the
only rechargeable alkaline battery in the U.S. market, commanding a 68% market
share of the rechargeable household battery market through mass merchandisers,
food and drug stores for the 52 weeks ended March 14, 1998. Since the
Recapitalization, management has lowered the price of Renewal rechargers by 33%
to encourage consumers to purchase the system and shifted Renewal's marketing
message from its environmental benefits to its money-saving benefits. Renewal
batteries present a value proposition to consumers because they can be
recharged over 25 times, providing 10 times the energy of disposable alkaline
batteries at only twice the retail price. In addition, alkaline rechargeables
are superior to nickel cadmium rechargeables (the primary competing technology)
because they provide more energy between charges, are sold fully charged,
retain their charge longer and are environmentally safer. Certain technology
underlying the Company's Renewal line of rechargeable alkaline batteries could
be made available to the Company's competitors under certain circumstances. See
"Risk Factors--Limited Intellectual Property Protection."
Hearing Aid Batteries. The Company was the largest worldwide seller of
hearing aid batteries in fiscal 1997, with a market share of approximately 52%.
In addition, the Company has strengthened its worldwide leadership with the
acquisition of Brisco. This strong market position is the result of hearing aid
battery products with advanced technological capabilities, consistent product
performance, a strong distribution system and an extensive marketing program.
Hearing aid batteries are produced in several sizes and are designed for use
with various types and sizes of hearing aids. The Company produces five sizes
and two types of zinc air button cells for use in hearing aids, which are sold
under the Loud'n Clear, ProLine, Best Labs, Ultracell, XCell and AIRPOWER brand
names and under several private labels, including Beltone, Miracle Ear, Siemens
and Starkey. Zinc air is a highly reliable, high energy density, lightweight
battery system with performance superior to that of traditional hearing aid
batteries. The Company was the pioneer and currently is the leading
manufacturer of the smallest (5A and 10A size) hearing aid batteries. The
Company's zinc air button cells offer consistently strong performance, capacity
and reliability based on ANSI testing criteria as applied by the Company.
Other Specialty Batteries. The Company's other specialty battery products
include non-hearing aid button cells, lithium coin cells, photo batteries,
keyless entry batteries and rechargeable nickel cadmium, nickel metal hydride,
lithium ion and sealed lead acid batteries. The Company produces button and
coin cells for watches, cameras, calculators, communications equipment and
medical instrumentation. The Company's market shares within each of these
categories vary. The Company's Lifex lithium coin cells are high-quality
lithium batteries with certain performance advantages over other lithium
battery systems. These products are used in calculators and personal computer
clocks and memory back-up systems. Lifex lithium coin cells have outstanding
shelf life and excellent performance. The Company's rechargeable lithium ion,
nickel metal hydride, nickel cadmium and sealed lead acid batteries are sourced
for use in cellular telephones, camcorders and cordless telephones.
Battery Merchandising and Advertising
Alkaline and Rechargeable Batteries. Since the Recapitalization, the
Company has substantially revised its merchandising and advertising strategies
for general batteries. Key elements of the Company's strategies include:
building the awareness and image of the Rayovac brand name; focusing on the
reformulated MAXIMUM alkaline product line; improving consumer perceptions of
the quality and performance of the Company's products; upgrading and unifying
product packaging; and solidifying the Company's position as the value brand by
offering batteries of equal quality and performance at a lower price than those
offered by its principal competitors. The Company's strategy is to provide
products of quality and performance equal to its major competitors in the
general battery
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market at a lower price, appealing to a large segment of the population
desiring a value brand. To demonstrate its value positioning, Rayovac offers
comparable battery packages at a lower price or, in some cases, more batteries
for the same price. The Company also works with individual retail channel
participants to develop unique merchandising programs and promotions and to
provide retailers with attractive profit margins to encourage retailer brand
support.
In response to the introduction by the Company's principal competitors in
the U.S. general battery market of on-the-label battery testers for alkaline
batteries, the Company developed an on-the-label tester for the Company's
alkaline batteries. Based on the Company's consumer testing which indicated
that such testers are difficult to use, prone to failure and do not represent a
significant marketing advantage, management decided not to proceed with the
implementation of such testers.
In the three fiscal years prior to the Recapitalization, the Company spent
substantially all of its advertising budget on its Renewal product line. The
Company's current advertising campaign designed by Young & Rubicam, the
Company's new advertising agency, has shifted advertising efforts to the
Company's MAXIMUM alkaline products. In addition, the Company launched its
first major national advertising campaign. The campaign is designed to increase
awareness of the Rayovac brand and to heighten customers' perceptions of the
quality, performance and value of Rayovac products. The Company has engaged
Michael Jordan as a spokesperson for its general battery products under a
contract which extends through 2004 and which, by its terms, may not be
cancelled or terminated by Mr. Jordan without cause prior to its expiration.
The Company substantially overhauled its marketing strategy for its
Renewal rechargeable batteries in 1997 to focus on the economic advantages of
Renewal rechargeable batteries and to position the rechargers at lower, more
attractive price points. As part of its marketing strategy for its rechargeable
batteries, the Company actively pursues OEM arrangements and other alliances
with major electronic device manufacturers.
Hearing Aid Batteries. To market and distribute its hearing aid battery
products, the Company continues to use a highly successful national print
advertising campaign featuring Arnold Palmer. A binaural wearer and user of
Rayovac hearing aid batteries, Mr. Palmer has been extremely effective in
promoting the use of hearing aids, expanding the market and communicating the
specific product benefits of Rayovac hearing aid batteries. The Company's
agreement with Mr. Palmer may not be cancelled or terminated by him without
cause prior to its expiration. The Company has also developed a national print
advertising campaign in selected publications such as Modern Maturity to reach
the largest potential market for hearing aid batteries. The Company also
pioneered the use of multipacks and intends to further expand multipack
distribution in additional professional and retail channels. Additionally, the
Company believes that it has developed strong relationships with hearing aid
manufacturers and audiologists, the primary purveyors of hearing aids, and
seeks to further penetrate the professional market. To further its marketing
and distribution capability in hearing aid batteries, in March 1998 the Company
acquired the battery distribution portion of Best Labs, a Florida distributor
of hearing aid batteries and a manufacturer of hearing instruments. The Company
has also established relationships with major Pacific Rim hearing aid battery
distributors to take advantage of anticipated global market growth. In
addition, the Company believes that the acquisition of Brisco will enable the
Company to further penetrate European markets for hearing aid batteries.
Other Specialty Batteries. The Company's marketing strategies for its
other specialty batteries focus on leveraging the Company's brand name and
strong market position to promote its specialty battery products. With the
acquisition of DPP, the Company plans to further position itself in the retail
market for rechargeable specialty batteries and accessories for use with
cellular telephones, camcorders and cordless telephones. The Company has
redesigned its product graphics and packaging of its other specialty battery
products to achieve a uniform brand appearance with the Company's other
products and generate greater brand awareness and loyalty. In addition, the
Company plans to continue to develop relationships with manufacturers of
communications equipment and other products in an effort to expand its share of
the non-hearing aid button cell market. The Company believes there to be
significant opportunity for growth in the photo and keyless entry battery
markets and seeks to further penetrate the replacement market for these
products. The Company has recently introduced a line of products to serve the
medical instrument and health services markets.
With regard to lithium coin cells, the Company seeks to further penetrate
the OEM portable personal computer market, as well as to broaden its customer
base by focusing additional marketing and distribution efforts on
telecommunication and medical equipment manufacturers.
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Lighting Products and Lantern Batteries
Products
The Company is a leading marketer of battery-powered lighting devices,
including flashlights, lanterns and similar portable products for the retail
and industrial markets. For the 52 weeks ended March 14, 1998 the Company's
products accounted for 13% of aggregate lighting product retail dollar sales in
the mass merchandiser retail market segment. Rayovac has established its
position in this market based on innovative product features, consistent
product quality and creative product packaging. In addition, the Company
endeavors to regularly introduce new products to stimulate consumer demand and
promote impulse purchases.
The Company also produces a wide range of consumer and industrial lantern
batteries. For calendar 1997, the Company held a 44% unit market share in the
lantern battery market. This market has experienced a decline in recent years
due to the declining use of this product for highway construction barricades.
Merchandising and Advertising
The Company's marketing strategy for its lighting products and lantern
batteries focuses on leveraging the Company's strong brand name, regularly
introducing new products, utilizing innovative packaging and merchandising
programs, and promoting impulse buying and gift purchases.
Sales and Distribution
General
After the Recapitalization, the Company reorganized its sales force by
distribution channel. As a result of this reorganization, the Company maintains
separate U.S. sales forces primarily to service its retail sales and
distribution channels and its hearing aid professionals, industrial and OEM
sales and distribution channels. In addition, the Company utilizes a network of
independent brokers to service participants in selected distribution channels.
In conjunction with its broader cost rationalization initiatives, the Company
has reduced the number of independent brokers and sales agents from over 100 to
approximately 50. With respect to sales of the Company's hearing aid batteries,
while most of the Company's sales have historically been through hearing aid
professionals, the Company is actively engaged in efforts to increase sales
through retail channels. In March 1998, the Company acquired the hearing aid
battery distribution portion of Best Labs. In addition, the Company maintains
its own sales force of approximately 30 employees in Europe which promotes the
sale of all of the Company's products.
Retail
In the retail segment, the Company realigned its sales resources to create
a sales force dedicated to each of its retail distribution channels. The
primary retail distribution channels include: mass merchandisers (both national
and regional) and warehouse clubs; food, drug and convenience stores;
electronics specialty stores and department stores; hardware and automotive
centers; specialty retailers; automotive aftermarket dealers; military sales;
and catalog showrooms. The Company works closely with individual retailers to
develop unique product promotions and to provide them with the opportunity for
attractive profit margins to encourage brand support. The Company has focused
sales for its Renewal product line on distribution channels which the Company
believes to be more suited for this product, such as electronics specialty
stores, and has recently begun shipments to Radio Shack.
The Company's sales efforts in the retail channel focus primarily on sales
and distribution to national mass merchandisers, in particular the Wal-Mart,
Kmart and Target chains, which collectively accounted for 55% of industry sales
growth in the domestic alkaline battery market over the past five years. The
Company's sales strategy for these and other mass merchandisers includes
increasing market share for all of the Company's products through the use of
account specific programs and a separate sales and marketing team dedicated to
these large retailers.
The Company's sales strategy is to penetrate further particular retail
distribution channels, including home centers, hardware stores, warehouse clubs
and food and drug stores. The Company's strategy for these retail channels is
to develop creative and focused marketing campaigns which emphasize the
performance parity and consumer cost advantage of the Rayovac brand and to
tailor specific promotional programs unique to these distribution channels.
Industrial and OEM
In the industrial battery market, the Company services three sales and
distribution channels: contract sales to governments and related agencies;
maintenance repair organizations (including buying groups); and office product
supply companies. The primary products sold to this market include alkaline,
heavy duty, and lantern batteries and
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flashlights. Maintenance repair organizations, the largest of which is W.W.
Grainger (to whom the Company is a major supplier of battery and lighting
products), generally sell to contractors and manufacturers. The office product
supply channel includes sales to both professional and retail companies in the
office product supply business.
In the OEM sales channel, the Company actively pursues OEM arrangements
and other alliances with major electronic device manufacturers for its
rechargeable batteries. The Company also utilizes the OEM channel for the sale
and distribution of its hearing aid batteries through strong relationships it
has developed with hearing aid manufacturers. The Company plans to continue to
develop relationships with manufacturers of communications equipment and other
products in an effort to expand its share of the non-hearing aid button cell
market. With regard to lithium coin cells, the Company plans to penetrate
further the OEM portable personal computer market and broaden its customer base
by focusing additional sales and distribution efforts on telecommunications and
medical equipment manufacturers.
Manufacturing and Raw Materials
The Company manufactures batteries in the United States and the United
Kingdom. In March 1998, the Company announced certain manufacturing changes
which include consolidating the Company's packaging operations at its Madison,
Wisconsin plant, closing the Company's Appleton, Wisconsin plant and relocating
the affected manufacturing operations for lithium batteries to the Company's
Portage, Wisconsin facility. Since the Recapitalization, the Company has
shifted manufacturing operations from its Newton Aycliffe, United Kingdom and
Kinston, North Carolina facilities to other facilities of the Company and
outsourced the manufacture of certain lighting products. These efforts have
increased plant capacity utilization and eliminated some of the Company's
underutilized manufacturing capacity. In March 1998, the Company announced the
closing of the Newton Aycliffe, United Kingdom facility and the sale of the
Kinston, North Carolina facility.
During the past five years, the Company has spent significant resources on
capital improvements, including the modernization of many of its manufacturing
lines and manufacturing processes. These manufacturing improvements have
enabled the Company to increase the quality and service life of its alkaline
batteries and to increase its manufacturing capacity. In March 1998, the
Company agreed to purchase from Matsushita a new high speed alkaline battery
manufacturing production line for its Fennimore, Wisconsin plant and to source
certain finished products, battery parts and material from Matsushita to
continue to supplement the Company's existing domestic production capacity.
Management believes that the Company's manufacturing capacity is sufficient to
meet its anticipated production requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The most significant raw materials used by the Company to manufacture
batteries are zinc powder, electrolytic manganese dioxide powder, graphite and
steel. There are a number of worldwide sources for all necessary raw materials,
and management believes that Rayovac will continue to have access to adequate
quantities of such materials at competitive prices. The Company regularly
engages in forward purchases and hedging transactions to effectively manage raw
material costs and inventory relative to anticipated production requirements.
See "Risk Factors--Raw Materials."
Research and Development
The Company's research and development strategy is to purchase or license
state-of-the-art manufacturing technology from third parties and to develop
such technology through the Company's own research and development efforts. In
March 1998, the Company announced the extension of its existing alkaline
battery technology agreement with Matsushita, pursuant to which the Company is
entitled to license (on a non-exclusive basis) Matsushita's highly advanced
designs, technology and manufacturing equipment for alkaline batteries,
including all developments and innovations thereto, through 2003. Thereafter,
the Company is entitled to license such technology existing as of such date
through 2023. Pursuant to the terms of the agreement, Matsushita may not cancel
or terminate this battery technology agreement prior to its expiration other
than for "cause" as described therein. The Company's research and development
efforts focus primarily on performance and cost improvements of existing
products and technologies. In recent years, these efforts have led to advances
in alkaline, heavy duty and lithium chemistries, as well as zinc air hearing
aid batteries and enhancements of licensed rechargeable alkaline technology.
The Company believes that continued development efforts are important in
light of the continually evolving nature of battery technology and credits the
competitive performance of its products to its recent development
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<PAGE>
efforts. In the hearing aid battery segment, the Company's research and
development group maintains close alliances with the developers of hearing aid
devices and often works in conjunction with these developers in preparing new
product designs. The success of these efforts is most recently demonstrated by
the Company's development of the two smallest (5A and 10A size) hearing aid
batteries. The Company's research and development efforts in the Lighting
Products and Lantern Batteries segment are focused on the development of new
products. Further, the Company continues to partner with the U.S. government in
research efforts to develop new battery technology. The Company's research and
development group includes approximately 95 employees, the expense for some of
whom is funded by U.S. government research contracts. The Company's
expenditures for research and development were approximately $6.2 million, $1.5
million, $5.4 million and $5.0 million for fiscal 1997, the Transition Period,
fiscal 1996 and fiscal 1995, respectively. See "--Patents, Trademarks and
Licenses."
Information Systems
The Company has completed an initial reorganization of its information
systems function by (i) hiring an experienced Chief Information Officer, (ii)
outsourcing mainframe computer operations, (iii) completing an enterprise
software system analysis and selection, and (iv) retaining outside consultants
to modernize and upgrade its data processing and telecommunications
infrastructure. The Company has purchased from SAP and begun implementing an
enterprise-wide, integrated information system to upgrade and modernize its
business operations, the majority of which will be substantially implemented by
mid-1999. When fully implemented, this system is expected to reduce cycle
times, lower manufacturing and administrative costs, improve both asset and
employee productivity and substantially address the Year 2000 issue. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Computer Systems Upgrade."
Patents, Trademarks and Licenses
The Company's success and ability to compete depends in part upon its
technology. The Company relies upon a combination of patent, trademark and
trade secret laws, together with licenses, confidentiality agreements and other
contractual covenants, to establish and protect its technology and other
intellectual property rights.
The Company owns or licenses from third parties a considerable number of
patents and patent applications throughout the world, primarily for battery
product improvements, additional features and manufacturing equipment. In March
1998, the Company announced the extension of its existing alkaline battery
technology agreement with Matsushita, pursuant to which the Company will
continue to license Matsushita's highly advanced designs, technology and
manufacturing equipment, including all developments and innovations thereto,
through 2003. Thereafter, the Company is entitled to license such technology
existing as of such date through 2023.
The Company also uses a number of trademarks in its business, including
Rayovac[RegTM], MAXIMUMTM, Renewal[RegTM], Loud'n Clear[RegTM], Power
Station[RegTM], ProLine[RegTM], LifexTM, Smart Pack[RegTM], Best Labs[RegTM],
Ultracell[RegTM], XCell[RegTM], AIRPOWER[RegTM], SmartTM Strip,
Workhorse[RegTM] and Roughneck[RegTM]. The Company relies on both registered
and common law trademarks in the United States to protect its trademark rights.
The Rayovac[RegTM] mark is also registered in countries outside the United
States, including in Europe and the Far East. The Company does not have any
right to the trademark "Rayovac" in Brazil, where the mark is owned by an
independent third-party battery manufacturer. In addition, ROV Limited, a third
party unaffiliated with the Company, has an exclusive, perpetual, royalty-free
license for the use of certain of the Company's trademarks (including the
"Rayovac" mark) in connection with zinc carbon and alkaline batteries and
certain lighting devices in many countries outside the United States, including
Latin America.
The Company has obtained a non-exclusive license to use certain technology
underlying its rechargeable battery line to manufacture such batteries in the
United States, Puerto Rico and Mexico and to sell and distribute batteries
based on the licensed technology worldwide. This license terminates with the
expiration of the last-expiring patent covering the licensed technology in
2015. In addition, in the conduct of its business, the Company relies upon
other licensed technology in the manufacture of its products. See Note 13 to
Notes to Consolidated Financial Statements.
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Competition
The Company believes that the markets for its products are highly
competitive. Duracell and Energizer are the Company's primary battery industry
competitors, each of which has substantially greater financial and other
resources and greater overall market share than the Company. Although other
competitors have sought to enter this market, the Company believes that new
market entrants would need significant financial and other resources to develop
brand recognition and the distribution capability necessary to serve the U.S.
marketplace. Substantial capital expenditures would be required to establish
U.S. battery manufacturing operations, although potential competitors could
import their products into the U.S. market. The Company and its primary
competitors enjoy significant advantages in having established brand
recognition and distribution channels. See "Risk Factors--Competition."
In February 1998, Duracell announced the introduction of a new line of
alkaline batteries under the name Duracell Ultra in the AA and AAA size
categories which is being marketed as providing increased performance in
certain high-drain devices, including cellular phones, digital cameras and
palm-sized computers. Duracell has indicated that this new line of alkaline
batteries will begin shipping to retailers in May 1998. Based on the Company's
preliminary analysis of this new product line in comparison to the Company's
technology and technology generally available in the market, the marketing
strategies announced by Duracell in connection with the introduction of the new
line and the premium pricing for such product, the Company does not anticipate
that this new product line will have a significant impact on the Company's
results of operations, however there can be no assurance in this regard. In May
1998 Energizer announced the introduction of Energizer Advanced Formula
alkaline batteries, available in all cell sizes, which Energizer claims will
provide superior performance in high drain devices and improved performance in
all other device categories. The Energizer Advanced Formula alkaline batteries
are expected to be available in the summer of 1998. The Company has not yet had
an opportunity to evaluate the Energizer Advanced Formula products or assess
any potential impact on the Company's results of operations. See "Risk
Factors--Competition."
In the U.S. market for general batteries, competition is based on brand
name recognition, perceived quality, price, performance, product packaging and
design innovation, as well as creative marketing, promotion and distribution
strategies. In comparison to the U.S. battery market, the international general
battery market has more competitors, is as highly competitive and has similar
methods of competition.
Competition in the hearing aid battery industry is based upon reliability,
performance, quality, product packaging and brand name recognition. The
Company's primary competitors in the hearing aid battery industry include
Duracell, Energizer and Panasonic. The battery-powered lighting device industry
is also very competitive and includes a greater number of competitors
(including Black & Decker, Mag-Lite and Energizer) than the U.S. battery
industry.
Employees
As of March 28, 1998 the Company had approximately 2,100 full-time
employees. The Company believes its relationship with its employees is good and
there have been no work stoppages involving Company employees since 1981. A
significant number of the Company's factory employees are represented by one of
four labor unions. The Company has recently entered into collective bargaining
agreements with its Madison, Fennimore, and Portage, Wisconsin employees, which
expire in 2000 for Madison and Fennimore employees and in 2002 for Portage
employees. The Company also recently entered into a collective bargaining
agreement with its Washington, United Kingdom employees which expires in
December 1998.
Properties and Equipment
The following table sets forth information regarding the Company's
manufacturing sites in the United States and the United Kingdom:
<TABLE>
<CAPTION>
Location Product Owned/Leased Square Feet
<S> <C> <C> <C>
Fennimore, WI Alkaline batteries and Renewal rechargeable batteries Owned 176,000
Madison, WI Heavy duty and general purpose batteries Owned 158,000
Washington, UK Zinc air button cells Leased 63,000
Portage, WI Zinc air and silver button cells Owned 62,000
Appleton, WI Lithium coin cells and alkaline computer batteries Owned 60,600
Wonewoc, WI Battery-powered lighting products and lantern batteries Leased 60,000
</TABLE>
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The Company also leases approximately 250,000 square feet of space in
Madison, Wisconsin for its corporate headquarters and technology center.
From fiscal 1993 through fiscal 1995 the Company has invested in all of
its major battery facilities. During this period, the Company invested
approximately $33 million in connection with the Fennimore Expansion.
Additional investments in zinc air battery production have helped to increase
output and precision of assembly as well as to increase the capacity of
critical component manufacturing. Investments in lithium coin cell production
have been used to build capacity for newly developed sizes of lithium coin
cells as well as to increase capacity of the largest volume sizes of such
cells. As part of the Company's recently announced restructuring, the Madison,
Wisconsin plant will phase out the manufacture of heavy duty batteries, which
will be sourced from other suppliers, and the Appleton, Wisconsin plant will be
closed with the manufacturing operations moved to Portage. In addition, in
March 1998 the Company agreed to purchase from Matsushita a new high speed
alkaline battery manufacturing production line for its Fennimore, Wisconsin
plant, which is expected to increase the Company's production capacity for AA
size batteries by up to 50%.
The following table sets forth information regarding the Company's
packaging and distribution sites:
<TABLE>
<CAPTION>
Location Owned/Leased Square Feet
<S> <C> <C>
Middleton, WI Leased 220,000
Newton Aycliffe, UK Leased 75,000
Laverne, TN Leased 73,000
Hayward, CA Leased 30,000
Billinghausen, GER Owned 5,000
</TABLE>
As part of the recently announced restructuring, the Company will centralize
its packaging operations into one location at its Madison, Wisconsin plant and
will close its Newton Aycliffe, UK facility. In addition, in March 1998 the
Company sold its Kinston, North Carolina facility. The Company believes that
its facilities, in general, are adequate for its present and currently
foreseeable needs.
Environmental Matters
The Company's facilities are subject to a broad range of federal, state,
local and foreign laws and regulations relating to the environment, including
those governing discharges to the air and water and land, the handling and
disposal of solid and hazardous substances and wastes, and the remediation of
contamination associated with releases of hazardous substances at Company
facilities and at off-site disposal locations. The Company has a proactive
environmental management program that includes the use of periodic
comprehensive environmental audits to detect and correct practices that may
violate environmental laws or are inconsistent with best management practices.
Based on information currently available to Company management, the Company
believes that it is substantially in compliance with applicable environmental
regulations at its facilities, although no assurance can be provided with
respect to such compliance in the future. There are no pending proceedings
against the Company alleging that the Company is or has been in violation of
environmental laws, and the Company is not aware of any such proceedings
contemplated by governmental authorities. The Company is, however, subject to
certain proceedings under CERCLA or analogous state laws, as described below.
The Company has from time to time been required to address the effect of
historic activities on the environmental condition of its properties, including
without limitation the effect of releases from underground storage tanks.
Several Company facilities have been in operation for decades and are
constructed on fill that includes, among other materials, used batteries
containing various heavy metals. The Company has accepted a deed restriction on
one such property in lieu of conducting remedial activities, and may consider
similar actions at other properties if appropriate. Although the Company is
currently engaged in remedial projects at a few of its facilities, the Company
does not expect that such projects will cause it to incur material
expenditures. Nonetheless, the Company has not conducted invasive testing to
identify all potential risks and, given the age of the Company's facilities and
the nature of the Company's operations, there can be no assurance that the
Company will not incur material liabilities in the future with respect to its
current or former facilities.
The Company has applied to TDEC for participation in TDEC's Voluntary
Cleanup Oversight and Assistance Program with respect to the Company's former
manganese processing facility in Covington, Tennessee. Pursuant to this
program, TDEC will conduct a site investigation to determine the extent of the
cleanup required at the Covington facility, however, there can be no assurance
that participation in this program will preclude this site from
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<PAGE>
being added to the National Priorities List as a Superfund site. Groundwater
monitoring conducted pursuant to the post-closure maintenance of solid waste
lagoons on site, and recent groundwater testing beneath former process areas on
site, indicate that there are elevated levels of certain inorganic
contaminants, particularly (but not exclusively) manganese, in the groundwater
underneath the site. The Company has completed closure of the aforementioned
lagoons and has completed the remediation of a stream that borders the site.
The Company cannot predict the outcome of TDEC's investigation of the site and
there can be no assurance that the Company will not incur material liabilities
in the future with respect to this site.
The Company has been and is subject to several proceedings related to its
disposal of industrial and hazardous waste at off-site disposal locations,
under CERCLA or analogous state laws that hold persons who "arranged for" the
disposal or treatment of such substances strictly liable for the costs incurred
in responding to the release or threatened release of hazardous substances from
such sites. Current and former owners and operators of such sites, and
transporters of waste who participated in the selection of such sites, are also
strictly liable for such costs. Liability under CERCLA is generally "joint and
several," so that a responsible party under CERCLA may be held liable for all
of the costs incurred at a particular site. However, as a practical matter,
liability at such sites generally is allocated among all of the viable
responsible parties. Some of the most significant factors for allocating
liabilities to persons that disposed of wastes at Superfund sites are the
relative volume of waste such persons sent to the site and the toxicity of such
waste. Other than the Velsicol Chemical and Morton International proceedings
described below (as to which there is insufficient information to make a
judgment as to the likelihood of a material impact on the Company's operations,
financial condition or liquidity at this time), the Company does not believe
that any of its pending proceedings under CERCLA or analogous state laws,
either individually or in the aggregate, will have a material impact on the
Company's operations, financial condition or liquidity, and the Company is not
aware of any such matters contemplated by governmental agencies that will have
such an impact. However, the Company may be named as a PRP at additional sites
in the future, and the costs associated with such additional or existing sites
may be material. In addition, certain of the Company's facilities have been in
operation for decades and, over such time, the Company and other prior
operators of such facilities have generated and disposed of wastes which are or
may be considered hazardous such as cadmium and mercury utilized in the battery
manufacturing process.
The Company has been named as a defendant in two lawsuits in connection
with a Superfund site located in Bergen County, New Jersey (Velsicol Chemical
Corporation, et al, v. A.E. Staley Manufacturing Company, et al., and Morton
International, Inc. v. A.E. Staley Manufacturing Company, et al., United States
District Court for the District of New Jersey, filed July 29, 1996). The
Company is one of approximately 50 defendants named in these cases. Both cases
involve contamination at a former mercury processing plant. One case was
brought by the current owner and the other case by a former owner. The
complaints in the two cases are identical, with four counts alleging claims for
contribution under CERCLA, the New Jersey Spill Act, the Federal Declaratory
Judgment Act and the common law. The plaintiffs allege that the Company
arranged for the treatment or disposal of hazardous substances at the site.
Consequently, the plaintiffs allege, the Company is liable to them for
contribution toward the costs of investigating and remediating the site.
No ad damnum is specified in either complaint. The Remedial
Investigation/Feasibility Study ("RI/FS") of the site was commenced in the fall
of 1997. Plaintiff's counsel estimates the cost of the RI/FS to be $4 million.
There is no estimate at this juncture as to the potential cost of remediation.
The Company is one of approximately 50 defendants who allegedly arranged for
treatment or disposal at the site. The remaining defendants are former owners
or operators of the site and adjacent industrial facilities which allegedly
contributed to the contamination. Evidence developed in discovery to date
indicates that while the Company was a customer of the facility, the
relationship was of relatively brief duration. The cost to remediate the Bergen
County Site has not been determined and the Company cannot predict the outcome
of these proceedings. See "Risk Factors--Environmental Matters."
There can be no assurances that additional proceedings relating to
off-site disposal locations will not arise in the future or that such
proceedings will not have a material adverse effect on the Company's business,
financial condition or results of operations. The discovery of previously
unknown contamination of property underlying or in the vicinity of the
Company's manufacturing facilities could require the Company to incur material
unforeseen expenses. Occurrences of any such events may have a material adverse
effect on the Company's financial condition. See "Risk Factors--Environmental
Matters." As of March 28, 1998 the Company has reserved $1.6 million for known
on-site and off-site environmental liabilities. The Company believes these
reserves are adequate, although there can be no assurance that this amount will
ultimately be adequate to cover such matters.
48
<PAGE>
Legal Proceedings
In the ordinary course of business, various suits and claims are filed
against the Company. The Company has been named as a defendant in two lawsuits
in connection with a Superfund site located in Bergen County, New Jersey
(Velsicol Chemical Corporation, et al. v. A.E. Staley Manufacturing Company, et
al. and Morton International, Inc. v. A.E. Staley Manufacturing Company, et
al., United States District Court for the District of New Jersey, filed July
29, 1996). For a discussion of the principal parties, the factual basis alleged
to underlie the proceedings and the relief sought, see "Business--Environmental
Matters." See also "Risk Factors--Environmental Matters." Other than the
Velsicol Chemical and Morton International proceedings (as to which there is
insufficient information to make a judgment as to the likelihood of a material
impact on the Company's business or financial condition at this time), the
Company is not party to any legal proceedings which, in the opinion of
management of the Company, are material to the Company's business or financial
condition.
49
<PAGE>
MANAGEMENT
Directors and Executive Officers
Set forth below is certain information regarding each director and
executive officer of the Company as of April 30, 1998:
<TABLE>
<CAPTION>
Name Age Position and Offices
- ---------------------- ----- -----------------------------------------------------
<S> <C> <C>
David A. Jones 48 Chairman of the Board and Chief Executive Officer
Kent J. Hussey 52 President, Chief Operating Officer and Director
Roger F. Warren 57 President/International and Contract MicroPower and
Director
Trygve Lonnebotn 60 Executive Vice President of Operations and Director
Stephen P. Shanesy 41 Executive Vice President and General Manager of
General Batteries and Lights
Kenneth V. Biller 51 Senior Vice President of Manufacturing/Supply Chain
Merrell M. Tomlin 46 Senior Vice President of Sales
Randall J. Steward 43 Senior Vice President of Finance and Chief Financial
Officer
James A. Broderick 54 Vice President, General Counsel and Secretary
Scott A. Schoen 39 Director
Thomas R. Shepherd 68 Director
Warren C. Smith, Jr. 41 Director
</TABLE>
Mr. Jones has served as the Chairman of the Board of Directors and Chief
Executive Officer of the Company since September 12, 1996. From September 1996
to April 1998 Mr. Jones also served as President of the Company. Between
February 1995 and March 1996, Mr. Jones was Chief Operating Officer, Chief
Executive Officer and Chairman of the Board of Directors of Thermoscan, Inc., a
manufacturer and marketer of infrared ear thermometers for consumer and
professional use. From 1989 to September 1994, he served as President and Chief
Executive Officer of The Regina Company, a manufacturer of vacuum cleaners and
other floor care equipment. In addition, Mr. Jones serves as a director of Ladd
Furniture, Inc. Mr. Jones has over 25 years of experience working in the
consumer durables industry, most recently in management of operations,
manufacturing and marketing.
Mr. Hussey is a director of the Company and has served as President and
Chief Operating Officer of the Company since April 1998. Prior to that time and
since joining the Company in October 1996, Mr. Hussey was the Executive Vice
President of Finance and Administration, Chief Financial Officer and a director
of the Company. From 1994 to 1996, Mr. Hussey was Vice President and Chief
Financial Officer of ECC International, a producer of industrial minerals and
specialty chemicals, and from 1991 to July 1994 he served as Vice President and
Chief Financial Officer of The Regina Company.
Mr. Warren is a director of the Company and has served as
President/International and Contract MicroPower of the Company since 1995. Mr.
Warren joined the Company in 1985 and has held several positions including
Executive Vice President and General Manager and Senior Vice President and
General Manager/International.
Mr. Lonnebotn is a director of the Company and, since 1985, has served as
Executive Vice President of Operations. He joined Rayovac in 1965.
Mr. Shanesy has been the Executive Vice President and General Manager of
General Batteries and Lights of the Company since April 1998. Prior to that
time and from December 1997, Mr. Shanesy served as Senior Vice President of
Marketing and the General Manager of General Batteries and Lights of the
Company. From January 1998 to December 1996, Mr. Shanesy was the Senior Vice
President of Marketing and the General Manager of General Batteries. From 1993
to 1996 Mr. Shanesy was Vice President of Marketing of Oscar Mayer and from
1991 to 1993 he was the Director of Marketing of Oscar Mayer. Prior to that
time and since 1983, Mr. Shanesy held various marketing positions with Kraft
Foods.
Mr. Biller has been the Senior Vice President of Manufacturing/Supply
Chain since January 1998. Prior to that time and since 1996 he was the Senior
Vice President and General Manager of Lighting Products & Industrial and was
Vice President and General Manager of Lighting Products & Industrial since
1995. Mr. Biller joined the
50
<PAGE>
Company in 1972 and has held several positions, including Director of
Technology/Battery Products and Vice President of Manufacturing.
Mr. Tomlin is the Senior Vice President of Sales of the Company. From
March 1996 to September 30, 1996, Mr. Tomlin served as Vice President Sales of
Braun of North America/Thermoscan and from August 1995 to March 1996, he served
as Vice President Sales of Thermoscan, Inc. Prior to that time, Mr. Tomlin was
Vice President of Sales of various divisions of Casio Electronics.
Mr. Steward has been the Senior Vice President of Finance and Chief
Financial Officer of the Company since April 1998. Mr. Steward joined the
Company in March of 1998 as Senior Vice President of Corporate Development.
From September 1997 to March 1998, Mr. Steward worked as an independent
consultant, primarily with Thermoscan, Inc. and Braun AG assisting with
financial and operational issues. From March 1996 to September 1997, Mr.
Steward served as President and General Manager of Thermoscan, Inc. From
January 1992 to March 1996, he served as Executive Vice President of Finance
and Administration and Chief Financial Officer of Thermoscan, Inc. Prior to
January 1991, Mr. Steward was a Finance Director for a division of Medtronic
Inc.
Mr. Broderick is Vice President, General Counsel and Secretary for Rayovac
and has held these positions since 1985.
Mr. Schoen has been a director of the Company since the Recapitalization
and is a Managing Director of THL Co., which he joined in 1986. In addition,
Mr. Schoen is a Vice President of Thomas H. Lee Advisors I and Thomas H. Lee
Advisors II, a Trustee of THL Equity Trust III, the general partner of THL
Equity Advisors Limited Partnership III, which is the general partner of Thomas
H. Lee Equity Fund III L.P., and a Trustee of THL Equity Trust IV, the general
partner of THL Equity Advisors IV, LLC, which is the general partner of Thomas
H. Lee Equity Fund IV, L.P. He is also a director of Syratech Corporation,
TransWestern Communications Corp. and various private corporations.
Mr. Shepherd has been a director of the Company since the Recapitalization
and is a Managing Director of THL Co. and has been engaged as a consultant to
THL Co. since 1986. In addition, Mr. Shepherd is an Executive Vice President of
Thomas H. Lee Advisors I and an officer of various other THL Co. affiliates. He
is also a director of General Nutrition Companies, Inc. and various private
corporations.
Mr. Smith has been a director of the Company since the Recapitalization
and has been employed by THL Co. since 1990 and currently serves as a Managing
Director of THL Co. In addition, Mr. Smith is a Vice President of Thomas H. Lee
Advisors I and T.H. Lee Mezzanine II. Mr. Smith is also a Managing Director and
Member of THL Equity Advisors Limited Partnership III, which is the general
partner of Thomas H. Lee Equity Fund III L.P. and a Managing Director and
Member of THL Equity Advisors IV, LLC, which is the general partner of Thomas
H. Lee Equity Fund IV, L.P. He is also a director of Finlay Enterprises, Inc.,
Finlay Fine Jewelry Corporation and various private corporations.
The Company anticipates that it will designate two additional independent
persons to the Board of Directors following the Offerings.
51
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock by the Selling Shareholders and each
director, executive officer and beneficial owner of more than 5% of the
Company's outstanding Common Stock and by all directors and executive officers
of the Company as a group, at the date hereof and after giving effect to the
sale of the shares of Common Stock offered hereby.
<TABLE>
<CAPTION>
Shares of Common
Shares Stock Beneficially
Shares of Common Shares Subject to Owned After the
Stock Beneficially Being Over- Offerings and Assuming
Owned Prior to Offered Allotment full Exercise of
the Offerings(2) Hereby(3) Options Over-Allotment Options
------------------------- ----------- ------------ -----------------------
Number Percentage Number Percentage
Directors, Executive Officers and 5% Shareholders of Shares of Class of Shares of Class
- --------------------------------------------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Thomas H. Lee Equity Fund III, L.P.(3) 75
State Street, Ste. 2600
Boston, MA 02109 ................................. 14,437,064 52.6% 4,109,800 563,235 9,764,029 35.6%
Thomas H. Lee Foreign Fund III, L.P.(3)
75 State Street, Ste. 2600
Boston, MA 02109 ................................. 894,341 3.3 254,592 34,891 604,858 2.2
THL--CCI Limited Partnership(4)
75 State Street, Ste. 2600
Boston, MA 02109 ................................. 1,515,753 5.5 431,490 59,134 1,025,129 3.7
David A. Jones(5) ................................. 664,388 2.4 217,357 53,144 392,496 1.4
Kent J. Hussey(6) ................................. 144,189 * 42,588 0 101,601 *
Roger F. Warren(7) ................................ 629,462 2.3 219,249 53,089 357,124 1.3
Stephen P. Shanesy(8) ............................. 105,103 * 33,423 8,093 63,587 *
Kenneth V. Biller(9) .............................. 157,193 * 49,987 12,104 95,102 *
Merrell M. Tomlin(10) ............................. 89,620 * 28,499 6,901 54,220 *
James A. Broderick(11) ............................ 241,399 * 77,486 19,391 144,522 *
Trygve Lonnebotn(12) .............................. 502,652 1.8 161,345 40,376 300,931 1.1
Randall J. Steward ................................ 7,500 * 0 0 7,500 *
Scott A. Schoen(3)(13) ............................ 72,756 * 20,711 2,838 49,207 *
Thomas R. Shepherd(13) ............................ 37,894 * 10,787 1,478 25,629 *
Warren C. Smith, Jr.(3)(13) ....................... 60,640 * 17,262 2,366 41,012 *
All directors and executive officers of the
Company as a group (12 persons)(3)(13) ........... 2,712,796 9.6% 879,917 199,948 1,632,931 5.8%
Other Officers
- ----------------------------------------------------
Gary E. Wilson(14) ................................ 133,959 * 42,999 6,300 84,660 *
Kenneth G. Drescher(15) ........................... 22,075 * 7,086 1,773 13,216 *
Dale R. Tetzlaff(16) .............................. 137,572 * 37,000 0 100,572 *
Linda G. Pauls Fleming, as trustee of the
Fleming Trust .................................... 8,000 * 600 0 7,400 *
Other Selling Shareholders
- ----------------------------------------------------
17 Other Selling Shareholders, each of whom
is selling less than 4,600 shares of Common
Stock in the Offerings and will beneficially
own on an aggregate basis less than 1% of
the outstanding Common Stock after the
Offerings ........................................ 121,777 * 36,499 4,069 81,181 *
</TABLE>
- ----------------
*Less than 1%
(1) Addresses are given only for beneficial owners of more than 5% of the
outstanding shares of Common Stock.
(2) Unless otherwise noted, the nature of beneficial ownership is sole voting
and/or investment power, except to the extent authority is shared by
spouses under applicable law. Shares of Common Stock not outstanding
(footnotes continued on following page)
52
<PAGE>
but deemed beneficially owned by virtue of the right of a person or group
to acquire them within 60 days are treated as outstanding only for purposes
of determining the number and percent of outstanding shares of Common Stock
owned by such person or group.
(3) THL Equity Advisors III Limited Partnership ("Advisors"), the general
partner of the THL Fund and Thomas H. Lee Foreign Fund III, L.P., THL
Equity Trust III ("Equity Trust"), the general partner of Advisors, Thomas
H. Lee, Scott A. Schoen, Warren C. Smith, Jr. and other managing directors
of THL Co., as Trustees of Equity Trust, and Thomas H. Lee as sole
shareholder of Equity Trust, may be deemed to be beneficial owners of the
shares of Common Stock held by such Funds. Each of such persons maintains a
principal business address at Suite 2600, 75 State Street, Boston, MA
02109. Each of such persons disclaims beneficial ownership of all shares.
(4) THL Investment Management Corp., the general partner of THL-CCI Limited
Partnership, and Thomas H. Lee, as director and sole shareholder of THL
Investment Management Corp., may also be deemed to be beneficial owners of
the shares of Common Stock held by THL-CCI Limited Partnership. Each of
such persons maintains a principal business address at Suite 2600, 75 State
Street, Boston, MA 02109.
(5) Includes 364,630 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
4,299 shares representing Mr. Jones' proportional interest in the THL Fund,
which proportional interest after the Offerings and assuming full exercise
of the over-allotment options granted to the Underwriters would be 2,908
shares before giving effect to the allocation of fees and obligations to
the THL Fund which allocation would reduce the number of shares
representing Mr. Jones' proportional interest in the THL Fund. Mr. Jones
disclaims beneficial ownership of these shares. Shares of Common Stock
beneficially owned prior to the Offerings also includes 42,606 shares
allocated for the account of such individual pursuant to the Deferred
Compensation Plan, all of which are being sold in the Offerings.
(6) Includes 91,158 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
8,419 shares allocated for the account of such individual pursuant to the
Deferred Compensation Plan, all of which are being sold in the Offerings.
(7) Includes 91,158 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
16,922 shares allocated for the account of such individual pursuant to the
Deferred Compensation Plan, all of which are being sold in the Offerings.
(8) Includes 45,579 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
14,757 shares allocated for the account of such individual pursuant to the
Deferred Compensation Plan, all of which are being sold in the Offerings.
(9) Includes 45,579 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
12,134 shares allocated for the account of such individual pursuant to the
Deferred Compensation Plan, all of which are being sold in the Offerings.
(10) Includes 45,579 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
8,386 shares allocated for the account of such individual pursuant to the
Deferred Compensation Plan, all of which are being sold in the Offerings.
(11) Includes 20,000 shares subject to options which are currently exercisable
and 7,974 shares allocated for the account of such individual pursuant to
the Deferred Compensation Plan.
(12) Includes 68,368 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
15,754 shares allocated for the account of such individual pursuant to the
Deferred Compensation Plan, all of which are being sold in the Offerings.
(13) Represents the proportional interest of such individual in THL-CCI Limited
Partnership; in the case of Mr. Smith, also includes 14,229 shares which
Mr. Smith may be deemed to beneficially own as a result of Mr. Smith's
children's proportional beneficial interest in THL-CCI Limited Partnership.
The proportional interests of Mr. Smith's children in THL-CCI Limited
Partnership after the Offerings, assuming full exercise of the
over-allotment options granted to the Underwriters, would be 9,624 shares.
(14) Includes 20,000 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
7,388 shares allocated for the account of such individual pursuant to the
Deferred Compensation Plan, all of which are being sold in the Offerings.
(15) Includes 2,075 shares allocated for the account of such individual pursuant
to the Deferred Compensation Plan. Shares of Common Stock beneficially
owned prior to the Offerings includes 20,000 shares subject to options
which are currently exercisable and shares of Common Stock beneficially
owned after the Offerings assuming full exercise of the over-allotment
options, includes 11,141 shares subject to options which are currently
exercisable.
(16) Includes 20,000 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
5,022 shares allocated for the account of such individual pursuant to the
Deferred Compensation Plan, all of which are being sold in the Offerings.
53
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summaries of the principal terms of certain outstanding
indebtedness of the Company do not purport to be complete and are subject to
the detailed provisions of, and qualified in their entirety by reference to,
the respective financing agreements, copies of which have been filed or
incorporated by reference as exhibits to the Registration Statement of which
this Prospectus is a part and to which exhibits reference is hereby made.
Whenever particular provisions of such documents are referred to, such
provisions are incorporated by reference as a part of the statements made, and
the statements are qualified in their entirety by such reference.
The Amended Credit Agreement
Pursuant to the Amended Credit Agreement, the Company has available senior
bank facilities in an aggregate amount of $160.0 million.
The Amended Credit Agreement provides a five-year reducing Revolver
Facility of up to $90.0 million under which working capital loans may be made
and a $10.0 million sublimit for letters of credit and a five-year amortizing
Acquisition Facility of $70.0 million (together, the "Bank Facilities"). The
Revolver Facility is reduced by $10.0, $15.0, and $15.0 million, respectively,
on December 31, 1999, 2000 and 2001 and expires on December 31, 2002. From
March 31, 1999 through December 31, 2000 the quarterly amortization rate will
be 5% of the balance outstanding under the Acquisition Facility as of December
31, 1998 (the "Outstanding Balance") and from March 31, 2001 through December
31, 2002 the quarterly amortization rate will be 7.5% of the Outstanding
Balance. The Acquisition Facility is subject to quarterly amortization
commencing March 31, 1999 through December 31, 2002. As of December 30, 1997,
all of the Company's senior term debt was replaced by revolver debt under the
Revolver Facility.
Borrowings under the Bank Facilities bear interest, in each case at the
Company's option, at Bank of America National Trust and Savings Association's
base rate or at IBOR plus .75%. Performance-based reductions and increases of
the Bank Facilities' interest rate are available. The Company also incurs
standard letter of credit fees to issuing institutions and other standard
commitment fees.
The indebtedness outstanding under the Amended Credit Agreement has been
guaranteed by ROV Holding, Inc., a wholly-owned subsidiary of the Company, and
is secured by all existing and after-acquired personal property of the Company
and its domestic subsidiaries, including the stock of all domestic subsidiaries
of the Company and any intercompany debt obligations and 65% of the stock of
all foreign subsidiaries (other than dormant subsidiaries) held directly by the
Company or its domestic subsidiaries, and, subject to certain exceptions, all
existing and after-acquired real property.
The Amended Credit Agreement contains financial and other restrictive
covenants customary and usual for credit facilities of this type, including
those involving maintenance of minimum interest coverage and a required maximum
leverage. The Amended Credit Agreement's covenants also restrict the ability of
the Company to incur additional indebtedness, create liens, make investments or
specified payments, give guarantees, merge or acquire or sell assets, and
restrict certain other activities.
"Events of Default" under the Amended Credit Agreement include, among
other things, failure to make payments when due, defaults under certain other
agreements or instruments of indebtedness, noncompliance with covenants,
breaches of representations and warranties, certain bankruptcy or insolvency
events, judgments in excess of specified amounts, pension plan defaults,
impairment of security interests in collateral, invalidity of guarantees and
certain "changes of control" (as defined in the Amended Credit Agreement).
The Notes
Pursuant to the Indenture, the Company issued $100 million of 10-1/4%
Senior Subordinated Notes Due 2006 to repay certain bridge financing incurred
in connection with the Recapitalization. On March 11, 1997, the Company
consummated an offer to exchange such notes for the Notes registered under the
Securities Act.
The Notes bear interest at the rate of 10-1/4% per annum, payable
semi-annually on May 1 and November 1 of each year and mature on November 1,
2006. The Notes are unsecured senior subordinated general obligations of the
Company and are unconditionally guaranteed on an unsecured senior subordinated
basis by ROV Holding, Inc. The payment of principal of, premium, if any, and
interest on the Notes and the guarantees thereon are subordinated in right of
payment to all existing and future Senior Debt (as defined in the Indenture),
including
54
<PAGE>
borrowings under the Amended Credit Agreement, whether outstanding on the date
of the Indenture or thereafter incurred.
The Notes are not redeemable at the option of the Company prior to
November 1, 2001. Thereafter the Notes are subject to redemption at the option
of the Company, in whole or in part, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning November 1 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
- ------------------------------ -------------
<S> <C>
2001 ......................... 105.125%
2002 ......................... 103.417
2003 ......................... 101.708
2004 and thereafter .......... 100.000
</TABLE>
In addition, at any time on or before October 22, 1999, the Company may
redeem up to 35% of the original aggregate principal amount of the Notes with
the net proceeds of a public equity offering at a redemption price equal to
109.25% of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of redemption, provided that at least 65% of the
original aggregate principal amount of the Notes remains outstanding
immediately after such redemption. The Company applied $38.2 million of the net
proceeds of the IPO to redeem or repurchase Notes in the aggregate principal
amount of $35.0 million.
Each holder of Notes has the right to require the Company to repurchase
all or any part of such holder's Notes at an offer price in cash equal to 101%
of the aggregate principal amount thereof plus accrued and unpaid interest
thereon upon a change of control of the Company. A change of control for this
purpose includes any of the following: (i) any transaction pursuant to which a
person or group becomes the beneficial owner of 50% or more of the voting power
of the voting stock of the Company, and more of the voting power of the Company
than is at that time beneficially owned by the THL Group, (ii) the time at
which individuals who were either members of the Board of Directors of the
Company as of the date of the Indenture or whose election was approved by such
members cease to be a majority of the directors of the Company then in office
or (iii) the sale, lease, transfer or other disposition in one or a series of
related transactions of all or substantially all the assets of the Company.
The Indenture restricts, among other things, the Company's ability to
incur additional indebtedness, pay dividends or make certain other restricted
payments, incur liens to secure pari passu or subordinated indebtedness, engage
in any sale and leaseback transaction, sell stock of subsidiaries, sell assets,
merge or consolidate with any other person, sell, assign, transfer, lease,
convey or otherwise dispose of substantially all of the assets of the Company,
enter into certain transactions with affiliates, or incur indebtedness that is
subordinate in right of payment to any Senior Debt (including indebtedness
incurred under the Amended Credit Agreement and any other indebtedness
permitted to be incurred under the Indenture) and senior in right of payment to
the Notes. The Indenture permits, under certain circumstances, the Company's
subsidiaries to be deemed unrestricted subsidiaries and thus not be subject to
the restrictions of the Indenture.
The Indenture contains standard events of default, including (i) defaults
in the payment of principal, premium or interest, (ii) defaults in the
compliance with covenants contained in the Indenture, (iii) cross defaults on
more than $5 million of other indebtedness, (iv) failure to pay more than $5
million of judgments and (v) certain events of bankruptcy with respect to the
Company and certain of its subsidiaries.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have 27,441,097 shares
of Common Stock outstanding. The 7,827,507 shares of Common Stock sold in the
IPO of the Company's Common Stock in November of 1997 and the 5,750,000 shares
to be sold in the Offerings will be freely tradeable without restriction or
further registration under the Securities Act, except for any such shares which
may be acquired by or shares sold by persons deemed to be "affiliates" of the
Company, as such term is defined under the Securities Act, which shares will be
subject to the resale limitations of Rule 144. Substantially all other shares
will be eligible for resale pursuant to Rule 144 after the Lockup Period.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned, for at
least one year, shares of Common Stock that have not been registered under the
Securities Act or that were acquired from an "affiliate" of the Company is
entitled to sell within any three-month period the number of shares of Common
Stock which does not exceed the greater of one percent of the number of then
outstanding shares of Common Stock or the average weekly reported trading
volume during the four calendar weeks preceding the sale. Sales under Rule 144
are also subject to certain notice requirements and to the availability of
current public information about the Company and must be made in unsolicited
brokers' transactions or to a market maker. A person (or persons whose shares
are aggregated) who is not an "affiliate" of the Company under the Securities
Act during the three months preceding a sale and who had beneficially owned
such shares for at least two years is entitled to sell such shares under Rule
144 without regard to the volume, notice, information and manner of sale
provisions of such Rule.
An aggregate of 2,497,321 shares of Common Stock are reserved for issuance
upon the exercise of outstanding options granted to employees and directors of
the Company pursuant to the 1996 Plan and the Incentive Plan. In November 1997,
the Company registered on a registration statement on Form S-8 the shares of
Common Stock issuable upon the exercise of options granted pursuant to the 1996
Plan and the Incentive Plan. Accordingly, shares issued upon exercise of such
options are freely tradeable, except for any shares held by an "affiliate" of
the Company.
No predictions can be made of the effect, if any, that sales of shares of
Common Stock or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of significant amounts
of Common Stock or the perception that such sales may occur could adversely
affect the prevailing market price of Common Stock, as well as impair the
ability of the Company to raise capital through the issuance of additional
equity securities. See "Risk Factors--Shares Eligible for Future Sale;
Potential for Adverse Effect on Stock Price; Registration Rights."
Notwithstanding the foregoing, in connection with the Offerings, the
Selling Shareholders, certain existing shareholders, the Company, its executive
officers and directors and the THL Group (holding an aggregate of approximately
14.3 million shares of Common Stock upon consummation of the Offerings) have
agreed, subject to certain exceptions, not to directly or indirectly (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of or otherwise dispose of or transfer any shares of Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or thereafter acquired by the person executing the agreement
or with respect to which the person executing the agreement thereafter acquires
the power of disposition, or file a registration statement under the Securities
Act with respect to the foregoing or (ii) enter into any swap or other
agreement that transfers, in whole or in part, the economic consequence of
ownership of the Common Stock whether any such swap or transaction is to be
settled by delivery of Common Stock or other securities, in cash or otherwise,
without the prior written consent of Merrill Lynch & Co. on behalf of the
Underwriters for a period of 90 days after the date of this Prospectus, other
than (i) the sale to the Underwriters of the shares of Common Stock under the
Underwriting Agreement, (ii) upon the exercise of outstanding stock options or
(iii) the issuance of options pursuant to the Company's stock option plans.
In connection with the Recapitalization, the THL Fund and other affiliates
of THL Co. which purchased shares of Common Stock pursuant to the
Recapitalization, certain other shareholders of the Company and the Company
entered into the Shareholders Agreement. The Shareholders Agreement provides
for certain restrictions on transfer of the shares beneficially owned by the
parties thereto. The Shareholders Agreement also provides that, subject to
certain limitations, the THL Group and their permitted transferees have demand
registration rights with respect to their shares of Common Stock. The THL Group
and certain other shareholders also have certain piggy-back registration
rights. See "Risk Factors--Shares Eligible for Future Sale; Potential for
Adverse Effect on Stock Price; Registration Rights."
56
<PAGE>
CERTAIN UNITED STATES FEDERAL TAX
CONSIDERATIONS FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax considerations with respect to the ownership and
disposition of Common Stock applicable to Non-U.S. Holders. In general, a "Non-
U.S. Holder" is any holder other than (i) a citizen or resident of the United
States, (ii) a corporation or partnership created or organized in the United
States or under the laws of the United States or of any state, (iii) an estate,
the income of which is includable in gross income for United States federal
income tax purposes regardless of its source, or (iv) a trust if (a) a court
within the United States is able to exercise primary supervision over the
administration of the trust and (b) one or more United States persons have the
authority to control all substantial decisions of the trust. This discussion is
based on current law, which is subject to change (possibly with retroactive
effect), and is for general information only. This discussion does not address
aspects of United States federal taxation other than income and estate taxation
and does not address all aspects of income and estate taxation or any aspects
of state, local or non-United States taxes, nor does it consider any specific
facts or circumstances that may apply to a particular Non-U.S. Holder
(including certain U.S. expatriates). ACCORDINGLY, PROSPECTIVE INVESTORS ARE
URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE,
LOCAL AND NON-UNITED STATES INCOME AND OTHER TAX CONSIDERATIONS OF HOLDING AND
DISPOSING OF SHARES OF COMMON STOCK.
Dividends
In general, dividends paid to a Non-U.S. Holder will be subject to United
States withholding tax at a 30% rate of the gross amount (or a lower rate
prescribed by an applicable income tax treaty) unless the dividends are either
(i) effectively connected with a trade or business carried on by the Non-U.S.
Holder within the United States, or (ii) if certain income tax treaties apply,
attributable to a permanent establishment in the United States maintained by
the Non-U.S. Holder. Dividends effectively connected with such a United States
trade or business or attributable to such a United States permanent
establishment generally will not be subject to United States withholding tax if
the Non-U.S. Holder files certain forms, including Internal Revenue Service
Form 4224, with the payor of the dividend, and generally will be subject to
United States federal income tax on a net income basis, in the same manner as
if the Non-U.S. Holder were a resident of the United States. A Non-U.S. Holder
that is a corporation may be subject to an additional branch profits tax at a
rate of 30% (or such lower rate as may be specified by an applicable income tax
treaty) on the repatriation from the United States of its "effectively
connected earnings and profits," subject to certain adjustments. To determine
the applicability of a tax treaty providing for a lower rate of withholding
under the currently effective United States Treasury Department regulations
(the "Current Regulations"), dividends paid to an address in a foreign country
are presumed to be paid to a resident of that country absent knowledge to the
contrary. Under United States Treasury Department regulations issued on October
6, 1997 (the "Final Regulations") generally effective for payments made after
December 31, 1998, a Non-U.S. Holder (including, in certain cases of Non-U.S.
Holders that are fiscally transparent entities, the owner or owners of such
entities) will be required to provide to the payor certain documentation that
such Non-U.S. Holder (or the owner or owners of such fiscally transparent
entities) is a foreign person in order to claim a reduced rate of withholding
pursuant to an applicable income tax treaty.
Gain on Sale or Other Disposition of Common Stock
In general, a Non-U.S. Holder will not be subject to United States federal
income tax on any gain realized upon the sale or other disposition of such
holder's shares of Common Stock unless (i) the gain either is effectively
connected with a trade or business carried on by the non-U.S. Holder within the
United States or, if certain income tax treaties apply, is attributable to a
permanent establishment in the United States maintained by the Non-U.S. Holder
(and, in either case, the branch profits tax discussed above may also apply if
the Non-U.S. Holder is a corporation); (ii) the Non-U.S. Holder is an
individual who holds shares of Common Stock as a capital asset and is present
in the United States for 183 days or more in the taxable year of disposition,
and certain other tests are met; or (iii) the Company is or has been a United
States real property holding corporation (a "USRPHC") for United States federal
income tax purposes (which the Company does not believe that it is or is likely
to become) at any time within the shorter of the five year period preceding
such disposition or such Non-U.S. Holder's holding period. If the Company were
or were to become a USRPHC at any time during this period, gains realized upon
a disposition of Common Stock by a Non-U.S. Holder which did not directly or
indirectly own more than 5% of the Common
57
<PAGE>
Stock during this period generally would not be subject to United States
federal income tax, provided that the Common Stock is regularly traded on an
established securities market.
Estate Tax
Common Stock owned or treated as owned by an individual who is not a
citizen or resident (as defined for United States federal estate tax purposes)
of the United States at the time of death will be includable in the
individual's gross estate for United States federal estate tax purposes unless
an applicable estate tax treaty provides otherwise, and therefore may be
subject to United States federal estate tax.
Backup Withholding, Information Reporting and Other Reporting Requirements
The Company must report annually to the Internal Revenue Service and to
each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply regardless
of whether withholding was reduced or eliminated by an applicable tax treaty.
Copies of this information also may be made available under the provisions of a
specific treaty or agreement with the tax authorities in the country in which
the Non-U.S. Holder resides or is established.
Under the Current Regulations, United States backup withholding tax (which
generally is imposed at the rate of 31% on certain payments to persons that
fail to furnish the information required under the United States information
reporting requirements) and information reporting requirements (other than
those discussed above under "Dividends") generally will not apply to dividends
paid on Common Stock to a Non-U.S. Holder at an address outside the United
States. Backup withholding and information reporting generally will apply,
however, to dividends paid on shares of Common Stock to a Non-U.S. Holder at an
address in the United States, if such holder fails to establish an exemption or
to provide certain other information to the payor.
Under the Current Regulations, the payment of proceeds from the
disposition of Common Stock to or through a United States office of a broker
will be subject to information reporting and backup withholding unless the
beneficial owner, under penalties of perjury, certifies, among other things,
its status as a Non-U.S. Holder or otherwise establishes an exemption. The
payment of proceeds from the disposition of Common Stock to or through a
non-U.S. office of a non-U.S. broker generally will not be subject to backup
withholding and information reporting except as noted below. In the case of
proceeds from a disposition of Common Stock paid to or through a non-U.S.
office of a broker that is (i) a United States person, (ii) a "controlled
foreign corporation" for United States federal income tax purposes, or (iii) a
foreign person 50% or more of whose gross income from certain periods is
effectively connected with a United States trade or business, information
reporting (but not backup withholding) will apply unless the broker has
documentary evidence in its files that the owner is a Non-U.S. Holder (and the
broker has no actual knowledge to the contrary).
Under the Final Regulations, the payment of dividends or the payment of
proceeds from the disposition of Common Stock to a Non-U.S. Holder may be
subject to information reporting and backup withholding unless such recipient
provides to the payor certain documentation as to its status as a Non-U.S.
Holder or otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules from a payment to a Non-U.S. Holder will be
refunded or credited against the Non-U.S. Holder's United States federal income
tax liability, if any, provided that the required information is furnished to
the Internal Revenue Service in a timely manner.
58
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette Securities Corporation
and Smith Barney Inc. are acting as representatives (the "U.S.
Representatives") of each of the Underwriters named below (the "U.S.
Underwriters"). Subject to the terms and conditions set forth in a U.S.
purchase agreement (the "U.S. Purchase Agreement") among the Company, the
Selling Shareholders and the U.S. Underwriters, and concurrently with the sale
of 1,150,000 shares of Common Stock to the International Managers (as defined
below), the Selling Shareholders have agreed to sell to the U.S. Underwriters,
and each of the U.S. Underwriters severally and not jointly has agreed to
purchase from the Selling Shareholders, the number of shares of Common Stock
set forth opposite their respective names below.
<TABLE>
<CAPTION>
Number
U.S. Underwriter of Shares
- ---------------- ------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .................................... 1,012,500
Bear, Stearns & Co. Inc. .................................... 1,012,500
Donaldson, Lufkin & Jenrette Securities Corporation ......... 1,012,500
Smith Barney Inc. ........................................... 1,012,500
Robert W. Baird & Co. Incorporated .......................... 100,000
Cleary Gull Reiland & McDevitt Inc. ......................... 100,000
PaineWebber Incorporated .................................... 100,000
Sutro & Co. Incorporated .................................... 100,000
Tucker Anthony Incorporated ................................. 100,000
Moors & Cabot, Inc. ......................................... 50,000
---------
Total ........................................... 4,600,000
=========
</TABLE>
The Company and the Selling Shareholders have also entered into an
international purchase agreement (the "International Purchase Agreement") with
certain underwriters outside the United States and Canada (the "International
Managers" and, together with the U.S. Underwriters, the "Underwriters") for
whom Merrill Lynch International, Bear, Stearns International Limited,
Donaldson, Lufkin & Jenrette International and Smith Barney Inc. are acting as
lead managers (the "Lead Managers"). Subject to the terms and conditions set
forth in the International Purchase Agreement, and concurrently with the sale
of 4,600,000 shares of Common Stock to the U.S. Underwriters pursuant to the
U.S. Purchase Agreement, the Selling Shareholders have agreed to sell to the
International Managers, and the International Managers severally and not
jointly have agreed to purchase from the Selling Shareholders, an aggregate of
1,150,000 shares of Common Stock. The price per share and the underwriting
discount per share of Common Stock will be identical under the U.S. Purchase
Agreement and the International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant to
such agreement are purchased. Under certain circumstances, under the U.S.
Purchase Agreement and the International Purchase Agreement, the commitments of
non-defaulting U.S. Underwriters may be increased. The closings with respect to
the sale of shares of Common Stock to be purchased by the U.S. Underwriters and
International Managers are conditioned upon one another.
The U.S. Representatives have advised the Company that the U.S.
Underwriters propose initially to offer the shares of Common Stock to the
public at the price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $.50 per share
of Common Stock. The U.S. Underwriters may allow, and such dealers may reallow,
a discount not in excess of $.10 per share of Common Stock on sales to certain
other dealers. After the Offerings, the public offering price, concession and
discount may be changed.
The Selling Shareholders have granted options to the U.S. Underwriters,
exercisable for 30 days after the date of this Prospectus, to purchase up to an
aggregate of 690,000 additional shares of Common Stock at the price set forth
on the cover page of this Prospectus, less the underwriting discount. The U.S.
Underwriters may exercise these options solely to cover over-allotments, if
any, made on the sale of the Common Stock offered hereby. To the extent that
the U.S. Underwriters exercise these options, each U.S. Underwriter will be
obligated, subject to certain
59
<PAGE>
conditions, to purchase a number of additional shares of Common Stock
proportionate to such U.S. Underwriters' initial amount reflected in the
foregoing table. The Selling Shareholders also have granted options to the
International Managers, exercisable for 30 days after the date of this
Prospectus, to purchase up to an aggregate of 172,500 additional shares of
Common Stock to cover over-allotments, if any, on terms similar to those
granted to the U.S. Underwriters.
The Company, the Selling Shareholders, and the Company's executive
officers and directors, the THL Group and certain other shareholders have
agreed, subject to certain exceptions, not to directly or indirectly (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of or otherwise dispose of or transfer any shares of Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or thereafter acquired by the person or entity executing the
agreement or with respect to which the person or entity executing the agreement
thereafter acquires the power of disposition, or file a registration statement
under the Securities Act with respect to the foregoing or (ii) enter into any
swap or other agreement that transfers, in whole or in part, the economic
consequence of ownership of the Common Stock whether any such swap or
transaction is to be settled by delivery of Common Stock or other securities,
in cash or otherwise, without the prior written consent of Merrill Lynch on
behalf of the Underwriters for a period of 90 days after the date of this
Prospectus. See "Shares Eligible for Future Sale."
The THL Group, the beneficial owner of more than 10% of the Company's
outstanding Common Stock, may be deemed to be an affiliate of Sutro & Co.
Incorporated, Tucker Anthony Incorporated and Cleary Gull Reiland & McDevitt
Inc., members of the NASD, which may participate in the U.S. Offering and the
International Offering. Accordingly, the U.S. Offering and the International
Offering will be conducted in accordance with NASD Conduct Rule 2720.
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
U.S. Underwriters and the International Managers are permitted to sell shares
of Common Stock to each other for purposes of resale at the offering price,
less an amount not greater than the selling concession. Under the terms of the
Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom they
sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to persons who are non-U.S. or non-Canadian persons or to persons they
believe intend to resell to persons who are non-U.S. or non-Canadian persons,
and the International Managers and any dealer to whom they sell shares of
Common Stock will not offer to sell or sell shares of Common Stock to U.S.
persons or to Canadian persons or to persons they believe intend to resell to
U.S. or Canadian persons, except in the case of transactions pursuant to the
Intersyndicate Agreement.
The Common Stock is listed on the New York Stock Exchange under the symbol
"ROV."
The Underwriters and International Managers do not intend to confirm sales
of the Common Stock offered hereby to any accounts over which they exercise
discretionary authority.
The Company and the Selling Shareholders have agreed to indemnify the U.S.
Underwriters and the International Managers against certain liabilities,
including certain liabilities under the Securities Act, or to contribute to
payments which the U.S. Underwriters and International Managers may be required
to make in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission (the "Commission") may limit the ability of
the Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the U.S. Representatives are
permitted to engage in certain transactions that stabilize the price of the
Common Stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the U.S.
Representatives may reduce that short position by purchasing Common Stock in
the open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described
above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might have been in the absence of such purchases.
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<PAGE>
None of the Company, the Selling Shareholders or any of the Underwriters
makes any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of the
Common Stock. In addition, none of the Company, the Selling Shareholders or any
of the Underwriters makes any representation that the U.S. Representatives will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
Donaldson, Lufkin & Jenrette Securities Corporation and its affiliate, DLJ
Capital Funding, Inc., have provided from time to time, and may provide in the
future, commercial and investment banking services to the Company and its
affiliates, including in connection with the Credit Agreement between the
Company, BA Securities, Inc., Donaldson, Lufkin & Jenrette Securities
Corporation and its affiliate DLJ Capital Funding, Inc. as arrangers for a
group of financial institutions and accredited investors which provided the
Company with senior bank facilities in an aggregate amount of $170 million.
61
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
and certain legal matters for the Selling Shareholders will be passed upon by
DeWitt Ross & Stevens s.c., Madison, Wisconsin. Certain other legal matters
relating to the Offering will be passed upon for the Company and the Selling
Shareholders by Skadden, Arps, Slate, Meagher & Flom LLP, Boston,
Massachusetts. Certain legal matters will be passed upon for the Underwriters
by Fried, Frank, Harris, Shriver & Jacobson (a partnership including
professional corporations), New York, New York. Fried, Frank, Harris, Shriver &
Jacobson will rely on the opinion of DeWitt Ross & Stevens s.c. as to certain
matters of Wisconsin law.
EXPERTS
The financial statements and schedule of the Company and Subsidiaries as
of September 30, 1997, and for the year then ended, have been included or
incorporated by reference herein in reliance upon the reports of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere or
incorporated by reference herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of the Company and Subsidiaries as of June 30,
1996 and as of September 30, 1996 and for each of the years in the two-year
period ended June 30, 1996, and the Transition Period ended September 30, 1996
have been included herein in reliance upon the report of Coopers & Lybrand
L.L.P., independent certified public accountants, appearing elsewhere herein,
given upon the authority of said firm as experts in accounting and auditing.
In June 1997, KPMG Peat Marwick LLP replaced Coopers & Lybrand L.L.P. as
the Company's independent accountants. The decision to engage KPMG Peat Marwick
LLP was made with the approval of the Company's Audit Committee.
The Company believes, and it has been advised by Coopers & Lybrand L.L.P.
that it concurs in such belief, that, during the period of its engagement, the
Company and Coopers & Lybrand L.L.P. did not have any disagreement on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of Coopers & Lybrand L.L.P., would have caused it to make
reference in connection with its report on the Company's financial statements
to the subject matter of the disagreement.
The report of Coopers & Lybrand L.L.P. on the Company's consolidated
financial statements as of June 30, 1995 and 1996 and as of September 30, 1996
and for each of the years in the two-year period ended June 30, 1996, and the
Transition Period ended September 30, 1996, did not contain an adverse opinion
or a disclaimer of opinion, nor was it qualified or modified as to uncertainty,
audit scope or accounting principles. During that period and through the date
of their termination there were no "reportable events" within the meaning of
Item 304(a)(1)(v) of Regulation S-K promulgated under the Securities Act.
62
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, and in accordance therewith files periodic reports and
other information with the Commission. The Company has filed with the
Commission the Registration Statement under the Securities Act with respect to
the shares of Common Stock being offered in the Offerings. This Prospectus does
not contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, to which reference is hereby made. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete; with respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description
thereof. Such reports, the Registration Statement and other exhibits and other
information omitted from this Prospectus may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also
be available for inspection and copying at the regional offices of the
Commission located at 7 World Trade Center, New York, New York 10048 and at
Northwestern Atrium Center, 500 West Madison Street (Suite 1400), Chicago,
Illinois 60661. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. Additionally, the Commission maintains a World Wide
Web site at (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission through the Electronic Data Gathering, Analysis and
Retrieval System. Such reports, proxy statements and other information may also
be inspected at the offices of the New York Stock Exchange at 20 Broad Street,
New York, New York 10005.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements of the Company and quarterly reports
containing unaudited financial information for the Company for the first three
fiscal quarters of each fiscal year.
63
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed with the Commission, are
incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997, as amended by Form 10-K/A dated May 26, 1998;
(2) The Company's Quarterly Reports on Form 10-Q for the quarterly periods
ended December 27, 1997, as amended by Form 10-Q/A dated May 26, 1998, and
March 28, 1998, as amended by Form 10-Q/A dated May 26, 1998; and
(3) The description of the Common Stock contained in the Company's Registration
Statement on Form 8-A filed under Section 12 of the Exchange Act dated
November 11, 1997.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the Offerings made hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of the filing of such documents. Any statement contained in this
Prospectus, in a supplement to this Prospectus or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed supplement to this Prospectus or
in any document that also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, on the written or oral
request of any such person, a copy of any or all of the documents referred to
above which have been or may be incorporated in this Prospectus by reference,
other than exhibits to such documents unless such exhibits are specifically
incorporated by reference in such documents. Requests for such copies should be
directed to: Rayovac Corporation, 601 Rayovac Drive, Madison, Wisconsin,
53711-2497, Attention: James A. Broderick, Vice President, General Counsel and
Secretary (Telephone: (608) 275-3340).
64
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Independent Auditors' Report ............................................................. F-2
Independent Auditors' Report ............................................................. F-3
Consolidated Balance Sheets as of June 30, 1996, September 30, 1996 and 1997 ............. F-4
Consolidated Statements of Operations for the years ended June 30, 1995 and 1996,
the transition period ended September 30, 1996 and year ended September 30, 1997 ........ F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1995 and 1996,
the transition period ended September 30, 1996 and year ended September 30, 1997 ........ F-6
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended June 30,
1994, 1995 and 1996, the transition period ended September 30, 1996 and the year ended
September 30, 1997 ...................................................................... F-7
Notes to Consolidated Financial Statements ............................................... F-8
Unaudited Condensed Consolidated Balance Sheets as of March 28, 1998 and September 30,
1997 .................................................................................... F-36
Unaudited Condensed Consolidated Statements of Operations for the three and six months
ended March 29, 1997 and March 28, 1998 ................................................. F-37
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended
March 29, 1997 and March 28, 1998 ....................................................... F-38
Notes to Unaudited Condensed Consolidated Financial Statements ........................... F-39
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
Rayovac Corporation:
We have audited the accompanying consolidated balance sheet of Rayovac
Corporation and Subsidiaries as of September 30, 1997, and the related
consolidated statements of operations, shareholders' deficit, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The accompanying consolidated
financial statements of Rayovac Corporation and Subsidiaries as of June 30,
1996 and September 30, 1996, and for each of the years ended June 30, 1995 and
1996, and the transition period from July 1, 1996 to September 30, 1996, were
audited by other auditors whose report thereon dated November 22, 1996, except
for notes 2n and 2r as to which the date is April 1, 1998 expressed an
unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the fiscal year 1997 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Rayovac Corporation and Subsidiaries as of September 30, 1997, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Milwaukee, Wisconsin
October 28, 1997, except as to
note 2n., which is as of April 1, 1998
F-2
<PAGE>
Independent Auditors' Report
To the Board of Directors of
Rayovac Corporation
We have audited the accompanying consolidated balance sheets of Rayovac
Corporation and Subsidiaries as of June 30, 1996 and September 30, 1996, and
the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the two years in the period ended June
30, 1996 and the period July 1, 1996 to September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rayovac
Corporation and Subsidiaries as of June 30, 1996 and September 30, 1996, and
the results of their operations and their cash flows for each of the two years
in the period ended June 30, 1996 and the period July 1, 1996 to September 30,
1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
November 22, 1996,
except for notes 2n and 2r
as to which the date is
April 1, 1998
F-3
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1996 1996 1997
------------ --------------- --------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 2,190 $ 4,255 $ 1,133
Receivables:
Trade accounts receivable, net of allowance for doubtful
receivables of $786, $722 and $1,221, respectively .......... 55,830 62,320 76,590
Other ........................................................ 2,322 4,156 3,079
Inventories .................................................... 66,941 70,121 58,551
Deferred income taxes .......................................... 5,861 9,158 9,099
Prepaid expenses and other ..................................... 4,975 4,864 5,928
-------- ---------- ----------
Total current assets ...................................... 138,119 154,874 154,380
-------- ---------- ----------
Property, plant and equipment, net .............................. 73,181 68,640 65,511
Deferred charges and other ...................................... 9,655 7,413 7,713
Debt issuance costs ............................................. 173 12,764 9,277
-------- ---------- ----------
Total assets .............................................. $221,128 $ 243,691 $ 236,881
======== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ........................... $ 11,631 $ 8,818 $ 23,880
Accounts payable ............................................... 38,695 46,921 57,259
Accrued liabilities:
Wages and benefits ........................................... 6,126 5,894 9,343
Accrued interest ............................................. 1,890 631 5,613
Recapitalization and other special charges ................... -- 14,942 4,612
Other ........................................................ 16,557 13,019 19,856
-------- ---------- ----------
Total current liabilities ................................. 74,899 90,225 120,563
-------- ---------- ----------
Long-term debt, net of current maturities ....................... 69,718 224,845 183,441
Employee benefit obligations, net of current portion ............ 12,141 12,138 11,291
Deferred income taxes ........................................... 2,584 142 735
Other ........................................................... 162 2,061 1,446
-------- ---------- ----------
Total liabilities ......................................... 159,504 329,411 317,476
-------- ---------- ----------
Shareholders' equity (deficit):
Common stock, $.01 par value, authorized 90,000 shares;
issued 50,000 shares; outstanding 49,500, 20,470 and
20,581 shares, respectively .................................. 500 500 500
Rayovac International Corporation common stock, $.50 value,
authorized 18 shares; issued and outstanding 10 shares at
June 30, 1996 ................................................ 5 -- --
Additional paid-in capital ..................................... 12,000 15,970 15,974
Foreign currency translation adjustment ........................ 1,650 1,689 2,270
Notes receivable from officers/shareholders .................... -- (500) (1,658)
Retained earnings .............................................. 48,002 25,143 31,321
-------- ---------- ----------
62,157 42,802 48,407
Less stock held in trust for deferred compensation
plan, 160 shares ............................................. -- -- (962)
Less treasury stock, at cost, 500, 29,530 and 29,419 shares,
respectively ................................................. (533) (128,522) (128,040)
-------- ---------- ----------
Total shareholders' equity (deficit) ............................ 61,624 (85,720) (80,595)
-------- ---------- ----------
Total liabilities and shareholders' equity (deficit) ............ $221,128 $ 243,691 $ 236,881
======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Transition
Year ended June 30, Period ended Year ended
----------------------------- September 30, September 30,
1995 1996 1996 1997
------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Net sales ........................................ $ 415,224 $ 423,354 $ 101,880 $ 432,552
Cost of goods sold ............................... 237,126 239,343 59,242 234,569
--------- --------- --------- ---------
Gross profit ................................... 178,098 184,011 42,638 197,983
--------- --------- --------- ---------
Operating expenses:
Selling ......................................... 108,703 116,525 27,796 122,055
General and administrative ...................... 32,861 31,767 8,628 32,205
Research and development ........................ 5,005 5,442 1,495 6,196
Recapitalization charges ........................ -- -- 12,326 --
Other special charges ........................... -- -- 16,065 3,002
--------- --------- --------- ---------
146,569 153,734 66,310 163,458
--------- --------- --------- ---------
Income (loss) from operations .................. 31,529 30,277 (23,672) 34,525
Interest expense ................................. 8,644 8,435 4,430 24,542
Other expense, net ............................... 230 552 76 378
--------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item .............................. 22,655 21,290 (28,178) 9,605
Income tax expense (benefit) ..................... 6,247 7,002 (8,904) 3,419
--------- --------- --------- ---------
Income (loss) before extraordinary item .......... 16,408 14,288 (19,274) 6,186
Extraordinary item, loss on early
extinguishment of debt, net of income tax
benefit of $777.................................. -- -- (1,647) --
--------- --------- --------- ---------
Net income (loss) .............................. $ 16,408 $ 14,288 $ (20,921) $ 6,186
========= ========= ========= =========
Basic net income (loss) per commons share:
Income (loss) before extraordinary item ......... $ 0.33 $ 0.29 $ (0.44) $ 0.30
Extraordinary item .............................. -- -- (0.04) --
--------- --------- --------- ---------
Net income (loss) .............................. $ 0.33 $ 0.29 $ (0.48) $ 0.30
========= ========= ========= =========
Weighted average shares of common stock
outstanding ..................................... 50,000 49,643 43,820 20,530
========= ========= ========= =========
Diluted net income (loss) per common share:
Income (loss) before extraordinary item ......... $ 0.33 $ 0.29 $ (0.44) $ 0.30
Extraordinary item .............................. -- -- (0.04) --
--------- --------- --------- ---------
Net income (loss) .............................. $ 0.33 $ 0.29 $ (0.48) $ 0.30
========= ========= ========= =========
Weighted average shares of common stock
and equivalents outstanding ..................... 50,000 49,643 43,820 20,642
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Transition
Year ended June 30, Period ended Year ended
---------------------------- September 30, September 30,
1995 1996 1996 1997
------------ --------------- --------------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .............................................. $ 16,408 $ 14,288 $ (20,921) $ 6,186
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Recapitalization and other special charges ................... -- -- 13,449 --
Extraordinary item, loss on early extinguishment of debt ..... -- -- 2,424 --
Amortization of debt issuance costs .......................... 103 53 1,609 3,563
Depreciation ................................................. 11,024 11,932 3,279 11,308
Deferred income taxes ........................................ 346 3 (5,739) 652
Loss (gain) on disposal of fixed assets ...................... 110 (108) 1,289 (326)
Curtailment gain ............................................. -- -- -- (2,923)
Changes in assets and liabilities:
Accounts receivable ......................................... (2,537) (6,166) (8,940) (14,794)
Inventories ................................................. 9,004 (1,779) (3,078) 11,987
Prepaid expenses and other .................................. (990) 1,148 741 (563)
Accounts payable and accrued liabilities .................... 2,051 (1,526) (185) 30,905
Accrued recapitalization and other special charges .......... -- -- 14,942 (10,330)
---------- --------- ---------- ----------
Net cash provided (used) by operating activities ............ 35,519 17,845 (1,130) 35,665
---------- --------- ---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment ..................... (16,938) (6,646) (1,248) (10,856)
Proceeds from sale of property, plant and equipment ............ 139 298 1,281 52
---------- --------- ---------- ----------
Net cash provided (used) by investing activities ............ (16,799) (6,348) 33 (10,804)
---------- --------- ---------- ----------
Cash flows from financing activities:
Reduction of debt .............................................. (106,383) (104,526) (107,090) (135,079)
Proceeds from debt financing ................................... 85,698 96,252 259,489 108,890
Cash overdraft ................................................. 3,925 2,339 (2,493) 164
Debt issuance costs ............................................ -- -- (14,373) --
Extinguishment of debt ......................................... -- -- (2,424) --
Proceeds from direct financing lease ........................... -- -- -- 100
Distributions from DISC ........................................ (1,500) (5,187) (1,943) --
Issuance of stock .............................................. -- -- -- 271
Acquisition of treasury stock .................................. -- (533) (127,925) (3,343)
Exercise of stock options ...................................... -- -- -- 1,438
Payments on capital lease obligation ........................... -- (295) (84) (426)
---------- --------- ---------- ----------
Net cash provided (used) by financing activities ............ (18,260) (11,950) 3,157 (27,985)
---------- --------- ---------- ----------
Effect of exchange rate changes on cash and cash
equivalents .................................................... (345) (2) 5 2
---------- --------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ........ 115 (455) 2,065 (3,122)
Cash and cash equivalents, beginning of period .................. 2,530 2,645 2,190 4,255
---------- --------- ---------- ----------
Cash and cash equivalents, end of period ........................ $ 2,645 $ 2,190 $ 4,255 $ 1,133
========== ========= ========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest ......................................... $ 8,789 $ 7,535 $ 7,977 $ 16,030
Cash paid for income taxes ..................................... 8,821 5,877 419 1,172
========== ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Rayovac
International
Corporation
common stock Foreign
Common Stock (DISC) Additional currency
--------------------- ----------------- paid-in translation
Shares Amount Shares Amount capital adjustment
------------ -------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1994 ....................... 50,000 $500 10 $ 5 $12,000 $1,555
------ ---- -- ---- ------- ------
Net income ...................................... -- -- -- -- -- --
Distributions from DISC ......................... -- -- -- -- -- --
Translation adjustment .......................... -- -- -- -- -- 424
Adjustment of additional minimum pension
liability ...................................... -- -- -- -- -- --
------ ---- -- ---- ------- ------
Balances at June 30, 1995 ....................... 50,000 500 10 5 12,000 1,979
------ ---- -- ---- ------- ------
Net income ...................................... -- -- -- -- -- --
Distributions from DISC ......................... -- -- -- -- -- --
Translation adjustment .......................... -- -- -- -- -- (329)
Adjustment of additional minimum pension
liability ...................................... -- -- -- -- -- --
Treasury stock acquired ......................... (500) -- -- -- -- --
------ ---- -- ---- ------- ------
Balances at June 30, 1996 ....................... 49,500 500 10 5 12,000 1,650
------ ---- -- ---- ------- ------
Net loss ........................................ -- -- -- -- -- --
Common stock acquired in Recapitalization ....... (29,030) -- -- -- -- --
Exercise of stock options ....................... -- -- -- -- 3,970 --
Increase in cost of existing treasury stock ..... -- -- -- -- -- --
Note receivable from officers/shareholders ...... -- -- -- -- -- --
Termination of DISC ............................. -- -- (10) (5) -- --
Translation adjustment .......................... -- -- -- -- -- 39
------- ---- --- ----- ------- ------
Balances at September 30, 1996 .................. 20,470 500 -- -- 15,970 1,689
------- ---- --- ----- ------- ------
Net income ...................................... -- -- -- -- -- --
Sale of common stock ............................ 111 -- -- -- 4 --
Treasury stock acquired ......................... (556) -- -- -- -- --
Exercise of stock options and sale of common
stock to trust ................................. 556 -- -- -- -- --
Notes receivable from officers/shareholders ..... -- -- -- -- -- --
Adjustment of additional minimum pension
liability ...................................... -- -- -- -- -- --
Translation adjustment .......................... -- -- -- -- -- 581
------- ---- --- ----- ------- ------
Balances at September 30, 1997 .................. 20,581 $500 -- $-- $15,974 $2,270
======= ==== === ===== ======= ======
<CAPTION>
Notes Total
receivable Stock shareholders'
officers/ Retained held in Treasury equity
shareholders earnings trust stock (deficit)
-------------- -------------- --------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1994 ....................... $ -- $ 23,862 $ -- $ -- $ 37,922
-------- --------- ------ ---------- ---------
Net income ...................................... -- 16,408 -- -- 16,408
Distributions from DISC ......................... -- (1,500) -- -- (1,500)
Translation adjustment .......................... -- -- -- -- 424
Adjustment of additional minimum pension
liability ...................................... -- 333 -- -- 333
-------- --------- ------ ---------- ---------
Balances at June 30, 1995 ....................... -- 39,103 -- -- 53,587
-------- --------- ------ ---------- ---------
Net income ...................................... -- 14,288 -- -- 14,288
Distributions from DISC ......................... -- (5,187) -- -- (5,187)
Translation adjustment .......................... -- -- -- -- (329)
Adjustment of additional minimum pension
liability ...................................... -- (202) -- -- (202)
Treasury stock acquired ......................... -- -- -- (533) (533)
-------- --------- ------ ---------- ---------
Balances at June 30, 1996 ....................... -- 48,002 -- (533) 61,624
-------- --------- ------ ---------- ---------
Net loss ........................................ -- (20,921) -- -- (20,921)
Common stock acquired in Recapitalization ....... -- -- -- (127,425) (127,425)
Exercise of stock options ....................... -- -- -- -- 3,970
Increase in cost of existing treasury stock ..... -- -- -- (564) (564)
Note receivable from officers/shareholders ...... (500) -- -- -- (500)
Termination of DISC ............................. -- (1,938) -- -- (1,943)
Translation adjustment .......................... -- -- -- -- 39
-------- --------- ------ ---------- ---------
Balances at September 30, 1996 .................. (500) 25,143 -- (128,522) (85,720)
-------- --------- ------ ---------- ---------
Net income ...................................... -- 6,186 -- -- 6,186
Sale of common stock ............................ -- -- -- 482 486
Treasury stock acquired ......................... -- -- -- (3,343) (3,343)
Exercise of stock options and sale of common
stock to trust ................................. -- -- (962) 3,343 2,381
Notes receivable from officers/shareholders ..... (1,158) -- -- -- (1,158)
Adjustment of additional minimum pension
liability ...................................... -- (8) -- -- (8)
Translation adjustment .......................... -- -- -- -- 581
-------- ----------- ------ ---------- -----------
Balances at September 30, 1997 .................. $ (1,658) $ 31,321 $ (962) $ (128,040) $ (80,595)
======== =========== ====== ========== ===========
</TABLE>
F-7
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
1. Description of Business and Recapitalization
Rayovac Corporation and its wholly owned subsidiaries (Company)
manufacture and market a variety of battery types including general (alkaline,
rechargeables, heavy duty, lantern and general purpose), button cell and
lithium. The Company also produces a variety of lighting devices such as
flashlights and lanterns. The Company's products are sold primarily to
retailers in the United States, Canada, Europe, and the Far East.
Effective as of September 12, 1996, the Company, all of the shareholders
of the Company, Thomas H. Lee Equity Fund III L.P. (Lee Fund) and other
affiliates of Thomas H. Lee Company (THL Co.) completed a recapitalization of
the Company (Recapitalization) pursuant to which: (i) the Company obtained
senior financing in an aggregate of $170,000, of which $131,000 was borrowed at
the closing of the Recapitalization; (ii) the Company obtained $100,000 in
financing through the issuance of senior subordinated increasing rate notes of
the Company (Bridge Notes); (iii) the Company redeemed a portion of the shares
of common stock held by the former President and Chief Executive Officer of the
Company; (iv) the Lee Fund and other affiliates of THL Co. purchased for cash
shares of common stock owned by shareholders of the Company; and (v) the
Company repaid certain of its outstanding indebtedness, including prepayment
fees and penalties. The prepayment fees and penalties paid have been recorded
as an extraordinary item in the Consolidated Statements of Operations. Other
non-recurring charges of $12,300 related to the Recapitalization were also
expensed, including $2,200 in advisory fees paid to the financial advisor to
the Company's selling shareholders; various legal and consulting fees of
$2,800; and $7,300 of stock option compensation, severance payments and
employment contract settlements for the benefit of certain present and former
officers, directors and management of the Company. Payment for these costs was
or is expected to be as follows: (i) $8,900 was paid prior to September 30,
1996; (ii) $2,815 was paid in fiscal year 1997 and (iii) $585 is expected to be
paid in fiscal year 1998.
In 1996, the Company changed its fiscal year end from June 30 to September
30. For clarity of presentation herein, the period from July 1, 1996, to
September 30, 1996 is referred to as the "Transition Period Ended September 30,
1996" or "Transition Period."
2. Significant Accounting Policies and Practices
a. Principles of Combination and Consolidation: The consolidated financial
statements include the financial statements of Rayovac Corporation and
its wholly owned subsidiaries. Rayovac International Corporation, a
Domestic International Sales Corporation (DISC) which was owned by the
Company's shareholders, was combined with Rayovac Corporation through
August 1996, when the DISC was terminated and the net assets distributed
to its shareholders. All intercompany transactions have been eliminated.
For reporting purposes, all financial statements are referred to as
"consolidated" financial statements.
b. Revenue Recognition: The Company recognizes revenue from product sales
upon shipment to the customer.
c. Use of Estimates: The preparation of 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 disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
d. Cash Equivalents: For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
e. Concentrations of Credit Risk, Major Customers and Employees: The
Company's trade receivables are subject to concentrations of credit risk
as three principal customers accounted for 26%, 24% and 24% of the
outstanding trade receivables as of June 30, 1996, and September 30, 1996
and 1997, respectively.
F-8
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
2. Significant Accounting Policies and Practices--Continued
The Company derived 28%, 28%, 25% and 29% of its net sales during the
years ended June 30, 1995 and 1996, the Transition Period, and the year
ended September 30, 1997, respectively, from the same three customers.
The Company has one customer that represented over 10% of its net
sales. The Company derived 16%, 18%, 18%, and 20% of its net sales from
this customer during the years ended June 30, 1995 and 1996, the
Transition Period, and the year ended September 30, 1997, respectively.
A significant number of the Company's factory employees are represented
by one of four labor unions. The Company has recently entered into
collective bargaining agreements with its Madison and Fennimore,
Wisconsin employees each of which expires in 2000. The Company's
collective bargaining agreement with 24 of its Washington, United Kingdom
employees is scheduled to expire in December 1997. In addition, the
Company's collective bargaining agreements with its 5 Hayward, California
and 203 Portage, Wisconsin employees are scheduled to expire in May and
July 1998, respectively. The Company believes its relationship with its
employees is good and there have been no work stoppages involving Company
employees since 1981.
f. Displays and Fixtures: The costs of displays and fixtures are
capitalized and recorded as a prepaid asset and charged to expense when
shipped to a customer location. Such prepaid assets amount to
approximately $1,068, $730 and $1,456 as of June 30, 1996, and September
30, 1996 and 1997, respectively.
g. Inventories: Inventories are stated at lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
h. Property, Plant and Equipment: Property, plant and equipment are stated
at cost. Depreciation on plant and equipment is calculated on the
straight-line method over the estimated useful lives of the assets.
Depreciable lives by major classification are as follows:
<TABLE>
<S> <C>
Building and improvements .............. 20-30 years
Machinery, equipment and other ......... 5-20 years
</TABLE>
i. Debt Issuance Costs: Debt issuance costs are capitalized and amortized
to interest expense over the lives of the related debt agreements.
j. Accounts Payable: Included in accounts payable at June 30, 1996, and
September 30, 1996 and 1997, is approximately $7,805, $5,312, and $5,476,
respectively, of book overdrafts on disbursement accounts which were
replenished prior to the presentation of checks for payment.
k. Income Taxes: Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
l. Foreign Currency Translation: Assets and liabilities of the Company's
foreign subsidiaries are translated at the rate of exchange existing at
year-end, with revenues, expenses, and cash flows translated at the
average of the monthly exchange rates. Adjustments resulting from
translation of the financial statements are accumulated as a separate
component of shareholders' equity (deficit). Exchange gains (losses) on
foreign currency transactions aggregating ($112), ($750), ($70), and
($639) for the years ended June 30, 1995 and 1996, the Transition Period,
and the year ended September 30, 1997, respectively, are included in
other expense, net, in the Consolidated Statements of Operations.
F-9
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
2. Significant Accounting Policies and Practices--Continued
m. Advertising Costs: The Company incurred expenses for advertising of
$25,556, $29,976, $7,505 and $24,326 in the years ended June 30, 1995
and 1996, the Transition Period, and the year ended September 30, 1997,
respectively. The Company expenses advertising production costs as such
costs are incurred.
n. Per Share Data: The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("FAS No. 128"), in Fiscal 1998.
This statement replaces the presentation of primary and fully diluted EPS
with basic and diluted EPS. Basic EPS is computed by dividing net income
available to common shareholders by the weighted-average number of common
shares outstanding for the period. Basic EPS does not consider common
stock equivalents. Diluted EPS reflects the dilution that would occur if
convertible debt securities and employee stock options were exercised or
converted into common shares or resulted in the issuance of common shares
that then shared in the net income of the entity. The computation of
diluted EPS uses the "if converted" and "treasury stock" methods to
reflect dilution. All prior period EPS data presented has been restated
for the adoption of FAS No. 128. The difference between the number of
shares used in the two calculations is due to employee stock options.
The Company also complies with certain requirements of the Securities and
Exchange Commission with respect to the calculation of earnings per share
for initial public offerings.
o. Derivative Financial Instruments: Derivative financial instruments are
used by the Company principally in the management of its interest rate,
foreign currency and raw material price exposures.
The Company uses interest rate swaps to manage its interest rate risk.
The net amounts to be paid or received under interest rate swap agreements
designated as hedges are accrued as interest rates change and are
recognized over the life of the swap agreements, as an adjustment to
interest expense from the underlying debt to which the swap is designated.
The related amounts payable to, or receivable from, the counterparties are
included in accounts payable or accounts receivable. The Company has
entered into an interest rate swap agreement which effectively fixes the
interest rate on floating rate debt at a rate of 6.16% for notional
principal amount of $62,500 through October 1999. The fair value of this
contract at September 30, 1997 is ($159).
The Company enters into forward foreign exchange contracts relating to
the anticipated settlement in local currencies of intercompany purchases
and sales. These contracts generally require the Company to exchange
foreign currencies for U.S. dollars. The contracts are marked to market,
and the related adjustment is recognized in other expense, net. The related
amounts payable to, or receivable from, the counterparties are included in
accounts payable or accounts receivable. The Company has approximately
$3,100 of forward exchange contracts at September 30, 1997. The fair value
at September 30, 1997, approximated the contract value.
The Company is exposed to risk from fluctuating prices for commodities
used in the manufacturing process. The Company hedges some of this risk
through the use of commodity calls and puts. The Company is buying calls,
which allow the Company to purchase a specified quantity of zinc through a
specified date for a fixed price, and writing puts, which allow the buyer
to sell to the Company a specified quantity of zinc through a specified
date at a fixed price. The maturity of, and the quantities covered by, the
contracts highly correlate to the Company's anticipated purchases of the
commodity. The cost of the calls, and the premiums received from the puts,
are amortized over the life of the agreements and are recorded in cost of
goods sold, along with the effect of the put and call agreements. At
September 30, 1997, the Company has purchased a series of calls with a
contract value of approximately $2,800 and sold a series of puts with a
contact value of approximately $2,400 for the period from October through
March designed to set a ceiling and floor price. While these transactions
have no carrying value, the fair value of these contracts was approximately
$138 at
F-10
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
2. Significant Accounting Policies and Practices--Continued
September 30, 1997. The Company has a receivable at September 30, 1997,
of approximately $222 in the accompanying consolidated balance sheet from
the settlement of September contracts.
These fair values represent the estimated amount the Company would
receive or pay to terminate agreements at September 30, 1997, taking into
consideration current market rates and the current credit worthiness of
the counterparties based on dealer quotes. The Company may be exposed to
credit loss in the event of nonperformance by the counterparties to these
contracts, but does not anticipate such nonperformance.
p. Environmental Expenditures: Environmental expenditures that relate to
current ongoing operations or to conditions caused by past operations are
expensed. The Company determines its liability on a site by site basis
and records a liability at the time when it is probable and can be
reasonably estimated. The estimated liability is not reduced for possible
recoveries from insurance carriers.
q. Stock Split: In September 1996, the Company's Board of Directors
declared a five-for-one stock split. A total of 16,376 additional shares
were issued in conjunction with the stock split to shareholders of
record. All applicable share and per share amounts herein have been
restated to reflect the stock split retroactively.
r. Reclassification: Certain prior year amounts have been reclassified to
conform with the current year presentation.
The Company has reclassified certain promotional expenses, previously
reported as a reduction of net sales, to selling expense. The amounts
which have been reclassified are $24,236 and $23,970 for the years ended
June 30, 1995 and 1996, respectively, $6,899 for the Transition Period
ended September 30, 1996, and $28,702 for the year ended September 30,
1997.
s. Impact of Recently Issued Accounting Standards: In February 1997, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share (FAS 128). FAS 128 will
be effective for periods ending after December 15, 1997, and specifies
the computation, presentation, and disclosure requirements for earnings
per share. Adoption of this accounting standard is not expected to have a
material effect on the earnings per share computations of the Company
assuming the current capital structure.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income (FAS 130), which
establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
All items that are required to be recognized under accounting standards
as components of comprehensive income are to be reported in a financial
statement that is displayed with the same prominence as other financial
statements. FAS 130 requires that an enterprise (i) classify items of
other comprehensive income by their nature in a financial statement, and
(ii) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital in the
equity section of the balance sheet. FAS 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is
required. The Company is evaluating the effect of this pronouncement on
its consolidated financial statements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information (FAS 131), which is effective for financial
statements for periods beginning after December 15, 1997. FAS 131
establishes standards for the way public business enterprises are to
report information about operating segments in annual financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Company is evaluating the effect of this pronouncement on
its consolidated financial statements.
F-11
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1996 1996 1997
---------- --------------- --------------
<S> <C> <C> <C>
Raw material ................................................. $24,238 $25,300 $23,291
Work-in-process .............................................. 19,081 14,651 15,286
Finished goods ............................................... 23,622 30,170 19,974
------- ------- -------
$66,941 $70,121 $58,551
======= ======= =======
</TABLE>
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1996 1996 1997
---------- --------------- --------------
<S> <C> <C> <C>
Land, building and improvements .............................. $ 15,469 $ 16,824 $ 10,752
Machinery, equipment and other ............................... 117,248 117,754 120,894
Construction in process ...................................... 5,339 6,232 11,326
-------- -------- --------
138,056 140,810 142,972
Less accumulated depreciation ................................ 64,875 72,170 77,461
-------- -------- --------
$ 73,181 $ 68,640 $ 65,511
======== ======== ========
</TABLE>
5. Debt
Debt consists of the following:
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1996 1996 1997
---------- --------------- --------------
<S> <C> <C> <C>
Term loan facility ........................................... $ -- $105,000 $ 100,500
Revolving credit facility .................................... -- 23,500 4,500
Series B Senior Subordinated Notes, due November 1,
2006, with interest at 10-1/4% payable semi-annually ........ -- -- 100,000
Bridge Notes ................................................. -- 100,000 --
Debt paid September 1996 due to Recapitalization:
Senior Secured Notes due 1997 through 2002 .................. 29,572 -- --
Subordinated Notes due through 2003 ......................... 7,270 -- --
Revolving credit facility ................................... 39,250 -- --
Notes payable in Pounds Sterling to a foreign bank, due
on demand, with interest at bank's base rate plus
1.87% ....................................................... 1,242 939 --
Capitalized lease obligation ................................. 1,330 1,246 866
Notes and obligations, weighted average interest rate of
5.24% at September 30, 1997 ................................. 2,685 2,978 1,455
------- -------- ---------
81,349 233,663 207,321
Less current maturities ...................................... 11,631 8,818 23,880
------- -------- ---------
Long-term debt ............................................... $69,718 $224,845 $ 183,441
======= ======== =========
</TABLE>
F-12
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
5. Debt --Continued
On September 12, 1996, the Company executed a Credit Agreement (Agreement)
arranged by BA Securities, Inc., Donaldson, Lufkin & Jenrette Securities
Corporation and certain of its affiliates for a group of financial institutions
and other accredited investors. The Agreement provides for senior bank
facilities, including term and revolving credit facilities in an aggregate
amount of $170,000. Interest on borrowings is computed, at the Company's
option, based on the Bank of America Illinois' base rate, as defined, (Base
Rate) or the Interbank Offering Rate (IBOR).
The term loan facility includes: (i) Tranche A term loan of $55,000,
quarterly amortization ranging from $1,000 to $3,750 beginning December 31,
1996, through September 30, 2002, interest at the Base Rate plus 1.5% per annum
or at IBOR plus 2.5% per annum (8.49% at September 30, 1997); (ii) Tranche B
term loan of $25,000, quarterly amortization amounts of $62.5 during each of
the first six years and $5,875 in the seventh year beginning December 31, 1996,
through September 30, 2003, interest at the Base Rate plus 2.0% per annum, or
IBOR plus 3.0% per annum (8.93% at September 30, 1997); (iii) Tranche C term
loan of $25,000, quarterly amortization of $62.5 during each of the first seven
years and $5,812.5 during the eighth year beginning December 31, 1996, through
September 30, 2004; interest at the Base Rate plus 2.25% per annum or IBOR plus
3.25% per annum (9.10% at September 30, 1997).
The revolving credit facility provides for aggregate working capital loans
up to $65,000 through September 30, 2002, reduced by outstanding letters of
credit ($10,000 limit), and other existing credit facilities and outstanding
obligations (approximately $5,000 at September 30, 1997). Interest on
borrowings is at the Base Rate plus 1.5% per annum or IBOR plus 2.5% per annum
(10.0% at September 30, 1997). The Company had outstanding letters of credit of
approximately $631 at September 30, 1997. A fee of 2.5% per annum is payable on
the outstanding letters of credit. The Company also incurs a fee of .25% per
annum of the average daily maximum amount available to be drawn on each letter
of credit issued. The revolving credit facility must be reduced for 30
consecutive days to no more than $5,000 for the fiscal year ending September
30, 1998, and to zero for any fiscal year thereafter.
The Agreement contains financial covenants with respect to borrowings
which include fixed charge coverage, adjusted net worth, and minimum earnings
before interest, income taxes, depreciation, amortization. In addition, the
Agreement restricts capital expenditures and the payment of dividends. The
Company is required to pay a commitment fee of 0.50% per annum on the average
daily unused portion of the revolving credit facility. The Tranche A term loan
and the revolving credit facility interest rates may be adjusted downward if
the Company's leverage ratio, as defined, decreases. Borrowings under the
Agreement are collateralized by substantially all the assets of the Company.
The Agreement also contains certain mandatory prepayment provisions, one of
which requires the Company to pay down $14.5 million by December 29, 1997 due
to excess cash flow generated as of September 30, 1997.
On October 22, 1996, the Company completed a private debt offering of
10-1/4% Senior Subordinated Notes due in 2006 (Old Notes) pursuant to an
Indenture. In March 1997, the Company exchanged the Old Notes for 10-1/4% Series
B Senior Subordinated Notes due in 2006 (New Notes) registered with the
Securities and Exchange Commission. The terms of the New Notes are identical in
all material respects to terms of the Old Notes. On or after November 1, 2001
or in certain circumstances, after a public offering of equity securities of
the Company, the New Notes will be redeemable at the option of the Company, in
whole or in part, at prescribed redemption prices plus accrued and unpaid
interest.
Upon a change in control, the Company shall be required to repurchase all
or any part of the New Notes at a purchase price equal to 101% of the aggregate
principal amount. The Company is also required to repurchase all or a portion
of the New Notes upon consummation of an asset sale, as defined, in excess of
$5,000.
The terms of the New Notes restrict or limit the ability of the Company
and its subsidiaries to, among other things, (i) pay dividends or make other
restricted payments, (ii) incur additional indebtedness and issue preferred
F-13
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
5. Debt --Continued
stock, (iii) create liens, (iv) incur dividend and other payment restrictions
affecting subsidiaries, (v) enter into mergers, consolidations, or sales of all
or substantially all of the assets of the Company, (vi) make asset sales, (vii)
enter into transactions with affiliates, and (viii) issue or sell capital stock
of wholly owned subsidiaries of the Company. Payment obligations under the New
Notes are fully and unconditionally guaranteed on a joint and several basis by
the Company's directly and wholly owned subsidiary, ROV Holding, Inc. (ROV or
Guarantor Subsidiary). The foreign subsidiaries of the Company, which do not
guarantee the payment obligations under the New Notes (Nonguarantor
Subsidiaries), are directly and wholly owned by ROV. See note 17.
The proceeds from the new Notes were used to pay down the Bridge Notes.
The Bridge Notes bore interest at prime plus 3.5%.
The aggregate scheduled maturities of debt are as follows:
<TABLE>
<S> <C>
Year ending September 30,
1998 ............................ $ 23,880
1999 ............................ 12,441
2000 ............................ 10,500
2001 ............................ 12,500
2002 ............................ 15,500
Thereafter ...................... 132,500
--------
$207,321
========
</TABLE>
The capitalized lease obligation is payable in Pounds Sterling in
installments of $425 in 1998 and $441 in 1999.
The carrying values of the debt instruments noted above are approximately
96% of their estimated fair values.
6. Shareholders' Equity (Deficit)
During the year ended June 30, 1996, the former principal shareholder of
the Company granted an officer and a director options to purchase 235 shares of
common stock owned by the shareholder personally at exercise prices per share
ranging from $3.65 to $5.77 (the book values per share at the respective dates
of grant). These options were exercised in conjunction with the
Recapitalization and resulted in a charge to earnings of approximately $3,970
during the Transition Period and an increase in additional paid-in capital in
the Consolidated Statements of Shareholders' Equity (Deficit).
Treasury stock acquired during the year ended June 30, 1996 was subject to
an agreement which provided the selling shareholder with additional
compensation for the common stock sold if a change in control occurred within a
specified period of time. As a result of the Recapitalization, the selling
shareholder was entitled to an additional $564, which is reflected as an
increase in treasury stock in the Consolidated Statements of Shareholders'
Equity (Deficit).
Retained earnings includes DISC retained earnings of $1,594 at June 30,
1996. In August 1996, the DISC was terminated and the net assets were
distributed to its shareholders.
In January 1997, the Company established a trust to fund future payments
under a deferred compensation plan. Certain employees eligible to participate
in the plan assigned stock options to the plan. The plan exercised the options
and purchased 160 shares of the Company's common stock. Shares issued to the
trust are valued at $962 and are reflected as a reduction of stockholders'
equity in the consolidated balance sheet.
The Company and the former principal shareholder of the Company, entered
into a Stock Sale Agreement, dated as of August 1, 1997 pursuant to which the
former principal shareholder sold 2,023 shares of common stock at $6.01 per
share to the Company and to the Thomas H. Lee Equity Fund III, L.P. (the "Lee
Fund") and certain other affiliates of Thomas H. Lee Company ("THL Co.," the
Lee Fund and such other affiliates being referred to
F-14
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
6. Shareholders' Equity (Deficit) --Continued
herein as the "Lee Group"). The Stock Sale Agreement provides that, among other
things, if (i) the Company enters into a business combination or other
transaction with a third party whereby less than a majority of the outstanding
capital stock of the surviving entity is owned by the Lee Group, and (ii) such
business combination or other transaction is the result of negotiations or
discussions entered into prior to December 31, 1997 and such combination is
consummated prior to June 30, 1998, then the Lee Group will remit to the former
principal shareholder all amounts, if any, received by the Lee Group (or any
affiliated transferee of shares owned by the Lee Group) from the sale of the
shares of common stock to such third party in excess of $6.01 per share. In
September 1997, another former shareholder sold 205 shares of common stock to
the Company and the Lee Group under similar terms.
On October 22, 1997, the shareholders of the Company approved the
authorization of 5,000 shares of Preferred Stock, $.01 par value, and an
increase in authorized shares of Common Stock from 90,000 to 150,000.
7. Stock Option Plans
Effective September 1996, the Company's Board of Directors (Board)
approved the Rayovac Corporation 1996 Stock Option Plan (1996 Plan) which is
intended to afford an incentive to select employees and directors of the
Company to promote the interests of the Company. Under the 1996 Plan, stock
options to acquire up to 3,000 shares of common stock, in the aggregate, may be
granted under either or both a time-vesting or a performance-vesting formula at
an exercise price equal to the market price of the common stock on the date of
grant. The time-vesting options become exercisable primarily in equal 20%
increments over a five year period. The performance-vesting options become
exercisable at the end of ten years with accelerated vesting over each of the
next five years if the Company achieves certain performance goals. Accelerated
vesting may occur upon sale of the Company, as defined in the Plan.
On September 3, 1997, the Board adopted the 1997 Rayovac Incentive Plan
(Incentive Plan) which was approved by the Shareholders on October 22, 1997 and
expires in August 2007. The Incentive Plan replaces the 1996 Plan and no
further awards will be granted under the 1996 Plan other than awards of options
for shares up to an amount equal to the number of shares covered by options
that terminate or expire prior to being exercised. Under the Incentive Plan,
the Company may grant to employees and non-employee directors stock options,
stock appreciation rights (SARs), restricted stock, and other stock-based
awards, as well as cash-based annual and long-term incentive awards.
Accelerated vesting will occur in the event of a change in control, as defined
in the Incentive Plan. Up to 3,000 shares of common stock may be issued under
the Incentive Plan.
During 1997, the Company adopted the Rayovac Corporation 1997 Stock Option
Plan (1997 Plan). Under the 1997 Plan, stock options to acquire up to 665
shares of common stock, in the aggregate, may be granted. The exercise price is
$6.01. The 1997 Plan and each option granted thereunder expire no later than
November 30, 1997.
A summary of the status of the Company's plan is as follows:
<TABLE>
<CAPTION>
Transition period ended Year ended
September 30, 1996 September 30, 1997
------------------------------ -----------------------------
Weighted-average Weighted-average
Options exercise price Options exercise price
--------- ------------------ --------- -----------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period ........... -- $ -- 1,464 $ 4.39
Granted .................................... 1,464 4.30 1,410 5.03
Exercised .................................. -- -- (556) 6.01
----- ----- ----- -------
Outstanding, end of period ................. 1,464 $ 4.30 2,318 $ 4.33
===== ====== ===== =======
Options exercisable, end of period ......... 40 $ 1.14 496 $ 4.13
===== ====== ===== =======
</TABLE>
The stock options outstanding on September 30, 1997, have a
weighted-average remaining contractual life estimated at 9.5 years.
F-15
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
7. Stock Option Plans --Continued
<TABLE>
<CAPTION>
Transition
period ended Year ended
September 30, 1996 September 30, 1997
-------------------- -------------------
<S> <C> <C>
Weighted-average grant-date
fair value of options granted during period ......... $ 1.92 $ 1.84
Assumptions used:
Risk-free interest rate ............................. 6.78% 6.78%
Expected life ....................................... 8 years 8 years
</TABLE>
The Company applies APB Opinion 25, Accounting for Stock Issued to Employees,
and related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized in the Consolidated Statements of
Operations. Had the Company recognized compensation expense determined on the
fair value at the grant dates for awards under the plans consistent with the
method prescribed by FASB Statement No. 123, Accounting for Stock Based
Compensation (SFAS No. 123), the Company's net income (loss) and net income
(loss) per share, on a pro forma basis, for the Transition Period and the year
ended September 30, 1997, would have been ($21,035) and ($0.48) per share and
$5,680 and $0.28 per share, respectively. The effects of applying FASB 123 may
not be representative of the effects on reported net income (loss) for future
years.
8. Income Taxes
Pretax income (loss) (income (loss) before income taxes and extraordinary
item) and income tax expense (benefit) consist of the following:
<TABLE>
<CAPTION>
Years ended Transition Year
June 30, period ended ended
----------------------- September 30, September 30,
1995 1996 1996 1997
---------- ---------- --------------- --------------
<S> <C> <C> <C> <C>
Pretax income (loss):
United States ..................... $16,505 $17,154 $ (27,713) $6,214
Outside the United States ......... 6,150 4,136 (2,889) 3,391
------- ------- --------- ------
Total pretax income (loss) ......... $22,655 $21,290 $ (30,602) $9,605
======= ======= ========= ======
Income tax expense (benefit):
Current:
Federal .......................... $ 3,923 $ 5,141 $ (3,870) $2,926
Foreign .......................... 797 1,469 (72) (176)
State ............................ 1,181 389 -- 17
------- ------- --------- ------
Total current 5,901 6,999 (3,942) 2,767
------- ------- --------- ------
Deferred:
Federal .......................... 799 54 (3,270) (842)
Foreign .......................... (544) (57) (847) 809
State ............................ 91 6 (1,622) 685
------- ------- --------- ------
Total deferred .................... 346 3 (5,739) 652
------- ------- --------- ------
$ 6,247 $ 7,002 $ (9,681) $3,419
======= ======= ========= ======
</TABLE>
F-16
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
8. Income Taxes --Continued
The following reconciles the Federal statutory income tax rate with the
Company's effective tax rate:
<TABLE>
<CAPTION>
Years ended Transition Year
June 30, period ended ended
----------------------- September 30, September 30,
1995 1996 1996 1997
---------- ---------- --------------- --------------
<S> <C> <C> <C> <C>
Statutory Federal income tax rate ...................... 35.0% 35.0% 35.0% 35.0%
DISC/FSC commission income ............................. (5.9) (5.2) 0.4 (1.2)
Effect of foreign items and rate differentials ......... (4.0) 1.0 (1.2) 0.3
State income taxes, net ................................ 3.6 1.1 3.9 4.9
Reduction of prior year tax provision .................. -- -- -- (3.0)
Nondeductible recapitalization charges ................. -- -- (6.2) --
Other .................................................. (1.1) 1.0 (0.3) (0.4)
---- ---- ---- ----
27.6% 32.9% 31.6% 35.6%
==== ==== ==== ====
</TABLE>
The components of the net deferred tax asset and types of significant
basis differences were as follows:
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1996 1996 1997
------------ --------------- --------------
<S> <C> <C> <C>
Current deferred tax assets:
Recapitalization charges .............................. $ -- $ 2,991 $ 792
Inventories and receivables ........................... 1,395 1,407 1,495
Marketing and promotional accruals .................... 1,498 1,252 3,256
Employee benefits ..................................... 1,554 1,780 1,509
Environmental accruals ................................ 420 752 679
Other ................................................. 994 976 1,368
-------- -------- --------
Total current deferred tax assets .................... 5,861 9,158 9,099
-------- -------- --------
Noncurrent deferred tax assets:
Employee benefits ..................................... 3,053 4,504 4,214
State net operating loss carryforwards... ............. -- 1,249 468
Package design expense ................................ 532 523 927
Promotional expense ................................... 784 854 594
Other ................................................. 1,516 1,475 1,753
-------- -------- --------
Total noncurrent deferred tax assets ................. 5,885 8,605 7,956
-------- -------- --------
Noncurrent deferred tax liabilities:
Property, plant, and equipment ........................ (8,430) (8,708) (8,651)
Other ................................................. (39) (39) (40)
-------- -------- --------
Total noncurrent deferred tax liabilities ............ (8,469) (8,747) (8,691)
-------- -------- --------
Net noncurrent deferred tax liabilities ................ $ (2,584) $ (142) $ (735)
======== ======== ========
</TABLE>
At September 30, 1997, the Company has operating loss carryforwards for
state income tax purposes of approximately $6,000, which expire generally in
years through 2012.
During 1995, the Company used approximately $3,200 of foreign net
operating loss carryforwards for which a deferred tax asset had not been
recognized in prior years due to uncertainty regarding future earnings of the
subsidiaries to which the carryforwards related. As a result, the Company
reversed the valuation allowance of $1,240 recorded at June 30, 1994, in 1995.
F-17
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
8. Income Taxes --Continued
Provision has not been made for United States income taxes on a portion of
the undistributed earnings of the Company's foreign subsidiaries (approximately
$4,342, $4,216, and $4,737 at June 30, 1996, and September 30, 1996 and 1997,
respectively), either because any taxes on dividends would be offset
substantially by foreign tax credits or because the Company intends to reinvest
those earnings. Such earnings would become taxable upon the sale or liquidation
of these foreign subsidiaries or upon remittance of dividends. It is not
practicable to estimate the amount of the deferred tax liability on such
earnings.
9. Leases
Future minimum rental commitments under noncancelable operating leases,
principally pertaining to land, buildings and equipment, are as follows:
<TABLE>
<S> <C>
Year ending September 30,
1998 .................... $ 6,828
1999 .................... 5,404
2000 .................... 4,455
2001 .................... 4,012
2002 .................... 4,017
Thereafter .............. 34,112
-------
$58,828
=======
</TABLE>
The above lease commitments include payments under leases for the
corporate headquarters facilities and other properties from partnerships in
which one of the Company's former shareholders is a partner. Annual minimum
rental commitments on the headquarters facility of $2,817 are subject to an
adjustment based upon changes in the Consumer Price Index. The leases on the
other properties require annual lease payments of $470 subject to annual
inflationary increases. All of the leases expire during the years 1998 through
2013.
Total rental expense was $8,189, $8,213, $1,995, and $8,126, for the years
ended June 30, 1995 and 1996, the Transition Period, and the year ended
September 30, 1997, respectively.
10. Postretirement Pension Benefits
The Company has various defined benefit pension plans covering
substantially all of its domestic employees. Plans covering salaried employees
provide pension benefits that are based on the employee's average compensation
for the five years which yield the highest average during the 10 consecutive
years prior to retirement. Plans covering hourly employees and union members
generally provide benefits of stated amounts for each year of service. The
Company's policy is to fund pension costs at amounts within the acceptable
ranges established by the Employee Retirement Income Security Act of 1974.
The Company also has nonqualified deferred compensation agreements with
certain of its employees under which the Company has agreed to pay certain
amounts annually for the first 15 years subsequent to retirement or to a
designated beneficiary upon death. It is management's intent that life
insurance contracts owned by the Company will fund these agreements.
F-18
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
10. Postretirement Pension Benefits --Continued
Net periodic pension cost for the aforementioned plans is summarized as
follows:
<TABLE>
<CAPTION>
Years ended Transition Year
June 30, period ended ended
------------------------- September 30, September 30,
1995 1996 1996 1997
----------- ----------- --------------- --------------
<S> <C> <C> <C> <C>
Service cost .................................. $ 1,711 $ 1,501 $2,149 $ 1,705
Interest cost ................................. 3,390 3,513 944 3,834
Actual return on plan assets .................. (2,054) (7,880) (605) (6,191)
Net amortization and deferral ................. (708) 4,994 (166) 2,763
Curtailment gain .............................. -- -- -- (2,923)
-------- -------- ------ --------
Net periodic pension cost (benefit) ......... $ 2,339 $ 2,128 $2,322 $ (812)
======== ======== ====== ========
</TABLE>
The following tables set forth the plans' funded status:
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------
Assets exceed Accumulated
accumulated benefits
benefits exceed assets
--------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation ............................................ $ 24,927 $ 19,138
Accumulated benefit obligation ....................................... 25,576 19,932
======== =========
Projected benefit obligation .......................................... $ 31,462 $ 19,932
Plan assets at fair value, primarily listed stocks, bonds and
cash equivalents ..................................................... 32,297 9,349
-------- ---------
Projected benefit obligation (in excess of) less than plan assets ..... 835 (10,583)
Unrecognized net gain ................................................. (2,341) (893)
Unrecognized net obligation (asset) ................................... (211) 4,711
Additional minimum liability .......................................... -- (3,823)
-------- ---------
Pension liability ................................................... $ (1,717) $ (10,588)
======== =========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996
--------------------------------
Assets exceed Accumulated
accumulated benefits
benefits exceed assets
--------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation ............................................ $ 25,273 $ 19,495
Accumulated benefit obligation ....................................... 25,930 20,305
======== =========
Projected benefit obligation .......................................... $ 31,910 $ 20,305
Plan assets at fair value, primarily listed stocks, bonds and
cash equivalents ..................................................... 32,341 9,364
-------- ---------
Projected benefit obligation (in excess of) less than plan assets ..... 431 (10,941)
Unrecognized net gain ................................................. (2,147) (832)
Unrecognized net obligation (asset) ................................... (208) 2,894
Additional minimum liability .......................................... -- (2,067)
Contribution .......................................................... 86 756
-------- ---------
Pension liability ................................................... $ (1,838) $ (10,190)
======== =========
</TABLE>
F-19
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
10. Postretirement Pension Benefits --Continued
<TABLE>
<CAPTION>
September 30, 1997
--------------------------------
Assets exceed Accumulated
accumulated benefits
benefits exceed assets
--------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation ............................................ $ 42,696 $ 13,326
Accumulated benefit obligation ....................................... 43,046 13,704
======== =========
Projected benefit obligation .......................................... $ 43,046 $ 13,704
Plan assets at fair value, primarily listed stocks, bonds and
cash equivalents ..................................................... 43,212 3,098
-------- ---------
Projected benefit obligation (in excess of) less than plan assets ..... 166 (10,606)
Unrecognized net loss (gain) .......................................... (1,194) 1
Unrecognized net asset ................................................ 1,028 1,476
Additional minimum liability .......................................... -- (1,486)
-------- ---------
Pension liability ................................................... $ -- $ (10,615)
======== =========
</TABLE>
Assumptions used in accounting for the aforementioned plans were:
<TABLE>
<CAPTION>
Years ended Transition Year
June 30, period ended ended
--------------------- September 30, September 30,
1995 1996 1996 1997
--------- --------- --------------- --------------
<S> <C> <C> <C> <C>
Discount rate used for funded status calculation ......... 8.0% 7.5% 7.5% 7.5%
Discount rate used for net periodic pension cost
calculations ............................................ 7.5 8.0 7.5 7.5
Rate of increase in compensation levels
(salaried plan only) .................................... 5.5 5.0 5.0 5.0
Expected long-term rate of return on assets .............. 9.0 9.0 9.0 9.0
</TABLE>
During the year ended September 30, 1997, the Company merged two of its
defined benefit plans and ceased future benefit accruals. The Company
recognized a $2,923 curtailment gain, which is included in other special
charges in the consolidated statement of operations. A discount rate of 6.5%
was used in the accounting for the curtailed plans. The Company has recorded an
additional minimum pension liability of $3,823, $2,067, and $1,486 at June 30,
1996, and September 30, 1996 and 1997, respectively, to recognize the
underfunded position of certain of its benefits plans. An intangible asset of
$3,582, $1,826, and $1,232 at June 30, 1996, and September 30, 1996 and 1997,
respectively, equal to the unrecognized prior service cost of these plans, has
also been recorded. The excess of the additional minimum liability over the
unrecognized prior service cost of $241 at June 30 and September 30, 1996, and
$249 at September 30, 1997, respectively, has been recorded as a reduction of
shareholders' equity (deficit).
The Company sponsors a defined contribution pension plan for its domestic
salaried employees which allows participants to make contributions by salary
reduction pursuant to Section 401(k) of the Internal Revenue Code. The Company
contributes annually 1% of participants' compensation, and may make additional
discretionary contributions. The Company also sponsors defined contribution
pension plans for employees of certain foreign subsidiaries. Company
contributions charged to operations, including discretionary amounts, for the
years ended June 30, 1995 and 1996, the Transition Period, and September 30,
1997, were $1,273, $ 1,000, $181, and $914, respectively.
F-20
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
11. Other Postretirement Benefit Plan
The Company provides certain health care and life insurance benefits to
eligible retired employees. Participants earn retiree health care benefits
after reaching age 45 over the next 10 succeeding years of service and remain
eligible until reaching age 65. The plan is contributory; retiree contributions
have been established as a flat dollar amount with contribution rates expected
to increase at the active medical trend rate. The plan is unfunded. The Company
is amortizing the transition obligation over a 20-year period.
The following sets forth the plan's funded status reconciled with amounts
reported in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1996 1996 1997
---------- --------------- --------------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees ........................................... $ 723 $ 687 $ 722
Fully eligible active participants ................. 805 820 813
Other active participants .......................... 896 970 869
-------- -------- --------
Total APBO .......................................... 2,424 2,477 2,404
Unrecognized net loss ............................... (1,269) (1,246) (1,008)
Unrecognized transition obligation .................. (641) (631) (591)
-------- -------- --------
Accrued postretirement benefit liability .......... $ 514 $ 600 $ 805
======== ======== ========
</TABLE>
Net periodic postretirement benefit cost includes the following
components:
<TABLE>
<CAPTION>
Years ended Transition Year
June 30, period ended ended
--------------- September 30, September 30,
1995 1996 1996 1997
------ ------ --------------- --------------
<S> <C> <C> <C> <C>
Service cost ....................................... $110 $129 $ 58 $249
Interest ........................................... 85 111 44 179
Net amortization and deferral ...................... 40 54 35 138
---- ---- ---- ----
Net periodic postretirement benefit cost ......... $235 $294 $137 $566
==== ==== ==== ====
</TABLE>
For measurement purposes, a 9.5% annual rate of increase in the per capita
costs of covered health care benefits was assumed for fiscal 1996 and 1997,
gradually decreasing to 5.5%. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation as of September 30,
1997, by $148 and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost for the year ended September 30, 1997,
by $40. A discount rate of 7.5% was used to determine the accumulated
postretirement benefit obligation.
F-21
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
12. Business Segment and International Operations
Information about the Company's operations in different geographic areas
is summarized follows:
<TABLE>
<CAPTION>
Years ended Transition Year
June 30, period ended ended
------------------------- September 30, September 30,
1995 1996 1996 1997
------------ ------------ --------------- --------------
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers:
United States ..................... $ 337,888 $ 341,967 $ 82,329 $ 352,468
Foreign:
Europe ........................... 60,696 64,432 15,304 62,546
Other ............................ 16,640 16,955 4,247 17,538
--------- --------- --------- ---------
Total .............................. $ 415,224 $ 423,354 $ 101,880 $ 432,552
========= ========= ========= =========
Transfers between geographic areas:
United States ..................... $ 26,928 $ 27,097 $ 7,432 $ 28,403
Foreign:
Europe ........................... 1,637 730 422 1,459
Other ............................ 49 -- -- --
--------- --------- --------- ---------
Total .............................. $ 28,614 $ 27,827 $ 7,854 $ 29,862
========= ========= ========= =========
Net sales:
United States ..................... $ 364,816 $ 369,065 $ 89,760 $ 380,872
Foreign:
Europe ........................... 62,333 65,161 15,727 64,004
Other ............................ 16,689 16,955 4,247 17,538
Eliminations ...................... (28,614) (27,827) (7,854) (29,862)
--------- --------- --------- ---------
Total .............................. $ 415,224 $ 423,354 $ 101,880 $ 432,552
========= ========= ========= =========
Income (loss) from operations:
United States ..................... $ 24,335 $ 24,759 $ (20,983) $ 30,379
Foreign:
Europe ........................... 5,410 5,002 (2,539) 3,759
Other ............................ 1,784 516 (150) 387
--------- --------- --------- ---------
Total .............................. $ 31,529 $ 30,277 $ (23,672) $ 34,525
========= ========= ========= =========
Total assets:
United States ..................... $ 189,557 $ 192,441 $ 213,730 $ 208,971
Foreign:
Europe ........................... 34,345 33,719 35,065 32,137
Other ............................ 16,093 17,532 18,782 17,946
Eliminations ...................... (19,405) (22,564) (23,886) (22,173)
--------- --------- --------- ---------
Total .............................. $ 220,590 $ 221,128 $ 243,691 $ 236,881
========= ========= ========= =========
</TABLE>
13. Commitments and Contingencies
The Company has entered into agreements to purchase certain equipment and
to pay annual royalties. In a December 1991 agreement, the Company committed to
pay $1,500 in January 1992 and annual royalties of $1,500 for the first five
years, beginning in 1993, plus $500 for each year thereafter, as long as the
related equipment patents are enforceable. In a March 1994 agreement, the
Company committed to pay $500 in April 1994 and annual royalties
F-22
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
13. Commitments and Contingencies --Continued
of $500 for five years beginning in 1995. Additionally, the Company has
committed to purchase tooling of $957 related to this equipment, $66 for other
tooling, at an unspecified date in the future and purchase manganese ore
amounting to $120 by March 1998.
The Company has provided for the estimated costs associated with
environmental remediation activities at some of its current and former
manufacturing sites. In addition, the Company, together with other parties, has
been designated a potentially responsible party of various third-party sites on
the United States EPA National Priorities List (Superfund). The Company
provides for the estimated costs of investigation and remediation of these
sites when such losses are probable and the amounts can be reasonably
estimated. The actual cost incurred may vary from these estimates due to the
inherent uncertainties involved. The Company believes that any additional
liability in excess of the amounts provided of $1,787, which may result from
resolution of these matters, will not have a material adverse effect on the
financial condition, liquidity, or cash flow of the Company.
The Company has certain other contingent liabilities with respect to
litigation, claims and contractual agreements arising in the ordinary course of
business. In the opinion of management, such contingent liabilities are not
likely to have a material adverse effect on the financial condition, liquidity
or cash flow of the Company.
14. Related Party Transactions
The Company and THL Co. are parties to a Management Agreement pursuant to
which the Company has engaged THL Co. to provide consulting and management
advisory services for an initial period of five years through September 2001.
In consideration of ongoing consulting and management advisory services, the
Company will pay THL Co. an aggregate annual fee of $360 plus expenses. Under
the Management Agreement and in connection with the closing of the
Recapitalization, the Company paid THL Co. and an affiliate $3,250 during the
Transition Period. The Company paid THL Co. aggregate fees of $386 for the year
ended September 30, 1997.
The Company and a shareholder of the Company (the principal shareholder
prior to the Recapitalization) are parties to agreements which include a
consulting arrangement and noncompetition provisions. Terms of the agreements
required the shareholder to provide consulting services for an annual fee of
$200 plus expenses. The term of these agreements runs concurrent with the
Management Agreement, subject to certain conditions as defined in the
agreements. The Consulting Agreement was terminated August 1, 1997. The Company
paid the shareholder $175 for the year ended September 1997.
The Company has notes receivable from officers in the amount of $500 and
$1,261 at September 30, 1996 and 1997, respectively, generally payable in five
years, which bear interest at 7% to 8%. Since the officers utilized the
proceeds of the notes to purchase common stock of the Company, directly or
through the exercise of stock options, the notes have been recorded as a
reduction of shareholders' equity (deficit). The Company has short-term notes
receivable from employees of $397 at September 30, 1997 which were used to
purchase common stock of the Company, through the exercise of stock options,
and are also classified as a reduction of shareholders' equity (deficit).
15. Other Special Charges
During the year ended September 30, 1997, the Company recorded special
charges as follows: (i) $2,500 of charges related to the exit of certain
manufacturing and distribution operations at the Company's Kinston, North
Carolina facility by early fiscal 1998 which includes $1,100 of employee
termination benefits for 137 employees, (ii) $1,400 of employee termination
benefits for 71 employees related to organizational restructuring in Europe and
the exit of certain manufacturing operations in the Company's Newton Aycliffe,
United Kingdom facility which the Company expects to complete in fiscal 1998,
(iii) $2,000 of charges for employee termination benefits for 77 employees
related to organizational restructuring in the United States which the Company
expects to complete in fiscal 1998. The number of employees anticipated to be
terminated was approximately equal to the actual numbers
F-23
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
15. Other Special Charges--Continued
referenced above. The charges were partially offset by a $2,900 gain related to
the curtailment of the Company's defined benefit pension plan covering all
domestic non-union employees. A summary of the restructuring activities follows.
<TABLE>
<CAPTION>
1997 Restructuring Summary
-----------------------------------------
Termination
Benefits Other Costs Total
------------ ------------- ----------
<S> <C> <C> <C>
Expenses accrued ............. $ 4,000 $ 600 $ $4,600
Changes in estimate .......... 500 600 1,100
Expensed as incurred ......... -- 200 200
Expenditures ................. (3,300) (700) (4,000)
-------- ------ --------
Balance 9/30/97 ................. $ 1,200 $ 700 $ 1,900
======== ====== ========
</TABLE>
During the Transition Period, the Company recorded special charges as
follows: (i) $2,700 of charges related to the exit of certain manufacturing
operations, (ii) $1,700 of charges to increase net deferred compensation plan
obligations to reflect curtailment of such plans; (iii) $1,500 of charges
reflecting the present value of lease payments for land which management has
determined will not be used for any future productive purpose; (iv) $6,900 in
costs and asset write-downs principally related to changes in product pricing
strategies adopted by management subsequent to the Recapitalization; and (v)
$3,300 of employee termination benefits and other charges. Payment for these
costs was or is expected to be as follows: $7,700 was paid prior to September
30, 1996; $5,600 was paid in fiscal 1997; and $2,800 is expected to be paid
thereafter.
16. Quarterly Results (unaudited)
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------
December 30, March 30, June 30, September 30,
1995 1996 1996 1996
-------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Net sales ....................................... $ 140,707 $ 80,563 $ 94,731 $ 101,880
Gross profit .................................... 63,219 34,672 39,495 42,638
Income (loss) before extraordinary item ......... 6,059 310 4,361 (19,274)
Net income (loss) ............................... 6,059 310 4,361 (20,921)
Basic net income (loss) per share ............... 0.12 0.01 0.09 (0.48)
Diluted net income (loss) per share ............. 0.12 0.01 0.09 (0.48)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------
December 28, March 29, June 29, September 30,
1996 1997 1997 1997
-------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Net sales ....................................... $ 141,922 $ 83,633 $ 95,466 $ 111,531
Gross profit .................................... 62,903 36,510 43,249 55,321
Net income (loss) ............................... 2,380 (1,720) 2,652 2,874
Basic net income (loss) per share ............... 0.12 (0.08) 0.13 0.14
Diluted net income (loss) per share ............. 0.12 (0.08) 0.13 0.14
</TABLE>
17. Consolidated Financial Statements
The following condensed consolidating financial data illustrates the
composition of the consolidated financial statements. Investments in
subsidiaries are accounted for by the Company on an unconsolidated basis (the
Company and the DISC) and the Guarantor Subsidiary using the equity method for
purposes of the consolidating presentation. Earnings of subsidiaries are
therefore reflected in the Company's and Guarantor Subsidiary's investment
accounts and earnings. The principal elimination entries eliminate investments
in subsidiaries and intercompany balances
F-24
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
and transactions. Separate financial
statements of the Guarantor Subsidiary are not presented because management has
determined that such financial statements would not be material to investors.
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Guarantor Nonguarantor
Parent subisidiary subsidiaries Eliminations Consolidated
------------ ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 633 $ 46 $ 454 $ -- $ 1,133
Receivables:
Trade accounts receivable, net ......................... 61,400 -- 15,190 -- 76,590
Other .................................................. 8,500 702 2,659 (8,782) 3,079
Inventories ............................................. 45,003 -- 13,722 (174) 58,551
Deferred income taxes ................................... 8,664 342 93 -- 9,099
Prepaid expenses and other .............................. 5,101 -- 827 -- 5,928
-------- ------- ------- -------- --------
Total current assets ............................... 129,301 1,090 32,945 (8,956) 154,380
-------- ------- ------- -------- --------
Property, plant and equipment, net ....................... 60,860 -- 4,651 -- 65,511
Deferred charges and other ............................... 8,411 -- 612 (1,310) 7,713
Debt issuance costs ...................................... 9,277 -- -- -- 9,277
Investment in subsidiaries ............................... 16,111 15,627 -- (31,738) --
-------- ------- ------- -------- --------
Total assets ....................................... $223,960 $16,717 $38,208 $(42,004) $236,881
======== ======= ======= ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt .................... $ 22,000 $ -- $ 1,880 $ -- $ 23,880
Accounts payable ........................................ 50,797 150 14,847 (8,535) 57,259
Accrued liabilities:
Wages and benefits ..................................... 7,766 -- 1,577 -- 9,343
Accrued interest ....................................... 5,594 -- 19 -- 5,613
Recapitalization and other special charges ............. 4,235 -- 377 -- 4,612
Other .................................................. 16,182 226 3,448 -- 19,856
-------- ------- ------- -------- --------
Total current liabilities .......................... 106,574 376 22,148 (8,535) 120,563
-------- ------- ------- -------- --------
Long-term debt, net of current maturities ................ 183,441 -- -- -- 183,441
Employee benefit obligations, net of current portion ..... 11,291 -- -- -- 11,291
Deferred income taxes .................................... 554 -- 181 -- 735
Other .................................................... 956 230 260 -- 1,446
-------- ------- ------- -------- --------
Total liabilities .................................. 302,816 606 22,589 (8,535) 317,476
-------- ------- ------- -------- --------
Shareholders' equity (deficit):
Common stock ............................................ 500 -- 12,072 (12,072) 500
Additional paid-in capital .............................. 15,974 3,525 750 (4,275) 15,974
Foreign currency translation adjustment ................. 2,270 2,270 2,270 (4,540) 2,270
Notes receivable from officers/shareholders ............. (1,658) -- -- -- (1,658)
Retained earnings ....................................... 33,060 10,316 527 (12,582) 31,321
-------- ------- ------- -------- --------
50,146 16,111 15,619 (33,469) 48,407
Less stock held in trust for deferred compensation ...... (962) -- -- -- (962)
Less treasury stock ..................................... (128,040) -- -- -- (128,040)
-------- ------- ------- -------- --------
Total shareholders' equity (deficit) ..................... (78,856) 16,111 15,619 (33,469) (80,595)
-------- ------- ------- -------- --------
Total liabilities and shareholders' equity (deficit) ..... $223,960 $16,717 $38,208 $(42,004) $236,881
======== ======= ======= ======== ========
</TABLE>
F-25
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Guarantor Nonguarantor
Parent subsidiary subsidiaries Eliminations Consolidated
----------- ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales .......................... $380,872 $ -- $81,542 $ (29,862) $432,552
Cost of goods sold ................. 212,861 -- 52,180 (30,472) 234,569
-------- -------- ------- --------- --------
Gross profit ..................... 168,011 -- 29,362 610 197,983
-------- -------- ------- --------- --------
Operating expenses:
Selling ........................... 104,685 -- 17,370 -- 122,055
General and administrative ........ 26,039 (817) 5,655 1,328 32,205
Research and development .......... 6,196 -- -- -- 6,196
Other special charges ............. 1,348 -- 1,654 -- 3,002
-------- -------- ------- --------- --------
138,268 (817) 24,679 1,328 163,458
-------- -------- ------- --------- --------
Income from operations ........... 29,743 817 4,683 (718) 34,525
Interest expense ................... 24,118 -- 424 -- 24,542
Equity in income of subsidiary ..... (3,475) (2,948) -- 6,423 --
Other (income) expense, net ........ (590) 6 962 -- 378
-------- -------- ------- --------- --------
Income before income taxes ......... 9,690 3,759 3,297 (7,141) 9,605
Income tax expense ................. 2,786 284 349 -- 3,419
-------- -------- ------- --------- --------
Net income ....................... $ 6,904 $ 3,475 $ 2,948 $ (7,141) $ 6,186
======== ======== ======= ========= ========
</TABLE>
F-26
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Guarantor Nonguarantor
Parent subsidiary subsidiaries Eliminations Consolidated
------------ ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by operating activities ..... $ 34,436 $ (11) $ 1,240 $-- $ 35,665
Cash flows from investing activities:
Purchases of property, plant and equipment .......... (10,113) -- (743) -- (10,856)
Proceeds from sale of property, plant and
equipment ......................................... 52 -- -- -- 52
Sale (purchase) of equipment and technology ......... (1,866) -- 1,866 -- --
---------- ----- --------- --- ----------
Net cash provided (used) by investing activities ..... (11,927) -- 1,123 -- (10,804)
---------- ----- --------- --- ----------
Cash flows from financing activities:
Reduction of debt ................................... (123,489) -- (11,590) -- (135,079)
Proceeds from debt financing ........................ 100,000 -- 8,890 -- 108,890
Cash overdrafts ..................................... 164 -- -- -- 164
Proceeds from direct financing lease ................ 100 -- -- -- 100
Issuance of stock ................................... 271 -- -- -- 271
Acquisition of treasury stock ....................... (3,343) -- -- -- (3,343)
Exercise of stock options ........................... 1,438 -- -- -- 1,438
Payments on capital lease obligations ............... -- -- (426) -- (426)
---------- ----- --------- --- ----------
Net cash provided (used) by financing activities ..... (24,859) -- (3,126) -- (27,985)
---------- ----- --------- --- ----------
Effect of exchange rate changes on cash and
cash equivalents .................................... -- -- 2 -- 2
---------- ----- --------- --- ----------
Net increase (decrease) in cash and cash
equivalents ........................................ (2,350) (11) (761) -- (3,122)
Cash and cash equivalents, beginning of period ....... 2,983 57 1,215 -- 4,255
---------- ----- --------- --- ----------
Cash and cash equivalents, end of period ............. $ 633 $ 46 $ 454 $-- $ 1,133
========== ===== ========= === ==========
</TABLE>
F-27
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 1996
<TABLE>
<CAPTION>
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
------------- ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 2,983 $ 57 $ 1,215 $ -- $ 4,255
Receivables:
Trade accounts receivable, net ......................... 45,614 -- 16,706 -- 62,320
Other .................................................. 15,128 162 95 (11,229) 4,156
Inventories ............................................. 57,615 -- 13,303 (797) 70,121
Deferred income taxes ................................... 7,888 1,026 244 -- 9,158
Prepaid expenses and other .............................. 3,457 -- 1,407 -- 4,864
-------- ------- -------- --------- --------
Total current assets ............................... 132,685 1,245 32,970 (12,026) 154,874
-------- ------- -------- --------- --------
Property, plant and equipment, net ....................... 61,495 -- 7,145 -- 68,640
Deferred charges and other ............................... 6,815 -- 598 -- 7,413
Debt issuance costs ...................................... 12,764 -- -- -- 12,764
Investment in subsidiaries ............................... 12,056 12,098 -- (24,154) --
-------- ------- -------- --------- --------
Total assets ....................................... $225,815 $13,343 $ 40,713 $ (36,180) $243,691
======== ======= ======== ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt .................... $ 4,500 $ -- $ 4,318 $ -- $ 8,818
Accounts payable ........................................ 40,830 597 16,505 (11,011) 46,921
Accrued liabilities:
Wages and benefits ..................................... 4,759 -- 1,135 -- 5,894
Accrued interest ...................................... 618 -- 13 -- 631
Recapitalization and other special charges ............ 11,645 -- 3,297 -- 14,942
Other .................................................. 10,043 484 2,492 -- 13,019
-------- ------- -------- --------- --------
Total current liabilities .......................... 72,395 1,081 27,760 (11,011) 90,225
-------- ------- -------- --------- --------
Long-term debt, net of current maturities ................ 223,990 -- 855 -- 224,845
Employee benefit obligations, net of current portion ..... 12,138 -- -- -- 12,138
Deferred income taxes .................................... (64) 206 -- -- 142
Other .................................................... 2,061 -- -- -- 2,061
-------- ------- -------- --------- --------
Total liabilities .................................. 310,520 1,287 28,615 (11,011) 329,411
Shareholders' equity (deficit):
Common stock ............................................ 500 -- 12,072 (12,072) 500
Additional paid-in capital .............................. 15,970 3,525 750 (4,275) 15,970
Foreign currency translation adjustment ................. 1,689 1,689 1,689 (3,378) 1,689
Notes receivable from officers/shareholders ............. (500) -- -- -- (500)
Retained earnings ....................................... 26,158 6,842 (2,413) (5,444) 25,143
-------- ------- -------- --------- --------
43,817 12,056 12,098 (25,169) 42,802
Less treasury stock, at cost ............................ (128,522) -- -- -- (128,522)
-------- ------- -------- --------- --------
Total shareholders' equity (deficit) ..................... (84,705) 12,056 12,098 (25,169) (85,720)
-------- ------- -------- --------- --------
Total liabilities and shareholders' equity (deficit) ..... $225,815 $13,343 $ 40,713 $ (36,180) $243,691
======== ======= ======== ========= ========
</TABLE>
F-28
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Transition period ended September 30, 1996
<TABLE>
<CAPTION>
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
------------ -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales ................................ $ 89,760 $ -- $ 19,974 $ (7,854) $ 101,880
Cost of goods sold ....................... 53,480 -- 13,470 (7,708) 59,242
--------- ------- -------- -------- ---------
Gross profit ........................... 36,280 -- 6,504 (146) 42,638
--------- ------- -------- -------- ---------
Operating expenses:
Selling ................................. 23,539 -- 4,257 -- 27,796
General and administrative .............. 6,508 2 2,109 9 8,628
Research and development ................ 1,495 -- -- -- 1,495
Recapitalization charges ................ 12,326 -- -- -- 12,326
Other special charges ................... 12,768 - 3,297 -- 16,065
--------- ------- -------- -------- ---------
56,636 2 9,663 9 66,310
--------- ------- -------- -------- ---------
Loss from operations ................... (20,356) (2) (3,159) (155) (23,672)
Interest expense ......................... 4,320 -- 110 -- 4,430
Equity in loss of subsidiary ............. 2,508 2,611 -- (5,119) --
Other (income) expense, net .............. (170) (162) 408 -- 76
--------- --------- -------- -------- ---------
Loss before income taxes and
extraordinary item ...................... (27,014) (2,451) (3,677) 4,964 (28,178)
Income tax (benefit) expense ............. (7,895) 57 (1,066) -- (8,904)
--------- --------- -------- -------- ---------
Loss before extraordinary item ........... (19,119) (2,508) (2,611) 4,964 (19,274)
Extraordinary item, loss on early
extinguishment of debt, net of income
tax benefit of $777...................... (1,647) -- -- -- (1,647)
--------- --------- -------- -------- ---------
Net loss ............................... $ (20,766) $(2,508) $ (2,611) $ 4,964 $ (20,921)
========= ========= ======== ======== =========
</TABLE>
F-29
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Transition period ended September 30, 1996
<TABLE>
<CAPTION>
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
------------ ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by operating activities ......... $ (2,078) $16 $ 932 $-- $ (1,130)
Cash flows from investing activities: ....................
Purchases of property, plant and equipment .............. (912) -- (336) -- (1,248)
Proceeds from sale of property, plant and
equipment ............................................. 1,281 -- -- -- 1,281
-------- --- -------- --- --------
Net cash provided (used) by investing activities ......... 369 -- (336) -- 33
-------- --- -------- --- --------
Cash flows from financing activities:
Reduction of debt ....................................... (104,138) -- (2,952) -- (107,090)
Proceeds from debt financing ............................ 256,500 -- 2,989 -- 259,489
Cash overdraft .......................................... (2,493) -- -- -- (2,493)
Debt issuance costs ..................................... (14,373) -- -- -- (14,373)
Extinguishment of debt .................................. (2,424) -- -- -- (2,424)
Distributions from DISC ................................. (1,943) -- -- -- (1,943)
Acquisition of treasury stock ........................... (127,925) -- -- -- (127,925)
Payments on capital lease obligation .................... -- -- (84) -- (84)
-------- --- -------- --- --------
Net cash provided (used) by financing activities ......... 3,204 -- (47) -- 3,157
-------- --- -------- --- --------
Effect of exchange rate changes on cash and cash
equivalents ............................................. -- -- 5 -- 5
-------- --- -------- --- --------
Net increase (decrease) in cash and cash
equivalents ........................................... 1,495 16 554 -- 2,065
Cash and cash equivalents, beginning of period ........... 1,488 41 661 -- 2,190
-------- --- -------- --- --------
Cash and cash equivalents, end of period ................. $ 2,983 $57 $ 1,215 $-- $ 4,255
======== === ======== === ========
</TABLE>
F-30
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 1996
<TABLE>
<CAPTION>
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
------------ ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 1,488 $ 41 $ 661 $ -- $ 2,190
Receivables:
Trade accounts receivable, net ............................. 40,138 -- 15,692 -- 55,830
Other ...................................................... 11,434 318 780 (10,210) 2,322
Inventories ................................................. 54,486 -- 12,951 (496) 66,941
Deferred income taxes ....................................... 5,439 179 243 -- 5,861
Prepaid expenses and other .................................. 3,415 -- 1,560 -- 4,975
-------- ------- ------- --------- --------
Total current assets ................................... 116,400 538 31,887 (10,706) 138,119
-------- ------- ------- --------- --------
Property, plant and equipment, net ........................... 65,747 -- 7,434 -- 73,181
Deferred charges and other ................................... 9,047 -- 608 -- 9,655
Debt issuance costs .......................................... 173 -- -- -- 173
Investment in subsidiaries ................................... 14,524 14,670 -- (29,194) --
-------- ------- ------- --------- --------
Total assets ........................................... $205,891 $15,208 $39,929 $ (39,900) $221,128
======== ======= ======= ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities: .........................................
Current maturities of long-term debt ........................ $ 7,350 $ -- $ 4,281 $ -- $ 11,631
Accounts payable ............................................ 32,906 492 15,145 (9,848) 38,695
Accrued liabilities:
Wages and benefits ......................................... 5,077 -- 1,049 -- 6,126
Accrued interest ........................................... 1,850 -- 40 -- 1,890
Other ...................................................... 12,768 (14) 3,803 -- 16,557
-------- ------- ------- --------- --------
Total current liabilities .............................. 59,951 478 24,318 (9,848) 74,899
-------- ------- ------- --------- --------
Long-term debt, net of current maturities .................... 68,777 -- 941 -- 69,718
Employee benefit obligations, net of current portion ......... 12,141 -- -- -- 12,141
Deferred income taxes ........................................ 2,378 206 -- -- 2,584
Other ........................................................ 162 -- -- -- 162
-------- ------- ------- --------- --------
Total liabilities ...................................... 143,409 684 25,259 (9,848) 159,504
-------- ------- ------- --------- --------
Shareholders' equity (deficit): ..............................
Common stock ................................................ 500 -- 12,072 (12,072) 500
Rayovac International Corporation common stock .............. 5 -- -- -- 5
Additional paid-in capital .................................. 12,000 3,525 750 (4,275) 12,000
Foreign currency translation adjustment ..................... 1,650 1,650 1,650 (3,300) 1,650
Retained earnings ........................................... 48,860 9,349 198 (10,405) 48,002
-------- ------- ------- --------- --------
63,015 14,524 14,670 (30,052) 62,157
Less treasury stock, at cost ................................ (533) -- -- -- (533)
Total shareholders' equity (deficit) ......................... 62,482 14,524 14,670 (30,052) 61,624
-------- ------- ------- --------- --------
Total liabilities and shareholders' equity (deficit) ......... $205,891 $15,208 $39,929 $ (39,900) $221,128
======== ======= ======= ========= ========
</TABLE>
F-31
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Year ended June 30, 1996
<TABLE>
<CAPTION>
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
----------- ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales .......................... $369,065 $ -- $82,116 $ (27,827) $423,354
Cost of goods sold ................. 213,349 -- 53,846 (27,852) 239,343
-------- -------- ------- --------- --------
Gross profit ...................... 155,716 -- 28,270 25 184,011
-------- -------- ------- --------- --------
Operating expenses:
Selling ........................... 99,486 -- 17,039 -- 116,525
General and administrative ........ 25,967 12 5,775 13 31,767
Research and development .......... 5,442 -- -- -- 5,442
-------- -------- ------- --------- --------
130,895 12 22,814 13 153,734
-------- -------- ------- --------- --------
Income (loss) from operations ..... 24,821 (12) 5,456 12 30,277
Interest expense ................... 7,731 -- 704 -- 8,435
Equity in income of subsidiary ..... (2,507) (2,167) -- 4,674 --
Other (income) expense, net ........ (51) (570) 1,173 -- 552
-------- -------- ------- --------- --------
Income before income taxes ......... 19,648 2,725 3,579 (4,662) 21,290
Income tax expense ................. 5,372 218 1,412 -- 7,002
-------- -------- ------- --------- --------
Net income ........................ $ 14,276 $ 2,507 $ 2,167 $ (4,662) $ 14,288
======== ======== ======= ========= ========
</TABLE>
F-32
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year ended June 30, 1996
<TABLE>
<CAPTION>
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
------------ ------------ -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by operating activities ......... $ 14,449 $ (292) $ 3,688 $ -- $ 17,845
Cash flows from investing activities:
Purchases of property, plant and equipment .............. (6,558) -- (88) -- (6,646)
Proceeds from sale of property, plant and
equipment ............................................. 298 -- -- -- 298
---------- ------ -------- ---- ----------
Net cash provided (used) by investing activities ......... (6,260) -- (88) -- (6,348)
---------- ------ -------- ---- ----------
Cash flows from financing activities:
Reduction of debt ....................................... (97,627) -- (6,899) -- (104,526)
Proceeds from debt financing ............................ 93,600 -- 2,652 -- 96,252
Cash overdraft .......................................... 2,339 -- -- -- 2,339
Distributions from DISC ................................. (5,187) -- -- -- (5,187)
Intercompany dividends .................................. -- 130 (130) -- --
Acquisition of treasury stock ........................... (533) -- -- -- (533)
Payments on capital lease obligation .................... -- -- (295) -- (295)
---------- ------ -------- ---- ----------
Net cash provided (used) by financing activities ......... (7,408) 130 (4,672) -- (11,950)
---------- ------ -------- ---- ----------
Effect of exchange rate changes on cash and cash
equivalents ............................................. -- -- (2) -- (2)
---------- ------ -------- ---- ----------
Net increase (decrease) in cash and cash
equivalents ............................................ 781 (162) (1,074) -- (455)
Cash and cash equivalents, beginning of period ........... 707 203 1,735 -- 2,645
---------- ------ -------- ---- ----------
Cash and cash equivalents, end of period ................. $ 1,488 $ 41 $ 661 $ -- $ 2,190
========== ====== ======== ==== ===========
</TABLE>
F-33
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Year ended June 30, 1995
<TABLE>
<CAPTION>
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
----------- ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales .............................. $364,816 $ -- $79,022 $ (28,614) $415,224
Cost of goods sold ..................... 214,119 -- 51,781 (28,774) 237,126
-------- -------- ------- --------- --------
Gross profit .......................... 150,697 -- 27,241 160 178,098
-------- -------- ------- --------- --------
Operating expenses:
Selling ............................... 93,935 -- 14,768 -- 108,703
General and administrative ............ 27,556 (651) 5,872 84 32,861
Research and development .............. 5,005 -- -- -- 5,005
-------- -------- ------- --------- --------
126,496 (651) 20,640 84 146,569
-------- -------- ------- --------- --------
Income from operations ................ 24,201 651 6,601 76 31,529
Interest expense ....................... 7,889 -- 755 -- 8,644
Equity in income of subsidiary ......... (5,520) (4,928) -- 10,448 --
Other (income) expense, net ............ (116) (319) 665 -- 230
-------- -------- ------- --------- --------
Income before income taxes.............. 21,948 5,898 5,181 (10,372) 22,655
Income tax expense ..................... 5,616 378 253 -- 6,247
-------- -------- ------- --------- --------
Net income ............................ $ 16,332 $ 5,520 $ 4,928 $ (10,372) $ 16,408
======== ======== ======= ========= ========
</TABLE>
F-34
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year ended June 30, 1995
<TABLE>
<CAPTION>
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
------------ ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by operating activities ......... $ 32,394 $ (3,823) $ 3,737 $ 3,211 $ 35,519
Cash flows from investing activities:
Purchases of property, plant and equipment .............. (14,288) -- (2,650) -- (16,938)
Proceeds from sale of property, plant and
equipment .............................................. 139 -- -- -- 139
---------- -------- -------- -------- ----------
Net cash (used) by investing activities .................. (14,149) -- (2,650) -- (16,799)
---------- -------- -------- -------- ----------
Cash flows from financing activities:
Reduction of debt ....................................... (100,536) -- (5,847) -- (106,383)
Proceeds from debt financing ............................ 79,749 -- 5,223 726 85,698
Cash overdraft .......................................... 3,925 -- -- -- 3,925
Distributions from DISC ................................. (1,500) -- -- -- (1,500)
Intercompany dividends .................................. -- 3,899 (3,899) -- --
---------- -------- -------- -------- ----------
Net cash provided (used) by financing activities ......... (18,362) 3,899 (4,523) 726 (18,260)
========== ======== ======== ======== ==========
Effect of exchange rate changes on cash and cash
equivalents ............................................. -- -- 3,592 (3,937) (345)
---------- -------- -------- -------- ----------
Net increase (decrease) in cash and cash
equivalents ............................................ (117) 76 156 -- 115
Cash and cash equivalents, beginning of period ........... 824 127 1,579 -- 2,530
---------- -------- -------- -------- ----------
Cash and cash equivalents, end of period ................. $ 707 $ 203 $ 1,735 $ -- $ 2,645
========== ======== ======== ======== ==========
</TABLE>
F-35
<PAGE>
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
As of March 28, 1998 and September 30, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
March 28, 1998 September 30, 1997
---------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 3,672 $ 1,133
Receivables ........................................................... 69,079 79,669
Inventories ........................................................... 61,254 58,551
Prepaid expenses and other ............................................ 14,434 15,027
---------- ----------
Total current assets ............................................. 148,439 154,380
Property, plant and equipment, net ..................................... 66,889 65,511
Deferred charges and other ............................................. 26,075 16,990
---------- ----------
Total assets ..................................................... $ 241,403 $ 236,881
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt .................................. $ 4,329 $ 23,880
Accounts payable ...................................................... 50,891 57,259
Accrued liabilities:
Wages and benefits and other ........................................ 28,067 34,812
Recapitalization and other special charges .......................... 9,856 4,612
---------- ----------
Total current liabilities ........................................ 93,143 120,563
Long-term debt, net of current maturities .............................. 125,148 183,441
Employee benefit obligations, net of current portion ................... 6,738 11,291
Other .................................................................. 4,160 2,181
---------- ----------
Total liabilities ................................................ 229,189 317,476
Shareholders' equity (deficit):
Common stock, $.01 par value, authorized 150,000 and 90,000 shares
respectively; issued 56,873 and 50,000 shares respectively;
outstanding 27,432 and 20,581 shares, respectively .................. 569 500
Additional paid-in capital ............................................ 103,155 15,974
Foreign currency translation adjustments .............................. 2,307 2,270
Notes receivable from officers/shareholders ........................... (1,361) (1,658)
Retained earnings ..................................................... 36,898 31,321
---------- ----------
141,568 48,407
Less stock held in trust for deferred compensation plan,
160 shares .......................................................... (962) (962)
Less treasury stock, at cost, 29,441 and 29,419 shares, respectively... (128,392) (128,040)
---------- ----------
Total shareholders' equity (deficit) ................................... 12,214 (80,595)
---------- ----------
Total liabilities and shareholders' equity (deficit) ................... $ 241,403 $ 236,881
========== ==========
</TABLE>
See accompanying notes which are an integral part of these statements.
F-36
<PAGE>
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the three month and six month periods ended March 28, 1998 and March 29,
1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
--------------------------- -----------------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
---- ---- ---- ----
Net sales ....................................... $ 96,081 $ 83,632 $ 246,076 $ 225,554
Cost of goods sold .............................. 50,545 47,123 127,900 126,142
-------- --------- --------- ----------
Gross profit ................................... 45,536 36,509 118,176 99,412
Selling ......................................... 28,204 22,592 73,676 61,272
General and administrative ...................... 9,102 7,660 17,363 15,264
Research and development ........................ 1,509 1,520 3,034 3,430
Other special charges ........................... 5,236 1,754 4,017 4,717
-------- --------- --------- ----------
Total operating expenses ....................... 44,051 33,526 98,090 84,683
Income from operations ....................... 1,485 2,983 20,086 14,729
Other expense (income): .........................
Interest expense ................................ 3,291 5,472 8,315 13,446
Other expense (income) ......................... (126) 300 (359) 314
-------- --------- --------- ----------
3,165 5,772 7,956 13,760
Income (loss) before income taxes and
extraordinary item ............................. (1,680) (2,789) 12,130 969
Income tax expense (benefit) .................... (698) (1,069) 4,578 309
-------- --------- --------- ----------
Income (loss) before extraordinary item ......... (982) (1,720) 7,552 660
Extraordinary item, loss on early
extinguishment of debt, net of income
tax benefit of $1,263........................... -- -- 1,975 --
-------- --------- --------- ----------
Net income (loss) .............................. $ (982) $ (1,720) $ 5,577 $ 660
======== ========= ========= ==========
Average shares outstanding ...................... 27,432 20,485 25,476 20,478
Basic earnings per share ........................
Income (loss) before extraordinary item ......... $ (0.04) $ (0.08) $ 0.30 $ 0.03
Extraordinary item .............................. -- -- (0.08) --
-------- --------- --------- ----------
Net income (loss) ............................... $ (0.04) $ (0.08) $ 0.22 $ 0.03
======== ========= ========= ==========
Average shares outstanding and common
stock equivalents .............................. 27,432 20,485 27,006 20,507
Diluted earnings per share ......................
Income (loss) before extraordinary item ......... $ (0.04) $ (0.08) $ 0.28 $ 0.03
Extraordinary item .............................. -- -- (0.07) --
-------- --------- --------- ----------
Net income (loss) ............................... $ (0.04) $ (0.08) $ 0.21 $ 0.03
======== ========= ========= ==========
</TABLE>
See accompanying notes which are an integral part of these statements.
F-37
<PAGE>
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the six month periods ended March 28, 1998 and March 29, 1997
(In thousands)
<TABLE>
<CAPTION>
1998 1997
--------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 5,577 $ 660
Non-cash adjustments to net income: .................................
Amortization ...................................................... 1,675 2,772
Depreciation ...................................................... 5,811 5,892
Other non-cash adjustments ........................................ (3,453) (330)
Net changes in other assets and liabilities, ........................
net of effects from acquisitions ................................... (5,239) 26,234
--------- ----------
Net cash provided by operating activities ...................... 4,371 35,228
Cash flows from investing activities: ................................
Purchases of property, plant and equipment .......................... (6,676) (2,625)
Proceeds from sale of property, plant and equipment ................. 3,292 --
Payment for acquisitions ............................................ (7,508) --
Other ............................................................... -- (215)
--------- ----------
Net cash used by investing activities .......................... (10,892) (2,840)
Cash flows from financing activities:
Reduction of debt ................................................... (137,987) (140,004)
Proceeds from debt financing ........................................ 59,859 112,243
Proceeds from issuance of common stock .............................. 87,268 --
Other ............................................................... (73) 265
--------- ----------
Net cash provided (used) by financing activities ............... 9,067 (27,496)
--------- ----------
Effect of exchange rate changes on cash and cash equivalents ......... (7) 3
------------ ----------
Net increase in cash and cash equivalents ...................... 2,539 4,895
Cash and cash equivalents, beginning of period ....................... 1,133 4,255
----------- ----------
Cash and cash equivalents, end of period ............................. $ 3,672 $ 9,150
=========== ==========
</TABLE>
See accompanying notes which are an integral part of these statements.
F-38
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. Significant Accounting Policies
Basis of Presentation
These financial statements have been prepared by Rayovac Corporation (the
"Company"), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC") and, in the opinion of the
Company, include all adjustments (all of which are normal and recurring in
nature) necessary to present fairly the financial position of the Company at
March 28, 1998, results of operations for the three and six month periods ended
March 28, 1998 and March 29, 1997, and cash flows for the six month periods
ended March 28, 1998 and March 29, 1997. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations.
These condensed consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto as of
September 30, 1997.
Derivative Financial Instruments
Derivative financial instruments are used by the Company principally in
the management of its interest rate, foreign currency and raw material price
exposures.
The Company uses interest rate swaps to manage its interest rate risk. The
net amounts to be paid or received under interest rate swap agreements
designated as hedges are accrued as interest rates change and are recognized
over the life of the swap agreements, as an adjustment to interest expense from
the underlying debt to which the swap is designated. The related amounts
payable to, or receivable from, the counter-parties are included in accrued
liabilities or accounts receivable. The Company has entered into an interest
rate swap agreement which effectively fixes the interest rate on floating rate
debt at a rate of 6.16% for a notional principal amount of $62,500 through
October 1999. The fair value of this contract at March 28, 1998 was ($382).
The Company has entered into an amortizing cross currency interest rate
swap agreement related to financing the acquisition of Brisco (as defined
herein). The agreement effectively fixes the interest and foreign exchange on
floating rate debt denominated in U.S. Dollars at a rate of 5.34% denominated
in German Marks. The unamortized notional principal amount at March 28, 1998 is
approximately $4,700. The fair value at March 28, 1998 approximated the
contract value.
The Company enters into forward foreign exchange contracts relating to the
anticipated settlement in local currencies of intercompany purchases and sales.
These contracts generally require the Company to exchange foreign currencies
for U.S. dollars. The contracts are marked to market and the related adjustment
is recognized in other expense (income). The related amounts payable to, or
receivable from, the counter-parties are included in accounts payable, or
accounts receivable. The Company has approximately $7,700 of such forward
exchange contracts at March 28, 1998. The fair value at March 28, 1998,
approximated the contract value.
The Company has also entered into foreign exchange contracts to hedge
payment obligations denominated in Japanese Yen under a commitment to purchase
certain production equipment from Matsushita. The Company has approximately
$6,700 of such forward exchange contracts outstanding at March 28, 1998. The
fair value at March 28, 1998 approximated the contract value.
The Company is exposed to risk from fluctuating prices for commodities
used in the manufacturing process. The Company hedges some of this risk through
the use of commodity swaps, calls and puts. The Company has entered into
commodity swap agreements which effectively fix the floating price on a
specified quantity of zinc through a specified date. The Company is buying
calls, which allow the Company to purchase a specified quantity of zinc through
a specified date for a fixed price, and writing puts, which allow the buyer to
sell to the Company a specified quantity of zinc through a specified date at a
fixed price. The maturity of, and the quantities covered by, the contracts
highly correlate to the Company's anticipated purchases of the commodity. The
cost of the calls,
F-39
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
(Unaudited)
(In thousands, except per share amounts)
1. Significant Accounting Policies --Continued
and the premiums received from the puts, are amortized over the life of the
agreements and are recorded in cost of goods sold, along with the effect of the
swap, put and call agreements. At March 28, 1998, the Company had entered into
a series of swap agreements with a contract value of approximately $3,200 for
the period from April through December of 1998. At March 28, 1998, the Company
had purchased a series of calls with a contract value of approximately $3,000
and sold a series of puts with a contract value of approximately $2,800 for the
period from April 1998 through March 1999 designed to set a ceiling and floor
price. While these transactions have no carrying value, the fair value of these
contracts was approximately ($600) at March 28, 1998.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
March 28, 1998 September 30, 1997
---------------- -------------------
<S> <C> <C>
Raw material ............. $20,450 $23,291
Work-in-process .......... 16,478 15,286
Finished goods ........... 24,326 19,974
------- -------
$61,254 $58,551
======= =======
</TABLE>
3. Earnings per Share Disclosure
Earnings per share is calculated based upon the following:
<TABLE>
<CAPTION>
Three Months Ended March 28, 1998 Three Months Ended March 29, 1997
----------------------------------------- ----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- --------------- ----------- ------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Loss before extraordinary item ....... $ (982) $ (1,720)
Basic EPS
Loss available to common
shareholders ........................ $ (982) 27,432 $ (0.04) $ (1,720) 20,485 $ (0.08)
Diluted EPS
Loss available to common
shareholders plus assumed
conversion .......................... $ (982) 27,432 $ (0.04) $ (1,720) 20,485 $ (0.08)
====== ====== ======= ======== ====== =======
</TABLE>
The effect of unexercised stock options outstanding for the three month
periods ending March 28, 1998 and March 29, 1997, were excluded from the
diluted EPS calculations as their effect was anti-dilutive. These options may
dilute EPS in the future.
F-40
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
(Unaudited)
(In thousands, except per share amounts)
3. Earnings per Share Disclosure --Continued
<TABLE>
<CAPTION>
Six Months Ended March 28, 1998 Six Months Ended March 29, 1997
----------------------------------------- ----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- --------------- ----------- ------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary
item ............................... $7,552 $660
Basic EPS
Income available to common
shareholders ....................... 7,552 25,476 $ 0.30 660 20,478 $ 0.03
====== ======
Effect of Dilutive Securities
Stock Options ....................... 1,530 29
Diluted EPS
Income available to common
shareholders plus assumed
conversion ......................... $7,552 27,006 $ 0.28 $660 20,507 $ 0.03
====== ====== ====== ==== ====== ======
</TABLE>
4. Commitments and Contingencies
The Company has entered into agreements to purchase certain equipment and
to pay annual royalties. In a December 1991 agreement, the Company committed to
pay annual royalties of $1,500 for the first five years, beginning in 1993, plus
$500 for each year thereafter, as long as the related equipment patents are
enforceable (2012). In a March 1994 agreement, the Company committed to pay $500
in 1994 and annual royalties of $500 for five years beginning in 1995. In a
March 1998 agreement which supersedes the previous agreements, the Company
committed to pay $2,000 in 1998 and 1999, $3,000 in 2000 through 2002 and $500
in each year thereafter, as long as the related equipment patents are
enforceable (2022). Additionally, the Company has committed to purchase tooling
of $700 related to this equipment.
The Company has provided for the estimated costs associated with
environmental remediation activities at some of its current and former
manufacturing sites. In addition, the Company, together with other parties, has
been designated a potentially responsible party of various third-party sites on
the United States EPA National Priorities List (Superfund). The Company
provides for the estimated costs of investigation and remediation of these
sites when such losses are probable and the amounts can be reasonably
estimated. The actual cost incurred may vary from these estimates due to the
inherent uncertainties involved. The Company believes that any additional
liability in excess of the amounts provided of $1,600, which may result
from resolution of these matters, will not have a material adverse effect on
the financial condition, liquidity, or cash flows of the Company.
5. Other
During the 1998 Fiscal First Quarter, the Company recorded a pre-tax
credit of $1,200 related to the buyout of deferred compensation
agreements with certain former employees.
On November 28, 1997, the Company acquired Brisco GmbH in Germany and
Brisco B.V. in Holland (collectively "Brisco"), a distributor of hearing aid
batteries for $4,900. Brisco recorded calendar 1997 sales of $4,500.
In the 1998 Fiscal Second Quarter the Company recorded special charges and
credits as follows: (i) $3,900 related to (a) the closing by September 1998 of
the Company's Newton Aycliffe, United Kingdom packaging facility,
F-41
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
(Unaudited)
(In thousands, except per share amounts)
5. Other --Continued
(b) the phasing out direct distribution by June 1998 in the United Kingdom, and
(c) the closing of one of the Company's German sales offices before the end of
fiscal 1998, which amount includes $1,800 of employee termination benefits for
73 employees, $1,000 of lease cancellation costs, and $1,000 of equipment and
intangible asset write-offs, (ii) $2,000 related to the closing by April 1999 of
the Company's Appleton, Wisconsin manufacturing facility, which amount includes
$1,600 of employee termination benefits for 141 employees, $200 of asset
write-offs and $200 of other costs, (iii) $1,700 related to the exit by January
1999 of certain manufacturing operations at the Company's Madison, Wisconsin
facility, which amount includes $300 of employee termination benefits for 34
employees, $1,300 of asset write-offs, and $100 of other costs, and (iv) a
$2,400 gain on the sale of the Company's previously closed Kinston, North
Carolina facility.
1998 Restructuring Summary
Termination Other
Benefits Costs Total
----------- ------ -----
Expense accrued $3,700 $3,800 $7,500
Balance 3/28/98 ------ ------ ------
$3,700 $3,800 $7,500*
====== ====== ======
During the year ended September 30, 1997, the Company recorded special
charges as follows: (i) $2,500 of charges related to the exit of certain
manufacturing and distribution operations at the Company's Kinston, North
Carolina facility by early fiscal 1998, which amount includes $1,100 of employee
termination benefits for 137 employees, (ii) $1,400 of employee termination
benefits for 71 employees related to organizational restructuring in Europe and
the exit of certain manufacturing operations in the Company's Newton Aycliffe,
United Kingdom facility which the Company expects to complete in fiscal 1998,
(iii) $2,000 of charges for employee termination benefits for 77 employees
related to organizational restructuring in the United States which the Company
expects to complete in fiscal 1998. The number of employees anticipated to be
terminated was approximately equal to the actual numbers referenced above. The
charges were partially offset by a $2,900 gain related to the curtailment of the
Company's defined benefit pension plan covering all domestic non-union
employees. A summary of the restructuring activities follows.
<TABLE>
<CAPTION>
1997 Restructuring Summary
-----------------------------------------
Termination
Benefits Other Costs Total
------------ ------------- ----------
<S> <C> <C> <C>
Expenses accrued ............. $ 4,000 $ 600 $ $4,600
Changes in estimate .......... 500 600 1,100
Expensed as incurred ......... -- 200 200
Expenditures ................. (3,300) (700) (4,000)
-------- ------ --------
Balance 9/30/97 ................ $ 1,200 $ 700 $ 1,900
======== ====== ========
Additional expense ........... -- -- --
Change in estimate ........... -- -- --
Expenditures ................. (700) -- (700)
-------- ------ --------
Balance 12/27/97 ............... $ 500 $ 700 $ 1,200
======== ====== ========
Expenses accrued ............. -- -- --
Change in estimate ........... (100) (400) (500)
Expenditures ................. (200) (200) (400)
-------- ------ --------
Balance 3/28/98 ................ $ 200 $ 100 $ 300
======== ====== ========
</TABLE>
F-42
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
(Unaudited)
(In thousands, except per share amounts)
5. Other --Continued
In the 1998 Fiscal Second Quarter, the Company acquired Direct Power Plus
of New York ("DPP"), a full line marketer of rechargeable batteries and
accessories for cellular phones and video camcorders for $4,700. DPP
recorded sales of $2,200 in the 1998 Fiscal Second Quarter.
6. Subsequent Events
On March 30, 1998, the Company acquired the battery distribution portion
of Best Labs, St. Petersburg, Florida, a distributor of hearing aid batteries
and a manufacturer of hearing instruments for $2,100. The acquired
portion of Best Labs had net sales of approximately $2,600 in calendar
1997.
On April 3, 1998, the Company announced the filing of a registration
statement with the SEC for a secondary offering of 6,500 shares of common stock.
The Company will not receive any proceeds from the sale of shares in the
offering but will pay certain expenses for the offering estimated at $800. Of
the shares being offered, 5,500 will be offered by Thomas H. Lee Group and its
affiliates and 1,000 by certain Rayovac officers and employees. The registration
statement has not yet become effective. These securities may not be sold nor any
offers to buy be accepted prior to the time the registration statement becomes
effective.
7. Guarantor Subsidiary
The following condensed consolidating financial data illustrates the
composition of the consolidated financial statements. Investments in
subsidiaries are accounted for by the Company and the Guarantor Subsidiary
using the equity method for purposes of the consolidating presentation.
Earnings of subsidiaries are therefore reflected in the Company's and Guarantor
Subsidiary's investment accounts and earnings. The principal elimination
entries eliminate investments in subsidiaries and inter-company balances and
transactions. Separate financial statements of the Guarantor Subsidiary are not
presented because management has determined that such financial statements
would not be material to investors.
F-43
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
(Unaudited)
(In thousands, except per share amounts)
7. Guarantor Subsidiary --Continued
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
As of March 28, 1998
<TABLE>
<CAPTION>
Guarantor Nonguarantor Consolidated
Parent Subsidiary Subsidiaries Eliminations Total
------------ ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 2,148 $ 46 $ 1,478 $ -- $ 3,672
Receivables ................................... 61,208 584 15,131 (7,844) 69,079
Inventories ................................... 48,728 -- 12,639 (113) 61,254
Prepaid expenses and other .................... 12,462 342 1,630 -- 14,434
---------- -------- -------- ---------- ----------
Total current assets ....................... 124,546 972 30,878 (7,957) 148,439
Property, plant and equipment, net ............. 61,530 -- 5,359 -- 66,889
Deferred charges and other ..................... 26,045 -- 4,996 (4,966) 26,075
Investment in subsidiaries ..................... 14,799 13,969 -- (28,768) --
---------- -------- -------- ---------- ----------
Total assets ............................... $ 226,920 $ 14,941 $ 41,233 $ (41,691) $ 241,403
========== ======== ======== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .......... $ 3,135 $ -- $ 2,175 $ (981) $ 4,329
Accounts payable .............................. 43,419 -- 14,193 (6,721) 50,891
Accrued liabilities: ..........................
Wages and benefits and other ................ 24,599 (88) 3,547 9 28,067
Recapitalization and other special
charges .................................... 6,478 -- 3,378 -- 9,856
---------- -------- -------- ---------- ----------
Total current liabilities .................. 77,631 (88) 23,293 (7,693) 93,143
Long-term debt, net of current maturities ...... 124,901 -- 3,783 (3,536) 125,148
Employee benefit obligations, net of
current portion ............................... 6,738 -- -- -- 6,738
Other .......................................... 3,742 230 188 -- 4,160
---------- -------- -------- ---------- ----------
Total liabilities .......................... 213,012 142 27,264 (11,229) 229,189
Shareholders' equity:
Common stock .................................. 569 -- 12,072 (12,072) 569
Additional paid-in capital .................... 103,155 3,525 750 (4,275) 103,155
Foreign currency translation adjustment ....... 2,307 2,307 2,307 (4,614) 2,307
Notes receivable from officers/
shareholders ................................ (1,361) -- -- -- (1,361)
Retained earnings ............................. 38,592 8,967 (1,160) (9,501) 36,898
---------- -------- -------- ---------- ----------
143,262 14,799 13,969 (30,462) 141,568
Less stock held in trust for deferred
compensation ................................ (962) -- -- -- (962)
Less treasury stock ........................... (128,392) -- -- -- (128,392)
---------- -------- -------- ---------- ----------
Total shareholders' equity ..................... 13,908 14,799 13,969 (30,462) 12,214
---------- -------- -------- ---------- ----------
Total liabilities and shareholders' equity ..... $ 226,920 $ 14,941 $ 41,233 $ (41,691) $ 241,403
========== ======== ======== ========== ==========
</TABLE>
F-44
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
(Unaudited)
(In thousands, except per share amounts)
7. Guarantor Subsidiary --Continued
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the three month period ended March 28, 1998
<TABLE>
<CAPTION>
Guarantor Nonguarantor Consolidated
Parent Subsidiary Subsidiaries Eliminations Total
-------------- ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales ............................... $ 83,519 $ -- $ 19,237 $(6,675) $ 96,081
Cost of goods sold ...................... 45,535 -- 11,689 (6,679) 50,545
-------- -------- -------- ------- --------
Gross profit ......................... 37,984 -- 7,548 4 45,536
Selling ................................. 24,277 -- 3,927 -- 28,204
General and administrative .............. 7,340 (245) 2,025 (18) 9,102
Research and development ................ 1,509 -- -- -- 1,509
Other special charges ................... 1,274 -- 3,962 -- 5,236
-------- -------- -------- ------- --------
Total operating expenses ............. 34,400 (245) 9,914 (18) 44,051
Income (loss) from operations ........... 3,584 245 (2,366) 22 1,485
Other expense (income):
Interest expense ........................ 3,211 -- 83 (3) 3,291
Equity in profit of subsidiary ......... 1,531 1,826 -- (3,357) --
Other expense (income) ................. (148) 6 13 3 (126)
-------- -------- -------- --------- --------
Loss before income taxes and
extraordinary item ..................... (1,010) (1,587) (2,462) 3,379 (1,680)
Income taxes (benefit) .................. (6) (56) (636) -- (698)
----------- -------- -------- --------- --------
Loss before extraordinary item .......... (1,004) (1,531) (1,826) 3,379 (982)
Extraordinary item ...................... -- -- -- -- --
---------- -------- -------- --------- --------
Net loss ................................ $ (1,004) $ (1,531) $ (1,826) $ 3,379 $ (982)
========== ======== ======== ========= ========
</TABLE>
F-45
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
(Unaudited)
(In thousands, except per share amounts)
7. Guarantor Subsidiary --Continued
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the six month period ended March 28, 1998
<TABLE>
<CAPTION>
Guarantor Nonguarantor Consolidated
Parent Subsidiary Subsidiaries Eliminations Total
----------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales ................................... $216,426 $ -- $ 44,036 $ (14,386) $ 246,076
Cost of goods sold .......................... 114,446 -- 27,849 (14,395) 127,900
-------- ------- --------- --------- ---------
Gross profit ............................. 101,980 -- 16,187 9 118,176
Selling ..................................... 63,708 -- 9,968 -- 73,676
General and administrative .................. 13,598 (476) 4,277 (36) 17,363
Research and development .................... 3,034 -- -- -- 3,034
Other special charges ....................... 55 -- 3,962 -- 4,017
-------- ------- --------- --------- ---------
Total operating expenses ................. 80,395 (476) 18,207 (36) 98,090
Income (loss) from operations ............... 21,585 476 (2,020) 45 20,086
Other expense (income):
Interest expense ........................... 8,075 -- 240 -- 8,315
Equity in profit of subsidiary ............. 1,349 1,687 -- (3,036) --
Other expense (income) ..................... (344) (4) (11) -- (359)
-------- ---------- --------- --------- ---------
9,080 1,683 229 (3,036) 7,956
Income (loss) before income taxes and
extraordinary item ......................... 12,505 (1,207) (2,249) 3,081 12,130
Income taxes (benefit) ...................... 4,998 142 (562) -- 4,578
-------- --------- --------- --------- ---------
Income (loss) before extraordinary item ..... 7,507 (1,349) (1,687) 3,081 7,552
Extraordinary item .......................... 1,975 -- -- -- 1,975
-------- --------- --------- --------- ---------
Net income (loss) ........................... $ 5,532 $(1,349) $ (1,687) $ 3,081 $ 5,577
======== ========= ========= ========= =========
</TABLE>
F-46
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
(Unaudited)
(In thousands, except per share amounts)
7. Guarantor Subsidiary --Continued
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the six month period ended March 28, 1998
<TABLE>
<CAPTION>
Guarantor Nonguarantor Consolidated
Parent Subsidiary Subsidiaries Eliminations Total
------------- ------------ -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by operating
activities .............................. $ (3,380) $-- $ 3,233 $ 4,518 $ 4,371
Cash flows from investing activities:
Purchases of property, plant and
equipment ............................. (5,839) -- (837) -- (6,676)
Proceeds from sale of property, plant,
and equip. ............................ 3,292 -- -- -- 3,292
Payment for acquisitions ................ (2,655) -- (4,853) -- (7,508)
---------- --- ------- -------- ---------
Net cash used by investing activities .... (5,202) -- (5,690) -- (10,892)
Cash flows from financing activities:
Reduction of debt ....................... (135,500) -- (2,487) -- (137,987)
Proceeds from debt financing ............ 58,193 -- 6,184 (4,518) 59,859
Proceeds from issuance of common
stock ................................. 87,268 -- -- -- 87,268
Other ................................... 136 -- (209) -- (73)
---------- --- ------- -------- ---------
Net cash provided by financing
activities .............................. 10,097 -- 3,488 (4,518) 9,067
Effect of exchange rate changes on
cash and cash equivalents ............... -- -- (7) -- (7)
---------- --- ---------- -------- ------------
Net increase in cash and cash
equivalents ............................. 1,515 -- 1,024 -- 2,539
Cash and cash equivalents, beginning
of period ............................... 633 46 454 -- 1,133
---------- --- --------- -------- -----------
Cash and cash equivalents, end
of period ............................... $ 2,148 $46 $ 1,478 $ -- $ 3,672
========== === ========= ======== ===========
</TABLE>
F-47
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[Inside Back Cover]
[Picture of Rayovac Store Display [Picture of Five Rayovac Photo/Electronic
for Remote Keyless Entry System and Keyless Entry Battery Packs
Batteries on Gray Background] on White and Blue Background]
[Picture of a Rayovac Alkaline [Picture of Rayovac Battery Products
Computer Battery on Black and Flashlights on Gray Background]
Background]
[Picture of Rayovac Loud'n Clear [Picture of Five Packs of Rayovac
Premium Zinc Air Hearing Aid Pro Line Premium Zinc Air Hearing Aid
Battery Pack on Light Gray Battery Packs on Gray Background]
Background]
<PAGE>
============================================================
No dealer, salesperson or other individual has been
authorized to give any information or to make any
representations not contained in this Prospectus in
connection with the offerings covered by this Prospectus.
If given or made, such information or representations must
not be relied upon as having been authorized by the Selling
Shareholders, the Company or the Underwriters. This
Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy the Common Stock in any
jurisdiction where, or to any person to whom, it is
unlawful to make such offer or solicitation. Neither the
delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that
there has not been any change in the facts set forth in
this Prospectus or in the affairs of the Company since the
date hereof.
----------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----------
<S> <C>
Prospectus Summary ........................... 3
Risk Factors ................................. 12
The Recapitalization ......................... 17
Use of Proceeds .............................. 17
Price Range of Common Stock
and Dividend Policy ....................... 17
Capitalization ............................... 18
Selected Financial Data ...................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................ 23
Business ..................................... 35
Management ................................... 50
Principal and Selling Shareholders ........... 52
Description of Certain Indebtedness .......... 54
Shares Eligible for Future Sale .............. 56
Certain United States Federal Tax
Considerations for Non-United States
Holders ................................... 57
Underwriting ................................. 59
Legal Matters ................................ 62
Experts ...................................... 62
Available Information ........................ 63
Incorporation of Certain Documents by
Reference ................................. 64
Index to Financial Statements ................ F-1
</TABLE>
5,750,000 Shares
RAYOVAC(R)
Common Stock
----------------------------------
P R O S P E C T U S
----------------------------------
Merrill Lynch & Co.
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
Securities Corporation
Salomon Smith Barney
May 28, 1998
============================================================
<PAGE>
PROSPECTUS Filed Pursuant to Rule 424(b)4
Registration No. 333-49281
5,750,000 Shares
RAYOVAC(R)
Common Stock
----------------
All of the 5,750,000 shares of Common Stock of Rayovac Corporation
("Rayovac" or the "Company") offered hereby are being sold by certain
shareholders (the "Selling Shareholders") of the Company. See "Principal and
Selling Shareholders." The Company is not selling any shares of Common Stock in
this Offering and will not receive any of the proceeds from the sale of shares
of Common Stock offered hereby.
Of the 5,750,000 shares of Common Stock offered hereby, 1,150,000 shares
are being offered for sale initially outside the United States and Canada by
the International Managers and 4,600,000 shares are being offered for sale
initially in a concurrent offering in the United States and Canada by the U.S.
Underwriters. The initial public offering price and the aggregate underwriting
discount per share will be identical for both Offerings. See "Underwriting."
The Common Stock is listed on the New York Stock Exchange under the symbol
"ROV." On May 28, 1998, the last sale price of the Common Stock as reported on
the New York Stock Exchange was $21-1/4 per share. See "Price Range of Common
Stock and Dividend Policy."
See "Risk Factors" beginning on page 12 for a discussion of certain
factors that should be considered by prospective purchasers of the Common Stock
offered hereby.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Proceeds to
Price to Underwriting Selling
Public Discount (1) Shareholders (2)
<S> <C> <C> <C>
Per Share .................. $ 21.00 $ 1.00 $ 20.00
- --------------------------------------------------------------------------------
Total (3) .................. $120,750,000 $5,750,000 $115,000,000
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) The Company has agreed to pay certain expenses of the Offerings estimated
at $800,000.
(3) The Selling Shareholders have granted the International Managers and the
U.S. Underwriters options to purchase up to an additional 172,500 shares
and 690,000 shares of Common Stock, respectively, in each case exercisable
within 30 days after the date hereof, solely to cover over-allotments, if
any. If such options are exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to the Selling Shareholders will be
$138,862,500, $6,612,500 and $132,250,000, respectively. See
"Underwriting."
----------------
The shares of Common Stock are offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Common Stock will be made in New York,
New York on or about June 3, 1998.
----------------
Merrill Lynch International
Bear, Stearns International Limited
Donaldson, Lufkin & Jenrette
International
Salomon Smith Barney International
----------------
The date of this Prospectus is May 28, 1998.
<PAGE>
[Inside Front Cover]
[RAYOVAC Logo](R)
[Picture of Five Rayovac [Picture of Michael Jordan
Maximum Alkaline Battery holding a Rayovac Maximum
Packs on Gray Background] Alkaline Battery Pack]
[Picture of Six Rayovac [Picture of Rayovac [Picture of Arnold Palmer
Rechargeable Battery Battery Store Display Advertisement for Rayovac
Products on Gray Background] on Gray Background] Hearing Aid Batteries]
----------------
RAYOVAC[RegTM], RENEWAL[RegTM], LOUD'N CLEAR[RegTM], POWER STATION[RegTM],
PROLINE[RegTM], WORKHORSE[RegTM], ROUGHNECK[RegTM], SMART PACK[RegTM], BEST
LABS[RegTM], ULTRACELL[RegTM], XCELL[RegTM] and AIRPOWER[RegTM] are registered
trademarks of the Company. MAXIMUM[TM], LIFEX[TM] and SMART[TM] STRIP are
trademarks of the Company. All other trademarks or tradenames referred to in
this Prospectus are the property of their respective owners.
----------------
Certain persons participating in the Offerings may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Such transactions may include stabilizing and the purchase of Common Stock to
cover syndicate short positions. For a description of these activities, see
"Underwriting."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by
reference to the more detailed information and financial statements, including
the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus assumes that the Underwriters'
over-allotment options have not been exercised. Upon consummation of the
Recapitalization (as defined herein) on September 12, 1996, the Company changed
its fiscal year end from June 30 to September 30. For clarity of presentation
and comparison, references to fiscal 1995 and fiscal 1996 are to the Company's
fiscal years ended June 30, 1995 and June 30, 1996, respectively, references to
the "Transition Period ended September 30, 1996" and the "Transition Period"
are to the period from July 1, 1996 to September 30, 1996 and references to
fiscal 1997 are to the Company's fiscal year ended September 30, 1997.
The Company
The Company is the leading value brand and the third largest domestic
manufacturer of general batteries, and is the leading worldwide manufacturer of
hearing aid batteries. The Company is also the leading domestic manufacturer of
rechargeable household batteries and certain other specialty batteries,
including lantern batteries. In addition, the Company is a leading marketer of
heavy duty batteries and battery-powered lighting products and also markets
rechargeable batteries for cellular phones and video camcorders. The Rayovac
brand name was first used as a trademark for batteries in 1921 and is a well
recognized name in the battery industry. The Company attributes the longevity
and strength of its brand name to its high-quality products and to the success
of its marketing and merchandising initiatives.
The Company has established its position as the leading value brand in the
U.S. general alkaline battery market by focusing on the mass merchandiser
channel. The Company achieved this position by (i) offering batteries with
quality and performance substantially equivalent to batteries offered by its
principal competitors at a lower price, (ii) emphasizing innovative in-store
merchandising programs, and (iii) offering retailers attractive margins. The
Company has established its position as the leader in various specialty battery
niche markets through (i) continuous technological advances, (ii) creative
distribution and marketing, and (iii) strong relationships with industry
professionals and manufacturers. The Company sells and distributes its products
in several channels, including mass merchandisers and warehouse clubs; food,
drug and convenience stores; electronics specialty stores and department
stores; hardware and automotive centers; specialty retailers; hearing aid
professionals; and industrial and government/OEM. The Company markets all of
its branded products under the Rayovac[RegTM] name and selected products under
sub-brand names such as MAXIMUM[TM], Renewal[RegTM], Loud'n Clear[RegTM],
ProLine[RegTM], Lifex[TM], Power Station[RegTM], Workhorse[RegTM],
Roughneck[RegTM], Best Labs[RegTM], Ultracell[RegTM], XCell[RegTM] and
AIRPOWER[RegTM].
Business Strategy
In September 1996, the Company and the shareholders of the Company
completed the Recapitalization pursuant to which, among other things,
affiliates of Thomas H. Lee Company acquired for cash approximately 80% of the
outstanding Common Stock of Rayovac. David A. Jones was hired as Chief
Executive Officer of the Company to implement a new business strategy focused
on (i) reinvigorating the Rayovac brand name by raising consumer brand
awareness through, among other things, focused marketing and advertising, (ii)
growing Rayovac's market share by expanding distribution into new channels,
increasing sales to under-penetrated channels and customers, launching new
products, and selectively pursuing acquisitions and alliances, (iii) reducing
costs by rationalizing manufacturing and distribution, better utilizing
existing plant capacity, outsourcing products where appropriate, reducing
working capital, and downsizing corporate overhead, and (iv) improving employee
productivity by increasing training and education, upgrading information
systems and implementing a pay-for-performance culture.
To implement its new strategy, the Company has undergone a significant
transformation since the Recapitalization.
Strengthened Senior Management Team. In addition to Mr. Jones, experienced
senior managers have been recruited to fill key positions: Kent J. Hussey, who
joined the Company as Executive Vice President of Finance and Administration
and Chief Financial Officer following the Recapitalization and was recently
promoted to the position of President and Chief Operating Officer; Merrell M.
Tomlin, Senior Vice President of Sales; Stephen P.
3
<PAGE>
Shanesy, Executive Vice President and General Manager of General Batteries and
Lights; and Randall J. Steward, Senior Vice President of Finance and Chief
Financial Officer. The new senior managers have over 75 years of collective
experience in the consumer products industry. In addition, the current
management team includes several key members who served the Company prior to
the Recapitalization, providing continuity and retaining significant battery
industry expertise. After giving effect to the Offerings, the nine executive
officers of the Company will beneficially own 10.2% of the outstanding Common
Stock (without giving effect to the Underwriters' over-allotment options) on a
fully diluted basis.
Restructured Operations. In March 1998, the Company announced
restructuring plans for its domestic and international operations designed to
maximize production and capacity efficiencies, reduce fixed costs, upgrade
existing technology and equipment, and improve customer service. Major elements
of the restructuring include (i) consolidating the Company's packaging
operations, (ii) outsourcing manufacturing of heavy duty batteries, and (iii)
closing certain of the Company's existing manufacturing, packaging and
distribution facilities. The Company recorded a charge of $7.5 million in the
second quarter of the current fiscal year in connection with the restructuring
program and expects to record an additional $2.0 million of costs in subsequent
periods. The Company currently anticipates annual aggregate cost savings of the
restructuring program, after full implementation (currently expected in early
1999), to be approximately $5.0 million. The restructuring is in addition to
prior actions taken by the Company following the Recapitalization to
rationalize manufacturing and other costs, which the Company estimates have an
annual aggregate cost savings of approximately $8.6 million. Such savings may
not be indicative of actual savings in future periods because of the likelihood
of additional overhead or other costs in future periods in support of business
growth objectives. The Company believes that its current manufacturing capacity
remains sufficient to meet its production requirements for the foreseeable
future.
Reorganized Sales, Marketing and Administration by Distribution
Channel. Rayovac has realigned its marketing department, sales organization,
supply chain and support functions to better serve the diverse customer needs
within major distribution channels. Customer-focused teams are now organized to
serve the following distribution channels: mass merchandisers and warehouse
clubs; food, drug and convenience stores; electronics specialty stores and
department stores; hardware and automotive centers; specialty retailers;
hearing aid professionals; and industrial and government/OEM. The Company
believes that sales to under-penetrated channels should increase as the
dedicated teams focus on implementing channel-specific marketing strategies,
sales promotions and customer service initiatives.
Launched New Sales and Marketing Programs. Rayovac has developed and
continues to implement broad new marketing initiatives designed to reinvigorate
the Rayovac brand name. Major steps completed to date include (i) selecting
Young & Rubicam as the Company's new advertising agency and developing its
first major national advertising campaign for its full line of general
batteries, (ii) launching a new and improved alkaline product line under the
MAXIMUM[TM] sub-brand, (iii) redesigning all product graphics and packaging to
convey a high-quality image and emphasize the Rayovac brand name, (iv)
extending the Company's existing contract with Michael Jordan to include his
representation for all Rayovac products, and (v) restructuring the Company's
sales representative network along distribution channels.
Reorganized Information Systems. The Company has completed an initial
overhaul of its information systems by (i) hiring an experienced Chief
Information Officer, (ii) outsourcing mainframe computer operations, (iii)
completing an enterprise software system analysis, and (iv) retaining outside
consultants to upgrade its data processing and telecommunications
infrastructure. The Company has purchased from SAP and begun implementing an
enterprise-wide, integrated information system to upgrade its business
operations, the majority of which is expected to be substantially completed by
mid-1999. When fully implemented, this system, along with efforts by the
Company's internal project team, is expected to reduce cycle times, lower
manufacturing and administrative costs, improve both asset and employee
productivity and substantially address the Year 2000 issue.
Growth Strategy
Rayovac believes it has significant growth opportunities in its businesses
and has developed strategies to increase sales, profits and market share. Key
elements of the Company's growth strategy are as follows:
4
<PAGE>
Reinvigorate the Rayovac Brand Name. The Company is committed to
reinvigorating the Rayovac brand name after many years of underdevelopment. The
brand, originally introduced in 1921, has wide recognition in all markets where
the Company competes, but has lower awareness than the more highly advertised
Duracell and Energizer brands. The Company has initiated an integrated
advertising campaign using significantly higher levels of TV and print media.
In 1997, the Company launched a reformulated alkaline battery, Rayovac
MAXIMUM[TM], supported by new graphics, new packaging, a new advertising
campaign, and aggressive introductory retail promotions. The Company's
marketing and advertising initiatives are designed to increase awareness of the
Rayovac brand and to increase retail sales by heightening customers'
perceptions of the quality, performance and value of Rayovac products.
Leverage Value Brand Position. Rayovac believes it has a unique position
in the general battery market as the value brand in an industry in which the
leading three brands (Duracell, Energizer and Rayovac) account for
approximately 90% of sales. The Company's strategy is to provide products of
quality and performance equal to its major competitors in the general battery
market at a lower price to appeal to a large segment of the population desiring
a value brand. To demonstrate its value positioning, Rayovac offers comparable
battery packages at a lower price or, in some cases, more batteries for the
same price.
Expand Retail Distribution. Historically, the Company had focused its
sales and marketing efforts on the mass merchandiser channel which accounted
for 44% of industry sales growth in the domestic alkaline battery market on a
unit basis over the past five years and has achieved a 19% unit share. The
Company believes its value brand positioned products and innovative
merchandising programs also make it an attractive supplier to other retail
channels, which represent a market of $1.7 billion or 69% of the general
battery market. The Company has reorganized its marketing, sales, and sales
representative organizations by channel in order to grow market share by (i)
gaining new customers, (ii) penetrating existing customers with a larger
assortment of products, (iii) offering a selection of products with high
sell-through, and (iv) utilizing more aggressive and channel specific
promotional programs. The Company believes that these initiatives have resulted
in significant success over the past fiscal year in gaining access to new
accounts and expanding product offerings to existing accounts and the Company
intends to continue to pursue these strategies.
Further Capitalize on Worldwide Leadership in Hearing Aid Batteries. The
Company seeks to increase its 52% worldwide market share in the hearing aid
battery segment, as it has done consistently for the past 10 years, by
leveraging its leading technology and dedicated sales and marketing
organizations. Rayovac is the only hearing aid battery manufacturer to
advertise its products and plans to continue to utilize Arnold Palmer as its
spokesperson in its print media campaign. Rayovac also markets large
multi-packs of hearing aid batteries which have rapidly gained consumer favor.
In November 1997, the Company acquired Brisco GmbH in Germany and Brisco B.V.
in Holland (collectively, "Brisco"). Brisco packages and distributes hearing
aid batteries in customized packaging to hearing health care professionals in
Germany and Holland as well as other European countries. In March 1998, the
Company acquired the battery distribution portion of Best Labs in St.
Petersburg, Florida, a distributor of hearing aid batteries in customized
packaging and a manufacturer of hearing instruments. The Company believes that
these acquisitions will enable the Company to further penetrate markets for
hearing aid batteries.
Develop New Markets. The Company intends to expand its business into new
markets for batteries and related products both domestically and
internationally by developing new products internally or through selective
acquisitions. These acquisitions may focus on expansion into new technologies,
product lines or geographic markets and may be of significant size. In March
1998, the Company acquired the retail portion of the business of Direct Power
Plus of New York (the business acquired being referred to herein as "DPP"), a
full line marketer of rechargeable batteries and accessories for cellular
phones and video camcorders. In conjunction with the acquisition of DPP, the
Company has announced the launch of a new line of rechargeable batteries for
cordless telephones. The Company may also pursue joint ventures or other
strategic marketing opportunities where appropriate to expand its markets or
product offerings. See "Risk Factors--Risks Associated with Future
Acquisitions."
Introduce New Niche Products. The Company has developed leading positions
in several important niche markets, including those for lantern batteries and
lithium coin cells. The Company intends to continue selectively pursuing
opportunities to exploit under-served niche markets and to enter high-growth
specialty battery markets. In 1997, the Company entered the market for photo
and keyless entry batteries and recently introduced a line of
5
<PAGE>
products to serve the medical instrument and health services markets. In the
lighting products segment, where market share is driven by new product
introductions, the Company is introducing a number of attractively designed new
products over the next twelve months and intends to bring new products to the
market in the future on a six-month cycle.
Reposition the Renewal Rechargeable Alkaline Battery. The Company's
Renewal rechargeable battery is the only rechargeable alkaline battery in the
U.S. market, commanding a 68% market share of the rechargeable household
battery market through mass merchandisers, food and drug stores for the 52
weeks ended March 14, 1998. Since the Recapitalization, the Company has lowered
the price of Renewal rechargers by 33% to encourage consumers to purchase the
system and promoted Renewal's money-saving benefits. Renewal batteries present
a value proposition to consumers because Renewal batteries can be recharged
over 25 times, providing 10 times the energy of disposable alkaline batteries
at only twice the retail price. In addition, alkaline rechargeables are
superior to nickel cadmium rechargeables (the primary competing technology)
because they provide more energy between charges, are sold fully charged,
retain their charge longer and are environmentally safer. The Company has
focused sales efforts for Renewal on distribution channels which the Company
believes to be more suited for this product, such as electronics specialty
stores, and has recently begun shipments to Radio Shack.
Recent Developments
Restructuring of Domestic and International Operations. In March 1998, the
Company announced restructuring plans for its domestic and international
operations designed to maximize production and capacity efficiencies, reduce
fixed costs, upgrade existing technology and equipment and improve customer
service. Major elements of the restructuring include (i) consolidating the
Company's packaging operations at its Madison, Wisconsin plant, (ii)
outsourcing the manufacture of heavy duty batteries, (iii) closing the
Company's Appleton, Wisconsin plant and relocating the affected manufacturing
operations for lithium batteries to the Company's Portage, Wisconsin facility,
and (iv) closing the Company's Newton Aycliffe, United Kingdom packaging and
distribution facility. The Company recorded a charge of $7.5 million in the
second quarter of the current fiscal year in connection with the restructuring
program and expects to record an additional $2.0 million of costs in subsequent
periods. The Company anticipates annual aggregate cost savings of the
restructuring program, after full implementation (currently expected in early
1999), to be approximately $5.0 million.
Sale of Idled Facility. In March 1998, the Company sold its Kinston, North
Carolina facility and recorded a gain of $2.4 million in the second fiscal
quarter.
Acquisitions. In November 1997, the Company acquired Brisco which packages
and distributes hearing aid batteries in customized packaging to hearing health
care professionals in Germany, Holland and several other European countries.
Brisco had sales of $4.5 million in calendar year 1997. In March 1998, the
Company acquired DPP, a full line marketer of rechargeable batteries and
accessories for cellular phones and video camcorders, with retail sales of $14
million in calendar year 1997. Also in March 1998, the Company acquired the
hearing aid battery distribution portion of Best Labs, a St. Petersburg,
Florida distributor of hearing aid batteries and a manufacturer of hearing
instruments. The battery distribution portion of Best Labs had net sales of
$2.6 million in 1997.
Amended Credit Agreement. On December 30, 1997, the Company entered into
an Amended and Restated Credit Agreement (the "Amended Credit Agreement") which
includes a five-year reducing revolver facility of $90 million (the "Revolver
Facility"), and a five-year amortizing acquisition facility of $70 million (the
"Acquisition Facility"). The Revolver Facility is reduced by $10.0, $15.0 and
$15.0 million, respectively, on December 31, 1999, 2000 and 2001, and expires
on December 31, 2002. The Acquisition Facility provides up to $70.0 million in
loans for qualifying acquisitions during a one-year commitment period expiring
December 31, 1998. Debt obtained under the Acquisition Facility is subject to
quarterly amortization commencing March 31, 1999 through December 31, 2002. As
of March 28, 1998, $56.1 million was outstanding on the Revolver Facility, with
approximately $5.8 million utilized for outstanding letters of credit, and $4.2
million was outstanding under the Acquisition Facility. See "Description of
Certain Indebtedness."
Extension of Technology Agreement; New Manufacturing Line. In March 1998,
the Company announced the extension of its existing alkaline battery technology
agreement with Matsushita Battery Industrial Co., Ltd. of Japan ("Matsushita"),
pursuant to which the Company is entitled to license Matsushita's highly
advanced designs, technology and manufacturing equipment, including all
developments and innovations thereto, through 2003.
6
<PAGE>
Thereafter, the Company is entitled to license such technology existing as of
such date through 2023. The Company has also agreed to purchase from Matsushita
a new high speed alkaline battery manufacturing production line for its
Fennimore, Wisconsin plant and to source certain finished products, battery
parts and material from Matsushita to continue to supplement the Company's
existing domestic production capacity. This new high speed manufacturing line
is anticipated to increase capacity for production of AA size batteries by up
to 50%.
Further Strengthening of Senior Management Team. In April 1998, the
Company named Kent J. Hussey President and Chief Operating Officer of the
Company. Previously, Mr. Hussey served as Executive Vice President of Finance
and Administration and Chief Financial Officer. The Company also at such time
named Randall J. Steward, formerly Senior Vice President of Corporate
Development, as Senior Vice President of Finance and Chief Financial Officer
and Stephen P. Shanesy, formerly Senior Vice President of Marketing and the
General Manager of General Batteries and Lights of the Company, as Executive
Vice President and General Manager of General Batteries and Lights of the
Company. In addition, David A. Jones, Chairman and Chief Executive Officer of
the Company, and Kent J. Hussey signed three-year employment contracts
effective until May 1, 2001.
The Offerings
The offering of 4,600,000 shares of the Company's Common Stock in the
United States and Canada (the "U.S. Offering") and the offering of 1,150,000
shares of the Common Stock outside the United States and Canada (the
"International Offering") are collectively referred to herein as the
"Offerings."
<TABLE>
<S> <C>
Common Stock offered by the Selling
Shareholders .......................... 5,750,000 shares
Common Stock to be outstanding after the
Offerings(1) .......................... 27,441,097 shares
Use of proceeds ........................ The Company will not receive any proceeds from the sale
of Common Stock by the Selling Shareholders.
New York Stock Exchange symbol ......... "ROV"
</TABLE>
- ----------------
(1) Excludes 5,259,268 shares of Common Stock reserved for sale or issuance
under the Company's employee benefit plans, of which options to purchase
2,497,321 shares have been granted and 2,761,947 shares remain available
for issuance or sale.
7
<PAGE>
Industry Market Data
External market information in this Prospectus is provided by the Company,
based on data licensed from A.C. Nielsen. The two primary sources of market
data are Nielsen Scanner Data (obtained from checkout scanners in selected food
stores, drug stores and mass merchandisers) and Nielsen Consumer Panel Data
(obtained from a group of representative households selected by A.C. Nielsen
equipped with in-home scanners). Except as set forth below, specific market
share references are based on Nielsen Scanner Data. Specific hearing aid
battery market share references are obtained from Nielsen Scanner Data, as
supplemented by National Family Opinion Purchase Diary Data. Information
regarding the size (in terms of both dollars and unit sales) of the total U.S.
retail battery market is based upon Nielsen Scanner Data, as supplemented by
Nielsen Consumer Panel Data. The Company has derived worldwide hearing aid
market share data and specialty battery market share data based on data from
the above noted sources, together with information relating to the Company's
sales of hearing aid batteries in Europe, the Company's estimates of
manufacturers' production levels of hearing aid products or other devices which
utilize specialty batteries and market price data.
Other industry data used throughout this Prospectus has been obtained from
a variety of industry surveys (including surveys forming a part of primary
research studies conducted by the Company) and publications but has not been
independently verified by the Company. The Company believes that information
contained in such surveys and publications has been obtained from reliable
sources, but there can be no assurance as to the accuracy and completeness of
such information.
Unless otherwise indicated, all market share estimates are Company
estimates based on the foregoing, are for the U.S. market and reflect units
sold.
Risk Factors
Purchasers of Common Stock in the Offerings should carefully consider the
risk factors set forth under the caption "Risk Factors" and the other
information included in this Prospectus prior to making an investment decision.
See "Risk Factors."
Forward-Looking Statements
This Prospectus contains certain forward-looking statements relating to,
among other things, future results of operations, growth plans, sales, capital
requirements and general industry and business conditions applicable to the
Company. These forward-looking statements are based largely on the Company's
current expectations and are subject to a number of risks and uncertainties.
Actual results could differ materially from those implied by these
forward-looking statements. Important factors to consider in evaluating such
forward-looking statements include changes in external competitive market
factors, changes in the Company's business strategy or an inability to execute
its strategy due to unanticipated changes in the Company's industry or the
economy in general and various competitive factors that may prevent the Company
from competing successfully in existing or new markets. In light of these risks
and uncertainties, many of which are described in further detail under the
caption "Risk Factors," there can be no assurance that the forward-looking
statements contained in this Prospectus will in fact be realized.
---------------------
Established in 1906, the Company is a Wisconsin corporation with its
principal executive offices at 601 Rayovac Drive, Madison, Wisconsin,
53711-2497. The Company's telephone number is (608) 275-3340.
8
<PAGE>
SUMMARY FINANCIAL DATA
The following summary historical financial data for the two fiscal years
ended June 30, 1996, the Transition Period ended September 30, 1996 and the
fiscal year ended September 30, 1997 is derived from the audited consolidated
financial statements of the Company, together with the notes thereto, included
elsewhere in this Prospectus. The summary historical financial data for the six
months ended March 29, 1997 and as of and for the six months ended March 28,
1998, included elsewhere in this Prospectus, and for the twelve months ended
September 30, 1996, not included herein, is derived from the unaudited
condensed consolidated financial statements of the Company and, in the opinion
of management, includes all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of financial position and results
of operations as of the date and for the period indicated. The summary
historical financial data of the Company for the fiscal years ended June 30,
1993 and June 30, 1994 is derived from audited consolidated financial
statements of the Company which are not included herein. The following summary
financial data should be read in conjunction with the Company's consolidated
financial statements and the related notes thereto and the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein.
This financial data, as well as all other financial data set forth herein,
gives effect to the reclassification by the Company of certain promotional
expenses, previously reported as a reduction of net sales, to selling expense,
which policy was adopted as of September 30, 1997. The amounts which have been
reclassified are $19.0 million, $17.5 million, $24.2 million, and $24.0 million
for the fiscal years ended June 30, 1993, 1994, 1995, and 1996, respectively,
$6.9 million for the Transition Period ended September 30, 1996, $24.1 million
for the twelve months ended September 30, 1996, and $15.4 million for the six
months ended March 29, 1997. The Company believes that this reclassification is
consistent with the method used by other consumer products companies.
<TABLE>
<CAPTION>
Transition Twelve Fiscal Six Months
Period Months Year Ended
Fiscal Year Ended June 30, Ended Ended Ended --------------------
------------------------------------ September September September March March
1993 1994 1995 1996 30, 1996 30, 1996 30, 1997 29, 1997 28, 1998
------- ------ ------ ------- -------- -------- --------- -------- --------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales .................... $372.4 $403.7 $415.2 $423.4 $101.9 $417.9 $432.6 $225.6 $246.1
Gross Profit ................. 171.0 168.8 178.1 184.0 42.6 180.0 198.0 99.4 118.2
Income (loss) from
operations (1)(2)(3)(4)..... 31.2 10.9 31.5 30.3 (23.7) (1.4) 34.5 14.7 20.1
Interest expense ............. 6.0 7.7 8.6 8.4 4.4 10.5 24.5 13.4 8.3
Net income (loss)(5) ......... 15.0 4.4 16.4 14.3 (20.9) (10.2) 6.2 0.7 5.6
Other Financial Data:
Depreciation ................. $ 7.4 $ 10.3 $ 11.0 $ 11.9 $ 3.3 $ 12.1 $ 11.3 $ 5.9 $ 5.8
Capital expenditures(6) ...... 30.3 12.5 16.9 6.6 1.2 8.4 10.9 2.6 6.7
Cash flows from operating
activities ................. 15.8 (18.7) 35.5 17.8 (1.1) 26.0 35.7 35.2 4.4
Cash flows from investing
activities ................. (30.1) (12.4) (16.8) (6.3) 0.0 (7.3) (10.8) (2.8) (10.9)
Cash flows from financing
activities ................. 13.7 30.8 (18.3) (12.0) 3.2 (16.8) (28.0) (27.5) 9.1
Income from operations
before non-recurring
charges (7) ................ 31.2 21.9 31.5 30.3 4.7 27.0 37.5 19.4 24.1
EBITDA(8) .................... 39.3 21.2 41.3 42.2 (20.4) 10.7 45.8 20.7 26.1
</TABLE>
<TABLE>
<CAPTION>
March 28, 1998
(in millions)
--------------
<S> <C>
Balance Sheet Data:
Working capital .................................................................................................. $ 55.3
Total assets ..................................................................................................... 241.4
Total debt ....................................................................................................... 129.5
Shareholders' equity ............................................................................................. 12.2
</TABLE>
(footnotes on following page)
9
<PAGE>
- ----------------
(1) Income from operations in fiscal 1994 was impacted by increased selling
expenses due to higher advertising and promotion expenses related to the
Renewal Introduction (as defined herein). In addition, income from
operations was impacted by non-recurring costs of $9.5 million in
connection with the Fennimore Expansion, including $8.4 million of
increased cost of goods sold and $1.1 million of increased general and
administrative expenses, and other special charges of approximately $1.5
million related to a plan to reduce the Company's cost structure and to
improve productivity through an approximate 2.5% reduction in headcount on
a worldwide basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Introduction."
(2) During the Transition Period, the Company recorded charges of $12.3 million
directly related to the Recapitalization and other special charges of $16.1
million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(3) In the fiscal year ended September 30, 1997, the Company recorded other
special charges of $5.9 million offset by a special credit of $2.9 million
which was related to the curtailment of the Company's defined benefit
pension plan covering all domestic non-union employees. The special charges
related to organizational restructuring in the United States, the
discontinuation of certain manufacturing operations at the Company's Newton
Aycliffe, United Kingdom facility and the discontinuation of operations at
the Company's facility in Kinston, North Carolina.
(4) In the six months ended March 28, 1998, the Company recorded net charges of
$4.0 million including (i) $1.7 million associated with consolidating
domestic battery packaging operations and outsourcing the manufacture of
heavy duty batteries, (ii) $2.0 million associated with closing the
Company's Appleton, Wisconsin manufacturing plant and consolidating it into
its Portage, Wisconsin manufacturing plant, (iii) $3.9 million associated
with closing the Company's Newton Aycliffe, United Kingdom facility,
phasing out direct distribution in the United Kingdom and closing one of
the Company's German sales offices, (iv) a $2.4 million gain on the sale of
the Company's previously closed Kingston, North Carolina facility, and (v)
income of $1.2 million in connection with the buyout of deferred
compensation agreements with certain former employees.
(5) The Recapitalization of the Company included repayment of certain
outstanding indebtedness, including prepayment fees and penalties. Such
prepayment fees and penalties of $2.4 million, net of income tax benefit of
$0.8 million, has been recorded as an extraordinary item in the Combined
Consolidated Statement of Operations for the Transition Period and the
twelve months ended September 30, 1996. In the six months ended March 28,
1998, the Company recorded extraordinary expense of $2.0 million net of
income taxes for the premium on the repurchase or redemption of the Notes
from the proceeds of the IPO.
(6) From fiscal 1993 through fiscal 1995 the Company invested an aggregate of
$32.7 million in connection with the Fennimore Expansion, including $19.7
million incurred in fiscal 1993. In addition, income from operations was
impacted by non-recurring costs of $9.5 million in connection with the
Fennimore Expansion, including $8.4 million of increased cost of goods sold
and $1.1 million of increased general and administrative expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Introduction."
(7) Income (loss) from operations includes expenses incurred during the
Fennimore Expansion (as defined herein) and the Recapitalization and other
special charges in fiscal 1994, the Transition Period ended September 30,
1996, the fiscal year ended September 30, 1997 and the six months ended
March 29, 1997 and March 28, 1998. Income from operations before these
non-recurring charges was as follows:
<TABLE>
<CAPTION>
Transition Twelve Fiscal Six Months
Fiscal Year Ended June 30, Period Months Year Ended
---------------------------------- Ended Ended Ended -------------------
September September September March March
1993 1994 1995 1996 30, 1996 30, 1996 30, 1997 29, 1997 28, 1998
----- ----- ----- ----- ---------- ---------- --------- -------- --------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from operations ..... $31.2 $10.9 $31.5 $30.3 $(23.7) $(1.4) $34.5 $14.7 $20.1
Fennimore Expansion ............... -- 9.5 -- -- -- -- -- -- --
Recapitalization and other
special charges .................. -- 1.5 -- -- 28.4 28.4 3.0 4.7 4.0
----- ----- ----- ----- ------ ----- ------ ----- -----
Income from operations before
non-recurring charges ............ $31.2 $21.9 $31.5 $30.3 $ 4.7 $27.0 $37.5 $19.4 $24.1
===== ===== ===== ===== ====== ===== ====== ===== =====
</TABLE>
(8) EBITDA represents income from operations plus depreciation and amortization
(excluding amortization of debt issuance costs) and reflects an adjustment
of income from operations to eliminate the establishment and subsequent
reversal of two reserves ($0.7 million established in fiscal 1993 and
reversed in fiscal 1995, and $0.5 million established in fiscal 1992 and
reversed in fiscal 1995). The Company believes that EBITDA and related
measures are commonly used by certain investors and analysts to analyze and
compare, and provide useful information regarding, the Company's ability to
service its indebtedness. However, the following factors should be
considered in evaluating such measures: EBITDA and related measures (i)
should not be considered in isolation, (ii) are not measures of performance
calculated in accordance with generally accepted accounting principles
("GAAP"), (iii) should not be construed as alternatives or substitutes for
income from operations, net income or cash flows from operating activities
in analyzing the Company's operating performance, financial position or
cash flows (in each case, as determined in accordance with GAAP) and (iv)
should not be used as indicators of the Company's operating performance or
measures of its liquidity. Additionally, because all companies do not
calculate EBITDA and related measures in a uniform fashion, the
calculations presented in this Prospectus may not be comparable to other
similarly titled measures of other companies.
(footnote continued on following page)
10
<PAGE>
EBITDA includes expenses incurred during the Fennimore Expansion (as
defined herein) and the Recapitalization and other special charges in
fiscal 1994, the Transition Period ended September 30, 1996, the fiscal
year ended September 30, 1997 and the six months ended March 29, 1997 and
March 28, 1998. EBITDA before these non-recurring charges was as follows:
<TABLE>
<CAPTION>
Transition Twelve Fiscal Six Months
Fiscal Year Ended June 30, Period Months Year Ended
------------------------------------ Ended Ended Ended -------------------
September September September March March
1993 1994 1995 1996 30, 1996 30, 1996 30, 1997 29, 1997 28, 1998
----- ------ ----- ----- ------ ------ -------- -------- --------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA ....................... $39.3 $21.2 $41.3 $42.2 $(20.4) $10.7 $45.8 $20.7 $26.1
Fennimore Expansion .......... -- 9.5 -- -- -- -- -- -- --
Recapitalization and other
special charges ............. -- 1.5 -- -- 28.4 28.4 3.0 4.7 4.0
----- ----- ----- ----- ------ ----- ----- ----- -----
EBITDA before non-
recurring charges ........... $39.3 $32.2 $41.3 $42.2 $ 8.0 $39.1 $48.8 $25.4 $30.1
===== ===== ===== ===== ====== ===== ===== ===== =====
</TABLE>
11
<PAGE>
RISK FACTORS
Prospective investors should carefully consider all of the information set
forth in this Prospectus, including the risk factors set forth below.
Competition
The industries in which the Company participates are very competitive.
Competition is based upon brand name recognition, perceived quality, price,
performance, product packaging and product innovation, as well as creative
marketing, promotion and distribution strategies. In the U.S. battery industry,
the Company competes primarily with two well established companies, Duracell
International Inc. ("Duracell"), a subsidiary of The Gillette Company, and
Eveready Battery Company, Inc., a subsidiary of Ralston Purina Company and
producer of Energizer brand batteries ("Energizer"), each of which has
substantially greater financial and other resources and greater overall market
share than the Company. In addition, the Company believes that Duracell and
Energizer may have lower costs of production and higher profit margins in
certain key product lines than the Company. The Company competes with these
competitors for the limited shelf space that retailers allot to battery
products and for the promotional efforts of such retailers.
In February 1998, Duracell announced the introduction of a new line of
alkaline batteries under the name Duracell Ultra in the AA and AAA size
category which is being marketed as providing increased performance in certain
high-tech devices, including cellular phones, digital cameras and palm-sized
computers. Duracell has indicated that this new line of alkaline battery will
begin shipping to retailers in May 1998. In May 1998 Energizer announced the
introduction of Energizer Advanced Formula alkaline batteries, available in all
cell sizes, which Energizer claims will provide superior performance in high
drain devices and improved performance in all other device categories. The
Energizer Advanced Formula alkaline batteries are expected to be available in
the summer of 1998. There can be no assurance that there will not be a
reduction in purchases of the Company's products by consumers or certain key
customers of the Company as a result of competition from these new alkaline
battery lines, which could have a material adverse effect on the Company's
business, financial condition or results of operations.
Although foreign battery manufacturers historically have not been
successful in penetrating the U.S. retail market to any significant extent,
they have, from time to time, attempted to establish a significant presence in
the U.S. battery market. There can be no assurance that these attempts will not
be successful in the future or that the Company will be able to compete
effectively with current or prospective participants in the U.S. battery
industry. In addition, the battery-powered lighting device industry is highly
competitive and includes a greater number of competitors than the U.S. battery
industry, some of which have greater financial and other resources than the
Company. See "Business--Competition."
Dependence on Key Customers
Wal-Mart Stores, Inc. ("Wal-Mart"), the Company's largest retailer
customer, accounted for 20% of the Company's net sales in fiscal 1997. In
addition, the Company's three largest retailer customers, including Wal-Mart,
together accounted for 29% of the Company's net sales in fiscal 1997. The
Company does not have long-term agreements with any of its major customers, and
sales are generally made to them through the use of individual purchase orders,
consistent with industry practice. There can be no assurance that there will
not be a significant reduction in purchases by any of the Company's three
largest retailer customers, which could have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Business--Sales and Distribution."
Risks Associated with Future Acquisitions
An element of the Company's growth strategy is to pursue increased market
penetration through strategic acquisitions, which could be of significant size
and involve either domestic or international parties. The diversion of
management attention required by the acquisition and integration of a separate
organization, including integration of information systems, as well as other
difficulties which may be encountered in the transition and integration
process, including but not limited to the integration of Brisco, DPP and Best
Labs, could have a material adverse effect on the revenue and operating results
of the Company. There can be no assurance that the Company will identify
suitable acquisition candidates, that acquisitions will be consummated on
acceptable terms or that the Company will be able to successfully integrate the
operations of any acquisition. In addition, the Company may incur
12
<PAGE>
additional indebtedness in connection with acquisitions, which might not be
available on terms as favorable to the Company as current terms and which would
increase the leveraged position of the Company. See "--Substantial Leverage."
Further, acquisitions utilizing equity may be dilutive to shareholders.
Environmental Matters
The Company's facilities are subject to a broad range of federal, state,
local and foreign laws and regulations relating to the environment, including
those governing discharges to the air and water and land, the handling and
disposal of solid and hazardous substances and wastes and the remediation of
contamination associated with releases of hazardous substances at Company
facilities and at off-site disposal locations. Risk of environmental liability
is inherent in the Company's business, however, and there can be no assurance
that material environmental costs will not arise in the future. In particular,
the Company might incur capital and other costs to comply with increasingly
stringent environmental laws and enforcement policies. Based on currently
available information, the Company believes that it is substantially in
compliance with applicable environmental regulations at its facilities,
although no assurance can be provided with respect to such compliance in the
future.
The Company has been identified as a potentially responsible party ("PRP")
under the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") or similar state laws with respect to the past disposal of waste at
the Refuse Hideaway Site in Middleton, Wisconsin. Such laws may impose
liability on certain statutory classes of persons that are considered jointly
and severally liable for the costs of investigation and remediation of
contaminated properties, regardless of fault or the legality of the original
disposal. These persons include the present or former owner or operator of a
facility and companies that generated, disposed or arranged for the disposal of
hazardous substances found at the facility. The Company presently estimates
that its liability with respect to the Middleton, Wisconsin site should not
exceed $100,000. The Company may be named as a PRP at additional sites in the
future, and the costs associated with such additional or existing sites may be
material. In addition, certain of the Company's battery manufacturing
facilities have been in operation for decades and, over such time, the Company
and other prior operators of such facilities have generated and disposed of
wastes such as manganese, cadmium and mercury which are or may be considered
hazardous. The Company has not conducted invasive testing to identify all
potential risks, and given the age of the Company's facilities and the nature
of the Company's operations, there can be no assurance that material
liabilities will not arise in the future in connection with its current or
former facilities. The discovery of previously unknown contamination of
property underlying or in the vicinity of the Company's manufacturing
facilities could require the Company to incur material unforeseen expenses.
Occurrences of any such events may have a material adverse effect on the
Company's financial condition.
In addition, the Company has applied to the Tennessee Department of
Environment and Conservation ("TDEC") for participation in TDEC's Voluntary
Cleanup Oversight and Assistance Program with respect to the Company's former
manganese processing facility in Covington, Tennessee. Pursuant to this
program, TDEC will conduct a site investigation to determine the extent of the
cleanup required at the Covington facility, however, there can be no assurance
that participation in this program will preclude this site from being added to
the National Priorities List as a Superfund site. Groundwater monitoring at the
site conducted pursuant to the post-closure maintenance of solid waste lagoons
on site, and recent groundwater testing beneath former process areas on site,
indicate that there are elevated levels of certain inorganic contaminants,
particularly (but not exclusively) manganese, in the groundwater underneath the
site. The Company cannot predict the outcome of TDEC's investigation of the
site. See "Business--Environmental Matters."
The Company has been and is subject to several proceedings related to its
disposal of industrial and hazardous material at off-site disposal locations
under CERCLA or analogous state laws that hold persons who "arranged for" the
disposal or treatment of such substances strictly liable for the costs incurred
in responding to the release or threatened release of hazardous substances from
such sites. Except for the Velsicol Chemical and Morton International
proceedings described below (as to which there is insufficient information to
make a judgment as to their impact on the Company at this time), the Company
does not believe that any of its pending CERCLA or analogous state matters,
either individually or in the aggregate, will have a material impact on the
Company's operations, financial condition or liquidity.
The Company has been named as a defendant in two lawsuits in connection
with a Superfund site located in Bergen County, New Jersey (Velsicol Chemical
Corporation, et al. v. A.E. Staley Manufacturing Company, et al., and Morton
International, Inc. v. A.E. Staley Manufacturing Company, et al., United States
District Court for the
13
<PAGE>
District of New Jersey, filed July 29, 1996). These lawsuits involve
contamination at a former mercury processing facility and the watershed of a
nearby creek (the "Bergen County Site"). The Company is one of approximately 50
defendants named in these lawsuits. The cost to remediate the Bergen County
Site has not been determined and the Company cannot predict the outcome of
these proceedings. See "Business--Environmental Matters."
Substantial Leverage
As of March 28, 1998, the Company had total indebtedness of $129.5 million
and total shareholders' equity of $12.2 million. Subject to the restrictions
contained in the Company's Amended Credit Agreement and the indenture (the
"Indenture") relating to the Company's 10-1/4% Series B Senior Subordinated
Notes due 2006 (the "Notes"), the Company may incur additional indebtedness
from time to time to finance acquisitions or capital expenditures or for other
corporate purposes. A significant portion of cash flow from operations must be
dedicated to the payment of principal of and interest on the Company's
indebtedness, thereby reducing the amount of funds available for working
capital, capital expenditures and other purposes. The Company's ability to make
scheduled payments on its outstanding indebtedness will depend on its future
operating performance which, in turn, will be affected by prevailing economic
conditions and financial, competitive, regulatory and similar factors. The
Amended Credit Agreement and the Indenture impose operational and financial
restrictions on the Company. See "Description of Certain Indebtedness."
Although the Company believes that, based on current levels of operations, its
cash flow from operations, together with external sources of liquidity, will be
adequate to make required payments on its debt, whether at or prior to
maturity, finance anticipated capital expenditures and fund working capital
requirements, there can be no assurance in this regard.
Battery Technology
The battery industry generally involves continually evolving technology
with individual advances typically resulting in modest increases in product
life. There can be no assurance that, as existing battery products and
technologies improve and new, more advanced products and technologies are
introduced, the Company's products will be able to compete effectively in any
of its targeted market segments. The development and successful introduction of
new and enhanced products and other competing technologies that may outperform
the Company's batteries and technological developments by competitors or
consumer perceptions as to improved product offerings of competitors may have a
material adverse effect on the Company's business, financial condition or
results of operations, particularly in the context of the substantially greater
resources of the Company's two principal competitors in the general battery
market, Duracell and Energizer. See "-- Competition." Similarly, in those
market segments where the Company's battery products currently have
technological advantages there can be no assurance that the Company's products
will maintain such advantages.
The general battery industry historically has sustained unit sales growth
even as battery life has increased with innovation (largely due to expansion in
the use of and the number of applications for batteries); however, there can be
no assurance that continued enhancements of battery performance (including
rechargeable battery performance) will not have an adverse effect on unit
sales.
Risks of Foreign Sales; Exchange Rate Fluctuations
The Company's foreign sales and certain expenses are transacted in foreign
currencies. In fiscal 1997, approximately 19% of the Company's revenues and 18%
of the Company's expenses were denominated in currencies other than U.S.
dollars. International operations and exports and imports to and from foreign
markets are subject to a number of special risks including, but not limited to,
risks with respect to currency exchange rates, economic and political
destabilization, restrictive actions by foreign governments (e.g. duties and
quotas and restrictions on transfer of funds), changes in United States and
foreign laws regarding trade and investment and difficulty in obtaining
distribution and support. Significant increases in the value of the U.S. dollar
relative to certain foreign currencies could have a material adverse effect on
the Company's results of operations. The Company generally hedges a portion of
its foreign currency exposure and will, in the future, be vulnerable to the
effects of currency exchange rate fluctuations. For a description of the
Company's operations in different geographic areas, including the Company's
sales, revenue and profit or loss and identifiable assets attributable to each
of the Company's geographic areas, see Note 12 of Notes to Consolidated
Financial Statements.
14
<PAGE>
Raw Materials
The Company's principal raw material for the production of its battery
products is zinc and the Company expects to spend approximately $7.5 million
for zinc in fiscal 1998. Prices for zinc are subject to market forces beyond
the control of the Company. The Company regularly engages in forward purchases
and hedging transactions to effectively manage raw material costs and inventory
relative to anticipated production requirements for the next six to twelve
months. However, the Company's future profitability may be materially adversely
affected by increased zinc prices to the extent it is unable to pass on higher
raw material costs to its customers. See Note 2.o. of Notes to Consolidated
Financial Statements and Note 1 to the Unaudited Condensed Consolidated
Financial Statements for the six months ended March 29, 1997 and March 28,
1998, included elsewhere herein.
Limited Intellectual Property Protection
The Company relies upon a combination of patent, trademark and trade
secret laws, together with licenses, confidentiality agreements and other
contractual covenants, to establish and protect its technology and other
intellectual property rights. There can be no assurance that the steps taken by
the Company or its licensors will be adequate to prevent misappropriation of
their technology or other intellectual property or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's or its licensors technology. Moreover,
although the Company believes that its current products do not infringe upon
the valid proprietary rights of others, there can be no assurance that third
parties will not assert infringement claims against the Company or its
licensors and that, in the event of an unfavorable ruling on any such claim, a
license or similar agreement will be available to the Company on reasonable
terms. Moreover, the laws of certain foreign countries do not protect
intellectual property rights to the same extent as do the laws of the United
States.
Certain technology underlying the Company's rechargeable line of alkaline
batteries is the subject of a non-exclusive license from a third party and
could be made available to the Company's competitors. The licensing of that
technology to a competitor could have an adverse effect on the Company's
business, financial condition or results of operations. The Company does not
believe, however, that this effect would be material to the Company because
revenues from sales of the Company's rechargeable alkaline batteries and
rechargers account for less than 10% of the Company's total revenues.
The Company does not have any right to the trademark "Rayovac" in Brazil,
where the mark is owned by an independent third-party battery manufacturer. In
addition, ROV Limited, a third party unaffiliated with the Company, has an
exclusive, perpetual, royalty-free license for the use on general batteries
(but not hearing aid or other specialty batteries) and lighting devices of the
Rayovac trademark in a number of countries, including in Latin America. See
"Business--Patents, Licenses and Trademarks."
Seasonality
Sales of the Company's products are seasonal, with the highest sales
occurring in the fiscal quarter ending on or about December 31, during the
holiday season. During the past four fiscal years, the Company's sales in the
quarter ending on or about December 31 have represented an average of 33% of
annual net sales. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality."
Control by Existing Shareholders
Upon completion of the Offerings, Thomas H. Lee Equity Fund III, L.P.
("THL Fund") and certain other affiliates of Thomas H. Lee Company ("THL Co.";
the THL Fund and such other affiliates being referred to herein as "THL Group")
will beneficially own 43.9% of the Company's outstanding Common Stock (41.5% if
the Underwriters' over-allotment options are exercised in full). Consequently,
THL Group will exercise significant control over the Company and in electing
the board of directors of the Company (the "Board of Directors") and approving
any action requiring shareholder approval, including the adoption of amendments
to the Company's Amended and Restated Articles of Incorporation and the
approval of mergers or sales of all or substantially all of the Company's
assets. See "Principal and Selling Shareholders." The Company's ability to take
certain of these actions is limited by certain terms of its outstanding
indebtedness. See "Description of Certain Indebtedness."
15
<PAGE>
Shares Eligible for Future Sale; Potential for Adverse Effect on Stock Price;
Registration Rights
Sales of a substantial number of shares of Common Stock in the public
market or the perception that such sales could occur could materially adversely
affect prevailing market prices for the Common Stock. Upon completion of the
Offerings, the Company will have outstanding 27,441,097 shares of Common Stock,
excluding 2,497,321 shares of Common Stock which have been granted under the
Company's stock incentive plans. Of these shares, the 7,827,507 shares of
Common Stock previously sold in the Company's initial public offering of Common
Stock in November 1997 (the "IPO") and the 5,750,000 shares of Common Stock to
be sold in the Offerings will be freely tradable without restriction under the
Securities Act of 1933, as amended (the "Securities Act"), except for any such
shares which may be acquired by an "affiliate" of the Company. In connection
with the Offerings, the Selling Shareholders, certain existing shareholders,
the Company, its executive officers and directors and the THL Group (holding an
aggregate of approximately 14.3 million shares of Common Stock upon
consummation of the Offerings) have agreed, subject to certain exceptions, not
to dispose of any shares of Common Stock for a period of 90 days from the date
of the Offerings (the "Lockup Period") without the consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") on behalf of the
Underwriters. Upon expiration of the Lockup Period, substantially all of such
shares will be eligible for sale in the public market subject to compliance
with the volume limitations and other restrictions of Rule 144 under the
Securities Act.
Following the consummation of the Offerings, the THL Group will hold
approximately 12.1 million shares of Common Stock (without giving effect to the
Underwriters' over-allotment options) and will be entitled to certain
registration rights with respect to the registration of such shares under the
Securities Act. Under the terms of a shareholders agreement between the Company
and certain shareholders, dated as of September 12, 1996, as amended as of
August 1, 1997 (the "Shareholders Agreement"), at any time when the THL Group
and their permitted transferees own in the aggregate at least 10% of the shares
acquired in the Recapitalization, the THL Group has the right to require the
Company to file a registration statement under the Securities Act in order to
register the sale of all or any part of its shares of Common Stock. These
Offerings are made pursuant to the provisions of the Shareholders Agreement.
Following these Offerings, the THL Group is entitled to demand that the Company
register their shares of Common Stock on three occasions at the Company's
expense; provided, however, that if the THL Group owns at least 10%, but not
more than 25%, of the shares acquired in the Recapitalization, then the Company
shall be obligated to effect only one such registration. Additionally, the THL
Group and shareholders party to the Shareholders Agreement have the right,
subject to certain limitations, to include their shares in certain offerings
initiated by the Company whether for its own account or for other shareholders.
The Company may in certain circumstances defer such registrations, and the
underwriters with respect to such sale have the right, subject to certain
limitations, to limit the number of shares included in such registrations. In
the event that the Company proposes to register the sale of any of its
securities under the Securities Act, the Company is required to promptly give
such shareholders written notice no later than 10 days before the effective
date of the registration statement, at which point such shareholders will have
five days to make a written request of the Company to include their shares of
Common Stock in such registration, subject to the underwriters' right to limit
such shares and certain other limitations. In general, the Company is required
to bear the expense of all such registrations except for transfer taxes. The
sale of such shares could have an adverse effect on the Company's ability to
raise equity capital in the public markets. The shares held by the THL Group
are subject to the Lockup Period referred to in the preceding paragraph. See
"Shares Eligible for Future Sale."
Anti-Takeover and Other Provisions of Wisconsin Law
Certain provisions of the Company's Amended and Restated Articles of
Incorporation, the Amended and Restated By-laws (the "By-laws") and of
Wisconsin corporation law may have the effect of discouraging, delaying or
preventing a change in control of the Company or unsolicited acquisition
proposals. In certain circumstances under provisions of Wisconsin law,
shareholders may be liable for liabilities of the Company with respect to
unpaid wages.
16
<PAGE>
THE RECAPITALIZATION
Effective as of September 12, 1996, the Company, all of the shareholders
of the Company, the THL Fund and other affiliates of THL Co. completed a
recapitalization (the "Recapitalization") pursuant to which, among other
things: (i) the Company obtained senior financing under a Credit Agreement
dated as of September 12, 1996 by and among the Company, Bank of America
National Trust and Savings Association and DLJ Capital Funding, Inc. (the
"Credit Agreement") in an aggregate amount of $170.0 million, of which $131.0
million was borrowed at the closing of the Recapitalization, including $26.0
million under the Revolving Credit Facility; (ii) the Company obtained $100.0
million in financing through the issuance of bridge notes (the "Bridge Notes");
(iii) the Company redeemed a portion of the shares of Common Stock held by
Thomas F. Pyle, Jr., the former President and Chief Executive Officer of the
Company; (iv) the THL Group purchased for cash shares of Common Stock owned by
shareholders of the Company (a group consisting of current and former directors
and management of the Company and the Thomas Pyle and Judith Pyle Charitable
Remainder Trust) which resulted in a change of control of the Company; and (v)
the Company repaid certain of its outstanding indebtedness, including
prepayment fees and penalties. The Bridge Notes were subsequently repaid with
the proceeds of the sale of 10-1/4% Senior Subordinated Notes Due 2006 (the
"Senior Subordinated Notes"), which were later exchanged for a like principal
amount of the Notes.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of shares of
Common Stock by the Selling Shareholders.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "ROV." The Common Stock commenced public trading on November 21,
1997. On April 29, 1998, the outstanding shares of Common Stock were held of
record by 285 shareholders based upon data provided by the transfer agent for
the Common Stock. The following table sets forth the reported high and low
prices per share of the Common Stock as reported on the New York Stock Exchange
Composite Transaction Tape for the fiscal periods indicated:
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
Fiscal 1998
- ------------------------------------------------------------------
Quarter ended December 27, 1997 (from November 21, 1997) ......... $17-3/4 $15-1/2
Quarter ended March 28, 1998 ..................................... $24-1/2 $16-3/4
Current quarter (to May 28, 1998) ................................ $24-1/2 $21-1/4
</TABLE>
On May 28, 1998, the closing price of the Common Stock on the New York
Stock Exchange Composite Transaction Tape was $21-1/4 per share.
The Company has not declared or paid and does not anticipate paying cash
dividends in the foreseeable future, but intends to retain any future earnings
for reinvestment in its business. In addition, the Amended Credit Agreement and
the Notes restrict the Company's ability to pay dividends to its shareholders.
Any future determination to pay cash dividends will be at the discretion of the
Board of Directors and will be dependent upon the Company's financial
condition, results of operations, capital requirements, contractual
restrictions and such other factors as the Board of Directors deems relevant.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 28, 1998. This table should be read in conjunction with the Company's
consolidated financial statements and the related notes thereto and the
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
As of March 28, 1998
----------------------
(Dollars in millions)
<S> <C>
Debt:
Revolver Facility ........................................... $ 56.1
Acquisition Facility ........................................ 4.2
Bankers' acceptances(1) ..................................... 1.5
Notes ....................................................... 65.0
Capitalized leases and foreign currency borrowings .......... 2.7
-------
Total debt ................................................. 129.5
-------
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares issued and outstanding .......................... --
Common stock, $.01 par value, 150,000,000 shares authorized;
27,432,238 shares outstanding ............................. 0.6
Additional paid in capital .................................. 103.2
Foreign currency translation ................................ 2.3
Notes receivable from officers/shareholders ................. (1.4)
Retained earnings ........................................... 36.9
Less stock held in trust .................................... (1.0)
Less treasury stock, at cost, 29,440,269 shares ............. (128.4)
-------
Total shareholders' equity ................................. 12.2
-------
Total capitalization ...................................... $141.7
=======
</TABLE>
- ----------------
(1) In connection with the acquisition of DPP, the Company assumed $1.5 million
of bankers' acceptances.
18
<PAGE>
SELECTED FINANCIAL DATA
The following selected historical financial data as of and for the two
fiscal years ended June 30, 1996, the Transition Period ended September 30,
1996 and the fiscal year ended September 30, 1997 is derived from the audited
consolidated financial statements of the Company, together with the notes
thereto, included elsewhere in this Prospectus. The selected historical
financial data as of and for the six months ended March 29, 1997 and March 28,
1998, included elsewhere in this Prospectus, and as of and for the twelve
months ended September 30, 1996, not included herein, is derived from the
unaudited condensed consolidated financial statements of the Company and, in
the opinion of management, includes all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of financial position and
results of operations as of the date and for the period indicated. The selected
historical financial data of the Company as of and for the two fiscal years
ended June 30, 1993 and June 30, 1994 is derived from audited consolidated
financial statements of the Company which are not included herein. The
following selected financial data should be read in conjunction with the
Company's consolidated financial statements and the related notes thereto and
the information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
This financial data, as well as all other financial data set forth herein,
gives effect to the reclassification by the Company of certain promotional
expenses, previously reported as a reduction of net sales, to selling expense,
which policy was adopted as of September 30, 1997. The amounts which have been
reclassified are $19.0 million, $17.5 million, $24.2 million, and $24.0 million
for the fiscal years ended June 30, 1993, 1994, 1995, and 1996, respectively,
$6.9 million for the Transition Period ended September 30, 1996, $24.1 million
for the twelve months ended September 30, 1996, and $15.4 million for the six
months ended March 29, 1997. The Company believes that this reclassification is
consistent with the method used by other consumer products companies.
19
<PAGE>
<TABLE>
<CAPTION>
Transition Twelve Fiscal Six Months
Period Months Year Ended
Fiscal Year Ended June 30, Ended Ended Ended -------------------
-------------------------------------- September September September March March
1993 1994 1995 1996 30, 1996 30, 1996 30, 1997 29, 1997 28, 1998
------- ------- ------- ------ --------- --------- --------- -------- --------
(In millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ....................... $372.4 $403.7 $415.2 $423.4 $101.9 $417.9 $432.6 $225.6 $246.1
Cost of goods sold .............. 201.4 234.9 237.1 239.4 59.3 237.9 234.6 126.2 127.9
------ ------ ------ ------ ------ ------ ------- ------ ------
Gross profit .................... 171.0 168.8 178.1 184.0 42.6 180.0 198.0 99.4 118.2
Selling expense ................. 98.8 121.3 108.7 116.5 27.8 114.4 122.1 61.3 73.7
General and administrative
expense ........................ 35.4 29.4 32.9 31.8 8.6 33.0 32.2 15.3 17.4
Research and development
expense ........................ 5.6 5.7 5.0 5.4 1.5 5.6 6.2 3.4 3.0
Recapitalization and other
special charges(1)(2)(3) ....... -- 1.5 -- -- 28.4 28.4 3.0 4.7 4.0
------- ------ ------- ------- ------ ------ ------- ------ ------
Income (loss) from
operations(4)(5) ............... 31.2 10.9 31.5 30.3 (23.7) (1.4) 34.5 14.7 20.1
Interest expense ................ 6.0 7.7 8.6 8.4 4.4 10.5 24.5 13.4 8.3
Other expense (income), net ..... 1.2 (0.6) 0.3 0.6 0.1 0.5 0.4 0.3 (0.3)
------- ------- ------- ------- ------- ------- ------- ------ ------
Income (loss) before income
taxes and extraordinary item.... 24.0 3.8 22.6 21.3 (28.2) (12.4) 9.6 1.0 12.1
Income tax expense (benefit) .... 9.0 (0.6) 6.2 7.0 (8.9) (3.8) 3.4 0.3 4.5
------- ------- ------- ------- ------- ------- ------- ------ ------
Income (loss) before
extraordinary item ............. 15.0 4.4 16.4 14.3 (19.3) (8.6) 6.2 0.7 7.6
Extraordinary item(6) ........... -- -- -- -- (1.6) (1.6) -- -- 2.0
------- ------- ------- ------- ------- ------- -------- ------ ------
Net income (loss) ............... $ 15.0 $ 4.4 $ 16.4 $ 14.3 $(20.9) $(10.2) $ 6.2 $ 0.7 $ 5.6
======= ======= ======= ======= ======= ======= ======== ====== ======
Basic net income (loss) per
common share before
extraordinary item ............. $ 0.30 $ 0.09 $ 0.33 $ 0.29 $(0.44) $(0.18) $0.30 $ 0.03 $ 0.30
======= ======= ======= ======= ======== ======== ======== ====== ======
Diluted net income (loss) per
common share before
extraordinary item ............. $ 0.30 $ 0.09 $ 0.33 $ 0.29 $(0.44) $(0.18) $0.30 $ 0.03 $ 0.28
======= ======= ======= ======= ======== ======== ======== ====== ======
Basic net income (loss) per
common share ................... $ 0.30 $ 0.09 $ 0.33 $ 0.29 $(0.48) $(0.21) $0.30 $ 0.03 $ 0.22
======= ======= ======= ======= ======== ======== ======== ====== ======
Diluted net income (loss) per
common share ................... $ 0.30 $ 0.09 $ 0.33 $ 0.29 $(0.48) $(0.21) $0.30 $ 0.03 $ 0.21
======= ======= ======= ======= ======== ======== ======== ====== ======
Weighted average common
shares ......................... 50.0 50.0 50.0 49.6 43.8 48.1 20.5 20.5 25.5
Weighted average common and
common equivalent shares ....... 50.0 50.0 50.0 49.6 43.8 48.1 20.6 20.5 27.0
Other Financial Data:
Depreciation .................... $ 7.4 $ 10.3 $ 11.0 $ 11.9 $ 3.3 $ 12.1 $ 11.3 $ 5.9 $ 5.8
Capital expenditures(7) ......... 30.3 12.5 16.9 6.6 1.2 8.4 10.9 2.6 6.7
Cash flows from operating
activities ..................... 15.8 (18.7) 35.5 17.8 (1.1) 26.0 35.7 35.2 4.4
Cash flows from investing
activities ..................... (30.1) (12.4) (16.8) (6.3) 0.0 (7.3) (10.8) (2.8) (10.9)
Cash flows from financing
activities ..................... 13.7 30.8 (18.3) (12.0) 3.2 (16.8) (28.0) (27.5) 9.1
EBITDA(8) ....................... 39.3 21.2 41.3 42.2 (20.4) 10.7 45.8 20.7 26.1
Balance Sheet Data:
Working capital ................. $ 31.6 $ 63.6 $ 55.9 $ 63.2 $ 64.6 $ 64.6 $ 33.8 $ 48.3 $ 55.3
Total assets .................... 189.0 222.4 220.6 221.1 243.7 243.7 236.9 211.3 241.4
Total debt ...................... 74.1 109.0 88.3 81.3 233.7 233.7 207.3 206.5 129.5
Shareholders' equity (deficit) .. 36.7 37.9 53.6 61.6 (85.7) (85.7) (80.6) (84.1) 12.2
</TABLE>
(footnotes on following page)
20
<PAGE>
- ------------
(1) During the Transition Period, the Company recorded charges of $12.3 million
directly related to the Recapitalization and other special charges of $16.1
million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(2) In the fiscal year ended September 30, 1997, the Company recorded other
special charges of $5.9 million offset by a special credit of $2.9 million
which was related to the curtailment of the Company's defined benefit
pension plan covering all domestic non-union employees. The special charges
related to organizational restructuring in the United States, the
discontinuation of certain manufacturing operations at the Company's Newton
Aycliffe, United Kingdom facility and the discontinuation of operations at
the Company's facility in Kinston, North Carolina.
(3) In the six months ended March 28, 1998, the Company recorded net charges of
$4.0 million including (i) $1.7 million associated with consolidating
domestic battery packaging operations and outsourcing the manufacture of
heavy duty batteries, (ii) $2.0 million associated with closing the
Company's Appleton, Wisconsin manufacturing plant and consolidating it into
its Portage, Wisconsin manufacturing plant, (iii) $3.9 million associated
with closing the Company's Newton Aycliffe, United Kingdom facility,
phasing out direct distribution in the United Kingdom and closing one of
the Company's German sales offices, (iv) a $2.4 million gain on the sale of
the Company's previously closed Kinston, North Carolina facility, and (v)
income of $1.2 million in connection with the buyout of deferred
compensation agreements with certain former employees.
(4) Income (loss) from operations includes expenses incurred during the
Fennimore Expansion and the Recapitalization and other special charges in
fiscal 1994, the Transition Period ended September 30, 1996, the fiscal
year ended September 30, 1997 and the six months ended March 29, 1997 and
March 28, 1998. Income from operations before these non-recurring charges
was as follows:
<TABLE>
<CAPTION>
Transition Twelve Fiscal Six Months
Fiscal Year Ended June 30, Period Months Year Ended
------------------------------------ Ended Ended Ended ------------------
September September September March March
1993 1994 1995 1996 30, 1996 30, 1996 30, 1997 29,1997 28, 1998
----- ------ ------ ------ --------- -------- ----------- --------- --------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from
operations .................. $31.2 $10.9 $31.5 $30.3 $(23.7) $(1.4) $34.5 $14.7 $20.1
Fennimore Expansion .......... -- 9.5 -- -- -- -- -- -- --
Recapitalization and other
special charges ............. -- 1.5 -- -- 28.4 28.4 3.0 4.7 4.0
----- ----- ----- ----- ------ ----- ----- ----- -----
Income from operations
before non-recurring
charges ..................... $31.2 $21.9 $31.5 $30.3 $ 4.7 $27.0 $37.5 $19.4 $24.1
===== ===== ===== ===== ====== ===== ===== ===== =====
</TABLE>
(5) Income from operations in fiscal 1994 was impacted by increased selling
expenses due to higher advertising and promotion expenses related to the
Renewal Introduction. In addition, income from operations was impacted by
non-recurring costs of $9.5 million in connection with the Fennimore
Expansion including $8.4 million of increased cost of goods sold and $1.1
million of increased general and administrative expenses, and other special
charges of approximately $1.5 million related to a plan to reduce the
Company's cost structure and to improve productivity through an approximate
2.5% reduction in headcount on a worldwide basis. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Introduction."
(6) The Recapitalization of the Company included repayment of certain
outstanding indebtedness, including prepayment fees and penalties. Such
prepayment fees and penalties of $2.4 million, net of income tax benefit of
$0.8 million, has been recorded as an extraordinary item in the
Consolidated Statement of Operations for the Transition Period ended
September 30, 1996. In the six months ended March 28, 1998, the Company
recorded extraordinary expense of $2.0 million net of income taxes for the
premium on the repurchase or redemption of the senior term notes in
connection with the IPO.
(7) From fiscal 1993 through fiscal 1995 the Company invested an aggregate of
$32.7 million in connection with the Fennimore Expansion, including $19.7
million incurred in fiscal 1993. In addition, income from operations was
impacted by non-recurring costs of $9.5 million in connection with the
Fennimore Expansion including $8.4 million of increased cost of goods sold
and $1.1 million of increased general and administrative expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Introduction."
(footnotes continued on following page)
21
<PAGE>
- ------------
(8) EBITDA represents income from operations plus depreciation and amortization
(excluding amortization of debt issuance costs) and reflects an adjustment
of income from operations to eliminate the establishment and subsequent
reversal of two reserves ($0.7 million established in fiscal 1993 and
reversed in fiscal 1995, and $0.5 million established in fiscal 1992 and
reversed in fiscal 1995). The Company believes that EBITDA and related
measures are commonly used by certain investors and analysts to analyze and
compare, and provide useful information regarding, the Company's ability to
service its indebtedness. However, the following factors should be
considered in evaluating such measures: EBITDA and related measures (i)
should not be considered in isolation, (ii) are not measures of performance
calculated in accordance with GAAP, (iii) should not be construed as
alternatives or substitutes for income from operations, net income or cash
flows from operating activities in analyzing the Company's operating
performance, financial position or cash flows (in each case, as determined
in accordance with GAAP) and (iv) should not be used as indicators of the
Company's operating performance or measures of its liquidity. Additionally,
because all companies do not calculate EBITDA and related measures in a
uniform fashion, the calculations presented in this Prospectus may not be
comparable to other similarly titled measures of other companies.
EBITDA includes expenses incurred during the Fennimore Expansion (as
defined herein) and the Recapitalization and other special charges in
fiscal 1994, the Transition Period ended September 30, 1996, the fiscal
year ended September 30, 1997 and the six months ended March 29, 1997 and
March 28, 1998. EBITDA before these non-recurring charges was as follows:
<TABLE>
<CAPTION>
Transition Twelve Fiscal Six Months
Fiscal Year Ended June 30, Period Months Year Ended
---------------------------------- Ended Ended Ended --------------------
September September September March 29, March 28,
1993 1994 1995 1996 30, 1996 30, 1996 30, 1997 1997 1998
------ ------ ------ ------ --------- --------- -------- ------- ---------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA ....................... $39.3 $21.2 $41.3 $42.2 $(20.4) $10.7 $45.8 $20.7 $26.1
Fennimore Expansion .......... -- 9.5 -- -- -- -- -- -- --
Recapitalization and other
special charges ............. -- 1.5 -- -- 28.4 28.4 3.0 4.7 4.0
----- ----- ----- ----- ------ ----- ----- ----- -----
EBITDA before non-
recurring charges ........... $39.3 $32.2 $41.3 $42.2 $ 8.0 $39.1 $48.8 $25.4 $30.1
===== ===== ===== ===== ====== ===== ===== ===== =====
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Company's consolidated financial statements and the
related notes thereto, included elsewhere herein.
Introduction
Upon completion of the Recapitalization, the Company changed its fiscal
year end from June 30 to September 30. For clarity of presentation and
comparison, references herein to fiscal 1994, fiscal 1995 and fiscal 1996 are
to the Company's fiscal years ended June 30, 1994, June 30, 1995 and June 30,
1996, respectively, and references to the "Transition Period ended September
30, 1996" and the "Transition Period" are to the period from July 1, 1996 to
September 30, 1996. References to fiscal 1997 are to the Company's fiscal year
ended September 30, 1997.
The Company's operating performance depends on a number of factors, the
most important of which are (i) general retailing trends, especially in the
mass merchandise segment of the retail market, (ii) the Company's overall
product mix among various specialty and general household batteries and
battery-powered lighting devices, which sell at different price points and
profit margins, (iii) the Company's overall competitive position, which is
affected by both the introduction of new products and promotions by the Company
and its competitors and the Company's relative pricing and battery performance,
and (iv) changes in operating expenses. Set forth below are specific
developments that have affected and may continue to affect the Company's
performance.
Restructuring of Operations and Other Cost Rationalization Initiatives. In
March 1998, the Company announced restructuring plans for its domestic and
international operations designed to maximize production and capacity
efficiencies, reduce fixed costs, upgrade existing technology and equipment and
improve customer service. Major elements of the restructuring include (i)
consolidating the Company's packaging operations, (ii) outsourcing the
manufacture of heavy duty batteries, and (iii) closing certain of the Company's
existing manufacturing, packaging and distribution facilities. The Company
recorded a charge of $7.5 million in the second quarter of the current fiscal
year in connection with the restructuring program and expects to record an
additional $2.0 million of costs in subsequent periods. The Company anticipates
annual aggregate cost savings of the restructuring program, after full
implementation (currently expected in early 1999), to be approximately $5.0
million.
The 1998 restructuring is in addition to the significant measures taken in
fiscal 1997 following the Recapitalization to rationalize the Company's
manufacturing, distribution, and general overhead costs. The initiatives
relating to manufacturing activities included discontinuing certain
manufacturing operations at the Company's Newton, Aycliffe, United Kingdom
facility and closing the Company's Kinston, North Carolina facility. In
addition, the Company implemented a significant organizational restructuring in
the United States and the United Kingdom. The Company recorded charges totaling
$5.9 million in fiscal 1997 in connection with the restructuring (see note 15
to the Consolidated Financial Statements) and expects annual savings of
approximately $8.6 million. Such savings may not be indicative of actual
savings in future periods because of the likelihood of additional overhead or
other costs in future periods in support of business growth objectives.
Investment in Future Growth Opportunities. Since the Recapitalization, the
Company has undertaken significant measures to pursue growth opportunities and
increase the Company's market share for its products. These measures include
(i) introducing the Company's existing hearing aid products into new markets,
including through the acquisition of Brisco and Best Labs; (ii) broadening the
Company's offering of specialty products, including through the acquisition of
DPP; (iii) expanding distribution into new channels such as electronics
specialty stores; (iv) further penetrating existing distribution channels such
as warehouse clubs and food and convenience stores; and (v) evaluating
opportunities for expansion of the Company's core business into international
markets, whether through acquisitions, joint ventures or other strategic
marketing opportunities. See "Business--Growth Strategy."
Expansion of Production Capacity. In March 1998, the Company agreed to
purchase from Matsushita for $10.0 million a new high speed alkaline battery
manufacturing production line for its Fennimore, Wisconsin plant, at which the
Company manufactures all of its alkaline products. The Company estimates costs
associated with the implementation of this new manufacturing line to be
approximately $1.0 million. The new high speed manufacturing line is
anticipated to increase the Company's production capacity for AA size batteries
by up to 50%. The recent investment in manufacturing technology and production
capacity follows the Fennimore Expansion (as defined herein), pursuant to
which, from fiscal 1993 through fiscal 1995 the Company invested an aggregate
of $32.7 million in the modernization and expansion of its production lines at
its Fennimore plant (the "Fennimore Expansion").
23
<PAGE>
As a result of the Fennimore Expansion, the Company replaced substantially all
of its alkaline battery manufacturing equipment with state-of-the-art
technology which more than doubled the Company's aggregate capacity for AA and
AAA size alkaline batteries. This investment also resulted in a reformulation
of the Company's alkaline batteries so as to be mercury-free, better performing
and higher quality. The Fennimore Expansion resulted in $9.5 million of
non-recurring costs in fiscal 1994. Such costs included increased raw material
costs incurred pursuant to the terms of equipment purchase agreements entered
into in connection with the Fennimore Expansion which required the Company to
source material from specified foreign vendors at an increased cost. These
incremental costs decreased in fiscal 1996 as a result of the increased use of
lower-cost domestic raw material sources to replace the foreign vendor
sourcing, which replacement was substantially completed in fiscal 1997.
Effect of Recapitalization. The Recapitalization of the Company, which was
completed on September 12, 1996, resulted in non-recurring charges of $12.3
million which were recognized in the Transition Period, including (i) $5.0
million of advisory, legal and consulting fees and (ii) $7.3 million of stock
option compensation, severance payments and employment contract settlements for
the benefit of certain current and former officers, directors and management of
the Company. In connection with the Recapitalization, the Company incurred
other non-recurring special charges of $16.1 million recognized in the
Transition Period, including (i) $2.7 million of charges related to the
discontinuation of certain manufacturing operations at the Company's Newton
Aycliffe, United Kingdom facility; (ii) $1.7 million of charges for deferred
compensation plan obligations to former officers of the Company resulting from
the curtailment of the plan; (iii) $1.5 million of charges reflecting the
present value of lease payments for land which new management determined would
not be used for any future productive purpose; (iv) $5.6 million in costs and
asset writedowns principally related to changes in pricing strategies for Power
Station, the Renewal recharging system; and (v) $4.6 million of termination
benefits and other charges. See "The Recapitalization."
Renewal Product Line. In fiscal 1994, the Company introduced the Renewal
rechargeable battery, the first alkaline rechargeable battery sold in the
United States (the "Renewal Introduction"). The Company incurred significant
advertising and promotional expense related to Renewal of $26.0 million in
fiscal 1994, $15.7 million in fiscal 1995 and $20.3 million in fiscal 1996,
with the fiscal 1996 increase largely due to the Company's new promotional
campaign featuring basketball superstar Michael Jordan.
Since the Recapitalization, the Company has significantly revised its
marketing and advertising strategies for the Renewal product line. Management
believes that continued improvement in consumer awareness of the value and
money-saving benefits of Renewal over conventional disposable alkaline
batteries will be necessary to further expand the Company's market for Renewal.
Although the percentage of the Company's advertising budget allocated to the
Renewal product line has decreased, the Company has begun aggressively
marketing Renewal's money-saving benefit over disposable alkaline batteries and
performance advantage over rechargeable nickel cadmium batteries and has
lowered the prices of the recharger system for Renewal. In addition, the
Company is focused on growing Renewal's market share by expanding distribution
into new channels such as electronics specialty stores and other speciality
retailers in the domestic market.
Seasonality
The Company's sales are seasonal, with the highest sales occurring in the
fiscal quarter ending on or about December 31, during the holiday season and
the lowest sales occurring in the fiscal quarter ending on or about March 30.
During the past four completed fiscal years, the Company's sales in the quarter
ended on or about December 31 have represented an average of 33% of annual net
sales. As a result of this seasonality, the Company's working capital
requirements and revolving credit borrowings are typically higher in the third
and fourth calendar quarters of each year. The following table sets forth the
Company's net sales for each of the periods presented.
<TABLE>
<CAPTION>
Fiscal Quarter Ended
----------------------------------------------- ------------------------------------------------------------------------
December 30, March 30, June 30, September 30, December 28, March 29, June 29, September 30, December 27, March 28,
1995 1996 1996 1996 1996 1997 1997 1997 1997 1998
----------- -------- -------- ------------- ------------ -------- -------- ------------ ----------- ---------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 140.9 $ 80.5 $ 94.6 $ 101.9 $ 141.9 $ 83.6 $ 95.5 $ 111.5 $ 150.0 $ 96.1
</TABLE>
24
<PAGE>
Results of Operations
This financial data, as well as all other data set forth herein, gives
effect to the reclassification by the Company of certain promotional expenses,
previously reported as a reduction of net sales, to selling expense, which
policy was adopted as of September 30, 1997. The amounts which have been
reclassified are $19.0 million, $17.5 million, $24.2 million and $24.0 million
for the years ended June 30, 1993, 1994, 1995 and 1996, respectively, $6.7
million for the three months ended September 30, 1995, $6.9 million for the
Transition Period ended September 30, 1996, $24.1 million for the twelve months
ended September 30, 1996, and $15.4 million for the six months ended March 29,
1997. The Company believes that this reclassification is consistent with the
method used by other consumer products companies.
The following table sets forth the percentage relationship of certain
items in the Company's statement of operations to net sales for the periods
presented:
<TABLE>
<CAPTION>
Fiscal Year
Ended Transition Six Months
--------------------- Three Months Period Twelve Months Fiscal Year Ended
Ended Ended Ended Ended ----------------------
June 30, June 30, September September September September March March
1995 1996 30, 1995 30, 1996 30, 1996 30, 1997 29, 1997 28, 1998
---------- ---------- ------------- ----------- -------------------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales .................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ........... 57.1 56.5 59.7 58.2 56.9 54.2 55.9 52.0
----- ----- ----- ------ ------ ----- ----- -----
Gross profit ................. 42.9 43.5 40.3 41.8 43.1 45.8 44.1 48.0
Selling expense .............. 26.2 27.5 27.9 27.3 27.4 28.2 27.2 29.9
General and
administrative expense....... 7.9 7.5 6.9 8.4 7.9 7.5 6.8 7.1
Research and
development expense ......... 1.2 1.3 1.2 1.5 1.3 1.4 1.5 1.2
Recapitalization and other
special charges ............. -- -- -- 27.9 6.8 0.7 2.1 1.6
----- ----- ----- ------ ------ ----- ----- -----
Income (loss) from
operations .................. 7.6% 7.2% 4.3% (23.3%) ( 0.3%) 8.0% 6.5% 8.2%
</TABLE>
Six Months Ended March 28, 1998 Compared to Six Months Ended March 29, 1997
Net Sales. Net sales were $246.1 million for the six months ended March
28, 1998 (the "1998 Six Month Period"), an increase of $20.5 million, or 9.1%,
from $225.6 million for the six months ended March 29, 1997 (the "1997 Six
Month Period"). Increased sales of alkaline batteries, hearing aid batteries,
and specialty batteries were somewhat offset by the continuing decline in the
domestic market for heavy duty batteries.
Alkaline general battery sales for the 1998 Six Month Period exceeded
alkaline general battery sales for the 1997 Six Month Period by approximately
26%, or $25.1 million, as a result of strong promotional programs, a price
increase implemented in the summer of 1997, sales to new customers, and
increased volume with existing customers, all of which increased market share.
Within specialty battery products, hearing aid battery sales increased
approximately 9% due primarily to growth in the market and the November 1997
acquisition of Brisco. In addition, net sales in the 1998 Six Month Period
included $2.2 million of specialty battery sales related to the DPP
acquisition.
Gross Profit. Gross profit increased $18.8 million, or 18.9%, to $118.2
million for the 1998 Six Month Period, from $99.4 million for the 1997 Six
Month Period, primarily as a result of increased sales of higher margin
alkaline batteries and decreased sales of lower margin heavy duty batteries.
Gross profit margins increased to 48.0% in the 1998 Six Month Period from 44.1%
in the 1997 Six Month Period due primarily to the change in sales mix toward
alkaline and away from heavy duty batteries, the alkaline price increase
implemented in the summer of 1997, and alkaline manufacturing cost
improvements.
Selling Expense. Selling expense increased $12.4 million, or 20.2%, to
$73.7 million for the 1998 Six Month Period from $61.3 million for the 1997 Six
Month Period. Selling expense as a percent of net sales increased to 29.9% in
the 1998 Six Month Period from 27.2% in the 1997 Six Month Period. The increase
in dollars and as a percent of sales was due primarily to increased advertising
and promotional spending which resulted in the increased alkaline general
battery sales. In addition, selling expense was lower during the 1997 Six Month
Period while a new advertising agency and promotional strategies were under
review.
25
<PAGE>
General and Administrative Expense. General and administrative expense
increased $2.1 million, or 13.7%, to $17.4 million for the 1998 Six Month
Period from $15.3 million for the 1997 Six Month Period primarily as a result
of higher costs associated with information system improvements worldwide and
increased expenses associated with being a publicly held company.
Research and Development Expense. Research and development expense
decreased $0.4 million to $3.0 million for the 1998 Six Month Period from $3.4
million for the 1997 Six Month Period primarily as a result of the increased
resources assigned to the development of an on-the-label battery tester in 1997
which management decided not to implement.
Other Special Charges. In March 1998, the Company recorded net charges of
$5.2 million including (i) a $1.7 million charge associated with consolidating
domestic battery packaging operations and outsourcing the manufacture of heavy
duty batteries, (ii) a $2.0 million charge associated with closing the
Company's Appleton, Wisconsin manufacturing plant and consolidating it into its
Portage, Wisconsin manufacturing plant, (iii) a $3.9 million charge associated
with closing the Company's Newton Aycliffe, United Kingdom facility, phasing
out direct distribution in the United Kingdom and closing one of the Company's
German sales offices, and (iv) a $2.4 million gain on the sale of the Company's
previously closed Kinston, North Carolina, facility. The Company expects to
record an additional $2.0 million of costs in subsequent periods related to
these restructuring and cost rationalization initiatives.
For the 1998 Six Month Period, the Company recorded net charges of $4.0
million. This includes the $5.2 million charge recorded in March offset by
income of $1.2 million in connection with the buy-out of deferred compensation
agreements with certain former employees recorded earlier in the fiscal year.
For the 1997 Six Month Period, the Company recorded charges of $4.7 million for
organizational restructuring in the U.S., the discontinuation of certain
manufacturing operations in the United Kingdom, and the closing of its Kinston,
North Carolina, facility. At September 30, 1997, the balance of these 1997
reserves was $1.9 million of which the Company expended $1.1 million in the
1998 Six Month Period and currently expects the balance to be expended by the
end of fiscal 1998.
Income From Operations. Income from operations increased $5.4 million, or
36.7%, to $20.1 million from $14.7 million for the 1997 Six Month Period. This
increase was due primarily to increased sales and gross profit offset by
increased selling and general and administrative expense. Income from
operations before special charges increased $4.7 million, or 24.2%, to $24.1
million from $19.4 million for the 1997 Six Month Period. As a percentage of
sales income from operations for the 1998 Six Month Period increased to 8.2%
from 6.5% for the 1997 Six Month Period.
Interest Expense. Interest expense decreased $5.1 million, or 38.1%, to
$8.3 million for the 1998 Six Month Period from $13.4 million for the 1997 Six
Month Period. This decrease was primarily as a result of decreased indebtedness
due to the application of proceeds of the Company's IPO in November 1997. In
addition to the effects of the IPO on the 1998 Six Month Period, the 1997 Six
Month Period interest expense included a $2.0 million write-off of unamortized
debt issuance costs.
Other Expense (Income). For the 1998 Six Month Period, interest income and
foreign exchange gain totaled $(0.4) million compared to $0.3 million of net
expense in the 1997 Six Month Period, attributed to foreign exchange losses
somewhat offset by interest income.
Income Tax Expense. The Company's effective tax rate was 37.7% for the
1998 Six Month Period, compared to 31.9% for the 1997 Six Month Period. This
more favorable tax rate in 1997 was due primarily to the Company's Foreign
Sales Corporation ("FSC") benefiting 1997 more than 1998.
Extraordinary Item. In the 1998 Six Month Period, the Company recorded
extraordinary expense of $2.0 million net of income taxes for the premium
payment on the redemption of a portion of the Company's Senior Subordinated
Notes.
Net Income. For the 1998 Six Month Period, net income was $5.6 million
compared to $0.7 million in the 1997 Six Month Period.
26
<PAGE>
Fiscal Year Ended September 30, 1997 Compared to Twelve Months Ended
September 30, 1996
Net Sales. The Company's net sales increased $14.7 million, or 3.5%, to
$432.6 million in fiscal 1997 from $417.9 million in the twelve months ended
September 30, 1996, primarily due to higher sales of alkaline batteries and
lithium batteries, offset in part by decreases in sales of heavy duty
batteries, lantern batteries and Renewal rechargeables. In the last quarter of
fiscal 1997, net sales increased $9.6 million, or 9.4%, to $111.5 million from
$101.9 million in the Transition Period, primarily due to higher sales of
alkaline batteries attributed to the introduction of a 4% price increase on
alkaline batteries in the U.S. phased in beginning May 1997, significant
promotional programs, and sales to new accounts.
Sales of alkaline batteries increased as a result of the launch of a new
integrated advertising campaign emphasizing the alkaline brand, new product
graphics and packaging (designed to build brand awareness and the Company's
value brand position), and strong promotional programs in the Company's fourth
fiscal quarter. The Company also gained significant new distribution on the
strength of this program.
Lithium sales increased primarily due to increased sales of computer clock
and memory back-up batteries to Compaq Computers and SGS Thomson, two of the
Company's larger OEM (Original Equipment Manufacturers) customers.
Sales of heavy duty and lantern batteries decreased primarily due to
declines in the market as consumers move toward alkaline batteries away from
heavy duty batteries. Lantern battery volume was also adversely impacted by the
migration to reflective tape in place of flashing lights on construction
barricades.
Hearing aid battery sales increased as a result of continued growth in the
overall hearing aid battery market. The Company's market leadership position in
this product line has resulted in new distribution gains in the retail channel,
the fastest growing channel for hearing aid batteries as consumers shift their
purchases toward this channel.
Net sales of lighting products increased slightly over the prior twelve
months due primarily to growth in key mass merchandiser accounts and wholesale
clubs.
Dollar sales of Renewal rechargeables were down approximately 12% due
primarily to the Company's decision to decrease prices of the chargers by 33%
in the first quarter of fiscal 1997 to reposition the product and encourage
consumers to purchase the system. Unit sales of chargers and batteries combined
were approximately 7% higher than the prior twelve months.
Gross Profit. Gross profit increased $18.0 million, or 10.0%, to $198.0
million in fiscal 1997 from $180.0 million for the twelve months ended
September 30, 1996. Gross profit as a percentage of net sales increased to
45.8% in fiscal 1997 from 43.1% in the prior twelve months. These increases are
attributed to increased sales of higher margin alkaline batteries, the
introduction of a 4% price increase on alkaline batteries in the U.S. phased in
beginning May 1997, and lower manufacturing costs as a result of cost
rationalization initiatives. Gross profit increased $12.7 million, or 29.8%, to
$55.3 million in the three months ended September 30, 1997 from $42.6 million
in the Transition Period, for these same reasons.
Selling Expense. Selling expense increased $7.7 million, or 6.7%, to
$122.1 million in fiscal 1997 from $114.4 million in the twelve months ended
September 30, 1996 due primarily to increased marketing expense to support the
launch of the Company's new graphics and packaging and increased consumer
promotions on the old graphics and packaging to help retailers promote this
product. These increases were partially offset by reduced advertising expense
while the Company developed its new advertising program. Selling expense
increased as a percentage of net sales to 28.2% in fiscal 1997 from 27.4% in
the prior twelve months because of increased marketing expenses.
General and Administrative Expense. General and administrative expense
decreased $0.8 million, or 2.4%, to $32.2 million in fiscal 1997 from $33.0
million in the twelve months ended September 30, 1996 due in part to cost
rationalization initiatives which included the elimination of the use of a
corporate aircraft. These decreases were partially offset by the expense
related to a new management incentive program implemented for fiscal 1997.
There were no management incentives earned during the twelve months ended
September 30, 1996. As a percentage of net sales, general and administrative
expense decreased to 7.5% in fiscal 1997 from 7.9% in the prior twelve months.
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Research and Development Expense. Research and development expense
increased $0.6 million, or 10.7%, to $6.2 million for fiscal 1997 from $5.6
million for the twelve months ended September 30, 1996 due primarily to the
development of an on-the-label battery tester which the Company decided not to
introduce.
Recapitalization and Other Special Charges. During fiscal 1997, the
Company recorded special charges of $3.0 million compared to $28.4 million
recorded in the twelve months ended September 30, 1996 as discussed above under
"Effect of Recapitalization." The current year amount represents the net
charges for organizational restructuring in the United States, the
discontinuation of certain manufacturing operations at the Company's Newton
Aycliffe, United Kingdom facility and the discontinuation of certain
manufacturing operations at the Company's facility in Kinston, North Carolina
partially offset by a credit of $2.9 million related to the curtailment of the
Company's defined benefit pension plan covering all domestic non-union
employees.
Income from Operations. Income from operations increased $35.9 million to
$34.5 million in fiscal 1997 from a loss of $(1.4) million for the twelve
months ended September 30, 1996. The Company's Recapitalization and other
special charges decrease of $25.4 million in combination with increased gross
profits were partially offset by increased operating expenses related to the
new marketing and advertising programs discussed above.
Interest Expense. Interest expense increased $14.0 million to $24.5
million in fiscal 1997 from $10.5 million in the prior twelve months due
primarily to increased indebtedness associated with the Recapitalization and a
write-off of $2.0 million of unamortized debt issuance costs related to the
Bridge Notes the Company issued in September 1996 which were refinanced in
fiscal 1997.
Net Income. Net income increased $16.4 million to $6.2 million in fiscal
1997 from a net loss of $(10.2) million in the twelve months ended September
30, 1996 primarily due to increased income from operations as discussed above
partially offset by increased interest expense due to the Recapitalization. The
Company's effective tax rate for fiscal 1997 was 35.6% compared to an effective
tax benefit rate of 31.0% for the prior twelve months due primarily to some of
the Recapitalization expenses in the prior twelve months being non-tax
deductible and the tax benefits of Rayovac International Corporation, a
domestic international sales corporation ("DISC") owned by the shareholders in
the prior twelve months. The DISC was terminated in August 1996 and replaced
with Rayovac Foreign Sales Corporation, a foreign sales corporation, in fiscal
1997 which generated fewer tax benefits in fiscal 1997.
Net income for the prior twelve months also decreased $1.6 million
resulting from an extraordinary loss on the early retirement of debt related to
the Recapitalization.
Fiscal Year Ended September 30, 1997 Compared to Transition Period Ended
September 30, 1996
Results of operations for fiscal 1997 include amounts for a twelve-month
period, while results for the Transition Period include amounts for a
three-month period. Results (in terms of dollars) for these periods are not
directly comparable. Accordingly, management's discussion and analysis for
these periods is generally based upon a comparison of specified results as a
percentage of net sales.
Net Sales. The Company's net sales increased $330.7 million to $432.6
million in fiscal 1997 from $101.9 million in the Transition Period due
primarily to fiscal 1997 including twelve months compared to three months in
the Transition Period. Sales during the Transition Period were unfavorably
impacted by the diversion of management attention and other Company resources
on matters associated with the pending Recapitalization.
Gross Profit. Gross profit increased $155.4 million to $198.0 million in
fiscal 1997 from $42.6 million in the Transition Period. As a percentage of net
sales, gross profit increased to 45.8% in fiscal 1997 from 41.8% in the
Transition Period due to selling more higher margin products like alkaline and
hearing aid batteries in fiscal 1997, the alkaline price increase discussed
above, and lower manufacturing costs attributed to cost rationalization
initiatives.
Selling Expense. Selling expense increased $94.3 million to $122.1 million
in fiscal 1997 from $27.8 million in the Transition Period. As a percentage of
net sales, selling expense increased to 28.2% in fiscal 1997 from 27.3% in the
Transition Period due to increased promotional spending to support the new
alkaline battery graphics and packaging, the new advertising program to build
brand awareness and increased spending to gain new distribution.
General and Administrative Expense. General and administrative expense
increased $23.6 million to $32.2 million in fiscal 1997 from $8.6 million in
the Transition Period. As a percentage of net sales, general and
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administrative expense decreased to 7.5% in fiscal 1997 from 8.4% in the
Transition Period attributed to the effects of cost rationalization
initiatives.
Research and Development Expense. Research and development expense
increased $4.7 million to $6.2 million in fiscal 1997 from $1.5 million in the
Transition Period. As a percentage of net sales, research and development
expense decreased slightly to 1.4% in fiscal 1997 from 1.5% in the Transition
Period due primarily to the effects of the cost rationalization initiatives.
Recapitalization and Other Special Charges. Recapitalization and other
special charges decreased by $25.4 million, or 89.4%, to $3.0 million in fiscal
1997 from $28.4 million in the Transition Period which is explained above in
the discussion of fiscal 1997 compared to the twelve months ended September 30,
1996.
Income (loss) from Operations. Income (loss) from operations increased
$58.2 million to $34.5 million in fiscal 1997 from $(23.7) million in the
Transition Period. As a percentage of net sales, income (loss) from operations
increased to 8.0% in fiscal 1997 from (23.3)% in the Transition Period for the
reasons discussed above.
Net Income (loss). Net income (loss) for fiscal 1997 increased $27.1
million to $6.2 million from $(20.9) million in the Transition Period. As a
percentage of net sales, net income (loss) increased to 1.4% in fiscal 1997
from (20.5)% in the Transition Period primarily due to significant
Recapitalization and other special charges in the Transition Period. In
addition, an extraordinary loss on the early retirement of debt decreased net
income in the Transition Period by $1.6 million, net of income taxes. The
effective tax rate for fiscal 1997 was 35.6% compared to 31.6% in the
Transition Period due primarily to some of the Recapitalization expenses being
non-tax deductible in the Transition Period.
Transition Period Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
Net Sales. The Company's net sales decreased $5.4 million, or 5.0%, to
$101.9 million in the Transition Period from $107.3 million in the three months
ended September 30, 1995 (the "Prior Fiscal Year Period") primarily due to
decreased sales to the food and drug store retail channels and the Company
having made sales to certain retail customers in connection with promotional
orders after the Transition Period which were made during the Prior Fiscal Year
Period.
Gross Profit. Gross profit decreased $0.6 million, or 1.4%, to $42.6
million in the Transition Period from $43.2 million in the Prior Fiscal Year
Period, primarily as a result of decreased sales in the Transition Period, as
discussed above. Gross profit increased as a percentage of net sales to 41.8%
in the Transition Period from 40.3% in the Prior Fiscal Year Period due
primarily to a lower proportion of promotion sales as discussed above.
Selling Expense. Selling expense decreased $2.1 million, or 7.0%, to $27.8
million in the Transition Period from $29.9 million in the Prior Fiscal Year
Period, primarily due to decreased advertising expense in the Transition
Period.
General and Administrative Expense. General and administrative expense
increased $1.2 million, or 16.2%, to $8.6 million in the Transition Period from
$7.4 million in the Prior Fiscal Year Period, primarily as a result of the
Company having incurred certain expenditures during the Transition Period which
were incurred subsequent to the Prior Fiscal Year Period.
Research and Development Expense. Research and development expense
increased $0.2 million, or 15.4%, to $1.5 million in the Transition Period from
$1.3 million in the Prior Fiscal Year Period, primarily as a result of
increased product development efforts.
Recapitalization and Other Special Charges. During the Transition Period,
the Company recorded charges of $28.4 million, including non-recurring charges
related to the Recapitalization and other special charges.
Non-recurring charges of $12.3 million related to the Recapitalization
include (i) $5.0 million of advisory, legal and consulting fees and (ii) $7.3
million of stock option compensation, severance payments and employment
contract settlements for the benefit of certain present and former officers,
directors and management of the Company.
Other special charges of $16.1 million include (i) $2.7 million of charges
related to the discontinuation of certain manufacturing operations at the
Company's Newton Aycliffe, United Kingdom facility; (ii) $1.7 million of
charges for deferred compensation plan obligations to former officers of the
Company resulting from the curtailment of the plan; (iii) $1.5 million of
charges reflecting the present value of lease payments for land which new
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management determined would not be used for any future productive purpose; (iv)
$5.6 million in costs and asset writedowns principally related to changes in
Renewal Power Station pricing strategies adopted by new management subsequent
to the Recapitalization and prior to September 30, 1996; and (v) $4.6 million
of termination benefits and other charges.
Income (loss) from Operations. Income (loss) from operations decreased
$28.3 million to $(23.7) million in the Transition Period from $4.6 million in
the Prior Fiscal Year Period for the reasons discussed above.
Net Income (loss). Net income (loss) for the Transition Period decreased
$22.3 million to $(20.9) million from $1.4 million in the Prior Fiscal Year
Period, primarily because of non-recurring charges related to the
Recapitalization and other special charges discussed above. In addition,
amortization of deferred finance charges related to the Bridge Notes and an
extraordinary loss on the early retirement of debt decreased net income in the
Transition Period by $2.6 million, net of income taxes.
Transition Period Ended September 30, 1996 Compared to Fiscal Year Ended June
30, 1996
Results of operations for the Transition Period Ended September 30, 1996
include amounts for a three-month period, while results for the fiscal year
ended June 30, 1996 include amounts for a twelve-month period. Results (in
terms of dollar amounts) for these periods are not directly comparable.
Accordingly, management's discussion and analysis for these periods is
generally based upon a comparison of specified results as a percentage of net
sales.
Net Sales. The Company's net sales decreased $321.5 million, or 75.9%, to
$101.9 million in the Transition Period from $423.4 million in fiscal 1996
because the Transition Period included only three months of net sales as
compared to twelve months in fiscal 1996. Overall pricing was relatively
constant between the two periods.
Gross Profit. Gross profit decreased $141.4 million, or 76.8%, to $42.6
million in the Transition Period from $184.0 million in fiscal 1996. As a
percentage of net sales, gross profit decreased to 41.8% in the Transition
Period from 43.5% in fiscal 1996, primarily because the products sold during
the Transition Period carried a higher average unit cost than the overall
average unit cost of products sold in fiscal 1996 due to seasonal sales trends.
Selling Expense. Selling expense decreased $88.7 million, or 76.1%, to
$27.8 million in the Transition Period from $116.5 million in fiscal 1996. As a
percentage of net sales, selling expenses decreased to 27.3% in the Transition
Period from 27.5% in fiscal 1996, primarily as a result of decreased
advertising expense in the Transition Period.
General and Administrative Expense. General and administrative expense
decreased $23.2 million, or 73.0%, to $8.6 million in the Transition Period
from $31.8 million in fiscal 1996. As a percentage of net sales, general and
administrative expense increased to 8.4% in the Transition Period from 7.5% in
fiscal 1996, primarily as a result of the effects of seasonal sales trends in
the Transition Period.
Research and Development Expense. Research and development expense
decreased $3.9 million, or 72.2%, to $1.5 million in the Transition Period from
$5.4 million in fiscal 1996. As a percentage of net sales, research and
development expense increased to 1.5% in the Transition Period from 1.3% in
fiscal 1996, primarily as a result of increased support for ongoing product
development efforts.
Recapitalization and Other Special Charges. During the Transition Period
ended September 30, 1996, the Company recorded charges totaling $28.4 million,
including non-recurring charges related to the Recapitalization and other
special charges. Non-recurring charges of $12.3 million related to the
Recapitalization include (i) $5.0 million of advisory, legal and consulting
fees and (ii) $7.3 million of stock option compensation, severance payments and
employment contract settlements for the benefit of certain present and former
officers, directors and management of the Company.
Other special charges of $16.1 million include (i) $2.7 million of charges
related to the discontinuation of certain manufacturing operations at the
Company's Newton Aycliffe, United Kingdom facility; (ii) $1.7 million of
charges for deferred compensation plan obligations to former officers of the
Company resulting from the curtailment of the plan; (iii) $1.5 million of
charges reflecting the present value of lease payments for land which new
management determined would not be used for any future productive purpose; (iv)
$5.6 million in costs and asset writedowns principally related to changes in
Renewal Power Station pricing strategies adopted by new management subsequent
to the Recapitalization and prior to September 30, 1996; and (v) $4.6 million
of termination benefits and other charges.
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Income (loss) from Operations. Income (loss) from operations decreased
$54.0 million, or 178.2%, to $(23.7) million in the Transition Period from
$30.3 million in fiscal 1996. As a percentage of net sales, income (loss) from
operations decreased to (23.3)% in the Transition Period from 7.2% in fiscal
1996 for the reasons discussed above.
Net Income (loss). Net income (loss) decreased $35.2 million, or 246.2%,
to $(20.9) million for the Transition Period from $14.3 million in fiscal 1996.
As a percentage of net sales, net income (loss) decreased to (20.5)% in the
Transition Period from 3.4% in fiscal 1996, primarily because of non-recurring
charges related to the Recapitalization and other special charges discussed
above. In addition, amortization of deferred finance charges related to the
Bridge Notes and an extraordinary loss on the early retirement of debt
decreased net income in the Transition Period by $2.6 million, net of income
taxes.
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
Net Sales. The Company's net sales increased $8.2 million, or 2.0%, to
$423.4 million in fiscal 1996 from $415.2 million in fiscal 1995, primarily due
to higher unit sales of hearing aid batteries, Renewal rechargeable batteries
and alkaline batteries, offset in part by decreases in unit sales of heavy duty
and lantern batteries. Overall pricing was relatively constant between the two
periods. Sales of hearing aid batteries increased as a result of unit sales
growth in the overall hearing aid battery market as well as increased
penetration by the Company's Loud'n Clear line of hearing aid batteries and the
introduction of a new miniature size battery, used in hearing aids that fit
completely in the ear. Unit sales of Renewal rechargeable alkaline batteries
increased as a result of increased consumer awareness of the benefits of
Renewal over nickel-cadmium household rechargeable batteries and disposable
batteries and as replacement sales increased to retailers who had sold through
their high levels of fiscal 1995 Renewal inventory. The Company's unit sales of
alkaline batteries increased as the Company participated to a certain extent in
the continued overall growth in the market for alkaline batteries. Unit sales
of heavy duty batteries decreased due to the continued worldwide migration away
from heavy duty batteries and toward alkaline batteries while unit sales of
lantern batteries also decreased due to an overall decline in the lantern
battery market.
Gross Profit. Gross profit increased $5.9 million, or 3.3%, to $184.0
million in fiscal 1996 from $178.1 million in fiscal 1995. Gross profit
increased as a percentage of net sales to 43.5% in fiscal 1996 from 42.9% in
fiscal 1995. These increases are primarily attributable to increased sales of
higher margin products such as Renewal rechargeable batteries and hearing aid
batteries. In addition, the Company experienced manufacturing cost
improvements, particularly for alkaline battery raw materials related to the
Fennimore Expansion as discussed above.
Selling Expense. Selling expense increased $7.8 million, or 7.2%, to
$116.5 million in fiscal 1996 from $108.7 million in fiscal 1995. Selling
expense as a percentage of net sales increased to 27.5% in 1996 from 26.2% in
1995. These increases are primarily attributable to increased advertising costs
to promote the Renewal product line as discussed above.
General and Administrative Expense. General and administrative expense
decreased $1.1 million, or 3.3%, to $31.8 million in fiscal 1996 from $32.9
million in fiscal 1995. General and administrative expense as a percentage of
net sales decreased from 7.9% in fiscal 1995 to 7.5% in fiscal 1996. These
decreases occurred primarily because the $4.0 million payment of management
incentives in 1995 was not repeated in fiscal 1996.
Research and Development Expense. Research and development expense
increased $0.4 million, or 8.0%, to $5.4 million in fiscal 1996 from $5.0
million in fiscal 1995 as a result of continued support for ongoing product
development efforts.
Income from Operations. Income from operations decreased $1.2 million, or
3.8%, to $30.3 million, or 7.2% of net sales in fiscal 1996, from $31.5
million, or 7.6% of net sales, in fiscal 1995 for the reasons discussed above.
Net Income. Net income decreased $2.1 million, or 12.8%, to $14.3 million
for fiscal 1996 from $16.4 million in fiscal 1995, principally as a result of
decreased income from operations and higher effective tax rates, which
increased from 27.4% in 1995 to 32.9% in 1996. The Company's effective income
tax rates in fiscal 1996 and fiscal 1995 were impacted by the income tax
benefits of Rayovac International Corporation, a domestic international sales
corporation ("DISC") owned by the Company's shareholders, and fiscal 1995 was
also impacted by the utilization of a foreign net operating loss carryforward.
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Liquidity and Capital Resources
For the 1998 Six Month Period, net cash provided by operating activities
decreased $30.8 million to $4.4 million from $35.2 million for the 1997 Six
Month Period. The decrease was due primarily to increased inventory levels in
the current year to support the growth in the business whereas a significant
reduction in excess inventory was experienced in the prior year. Costs
associated with the 1997 restructuring initiatives were funded from cash
provided from operating activities and the Company currently expects to
similarly fund the 1998 restructuring initiatives with cash provided from
operating activities.
Capital expenditures for the 1998 Six Month Period were $6.7 million, an
increase of $4.1 million from $2.6 million in the 1997 Six Month Period. This
increase reflects continued spending on the implementation of new computer
systems in fiscal 1998 and the down payment on a new alkaline production line
for one of the Company's manufacturing facilities.
In March 1998, the Company sold its Kinston, North Carolina, facility for
approximately $3.3 million. The Company also acquired DPP for $4.7 million plus
incentive payments over four years which are anticipated to total approximately
$2.7 million. The initial $4.7 million acquisition price consisted of $3.2
million in cash (of which $0.5 million is to be paid in cash after a specified
time period for resolution of acquisition related claims), and $1.5 million of
assumed bankers' acceptances. In November 1997, the Company acquired Brisco for
approximately $4.9 million.
Capital expenditures for fiscal 1997 were $10.9 million, an increase of
$2.5 million from the prior twelve months, due primarily to new computer
information systems purchased in September 1997. Capital expenditures for
fiscal 1996 and the Transition Period reflected maintenance level spending.
Spending will continue on the implementation of the new computer systems in
fiscal 1998 which is expected to be substantially completed by mid-1999.
The Company currently expects an increase in capital expenditures to
approximately $18.0 million in fiscal 1998 (including the $6.7 million expended
in the first six months of the fiscal year) due to alkaline capacity expansion,
alkaline vertical integration programs, and continued spending on new computer
information systems. The Company believes that cash flow from operating
activities and periodic borrowings under its existing credit facilities will be
adequate to meet the Company's short-term and long-term liquidity requirements
prior to the maturity of those credit facilities, although no assurance can be
given in this regard. On December 30, 1997, the Credit Agreement dated
September 12, 1996, was amended. The Amended Credit Agreement provides for more
favorable borrowing costs and covenants consistent with the Company's improved
credit position resulting from the paydown of debt with the net proceeds of the
IPO. The Amended Credit Agreement includes a five-year reducing Revolver
Facility of $90.0 million and a five-year amortizing Acquisition Facility of
$70.0 million. The Revolver Facility is reduced by $10.0, $15.0 and $15.0
million respectively on December 31, 1999, 2000 and 2001 and expires on
December 31, 2002. The Acquisition Facility provides up to $70.0 million in
loans for qualifying acquisitions during a one-year commitment period expiring
December 31, 1998. Debt obtained under the Acquisition Facility is subject to
quarterly amortization commencing March 31, 1999 through December 31, 2002. As
of March 28, 1998, $56.1 million was outstanding on the Revolver Facility, with
approximately $5.8 million utilized for outstanding letters of credit, and $4.2
million was outstanding under the Acquisition Facility. See "Description of
Certain Indebtedness."
The Amended Credit Agreement contains financial covenants customary and
usual for credit facilities of this type, including those involving limitations
on liens, limitations on the disposition of assets, limitations on loans and
investments, limitations on lease obligations, maintenance of minimum interest
coverage, maximum leverage ratios, restrictions on dividend payments,
distribution of assets and redemption of subordinated debt, limitations on sale
and leaseback transactions and limitations on issuance of guaranty obligations.
In particular, the Company may not permit to occur (i) an interest coverage
ratio for any computation period which is less than 3.0 to 1.0 or (ii) a
leverage ratio for the computation periods from December 31, 1997 through
September 30, 1999 which exceeds 3.75 to 1.0, for the computation periods from
December 31, 1999 through September 30, 2000 which exceeds 3.50 to 1.0 and for
the computation periods from December 31, 2000 and thereafter which exceeds
3.25 to 1.0. The Company also may not and may not permit any subsidiary to
create, incur, assume, suffer to exist or otherwise become or remain directly
or indirectly liable with respect to any additional indebtedness, except as
specifically contemplated by the Amended Credit Agreement. As of the date
hereof, the Company is in compliance with all covenants contained in the
Amended Credit Agreement.
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In addition, the Indenture also restricts, in some instances, the
Company's ability to incur additional indebtedness. Pursuant to the terms of
the Indenture, there is no limit on the additional amount of indebtedness the
Company may incur if the Fixed Charge Coverage Ratio (as defined in the
Indenture) for the Company's most recently ended four full fiscal quarters for
which internal financial statements are available immediately preceding the
date on which such additional indebtedness has been incurred would have been at
least 2.0 to 1.0, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional indebtedness
had been incurred at the beginning of such four-quarter period. In addition,
the Company may be able to incur additional indebtedness in certain
circumstances even if it does not satisfy the 2.0 to 1.0 test described above,
as set forth in the Indenture.
The Company is subject to various federal, state, local and foreign
environmental laws and regulations in the jurisdictions in which it operates,
including laws and regulations relating to discharges to air, water and land,
the handling and disposal of solid and hazardous waste and the cleanup of
properties affected by hazardous substances. Except for liabilities related to
the Velsicol Chemical and Morton International proceedings described under
"Business--Environmental Matters" as to which the Company cannot predict the
impact of such liabilities, the Company does not currently anticipate any
material adverse effect on its operations or financial condition or any
material capital expenditure as a result of its efforts to comply with
environmental laws and as of March 28, 1998 had reserved $1.6 million for known
on-site and off-site environmental liabilities. See Note 4 to Notes to
Condensed Consolidated Financial Statements for the six months ended March 28,
1998. Some risk of environmental liability is inherent in the Company's
business, however, and there can be no assurance that material environmental
costs will not arise in the future. The Company has been identified as a PRP
under CERCLA or similar state laws with respect to the past disposal of waste
and is a party to two lawsuits as to which there is insufficient information to
make a judgment as to the likelihood of a material impact on the Company's
operations, financial condition or liquidity at this time. The Company may be
named as a PRP at additional sites in the future, and the costs associated with
such additional or existing sites may be material. In addition, certain of the
Company's facilities have been in operation for decades and, over such time,
the Company and other prior operators of such facilities have generated and
disposed of wastes which are or may be considered hazardous such as cadmium and
mercury utilized in the battery manufacturing process. See "Risk
Factors--Environmental Matters" and "Business--Environmental Matters." The
Company engages in hedging transactions in the ordinary course of its business.
See Note 2.o. to Notes to the Company's Audited Consolidated Financial
Statements and Note 1 to Notes to Condensed Consolidated Financial Statements
for the six months ended March 28, 1998.
Computer Systems Upgrade
The Company is in the process of implementing its enterprise-wide,
integrated information system upgrade. The SAP system is also expected to
substantially address the Year 2000 issue. Management currently expects to
substantially complete implementation of the upgrade in mid-1999 and to spend
an estimated additional $1.0 million on Year 2000 issues. The Company presently
believes that with modifications to existing software and converting to new
software, the Year 2000 issue will not pose significant operational problems
for the Company's computer systems. However, there can be no assurance that
unforeseen difficulties will not arise for any of the Company, its customers or
vendors and that related costs will not thereby be incurred.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("FAS 130"), which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported
in a financial statement that is displayed with the same prominence as other
financial statements. FAS 130 requires that an enterprise (i) classify items of
other comprehensive income by their nature in a financial statement and (ii)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in-capital in the equity section of the
balance sheet. FAS 130 is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. The Company is evaluating the effect of
this pronouncement on its consolidated financial statements.
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In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("FAS 131"), which is effective for financial statements for periods beginning
after December 15, 1997. FAS 131 establishes standards for the way public
business enterprises are to report information about operating segments in
annual financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The Company is evaluating the effect of this pronouncement on its
consolidated financial statements.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits ("FAS No. 132"), which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable. FAS No. 132 is effective for fiscal years beginning after December
15, 1997. Restatement of disclosures for earlier periods provided for
comparative purposes is required unless the information is not readily
available. The Company is evaluating the effect of this pronouncement on its
consolidated financial statements.
34
<PAGE>
BUSINESS
General
The Company is the leading value brand and the third largest domestic
manufacturer of general batteries, and is the leading worldwide manufacturer of
hearing aid batteries. The Company is also the leading domestic manufacturer of
rechargeable household batteries and certain other specialty batteries,
including lantern batteries. In addition, the Company is a leading marketer of
heavy duty batteries and battery-powered lighting products and also markets
rechargeable batteries for cellular phones and video camcorders. The Rayovac
brand name was first used as a trademark for batteries in 1921 and is a well
recognized name in the battery industry. The Company attributes the longevity
and strength of its brand name to its high-quality products and to the success
of its marketing and merchandising initiatives.
The Company has established its position as the leading value brand in the
U.S. general alkaline battery market by focusing on the mass merchandiser
channel. The Company achieved this position by (i) offering batteries with
quality and performance substantially equivalent to batteries offered by its
principal competitors at a lower price, (ii) emphasizing innovative in-store
merchandising programs, and (iii) offering retailers attractive margins. The
Company has established its position as the leader in various specialty battery
niche markets through (i) continuous technological advances, (ii) creative
distribution and marketing, and (iii) strong relationships with industry
professionals and manufacturers. The Company sells and distributes its products
in several channels, including mass merchandisers and warehouse clubs; food,
drug and convenience stores; electronics specialty stores and department
stores; hardware and automotive centers; specialty retailers; hearing aid
professionals; and industrial and government/OEM. The Company markets all of
its branded products under the Rayovac[RegTM] name and selected products under
sub-brand names such as MAXIMUM[TM], Renewal[RegTM], Loud'n Clear[RegTM],
ProLine[RegTM], Lifex[TM], Power Station[RegTM], Workhorse[RegTM],
Roughneck[RegTM], Best Labs[RegTM], Ultracell[RegTM], XCell[RegTM] and
AIRPOWER[RegTM].
Business Strategy
In September 1996, the Company and the shareholders of the Company
completed the Recapitalization pursuant to which, among other things,
affiliates of Thomas H. Lee Company acquired for cash approximately 80% of the
outstanding Common Stock of Rayovac. David A. Jones was hired as Chief
Executive Officer of the Company to implement a new business strategy focused
on (i) reinvigorating the Rayovac brand name by raising consumer brand
awareness through, among other things, focused marketing and advertising, (ii)
growing Rayovac's market share by expanding distribution into new channels,
increasing sales to under-penetrated channels and customers, launching new
products, and selectively pursuing acquisitions and alliances, (iii) reducing
costs by rationalizing manufacturing and distribution, better utilizing
existing plant capacity, outsourcing products where appropriate, reducing
working capital, and downsizing corporate overhead, and (iv) improving employee
productivity by increasing training and education, upgrading information
systems, and implementing a pay-for-performance culture.
To implement its new strategy, the Company has undergone a significant
transformation since the Recapitalization.
Strengthened Senior Management Team. In addition to Mr. Jones, experienced
senior managers have been recruited to fill key positions: Kent J. Hussey, who
joined the Company as Executive Vice President of Finance and Administration
and Chief Financial Officer and was recently promoted to the position of
President and Chief Operating Officer; Merrell M. Tomlin, Senior Vice President
of Sales; Stephen P. Shanesy, Executive Vice President and General Manager of
General Batteries and Lights; and Randall J. Steward, Senior Vice President of
Finance and Chief Financial Officer. The new senior managers have over 75 years
of collective experience in the consumer products industry. In addition, the
current management team includes several key members who served the Company
prior to the Recapitalization, providing continuity and retaining significant
battery industry expertise. After giving effect to the Offerings, the nine
executive officers of the Company will beneficially own 10.2% of the
outstanding Common Stock (without giving effect to the Underwriters'
over-allotment options) on a fully diluted basis.
Restructured Operations. In March 1998, the Company announced
restructuring plans for its domestic and international operations designed to
maximize production and capacity efficiencies, reduce fixed costs, upgrade
existing technology and equipment, and improve customer service. Major elements
of the restructuring include (i) consolidating the Company's packaging
operations, (ii) outsourcing manufacturing of heavy duty batteries, and (iii)
35
<PAGE>
closing certain of the Company's existing manufacturing, packaging and
distribution facilities. The Company recorded a charge of $7.5 million in the
second quarter of the current fiscal year in connection with the restructuring
program and expects to record an additional $2.0 million of costs in subsequent
periods. The Company currently anticipates annual aggregate cost savings of the
restructuring program, after full implementation (currently expected in early
1999), to be approximately $5.0 million.
The restructuring further implements actions taken by the Company
following the Recapitalization to rationalize manufacturing and other costs,
including (i) consolidating certain manufacturing operations at the Company's
facilities and closing other facilities; (ii) sourcing some products previously
manufactured by the Company; (iii) implementing a significant organizational
restructuring and additional measures to rationalize manufacturing,
distribution and overhead costs; and (iv) eliminating costs associated with the
use of a corporate aircraft. The Company estimates the annual aggregate cost
savings associated with these earlier actions at approximately $8.6 million.
Such savings may not be indicative of actual savings in future periods because
of the likelihood of additional overhead or other costs in future periods in
support of business growth objectives. The Company believes that its current
manufacturing capacity remains sufficient to meet its anticipated production
requirements for the foreseeable future.
Reorganized Sales, Marketing and Administration by Distribution
Channel. Rayovac has realigned its marketing department, sales organization,
supply chain and support functions to better serve the diverse customer needs
within major distribution channels. Customer-focused teams are now organized to
serve the following distribution channels: mass merchandisers and warehouse
clubs; food, drug and convenience stores; electronics specialty stores and
department stores; hardware and automotive centers; specialty retailers;
hearing aid professionals; industrial and government/OEM. The Company believes
that sales to under-penetrated channels should increase as the dedicated teams
focus on implementing channel-specific marketing strategies, sales promotions
and customer service initiatives.
Launched New Sales and Marketing Programs. Rayovac has developed and
continues to implement broad new marketing initiatives designed to reinvigorate
the Rayovac brand name. Major steps completed to date include (i) selecting
Young & Rubicam as the Company's new advertising agency and developing its
first major national advertising campaign for its full line of general
batteries, (ii) launching a new and improved alkaline product line under the
MAXIMUM[TM] sub-brand, (iii) redesigning all product graphics and packaging to
convey a high-quality image and emphasize the Rayovac brand name, (iv)
extending the Company's existing contract with Michael Jordan to include his
representation for all Rayovac products, and (v) restructuring the Company's
sales representative network along distribution channels.
Reorganized Information Systems. The Company has completed an initial
overhaul of its information systems by (i) hiring an experienced Chief
Information Officer, (ii) outsourcing mainframe computer operations, (iii)
completing an enterprise software system analysis, and (iv) retaining outside
consultants to modernize and upgrade its data processing and telecommunications
infrastructure. The Company has purchased from SAP and begun implementing an
enterprise-wide, integrated information system to upgrade and modernize its
business operations, the majority of which is expected to be substantially
completed by mid-1999. When fully implemented, this system, along with efforts
by the Company's internal project team, is expected to reduce cycle times,
lower manufacturing and administrative costs, improve both asset and employee
productivity and substantially address the Year 2000 issue.
Growth Strategy
Rayovac believes it has significant growth opportunities in its businesses
and has developed strategies to increase sales, profits and market share. Key
elements of the Company's growth strategy are as follows:
Reinvigorate the Rayovac Brand Name. The Company is committed to
reinvigorating the Rayovac brand name after many years of underdevelopment. The
brand, originally introduced in 1921, has wide recognition in all markets where
the Company competes, but has lower awareness than the more highly advertised
Duracell and Energizer brands. The Company has initiated an integrated
advertising campaign using significantly higher levels of TV and print media.
In 1997, the Company launched a reformulated alkaline battery, Rayovac
MAXIMUM[TM], supported by new graphics, new packaging, a new advertising
campaign, and aggressive introductory retail promotions. The Company's
marketing and advertising initiatives are designed to increase awareness of the
Rayovac
36
<PAGE>
brand and to increase retail sales by heightening customers' perceptions of the
quality, performance and value of Rayovac products.
Leverage Value Brand Position. Rayovac believes it has a unique position
in the general battery market as the value brand in an industry in which the
leading three brands (Duracell, Energizer and Rayovac) account for
approximately 90% of sales. The Company's strategy is to provide products of
quality and performance equal to its major competitors in the general battery
market at a lower price to appeal to a large segment of the population desiring
a value brand. To demonstrate its value positioning, Rayovac offers comparable
battery packages at a lower price or, in some cases, more batteries for the
same price.
Expand Retail Distribution. Historically the Company had focused its sales
and marketing efforts on the mass merchandiser channel which accounted for 44%
of industry sales growth in the domestic alkaline battery market on a unit
basis over the past five years and has achieved a 19% unit share. The Company
believes its value brand positioned products and innovative merchandising
programs also make it an attractive supplier to other retail channels, which
represent a market of $1.7 billion or 69% of the general battery market. The
Company has reorganized its marketing, sales, and sales representative
organizations by channel in order to grow market share by (i) gaining new
customers, (ii) penetrating existing customers with a larger assortment of
products, (iii) offering a selection of products with high sell-through, and
(iv) utilizing more aggressive and channel specific promotional programs. The
Company believes that these initiatives have resulted in significant success
over the past fiscal year in gaining access to new accounts and expanding
product offerings to existing accounts and the Company intends to continue to
pursue these strategies.
Further Capitalize on Worldwide Leadership in Hearing Aid Batteries. The
Company seeks to increase its 52% worldwide market share in the hearing aid
battery segment, as it has done consistently for the past 10 years, by
leveraging its leading technology and dedicated sales and marketing
organizations. Rayovac is the only hearing aid battery manufacturer to
advertise its products and plans to continue to utilize Arnold Palmer as its
spokesperson in its print media campaign. Rayovac also markets large
multi-packs of hearing aid batteries which have rapidly gained consumer favor.
In November 1997, the Company acquired Brisco, which packages and distributes
hearing aid batteries in customized packaging to hearing health care
professionals in Germany and Holland as well as other European countries. In
March 1998, the Company acquired the battery distribution portion of Best Labs
in St. Petersburg, Florida, a distributor of hearing aid batteries in
customized packaging and a manufacturer of hearing instruments. The Company
believes that these acquisitions will enable the Company to further penetrate
markets for hearing aid batteries.
Develop New Markets. The Company intends to expand its business into new
markets for batteries and related products both domestically and
internationally by developing new products internally or selective
acquisitions. These acquisitions may focus on expansion into new technologies,
product lines or geographic markets and may be of significant size. In March
1998, the Company acquired the retail portion of the business of DPP, a full
line marketer of rechargeable batteries and accessories for cellular phones and
video camcorders. In conjunction with the acquisition of DPP, the Company has
announced the launch of a new line of rechargeable batteries for cordless
telephones. The Company may also pursue joint ventures or other strategic
marketing opportunities where appropriate to expand its markets or product
offerings. See "Risk Factors--Risks Associated with Future Acquisitions."
Introduce New Niche Products. The Company has developed leading positions
in several important niche markets, including those for lantern batteries and
lithium coin cells. The Company intends to continue selectively pursuing
opportunities to exploit under-served niche markets and to enter high-growth
specialty battery markets. In 1997, the Company entered the market for photo
and keyless entry batteries and recently introduced a line of products to
service the medical instrument and health services markets. In the lighting
products segment, where market share is driven by new product introductions,
the Company is introducing a number of attractively designed new products over
the next twelve months and intends to bring new products to the market in the
future on a six-month cycle.
Reposition the Renewal Rechargeable Alkaline Battery. The Company's
Renewal rechargeable battery is the only rechargeable alkaline battery in the
U.S. market, commanding a 68% market share of the rechargeable household
battery market through mass merchandisers, food and drug stores for the 52
weeks ended March 14, 1998. Since the Recapitalization, the Company has lowered
the price of Renewal rechargers by 33% to encourage consumers to purchase the
system and promoted Renewal's money-saving benefits. Renewal batteries present
a
37
<PAGE>
value proposition to consumers because Renewal batteries can be recharged over
25 times, providing 10 times the energy of disposable alkaline batteries at
only twice the retail price. In addition, alkaline rechargeables are superior
to nickel cadmium rechargeables (the primary competing technology) because they
provide more energy between charges, are sold fully charged, retain their
charge longer and are environmentally safer. The Company has focused sales
efforts for Renewal on distribution channels which the Company believes to be
more suited for this product, such as electronics specialty stores, and has
recently begun shipments to Radio Shack.
Battery Industry
The U.S. battery industry had aggregate sales in 1997 of approximately
$4.3 billion as set forth below.
<TABLE>
<CAPTION>
1997 U.S. Battery Industry Sales (In billions)
<S> <C>
Retail:
General ................................ $ 2.4
Hearing aid ............................ 0.2
Other specialty ........................ 0.9
Industrial, OEM and Government ......... 0.8
------
Total .................................. $ 4.3
======
</TABLE>
As set forth below, this segment has experienced steady growth, with
compound annual unit sales growth since 1990 of 4%.
RETAIL GENERAL BATTERY MARKET
Total Retail General Batteries
------------------------------
[LINE CHART DATA]
Dollars Units
(Millions) (Millions)
1990 1834 2225
1991 1912 2358
1992 2003 2543
1993 2099 2715
1994 2192 2910
1995 2316 3071
1996 2395 3156
1997 2431 3246
Source: A.C. Nielsen Scanner Data,
A.C. Nielsen Consumer Panel Data and Company estimates.
The U.S. battery industry is dominated by three manufacturers, (Duracell,
Energizer and Rayovac) each of which manufactures and markets a wide variety of
batteries. Together, these three accounted for approximately 90% of the U.S.
retail general battery market in calendar 1997. Retail sales of general and
specialty batteries represent the largest portion of the U.S. battery industry,
accounting for approximately 80% of sales in 1997. Batteries are popular with
many retailers because they provide attractive profit margins. As batteries are
an impulse purchase item, increasing display locations in stores tends to
generate increased sales.
The growth in retail sales of general batteries in the U.S. is largely due
to (i) the popularity and proliferation of battery-powered devices (such as
remote controls, personal radios and cassette players, pagers, portable compact
disc players, electronic and video games and battery-powered toys), (ii) the
miniaturization of battery-powered devices, which has resulted in consumption
of a larger number of smaller batteries, and (iii) increased purchases of
multiple-battery packages for household "pantry" inventory. These factors have
increased the average household usage of batteries from an estimated 23
batteries per year in 1986 to an estimated 36 batteries per year in 1997.
Similar to general retailing trends, increased battery sales through mass
merchandisers and warehouse clubs have driven the overall growth of retail
battery sales. Mass merchandisers accounted for 66% of the total increase in
general battery retail dollar sales from 1993 through 1997 and, together with
warehouse clubs, accounted for 41% of total retail battery sales in 1997.
In 1997, U.S. and worldwide retail sales of hearing aid batteries were
approximately $219 million and $565 million, respectively, and have grown at a
compound annual growth rate of 7% and 5%, respectively, over the last five
years. Growth in the hearing aid battery market has been driven by an aging
population; increases in hearing
38
<PAGE>
instrument device sales driven by technological advances, including
miniaturization, which provides higher cosmetic appeal and improved
amplification; and the higher replacement rates of smaller hearing instruments.
Other markets in which the Company operates include those for replacement
watch and calculator batteries, which had worldwide sales of approximately $924
million in 1997, photo batteries, which had worldwide sales of approximately
$660 million in 1997 and lithium coin cells, which had worldwide sales of
approximately $56 million in 1997.
Products
Rayovac develops, manufactures and markets a wide variety of batteries and
battery-powered lighting devices. The Company's broad line of products includes
(i) general batteries (including alkaline, heavy duty and rechargeable alkaline
batteries) and specialty batteries (including hearing aid, watch, photo,
keyless entry, and personal computer clock, memory back-up batteries,
rechargeable batteries for cordless telephones and rechargeable batteries,
battery chargers and accessories for cellular phones and camcorders) and (ii)
lighting products and lantern batteries. General batteries (D, C, AA, AAA and
9-volt sizes) are used in devices such as radios, remote controls, personal
radios and cassette players, pagers, portable compact disc players, electronic
and video games and battery-powered toys, as well as a variety of
battery-powered industrial applications. Of the Company's specialty batteries,
button cells are used in smaller devices (such as hearing aids and watches),
lithium coin cells are used in cameras, calculators, communication equipment,
medical instrumentation and personal computer clocks and memory back-up
systems, and lantern batteries are used almost exclusively in battery-powered
lanterns. The Company's lighting products include flashlights, lanterns and
similar portable products.
Net sales data for the Company's products as a percentage of net sales for
fiscal 1995, fiscal 1996, the Transition Period, fiscal 1997 and six months
ended March 29, 1997 and March 28, 1998 are set forth below.
<TABLE>
<CAPTION>
Percentage of Company Net Sales
--------------------------------------------------------------------------------------
Transition
Period Fiscal Year
Fiscal Year Ended Ended
Ended June 30, September 30, September 30, Six Months Ended
--------------------- --------------- --------------- --------------------------------
1995 1996 1996 1997 March 29, 1997 March 28, 1998
Product Type ---------- ---------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Battery Products:
Alkaline .......................... 43.4% 43.6% 41.4% 45.0% 43.7% 50.2%
Heavy Duty ........................ 14.1 12.2 12.7 10.4 11.3 8.3
Rechargeable Batteries ............ 5.6 7.1 5.1 5.5 6.3 5.6
Hearing Aid ....................... 12.7 14.6 14.3 14.8 14.2 14.2
Other Specialty Batteries ......... 10.0 8.6 10.1 9.8 9.6 8.0
----- ----- ----- ----- ----- -----
Total ........................... 85.8 86.1 83.6 85.5 85.1 86.3
Lighting Products and
Lantern Batteries ................ 14.2 13.9 16.4 14.5 14.9 13.7
----- ----- ----- ----- ----- -----
Total ........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
39
<PAGE>
Battery Products
A description of the Company's major battery products including their
typical uses is set forth below.
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
General Batteries Hearing Aid
Batteries
- --------------------------------------------------------------------------------
Technology Alkaline Zinc Zinc Air
- --------------------------------------------------------------------------------
Types/ - Disposable Heavy Duty --
Common - Rechargeable (Zinc Chloride)
Name:
- --------------------------------------------------------------------------------
Brand; Rayovac; Rayovac Rayovac; Loud'n
Sub-brand MAXIMUM, Clear, ProLine,
Names(1): Renewal, Best Labs,
Power Ultracell
Station XCell and
AIRPOWER
- --------------------------------------------------------------------------------
Sizes: D, C, AA, AAA, 9-volt(2) 5 sizes
for both Alkaline and Zinc
- --------------------------------------------------------------------------------
Typical Uses: All standard household Hearing
applications including aids
pagers, personal radios
and cassette players,
remote controls and a
wide variety of
industrial applications
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Other Specialty Batteries Lantern
Batteries
- --------------------------------------------------------------------------------
Technology Lithium Silver Lithium Ion, Zinc
Nickel Metal
Hydride, Nickel
Cadmium and
Sealed Lead
Acid
- --------------------------------------------------------------------------------
Types/ -- -- Rechargeable Lantern
Common (Alkaline, Zinc
Name: Chloride and
Zinc Carbon)
- --------------------------------------------------------------------------------
Brand; Rayovac; Rayovac Rayovac Rayovac
Sub-brand Lifex
Names(1):
- --------------------------------------------------------------------------------
Sizes: 5 primary 10 primary 35 sizes Standard
sizes sizes lantern
- --------------------------------------------------------------------------------
Typical Uses: Personal Watches Cellular phones, Beam lanterns,
computer camcorders and Camping
clocks and cordless phones Lanterns
memory
back-up
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company also produces and supplies private label brands in selected
categories.
(2) The Company does not produce 9-volt rechargeable batteries.
Products
Alkaline Batteries. Alkaline batteries are based on technology which first
gained widespread application during the 1980s. Alkaline batteries provide
greater average energy per cell and considerably longer service life than
traditional zinc chloride (heavy duty) or zinc carbon (general purpose)
batteries, the dominant battery types throughout the world until the 1980s.
Alkaline performance superiority has resulted in alkaline batteries steadily
displacing zinc chloride and zinc carbon batteries. In the domestic retail
general battery market, for instance, alkaline batteries represented
approximately 87% of total battery unit sales in calendar 1997, despite higher
per battery prices than zinc batteries.
Rayovac produces a full line of alkaline batteries including D, C, AA, AAA
and 9-volt size batteries for both consumers and industrial customers. The
Company's alkaline batteries are marketed and sold primarily under the Rayovac
MAXIMUM brand, although the Company also engages in limited private label
manufacture of alkaline batteries. AA and AAA size batteries are often used
with smaller electronic devices such as remote controls, photography equipment,
personal radios and cassette players, pagers, portable compact disc players and
electronic and video games. C and D size batteries are generally used in
devices such as flashlights, lanterns, radios, cassette players and battery-
powered toys. 9-volt size batteries are generally used in fire alarms, smoke
detectors and communication devices.
The Company regularly tests the performance of its alkaline batteries
against those of its competitors across a number of applications and battery
sizes using American National Standards Institute ("ANSI") testing criteria,
the standardized testing criteria generally used by industry participants to
evaluate battery performance, as well as its own specific product device
testing, which the Company believes may provide more relevant information to
consumers. Although relative performance varies based on battery size and
device tests, the average performance of the Company's alkaline batteries and
those of its competitors are substantially equivalent. The Company's
performance comparison results are corroborated by published independent test
results.
40
<PAGE>
For calendar 1997 the Company had an 11% overall alkaline battery unit
market share and a 19% alkaline battery unit market share within the mass
merchandiser retail channel.
Heavy Duty Batteries. Heavy duty batteries include zinc chloride batteries
designed for low and medium-drain devices such as lanterns, flashlights, radios
and remote controls. In March 1998, the Company announced a restructuring of
operations, including the outsourcing of the manufacturing of heavy duty
batteries. In fiscal 1997, the Company produced a full line of heavy duty
batteries, although AA, C and D size heavy duty batteries together accounted
for 90% of the Company's heavy duty battery unit sales in fiscal 1997.
The Company had a 35% unit market share in the heavy duty battery market
through mass merchandisers, food and drug stores for the 52 weeks ended March
14, 1998. Generally, the size of the heavy duty battery market has been
decreasing because of increased sales of alkaline batteries for uses
traditionally served by non-alkaline batteries.
Rechargeable Batteries. The Company's Renewal rechargeable battery is the
only rechargeable alkaline battery in the U.S. market, commanding a 68% market
share of the rechargeable household battery market through mass merchandisers,
food and drug stores for the 52 weeks ended March 14, 1998. Since the
Recapitalization, management has lowered the price of Renewal rechargers by 33%
to encourage consumers to purchase the system and shifted Renewal's marketing
message from its environmental benefits to its money-saving benefits. Renewal
batteries present a value proposition to consumers because they can be
recharged over 25 times, providing 10 times the energy of disposable alkaline
batteries at only twice the retail price. In addition, alkaline rechargeables
are superior to nickel cadmium rechargeables (the primary competing technology)
because they provide more energy between charges, are sold fully charged,
retain their charge longer and are environmentally safer. Certain technology
underlying the Company's Renewal line of rechargeable alkaline batteries could
be made available to the Company's competitors under certain circumstances. See
"Risk Factors--Limited Intellectual Property Protection."
Hearing Aid Batteries. The Company was the largest worldwide seller of
hearing aid batteries in fiscal 1997, with a market share of approximately 52%.
In addition, the Company has strengthened its worldwide leadership with the
acquisition of Brisco. This strong market position is the result of hearing aid
battery products with advanced technological capabilities, consistent product
performance, a strong distribution system and an extensive marketing program.
Hearing aid batteries are produced in several sizes and are designed for use
with various types and sizes of hearing aids. The Company produces five sizes
and two types of zinc air button cells for use in hearing aids, which are sold
under the Loud'n Clear, ProLine, Best Labs, Ultracell, XCell and AIRPOWER brand
names and under several private labels, including Beltone, Miracle Ear, Siemens
and Starkey. Zinc air is a highly reliable, high energy density, lightweight
battery system with performance superior to that of traditional hearing aid
batteries. The Company was the pioneer and currently is the leading
manufacturer of the smallest (5A and 10A size) hearing aid batteries. The
Company's zinc air button cells offer consistently strong performance, capacity
and reliability based on ANSI testing criteria as applied by the Company.
Other Specialty Batteries. The Company's other specialty battery products
include non-hearing aid button cells, lithium coin cells, photo batteries,
keyless entry batteries and rechargeable nickel cadmium, nickel metal hydride,
lithium ion and sealed lead acid batteries. The Company produces button and
coin cells for watches, cameras, calculators, communications equipment and
medical instrumentation. The Company's market shares within each of these
categories vary. The Company's Lifex lithium coin cells are high-quality
lithium batteries with certain performance advantages over other lithium
battery systems. These products are used in calculators and personal computer
clocks and memory back-up systems. Lifex lithium coin cells have outstanding
shelf life and excellent performance. The Company's rechargeable lithium ion,
nickel metal hydride, nickel cadmium and sealed lead acid batteries are sourced
for use in cellular telephones, camcorders and cordless telephones.
Battery Merchandising and Advertising
Alkaline and Rechargeable Batteries. Since the Recapitalization, the
Company has substantially revised its merchandising and advertising strategies
for general batteries. Key elements of the Company's strategies include:
building the awareness and image of the Rayovac brand name; focusing on the
reformulated MAXIMUM alkaline product line; improving consumer perceptions of
the quality and performance of the Company's products; upgrading and unifying
product packaging; and solidifying the Company's position as the value brand by
offering batteries of equal quality and performance at a lower price than those
offered by its principal competitors. The Company's strategy is to provide
products of quality and performance equal to its major competitors in the
general battery
41
<PAGE>
market at a lower price, appealing to a large segment of the population
desiring a value brand. To demonstrate its value positioning, Rayovac offers
comparable battery packages at a lower price or, in some cases, more batteries
for the same price. The Company also works with individual retail channel
participants to develop unique merchandising programs and promotions and to
provide retailers with attractive profit margins to encourage retailer brand
support.
In response to the introduction by the Company's principal competitors in
the U.S. general battery market of on-the-label battery testers for alkaline
batteries, the Company developed an on-the-label tester for the Company's
alkaline batteries. Based on the Company's consumer testing which indicated
that such testers are difficult to use, prone to failure and do not represent a
significant marketing advantage, management decided not to proceed with the
implementation of such testers.
In the three fiscal years prior to the Recapitalization, the Company spent
substantially all of its advertising budget on its Renewal product line. The
Company's current advertising campaign designed by Young & Rubicam, the
Company's new advertising agency, has shifted advertising efforts to the
Company's MAXIMUM alkaline products. In addition, the Company launched its
first major national advertising campaign. The campaign is designed to increase
awareness of the Rayovac brand and to heighten customers' perceptions of the
quality, performance and value of Rayovac products. The Company has engaged
Michael Jordan as a spokesperson for its general battery products under a
contract which extends through 2004 and which, by its terms, may not be
cancelled or terminated by Mr. Jordan without cause prior to its expiration.
The Company substantially overhauled its marketing strategy for its
Renewal rechargeable batteries in 1997 to focus on the economic advantages of
Renewal rechargeable batteries and to position the rechargers at lower, more
attractive price points. As part of its marketing strategy for its rechargeable
batteries, the Company actively pursues OEM arrangements and other alliances
with major electronic device manufacturers.
Hearing Aid Batteries. To market and distribute its hearing aid battery
products, the Company continues to use a highly successful national print
advertising campaign featuring Arnold Palmer. A binaural wearer and user of
Rayovac hearing aid batteries, Mr. Palmer has been extremely effective in
promoting the use of hearing aids, expanding the market and communicating the
specific product benefits of Rayovac hearing aid batteries. The Company's
agreement with Mr. Palmer may not be cancelled or terminated by him without
cause prior to its expiration. The Company has also developed a national print
advertising campaign in selected publications such as Modern Maturity to reach
the largest potential market for hearing aid batteries. The Company also
pioneered the use of multipacks and intends to further expand multipack
distribution in additional professional and retail channels. Additionally, the
Company believes that it has developed strong relationships with hearing aid
manufacturers and audiologists, the primary purveyors of hearing aids, and
seeks to further penetrate the professional market. To further its marketing
and distribution capability in hearing aid batteries, in March 1998 the Company
acquired the battery distribution portion of Best Labs, a Florida distributor
of hearing aid batteries and a manufacturer of hearing instruments. The Company
has also established relationships with major Pacific Rim hearing aid battery
distributors to take advantage of anticipated global market growth. In
addition, the Company believes that the acquisition of Brisco will enable the
Company to further penetrate European markets for hearing aid batteries.
Other Specialty Batteries. The Company's marketing strategies for its
other specialty batteries focus on leveraging the Company's brand name and
strong market position to promote its specialty battery products. With the
acquisition of DPP, the Company plans to further position itself in the retail
market for rechargeable specialty batteries and accessories for use with
cellular telephones, camcorders and cordless telephones. The Company has
redesigned its product graphics and packaging of its other specialty battery
products to achieve a uniform brand appearance with the Company's other
products and generate greater brand awareness and loyalty. In addition, the
Company plans to continue to develop relationships with manufacturers of
communications equipment and other products in an effort to expand its share of
the non-hearing aid button cell market. The Company believes there to be
significant opportunity for growth in the photo and keyless entry battery
markets and seeks to further penetrate the replacement market for these
products. The Company has recently introduced a line of products to serve the
medical instrument and health services markets.
With regard to lithium coin cells, the Company seeks to further penetrate
the OEM portable personal computer market, as well as to broaden its customer
base by focusing additional marketing and distribution efforts on
telecommunication and medical equipment manufacturers.
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<PAGE>
Lighting Products and Lantern Batteries
Products
The Company is a leading marketer of battery-powered lighting devices,
including flashlights, lanterns and similar portable products for the retail
and industrial markets. For the 52 weeks ended March 14, 1998 the Company's
products accounted for 13% of aggregate lighting product retail dollar sales in
the mass merchandiser retail market segment. Rayovac has established its
position in this market based on innovative product features, consistent
product quality and creative product packaging. In addition, the Company
endeavors to regularly introduce new products to stimulate consumer demand and
promote impulse purchases.
The Company also produces a wide range of consumer and industrial lantern
batteries. For calendar 1997, the Company held a 44% unit market share in the
lantern battery market. This market has experienced a decline in recent years
due to the declining use of this product for highway construction barricades.
Merchandising and Advertising
The Company's marketing strategy for its lighting products and lantern
batteries focuses on leveraging the Company's strong brand name, regularly
introducing new products, utilizing innovative packaging and merchandising
programs, and promoting impulse buying and gift purchases.
Sales and Distribution
General
After the Recapitalization, the Company reorganized its sales force by
distribution channel. As a result of this reorganization, the Company maintains
separate U.S. sales forces primarily to service its retail sales and
distribution channels and its hearing aid professionals, industrial and OEM
sales and distribution channels. In addition, the Company utilizes a network of
independent brokers to service participants in selected distribution channels.
In conjunction with its broader cost rationalization initiatives, the Company
has reduced the number of independent brokers and sales agents from over 100 to
approximately 50. With respect to sales of the Company's hearing aid batteries,
while most of the Company's sales have historically been through hearing aid
professionals, the Company is actively engaged in efforts to increase sales
through retail channels. In March 1998, the Company acquired the hearing aid
battery distribution portion of Best Labs. In addition, the Company maintains
its own sales force of approximately 30 employees in Europe which promotes the
sale of all of the Company's products.
Retail
In the retail segment, the Company realigned its sales resources to create
a sales force dedicated to each of its retail distribution channels. The
primary retail distribution channels include: mass merchandisers (both national
and regional) and warehouse clubs; food, drug and convenience stores;
electronics specialty stores and department stores; hardware and automotive
centers; specialty retailers; automotive aftermarket dealers; military sales;
and catalog showrooms. The Company works closely with individual retailers to
develop unique product promotions and to provide them with the opportunity for
attractive profit margins to encourage brand support. The Company has focused
sales for its Renewal product line on distribution channels which the Company
believes to be more suited for this product, such as electronics specialty
stores, and has recently begun shipments to Radio Shack.
The Company's sales efforts in the retail channel focus primarily on sales
and distribution to national mass merchandisers, in particular the Wal-Mart,
Kmart and Target chains, which collectively accounted for 55% of industry sales
growth in the domestic alkaline battery market over the past five years. The
Company's sales strategy for these and other mass merchandisers includes
increasing market share for all of the Company's products through the use of
account specific programs and a separate sales and marketing team dedicated to
these large retailers.
The Company's sales strategy is to penetrate further particular retail
distribution channels, including home centers, hardware stores, warehouse clubs
and food and drug stores. The Company's strategy for these retail channels is
to develop creative and focused marketing campaigns which emphasize the
performance parity and consumer cost advantage of the Rayovac brand and to
tailor specific promotional programs unique to these distribution channels.
Industrial and OEM
In the industrial battery market, the Company services three sales and
distribution channels: contract sales to governments and related agencies;
maintenance repair organizations (including buying groups); and office product
supply companies. The primary products sold to this market include alkaline,
heavy duty, and lantern batteries and
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<PAGE>
flashlights. Maintenance repair organizations, the largest of which is W.W.
Grainger (to whom the Company is a major supplier of battery and lighting
products), generally sell to contractors and manufacturers. The office product
supply channel includes sales to both professional and retail companies in the
office product supply business.
In the OEM sales channel, the Company actively pursues OEM arrangements
and other alliances with major electronic device manufacturers for its
rechargeable batteries. The Company also utilizes the OEM channel for the sale
and distribution of its hearing aid batteries through strong relationships it
has developed with hearing aid manufacturers. The Company plans to continue to
develop relationships with manufacturers of communications equipment and other
products in an effort to expand its share of the non-hearing aid button cell
market. With regard to lithium coin cells, the Company plans to penetrate
further the OEM portable personal computer market and broaden its customer base
by focusing additional sales and distribution efforts on telecommunications and
medical equipment manufacturers.
Manufacturing and Raw Materials
The Company manufactures batteries in the United States and the United
Kingdom. In March 1998, the Company announced certain manufacturing changes
which include consolidating the Company's packaging operations at its Madison,
Wisconsin plant, closing the Company's Appleton, Wisconsin plant and relocating
the affected manufacturing operations for lithium batteries to the Company's
Portage, Wisconsin facility. Since the Recapitalization, the Company has
shifted manufacturing operations from its Newton Aycliffe, United Kingdom and
Kinston, North Carolina facilities to other facilities of the Company and
outsourced the manufacture of certain lighting products. These efforts have
increased plant capacity utilization and eliminated some of the Company's
underutilized manufacturing capacity. In March 1998, the Company announced the
closing of the Newton Aycliffe, United Kingdom facility and the sale of the
Kinston, North Carolina facility.
During the past five years, the Company has spent significant resources on
capital improvements, including the modernization of many of its manufacturing
lines and manufacturing processes. These manufacturing improvements have
enabled the Company to increase the quality and service life of its alkaline
batteries and to increase its manufacturing capacity. In March 1998, the
Company agreed to purchase from Matsushita a new high speed alkaline battery
manufacturing production line for its Fennimore, Wisconsin plant and to source
certain finished products, battery parts and material from Matsushita to
continue to supplement the Company's existing domestic production capacity.
Management believes that the Company's manufacturing capacity is sufficient to
meet its anticipated production requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The most significant raw materials used by the Company to manufacture
batteries are zinc powder, electrolytic manganese dioxide powder, graphite and
steel. There are a number of worldwide sources for all necessary raw materials,
and management believes that Rayovac will continue to have access to adequate
quantities of such materials at competitive prices. The Company regularly
engages in forward purchases and hedging transactions to effectively manage raw
material costs and inventory relative to anticipated production requirements.
See "Risk Factors--Raw Materials."
Research and Development
The Company's research and development strategy is to purchase or license
state-of-the-art manufacturing technology from third parties and to develop
such technology through the Company's own research and development efforts. In
March 1998, the Company announced the extension of its existing alkaline
battery technology agreement with Matsushita, pursuant to which the Company is
entitled to license (on a non-exclusive basis) Matsushita's highly advanced
designs, technology and manufacturing equipment for alkaline batteries,
including all developments and innovations thereto, through 2003. Thereafter,
the Company is entitled to license such technology existing as of such date
through 2023. Pursuant to the terms of the agreement, Matsushita may not cancel
or terminate this battery technology agreement prior to its expiration other
than for "cause" as described therein. The Company's research and development
efforts focus primarily on performance and cost improvements of existing
products and technologies. In recent years, these efforts have led to advances
in alkaline, heavy duty and lithium chemistries, as well as zinc air hearing
aid batteries and enhancements of licensed rechargeable alkaline technology.
The Company believes that continued development efforts are important in
light of the continually evolving nature of battery technology and credits the
competitive performance of its products to its recent development
44
<PAGE>
efforts. In the hearing aid battery segment, the Company's research and
development group maintains close alliances with the developers of hearing aid
devices and often works in conjunction with these developers in preparing new
product designs. The success of these efforts is most recently demonstrated by
the Company's development of the two smallest (5A and 10A size) hearing aid
batteries. The Company's research and development efforts in the Lighting
Products and Lantern Batteries segment are focused on the development of new
products. Further, the Company continues to partner with the U.S. government in
research efforts to develop new battery technology. The Company's research and
development group includes approximately 95 employees, the expense for some of
whom is funded by U.S. government research contracts. The Company's
expenditures for research and development were approximately $6.2 million, $1.5
million, $5.4 million and $5.0 million for fiscal 1997, the Transition Period,
fiscal 1996 and fiscal 1995, respectively. See "--Patents, Trademarks and
Licenses."
Information Systems
The Company has completed an initial reorganization of its information
systems function by (i) hiring an experienced Chief Information Officer, (ii)
outsourcing mainframe computer operations, (iii) completing an enterprise
software system analysis and selection, and (iv) retaining outside consultants
to modernize and upgrade its data processing and telecommunications
infrastructure. The Company has purchased from SAP and begun implementing an
enterprise-wide, integrated information system to upgrade and modernize its
business operations, the majority of which will be substantially implemented by
mid-1999. When fully implemented, this system is expected to reduce cycle
times, lower manufacturing and administrative costs, improve both asset and
employee productivity and substantially address the Year 2000 issue. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Computer Systems Upgrade."
Patents, Trademarks and Licenses
The Company's success and ability to compete depends in part upon its
technology. The Company relies upon a combination of patent, trademark and
trade secret laws, together with licenses, confidentiality agreements and other
contractual covenants, to establish and protect its technology and other
intellectual property rights.
The Company owns or licenses from third parties a considerable number of
patents and patent applications throughout the world, primarily for battery
product improvements, additional features and manufacturing equipment. In March
1998, the Company announced the extension of its existing alkaline battery
technology agreement with Matsushita, pursuant to which the Company will
continue to license Matsushita's highly advanced designs, technology and
manufacturing equipment, including all developments and innovations thereto,
through 2003. Thereafter, the Company is entitled to license such technology
existing as of such date through 2023.
The Company also uses a number of trademarks in its business, including
Rayovac[RegTM], MAXIMUMTM, Renewal[RegTM], Loud'n Clear[RegTM], Power
Station[RegTM], ProLine[RegTM], LifexTM, Smart Pack[RegTM], Best Labs[RegTM],
Ultracell[RegTM], XCell[RegTM], AIRPOWER[RegTM], SmartTM Strip,
Workhorse[RegTM] and Roughneck[RegTM]. The Company relies on both registered
and common law trademarks in the United States to protect its trademark rights.
The Rayovac[RegTM] mark is also registered in countries outside the United
States, including in Europe and the Far East. The Company does not have any
right to the trademark "Rayovac" in Brazil, where the mark is owned by an
independent third-party battery manufacturer. In addition, ROV Limited, a third
party unaffiliated with the Company, has an exclusive, perpetual, royalty-free
license for the use of certain of the Company's trademarks (including the
"Rayovac" mark) in connection with zinc carbon and alkaline batteries and
certain lighting devices in many countries outside the United States, including
Latin America.
The Company has obtained a non-exclusive license to use certain technology
underlying its rechargeable battery line to manufacture such batteries in the
United States, Puerto Rico and Mexico and to sell and distribute batteries
based on the licensed technology worldwide. This license terminates with the
expiration of the last-expiring patent covering the licensed technology in
2015. In addition, in the conduct of its business, the Company relies upon
other licensed technology in the manufacture of its products. See Note 13 to
Notes to Consolidated Financial Statements.
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<PAGE>
Competition
The Company believes that the markets for its products are highly
competitive. Duracell and Energizer are the Company's primary battery industry
competitors, each of which has substantially greater financial and other
resources and greater overall market share than the Company. Although other
competitors have sought to enter this market, the Company believes that new
market entrants would need significant financial and other resources to develop
brand recognition and the distribution capability necessary to serve the U.S.
marketplace. Substantial capital expenditures would be required to establish
U.S. battery manufacturing operations, although potential competitors could
import their products into the U.S. market. The Company and its primary
competitors enjoy significant advantages in having established brand
recognition and distribution channels. See "Risk Factors--Competition."
In February 1998, Duracell announced the introduction of a new line of
alkaline batteries under the name Duracell Ultra in the AA and AAA size
categories which is being marketed as providing increased performance in
certain high-drain devices, including cellular phones, digital cameras and
palm-sized computers. Duracell has indicated that this new line of alkaline
batteries will begin shipping to retailers in May 1998. Based on the Company's
preliminary analysis of this new product line in comparison to the Company's
technology and technology generally available in the market, the marketing
strategies announced by Duracell in connection with the introduction of the new
line and the premium pricing for such product, the Company does not anticipate
that this new product line will have a significant impact on the Company's
results of operations, however there can be no assurance in this regard. In May
1998 Energizer announced the introduction of Energizer Advanced Formula
alkaline batteries, available in all cell sizes, which Energizer claims will
provide superior performance in high drain devices and improved performance in
all other device categories. The Energizer Advanced Formula alkaline batteries
are expected to be available in the summer of 1998. The Company has not yet had
an opportunity to evaluate the Energizer Advanced Formula products or assess
any potential impact on the Company's results of operations. See "Risk
Factors--Competition."
In the U.S. market for general batteries, competition is based on brand
name recognition, perceived quality, price, performance, product packaging and
design innovation, as well as creative marketing, promotion and distribution
strategies. In comparison to the U.S. battery market, the international general
battery market has more competitors, is as highly competitive and has similar
methods of competition.
Competition in the hearing aid battery industry is based upon reliability,
performance, quality, product packaging and brand name recognition. The
Company's primary competitors in the hearing aid battery industry include
Duracell, Energizer and Panasonic. The battery-powered lighting device industry
is also very competitive and includes a greater number of competitors
(including Black & Decker, Mag-Lite and Energizer) than the U.S. battery
industry.
Employees
As of March 28, 1998 the Company had approximately 2,100 full-time
employees. The Company believes its relationship with its employees is good and
there have been no work stoppages involving Company employees since 1981. A
significant number of the Company's factory employees are represented by one of
four labor unions. The Company has recently entered into collective bargaining
agreements with its Madison, Fennimore, and Portage, Wisconsin employees, which
expire in 2000 for Madison and Fennimore employees and in 2002 for Portage
employees. The Company also recently entered into a collective bargaining
agreement with its Washington, United Kingdom employees which expires in
December 1998.
Properties and Equipment
The following table sets forth information regarding the Company's
manufacturing sites in the United States and the United Kingdom:
<TABLE>
<CAPTION>
Location Product Owned/Leased Square Feet
<S> <C> <C> <C>
Fennimore, WI Alkaline batteries and Renewal rechargeable batteries Owned 176,000
Madison, WI Heavy duty and general purpose batteries Owned 158,000
Washington, UK Zinc air button cells Leased 63,000
Portage, WI Zinc air and silver button cells Owned 62,000
Appleton, WI Lithium coin cells and alkaline computer batteries Owned 60,600
Wonewoc, WI Battery-powered lighting products and lantern batteries Leased 60,000
</TABLE>
46
<PAGE>
The Company also leases approximately 250,000 square feet of space in
Madison, Wisconsin for its corporate headquarters and technology center.
From fiscal 1993 through fiscal 1995 the Company has invested in all of
its major battery facilities. During this period, the Company invested
approximately $33 million in connection with the Fennimore Expansion.
Additional investments in zinc air battery production have helped to increase
output and precision of assembly as well as to increase the capacity of
critical component manufacturing. Investments in lithium coin cell production
have been used to build capacity for newly developed sizes of lithium coin
cells as well as to increase capacity of the largest volume sizes of such
cells. As part of the Company's recently announced restructuring, the Madison,
Wisconsin plant will phase out the manufacture of heavy duty batteries, which
will be sourced from other suppliers, and the Appleton, Wisconsin plant will be
closed with the manufacturing operations moved to Portage. In addition, in
March 1998 the Company agreed to purchase from Matsushita a new high speed
alkaline battery manufacturing production line for its Fennimore, Wisconsin
plant, which is expected to increase the Company's production capacity for AA
size batteries by up to 50%.
The following table sets forth information regarding the Company's
packaging and distribution sites:
<TABLE>
<CAPTION>
Location Owned/Leased Square Feet
<S> <C> <C>
Middleton, WI Leased 220,000
Newton Aycliffe, UK Leased 75,000
Laverne, TN Leased 73,000
Hayward, CA Leased 30,000
Billinghausen, GER Owned 5,000
</TABLE>
As part of the recently announced restructuring, the Company will centralize
its packaging operations into one location at its Madison, Wisconsin plant and
will close its Newton Aycliffe, UK facility. In addition, in March 1998 the
Company sold its Kinston, North Carolina facility. The Company believes that
its facilities, in general, are adequate for its present and currently
foreseeable needs.
Environmental Matters
The Company's facilities are subject to a broad range of federal, state,
local and foreign laws and regulations relating to the environment, including
those governing discharges to the air and water and land, the handling and
disposal of solid and hazardous substances and wastes, and the remediation of
contamination associated with releases of hazardous substances at Company
facilities and at off-site disposal locations. The Company has a proactive
environmental management program that includes the use of periodic
comprehensive environmental audits to detect and correct practices that may
violate environmental laws or are inconsistent with best management practices.
Based on information currently available to Company management, the Company
believes that it is substantially in compliance with applicable environmental
regulations at its facilities, although no assurance can be provided with
respect to such compliance in the future. There are no pending proceedings
against the Company alleging that the Company is or has been in violation of
environmental laws, and the Company is not aware of any such proceedings
contemplated by governmental authorities. The Company is, however, subject to
certain proceedings under CERCLA or analogous state laws, as described below.
The Company has from time to time been required to address the effect of
historic activities on the environmental condition of its properties, including
without limitation the effect of releases from underground storage tanks.
Several Company facilities have been in operation for decades and are
constructed on fill that includes, among other materials, used batteries
containing various heavy metals. The Company has accepted a deed restriction on
one such property in lieu of conducting remedial activities, and may consider
similar actions at other properties if appropriate. Although the Company is
currently engaged in remedial projects at a few of its facilities, the Company
does not expect that such projects will cause it to incur material
expenditures. Nonetheless, the Company has not conducted invasive testing to
identify all potential risks and, given the age of the Company's facilities and
the nature of the Company's operations, there can be no assurance that the
Company will not incur material liabilities in the future with respect to its
current or former facilities.
The Company has applied to TDEC for participation in TDEC's Voluntary
Cleanup Oversight and Assistance Program with respect to the Company's former
manganese processing facility in Covington, Tennessee. Pursuant to this
program, TDEC will conduct a site investigation to determine the extent of the
cleanup required at the Covington facility, however, there can be no assurance
that participation in this program will preclude this site from
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<PAGE>
being added to the National Priorities List as a Superfund site. Groundwater
monitoring conducted pursuant to the post-closure maintenance of solid waste
lagoons on site, and recent groundwater testing beneath former process areas on
site, indicate that there are elevated levels of certain inorganic
contaminants, particularly (but not exclusively) manganese, in the groundwater
underneath the site. The Company has completed closure of the aforementioned
lagoons and has completed the remediation of a stream that borders the site.
The Company cannot predict the outcome of TDEC's investigation of the site and
there can be no assurance that the Company will not incur material liabilities
in the future with respect to this site.
The Company has been and is subject to several proceedings related to its
disposal of industrial and hazardous waste at off-site disposal locations,
under CERCLA or analogous state laws that hold persons who "arranged for" the
disposal or treatment of such substances strictly liable for the costs incurred
in responding to the release or threatened release of hazardous substances from
such sites. Current and former owners and operators of such sites, and
transporters of waste who participated in the selection of such sites, are also
strictly liable for such costs. Liability under CERCLA is generally "joint and
several," so that a responsible party under CERCLA may be held liable for all
of the costs incurred at a particular site. However, as a practical matter,
liability at such sites generally is allocated among all of the viable
responsible parties. Some of the most significant factors for allocating
liabilities to persons that disposed of wastes at Superfund sites are the
relative volume of waste such persons sent to the site and the toxicity of such
waste. Other than the Velsicol Chemical and Morton International proceedings
described below (as to which there is insufficient information to make a
judgment as to the likelihood of a material impact on the Company's operations,
financial condition or liquidity at this time), the Company does not believe
that any of its pending proceedings under CERCLA or analogous state laws,
either individually or in the aggregate, will have a material impact on the
Company's operations, financial condition or liquidity, and the Company is not
aware of any such matters contemplated by governmental agencies that will have
such an impact. However, the Company may be named as a PRP at additional sites
in the future, and the costs associated with such additional or existing sites
may be material. In addition, certain of the Company's facilities have been in
operation for decades and, over such time, the Company and other prior
operators of such facilities have generated and disposed of wastes which are or
may be considered hazardous such as cadmium and mercury utilized in the battery
manufacturing process.
The Company has been named as a defendant in two lawsuits in connection
with a Superfund site located in Bergen County, New Jersey (Velsicol Chemical
Corporation, et al, v. A.E. Staley Manufacturing Company, et al., and Morton
International, Inc. v. A.E. Staley Manufacturing Company, et al., United States
District Court for the District of New Jersey, filed July 29, 1996). The
Company is one of approximately 50 defendants named in these cases. Both cases
involve contamination at a former mercury processing plant. One case was
brought by the current owner and the other case by a former owner. The
complaints in the two cases are identical, with four counts alleging claims for
contribution under CERCLA, the New Jersey Spill Act, the Federal Declaratory
Judgment Act and the common law. The plaintiffs allege that the Company
arranged for the treatment or disposal of hazardous substances at the site.
Consequently, the plaintiffs allege, the Company is liable to them for
contribution toward the costs of investigating and remediating the site.
No ad damnum is specified in either complaint. The Remedial
Investigation/Feasibility Study ("RI/FS") of the site was commenced in the fall
of 1997. Plaintiff's counsel estimates the cost of the RI/FS to be $4 million.
There is no estimate at this juncture as to the potential cost of remediation.
The Company is one of approximately 50 defendants who allegedly arranged for
treatment or disposal at the site. The remaining defendants are former owners
or operators of the site and adjacent industrial facilities which allegedly
contributed to the contamination. Evidence developed in discovery to date
indicates that while the Company was a customer of the facility, the
relationship was of relatively brief duration. The cost to remediate the Bergen
County Site has not been determined and the Company cannot predict the outcome
of these proceedings. See "Risk Factors--Environmental Matters."
There can be no assurances that additional proceedings relating to
off-site disposal locations will not arise in the future or that such
proceedings will not have a material adverse effect on the Company's business,
financial condition or results of operations. The discovery of previously
unknown contamination of property underlying or in the vicinity of the
Company's manufacturing facilities could require the Company to incur material
unforeseen expenses. Occurrences of any such events may have a material adverse
effect on the Company's financial condition. See "Risk Factors--Environmental
Matters." As of March 28, 1998 the Company has reserved $1.6 million for known
on-site and off-site environmental liabilities. The Company believes these
reserves are adequate, although there can be no assurance that this amount will
ultimately be adequate to cover such matters.
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Legal Proceedings
In the ordinary course of business, various suits and claims are filed
against the Company. The Company has been named as a defendant in two lawsuits
in connection with a Superfund site located in Bergen County, New Jersey
(Velsicol Chemical Corporation, et al. v. A.E. Staley Manufacturing Company, et
al. and Morton International, Inc. v. A.E. Staley Manufacturing Company, et
al., United States District Court for the District of New Jersey, filed July
29, 1996). For a discussion of the principal parties, the factual basis alleged
to underlie the proceedings and the relief sought, see "Business--Environmental
Matters." See also "Risk Factors--Environmental Matters." Other than the
Velsicol Chemical and Morton International proceedings (as to which there is
insufficient information to make a judgment as to the likelihood of a material
impact on the Company's business or financial condition at this time), the
Company is not party to any legal proceedings which, in the opinion of
management of the Company, are material to the Company's business or financial
condition.
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MANAGEMENT
Directors and Executive Officers
Set forth below is certain information regarding each director and
executive officer of the Company as of April 30, 1998:
<TABLE>
<CAPTION>
Name Age Position and Offices
- ---------------------- ----- -----------------------------------------------------
<S> <C> <C>
David A. Jones 48 Chairman of the Board and Chief Executive Officer
Kent J. Hussey 52 President, Chief Operating Officer and Director
Roger F. Warren 57 President/International and Contract MicroPower and
Director
Trygve Lonnebotn 60 Executive Vice President of Operations and Director
Stephen P. Shanesy 41 Executive Vice President and General Manager of
General Batteries and Lights
Kenneth V. Biller 51 Senior Vice President of Manufacturing/Supply Chain
Merrell M. Tomlin 46 Senior Vice President of Sales
Randall J. Steward 43 Senior Vice President of Finance and Chief Financial
Officer
James A. Broderick 54 Vice President, General Counsel and Secretary
Scott A. Schoen 39 Director
Thomas R. Shepherd 68 Director
Warren C. Smith, Jr. 41 Director
</TABLE>
Mr. Jones has served as the Chairman of the Board of Directors and Chief
Executive Officer of the Company since September 12, 1996. From September 1996
to April 1998 Mr. Jones also served as President of the Company. Between
February 1995 and March 1996, Mr. Jones was Chief Operating Officer, Chief
Executive Officer and Chairman of the Board of Directors of Thermoscan, Inc., a
manufacturer and marketer of infrared ear thermometers for consumer and
professional use. From 1989 to September 1994, he served as President and Chief
Executive Officer of The Regina Company, a manufacturer of vacuum cleaners and
other floor care equipment. In addition, Mr. Jones serves as a director of Ladd
Furniture, Inc. Mr. Jones has over 25 years of experience working in the
consumer durables industry, most recently in management of operations,
manufacturing and marketing.
Mr. Hussey is a director of the Company and has served as President and
Chief Operating Officer of the Company since April 1998. Prior to that time and
since joining the Company in October 1996, Mr. Hussey was the Executive Vice
President of Finance and Administration, Chief Financial Officer and a director
of the Company. From 1994 to 1996, Mr. Hussey was Vice President and Chief
Financial Officer of ECC International, a producer of industrial minerals and
specialty chemicals, and from 1991 to July 1994 he served as Vice President and
Chief Financial Officer of The Regina Company.
Mr. Warren is a director of the Company and has served as
President/International and Contract MicroPower of the Company since 1995. Mr.
Warren joined the Company in 1985 and has held several positions including
Executive Vice President and General Manager and Senior Vice President and
General Manager/International.
Mr. Lonnebotn is a director of the Company and, since 1985, has served as
Executive Vice President of Operations. He joined Rayovac in 1965.
Mr. Shanesy has been the Executive Vice President and General Manager of
General Batteries and Lights of the Company since April 1998. Prior to that
time and from December 1997, Mr. Shanesy served as Senior Vice President of
Marketing and the General Manager of General Batteries and Lights of the
Company. From January 1998 to December 1996, Mr. Shanesy was the Senior Vice
President of Marketing and the General Manager of General Batteries. From 1993
to 1996 Mr. Shanesy was Vice President of Marketing of Oscar Mayer and from
1991 to 1993 he was the Director of Marketing of Oscar Mayer. Prior to that
time and since 1983, Mr. Shanesy held various marketing positions with Kraft
Foods.
Mr. Biller has been the Senior Vice President of Manufacturing/Supply
Chain since January 1998. Prior to that time and since 1996 he was the Senior
Vice President and General Manager of Lighting Products & Industrial and was
Vice President and General Manager of Lighting Products & Industrial since
1995. Mr. Biller joined the
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Company in 1972 and has held several positions, including Director of
Technology/Battery Products and Vice President of Manufacturing.
Mr. Tomlin is the Senior Vice President of Sales of the Company. From
March 1996 to September 30, 1996, Mr. Tomlin served as Vice President Sales of
Braun of North America/Thermoscan and from August 1995 to March 1996, he served
as Vice President Sales of Thermoscan, Inc. Prior to that time, Mr. Tomlin was
Vice President of Sales of various divisions of Casio Electronics.
Mr. Steward has been the Senior Vice President of Finance and Chief
Financial Officer of the Company since April 1998. Mr. Steward joined the
Company in March of 1998 as Senior Vice President of Corporate Development.
From September 1997 to March 1998, Mr. Steward worked as an independent
consultant, primarily with Thermoscan, Inc. and Braun AG assisting with
financial and operational issues. From March 1996 to September 1997, Mr.
Steward served as President and General Manager of Thermoscan, Inc. From
January 1992 to March 1996, he served as Executive Vice President of Finance
and Administration and Chief Financial Officer of Thermoscan, Inc. Prior to
January 1991, Mr. Steward was a Finance Director for a division of Medtronic
Inc.
Mr. Broderick is Vice President, General Counsel and Secretary for Rayovac
and has held these positions since 1985.
Mr. Schoen has been a director of the Company since the Recapitalization
and is a Managing Director of THL Co., which he joined in 1986. In addition,
Mr. Schoen is a Vice President of Thomas H. Lee Advisors I and Thomas H. Lee
Advisors II, a Trustee of THL Equity Trust III, the general partner of THL
Equity Advisors Limited Partnership III, which is the general partner of Thomas
H. Lee Equity Fund III L.P., and a Trustee of THL Equity Trust IV, the general
partner of THL Equity Advisors IV, LLC, which is the general partner of Thomas
H. Lee Equity Fund IV, L.P. He is also a director of Syratech Corporation,
TransWestern Communications Corp. and various private corporations.
Mr. Shepherd has been a director of the Company since the Recapitalization
and is a Managing Director of THL Co. and has been engaged as a consultant to
THL Co. since 1986. In addition, Mr. Shepherd is an Executive Vice President of
Thomas H. Lee Advisors I and an officer of various other THL Co. affiliates. He
is also a director of General Nutrition Companies, Inc. and various private
corporations.
Mr. Smith has been a director of the Company since the Recapitalization
and has been employed by THL Co. since 1990 and currently serves as a Managing
Director of THL Co. In addition, Mr. Smith is a Vice President of Thomas H. Lee
Advisors I and T.H. Lee Mezzanine II. Mr. Smith is also a Managing Director and
Member of THL Equity Advisors Limited Partnership III, which is the general
partner of Thomas H. Lee Equity Fund III L.P. and a Managing Director and
Member of THL Equity Advisors IV, LLC, which is the general partner of Thomas
H. Lee Equity Fund IV, L.P. He is also a director of Finlay Enterprises, Inc.,
Finlay Fine Jewelry Corporation and various private corporations.
The Company anticipates that it will designate two additional independent
persons to the Board of Directors following the Offerings.
51
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock by the Selling Shareholders and each
director, executive officer and beneficial owner of more than 5% of the
Company's outstanding Common Stock and by all directors and executive officers
of the Company as a group, at the date hereof and after giving effect to the
sale of the shares of Common Stock offered hereby.
<TABLE>
<CAPTION>
Shares of Common
Shares Stock Beneficially
Shares of Common Shares Subject to Owned After the
Stock Beneficially Being Over- Offerings and Assuming
Owned Prior to Offered Allotment full Exercise of
the Offerings(2) Hereby(3) Options Over-Allotment Options
------------------------- ----------- ------------ -----------------------
Number Percentage Number Percentage
Directors, Executive Officers and 5% Shareholders of Shares of Class of Shares of Class
- --------------------------------------------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Thomas H. Lee Equity Fund III, L.P.(3) 75
State Street, Ste. 2600
Boston, MA 02109 ................................. 14,437,064 52.6% 4,109,800 563,235 9,764,029 35.6%
Thomas H. Lee Foreign Fund III, L.P.(3)
75 State Street, Ste. 2600
Boston, MA 02109 ................................. 894,341 3.3 254,592 34,891 604,858 2.2
THL--CCI Limited Partnership(4)
75 State Street, Ste. 2600
Boston, MA 02109 ................................. 1,515,753 5.5 431,490 59,134 1,025,129 3.7
David A. Jones(5) ................................. 664,388 2.4 217,357 53,144 392,496 1.4
Kent J. Hussey(6) ................................. 144,189 * 42,588 0 101,601 *
Roger F. Warren(7) ................................ 629,462 2.3 219,249 53,089 357,124 1.3
Stephen P. Shanesy(8) ............................. 105,103 * 33,423 8,093 63,587 *
Kenneth V. Biller(9) .............................. 157,193 * 49,987 12,104 95,102 *
Merrell M. Tomlin(10) ............................. 89,620 * 28,499 6,901 54,220 *
James A. Broderick(11) ............................ 241,399 * 77,486 19,391 144,522 *
Trygve Lonnebotn(12) .............................. 502,652 1.8 161,345 40,376 300,931 1.1
Randall J. Steward ................................ 7,500 * 0 0 7,500 *
Scott A. Schoen(3)(13) ............................ 72,756 * 20,711 2,838 49,207 *
Thomas R. Shepherd(13) ............................ 37,894 * 10,787 1,478 25,629 *
Warren C. Smith, Jr.(3)(13) ....................... 60,640 * 17,262 2,366 41,012 *
All directors and executive officers of the
Company as a group (12 persons)(3)(13) ........... 2,712,796 9.6% 879,917 199,948 1,632,931 5.8%
Other Officers
- ----------------------------------------------------
Gary E. Wilson(14) ................................ 133,959 * 42,999 6,300 84,660 *
Kenneth G. Drescher(15) ........................... 22,075 * 7,086 1,773 13,216 *
Dale R. Tetzlaff(16) .............................. 137,572 * 37,000 0 100,572 *
Linda G. Pauls Fleming, as trustee of the
Fleming Trust .................................... 8,000 * 600 0 7,400 *
Other Selling Shareholders
- ----------------------------------------------------
17 Other Selling Shareholders, each of whom
is selling less than 4,600 shares of Common
Stock in the Offerings and will beneficially
own on an aggregate basis less than 1% of
the outstanding Common Stock after the
Offerings ........................................ 121,777 * 36,499 4,069 81,181 *
</TABLE>
- ----------------
*Less than 1%
(1) Addresses are given only for beneficial owners of more than 5% of the
outstanding shares of Common Stock.
(2) Unless otherwise noted, the nature of beneficial ownership is sole voting
and/or investment power, except to the extent authority is shared by
spouses under applicable law. Shares of Common Stock not outstanding
(footnotes continued on following page)
52
<PAGE>
but deemed beneficially owned by virtue of the right of a person or group
to acquire them within 60 days are treated as outstanding only for purposes
of determining the number and percent of outstanding shares of Common Stock
owned by such person or group.
(3) THL Equity Advisors III Limited Partnership ("Advisors"), the general
partner of the THL Fund and Thomas H. Lee Foreign Fund III, L.P., THL
Equity Trust III ("Equity Trust"), the general partner of Advisors, Thomas
H. Lee, Scott A. Schoen, Warren C. Smith, Jr. and other managing directors
of THL Co., as Trustees of Equity Trust, and Thomas H. Lee as sole
shareholder of Equity Trust, may be deemed to be beneficial owners of the
shares of Common Stock held by such Funds. Each of such persons maintains a
principal business address at Suite 2600, 75 State Street, Boston, MA
02109. Each of such persons disclaims beneficial ownership of all shares.
(4) THL Investment Management Corp., the general partner of THL-CCI Limited
Partnership, and Thomas H. Lee, as director and sole shareholder of THL
Investment Management Corp., may also be deemed to be beneficial owners of
the shares of Common Stock held by THL-CCI Limited Partnership. Each of
such persons maintains a principal business address at Suite 2600, 75 State
Street, Boston, MA 02109.
(5) Includes 364,630 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
4,299 shares representing Mr. Jones' proportional interest in the THL Fund,
which proportional interest after the Offerings and assuming full exercise
of the over-allotment options granted to the Underwriters would be 2,908
shares before giving effect to the allocation of fees and obligations to
the THL Fund which allocation would reduce the number of shares
representing Mr. Jones' proportional interest in the THL Fund. Mr. Jones
disclaims beneficial ownership of these shares. Shares of Common Stock
beneficially owned prior to the Offerings also includes 42,606 shares
allocated for the account of such individual pursuant to the Deferred
Compensation Plan, all of which are being sold in the Offerings.
(6) Includes 91,158 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
8,419 shares allocated for the account of such individual pursuant to the
Deferred Compensation Plan, all of which are being sold in the Offerings.
(7) Includes 91,158 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
16,922 shares allocated for the account of such individual pursuant to the
Deferred Compensation Plan, all of which are being sold in the Offerings.
(8) Includes 45,579 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
14,757 shares allocated for the account of such individual pursuant to the
Deferred Compensation Plan, all of which are being sold in the Offerings.
(9) Includes 45,579 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
12,134 shares allocated for the account of such individual pursuant to the
Deferred Compensation Plan, all of which are being sold in the Offerings.
(10) Includes 45,579 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
8,386 shares allocated for the account of such individual pursuant to the
Deferred Compensation Plan, all of which are being sold in the Offerings.
(11) Includes 20,000 shares subject to options which are currently exercisable
and 7,974 shares allocated for the account of such individual pursuant to
the Deferred Compensation Plan.
(12) Includes 68,368 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
15,754 shares allocated for the account of such individual pursuant to the
Deferred Compensation Plan, all of which are being sold in the Offerings.
(13) Represents the proportional interest of such individual in THL-CCI Limited
Partnership; in the case of Mr. Smith, also includes 14,229 shares which
Mr. Smith may be deemed to beneficially own as a result of Mr. Smith's
children's proportional beneficial interest in THL-CCI Limited Partnership.
The proportional interests of Mr. Smith's children in THL-CCI Limited
Partnership after the Offerings, assuming full exercise of the
over-allotment options granted to the Underwriters, would be 9,624 shares.
(14) Includes 20,000 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
7,388 shares allocated for the account of such individual pursuant to the
Deferred Compensation Plan, all of which are being sold in the Offerings.
(15) Includes 2,075 shares allocated for the account of such individual pursuant
to the Deferred Compensation Plan. Shares of Common Stock beneficially
owned prior to the Offerings includes 20,000 shares subject to options
which are currently exercisable and shares of Common Stock beneficially
owned after the Offerings assuming full exercise of the over-allotment
options, includes 11,141 shares subject to options which are currently
exercisable.
(16) Includes 20,000 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
5,022 shares allocated for the account of such individual pursuant to the
Deferred Compensation Plan, all of which are being sold in the Offerings.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summaries of the principal terms of certain outstanding
indebtedness of the Company do not purport to be complete and are subject to
the detailed provisions of, and qualified in their entirety by reference to,
the respective financing agreements, copies of which have been filed or
incorporated by reference as exhibits to the Registration Statement of which
this Prospectus is a part and to which exhibits reference is hereby made.
Whenever particular provisions of such documents are referred to, such
provisions are incorporated by reference as a part of the statements made, and
the statements are qualified in their entirety by such reference.
The Amended Credit Agreement
Pursuant to the Amended Credit Agreement, the Company has available senior
bank facilities in an aggregate amount of $160.0 million.
The Amended Credit Agreement provides a five-year reducing Revolver
Facility of up to $90.0 million under which working capital loans may be made
and a $10.0 million sublimit for letters of credit and a five-year amortizing
Acquisition Facility of $70.0 million (together, the "Bank Facilities"). The
Revolver Facility is reduced by $10.0, $15.0, and $15.0 million, respectively,
on December 31, 1999, 2000 and 2001 and expires on December 31, 2002. From
March 31, 1999 through December 31, 2000 the quarterly amortization rate will
be 5% of the balance outstanding under the Acquisition Facility as of December
31, 1998 (the "Outstanding Balance") and from March 31, 2001 through December
31, 2002 the quarterly amortization rate will be 7.5% of the Outstanding
Balance. The Acquisition Facility is subject to quarterly amortization
commencing March 31, 1999 through December 31, 2002. As of December 30, 1997,
all of the Company's senior term debt was replaced by revolver debt under the
Revolver Facility.
Borrowings under the Bank Facilities bear interest, in each case at the
Company's option, at Bank of America National Trust and Savings Association's
base rate or at IBOR plus .75%. Performance-based reductions and increases of
the Bank Facilities' interest rate are available. The Company also incurs
standard letter of credit fees to issuing institutions and other standard
commitment fees.
The indebtedness outstanding under the Amended Credit Agreement has been
guaranteed by ROV Holding, Inc., a wholly-owned subsidiary of the Company, and
is secured by all existing and after-acquired personal property of the Company
and its domestic subsidiaries, including the stock of all domestic subsidiaries
of the Company and any intercompany debt obligations and 65% of the stock of
all foreign subsidiaries (other than dormant subsidiaries) held directly by the
Company or its domestic subsidiaries, and, subject to certain exceptions, all
existing and after-acquired real property.
The Amended Credit Agreement contains financial and other restrictive
covenants customary and usual for credit facilities of this type, including
those involving maintenance of minimum interest coverage and a required maximum
leverage. The Amended Credit Agreement's covenants also restrict the ability of
the Company to incur additional indebtedness, create liens, make investments or
specified payments, give guarantees, merge or acquire or sell assets, and
restrict certain other activities.
"Events of Default" under the Amended Credit Agreement include, among
other things, failure to make payments when due, defaults under certain other
agreements or instruments of indebtedness, noncompliance with covenants,
breaches of representations and warranties, certain bankruptcy or insolvency
events, judgments in excess of specified amounts, pension plan defaults,
impairment of security interests in collateral, invalidity of guarantees and
certain "changes of control" (as defined in the Amended Credit Agreement).
The Notes
Pursuant to the Indenture, the Company issued $100 million of 10-1/4%
Senior Subordinated Notes Due 2006 to repay certain bridge financing incurred
in connection with the Recapitalization. On March 11, 1997, the Company
consummated an offer to exchange such notes for the Notes registered under the
Securities Act.
The Notes bear interest at the rate of 10-1/4% per annum, payable
semi-annually on May 1 and November 1 of each year and mature on November 1,
2006. The Notes are unsecured senior subordinated general obligations of the
Company and are unconditionally guaranteed on an unsecured senior subordinated
basis by ROV Holding, Inc. The payment of principal of, premium, if any, and
interest on the Notes and the guarantees thereon are subordinated in right of
payment to all existing and future Senior Debt (as defined in the Indenture),
including
54
<PAGE>
borrowings under the Amended Credit Agreement, whether outstanding on the date
of the Indenture or thereafter incurred.
The Notes are not redeemable at the option of the Company prior to
November 1, 2001. Thereafter the Notes are subject to redemption at the option
of the Company, in whole or in part, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning November 1 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
- ------------------------------ -------------
<S> <C>
2001 ......................... 105.125%
2002 ......................... 103.417
2003 ......................... 101.708
2004 and thereafter .......... 100.000
</TABLE>
In addition, at any time on or before October 22, 1999, the Company may
redeem up to 35% of the original aggregate principal amount of the Notes with
the net proceeds of a public equity offering at a redemption price equal to
109.25% of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of redemption, provided that at least 65% of the
original aggregate principal amount of the Notes remains outstanding
immediately after such redemption. The Company applied $38.2 million of the net
proceeds of the IPO to redeem or repurchase Notes in the aggregate principal
amount of $35.0 million.
Each holder of Notes has the right to require the Company to repurchase
all or any part of such holder's Notes at an offer price in cash equal to 101%
of the aggregate principal amount thereof plus accrued and unpaid interest
thereon upon a change of control of the Company. A change of control for this
purpose includes any of the following: (i) any transaction pursuant to which a
person or group becomes the beneficial owner of 50% or more of the voting power
of the voting stock of the Company, and more of the voting power of the Company
than is at that time beneficially owned by the THL Group, (ii) the time at
which individuals who were either members of the Board of Directors of the
Company as of the date of the Indenture or whose election was approved by such
members cease to be a majority of the directors of the Company then in office
or (iii) the sale, lease, transfer or other disposition in one or a series of
related transactions of all or substantially all the assets of the Company.
The Indenture restricts, among other things, the Company's ability to
incur additional indebtedness, pay dividends or make certain other restricted
payments, incur liens to secure pari passu or subordinated indebtedness, engage
in any sale and leaseback transaction, sell stock of subsidiaries, sell assets,
merge or consolidate with any other person, sell, assign, transfer, lease,
convey or otherwise dispose of substantially all of the assets of the Company,
enter into certain transactions with affiliates, or incur indebtedness that is
subordinate in right of payment to any Senior Debt (including indebtedness
incurred under the Amended Credit Agreement and any other indebtedness
permitted to be incurred under the Indenture) and senior in right of payment to
the Notes. The Indenture permits, under certain circumstances, the Company's
subsidiaries to be deemed unrestricted subsidiaries and thus not be subject to
the restrictions of the Indenture.
The Indenture contains standard events of default, including (i) defaults
in the payment of principal, premium or interest, (ii) defaults in the
compliance with covenants contained in the Indenture, (iii) cross defaults on
more than $5 million of other indebtedness, (iv) failure to pay more than $5
million of judgments and (v) certain events of bankruptcy with respect to the
Company and certain of its subsidiaries.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have 27,441,097 shares
of Common Stock outstanding. The 7,827,507 shares of Common Stock sold in the
IPO of the Company's Common Stock in November of 1997 and the 5,750,000 shares
to be sold in the Offerings will be freely tradeable without restriction or
further registration under the Securities Act, except for any such shares which
may be acquired by or shares sold by persons deemed to be "affiliates" of the
Company, as such term is defined under the Securities Act, which shares will be
subject to the resale limitations of Rule 144. Substantially all other shares
will be eligible for resale pursuant to Rule 144 after the Lockup Period.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned, for at
least one year, shares of Common Stock that have not been registered under the
Securities Act or that were acquired from an "affiliate" of the Company is
entitled to sell within any three-month period the number of shares of Common
Stock which does not exceed the greater of one percent of the number of then
outstanding shares of Common Stock or the average weekly reported trading
volume during the four calendar weeks preceding the sale. Sales under Rule 144
are also subject to certain notice requirements and to the availability of
current public information about the Company and must be made in unsolicited
brokers' transactions or to a market maker. A person (or persons whose shares
are aggregated) who is not an "affiliate" of the Company under the Securities
Act during the three months preceding a sale and who had beneficially owned
such shares for at least two years is entitled to sell such shares under Rule
144 without regard to the volume, notice, information and manner of sale
provisions of such Rule.
An aggregate of 2,497,321 shares of Common Stock are reserved for issuance
upon the exercise of outstanding options granted to employees and directors of
the Company pursuant to the 1996 Plan and the Incentive Plan. In November 1997,
the Company registered on a registration statement on Form S-8 the shares of
Common Stock issuable upon the exercise of options granted pursuant to the 1996
Plan and the Incentive Plan. Accordingly, shares issued upon exercise of such
options are freely tradeable, except for any shares held by an "affiliate" of
the Company.
No predictions can be made of the effect, if any, that sales of shares of
Common Stock or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of significant amounts
of Common Stock or the perception that such sales may occur could adversely
affect the prevailing market price of Common Stock, as well as impair the
ability of the Company to raise capital through the issuance of additional
equity securities. See "Risk Factors--Shares Eligible for Future Sale;
Potential for Adverse Effect on Stock Price; Registration Rights."
Notwithstanding the foregoing, in connection with the Offerings, the
Selling Shareholders, certain existing shareholders, the Company, its executive
officers and directors and the THL Group (holding an aggregate of approximately
14.3 million shares of Common Stock upon consummation of the Offerings) have
agreed, subject to certain exceptions, not to directly or indirectly (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of or otherwise dispose of or transfer any shares of Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or thereafter acquired by the person executing the agreement
or with respect to which the person executing the agreement thereafter acquires
the power of disposition, or file a registration statement under the Securities
Act with respect to the foregoing or (ii) enter into any swap or other
agreement that transfers, in whole or in part, the economic consequence of
ownership of the Common Stock whether any such swap or transaction is to be
settled by delivery of Common Stock or other securities, in cash or otherwise,
without the prior written consent of Merrill Lynch & Co. on behalf of the
Underwriters for a period of 90 days after the date of this Prospectus, other
than (i) the sale to the Underwriters of the shares of Common Stock under the
Underwriting Agreement, (ii) upon the exercise of outstanding stock options or
(iii) the issuance of options pursuant to the Company's stock option plans.
In connection with the Recapitalization, the THL Fund and other affiliates
of THL Co. which purchased shares of Common Stock pursuant to the
Recapitalization, certain other shareholders of the Company and the Company
entered into the Shareholders Agreement. The Shareholders Agreement provides
for certain restrictions on transfer of the shares beneficially owned by the
parties thereto. The Shareholders Agreement also provides that, subject to
certain limitations, the THL Group and their permitted transferees have demand
registration rights with respect to their shares of Common Stock. The THL Group
and certain other shareholders also have certain piggy-back registration
rights. See "Risk Factors--Shares Eligible for Future Sale; Potential for
Adverse Effect on Stock Price; Registration Rights."
56
<PAGE>
CERTAIN UNITED STATES FEDERAL TAX
CONSIDERATIONS FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax considerations with respect to the ownership and
disposition of Common Stock applicable to Non-U.S. Holders. In general, a "Non-
U.S. Holder" is any holder other than (i) a citizen or resident of the United
States, (ii) a corporation or partnership created or organized in the United
States or under the laws of the United States or of any state, (iii) an estate,
the income of which is includable in gross income for United States federal
income tax purposes regardless of its source, or (iv) a trust if (a) a court
within the United States is able to exercise primary supervision over the
administration of the trust and (b) one or more United States persons have the
authority to control all substantial decisions of the trust. This discussion is
based on current law, which is subject to change (possibly with retroactive
effect), and is for general information only. This discussion does not address
aspects of United States federal taxation other than income and estate taxation
and does not address all aspects of income and estate taxation or any aspects
of state, local or non-United States taxes, nor does it consider any specific
facts or circumstances that may apply to a particular Non-U.S. Holder
(including certain U.S. expatriates). ACCORDINGLY, PROSPECTIVE INVESTORS ARE
URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE,
LOCAL AND NON-UNITED STATES INCOME AND OTHER TAX CONSIDERATIONS OF HOLDING AND
DISPOSING OF SHARES OF COMMON STOCK.
Dividends
In general, dividends paid to a Non-U.S. Holder will be subject to United
States withholding tax at a 30% rate of the gross amount (or a lower rate
prescribed by an applicable income tax treaty) unless the dividends are either
(i) effectively connected with a trade or business carried on by the Non-U.S.
Holder within the United States, or (ii) if certain income tax treaties apply,
attributable to a permanent establishment in the United States maintained by
the Non-U.S. Holder. Dividends effectively connected with such a United States
trade or business or attributable to such a United States permanent
establishment generally will not be subject to United States withholding tax if
the Non-U.S. Holder files certain forms, including Internal Revenue Service
Form 4224, with the payor of the dividend, and generally will be subject to
United States federal income tax on a net income basis, in the same manner as
if the Non-U.S. Holder were a resident of the United States. A Non-U.S. Holder
that is a corporation may be subject to an additional branch profits tax at a
rate of 30% (or such lower rate as may be specified by an applicable income tax
treaty) on the repatriation from the United States of its "effectively
connected earnings and profits," subject to certain adjustments. To determine
the applicability of a tax treaty providing for a lower rate of withholding
under the currently effective United States Treasury Department regulations
(the "Current Regulations"), dividends paid to an address in a foreign country
are presumed to be paid to a resident of that country absent knowledge to the
contrary. Under United States Treasury Department regulations issued on October
6, 1997 (the "Final Regulations") generally effective for payments made after
December 31, 1998, a Non-U.S. Holder (including, in certain cases of Non-U.S.
Holders that are fiscally transparent entities, the owner or owners of such
entities) will be required to provide to the payor certain documentation that
such Non-U.S. Holder (or the owner or owners of such fiscally transparent
entities) is a foreign person in order to claim a reduced rate of withholding
pursuant to an applicable income tax treaty.
Gain on Sale or Other Disposition of Common Stock
In general, a Non-U.S. Holder will not be subject to United States federal
income tax on any gain realized upon the sale or other disposition of such
holder's shares of Common Stock unless (i) the gain either is effectively
connected with a trade or business carried on by the non-U.S. Holder within the
United States or, if certain income tax treaties apply, is attributable to a
permanent establishment in the United States maintained by the Non-U.S. Holder
(and, in either case, the branch profits tax discussed above may also apply if
the Non-U.S. Holder is a corporation); (ii) the Non-U.S. Holder is an
individual who holds shares of Common Stock as a capital asset and is present
in the United States for 183 days or more in the taxable year of disposition,
and certain other tests are met; or (iii) the Company is or has been a United
States real property holding corporation (a "USRPHC") for United States federal
income tax purposes (which the Company does not believe that it is or is likely
to become) at any time within the shorter of the five year period preceding
such disposition or such Non-U.S. Holder's holding period. If the Company were
or were to become a USRPHC at any time during this period, gains realized upon
a disposition of Common Stock by a Non-U.S. Holder which did not directly or
indirectly own more than 5% of the Common
57
<PAGE>
Stock during this period generally would not be subject to United States
federal income tax, provided that the Common Stock is regularly traded on an
established securities market.
Estate Tax
Common Stock owned or treated as owned by an individual who is not a
citizen or resident (as defined for United States federal estate tax purposes)
of the United States at the time of death will be includable in the
individual's gross estate for United States federal estate tax purposes unless
an applicable estate tax treaty provides otherwise, and therefore may be
subject to United States federal estate tax.
Backup Withholding, Information Reporting and Other Reporting Requirements
The Company must report annually to the Internal Revenue Service and to
each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply regardless
of whether withholding was reduced or eliminated by an applicable tax treaty.
Copies of this information also may be made available under the provisions of a
specific treaty or agreement with the tax authorities in the country in which
the Non-U.S. Holder resides or is established.
Under the Current Regulations, United States backup withholding tax (which
generally is imposed at the rate of 31% on certain payments to persons that
fail to furnish the information required under the United States information
reporting requirements) and information reporting requirements (other than
those discussed above under "Dividends") generally will not apply to dividends
paid on Common Stock to a Non-U.S. Holder at an address outside the United
States. Backup withholding and information reporting generally will apply,
however, to dividends paid on shares of Common Stock to a Non-U.S. Holder at an
address in the United States, if such holder fails to establish an exemption or
to provide certain other information to the payor.
Under the Current Regulations, the payment of proceeds from the
disposition of Common Stock to or through a United States office of a broker
will be subject to information reporting and backup withholding unless the
beneficial owner, under penalties of perjury, certifies, among other things,
its status as a Non-U.S. Holder or otherwise establishes an exemption. The
payment of proceeds from the disposition of Common Stock to or through a
non-U.S. office of a non-U.S. broker generally will not be subject to backup
withholding and information reporting except as noted below. In the case of
proceeds from a disposition of Common Stock paid to or through a non-U.S.
office of a broker that is (i) a United States person, (ii) a "controlled
foreign corporation" for United States federal income tax purposes, or (iii) a
foreign person 50% or more of whose gross income from certain periods is
effectively connected with a United States trade or business, information
reporting (but not backup withholding) will apply unless the broker has
documentary evidence in its files that the owner is a Non-U.S. Holder (and the
broker has no actual knowledge to the contrary).
Under the Final Regulations, the payment of dividends or the payment of
proceeds from the disposition of Common Stock to a Non-U.S. Holder may be
subject to information reporting and backup withholding unless such recipient
provides to the payor certain documentation as to its status as a Non-U.S.
Holder or otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules from a payment to a Non-U.S. Holder will be
refunded or credited against the Non-U.S. Holder's United States federal income
tax liability, if any, provided that the required information is furnished to
the Internal Revenue Service in a timely manner.
58
<PAGE>
UNDERWRITING
Merrill Lynch International, Bear, Stearns International Limited,
Donaldson, Lufkin & Jenrette International and Smith Barney Inc. are acting as
lead managers (the "Lead Managers") for each of the International Managers
named below (the "International Managers"). Subject to the terms and conditions
set forth in an international purchase agreement (the "International Purchase
Agreement") among the Company, the Selling Shareholders and the International
Managers and concurrently with the sale of 4,600,000 shares of Common Stock to
the U.S. Underwriters (as defined below), the Company has agreed to sell to the
International Managers, and each of the International Managers severally and
not jointly has agreed to purchase from the Company, the number of shares of
Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
Number of
International Manager Shares
- --------------------- ------------
<S> <C>
Merrill Lynch International ........................ 287,500
Bear, Stearns International Limited ................ 287,500
Donaldson, Lufkin & Jenrette International ......... 287,500
Smith Barney Inc. .................................. 287,500
-------
Total .............................................. 1,150,000
=========
</TABLE>
The Company has also entered into a U.S. purchase agreement (the "U.S.
Purchase Agreement") with certain underwriters in the United States and Canada
(the "U.S. Underwriters" and, together with the International Managers, the
"Underwriters"), for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and Smith Barney Inc. are acting as representatives (the
"U.S. Representatives"). Subject to the terms and conditions set forth in the
U.S. Purchase Agreement, and concurrently with the sale of 1,150,000 shares of
Common Stock to the International Managers pursuant to the International
Purchase Agreement, the Selling Shareholders have agreed to sell to the U.S.
Underwriters, and the U.S. Underwriters severally and not jointly have agreed
to purchase from the Company, an aggregate of 4,600,000 shares of Common Stock.
The initial public offering price per share of Common Stock and the
underwriting discount per share of Common Stock will be identical under the
International Purchase Agreement and the U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement,
the several International Managers and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant to
such agreement are purchased. Under certain circumstances, under the
International Purchase Agreement and the U.S. Purchase Agreement, the
commitments of non-defaulting Underwriters may be increased. The closings with
respect to the sale of shares of Common Stock to be purchased by the
International Managers and the U.S. Underwriters are conditioned upon one
another.
The Lead Managers have advised the Company that the International Managers
propose initially to offer the shares of Common Stock to the public at the
initial public offering price set forth on the cover page of this Prospectus,
and to certain dealers at such price less a concession not in excess of $.50
per share of Common Stock. The International Managers, may allow, and such
dealers may reallow, a discount not in excess of $.10 per share of Common Stock
on sales to certain other dealers. After the initial public offering, the
public offering price, concession and discount may be changed.
The Selling Shareholders have granted options to the International
Managers, exercisable within 30 days after the date of this Prospectus, to
purchase up to 172,500 additional shares of Common Stock at the initial public
offering price set forth on the cover page of this Prospectus, less the
underwriting discount. The International Managers may exercise these options
solely to cover over-allotments, if any, made on the sale of the Common Stock
offered hereby. To the extent that the International Managers exercise these
options, each International Manager will be obligated, subject to certain
conditions, to purchase a number of additional shares of Common Stock
proportionate to such International Manager's initial amount reflected in the
foregoing table. The Selling Shareholders also have granted options to the U.S.
Underwriters, exercisable within 30 days after the date of this Prospectus, to
purchase up to aggregate of 690,000 additional shares of Common Stock to cover
over-allotments, if any, on terms similar to those granted to the International
Managers.
The Company, the Selling Shareholders, the Company's executive officers
and directors, the THL Group and certain other shareholders have agreed,
subject to certain exceptions, not to directly or indirectly (i) offer, pledge,
59
<PAGE>
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant for the sale of
or otherwise dispose of or transfer any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock, whether now
owned or thereafter acquired by the person executing the agreement or with
respect to which the person executing the agreement thereafter acquires the
power of disposition, or file a registration statement under the Securities Act
with respect to the foregoing or (ii) enter into any swap or other agreement
that transfers, in whole or in part, the economic consequence of ownership of
the Common Stock whether any such swap or transaction is to be settled by
delivery of Common Stock or other securities, in cash or otherwise, without the
prior written consent of Merrill Lynch on behalf of the Underwriters, for a
period of 90 days after the date of this Prospectus. See "Shares Eligible for
Future Sale."
The THL Group, the beneficial owner of more than 10% of the Company's
outstanding Common Stock, may be deemed to be an affiliate of Sutro & Co.
Incorporated, Tucker Anthony Incorporated and Cleary Gull Reiland & McDevitt
Inc., members of the NASD, which may participate in the U.S. Offering and the
International Offering. Accordingly, the International Offering and the U.S.
Offering will be conducted in accordance with NASD Conduct Rule 2720.
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
International Managers and the U.S. Underwriters are permitted to sell shares
of Common Stock to each other for purposes of resale at the initial public
offering price, less an amount not greater than the selling concession. Under
the terms of the Intersyndicate Agreement, the U.S. Underwriters and any dealer
to whom they sell shares of Common Stock will not offer to sell or sell shares
of Common Stock to persons who are non-U.S. or non-Canadian persons or to
persons they believe intend to resell to persons who are non-U.S. or
non-Canadian persons, and the International Managers and any dealer to whom
they sell shares of Common Stock will not offer to sell or sell shares of
Common Stock to U.S. persons or to Canadian persons or to persons they believe
intend to resell to U.S. persons or Canadian persons, except in the case of
transactions pursuant to the Intersyndicate Agreement.
The Common Stock is listed on the New York Stock Exchange under the symbol
"ROV."
The International Managers and the U.S. Underwriters have informed the
Company that they do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
The Company and the Selling Shareholders have agreed to indemnify the
International Managers and the U.S. Underwriters against certain liabilities,
including liabilities under the Securities Act or to contribute to payments
which the International Managers and U.S. Underwriters may be required to make
in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission (the "Commission") may limit the ability of
the Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the U.S. Representatives are
permitted to engage in certain transactions that stabilize the price of the
Common Stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the U.S.
Representatives may reduce that short position by purchasing Common Stock in
the open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described
above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might have been in the absence of such purchases.
None of the Company, the Selling Shareholders or any of the Underwriters
makes any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of the
Common Stock. In addition, none of the Company, the Selling Shareholders or any
of the Underwriters makes any representation that the U.S. Representatives will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
Each International Manager has agreed that (i) it has not offered or sold,
and, for a period of six months from the Closing Date, will not offer or sell,
to persons in the United Kingdom, other than to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the
60
<PAGE>
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995; (ii) it
has complied with and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in relation to
the shares of Common Stock in, from or otherwise involving the United Kingdom;
and (iii) it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issue of
shares of Common Stock to a person who is of a kind described in Article 11(3)
of the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1996, or is a person to whom such document may otherwise lawfully be
issued or passed on.
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of Common
Stock, or the possession, circulation or distribution of this Prospectus or any
other material relating to the Company or shares of Common Stock in any
jurisdiction where action for that purpose is required. Accordingly, the shares
of Common Stock may not be offered or sold, directly or indirectly, and neither
this Prospectus nor any other offering material or advertisements in connection
with the shares of Common Stock may be distributed or published, in or from any
country or jurisdiction except in compliance with any applicable rules and
regulations of any such country or jurisdiction.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page hereof.
Donaldson, Lufkin & Jenrette Securities Corporation and its affiliate, DLJ
Capital Funding, Inc., have provided from time to time, and may provide in the
future, commercial and investment banking services to the Company and its
affiliates, including in connection with the Credit Agreement between the
Company, BA Securities, Inc., Donaldson, Lufkin & Jenrette Securities
Corporation and its affiliate DLJ Capital Funding, Inc. as arrangers for a
group of financial institutions and accredited investors which provided the
Company with senior bank facilities in an aggregate amount of $170 million.
61
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
and certain legal matters for the Selling Shareholders will be passed upon by
DeWitt Ross & Stevens s.c., Madison, Wisconsin. Certain other legal matters
relating to the Offering will be passed upon for the Company and the Selling
Shareholders by Skadden, Arps, Slate, Meagher & Flom LLP, Boston,
Massachusetts. Certain legal matters will be passed upon for the Underwriters
by Fried, Frank, Harris, Shriver & Jacobson (a partnership including
professional corporations), New York, New York. Fried, Frank, Harris, Shriver &
Jacobson will rely on the opinion of DeWitt Ross & Stevens s.c. as to certain
matters of Wisconsin law.
EXPERTS
The financial statements and schedule of the Company and Subsidiaries as
of September 30, 1997, and for the year then ended, have been included or
incorporated by reference herein in reliance upon the reports of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere or
incorporated by reference herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of the Company and Subsidiaries as of June 30,
1996 and as of September 30, 1996 and for each of the years in the two-year
period ended June 30, 1996, and the Transition Period ended September 30, 1996
have been included herein in reliance upon the report of Coopers & Lybrand
L.L.P., independent certified public accountants, appearing elsewhere herein,
given upon the authority of said firm as experts in accounting and auditing.
In June 1997, KPMG Peat Marwick LLP replaced Coopers & Lybrand L.L.P. as
the Company's independent accountants. The decision to engage KPMG Peat Marwick
LLP was made with the approval of the Company's Audit Committee.
The Company believes, and it has been advised by Coopers & Lybrand L.L.P.
that it concurs in such belief, that, during the period of its engagement, the
Company and Coopers & Lybrand L.L.P. did not have any disagreement on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of Coopers & Lybrand L.L.P., would have caused it to make
reference in connection with its report on the Company's financial statements
to the subject matter of the disagreement.
The report of Coopers & Lybrand L.L.P. on the Company's consolidated
financial statements as of June 30, 1995 and 1996 and as of September 30, 1996
and for each of the years in the two-year period ended June 30, 1996, and the
Transition Period ended September 30, 1996, did not contain an adverse opinion
or a disclaimer of opinion, nor was it qualified or modified as to uncertainty,
audit scope or accounting principles. During that period and through the date
of their termination there were no "reportable events" within the meaning of
Item 304(a)(1)(v) of Regulation S-K promulgated under the Securities Act.
62
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, and in accordance therewith files periodic reports and
other information with the Commission. The Company has filed with the
Commission the Registration Statement under the Securities Act with respect to
the shares of Common Stock being offered in the Offerings. This Prospectus does
not contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, to which reference is hereby made. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete; with respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description
thereof. Such reports, the Registration Statement and other exhibits and other
information omitted from this Prospectus may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also
be available for inspection and copying at the regional offices of the
Commission located at 7 World Trade Center, New York, New York 10048 and at
Northwestern Atrium Center, 500 West Madison Street (Suite 1400), Chicago,
Illinois 60661. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. Additionally, the Commission maintains a World Wide
Web site at (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission through the Electronic Data Gathering, Analysis and
Retrieval System. Such reports, proxy statements and other information may also
be inspected at the offices of the New York Stock Exchange at 20 Broad Street,
New York, New York 10005.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements of the Company and quarterly reports
containing unaudited financial information for the Company for the first three
fiscal quarters of each fiscal year.
63
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed with the Commission, are
incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997, as amended by Form 10-K/A dated May 26, 1998;
(2) The Company's Quarterly Reports on Form 10-Q for the quarterly periods
ended December 27, 1997, as amended by Form 10-Q/A dated May 26, 1998, and
March 28, 1998, as amended by Form 10-Q/A dated May 26, 1998; and
(3) The description of the Common Stock contained in the Company's Registration
Statement on Form 8-A filed under Section 12 of the Exchange Act dated
November 11, 1997.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the Offerings made hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of the filing of such documents. Any statement contained in this
Prospectus, in a supplement to this Prospectus or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed supplement to this Prospectus or
in any document that also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, on the written or oral
request of any such person, a copy of any or all of the documents referred to
above which have been or may be incorporated in this Prospectus by reference,
other than exhibits to such documents unless such exhibits are specifically
incorporated by reference in such documents. Requests for such copies should be
directed to: Rayovac Corporation, 601 Rayovac Drive, Madison, Wisconsin,
53711-2497, Attention: James A. Broderick, Vice President, General Counsel and
Secretary (Telephone: (608) 275-3340).
64
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Independent Auditors' Report ............................................................. F-2
Independent Auditors' Report ............................................................. F-3
Consolidated Balance Sheets as of June 30, 1996, September 30, 1996 and 1997 ............. F-4
Consolidated Statements of Operations for the years ended June 30, 1995 and 1996,
the transition period ended September 30, 1996 and year ended September 30, 1997 ........ F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1995 and 1996,
the transition period ended September 30, 1996 and year ended September 30, 1997 ........ F-6
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended June 30,
1994, 1995 and 1996, the transition period ended September 30, 1996 and the year ended
September 30, 1997 ...................................................................... F-7
Notes to Consolidated Financial Statements ............................................... F-8
Unaudited Condensed Consolidated Balance Sheets as of March 28, 1998 and September 30,
1997 .................................................................................... F-36
Unaudited Condensed Consolidated Statements of Operations for the three and six months
ended March 29, 1997 and March 28, 1998 ................................................. F-37
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended
March 29, 1997 and March 28, 1998 ....................................................... F-38
Notes to Unaudited Condensed Consolidated Financial Statements ........................... F-39
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
Rayovac Corporation:
We have audited the accompanying consolidated balance sheet of Rayovac
Corporation and Subsidiaries as of September 30, 1997, and the related
consolidated statements of operations, shareholders' deficit, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The accompanying consolidated
financial statements of Rayovac Corporation and Subsidiaries as of June 30,
1996 and September 30, 1996, and for each of the years ended June 30, 1995 and
1996, and the transition period from July 1, 1996 to September 30, 1996, were
audited by other auditors whose report thereon dated November 22, 1996, except
for notes 2n and 2r as to which the date is April 1, 1998 expressed an
unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the fiscal year 1997 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Rayovac Corporation and Subsidiaries as of September 30, 1997, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Milwaukee, Wisconsin
October 28, 1997, except as to
note 2n., which is as of April 1, 1998
F-2
<PAGE>
Independent Auditors' Report
To the Board of Directors of
Rayovac Corporation
We have audited the accompanying consolidated balance sheets of Rayovac
Corporation and Subsidiaries as of June 30, 1996 and September 30, 1996, and
the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the two years in the period ended June
30, 1996 and the period July 1, 1996 to September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rayovac
Corporation and Subsidiaries as of June 30, 1996 and September 30, 1996, and
the results of their operations and their cash flows for each of the two years
in the period ended June 30, 1996 and the period July 1, 1996 to September 30,
1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
November 22, 1996,
except for notes 2n and 2r
as to which the date is
April 1, 1998
F-3
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1996 1996 1997
------------ --------------- --------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 2,190 $ 4,255 $ 1,133
Receivables:
Trade accounts receivable, net of allowance for doubtful
receivables of $786, $722 and $1,221, respectively .......... 55,830 62,320 76,590
Other ........................................................ 2,322 4,156 3,079
Inventories .................................................... 66,941 70,121 58,551
Deferred income taxes .......................................... 5,861 9,158 9,099
Prepaid expenses and other ..................................... 4,975 4,864 5,928
-------- ---------- ----------
Total current assets ...................................... 138,119 154,874 154,380
-------- ---------- ----------
Property, plant and equipment, net .............................. 73,181 68,640 65,511
Deferred charges and other ...................................... 9,655 7,413 7,713
Debt issuance costs ............................................. 173 12,764 9,277
-------- ---------- ----------
Total assets .............................................. $221,128 $ 243,691 $ 236,881
======== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ........................... $ 11,631 $ 8,818 $ 23,880
Accounts payable ............................................... 38,695 46,921 57,259
Accrued liabilities:
Wages and benefits ........................................... 6,126 5,894 9,343
Accrued interest ............................................. 1,890 631 5,613
Recapitalization and other special charges ................... -- 14,942 4,612
Other ........................................................ 16,557 13,019 19,856
-------- ---------- ----------
Total current liabilities ................................. 74,899 90,225 120,563
-------- ---------- ----------
Long-term debt, net of current maturities ....................... 69,718 224,845 183,441
Employee benefit obligations, net of current portion ............ 12,141 12,138 11,291
Deferred income taxes ........................................... 2,584 142 735
Other ........................................................... 162 2,061 1,446
-------- ---------- ----------
Total liabilities ......................................... 159,504 329,411 317,476
-------- ---------- ----------
Shareholders' equity (deficit):
Common stock, $.01 par value, authorized 90,000 shares;
issued 50,000 shares; outstanding 49,500, 20,470 and
20,581 shares, respectively .................................. 500 500 500
Rayovac International Corporation common stock, $.50 value,
authorized 18 shares; issued and outstanding 10 shares at
June 30, 1996 ................................................ 5 -- --
Additional paid-in capital ..................................... 12,000 15,970 15,974
Foreign currency translation adjustment ........................ 1,650 1,689 2,270
Notes receivable from officers/shareholders .................... -- (500) (1,658)
Retained earnings .............................................. 48,002 25,143 31,321
-------- ---------- ----------
62,157 42,802 48,407
Less stock held in trust for deferred compensation
plan, 160 shares ............................................. -- -- (962)
Less treasury stock, at cost, 500, 29,530 and 29,419 shares,
respectively ................................................. (533) (128,522) (128,040)
-------- ---------- ----------
Total shareholders' equity (deficit) ............................ 61,624 (85,720) (80,595)
-------- ---------- ----------
Total liabilities and shareholders' equity (deficit) ............ $221,128 $ 243,691 $ 236,881
======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Transition
Year ended June 30, Period ended Year ended
----------------------------- September 30, September 30,
1995 1996 1996 1997
------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Net sales ........................................ $ 415,224 $ 423,354 $ 101,880 $ 432,552
Cost of goods sold ............................... 237,126 239,343 59,242 234,569
--------- --------- --------- ---------
Gross profit ................................... 178,098 184,011 42,638 197,983
--------- --------- --------- ---------
Operating expenses:
Selling ......................................... 108,703 116,525 27,796 122,055
General and administrative ...................... 32,861 31,767 8,628 32,205
Research and development ........................ 5,005 5,442 1,495 6,196
Recapitalization charges ........................ -- -- 12,326 --
Other special charges ........................... -- -- 16,065 3,002
--------- --------- --------- ---------
146,569 153,734 66,310 163,458
--------- --------- --------- ---------
Income (loss) from operations .................. 31,529 30,277 (23,672) 34,525
Interest expense ................................. 8,644 8,435 4,430 24,542
Other expense, net ............................... 230 552 76 378
--------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item .............................. 22,655 21,290 (28,178) 9,605
Income tax expense (benefit) ..................... 6,247 7,002 (8,904) 3,419
--------- --------- --------- ---------
Income (loss) before extraordinary item .......... 16,408 14,288 (19,274) 6,186
Extraordinary item, loss on early
extinguishment of debt, net of income tax
benefit of $777.................................. -- -- (1,647) --
--------- --------- --------- ---------
Net income (loss) .............................. $ 16,408 $ 14,288 $ (20,921) $ 6,186
========= ========= ========= =========
Basic net income (loss) per commons share:
Income (loss) before extraordinary item ......... $ 0.33 $ 0.29 $ (0.44) $ 0.30
Extraordinary item .............................. -- -- (0.04) --
--------- --------- --------- ---------
Net income (loss) .............................. $ 0.33 $ 0.29 $ (0.48) $ 0.30
========= ========= ========= =========
Weighted average shares of common stock
outstanding ..................................... 50,000 49,643 43,820 20,530
========= ========= ========= =========
Diluted net income (loss) per common share:
Income (loss) before extraordinary item ......... $ 0.33 $ 0.29 $ (0.44) $ 0.30
Extraordinary item .............................. -- -- (0.04) --
--------- --------- --------- ---------
Net income (loss) .............................. $ 0.33 $ 0.29 $ (0.48) $ 0.30
========= ========= ========= =========
Weighted average shares of common stock
and equivalents outstanding ..................... 50,000 49,643 43,820 20,642
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Transition
Year ended June 30, Period ended Year ended
---------------------------- September 30, September 30,
1995 1996 1996 1997
------------ --------------- --------------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .............................................. $ 16,408 $ 14,288 $ (20,921) $ 6,186
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Recapitalization and other special charges ................... -- -- 13,449 --
Extraordinary item, loss on early extinguishment of debt ..... -- -- 2,424 --
Amortization of debt issuance costs .......................... 103 53 1,609 3,563
Depreciation ................................................. 11,024 11,932 3,279 11,308
Deferred income taxes ........................................ 346 3 (5,739) 652
Loss (gain) on disposal of fixed assets ...................... 110 (108) 1,289 (326)
Curtailment gain ............................................. -- -- -- (2,923)
Changes in assets and liabilities:
Accounts receivable ......................................... (2,537) (6,166) (8,940) (14,794)
Inventories ................................................. 9,004 (1,779) (3,078) 11,987
Prepaid expenses and other .................................. (990) 1,148 741 (563)
Accounts payable and accrued liabilities .................... 2,051 (1,526) (185) 30,905
Accrued recapitalization and other special charges .......... -- -- 14,942 (10,330)
---------- --------- ---------- ----------
Net cash provided (used) by operating activities ............ 35,519 17,845 (1,130) 35,665
---------- --------- ---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment ..................... (16,938) (6,646) (1,248) (10,856)
Proceeds from sale of property, plant and equipment ............ 139 298 1,281 52
---------- --------- ---------- ----------
Net cash provided (used) by investing activities ............ (16,799) (6,348) 33 (10,804)
---------- --------- ---------- ----------
Cash flows from financing activities:
Reduction of debt .............................................. (106,383) (104,526) (107,090) (135,079)
Proceeds from debt financing ................................... 85,698 96,252 259,489 108,890
Cash overdraft ................................................. 3,925 2,339 (2,493) 164
Debt issuance costs ............................................ -- -- (14,373) --
Extinguishment of debt ......................................... -- -- (2,424) --
Proceeds from direct financing lease ........................... -- -- -- 100
Distributions from DISC ........................................ (1,500) (5,187) (1,943) --
Issuance of stock .............................................. -- -- -- 271
Acquisition of treasury stock .................................. -- (533) (127,925) (3,343)
Exercise of stock options ...................................... -- -- -- 1,438
Payments on capital lease obligation ........................... -- (295) (84) (426)
---------- --------- ---------- ----------
Net cash provided (used) by financing activities ............ (18,260) (11,950) 3,157 (27,985)
---------- --------- ---------- ----------
Effect of exchange rate changes on cash and cash
equivalents .................................................... (345) (2) 5 2
---------- --------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ........ 115 (455) 2,065 (3,122)
Cash and cash equivalents, beginning of period .................. 2,530 2,645 2,190 4,255
---------- --------- ---------- ----------
Cash and cash equivalents, end of period ........................ $ 2,645 $ 2,190 $ 4,255 $ 1,133
========== ========= ========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest ......................................... $ 8,789 $ 7,535 $ 7,977 $ 16,030
Cash paid for income taxes ..................................... 8,821 5,877 419 1,172
========== ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Rayovac
International
Corporation
common stock Foreign
Common Stock (DISC) Additional currency
--------------------- ----------------- paid-in translation
Shares Amount Shares Amount capital adjustment
------------ -------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1994 ....................... 50,000 $500 10 $ 5 $12,000 $1,555
------ ---- -- ---- ------- ------
Net income ...................................... -- -- -- -- -- --
Distributions from DISC ......................... -- -- -- -- -- --
Translation adjustment .......................... -- -- -- -- -- 424
Adjustment of additional minimum pension
liability ...................................... -- -- -- -- -- --
------ ---- -- ---- ------- ------
Balances at June 30, 1995 ....................... 50,000 500 10 5 12,000 1,979
------ ---- -- ---- ------- ------
Net income ...................................... -- -- -- -- -- --
Distributions from DISC ......................... -- -- -- -- -- --
Translation adjustment .......................... -- -- -- -- -- (329)
Adjustment of additional minimum pension
liability ...................................... -- -- -- -- -- --
Treasury stock acquired ......................... (500) -- -- -- -- --
------ ---- -- ---- ------- ------
Balances at June 30, 1996 ....................... 49,500 500 10 5 12,000 1,650
------ ---- -- ---- ------- ------
Net loss ........................................ -- -- -- -- -- --
Common stock acquired in Recapitalization ....... (29,030) -- -- -- -- --
Exercise of stock options ....................... -- -- -- -- 3,970 --
Increase in cost of existing treasury stock ..... -- -- -- -- -- --
Note receivable from officers/shareholders ...... -- -- -- -- -- --
Termination of DISC ............................. -- -- (10) (5) -- --
Translation adjustment .......................... -- -- -- -- -- 39
------- ---- --- ----- ------- ------
Balances at September 30, 1996 .................. 20,470 500 -- -- 15,970 1,689
------- ---- --- ----- ------- ------
Net income ...................................... -- -- -- -- -- --
Sale of common stock ............................ 111 -- -- -- 4 --
Treasury stock acquired ......................... (556) -- -- -- -- --
Exercise of stock options and sale of common
stock to trust ................................. 556 -- -- -- -- --
Notes receivable from officers/shareholders ..... -- -- -- -- -- --
Adjustment of additional minimum pension
liability ...................................... -- -- -- -- -- --
Translation adjustment .......................... -- -- -- -- -- 581
------- ---- --- ----- ------- ------
Balances at September 30, 1997 .................. 20,581 $500 -- $-- $15,974 $2,270
======= ==== === ===== ======= ======
<CAPTION>
Notes Total
receivable Stock shareholders'
officers/ Retained held in Treasury equity
shareholders earnings trust stock (deficit)
-------------- -------------- --------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1994 ....................... $ -- $ 23,862 $ -- $ -- $ 37,922
-------- --------- ------ ---------- ---------
Net income ...................................... -- 16,408 -- -- 16,408
Distributions from DISC ......................... -- (1,500) -- -- (1,500)
Translation adjustment .......................... -- -- -- -- 424
Adjustment of additional minimum pension
liability ...................................... -- 333 -- -- 333
-------- --------- ------ ---------- ---------
Balances at June 30, 1995 ....................... -- 39,103 -- -- 53,587
-------- --------- ------ ---------- ---------
Net income ...................................... -- 14,288 -- -- 14,288
Distributions from DISC ......................... -- (5,187) -- -- (5,187)
Translation adjustment .......................... -- -- -- -- (329)
Adjustment of additional minimum pension
liability ...................................... -- (202) -- -- (202)
Treasury stock acquired ......................... -- -- -- (533) (533)
-------- --------- ------ ---------- ---------
Balances at June 30, 1996 ....................... -- 48,002 -- (533) 61,624
-------- --------- ------ ---------- ---------
Net loss ........................................ -- (20,921) -- -- (20,921)
Common stock acquired in Recapitalization ....... -- -- -- (127,425) (127,425)
Exercise of stock options ....................... -- -- -- -- 3,970
Increase in cost of existing treasury stock ..... -- -- -- (564) (564)
Note receivable from officers/shareholders ...... (500) -- -- -- (500)
Termination of DISC ............................. -- (1,938) -- -- (1,943)
Translation adjustment .......................... -- -- -- -- 39
-------- --------- ------ ---------- ---------
Balances at September 30, 1996 .................. (500) 25,143 -- (128,522) (85,720)
-------- --------- ------ ---------- ---------
Net income ...................................... -- 6,186 -- -- 6,186
Sale of common stock ............................ -- -- -- 482 486
Treasury stock acquired ......................... -- -- -- (3,343) (3,343)
Exercise of stock options and sale of common
stock to trust ................................. -- -- (962) 3,343 2,381
Notes receivable from officers/shareholders ..... (1,158) -- -- -- (1,158)
Adjustment of additional minimum pension
liability ...................................... -- (8) -- -- (8)
Translation adjustment .......................... -- -- -- -- 581
-------- ----------- ------ ---------- -----------
Balances at September 30, 1997 .................. $ (1,658) $ 31,321 $ (962) $ (128,040) $ (80,595)
======== =========== ====== ========== ===========
</TABLE>
F-7
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
1. Description of Business and Recapitalization
Rayovac Corporation and its wholly owned subsidiaries (Company)
manufacture and market a variety of battery types including general (alkaline,
rechargeables, heavy duty, lantern and general purpose), button cell and
lithium. The Company also produces a variety of lighting devices such as
flashlights and lanterns. The Company's products are sold primarily to
retailers in the United States, Canada, Europe, and the Far East.
Effective as of September 12, 1996, the Company, all of the shareholders
of the Company, Thomas H. Lee Equity Fund III L.P. (Lee Fund) and other
affiliates of Thomas H. Lee Company (THL Co.) completed a recapitalization of
the Company (Recapitalization) pursuant to which: (i) the Company obtained
senior financing in an aggregate of $170,000, of which $131,000 was borrowed at
the closing of the Recapitalization; (ii) the Company obtained $100,000 in
financing through the issuance of senior subordinated increasing rate notes of
the Company (Bridge Notes); (iii) the Company redeemed a portion of the shares
of common stock held by the former President and Chief Executive Officer of the
Company; (iv) the Lee Fund and other affiliates of THL Co. purchased for cash
shares of common stock owned by shareholders of the Company; and (v) the
Company repaid certain of its outstanding indebtedness, including prepayment
fees and penalties. The prepayment fees and penalties paid have been recorded
as an extraordinary item in the Consolidated Statements of Operations. Other
non-recurring charges of $12,300 related to the Recapitalization were also
expensed, including $2,200 in advisory fees paid to the financial advisor to
the Company's selling shareholders; various legal and consulting fees of
$2,800; and $7,300 of stock option compensation, severance payments and
employment contract settlements for the benefit of certain present and former
officers, directors and management of the Company. Payment for these costs was
or is expected to be as follows: (i) $8,900 was paid prior to September 30,
1996; (ii) $2,815 was paid in fiscal year 1997 and (iii) $585 is expected to be
paid in fiscal year 1998.
In 1996, the Company changed its fiscal year end from June 30 to September
30. For clarity of presentation herein, the period from July 1, 1996, to
September 30, 1996 is referred to as the "Transition Period Ended September 30,
1996" or "Transition Period."
2. Significant Accounting Policies and Practices
a. Principles of Combination and Consolidation: The consolidated financial
statements include the financial statements of Rayovac Corporation and
its wholly owned subsidiaries. Rayovac International Corporation, a
Domestic International Sales Corporation (DISC) which was owned by the
Company's shareholders, was combined with Rayovac Corporation through
August 1996, when the DISC was terminated and the net assets distributed
to its shareholders. All intercompany transactions have been eliminated.
For reporting purposes, all financial statements are referred to as
"consolidated" financial statements.
b. Revenue Recognition: The Company recognizes revenue from product sales
upon shipment to the customer.
c. Use of Estimates: The preparation of 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 disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
d. Cash Equivalents: For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
e. Concentrations of Credit Risk, Major Customers and Employees: The
Company's trade receivables are subject to concentrations of credit risk
as three principal customers accounted for 26%, 24% and 24% of the
outstanding trade receivables as of June 30, 1996, and September 30, 1996
and 1997, respectively.
F-8
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
2. Significant Accounting Policies and Practices--Continued
The Company derived 28%, 28%, 25% and 29% of its net sales during the
years ended June 30, 1995 and 1996, the Transition Period, and the year
ended September 30, 1997, respectively, from the same three customers.
The Company has one customer that represented over 10% of its net
sales. The Company derived 16%, 18%, 18%, and 20% of its net sales from
this customer during the years ended June 30, 1995 and 1996, the
Transition Period, and the year ended September 30, 1997, respectively.
A significant number of the Company's factory employees are represented
by one of four labor unions. The Company has recently entered into
collective bargaining agreements with its Madison and Fennimore,
Wisconsin employees each of which expires in 2000. The Company's
collective bargaining agreement with 24 of its Washington, United Kingdom
employees is scheduled to expire in December 1997. In addition, the
Company's collective bargaining agreements with its 5 Hayward, California
and 203 Portage, Wisconsin employees are scheduled to expire in May and
July 1998, respectively. The Company believes its relationship with its
employees is good and there have been no work stoppages involving Company
employees since 1981.
f. Displays and Fixtures: The costs of displays and fixtures are
capitalized and recorded as a prepaid asset and charged to expense when
shipped to a customer location. Such prepaid assets amount to
approximately $1,068, $730 and $1,456 as of June 30, 1996, and September
30, 1996 and 1997, respectively.
g. Inventories: Inventories are stated at lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
h. Property, Plant and Equipment: Property, plant and equipment are stated
at cost. Depreciation on plant and equipment is calculated on the
straight-line method over the estimated useful lives of the assets.
Depreciable lives by major classification are as follows:
<TABLE>
<S> <C>
Building and improvements .............. 20-30 years
Machinery, equipment and other ......... 5-20 years
</TABLE>
i. Debt Issuance Costs: Debt issuance costs are capitalized and amortized
to interest expense over the lives of the related debt agreements.
j. Accounts Payable: Included in accounts payable at June 30, 1996, and
September 30, 1996 and 1997, is approximately $7,805, $5,312, and $5,476,
respectively, of book overdrafts on disbursement accounts which were
replenished prior to the presentation of checks for payment.
k. Income Taxes: Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
l. Foreign Currency Translation: Assets and liabilities of the Company's
foreign subsidiaries are translated at the rate of exchange existing at
year-end, with revenues, expenses, and cash flows translated at the
average of the monthly exchange rates. Adjustments resulting from
translation of the financial statements are accumulated as a separate
component of shareholders' equity (deficit). Exchange gains (losses) on
foreign currency transactions aggregating ($112), ($750), ($70), and
($639) for the years ended June 30, 1995 and 1996, the Transition Period,
and the year ended September 30, 1997, respectively, are included in
other expense, net, in the Consolidated Statements of Operations.
F-9
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
2. Significant Accounting Policies and Practices--Continued
m. Advertising Costs: The Company incurred expenses for advertising of
$25,556, $29,976, $7,505 and $24,326 in the years ended June 30, 1995
and 1996, the Transition Period, and the year ended September 30, 1997,
respectively. The Company expenses advertising production costs as such
costs are incurred.
n. Per Share Data: The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("FAS No. 128"), in Fiscal 1998.
This statement replaces the presentation of primary and fully diluted EPS
with basic and diluted EPS. Basic EPS is computed by dividing net income
available to common shareholders by the weighted-average number of common
shares outstanding for the period. Basic EPS does not consider common
stock equivalents. Diluted EPS reflects the dilution that would occur if
convertible debt securities and employee stock options were exercised or
converted into common shares or resulted in the issuance of common shares
that then shared in the net income of the entity. The computation of
diluted EPS uses the "if converted" and "treasury stock" methods to
reflect dilution. All prior period EPS data presented has been restated
for the adoption of FAS No. 128. The difference between the number of
shares used in the two calculations is due to employee stock options.
The Company also complies with certain requirements of the Securities and
Exchange Commission with respect to the calculation of earnings per share
for initial public offerings.
o. Derivative Financial Instruments: Derivative financial instruments are
used by the Company principally in the management of its interest rate,
foreign currency and raw material price exposures.
The Company uses interest rate swaps to manage its interest rate risk.
The net amounts to be paid or received under interest rate swap agreements
designated as hedges are accrued as interest rates change and are
recognized over the life of the swap agreements, as an adjustment to
interest expense from the underlying debt to which the swap is designated.
The related amounts payable to, or receivable from, the counterparties are
included in accounts payable or accounts receivable. The Company has
entered into an interest rate swap agreement which effectively fixes the
interest rate on floating rate debt at a rate of 6.16% for notional
principal amount of $62,500 through October 1999. The fair value of this
contract at September 30, 1997 is ($159).
The Company enters into forward foreign exchange contracts relating to
the anticipated settlement in local currencies of intercompany purchases
and sales. These contracts generally require the Company to exchange
foreign currencies for U.S. dollars. The contracts are marked to market,
and the related adjustment is recognized in other expense, net. The related
amounts payable to, or receivable from, the counterparties are included in
accounts payable or accounts receivable. The Company has approximately
$3,100 of forward exchange contracts at September 30, 1997. The fair value
at September 30, 1997, approximated the contract value.
The Company is exposed to risk from fluctuating prices for commodities
used in the manufacturing process. The Company hedges some of this risk
through the use of commodity calls and puts. The Company is buying calls,
which allow the Company to purchase a specified quantity of zinc through a
specified date for a fixed price, and writing puts, which allow the buyer
to sell to the Company a specified quantity of zinc through a specified
date at a fixed price. The maturity of, and the quantities covered by, the
contracts highly correlate to the Company's anticipated purchases of the
commodity. The cost of the calls, and the premiums received from the puts,
are amortized over the life of the agreements and are recorded in cost of
goods sold, along with the effect of the put and call agreements. At
September 30, 1997, the Company has purchased a series of calls with a
contract value of approximately $2,800 and sold a series of puts with a
contact value of approximately $2,400 for the period from October through
March designed to set a ceiling and floor price. While these transactions
have no carrying value, the fair value of these contracts was approximately
$138 at
F-10
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
2. Significant Accounting Policies and Practices--Continued
September 30, 1997. The Company has a receivable at September 30, 1997,
of approximately $222 in the accompanying consolidated balance sheet from
the settlement of September contracts.
These fair values represent the estimated amount the Company would
receive or pay to terminate agreements at September 30, 1997, taking into
consideration current market rates and the current credit worthiness of
the counterparties based on dealer quotes. The Company may be exposed to
credit loss in the event of nonperformance by the counterparties to these
contracts, but does not anticipate such nonperformance.
p. Environmental Expenditures: Environmental expenditures that relate to
current ongoing operations or to conditions caused by past operations are
expensed. The Company determines its liability on a site by site basis
and records a liability at the time when it is probable and can be
reasonably estimated. The estimated liability is not reduced for possible
recoveries from insurance carriers.
q. Stock Split: In September 1996, the Company's Board of Directors
declared a five-for-one stock split. A total of 16,376 additional shares
were issued in conjunction with the stock split to shareholders of
record. All applicable share and per share amounts herein have been
restated to reflect the stock split retroactively.
r. Reclassification: Certain prior year amounts have been reclassified to
conform with the current year presentation.
The Company has reclassified certain promotional expenses, previously
reported as a reduction of net sales, to selling expense. The amounts
which have been reclassified are $24,236 and $23,970 for the years ended
June 30, 1995 and 1996, respectively, $6,899 for the Transition Period
ended September 30, 1996, and $28,702 for the year ended September 30,
1997.
s. Impact of Recently Issued Accounting Standards: In February 1997, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share (FAS 128). FAS 128 will
be effective for periods ending after December 15, 1997, and specifies
the computation, presentation, and disclosure requirements for earnings
per share. Adoption of this accounting standard is not expected to have a
material effect on the earnings per share computations of the Company
assuming the current capital structure.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income (FAS 130), which
establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
All items that are required to be recognized under accounting standards
as components of comprehensive income are to be reported in a financial
statement that is displayed with the same prominence as other financial
statements. FAS 130 requires that an enterprise (i) classify items of
other comprehensive income by their nature in a financial statement, and
(ii) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital in the
equity section of the balance sheet. FAS 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is
required. The Company is evaluating the effect of this pronouncement on
its consolidated financial statements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information (FAS 131), which is effective for financial
statements for periods beginning after December 15, 1997. FAS 131
establishes standards for the way public business enterprises are to
report information about operating segments in annual financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Company is evaluating the effect of this pronouncement on
its consolidated financial statements.
F-11
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1996 1996 1997
---------- --------------- --------------
<S> <C> <C> <C>
Raw material ................................................. $24,238 $25,300 $23,291
Work-in-process .............................................. 19,081 14,651 15,286
Finished goods ............................................... 23,622 30,170 19,974
------- ------- -------
$66,941 $70,121 $58,551
======= ======= =======
</TABLE>
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1996 1996 1997
---------- --------------- --------------
<S> <C> <C> <C>
Land, building and improvements .............................. $ 15,469 $ 16,824 $ 10,752
Machinery, equipment and other ............................... 117,248 117,754 120,894
Construction in process ...................................... 5,339 6,232 11,326
-------- -------- --------
138,056 140,810 142,972
Less accumulated depreciation ................................ 64,875 72,170 77,461
-------- -------- --------
$ 73,181 $ 68,640 $ 65,511
======== ======== ========
</TABLE>
5. Debt
Debt consists of the following:
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1996 1996 1997
---------- --------------- --------------
<S> <C> <C> <C>
Term loan facility ........................................... $ -- $105,000 $ 100,500
Revolving credit facility .................................... -- 23,500 4,500
Series B Senior Subordinated Notes, due November 1,
2006, with interest at 10-1/4% payable semi-annually ........ -- -- 100,000
Bridge Notes ................................................. -- 100,000 --
Debt paid September 1996 due to Recapitalization:
Senior Secured Notes due 1997 through 2002 .................. 29,572 -- --
Subordinated Notes due through 2003 ......................... 7,270 -- --
Revolving credit facility ................................... 39,250 -- --
Notes payable in Pounds Sterling to a foreign bank, due
on demand, with interest at bank's base rate plus
1.87% ....................................................... 1,242 939 --
Capitalized lease obligation ................................. 1,330 1,246 866
Notes and obligations, weighted average interest rate of
5.24% at September 30, 1997 ................................. 2,685 2,978 1,455
------- -------- ---------
81,349 233,663 207,321
Less current maturities ...................................... 11,631 8,818 23,880
------- -------- ---------
Long-term debt ............................................... $69,718 $224,845 $ 183,441
======= ======== =========
</TABLE>
F-12
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
5. Debt --Continued
On September 12, 1996, the Company executed a Credit Agreement (Agreement)
arranged by BA Securities, Inc., Donaldson, Lufkin & Jenrette Securities
Corporation and certain of its affiliates for a group of financial institutions
and other accredited investors. The Agreement provides for senior bank
facilities, including term and revolving credit facilities in an aggregate
amount of $170,000. Interest on borrowings is computed, at the Company's
option, based on the Bank of America Illinois' base rate, as defined, (Base
Rate) or the Interbank Offering Rate (IBOR).
The term loan facility includes: (i) Tranche A term loan of $55,000,
quarterly amortization ranging from $1,000 to $3,750 beginning December 31,
1996, through September 30, 2002, interest at the Base Rate plus 1.5% per annum
or at IBOR plus 2.5% per annum (8.49% at September 30, 1997); (ii) Tranche B
term loan of $25,000, quarterly amortization amounts of $62.5 during each of
the first six years and $5,875 in the seventh year beginning December 31, 1996,
through September 30, 2003, interest at the Base Rate plus 2.0% per annum, or
IBOR plus 3.0% per annum (8.93% at September 30, 1997); (iii) Tranche C term
loan of $25,000, quarterly amortization of $62.5 during each of the first seven
years and $5,812.5 during the eighth year beginning December 31, 1996, through
September 30, 2004; interest at the Base Rate plus 2.25% per annum or IBOR plus
3.25% per annum (9.10% at September 30, 1997).
The revolving credit facility provides for aggregate working capital loans
up to $65,000 through September 30, 2002, reduced by outstanding letters of
credit ($10,000 limit), and other existing credit facilities and outstanding
obligations (approximately $5,000 at September 30, 1997). Interest on
borrowings is at the Base Rate plus 1.5% per annum or IBOR plus 2.5% per annum
(10.0% at September 30, 1997). The Company had outstanding letters of credit of
approximately $631 at September 30, 1997. A fee of 2.5% per annum is payable on
the outstanding letters of credit. The Company also incurs a fee of .25% per
annum of the average daily maximum amount available to be drawn on each letter
of credit issued. The revolving credit facility must be reduced for 30
consecutive days to no more than $5,000 for the fiscal year ending September
30, 1998, and to zero for any fiscal year thereafter.
The Agreement contains financial covenants with respect to borrowings
which include fixed charge coverage, adjusted net worth, and minimum earnings
before interest, income taxes, depreciation, amortization. In addition, the
Agreement restricts capital expenditures and the payment of dividends. The
Company is required to pay a commitment fee of 0.50% per annum on the average
daily unused portion of the revolving credit facility. The Tranche A term loan
and the revolving credit facility interest rates may be adjusted downward if
the Company's leverage ratio, as defined, decreases. Borrowings under the
Agreement are collateralized by substantially all the assets of the Company.
The Agreement also contains certain mandatory prepayment provisions, one of
which requires the Company to pay down $14.5 million by December 29, 1997 due
to excess cash flow generated as of September 30, 1997.
On October 22, 1996, the Company completed a private debt offering of
10-1/4% Senior Subordinated Notes due in 2006 (Old Notes) pursuant to an
Indenture. In March 1997, the Company exchanged the Old Notes for 10-1/4% Series
B Senior Subordinated Notes due in 2006 (New Notes) registered with the
Securities and Exchange Commission. The terms of the New Notes are identical in
all material respects to terms of the Old Notes. On or after November 1, 2001
or in certain circumstances, after a public offering of equity securities of
the Company, the New Notes will be redeemable at the option of the Company, in
whole or in part, at prescribed redemption prices plus accrued and unpaid
interest.
Upon a change in control, the Company shall be required to repurchase all
or any part of the New Notes at a purchase price equal to 101% of the aggregate
principal amount. The Company is also required to repurchase all or a portion
of the New Notes upon consummation of an asset sale, as defined, in excess of
$5,000.
The terms of the New Notes restrict or limit the ability of the Company
and its subsidiaries to, among other things, (i) pay dividends or make other
restricted payments, (ii) incur additional indebtedness and issue preferred
F-13
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
5. Debt --Continued
stock, (iii) create liens, (iv) incur dividend and other payment restrictions
affecting subsidiaries, (v) enter into mergers, consolidations, or sales of all
or substantially all of the assets of the Company, (vi) make asset sales, (vii)
enter into transactions with affiliates, and (viii) issue or sell capital stock
of wholly owned subsidiaries of the Company. Payment obligations under the New
Notes are fully and unconditionally guaranteed on a joint and several basis by
the Company's directly and wholly owned subsidiary, ROV Holding, Inc. (ROV or
Guarantor Subsidiary). The foreign subsidiaries of the Company, which do not
guarantee the payment obligations under the New Notes (Nonguarantor
Subsidiaries), are directly and wholly owned by ROV. See note 17.
The proceeds from the new Notes were used to pay down the Bridge Notes.
The Bridge Notes bore interest at prime plus 3.5%.
The aggregate scheduled maturities of debt are as follows:
<TABLE>
<S> <C>
Year ending September 30,
1998 ............................ $ 23,880
1999 ............................ 12,441
2000 ............................ 10,500
2001 ............................ 12,500
2002 ............................ 15,500
Thereafter ...................... 132,500
--------
$207,321
========
</TABLE>
The capitalized lease obligation is payable in Pounds Sterling in
installments of $425 in 1998 and $441 in 1999.
The carrying values of the debt instruments noted above are approximately
96% of their estimated fair values.
6. Shareholders' Equity (Deficit)
During the year ended June 30, 1996, the former principal shareholder of
the Company granted an officer and a director options to purchase 235 shares of
common stock owned by the shareholder personally at exercise prices per share
ranging from $3.65 to $5.77 (the book values per share at the respective dates
of grant). These options were exercised in conjunction with the
Recapitalization and resulted in a charge to earnings of approximately $3,970
during the Transition Period and an increase in additional paid-in capital in
the Consolidated Statements of Shareholders' Equity (Deficit).
Treasury stock acquired during the year ended June 30, 1996 was subject to
an agreement which provided the selling shareholder with additional
compensation for the common stock sold if a change in control occurred within a
specified period of time. As a result of the Recapitalization, the selling
shareholder was entitled to an additional $564, which is reflected as an
increase in treasury stock in the Consolidated Statements of Shareholders'
Equity (Deficit).
Retained earnings includes DISC retained earnings of $1,594 at June 30,
1996. In August 1996, the DISC was terminated and the net assets were
distributed to its shareholders.
In January 1997, the Company established a trust to fund future payments
under a deferred compensation plan. Certain employees eligible to participate
in the plan assigned stock options to the plan. The plan exercised the options
and purchased 160 shares of the Company's common stock. Shares issued to the
trust are valued at $962 and are reflected as a reduction of stockholders'
equity in the consolidated balance sheet.
The Company and the former principal shareholder of the Company, entered
into a Stock Sale Agreement, dated as of August 1, 1997 pursuant to which the
former principal shareholder sold 2,023 shares of common stock at $6.01 per
share to the Company and to the Thomas H. Lee Equity Fund III, L.P. (the "Lee
Fund") and certain other affiliates of Thomas H. Lee Company ("THL Co.," the
Lee Fund and such other affiliates being referred to
F-14
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
6. Shareholders' Equity (Deficit) --Continued
herein as the "Lee Group"). The Stock Sale Agreement provides that, among other
things, if (i) the Company enters into a business combination or other
transaction with a third party whereby less than a majority of the outstanding
capital stock of the surviving entity is owned by the Lee Group, and (ii) such
business combination or other transaction is the result of negotiations or
discussions entered into prior to December 31, 1997 and such combination is
consummated prior to June 30, 1998, then the Lee Group will remit to the former
principal shareholder all amounts, if any, received by the Lee Group (or any
affiliated transferee of shares owned by the Lee Group) from the sale of the
shares of common stock to such third party in excess of $6.01 per share. In
September 1997, another former shareholder sold 205 shares of common stock to
the Company and the Lee Group under similar terms.
On October 22, 1997, the shareholders of the Company approved the
authorization of 5,000 shares of Preferred Stock, $.01 par value, and an
increase in authorized shares of Common Stock from 90,000 to 150,000.
7. Stock Option Plans
Effective September 1996, the Company's Board of Directors (Board)
approved the Rayovac Corporation 1996 Stock Option Plan (1996 Plan) which is
intended to afford an incentive to select employees and directors of the
Company to promote the interests of the Company. Under the 1996 Plan, stock
options to acquire up to 3,000 shares of common stock, in the aggregate, may be
granted under either or both a time-vesting or a performance-vesting formula at
an exercise price equal to the market price of the common stock on the date of
grant. The time-vesting options become exercisable primarily in equal 20%
increments over a five year period. The performance-vesting options become
exercisable at the end of ten years with accelerated vesting over each of the
next five years if the Company achieves certain performance goals. Accelerated
vesting may occur upon sale of the Company, as defined in the Plan.
On September 3, 1997, the Board adopted the 1997 Rayovac Incentive Plan
(Incentive Plan) which was approved by the Shareholders on October 22, 1997 and
expires in August 2007. The Incentive Plan replaces the 1996 Plan and no
further awards will be granted under the 1996 Plan other than awards of options
for shares up to an amount equal to the number of shares covered by options
that terminate or expire prior to being exercised. Under the Incentive Plan,
the Company may grant to employees and non-employee directors stock options,
stock appreciation rights (SARs), restricted stock, and other stock-based
awards, as well as cash-based annual and long-term incentive awards.
Accelerated vesting will occur in the event of a change in control, as defined
in the Incentive Plan. Up to 3,000 shares of common stock may be issued under
the Incentive Plan.
During 1997, the Company adopted the Rayovac Corporation 1997 Stock Option
Plan (1997 Plan). Under the 1997 Plan, stock options to acquire up to 665
shares of common stock, in the aggregate, may be granted. The exercise price is
$6.01. The 1997 Plan and each option granted thereunder expire no later than
November 30, 1997.
A summary of the status of the Company's plan is as follows:
<TABLE>
<CAPTION>
Transition period ended Year ended
September 30, 1996 September 30, 1997
------------------------------ -----------------------------
Weighted-average Weighted-average
Options exercise price Options exercise price
--------- ------------------ --------- -----------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period ........... -- $ -- 1,464 $ 4.39
Granted .................................... 1,464 4.30 1,410 5.03
Exercised .................................. -- -- (556) 6.01
----- ----- ----- -------
Outstanding, end of period ................. 1,464 $ 4.30 2,318 $ 4.33
===== ====== ===== =======
Options exercisable, end of period ......... 40 $ 1.14 496 $ 4.13
===== ====== ===== =======
</TABLE>
The stock options outstanding on September 30, 1997, have a
weighted-average remaining contractual life estimated at 9.5 years.
F-15
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
7. Stock Option Plans --Continued
<TABLE>
<CAPTION>
Transition
period ended Year ended
September 30, 1996 September 30, 1997
-------------------- -------------------
<S> <C> <C>
Weighted-average grant-date
fair value of options granted during period ......... $ 1.92 $ 1.84
Assumptions used:
Risk-free interest rate ............................. 6.78% 6.78%
Expected life ....................................... 8 years 8 years
</TABLE>
The Company applies APB Opinion 25, Accounting for Stock Issued to Employees,
and related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized in the Consolidated Statements of
Operations. Had the Company recognized compensation expense determined on the
fair value at the grant dates for awards under the plans consistent with the
method prescribed by FASB Statement No. 123, Accounting for Stock Based
Compensation (SFAS No. 123), the Company's net income (loss) and net income
(loss) per share, on a pro forma basis, for the Transition Period and the year
ended September 30, 1997, would have been ($21,035) and ($0.48) per share and
$5,680 and $0.28 per share, respectively. The effects of applying FASB 123 may
not be representative of the effects on reported net income (loss) for future
years.
8. Income Taxes
Pretax income (loss) (income (loss) before income taxes and extraordinary
item) and income tax expense (benefit) consist of the following:
<TABLE>
<CAPTION>
Years ended Transition Year
June 30, period ended ended
----------------------- September 30, September 30,
1995 1996 1996 1997
---------- ---------- --------------- --------------
<S> <C> <C> <C> <C>
Pretax income (loss):
United States ..................... $16,505 $17,154 $ (27,713) $6,214
Outside the United States ......... 6,150 4,136 (2,889) 3,391
------- ------- --------- ------
Total pretax income (loss) ......... $22,655 $21,290 $ (30,602) $9,605
======= ======= ========= ======
Income tax expense (benefit):
Current:
Federal .......................... $ 3,923 $ 5,141 $ (3,870) $2,926
Foreign .......................... 797 1,469 (72) (176)
State ............................ 1,181 389 -- 17
------- ------- --------- ------
Total current 5,901 6,999 (3,942) 2,767
------- ------- --------- ------
Deferred:
Federal .......................... 799 54 (3,270) (842)
Foreign .......................... (544) (57) (847) 809
State ............................ 91 6 (1,622) 685
------- ------- --------- ------
Total deferred .................... 346 3 (5,739) 652
------- ------- --------- ------
$ 6,247 $ 7,002 $ (9,681) $3,419
======= ======= ========= ======
</TABLE>
F-16
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
8. Income Taxes --Continued
The following reconciles the Federal statutory income tax rate with the
Company's effective tax rate:
<TABLE>
<CAPTION>
Years ended Transition Year
June 30, period ended ended
----------------------- September 30, September 30,
1995 1996 1996 1997
---------- ---------- --------------- --------------
<S> <C> <C> <C> <C>
Statutory Federal income tax rate ...................... 35.0% 35.0% 35.0% 35.0%
DISC/FSC commission income ............................. (5.9) (5.2) 0.4 (1.2)
Effect of foreign items and rate differentials ......... (4.0) 1.0 (1.2) 0.3
State income taxes, net ................................ 3.6 1.1 3.9 4.9
Reduction of prior year tax provision .................. -- -- -- (3.0)
Nondeductible recapitalization charges ................. -- -- (6.2) --
Other .................................................. (1.1) 1.0 (0.3) (0.4)
---- ---- ---- ----
27.6% 32.9% 31.6% 35.6%
==== ==== ==== ====
</TABLE>
The components of the net deferred tax asset and types of significant
basis differences were as follows:
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1996 1996 1997
------------ --------------- --------------
<S> <C> <C> <C>
Current deferred tax assets:
Recapitalization charges .............................. $ -- $ 2,991 $ 792
Inventories and receivables ........................... 1,395 1,407 1,495
Marketing and promotional accruals .................... 1,498 1,252 3,256
Employee benefits ..................................... 1,554 1,780 1,509
Environmental accruals ................................ 420 752 679
Other ................................................. 994 976 1,368
-------- -------- --------
Total current deferred tax assets .................... 5,861 9,158 9,099
-------- -------- --------
Noncurrent deferred tax assets:
Employee benefits ..................................... 3,053 4,504 4,214
State net operating loss carryforwards... ............. -- 1,249 468
Package design expense ................................ 532 523 927
Promotional expense ................................... 784 854 594
Other ................................................. 1,516 1,475 1,753
-------- -------- --------
Total noncurrent deferred tax assets ................. 5,885 8,605 7,956
-------- -------- --------
Noncurrent deferred tax liabilities:
Property, plant, and equipment ........................ (8,430) (8,708) (8,651)
Other ................................................. (39) (39) (40)
-------- -------- --------
Total noncurrent deferred tax liabilities ............ (8,469) (8,747) (8,691)
-------- -------- --------
Net noncurrent deferred tax liabilities ................ $ (2,584) $ (142) $ (735)
======== ======== ========
</TABLE>
At September 30, 1997, the Company has operating loss carryforwards for
state income tax purposes of approximately $6,000, which expire generally in
years through 2012.
During 1995, the Company used approximately $3,200 of foreign net
operating loss carryforwards for which a deferred tax asset had not been
recognized in prior years due to uncertainty regarding future earnings of the
subsidiaries to which the carryforwards related. As a result, the Company
reversed the valuation allowance of $1,240 recorded at June 30, 1994, in 1995.
F-17
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
8. Income Taxes --Continued
Provision has not been made for United States income taxes on a portion of
the undistributed earnings of the Company's foreign subsidiaries (approximately
$4,342, $4,216, and $4,737 at June 30, 1996, and September 30, 1996 and 1997,
respectively), either because any taxes on dividends would be offset
substantially by foreign tax credits or because the Company intends to reinvest
those earnings. Such earnings would become taxable upon the sale or liquidation
of these foreign subsidiaries or upon remittance of dividends. It is not
practicable to estimate the amount of the deferred tax liability on such
earnings.
9. Leases
Future minimum rental commitments under noncancelable operating leases,
principally pertaining to land, buildings and equipment, are as follows:
<TABLE>
<S> <C>
Year ending September 30,
1998 .................... $ 6,828
1999 .................... 5,404
2000 .................... 4,455
2001 .................... 4,012
2002 .................... 4,017
Thereafter .............. 34,112
-------
$58,828
=======
</TABLE>
The above lease commitments include payments under leases for the
corporate headquarters facilities and other properties from partnerships in
which one of the Company's former shareholders is a partner. Annual minimum
rental commitments on the headquarters facility of $2,817 are subject to an
adjustment based upon changes in the Consumer Price Index. The leases on the
other properties require annual lease payments of $470 subject to annual
inflationary increases. All of the leases expire during the years 1998 through
2013.
Total rental expense was $8,189, $8,213, $1,995, and $8,126, for the years
ended June 30, 1995 and 1996, the Transition Period, and the year ended
September 30, 1997, respectively.
10. Postretirement Pension Benefits
The Company has various defined benefit pension plans covering
substantially all of its domestic employees. Plans covering salaried employees
provide pension benefits that are based on the employee's average compensation
for the five years which yield the highest average during the 10 consecutive
years prior to retirement. Plans covering hourly employees and union members
generally provide benefits of stated amounts for each year of service. The
Company's policy is to fund pension costs at amounts within the acceptable
ranges established by the Employee Retirement Income Security Act of 1974.
The Company also has nonqualified deferred compensation agreements with
certain of its employees under which the Company has agreed to pay certain
amounts annually for the first 15 years subsequent to retirement or to a
designated beneficiary upon death. It is management's intent that life
insurance contracts owned by the Company will fund these agreements.
F-18
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
10. Postretirement Pension Benefits --Continued
Net periodic pension cost for the aforementioned plans is summarized as
follows:
<TABLE>
<CAPTION>
Years ended Transition Year
June 30, period ended ended
------------------------- September 30, September 30,
1995 1996 1996 1997
----------- ----------- --------------- --------------
<S> <C> <C> <C> <C>
Service cost .................................. $ 1,711 $ 1,501 $2,149 $ 1,705
Interest cost ................................. 3,390 3,513 944 3,834
Actual return on plan assets .................. (2,054) (7,880) (605) (6,191)
Net amortization and deferral ................. (708) 4,994 (166) 2,763
Curtailment gain .............................. -- -- -- (2,923)
-------- -------- ------ --------
Net periodic pension cost (benefit) ......... $ 2,339 $ 2,128 $2,322 $ (812)
======== ======== ====== ========
</TABLE>
The following tables set forth the plans' funded status:
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------
Assets exceed Accumulated
accumulated benefits
benefits exceed assets
--------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation ............................................ $ 24,927 $ 19,138
Accumulated benefit obligation ....................................... 25,576 19,932
======== =========
Projected benefit obligation .......................................... $ 31,462 $ 19,932
Plan assets at fair value, primarily listed stocks, bonds and
cash equivalents ..................................................... 32,297 9,349
-------- ---------
Projected benefit obligation (in excess of) less than plan assets ..... 835 (10,583)
Unrecognized net gain ................................................. (2,341) (893)
Unrecognized net obligation (asset) ................................... (211) 4,711
Additional minimum liability .......................................... -- (3,823)
-------- ---------
Pension liability ................................................... $ (1,717) $ (10,588)
======== =========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996
--------------------------------
Assets exceed Accumulated
accumulated benefits
benefits exceed assets
--------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation ............................................ $ 25,273 $ 19,495
Accumulated benefit obligation ....................................... 25,930 20,305
======== =========
Projected benefit obligation .......................................... $ 31,910 $ 20,305
Plan assets at fair value, primarily listed stocks, bonds and
cash equivalents ..................................................... 32,341 9,364
-------- ---------
Projected benefit obligation (in excess of) less than plan assets ..... 431 (10,941)
Unrecognized net gain ................................................. (2,147) (832)
Unrecognized net obligation (asset) ................................... (208) 2,894
Additional minimum liability .......................................... -- (2,067)
Contribution .......................................................... 86 756
-------- ---------
Pension liability ................................................... $ (1,838) $ (10,190)
======== =========
</TABLE>
F-19
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
10. Postretirement Pension Benefits --Continued
<TABLE>
<CAPTION>
September 30, 1997
--------------------------------
Assets exceed Accumulated
accumulated benefits
benefits exceed assets
--------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation ............................................ $ 42,696 $ 13,326
Accumulated benefit obligation ....................................... 43,046 13,704
======== =========
Projected benefit obligation .......................................... $ 43,046 $ 13,704
Plan assets at fair value, primarily listed stocks, bonds and
cash equivalents ..................................................... 43,212 3,098
-------- ---------
Projected benefit obligation (in excess of) less than plan assets ..... 166 (10,606)
Unrecognized net loss (gain) .......................................... (1,194) 1
Unrecognized net asset ................................................ 1,028 1,476
Additional minimum liability .......................................... -- (1,486)
-------- ---------
Pension liability ................................................... $ -- $ (10,615)
======== =========
</TABLE>
Assumptions used in accounting for the aforementioned plans were:
<TABLE>
<CAPTION>
Years ended Transition Year
June 30, period ended ended
--------------------- September 30, September 30,
1995 1996 1996 1997
--------- --------- --------------- --------------
<S> <C> <C> <C> <C>
Discount rate used for funded status calculation ......... 8.0% 7.5% 7.5% 7.5%
Discount rate used for net periodic pension cost
calculations ............................................ 7.5 8.0 7.5 7.5
Rate of increase in compensation levels
(salaried plan only) .................................... 5.5 5.0 5.0 5.0
Expected long-term rate of return on assets .............. 9.0 9.0 9.0 9.0
</TABLE>
During the year ended September 30, 1997, the Company merged two of its
defined benefit plans and ceased future benefit accruals. The Company
recognized a $2,923 curtailment gain, which is included in other special
charges in the consolidated statement of operations. A discount rate of 6.5%
was used in the accounting for the curtailed plans. The Company has recorded an
additional minimum pension liability of $3,823, $2,067, and $1,486 at June 30,
1996, and September 30, 1996 and 1997, respectively, to recognize the
underfunded position of certain of its benefits plans. An intangible asset of
$3,582, $1,826, and $1,232 at June 30, 1996, and September 30, 1996 and 1997,
respectively, equal to the unrecognized prior service cost of these plans, has
also been recorded. The excess of the additional minimum liability over the
unrecognized prior service cost of $241 at June 30 and September 30, 1996, and
$249 at September 30, 1997, respectively, has been recorded as a reduction of
shareholders' equity (deficit).
The Company sponsors a defined contribution pension plan for its domestic
salaried employees which allows participants to make contributions by salary
reduction pursuant to Section 401(k) of the Internal Revenue Code. The Company
contributes annually 1% of participants' compensation, and may make additional
discretionary contributions. The Company also sponsors defined contribution
pension plans for employees of certain foreign subsidiaries. Company
contributions charged to operations, including discretionary amounts, for the
years ended June 30, 1995 and 1996, the Transition Period, and September 30,
1997, were $1,273, $ 1,000, $181, and $914, respectively.
F-20
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
11. Other Postretirement Benefit Plan
The Company provides certain health care and life insurance benefits to
eligible retired employees. Participants earn retiree health care benefits
after reaching age 45 over the next 10 succeeding years of service and remain
eligible until reaching age 65. The plan is contributory; retiree contributions
have been established as a flat dollar amount with contribution rates expected
to increase at the active medical trend rate. The plan is unfunded. The Company
is amortizing the transition obligation over a 20-year period.
The following sets forth the plan's funded status reconciled with amounts
reported in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1996 1996 1997
---------- --------------- --------------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees ........................................... $ 723 $ 687 $ 722
Fully eligible active participants ................. 805 820 813
Other active participants .......................... 896 970 869
-------- -------- --------
Total APBO .......................................... 2,424 2,477 2,404
Unrecognized net loss ............................... (1,269) (1,246) (1,008)
Unrecognized transition obligation .................. (641) (631) (591)
-------- -------- --------
Accrued postretirement benefit liability .......... $ 514 $ 600 $ 805
======== ======== ========
</TABLE>
Net periodic postretirement benefit cost includes the following
components:
<TABLE>
<CAPTION>
Years ended Transition Year
June 30, period ended ended
--------------- September 30, September 30,
1995 1996 1996 1997
------ ------ --------------- --------------
<S> <C> <C> <C> <C>
Service cost ....................................... $110 $129 $ 58 $249
Interest ........................................... 85 111 44 179
Net amortization and deferral ...................... 40 54 35 138
---- ---- ---- ----
Net periodic postretirement benefit cost ......... $235 $294 $137 $566
==== ==== ==== ====
</TABLE>
For measurement purposes, a 9.5% annual rate of increase in the per capita
costs of covered health care benefits was assumed for fiscal 1996 and 1997,
gradually decreasing to 5.5%. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation as of September 30,
1997, by $148 and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost for the year ended September 30, 1997,
by $40. A discount rate of 7.5% was used to determine the accumulated
postretirement benefit obligation.
F-21
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
12. Business Segment and International Operations
Information about the Company's operations in different geographic areas
is summarized follows:
<TABLE>
<CAPTION>
Years ended Transition Year
June 30, period ended ended
------------------------- September 30, September 30,
1995 1996 1996 1997
------------ ------------ --------------- --------------
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers:
United States ..................... $ 337,888 $ 341,967 $ 82,329 $ 352,468
Foreign:
Europe ........................... 60,696 64,432 15,304 62,546
Other ............................ 16,640 16,955 4,247 17,538
--------- --------- --------- ---------
Total .............................. $ 415,224 $ 423,354 $ 101,880 $ 432,552
========= ========= ========= =========
Transfers between geographic areas:
United States ..................... $ 26,928 $ 27,097 $ 7,432 $ 28,403
Foreign:
Europe ........................... 1,637 730 422 1,459
Other ............................ 49 -- -- --
--------- --------- --------- ---------
Total .............................. $ 28,614 $ 27,827 $ 7,854 $ 29,862
========= ========= ========= =========
Net sales:
United States ..................... $ 364,816 $ 369,065 $ 89,760 $ 380,872
Foreign:
Europe ........................... 62,333 65,161 15,727 64,004
Other ............................ 16,689 16,955 4,247 17,538
Eliminations ...................... (28,614) (27,827) (7,854) (29,862)
--------- --------- --------- ---------
Total .............................. $ 415,224 $ 423,354 $ 101,880 $ 432,552
========= ========= ========= =========
Income (loss) from operations:
United States ..................... $ 24,335 $ 24,759 $ (20,983) $ 30,379
Foreign:
Europe ........................... 5,410 5,002 (2,539) 3,759
Other ............................ 1,784 516 (150) 387
--------- --------- --------- ---------
Total .............................. $ 31,529 $ 30,277 $ (23,672) $ 34,525
========= ========= ========= =========
Total assets:
United States ..................... $ 189,557 $ 192,441 $ 213,730 $ 208,971
Foreign:
Europe ........................... 34,345 33,719 35,065 32,137
Other ............................ 16,093 17,532 18,782 17,946
Eliminations ...................... (19,405) (22,564) (23,886) (22,173)
--------- --------- --------- ---------
Total .............................. $ 220,590 $ 221,128 $ 243,691 $ 236,881
========= ========= ========= =========
</TABLE>
13. Commitments and Contingencies
The Company has entered into agreements to purchase certain equipment and
to pay annual royalties. In a December 1991 agreement, the Company committed to
pay $1,500 in January 1992 and annual royalties of $1,500 for the first five
years, beginning in 1993, plus $500 for each year thereafter, as long as the
related equipment patents are enforceable. In a March 1994 agreement, the
Company committed to pay $500 in April 1994 and annual royalties
F-22
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
13. Commitments and Contingencies --Continued
of $500 for five years beginning in 1995. Additionally, the Company has
committed to purchase tooling of $957 related to this equipment, $66 for other
tooling, at an unspecified date in the future and purchase manganese ore
amounting to $120 by March 1998.
The Company has provided for the estimated costs associated with
environmental remediation activities at some of its current and former
manufacturing sites. In addition, the Company, together with other parties, has
been designated a potentially responsible party of various third-party sites on
the United States EPA National Priorities List (Superfund). The Company
provides for the estimated costs of investigation and remediation of these
sites when such losses are probable and the amounts can be reasonably
estimated. The actual cost incurred may vary from these estimates due to the
inherent uncertainties involved. The Company believes that any additional
liability in excess of the amounts provided of $1,787, which may result from
resolution of these matters, will not have a material adverse effect on the
financial condition, liquidity, or cash flow of the Company.
The Company has certain other contingent liabilities with respect to
litigation, claims and contractual agreements arising in the ordinary course of
business. In the opinion of management, such contingent liabilities are not
likely to have a material adverse effect on the financial condition, liquidity
or cash flow of the Company.
14. Related Party Transactions
The Company and THL Co. are parties to a Management Agreement pursuant to
which the Company has engaged THL Co. to provide consulting and management
advisory services for an initial period of five years through September 2001.
In consideration of ongoing consulting and management advisory services, the
Company will pay THL Co. an aggregate annual fee of $360 plus expenses. Under
the Management Agreement and in connection with the closing of the
Recapitalization, the Company paid THL Co. and an affiliate $3,250 during the
Transition Period. The Company paid THL Co. aggregate fees of $386 for the year
ended September 30, 1997.
The Company and a shareholder of the Company (the principal shareholder
prior to the Recapitalization) are parties to agreements which include a
consulting arrangement and noncompetition provisions. Terms of the agreements
required the shareholder to provide consulting services for an annual fee of
$200 plus expenses. The term of these agreements runs concurrent with the
Management Agreement, subject to certain conditions as defined in the
agreements. The Consulting Agreement was terminated August 1, 1997. The Company
paid the shareholder $175 for the year ended September 1997.
The Company has notes receivable from officers in the amount of $500 and
$1,261 at September 30, 1996 and 1997, respectively, generally payable in five
years, which bear interest at 7% to 8%. Since the officers utilized the
proceeds of the notes to purchase common stock of the Company, directly or
through the exercise of stock options, the notes have been recorded as a
reduction of shareholders' equity (deficit). The Company has short-term notes
receivable from employees of $397 at September 30, 1997 which were used to
purchase common stock of the Company, through the exercise of stock options,
and are also classified as a reduction of shareholders' equity (deficit).
15. Other Special Charges
During the year ended September 30, 1997, the Company recorded special
charges as follows: (i) $2,500 of charges related to the exit of certain
manufacturing and distribution operations at the Company's Kinston, North
Carolina facility by early fiscal 1998 which includes $1,100 of employee
termination benefits for 137 employees, (ii) $1,400 of employee termination
benefits for 71 employees related to organizational restructuring in Europe and
the exit of certain manufacturing operations in the Company's Newton Aycliffe,
United Kingdom facility which the Company expects to complete in fiscal 1998,
(iii) $2,000 of charges for employee termination benefits for 77 employees
related to organizational restructuring in the United States which the Company
expects to complete in fiscal 1998. The number of employees anticipated to be
terminated was approximately equal to the actual numbers
F-23
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
15. Other Special Charges--Continued
referenced above. The charges were partially offset by a $2,900 gain related to
the curtailment of the Company's defined benefit pension plan covering all
domestic non-union employees. A summary of the restructuring activities follows.
<TABLE>
<CAPTION>
1997 Restructuring Summary
-----------------------------------------
Termination
Benefits Other Costs Total
------------ ------------- ----------
<S> <C> <C> <C>
Expenses accrued ............. $ 4,000 $ 600 $ $4,600
Changes in estimate .......... 500 600 1,100
Expensed as incurred ......... -- 200 200
Expenditures ................. (3,300) (700) (4,000)
-------- ------ --------
Balance 9/30/97 ................. $ 1,200 $ 700 $ 1,900
======== ====== ========
</TABLE>
During the Transition Period, the Company recorded special charges as
follows: (i) $2,700 of charges related to the exit of certain manufacturing
operations, (ii) $1,700 of charges to increase net deferred compensation plan
obligations to reflect curtailment of such plans; (iii) $1,500 of charges
reflecting the present value of lease payments for land which management has
determined will not be used for any future productive purpose; (iv) $6,900 in
costs and asset write-downs principally related to changes in product pricing
strategies adopted by management subsequent to the Recapitalization; and (v)
$3,300 of employee termination benefits and other charges. Payment for these
costs was or is expected to be as follows: $7,700 was paid prior to September
30, 1996; $5,600 was paid in fiscal 1997; and $2,800 is expected to be paid
thereafter.
16. Quarterly Results (unaudited)
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------
December 30, March 30, June 30, September 30,
1995 1996 1996 1996
-------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Net sales ....................................... $ 140,707 $ 80,563 $ 94,731 $ 101,880
Gross profit .................................... 63,219 34,672 39,495 42,638
Income (loss) before extraordinary item ......... 6,059 310 4,361 (19,274)
Net income (loss) ............................... 6,059 310 4,361 (20,921)
Basic net income (loss) per share ............... 0.12 0.01 0.09 (0.48)
Diluted net income (loss) per share ............. 0.12 0.01 0.09 (0.48)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------
December 28, March 29, June 29, September 30,
1996 1997 1997 1997
-------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Net sales ....................................... $ 141,922 $ 83,633 $ 95,466 $ 111,531
Gross profit .................................... 62,903 36,510 43,249 55,321
Net income (loss) ............................... 2,380 (1,720) 2,652 2,874
Basic net income (loss) per share ............... 0.12 (0.08) 0.13 0.14
Diluted net income (loss) per share ............. 0.12 (0.08) 0.13 0.14
</TABLE>
17. Consolidated Financial Statements
The following condensed consolidating financial data illustrates the
composition of the consolidated financial statements. Investments in
subsidiaries are accounted for by the Company on an unconsolidated basis (the
Company and the DISC) and the Guarantor Subsidiary using the equity method for
purposes of the consolidating presentation. Earnings of subsidiaries are
therefore reflected in the Company's and Guarantor Subsidiary's investment
accounts and earnings. The principal elimination entries eliminate investments
in subsidiaries and intercompany balances
F-24
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
and transactions. Separate financial
statements of the Guarantor Subsidiary are not presented because management has
determined that such financial statements would not be material to investors.
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Guarantor Nonguarantor
Parent subisidiary subsidiaries Eliminations Consolidated
------------ ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 633 $ 46 $ 454 $ -- $ 1,133
Receivables:
Trade accounts receivable, net ......................... 61,400 -- 15,190 -- 76,590
Other .................................................. 8,500 702 2,659 (8,782) 3,079
Inventories ............................................. 45,003 -- 13,722 (174) 58,551
Deferred income taxes ................................... 8,664 342 93 -- 9,099
Prepaid expenses and other .............................. 5,101 -- 827 -- 5,928
-------- ------- ------- -------- --------
Total current assets ............................... 129,301 1,090 32,945 (8,956) 154,380
-------- ------- ------- -------- --------
Property, plant and equipment, net ....................... 60,860 -- 4,651 -- 65,511
Deferred charges and other ............................... 8,411 -- 612 (1,310) 7,713
Debt issuance costs ...................................... 9,277 -- -- -- 9,277
Investment in subsidiaries ............................... 16,111 15,627 -- (31,738) --
-------- ------- ------- -------- --------
Total assets ....................................... $223,960 $16,717 $38,208 $(42,004) $236,881
======== ======= ======= ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt .................... $ 22,000 $ -- $ 1,880 $ -- $ 23,880
Accounts payable ........................................ 50,797 150 14,847 (8,535) 57,259
Accrued liabilities:
Wages and benefits ..................................... 7,766 -- 1,577 -- 9,343
Accrued interest ....................................... 5,594 -- 19 -- 5,613
Recapitalization and other special charges ............. 4,235 -- 377 -- 4,612
Other .................................................. 16,182 226 3,448 -- 19,856
-------- ------- ------- -------- --------
Total current liabilities .......................... 106,574 376 22,148 (8,535) 120,563
-------- ------- ------- -------- --------
Long-term debt, net of current maturities ................ 183,441 -- -- -- 183,441
Employee benefit obligations, net of current portion ..... 11,291 -- -- -- 11,291
Deferred income taxes .................................... 554 -- 181 -- 735
Other .................................................... 956 230 260 -- 1,446
-------- ------- ------- -------- --------
Total liabilities .................................. 302,816 606 22,589 (8,535) 317,476
-------- ------- ------- -------- --------
Shareholders' equity (deficit):
Common stock ............................................ 500 -- 12,072 (12,072) 500
Additional paid-in capital .............................. 15,974 3,525 750 (4,275) 15,974
Foreign currency translation adjustment ................. 2,270 2,270 2,270 (4,540) 2,270
Notes receivable from officers/shareholders ............. (1,658) -- -- -- (1,658)
Retained earnings ....................................... 33,060 10,316 527 (12,582) 31,321
-------- ------- ------- -------- --------
50,146 16,111 15,619 (33,469) 48,407
Less stock held in trust for deferred compensation ...... (962) -- -- -- (962)
Less treasury stock ..................................... (128,040) -- -- -- (128,040)
-------- ------- ------- -------- --------
Total shareholders' equity (deficit) ..................... (78,856) 16,111 15,619 (33,469) (80,595)
-------- ------- ------- -------- --------
Total liabilities and shareholders' equity (deficit) ..... $223,960 $16,717 $38,208 $(42,004) $236,881
======== ======= ======= ======== ========
</TABLE>
F-25
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Guarantor Nonguarantor
Parent subsidiary subsidiaries Eliminations Consolidated
----------- ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales .......................... $380,872 $ -- $81,542 $ (29,862) $432,552
Cost of goods sold ................. 212,861 -- 52,180 (30,472) 234,569
-------- -------- ------- --------- --------
Gross profit ..................... 168,011 -- 29,362 610 197,983
-------- -------- ------- --------- --------
Operating expenses:
Selling ........................... 104,685 -- 17,370 -- 122,055
General and administrative ........ 26,039 (817) 5,655 1,328 32,205
Research and development .......... 6,196 -- -- -- 6,196
Other special charges ............. 1,348 -- 1,654 -- 3,002
-------- -------- ------- --------- --------
138,268 (817) 24,679 1,328 163,458
-------- -------- ------- --------- --------
Income from operations ........... 29,743 817 4,683 (718) 34,525
Interest expense ................... 24,118 -- 424 -- 24,542
Equity in income of subsidiary ..... (3,475) (2,948) -- 6,423 --
Other (income) expense, net ........ (590) 6 962 -- 378
-------- -------- ------- --------- --------
Income before income taxes ......... 9,690 3,759 3,297 (7,141) 9,605
Income tax expense ................. 2,786 284 349 -- 3,419
-------- -------- ------- --------- --------
Net income ....................... $ 6,904 $ 3,475 $ 2,948 $ (7,141) $ 6,186
======== ======== ======= ========= ========
</TABLE>
F-26
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Guarantor Nonguarantor
Parent subsidiary subsidiaries Eliminations Consolidated
------------ ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by operating activities ..... $ 34,436 $ (11) $ 1,240 $-- $ 35,665
Cash flows from investing activities:
Purchases of property, plant and equipment .......... (10,113) -- (743) -- (10,856)
Proceeds from sale of property, plant and
equipment ......................................... 52 -- -- -- 52
Sale (purchase) of equipment and technology ......... (1,866) -- 1,866 -- --
---------- ----- --------- --- ----------
Net cash provided (used) by investing activities ..... (11,927) -- 1,123 -- (10,804)
---------- ----- --------- --- ----------
Cash flows from financing activities:
Reduction of debt ................................... (123,489) -- (11,590) -- (135,079)
Proceeds from debt financing ........................ 100,000 -- 8,890 -- 108,890
Cash overdrafts ..................................... 164 -- -- -- 164
Proceeds from direct financing lease ................ 100 -- -- -- 100
Issuance of stock ................................... 271 -- -- -- 271
Acquisition of treasury stock ....................... (3,343) -- -- -- (3,343)
Exercise of stock options ........................... 1,438 -- -- -- 1,438
Payments on capital lease obligations ............... -- -- (426) -- (426)
---------- ----- --------- --- ----------
Net cash provided (used) by financing activities ..... (24,859) -- (3,126) -- (27,985)
---------- ----- --------- --- ----------
Effect of exchange rate changes on cash and
cash equivalents .................................... -- -- 2 -- 2
---------- ----- --------- --- ----------
Net increase (decrease) in cash and cash
equivalents ........................................ (2,350) (11) (761) -- (3,122)
Cash and cash equivalents, beginning of period ....... 2,983 57 1,215 -- 4,255
---------- ----- --------- --- ----------
Cash and cash equivalents, end of period ............. $ 633 $ 46 $ 454 $-- $ 1,133
========== ===== ========= === ==========
</TABLE>
F-27
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 1996
<TABLE>
<CAPTION>
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
------------- ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 2,983 $ 57 $ 1,215 $ -- $ 4,255
Receivables:
Trade accounts receivable, net ......................... 45,614 -- 16,706 -- 62,320
Other .................................................. 15,128 162 95 (11,229) 4,156
Inventories ............................................. 57,615 -- 13,303 (797) 70,121
Deferred income taxes ................................... 7,888 1,026 244 -- 9,158
Prepaid expenses and other .............................. 3,457 -- 1,407 -- 4,864
-------- ------- -------- --------- --------
Total current assets ............................... 132,685 1,245 32,970 (12,026) 154,874
-------- ------- -------- --------- --------
Property, plant and equipment, net ....................... 61,495 -- 7,145 -- 68,640
Deferred charges and other ............................... 6,815 -- 598 -- 7,413
Debt issuance costs ...................................... 12,764 -- -- -- 12,764
Investment in subsidiaries ............................... 12,056 12,098 -- (24,154) --
-------- ------- -------- --------- --------
Total assets ....................................... $225,815 $13,343 $ 40,713 $ (36,180) $243,691
======== ======= ======== ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt .................... $ 4,500 $ -- $ 4,318 $ -- $ 8,818
Accounts payable ........................................ 40,830 597 16,505 (11,011) 46,921
Accrued liabilities:
Wages and benefits ..................................... 4,759 -- 1,135 -- 5,894
Accrued interest ...................................... 618 -- 13 -- 631
Recapitalization and other special charges ............ 11,645 -- 3,297 -- 14,942
Other .................................................. 10,043 484 2,492 -- 13,019
-------- ------- -------- --------- --------
Total current liabilities .......................... 72,395 1,081 27,760 (11,011) 90,225
-------- ------- -------- --------- --------
Long-term debt, net of current maturities ................ 223,990 -- 855 -- 224,845
Employee benefit obligations, net of current portion ..... 12,138 -- -- -- 12,138
Deferred income taxes .................................... (64) 206 -- -- 142
Other .................................................... 2,061 -- -- -- 2,061
-------- ------- -------- --------- --------
Total liabilities .................................. 310,520 1,287 28,615 (11,011) 329,411
Shareholders' equity (deficit):
Common stock ............................................ 500 -- 12,072 (12,072) 500
Additional paid-in capital .............................. 15,970 3,525 750 (4,275) 15,970
Foreign currency translation adjustment ................. 1,689 1,689 1,689 (3,378) 1,689
Notes receivable from officers/shareholders ............. (500) -- -- -- (500)
Retained earnings ....................................... 26,158 6,842 (2,413) (5,444) 25,143
-------- ------- -------- --------- --------
43,817 12,056 12,098 (25,169) 42,802
Less treasury stock, at cost ............................ (128,522) -- -- -- (128,522)
-------- ------- -------- --------- --------
Total shareholders' equity (deficit) ..................... (84,705) 12,056 12,098 (25,169) (85,720)
-------- ------- -------- --------- --------
Total liabilities and shareholders' equity (deficit) ..... $225,815 $13,343 $ 40,713 $ (36,180) $243,691
======== ======= ======== ========= ========
</TABLE>
F-28
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Transition period ended September 30, 1996
<TABLE>
<CAPTION>
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
------------ -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales ................................ $ 89,760 $ -- $ 19,974 $ (7,854) $ 101,880
Cost of goods sold ....................... 53,480 -- 13,470 (7,708) 59,242
--------- ------- -------- -------- ---------
Gross profit ........................... 36,280 -- 6,504 (146) 42,638
--------- ------- -------- -------- ---------
Operating expenses:
Selling ................................. 23,539 -- 4,257 -- 27,796
General and administrative .............. 6,508 2 2,109 9 8,628
Research and development ................ 1,495 -- -- -- 1,495
Recapitalization charges ................ 12,326 -- -- -- 12,326
Other special charges ................... 12,768 - 3,297 -- 16,065
--------- ------- -------- -------- ---------
56,636 2 9,663 9 66,310
--------- ------- -------- -------- ---------
Loss from operations ................... (20,356) (2) (3,159) (155) (23,672)
Interest expense ......................... 4,320 -- 110 -- 4,430
Equity in loss of subsidiary ............. 2,508 2,611 -- (5,119) --
Other (income) expense, net .............. (170) (162) 408 -- 76
--------- --------- -------- -------- ---------
Loss before income taxes and
extraordinary item ...................... (27,014) (2,451) (3,677) 4,964 (28,178)
Income tax (benefit) expense ............. (7,895) 57 (1,066) -- (8,904)
--------- --------- -------- -------- ---------
Loss before extraordinary item ........... (19,119) (2,508) (2,611) 4,964 (19,274)
Extraordinary item, loss on early
extinguishment of debt, net of income
tax benefit of $777...................... (1,647) -- -- -- (1,647)
--------- --------- -------- -------- ---------
Net loss ............................... $ (20,766) $(2,508) $ (2,611) $ 4,964 $ (20,921)
========= ========= ======== ======== =========
</TABLE>
F-29
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Transition period ended September 30, 1996
<TABLE>
<CAPTION>
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
------------ ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by operating activities ......... $ (2,078) $16 $ 932 $-- $ (1,130)
Cash flows from investing activities: ....................
Purchases of property, plant and equipment .............. (912) -- (336) -- (1,248)
Proceeds from sale of property, plant and
equipment ............................................. 1,281 -- -- -- 1,281
-------- --- -------- --- --------
Net cash provided (used) by investing activities ......... 369 -- (336) -- 33
-------- --- -------- --- --------
Cash flows from financing activities:
Reduction of debt ....................................... (104,138) -- (2,952) -- (107,090)
Proceeds from debt financing ............................ 256,500 -- 2,989 -- 259,489
Cash overdraft .......................................... (2,493) -- -- -- (2,493)
Debt issuance costs ..................................... (14,373) -- -- -- (14,373)
Extinguishment of debt .................................. (2,424) -- -- -- (2,424)
Distributions from DISC ................................. (1,943) -- -- -- (1,943)
Acquisition of treasury stock ........................... (127,925) -- -- -- (127,925)
Payments on capital lease obligation .................... -- -- (84) -- (84)
-------- --- -------- --- --------
Net cash provided (used) by financing activities ......... 3,204 -- (47) -- 3,157
-------- --- -------- --- --------
Effect of exchange rate changes on cash and cash
equivalents ............................................. -- -- 5 -- 5
-------- --- -------- --- --------
Net increase (decrease) in cash and cash
equivalents ........................................... 1,495 16 554 -- 2,065
Cash and cash equivalents, beginning of period ........... 1,488 41 661 -- 2,190
-------- --- -------- --- --------
Cash and cash equivalents, end of period ................. $ 2,983 $57 $ 1,215 $-- $ 4,255
======== === ======== === ========
</TABLE>
F-30
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 1996
<TABLE>
<CAPTION>
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
------------ ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 1,488 $ 41 $ 661 $ -- $ 2,190
Receivables:
Trade accounts receivable, net ............................. 40,138 -- 15,692 -- 55,830
Other ...................................................... 11,434 318 780 (10,210) 2,322
Inventories ................................................. 54,486 -- 12,951 (496) 66,941
Deferred income taxes ....................................... 5,439 179 243 -- 5,861
Prepaid expenses and other .................................. 3,415 -- 1,560 -- 4,975
-------- ------- ------- --------- --------
Total current assets ................................... 116,400 538 31,887 (10,706) 138,119
-------- ------- ------- --------- --------
Property, plant and equipment, net ........................... 65,747 -- 7,434 -- 73,181
Deferred charges and other ................................... 9,047 -- 608 -- 9,655
Debt issuance costs .......................................... 173 -- -- -- 173
Investment in subsidiaries ................................... 14,524 14,670 -- (29,194) --
-------- ------- ------- --------- --------
Total assets ........................................... $205,891 $15,208 $39,929 $ (39,900) $221,128
======== ======= ======= ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities: .........................................
Current maturities of long-term debt ........................ $ 7,350 $ -- $ 4,281 $ -- $ 11,631
Accounts payable ............................................ 32,906 492 15,145 (9,848) 38,695
Accrued liabilities:
Wages and benefits ......................................... 5,077 -- 1,049 -- 6,126
Accrued interest ........................................... 1,850 -- 40 -- 1,890
Other ...................................................... 12,768 (14) 3,803 -- 16,557
-------- ------- ------- --------- --------
Total current liabilities .............................. 59,951 478 24,318 (9,848) 74,899
-------- ------- ------- --------- --------
Long-term debt, net of current maturities .................... 68,777 -- 941 -- 69,718
Employee benefit obligations, net of current portion ......... 12,141 -- -- -- 12,141
Deferred income taxes ........................................ 2,378 206 -- -- 2,584
Other ........................................................ 162 -- -- -- 162
-------- ------- ------- --------- --------
Total liabilities ...................................... 143,409 684 25,259 (9,848) 159,504
-------- ------- ------- --------- --------
Shareholders' equity (deficit): ..............................
Common stock ................................................ 500 -- 12,072 (12,072) 500
Rayovac International Corporation common stock .............. 5 -- -- -- 5
Additional paid-in capital .................................. 12,000 3,525 750 (4,275) 12,000
Foreign currency translation adjustment ..................... 1,650 1,650 1,650 (3,300) 1,650
Retained earnings ........................................... 48,860 9,349 198 (10,405) 48,002
-------- ------- ------- --------- --------
63,015 14,524 14,670 (30,052) 62,157
Less treasury stock, at cost ................................ (533) -- -- -- (533)
Total shareholders' equity (deficit) ......................... 62,482 14,524 14,670 (30,052) 61,624
-------- ------- ------- --------- --------
Total liabilities and shareholders' equity (deficit) ......... $205,891 $15,208 $39,929 $ (39,900) $221,128
======== ======= ======= ========= ========
</TABLE>
F-31
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Year ended June 30, 1996
<TABLE>
<CAPTION>
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
----------- ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales .......................... $369,065 $ -- $82,116 $ (27,827) $423,354
Cost of goods sold ................. 213,349 -- 53,846 (27,852) 239,343
-------- -------- ------- --------- --------
Gross profit ...................... 155,716 -- 28,270 25 184,011
-------- -------- ------- --------- --------
Operating expenses:
Selling ........................... 99,486 -- 17,039 -- 116,525
General and administrative ........ 25,967 12 5,775 13 31,767
Research and development .......... 5,442 -- -- -- 5,442
-------- -------- ------- --------- --------
130,895 12 22,814 13 153,734
-------- -------- ------- --------- --------
Income (loss) from operations ..... 24,821 (12) 5,456 12 30,277
Interest expense ................... 7,731 -- 704 -- 8,435
Equity in income of subsidiary ..... (2,507) (2,167) -- 4,674 --
Other (income) expense, net ........ (51) (570) 1,173 -- 552
-------- -------- ------- --------- --------
Income before income taxes ......... 19,648 2,725 3,579 (4,662) 21,290
Income tax expense ................. 5,372 218 1,412 -- 7,002
-------- -------- ------- --------- --------
Net income ........................ $ 14,276 $ 2,507 $ 2,167 $ (4,662) $ 14,288
======== ======== ======= ========= ========
</TABLE>
F-32
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year ended June 30, 1996
<TABLE>
<CAPTION>
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
------------ ------------ -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by operating activities ......... $ 14,449 $ (292) $ 3,688 $ -- $ 17,845
Cash flows from investing activities:
Purchases of property, plant and equipment .............. (6,558) -- (88) -- (6,646)
Proceeds from sale of property, plant and
equipment ............................................. 298 -- -- -- 298
---------- ------ -------- ---- ----------
Net cash provided (used) by investing activities ......... (6,260) -- (88) -- (6,348)
---------- ------ -------- ---- ----------
Cash flows from financing activities:
Reduction of debt ....................................... (97,627) -- (6,899) -- (104,526)
Proceeds from debt financing ............................ 93,600 -- 2,652 -- 96,252
Cash overdraft .......................................... 2,339 -- -- -- 2,339
Distributions from DISC ................................. (5,187) -- -- -- (5,187)
Intercompany dividends .................................. -- 130 (130) -- --
Acquisition of treasury stock ........................... (533) -- -- -- (533)
Payments on capital lease obligation .................... -- -- (295) -- (295)
---------- ------ -------- ---- ----------
Net cash provided (used) by financing activities ......... (7,408) 130 (4,672) -- (11,950)
---------- ------ -------- ---- ----------
Effect of exchange rate changes on cash and cash
equivalents ............................................. -- -- (2) -- (2)
---------- ------ -------- ---- ----------
Net increase (decrease) in cash and cash
equivalents ............................................ 781 (162) (1,074) -- (455)
Cash and cash equivalents, beginning of period ........... 707 203 1,735 -- 2,645
---------- ------ -------- ---- ----------
Cash and cash equivalents, end of period ................. $ 1,488 $ 41 $ 661 $ -- $ 2,190
========== ====== ======== ==== ===========
</TABLE>
F-33
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Year ended June 30, 1995
<TABLE>
<CAPTION>
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
----------- ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales .............................. $364,816 $ -- $79,022 $ (28,614) $415,224
Cost of goods sold ..................... 214,119 -- 51,781 (28,774) 237,126
-------- -------- ------- --------- --------
Gross profit .......................... 150,697 -- 27,241 160 178,098
-------- -------- ------- --------- --------
Operating expenses:
Selling ............................... 93,935 -- 14,768 -- 108,703
General and administrative ............ 27,556 (651) 5,872 84 32,861
Research and development .............. 5,005 -- -- -- 5,005
-------- -------- ------- --------- --------
126,496 (651) 20,640 84 146,569
-------- -------- ------- --------- --------
Income from operations ................ 24,201 651 6,601 76 31,529
Interest expense ....................... 7,889 -- 755 -- 8,644
Equity in income of subsidiary ......... (5,520) (4,928) -- 10,448 --
Other (income) expense, net ............ (116) (319) 665 -- 230
-------- -------- ------- --------- --------
Income before income taxes.............. 21,948 5,898 5,181 (10,372) 22,655
Income tax expense ..................... 5,616 378 253 -- 6,247
-------- -------- ------- --------- --------
Net income ............................ $ 16,332 $ 5,520 $ 4,928 $ (10,372) $ 16,408
======== ======== ======= ========= ========
</TABLE>
F-34
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year ended June 30, 1995
<TABLE>
<CAPTION>
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
------------ ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by operating activities ......... $ 32,394 $ (3,823) $ 3,737 $ 3,211 $ 35,519
Cash flows from investing activities:
Purchases of property, plant and equipment .............. (14,288) -- (2,650) -- (16,938)
Proceeds from sale of property, plant and
equipment .............................................. 139 -- -- -- 139
---------- -------- -------- -------- ----------
Net cash (used) by investing activities .................. (14,149) -- (2,650) -- (16,799)
---------- -------- -------- -------- ----------
Cash flows from financing activities:
Reduction of debt ....................................... (100,536) -- (5,847) -- (106,383)
Proceeds from debt financing ............................ 79,749 -- 5,223 726 85,698
Cash overdraft .......................................... 3,925 -- -- -- 3,925
Distributions from DISC ................................. (1,500) -- -- -- (1,500)
Intercompany dividends .................................. -- 3,899 (3,899) -- --
---------- -------- -------- -------- ----------
Net cash provided (used) by financing activities ......... (18,362) 3,899 (4,523) 726 (18,260)
========== ======== ======== ======== ==========
Effect of exchange rate changes on cash and cash
equivalents ............................................. -- -- 3,592 (3,937) (345)
---------- -------- -------- -------- ----------
Net increase (decrease) in cash and cash
equivalents ............................................ (117) 76 156 -- 115
Cash and cash equivalents, beginning of period ........... 824 127 1,579 -- 2,530
---------- -------- -------- -------- ----------
Cash and cash equivalents, end of period ................. $ 707 $ 203 $ 1,735 $ -- $ 2,645
========== ======== ======== ======== ==========
</TABLE>
F-35
<PAGE>
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
As of March 28, 1998 and September 30, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
March 28, 1998 September 30, 1997
---------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 3,672 $ 1,133
Receivables ........................................................... 69,079 79,669
Inventories ........................................................... 61,254 58,551
Prepaid expenses and other ............................................ 14,434 15,027
---------- ----------
Total current assets ............................................. 148,439 154,380
Property, plant and equipment, net ..................................... 66,889 65,511
Deferred charges and other ............................................. 26,075 16,990
---------- ----------
Total assets ..................................................... $ 241,403 $ 236,881
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt .................................. $ 4,329 $ 23,880
Accounts payable ...................................................... 50,891 57,259
Accrued liabilities:
Wages and benefits and other ........................................ 28,067 34,812
Recapitalization and other special charges .......................... 9,856 4,612
---------- ----------
Total current liabilities ........................................ 93,143 120,563
Long-term debt, net of current maturities .............................. 125,148 183,441
Employee benefit obligations, net of current portion ................... 6,738 11,291
Other .................................................................. 4,160 2,181
---------- ----------
Total liabilities ................................................ 229,189 317,476
Shareholders' equity (deficit):
Common stock, $.01 par value, authorized 150,000 and 90,000 shares
respectively; issued 56,873 and 50,000 shares respectively;
outstanding 27,432 and 20,581 shares, respectively .................. 569 500
Additional paid-in capital ............................................ 103,155 15,974
Foreign currency translation adjustments .............................. 2,307 2,270
Notes receivable from officers/shareholders ........................... (1,361) (1,658)
Retained earnings ..................................................... 36,898 31,321
---------- ----------
141,568 48,407
Less stock held in trust for deferred compensation plan,
160 shares .......................................................... (962) (962)
Less treasury stock, at cost, 29,441 and 29,419 shares, respectively... (128,392) (128,040)
---------- ----------
Total shareholders' equity (deficit) ................................... 12,214 (80,595)
---------- ----------
Total liabilities and shareholders' equity (deficit) ................... $ 241,403 $ 236,881
========== ==========
</TABLE>
See accompanying notes which are an integral part of these statements.
F-36
<PAGE>
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the three month and six month periods ended March 28, 1998 and March 29,
1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
--------------------------- -----------------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
---- ---- ---- ----
Net sales ....................................... $ 96,081 $ 83,632 $ 246,076 $ 225,554
Cost of goods sold .............................. 50,545 47,123 127,900 126,142
-------- --------- --------- ----------
Gross profit ................................... 45,536 36,509 118,176 99,412
Selling ......................................... 28,204 22,592 73,676 61,272
General and administrative ...................... 9,102 7,660 17,363 15,264
Research and development ........................ 1,509 1,520 3,034 3,430
Other special charges ........................... 5,236 1,754 4,017 4,717
-------- --------- --------- ----------
Total operating expenses ....................... 44,051 33,526 98,090 84,683
Income from operations ....................... 1,485 2,983 20,086 14,729
Other expense (income): .........................
Interest expense ................................ 3,291 5,472 8,315 13,446
Other expense (income) ......................... (126) 300 (359) 314
-------- --------- --------- ----------
3,165 5,772 7,956 13,760
Income (loss) before income taxes and
extraordinary item ............................. (1,680) (2,789) 12,130 969
Income tax expense (benefit) .................... (698) (1,069) 4,578 309
-------- --------- --------- ----------
Income (loss) before extraordinary item ......... (982) (1,720) 7,552 660
Extraordinary item, loss on early
extinguishment of debt, net of income
tax benefit of $1,263........................... -- -- 1,975 --
-------- --------- --------- ----------
Net income (loss) .............................. $ (982) $ (1,720) $ 5,577 $ 660
======== ========= ========= ==========
Average shares outstanding ...................... 27,432 20,485 25,476 20,478
Basic earnings per share ........................
Income (loss) before extraordinary item ......... $ (0.04) $ (0.08) $ 0.30 $ 0.03
Extraordinary item .............................. -- -- (0.08) --
-------- --------- --------- ----------
Net income (loss) ............................... $ (0.04) $ (0.08) $ 0.22 $ 0.03
======== ========= ========= ==========
Average shares outstanding and common
stock equivalents .............................. 27,432 20,485 27,006 20,507
Diluted earnings per share ......................
Income (loss) before extraordinary item ......... $ (0.04) $ (0.08) $ 0.28 $ 0.03
Extraordinary item .............................. -- -- (0.07) --
-------- --------- --------- ----------
Net income (loss) ............................... $ (0.04) $ (0.08) $ 0.21 $ 0.03
======== ========= ========= ==========
</TABLE>
See accompanying notes which are an integral part of these statements.
F-37
<PAGE>
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the six month periods ended March 28, 1998 and March 29, 1997
(In thousands)
<TABLE>
<CAPTION>
1998 1997
--------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 5,577 $ 660
Non-cash adjustments to net income: .................................
Amortization ...................................................... 1,675 2,772
Depreciation ...................................................... 5,811 5,892
Other non-cash adjustments ........................................ (3,453) (330)
Net changes in other assets and liabilities, ........................
net of effects from acquisitions ................................... (5,239) 26,234
--------- ----------
Net cash provided by operating activities ...................... 4,371 35,228
Cash flows from investing activities: ................................
Purchases of property, plant and equipment .......................... (6,676) (2,625)
Proceeds from sale of property, plant and equipment ................. 3,292 --
Payment for acquisitions ............................................ (7,508) --
Other ............................................................... -- (215)
--------- ----------
Net cash used by investing activities .......................... (10,892) (2,840)
Cash flows from financing activities:
Reduction of debt ................................................... (137,987) (140,004)
Proceeds from debt financing ........................................ 59,859 112,243
Proceeds from issuance of common stock .............................. 87,268 --
Other ............................................................... (73) 265
--------- ----------
Net cash provided (used) by financing activities ............... 9,067 (27,496)
--------- ----------
Effect of exchange rate changes on cash and cash equivalents ......... (7) 3
------------ ----------
Net increase in cash and cash equivalents ...................... 2,539 4,895
Cash and cash equivalents, beginning of period ....................... 1,133 4,255
----------- ----------
Cash and cash equivalents, end of period ............................. $ 3,672 $ 9,150
=========== ==========
</TABLE>
See accompanying notes which are an integral part of these statements.
F-38
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. Significant Accounting Policies
Basis of Presentation
These financial statements have been prepared by Rayovac Corporation (the
"Company"), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC") and, in the opinion of the
Company, include all adjustments (all of which are normal and recurring in
nature) necessary to present fairly the financial position of the Company at
March 28, 1998, results of operations for the three and six month periods ended
March 28, 1998 and March 29, 1997, and cash flows for the six month periods
ended March 28, 1998 and March 29, 1997. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations.
These condensed consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto as of
September 30, 1997.
Derivative Financial Instruments
Derivative financial instruments are used by the Company principally in
the management of its interest rate, foreign currency and raw material price
exposures.
The Company uses interest rate swaps to manage its interest rate risk. The
net amounts to be paid or received under interest rate swap agreements
designated as hedges are accrued as interest rates change and are recognized
over the life of the swap agreements, as an adjustment to interest expense from
the underlying debt to which the swap is designated. The related amounts
payable to, or receivable from, the counter-parties are included in accrued
liabilities or accounts receivable. The Company has entered into an interest
rate swap agreement which effectively fixes the interest rate on floating rate
debt at a rate of 6.16% for a notional principal amount of $62,500 through
October 1999. The fair value of this contract at March 28, 1998 was ($382).
The Company has entered into an amortizing cross currency interest rate
swap agreement related to financing the acquisition of Brisco (as defined
herein). The agreement effectively fixes the interest and foreign exchange on
floating rate debt denominated in U.S. Dollars at a rate of 5.34% denominated
in German Marks. The unamortized notional principal amount at March 28, 1998 is
approximately $4,700. The fair value at March 28, 1998 approximated the
contract value.
The Company enters into forward foreign exchange contracts relating to the
anticipated settlement in local currencies of intercompany purchases and sales.
These contracts generally require the Company to exchange foreign currencies
for U.S. dollars. The contracts are marked to market and the related adjustment
is recognized in other expense (income). The related amounts payable to, or
receivable from, the counter-parties are included in accounts payable, or
accounts receivable. The Company has approximately $7,700 of such forward
exchange contracts at March 28, 1998. The fair value at March 28, 1998,
approximated the contract value.
The Company has also entered into foreign exchange contracts to hedge
payment obligations denominated in Japanese Yen under a commitment to purchase
certain production equipment from Matsushita. The Company has approximately
$6,700 of such forward exchange contracts outstanding at March 28, 1998. The
fair value at March 28, 1998 approximated the contract value.
The Company is exposed to risk from fluctuating prices for commodities
used in the manufacturing process. The Company hedges some of this risk through
the use of commodity swaps, calls and puts. The Company has entered into
commodity swap agreements which effectively fix the floating price on a
specified quantity of zinc through a specified date. The Company is buying
calls, which allow the Company to purchase a specified quantity of zinc through
a specified date for a fixed price, and writing puts, which allow the buyer to
sell to the Company a specified quantity of zinc through a specified date at a
fixed price. The maturity of, and the quantities covered by, the contracts
highly correlate to the Company's anticipated purchases of the commodity. The
cost of the calls,
F-39
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
(Unaudited)
(In thousands, except per share amounts)
1. Significant Accounting Policies --Continued
and the premiums received from the puts, are amortized over the life of the
agreements and are recorded in cost of goods sold, along with the effect of the
swap, put and call agreements. At March 28, 1998, the Company had entered into
a series of swap agreements with a contract value of approximately $3,200 for
the period from April through December of 1998. At March 28, 1998, the Company
had purchased a series of calls with a contract value of approximately $3,000
and sold a series of puts with a contract value of approximately $2,800 for the
period from April 1998 through March 1999 designed to set a ceiling and floor
price. While these transactions have no carrying value, the fair value of these
contracts was approximately ($600) at March 28, 1998.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
March 28, 1998 September 30, 1997
---------------- -------------------
<S> <C> <C>
Raw material ............. $20,450 $23,291
Work-in-process .......... 16,478 15,286
Finished goods ........... 24,326 19,974
------- -------
$61,254 $58,551
======= =======
</TABLE>
3. Earnings per Share Disclosure
Earnings per share is calculated based upon the following:
<TABLE>
<CAPTION>
Three Months Ended March 28, 1998 Three Months Ended March 29, 1997
----------------------------------------- ----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- --------------- ----------- ------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Loss before extraordinary item ....... $ (982) $ (1,720)
Basic EPS
Loss available to common
shareholders ........................ $ (982) 27,432 $ (0.04) $ (1,720) 20,485 $ (0.08)
Diluted EPS
Loss available to common
shareholders plus assumed
conversion .......................... $ (982) 27,432 $ (0.04) $ (1,720) 20,485 $ (0.08)
====== ====== ======= ======== ====== =======
</TABLE>
The effect of unexercised stock options outstanding for the three month
periods ending March 28, 1998 and March 29, 1997, were excluded from the
diluted EPS calculations as their effect was anti-dilutive. These options may
dilute EPS in the future.
F-40
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
(Unaudited)
(In thousands, except per share amounts)
3. Earnings per Share Disclosure --Continued
<TABLE>
<CAPTION>
Six Months Ended March 28, 1998 Six Months Ended March 29, 1997
----------------------------------------- ----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- --------------- ----------- ------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary
item ............................... $7,552 $660
Basic EPS
Income available to common
shareholders ....................... 7,552 25,476 $ 0.30 660 20,478 $ 0.03
====== ======
Effect of Dilutive Securities
Stock Options ....................... 1,530 29
Diluted EPS
Income available to common
shareholders plus assumed
conversion ......................... $7,552 27,006 $ 0.28 $660 20,507 $ 0.03
====== ====== ====== ==== ====== ======
</TABLE>
4. Commitments and Contingencies
The Company has entered into agreements to purchase certain equipment and
to pay annual royalties. In a December 1991 agreement, the Company committed to
pay annual royalties of $1,500 for the first five years, beginning in 1993, plus
$500 for each year thereafter, as long as the related equipment patents are
enforceable (2012). In a March 1994 agreement, the Company committed to pay $500
in 1994 and annual royalties of $500 for five years beginning in 1995. In a
March 1998 agreement which supersedes the previous agreements, the Company
committed to pay $2,000 in 1998 and 1999, $3,000 in 2000 through 2002 and $500
in each year thereafter, as long as the related equipment patents are
enforceable (2022). Additionally, the Company has committed to purchase tooling
of $700 related to this equipment.
The Company has provided for the estimated costs associated with
environmental remediation activities at some of its current and former
manufacturing sites. In addition, the Company, together with other parties, has
been designated a potentially responsible party of various third-party sites on
the United States EPA National Priorities List (Superfund). The Company
provides for the estimated costs of investigation and remediation of these
sites when such losses are probable and the amounts can be reasonably
estimated. The actual cost incurred may vary from these estimates due to the
inherent uncertainties involved. The Company believes that any additional
liability in excess of the amounts provided of $1,600, which may result
from resolution of these matters, will not have a material adverse effect on
the financial condition, liquidity, or cash flows of the Company.
5. Other
During the 1998 Fiscal First Quarter, the Company recorded a pre-tax
credit of $1,200 related to the buyout of deferred compensation
agreements with certain former employees.
On November 28, 1997, the Company acquired Brisco GmbH in Germany and
Brisco B.V. in Holland (collectively "Brisco"), a distributor of hearing aid
batteries for $4,900. Brisco recorded calendar 1997 sales of $4,500.
In the 1998 Fiscal Second Quarter the Company recorded special charges and
credits as follows: (i) $3,900 related to (a) the closing by September 1998 of
the Company's Newton Aycliffe, United Kingdom packaging facility,
F-41
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
(Unaudited)
(In thousands, except per share amounts)
5. Other --Continued
(b) the phasing out direct distribution by June 1998 in the United Kingdom, and
(c) the closing of one of the Company's German sales offices before the end of
fiscal 1998, which amount includes $1,800 of employee termination benefits for
73 employees, $1,000 of lease cancellation costs, and $1,000 of equipment and
intangible asset write-offs, (ii) $2,000 related to the closing by April 1999 of
the Company's Appleton, Wisconsin manufacturing facility, which amount includes
$1,600 of employee termination benefits for 141 employees, $200 of asset
write-offs and $200 of other costs, (iii) $1,700 related to the exit by January
1999 of certain manufacturing operations at the Company's Madison, Wisconsin
facility, which amount includes $300 of employee termination benefits for 34
employees, $1,300 of asset write-offs, and $100 of other costs, and (iv) a
$2,400 gain on the sale of the Company's previously closed Kinston, North
Carolina facility.
1998 Restructuring Summary
Termination Other
Benefits Costs Total
----------- ------ -----
Expense accrued $3,700 $3,800 $7,500
Balance 3/28/98 ------ ------ ------
$3,700 $3,800 $7,500*
====== ====== ======
During the year ended September 30, 1997, the Company recorded special
charges as follows: (i) $2,500 of charges related to the exit of certain
manufacturing and distribution operations at the Company's Kinston, North
Carolina facility by early fiscal 1998, which amount includes $1,100 of employee
termination benefits for 137 employees, (ii) $1,400 of employee termination
benefits for 71 employees related to organizational restructuring in Europe and
the exit of certain manufacturing operations in the Company's Newton Aycliffe,
United Kingdom facility which the Company expects to complete in fiscal 1998,
(iii) $2,000 of charges for employee termination benefits for 77 employees
related to organizational restructuring in the United States which the Company
expects to complete in fiscal 1998. The number of employees anticipated to be
terminated was approximately equal to the actual numbers referenced above. The
charges were partially offset by a $2,900 gain related to the curtailment of the
Company's defined benefit pension plan covering all domestic non-union
employees. A summary of the restructuring activities follows.
<TABLE>
<CAPTION>
1997 Restructuring Summary
-----------------------------------------
Termination
Benefits Other Costs Total
------------ ------------- ----------
<S> <C> <C> <C>
Expenses accrued ............. $ 4,000 $ 600 $ $4,600
Changes in estimate .......... 500 600 1,100
Expensed as incurred ......... -- 200 200
Expenditures ................. (3,300) (700) (4,000)
-------- ------ --------
Balance 9/30/97 ................ $ 1,200 $ 700 $ 1,900
======== ====== ========
Additional expense ........... -- -- --
Change in estimate ........... -- -- --
Expenditures ................. (700) -- (700)
-------- ------ --------
Balance 12/27/97 ............... $ 500 $ 700 $ 1,200
======== ====== ========
Expenses accrued ............. -- -- --
Change in estimate ........... (100) (400) (500)
Expenditures ................. (200) (200) (400)
-------- ------ --------
Balance 3/28/98 ................ $ 200 $ 100 $ 300
======== ====== ========
</TABLE>
F-42
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
(Unaudited)
(In thousands, except per share amounts)
5. Other --Continued
In the 1998 Fiscal Second Quarter, the Company acquired Direct Power Plus
of New York ("DPP"), a full line marketer of rechargeable batteries and
accessories for cellular phones and video camcorders for $4,700. DPP
recorded sales of $2,200 in the 1998 Fiscal Second Quarter.
6. Subsequent Events
On March 30, 1998, the Company acquired the battery distribution portion
of Best Labs, St. Petersburg, Florida, a distributor of hearing aid batteries
and a manufacturer of hearing instruments for $2,100. The acquired
portion of Best Labs had net sales of approximately $2,600 in calendar
1997.
On April 3, 1998, the Company announced the filing of a registration
statement with the SEC for a secondary offering of 6,500 shares of common stock.
The Company will not receive any proceeds from the sale of shares in the
offering but will pay certain expenses for the offering estimated at $800. Of
the shares being offered, 5,500 will be offered by Thomas H. Lee Group and its
affiliates and 1,000 by certain Rayovac officers and employees. The registration
statement has not yet become effective. These securities may not be sold nor any
offers to buy be accepted prior to the time the registration statement becomes
effective.
7. Guarantor Subsidiary
The following condensed consolidating financial data illustrates the
composition of the consolidated financial statements. Investments in
subsidiaries are accounted for by the Company and the Guarantor Subsidiary
using the equity method for purposes of the consolidating presentation.
Earnings of subsidiaries are therefore reflected in the Company's and Guarantor
Subsidiary's investment accounts and earnings. The principal elimination
entries eliminate investments in subsidiaries and inter-company balances and
transactions. Separate financial statements of the Guarantor Subsidiary are not
presented because management has determined that such financial statements
would not be material to investors.
F-43
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
(Unaudited)
(In thousands, except per share amounts)
7. Guarantor Subsidiary --Continued
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
As of March 28, 1998
<TABLE>
<CAPTION>
Guarantor Nonguarantor Consolidated
Parent Subsidiary Subsidiaries Eliminations Total
------------ ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 2,148 $ 46 $ 1,478 $ -- $ 3,672
Receivables ................................... 61,208 584 15,131 (7,844) 69,079
Inventories ................................... 48,728 -- 12,639 (113) 61,254
Prepaid expenses and other .................... 12,462 342 1,630 -- 14,434
---------- -------- -------- ---------- ----------
Total current assets ....................... 124,546 972 30,878 (7,957) 148,439
Property, plant and equipment, net ............. 61,530 -- 5,359 -- 66,889
Deferred charges and other ..................... 26,045 -- 4,996 (4,966) 26,075
Investment in subsidiaries ..................... 14,799 13,969 -- (28,768) --
---------- -------- -------- ---------- ----------
Total assets ............................... $ 226,920 $ 14,941 $ 41,233 $ (41,691) $ 241,403
========== ======== ======== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .......... $ 3,135 $ -- $ 2,175 $ (981) $ 4,329
Accounts payable .............................. 43,419 -- 14,193 (6,721) 50,891
Accrued liabilities: ..........................
Wages and benefits and other ................ 24,599 (88) 3,547 9 28,067
Recapitalization and other special
charges .................................... 6,478 -- 3,378 -- 9,856
---------- -------- -------- ---------- ----------
Total current liabilities .................. 77,631 (88) 23,293 (7,693) 93,143
Long-term debt, net of current maturities ...... 124,901 -- 3,783 (3,536) 125,148
Employee benefit obligations, net of
current portion ............................... 6,738 -- -- -- 6,738
Other .......................................... 3,742 230 188 -- 4,160
---------- -------- -------- ---------- ----------
Total liabilities .......................... 213,012 142 27,264 (11,229) 229,189
Shareholders' equity:
Common stock .................................. 569 -- 12,072 (12,072) 569
Additional paid-in capital .................... 103,155 3,525 750 (4,275) 103,155
Foreign currency translation adjustment ....... 2,307 2,307 2,307 (4,614) 2,307
Notes receivable from officers/
shareholders ................................ (1,361) -- -- -- (1,361)
Retained earnings ............................. 38,592 8,967 (1,160) (9,501) 36,898
---------- -------- -------- ---------- ----------
143,262 14,799 13,969 (30,462) 141,568
Less stock held in trust for deferred
compensation ................................ (962) -- -- -- (962)
Less treasury stock ........................... (128,392) -- -- -- (128,392)
---------- -------- -------- ---------- ----------
Total shareholders' equity ..................... 13,908 14,799 13,969 (30,462) 12,214
---------- -------- -------- ---------- ----------
Total liabilities and shareholders' equity ..... $ 226,920 $ 14,941 $ 41,233 $ (41,691) $ 241,403
========== ======== ======== ========== ==========
</TABLE>
F-44
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
(Unaudited)
(In thousands, except per share amounts)
7. Guarantor Subsidiary --Continued
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the three month period ended March 28, 1998
<TABLE>
<CAPTION>
Guarantor Nonguarantor Consolidated
Parent Subsidiary Subsidiaries Eliminations Total
-------------- ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales ............................... $ 83,519 $ -- $ 19,237 $(6,675) $ 96,081
Cost of goods sold ...................... 45,535 -- 11,689 (6,679) 50,545
-------- -------- -------- ------- --------
Gross profit ......................... 37,984 -- 7,548 4 45,536
Selling ................................. 24,277 -- 3,927 -- 28,204
General and administrative .............. 7,340 (245) 2,025 (18) 9,102
Research and development ................ 1,509 -- -- -- 1,509
Other special charges ................... 1,274 -- 3,962 -- 5,236
-------- -------- -------- ------- --------
Total operating expenses ............. 34,400 (245) 9,914 (18) 44,051
Income (loss) from operations ........... 3,584 245 (2,366) 22 1,485
Other expense (income):
Interest expense ........................ 3,211 -- 83 (3) 3,291
Equity in profit of subsidiary ......... 1,531 1,826 -- (3,357) --
Other expense (income) ................. (148) 6 13 3 (126)
-------- -------- -------- --------- --------
Loss before income taxes and
extraordinary item ..................... (1,010) (1,587) (2,462) 3,379 (1,680)
Income taxes (benefit) .................. (6) (56) (636) -- (698)
----------- -------- -------- --------- --------
Loss before extraordinary item .......... (1,004) (1,531) (1,826) 3,379 (982)
Extraordinary item ...................... -- -- -- -- --
---------- -------- -------- --------- --------
Net loss ................................ $ (1,004) $ (1,531) $ (1,826) $ 3,379 $ (982)
========== ======== ======== ========= ========
</TABLE>
F-45
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
(Unaudited)
(In thousands, except per share amounts)
7. Guarantor Subsidiary --Continued
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the six month period ended March 28, 1998
<TABLE>
<CAPTION>
Guarantor Nonguarantor Consolidated
Parent Subsidiary Subsidiaries Eliminations Total
----------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales ................................... $216,426 $ -- $ 44,036 $ (14,386) $ 246,076
Cost of goods sold .......................... 114,446 -- 27,849 (14,395) 127,900
-------- ------- --------- --------- ---------
Gross profit ............................. 101,980 -- 16,187 9 118,176
Selling ..................................... 63,708 -- 9,968 -- 73,676
General and administrative .................. 13,598 (476) 4,277 (36) 17,363
Research and development .................... 3,034 -- -- -- 3,034
Other special charges ....................... 55 -- 3,962 -- 4,017
-------- ------- --------- --------- ---------
Total operating expenses ................. 80,395 (476) 18,207 (36) 98,090
Income (loss) from operations ............... 21,585 476 (2,020) 45 20,086
Other expense (income):
Interest expense ........................... 8,075 -- 240 -- 8,315
Equity in profit of subsidiary ............. 1,349 1,687 -- (3,036) --
Other expense (income) ..................... (344) (4) (11) -- (359)
-------- ---------- --------- --------- ---------
9,080 1,683 229 (3,036) 7,956
Income (loss) before income taxes and
extraordinary item ......................... 12,505 (1,207) (2,249) 3,081 12,130
Income taxes (benefit) ...................... 4,998 142 (562) -- 4,578
-------- --------- --------- --------- ---------
Income (loss) before extraordinary item ..... 7,507 (1,349) (1,687) 3,081 7,552
Extraordinary item .......................... 1,975 -- -- -- 1,975
-------- --------- --------- --------- ---------
Net income (loss) ........................... $ 5,532 $(1,349) $ (1,687) $ 3,081 $ 5,577
======== ========= ========= ========= =========
</TABLE>
F-46
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
(Unaudited)
(In thousands, except per share amounts)
7. Guarantor Subsidiary --Continued
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the six month period ended March 28, 1998
<TABLE>
<CAPTION>
Guarantor Nonguarantor Consolidated
Parent Subsidiary Subsidiaries Eliminations Total
------------- ------------ -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by operating
activities .............................. $ (3,380) $-- $ 3,233 $ 4,518 $ 4,371
Cash flows from investing activities:
Purchases of property, plant and
equipment ............................. (5,839) -- (837) -- (6,676)
Proceeds from sale of property, plant,
and equip. ............................ 3,292 -- -- -- 3,292
Payment for acquisitions ................ (2,655) -- (4,853) -- (7,508)
---------- --- ------- -------- ---------
Net cash used by investing activities .... (5,202) -- (5,690) -- (10,892)
Cash flows from financing activities:
Reduction of debt ....................... (135,500) -- (2,487) -- (137,987)
Proceeds from debt financing ............ 58,193 -- 6,184 (4,518) 59,859
Proceeds from issuance of common
stock ................................. 87,268 -- -- -- 87,268
Other ................................... 136 -- (209) -- (73)
---------- --- ------- -------- ---------
Net cash provided by financing
activities .............................. 10,097 -- 3,488 (4,518) 9,067
Effect of exchange rate changes on
cash and cash equivalents ............... -- -- (7) -- (7)
---------- --- ---------- -------- ------------
Net increase in cash and cash
equivalents ............................. 1,515 -- 1,024 -- 2,539
Cash and cash equivalents, beginning
of period ............................... 633 46 454 -- 1,133
---------- --- --------- -------- -----------
Cash and cash equivalents, end
of period ............................... $ 2,148 $46 $ 1,478 $ -- $ 3,672
========== === ========= ======== ===========
</TABLE>
F-47
<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
============================================================
No dealer, salesperson or other individual has been
authorized to give any information or to make any
representations not contained in this Prospectus in
connection with the offering covered by this Prospectus. If
given or made, such information or representations must not
be relied upon as having been authorized by the Company or
the Underwriters. This Prospectus does not constitute an
offer to sell, or a solicitation of an offer to buy the
Common Stock in any jurisdiction where, or to any person to
whom, it is unlawful to make such offer or solicitation.
Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any
implication that there has not been any change in the facts
set forth in this Prospectus or in the affairs of the
Company since the date hereof.
In the Prospectus, references to "dollars" and "$" are
to United States dollars.
----------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----------
<S> <C>
Prospectus Summary ........................... 3
Risk Factors ................................. 12
The Recapitalization ......................... 17
Use of Proceeds .............................. 17
Price Range of Common Stock and
Dividend Policy ........................... 17
Capitalization ............................... 18
Selected Financial Data ...................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................ 23
Business ..................................... 35
Management ................................... 50
Principal and Selling Shareholders ........... 52
Description of Certain Indebtedness .......... 54
Shares Eligible for Future Sale .............. 56
Certain United States Federal Tax
Considerations for Non-United States
Holders ................................... 57
Underwriting ................................. 59
Legal Matters ................................ 62
Experts ...................................... 62
Available Information ........................ 63
Incorporation of Certain Documents by
Reference ................................. 64
Index to Financial Statements ................ F-1
</TABLE>
5,750,000 Shares
RAYOVAC(R)
Common Stock
----------------------------------
P R O S P E C T U S
----------------------------------
Merrill Lynch International
Bear, Stearns International Limited
Donaldson, Lufkin & Jenrette
International
Salomon Smith Barney International
May 28, 1998
============================================================
