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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _________.
Commission file No. 333-17895
RAYOVAC CORPORATION
(Exact name of registrant as specified in its charter)
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Wisconsin 22-2423556
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
601 Rayovac Drive 53711-2497
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (608) 275-3340
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange
Title of each class on which registered
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Common Stock, Par Value $.01 New York Stock Exchange, Inc.
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
On December 16, 1998, the aggregate market value of the voting stock held
by non-affiliates of the registrant was $390,173,524. As of December 16, 1998,
there were outstanding 27,480,271 shares of the registrant's Common Stock,
$0.01 par value.
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TABLE OF CONTENTS
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Page
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PART I
ITEM 1. BUSINESS ........................................................ 3
ITEM 2. PROPERTIES ...................................................... 14
ITEM 3. LEGAL PROCEEDINGS ............................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS ......... 16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS .......................................... 16
ITEM 6. SELECTED FINANCIAL DATA ......................................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .................................... 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..... 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA ...................... 32
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ..................................... 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS ............................... 32
ITEM 11. EXECUTIVE COMPENSATION ......................................... 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ............................................... 38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................. 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K ................................................. 40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE .................................................... 41
SIGNATURES .............................................................. 80
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PART I
ITEM 1. BUSINESS
General
Rayovac Corporation ("Rayovac" or 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/Original Equipment Manufacturers
("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], Extra[RegTM],
XCell[RegTM] and AIRPOWER[RegTM].
In September 1996, the Company and all of the shareholders of the Company
completed a recapitalization of the Company (the "Recapitalization"), which
resulted in, among other things, 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 herein as the "Lee
Group") acquiring control of the Company.
Upon consummation of the Recapitalization, the Company changed its fiscal
year end from June 30 to September 30. For clarity of presentation and
comparison, references to fiscal 1996 are to the Company's fiscal year ended
June 30, 1996, 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 and fiscal 1998 are to the Company's
fiscal years ended September 30, 1997 and September 30, 1998, respectively.
Upon completion of the Recapitalization, 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 reorganizing workflow to support the business units,
implementing modern information systems, increasing training and education, and
implementing a pay-for-performance culture.
To implement its new strategy, the Company has, among other things,
strengthened its senior management team, reorganized sales, marketing and
administration by distribution channel, launched new sales and marketing
programs, outsourced certain non-manufacturing operations, rationalized
manufacturing and other costs and reorganized its information systems.
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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:
Continue to Reinvigorate the Rayovac Brand Name. The Company is committed
to continuing to reinvigorate 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 substantially equivalent 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. As a result, the
Company has achieved a 21% unit share of domestic alkaline battery sales
through mass merchandisers. 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 $2.0 billion or
72% 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.
Further Capitalize on Worldwide Leadership in Hearing Aid Batteries. The
Company seeks to increase its market share in the hearing aid battery segment
by leveraging its leading technology and dedicated sales and marketing
organizations and through strategic acquisitions. Rayovac 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.
Develop New Markets. The Company intends to continue 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 launched 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.
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 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.
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Reposition the Renewal Rechargeable Alkaline Battery. The Company's
Renewal rechargeable battery is the only rechargeable alkaline battery in the
U.S. market. Since the Recapitalization, the Company has lowered the price of
Renewal rechargers to encourage consumers to purchase the system and promoted
Renewal's money-saving benefits. 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. The Company has also recently launched the sale of
the Renewal battery system in Europe.
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 charges of $9.5 million in fiscal
1998 in connection with the restructuring program and expects to record an
additional $1.5 million of costs as incurred.
Sale of Idled Facility. In March 1998, the Company sold its Kinston, North
Carolina facility and recorded a gain of $2.4 million.
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.
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. 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%.
Strategic Alliance with 1-800-Batteries. The Company recently formed a
strategic alliance with 1-800-Batteries, the world's leading Internet and
direct to consumer rechargeable battery marketer. Through this strategic
alliance, the Company seeks to install state-of-the-art telephone hotline
ordering systems in retail stores. When consumers cannot find the batteries and
accessories they need in a store, they can use this in-store system to order
any Rayovac products for next day home delivery upon payment by credit card.
Extension into China. In 1998, the Company entered the Chinese battery
market, the world's largest consumer market. The controlled launch of alkaline
batteries will use well established battery distributors, backed by television
commercials and battery graphics featuring Michael Jordan.
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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.
New Board Members. The Company has added two new board members with
extensive experience in consumer products. John Lupo currently is Executive
Vice President of Sales and Marketing for Bassett Furniture Inc. He previously
held numerous executive positions at Wal-Mart and has extensive retail
merchandising background. Joseph Deering currently is President of the food
equipment group of PreMark International Incorporated, a manufacturer and
distributor of food service equipment. He has extensive experience in
manufacturing and brand marketing.
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 1996, the Transition Period, fiscal 1997 and fiscal 1998 are set forth
below.
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Percentage of Company Net Sales
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Transition
Period Fiscal Year
Fiscal Year Ended Ended
Ended June 30, September 30, September 30,
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1996 1996 1997 1998
Product Type ---------------- --------------- ---------- ----------
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Battery Products:
Alkaline ................................... 43.6% 41.4% 45.0% 49.1%
Heavy Duty ................................. 12.2 12.7 10.4 7.8
Rechargeable Batteries ..................... 7.1 5.1 5.5 5.4
Hearing Aid ................................ 14.6 14.3 14.8 14.8
Other Specialty Batteries .................. 8.6 10.1 9.8 9.1
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Total .................................... 86.1 83.6 85.5 86.2
Lighting Products and Lantern Batteries..... 13.9 16.4 14.5 13.8
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Total .................................... 100.0% 100.0% 100.0% 100.0%
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Battery Products
A description of the Company's major battery products including their
typical uses is set forth below.
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General Batteries Hearing Aid
Batteries
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Technology Alkaline Zinc Zinc Air
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Types/ - Disposable Heavy Duty --
Common - Rechargeable (Zinc Chloride)
Name:
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Brand; Rayovac; Rayovac Rayovac; Loud'n
Sub-brand MAXIMUM, Clear, ProLine,
Names(1): Renewal, Best Labs,
Power Ultracell
Station XCell and
AIRPOWER
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Sizes: D, C, AA, AAA, 9-volt(2) 5 sizes
for both Alkaline and Zinc
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Typical Uses: All standard household Hearing
applications including aids
pagers, personal radios
and cassette players,
remote controls and a
wide variety of
industrial applications
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Other Specialty Batteries Lantern
Batteries
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Technology Lithium Silver Lithium Ion, Zinc
Nickel Metal
Hydride, Nickel
Cadmium and
Sealed Lead
Acid
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Types/ -- -- Rechargeable Lantern
Common (Alkaline, Zinc
Name: Chloride and
Zinc Carbon)
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Brand; Rayovac; Rayovac Rayovac Rayovac
Sub-brand Lifex
Names(1):
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Sizes: 5 primary 10 primary 35 sizes Standard
sizes sizes lantern
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Typical Uses: Personal Watches Cellular phones, Beam lanterns,
computer camcorders and Camping
clocks and cordless phones lanterns
memory
back-up
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(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. 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.
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. For the majority of fiscal 1998, 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
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. Since the
Recapitalization, management has lowered the price of Renewal rechargers to
encourage consumers to purchase the system and shifted Renewal's marketing
message from its environmental benefits to its money-saving benefits. Certain
technology underlying the Company's Renewal line of rechargeable alkaline
batteries could be made available to the Company's competitors under certain
circumstances.
Hearing Aid Batteries. The Company was the largest worldwide seller of
hearing aid batteries in fiscal 1998. In addition, the Company has strengthened
its worldwide leadership with the acquisition of Brisco. This strong
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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, Extra, XCell and AIRPOWER brand names and under several private
labels, including Beltone, Miracle Ear, Siemens and Starkey. The Company was
the pioneer and currently is the leading manufacturer of the smallest (5A and
10A size) hearing aid batteries.
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 medical batteries as well as 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 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 substantially equivalent to its major
competitors in the general battery 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 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
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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.
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. 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. 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
9
<PAGE>
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 on sales and
distribution to national mass merchandisers, in particular the Wal-Mart, Kmart
and Target chains, which collectively accounted for over half 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 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
10
<PAGE>
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 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. Based on anticipated
production requirements, the Company regularly engages in forward purchases and
hedging transactions to effectively manage raw material costs and inventory
relative to anticipated production requirements. See "Quantitative and
Qualitative Disclosures about Market Risk."
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 the end of March
2003. Thereafter, the Company is entitled to license such technology existing
as of such date through the end of March 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 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, $6.2 million, $1.5 million and
$5.4 million for fiscal 1998, fiscal 1997, the Transition Period and fiscal
1996, 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--Year 2000."
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.
11
<PAGE>
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 the end of March 2003. Thereafter, the Company is entitled to license
such technology existing as of such date through the end of March 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 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 "Recent
Developments--Extension of Technology Agreement: New Manufacturing Line."
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.
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 began 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 were available in the summer of 1998. Despite these
competitive launches, the Company has continued to build volume and market
share behind its marketing and sales initiatives. The Company looks to continue
upgrading its alkaline technology to remain competitive. These upgrades will be
phased into the line in the coming year.
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
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<PAGE>
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.
Environmental Compliance
Due to the nature of the operations conducted by the Company, the
Company's facilities are subject to a broad range of federal, state, local and
foreign legal and regulatory provisions relating to the environment, including
those regulating the discharge of materials into the environment, 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 off-site disposal locations. Except as set forth herein under
Item 3, "Legal Proceedings," Rayovac believes that compliance with the federal,
state, local and foreign provisions to which it is subject will not have a
material effect upon its capital expenditures, earnings and competitive
position. See Item 3 hereof for certain additional information regarding
environmental matters involving the Company included in the description of
legal proceedings.
Employees
As of September 30, 1998 the Company had approximately 2,200 employees.
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 three completed fiscal years, the Company's
sales in the quarter ending on or about December 31 have represented an average
of 32% of annual net sales. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality."
Financial Information about Foreign and Domestic Operations
Financial information pertaining to the Company's foreign and domestic
operations is set forth in Note 13 of Notes to Consolidated Financial
Statements filed herewith and incorporated by reference into Item 8 hereof.
Forward Looking Statements
Certain of the information contained in this Annual Report on Form 10-K,
including without limitation statements made under this Part I, Item 1,
"Business" and Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 7A, "Quantitative and
Qualitative Disclosures about Market Risk" which are not historical facts, may
include "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In reviewing
such information, it should be kept in mind that the Company's actual results
may differ materially from those set forth in such forward-looking statements.
Important factors that could cause the Company's actual results to differ
materially from those included in the forward-looking statements made herein
include, without limitation, (i) significant changes in consumer demand for
household or hearing aid batteries in the United States or Europe; (ii) the
loss of or a significant reduction in sales through a significant retailer
customer; (iii) the introduction of new product features or new battery
technology by a competitor; (iv) the enactment of unexpected environmental
regulations negatively impacting consumer demand for certain of the Company's
battery products; (v) difficulties or delays in the integration of operations
of acquired companies; (vi) Year 2000 problems of the Company or of its
customers or its suppliers which may make it difficult or impossible to fulfill
their commitments to the Company; and (vii) currency fluctuations in
significant international markets.
Additional factors and assumptions that could generally cause the
Company's actual results to differ materially from those included in the
forward-looking statements made herein include, without limitation, the
Company's ability to develop and introduce new products, the effects of general
economic conditions in the United States or abroad, the sufficiency of the
Company's production capacity to meet future demand for its products, the
Company's ability to keep pace with the technological standards in its industry
and the Company's ability to continue to penetrate and develop new distribution
channels for its products. Other factors and assumptions not identified above
were also involved in the derivation of the forward-looking statements
contained in this Annual Report on Form 10-K and the failure of such other
assumptions to be realized, as well as other factors, may also cause actual
results
13
<PAGE>
to differ materially from those projected. The Company assumes no obligation to
update these forward-looking statements to reflect actual results or changes in
factors or assumptions affecting such forward-looking statements.
ITEM 2. PROPERTIES
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
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 60,000
Wonewoc, WI Battery-powered lighting products and lantern batteries Leased 90,000
</TABLE>
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 announced restructuring, the Madison, Wisconsin
plant is phasing 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 after completion of a 39,000
square foot expansion. 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
Lavergne, TN Leased 65,000
Hayward, CA Leased 38,000
Billinghausen, GER Owned 5,000
Madison, WI Owned 158,000
</TABLE>
As part of the 1998 announced restructuring, the Company is centralizing 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.
ITEM 3. LEGAL PROCEEDINGS
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 the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA") or analogous state laws, as
described below.
14
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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 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 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 potentially responsible
party ("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 and the watershed of
a nearby creek. 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.
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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. As of September 30, 1998 the
Company has reserved $1.5 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
environmental liabilities.
Other than the Velsicol Chemical and Morton International proceedings, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, $.01 par value per share (the "Common Stock"),
is traded on the New York Stock Exchange (the "NYSE") under the symbol "ROV."
The Common Stock commenced public trading on November 21, 1997. As of December
22, 1998, there were approximately 344 holders of record of Common Stock 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>
Fiscal 1998 High Low
- ------------------------------------------------------------------- --------- ---------
<S> <C> <C>
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
Quarter ended June 27, 1998 ....................................... $24-1/2 $20
Quarter ended September 30, 1998 .................................. $22-3/4 $13-1/4
</TABLE>
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 (each as defined herein) 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.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data as of and for the fiscal
year ended June 30, 1996, the Transition Period ended September 30, 1996 and
the two fiscal years ended September 30, 1997 and September 30, 1998 is derived
from the audited consolidated financial statements of the Company included
elsewhere in this Annual Report on Form 10-K. The selected historical financial
data 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, 1994 and June 30, 1995 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
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
Transition Twelve
Period Months Fiscal Year Ended
Fiscal Year Ended June 30, Ended Ended September 30,
----------------------------------- September September ------------------------
1994 1995 1996 30, 1996 30, 1996 1997 1998
----------- ----------- ----------- ------------ ------------ ----------- -----------
(In millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ........................ $ 403.7 $ 415.2 $ 423.4 $ 101.9 $ 417.9 $ 432.6 $ 495.7
Cost of goods sold ............... 234.9 237.1 239.4 59.3 237.9 234.6 258.0
------- ------- ------- ------- ------- ------- -------
Gross profit ..................... 168.8 178.1 184.0 42.6 180.0 198.0 237.7
Selling expense .................. 121.3 108.7 116.5 27.8 114.4 122.1 148.9
General and administrative
expense ......................... 29.4 32.9 31.8 8.6 33.0 32.2 35.9
Research and development
expense ......................... 5.7 5.0 5.4 1.5 5.6 6.2 6.2
Recapitalization and other
special charges(1)(2)(3) ........ 1.5 -- -- 28.4 28.4 3.0 6.2
------- -------- -------- ------- ------- ------- -------
Income (loss) from
operations(4) ................... 10.9 31.5 30.3 ( 23.7) ( 1.4) 34.5 40.5
Interest expense ................. 7.7 8.6 8.4 4.4 10.5 24.5 15.7
Other expense (income), net ...... ( 0.6) 0.3 0.6 0.1 0.5 0.4 ( 0.2)
-------- -------- -------- -------- -------- ------- --------
Income (loss) before income
taxes and extraordinary item..... 3.8 22.6 21.3 ( 28.2) ( 12.4) 9.6 25.0
Income tax expense (benefit) ..... ( 0.6) 6.2 7.0 ( 8.9) ( 3.8) 3.4 8.6
-------- -------- -------- -------- -------- ------- --------
Income (loss) before
extraordinary item .............. 4.4 16.4 14.3 ( 19.3) ( 8.6) 6.2 16.4
Extraordinary item(5) ............ -- -- -- ( 1.6) ( 1.6) -- ( 2.0)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ................ $ 4.4 $ 16.4 $ 14.3 $ (20.9) $ (10.2) $ 6.2 $ 14.4
======== ======== ======== ======== ======== ======== ========
Basic net income (loss) per
common share before
extraordinary item .............. $ 0.09 $ 0.33 $ 0.29 $ (0.44) $ (0.18) $ 0.30 $ 0.62
======== ======== ======== ========= ========= ======== ========
Diluted net income (loss) per
common share before
extraordinary item .............. $ 0.09 $ 0.33 $ 0.29 $ (0.44) $ (0.18) $ 0.30 $ 0.58
======== ======== ======== ========= ========= ======== ========
Basic net income (loss) per
common share .................... $ 0.09 $ 0.33 $ 0.29 $ (0.48) $ (0.21) $ 0.30 $ 0.54
======== ======== ======== ========= ========= ======== ========
Diluted net income (loss) per
common share .................... $ 0.09 $ 0.33 $ 0.29 $ (0.48) $ (0.21) $ 0.30 $ 0.51
======== ======== ======== ========= ========= ======== ========
Weighted average common shares 50.0 50.0 49.6 43.8 48.1 20.5 26.5
Weighted average common and
common equivalent shares ........ 50.0 50.0 49.6 43.8 48.1 20.6 28.1
Other Financial Data:
Depreciation ..................... $ 10.3 $ 11.0 $ 11.9 $ 3.3 $ 12.1 $ 11.3 $ 10.9
Capital expenditures ............. 12.5 16.9 6.6 1.2 8.4 10.9 15.9
Cash flows from operating
activities ...................... ( 18.7) 35.5 17.8 ( 1.1) 26.0 35.7 ( 1.5)
Cash flows from investing
activities ...................... ( 12.4) ( 16.8) ( 6.3) 0.0 ( 7.3) ( 10.8) ( 23.4)
Cash flows from financing
activities ...................... 30.8 ( 18.3) ( 12.0) 3.2 ( 16.8) ( 28.0) 25.4
EBITDA(6) ........................ 21.2 41.3 42.2 ( 20.4) 10.7 45.8 52.9
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Transition Twelve
Period Months Fiscal Year Ended
Fiscal Year Ended June 30, Ended Ended September 30,
-------------------------------- September September ----------------------
1994 1995 1996 30, 1996 30, 1996 1997 1998
---------- ---------- ---------- ----------- ---------- ---------- ----------
(In millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ..................... $ 63.6 $ 55.9 $ 63.2 $ 64.6 $ 64.6 $ 33.8 $ 81.6
Total assets ........................ 222.4 220.6 221.1 243.7 243.7 236.3 286.3
Total debt .......................... 109.0 88.3 81.3 233.7 233.7 207.3 152.3
Shareholders' equity (deficit) ...... 37.9 53.6 61.6 (85.7) (85.7) (80.6) 21.9
</TABLE>
- ------------
(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 fiscal year ended September 30, 1998, the Company recorded net
special charges of $6.2 million including (i) $2.0 million associated with
consolidating domestic battery packaging operations and outsourcing the
manufacture of heavy duty batteries, (ii) $2.2 million associated with
closing the Company's Appleton, Wisconsin manufacturing plant and
consolidating it into its Portage, Wisconsin manufacturing plant, (iii)
$5.3 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, (v) income of $1.2 million in connection with the
settlement of deferred compensation agreements with certain former
employees, (vi) $0.8 million associated with the secondary offering of
Common Stock (the "Secondary Offering") which was completed in June 1998,
and (vii) miscellaneous credits of $0.4 million.
(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 and the fiscal
years ended September 30, 1997 and 1998. Income from operations before
these non-recurring charges was as follows:
<TABLE>
<CAPTION>
Transition Twelve
Period Months Fiscal Year Ended
Fiscal Year Ended June 30, Ended Ended September 30,
------------------------------------ September September --------------------------
1994 1995 1996 30, 1996 30, 1996 1997 1998
---------- ---------- ---------- ------------ ---------- ---------- ----------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from
operations ................. $ 10.9 $ 31.5 $ 30.3 $ (23.7) $ (1.4) $ 34.5 $ 40.5
Fennimore Expansion ......... 9.5 -- -- -- -- -- --
Recapitalization and other
special charges ............ 1.5 -- -- 28.4 28.4 3.0 6.2
------- ------ ------ ------- ------- ------- -------
Income from operations
before non-recurring
charges .................... $ 21.9 $ 31.5 $ 30.3 $ 4.7 $ 27.0 $ 37.5 $ 46.7
======= ====== ====== ======= ======= ======= =======
</TABLE>
(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
Consolidated Statement of Operations for the Transition Period ended
September 30, 1996. In the fiscal year ended September 30, 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 Company's initial public offering ("IPO") completed
in November 1997.
18
<PAGE>
(6) 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.
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 and the fiscal years ended
September 30, 1997 and 1998. EBITDA before these non-recurring charges was
as follows:
<TABLE>
<CAPTION>
Transition Twelve
Period Months Fiscal Year Ended
Fiscal Year Ended June 30, Ended Ended September 30,
------------------------------------ September September --------------------------
1994 1995 1996 30, 1996 30, 1996 1997 1998
---------- ---------- ---------- ------------ ---------- ---------- ----------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA ...................... $ 21.2 $ 41.3 $ 42.2 $ (20.4) $ 10.7 $ 45.8 $ 52.9
Fennimore Expansion ......... 9.5 -- -- -- -- -- --
Recapitalization and other
special charges ............ 1.5 -- -- 28.4 28.4 3.0 6.2
------- ------ ------ ------- ------- ------- -------
EBITDA before non-
recurring charges .......... $ 32.2 $ 41.3 $ 42.2 $ 8.0 $ 39.1 $ 48.8 $ 59.1
======= ====== ====== ======= ======= ======= =======
</TABLE>
19
<PAGE>
ITEM 7. 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 and fiscal 1998 are to the
Company's fiscal years ended September 30, 1997 and September 30, 1998.
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 charges of $9.5 million in fiscal 1998 in connection with the
restructuring program and expects to record an additional $1.5 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.
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 the battery distribution
portion of 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 investment, from fiscal 1993 through fiscal 1995, by the
Company of an aggregate of $32.7 million in the modernization and expansion of
its production lines at its Fennimore plant (the "Fennimore Expansion"). 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
20
<PAGE>
more than doubled the Company's aggregate capacity since fiscal 1994 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 $12.1
million of which $12.3 million was recognized in the Transition Period and a
$0.2 million credit was recognized in fiscal 1998. These charges included (i)
$5.0 million of advisory, legal and consulting fees and (ii) $7.1 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)
$6.9 million in costs and asset writedowns principally related to changes in
pricing strategies for Power Station, the Renewal recharging system; and (v)
$3.3 million of termination benefits and other charges.
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 three completed fiscal years, the Company's sales in the
quarter ended on or about December 31 have represented an average of 32% 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.
21
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
---------------------------------------
(In Millions)
<S> <C> <C> <C>
Fiscal Quarter Ended 1996 1997 1998
- --------------------- ---- ---- ----
December ........... $ 140.9 $ 141.9 $ 150.0
March .............. 80.5 83.6 96.1
June ............... 94.6 95.5 111.1
September .......... 101.9 111.5 138.6
</TABLE>
Results of Operations
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>
Transition
Fiscal Year Three Months Period Twelve Months Fiscal Year Ended
Ended Ended Ended Ended September 30,
June 30, September 30, September 30, September 30, ----------------------------
1996 1995 1996 1996 1997 1998
------------- --------------- --------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales .................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ......... 56.5 59.7 58.2 56.9 54.2 52.0
----- ----- ------ ------ ----- -----
Gross profit ............... 43.5 40.3 41.8 43.1 45.8 48.0
Selling expense ............ 27.5 27.9 27.3 27.4 28.2 30.0
General and
administrative expense..... 7.5 6.9 8.4 7.9 7.5 7.2
Research and
development expense ....... 1.3 1.2 1.5 1.3 1.4 1.3
Recapitalization and other
special charges ........... -- -- 27.9 6.8 0.7 1.3
----- ----- ------ ------ ----- -----
Income (loss) from
operations ................ 7.2% 4.3% (23.3%) ( 0.3%) 8.0% 8.2%
</TABLE>
Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended September
30, 1997
Net Sales. The Company's net sales increased $63.1 million, or 14.6%, to
$495.7 million in fiscal 1998 from $432.6 million in fiscal 1997. The increase
was driven by increased sales of alkaline, alkaline rechargeable, hearing aid
and specialty batteries and lighting products, somewhat offset by the continued
decline in the heavy duty battery market. Acquisitions made during fiscal 1988
contributed $14.0 million to the improvement in sales.
Alkaline sales for fiscal 1998 increased $48.7 million, or 25.0%, to
$243.4 million from $194.7 million in fiscal 1997. Alkaline rechargeable sales
increased 13.6% to $26.7 million in fiscal 1998. The growth in alkaline and
alkaline rechargeable sales was driven by strong promotional programs, new
customers and expanded distribution with existing customers.
Hearing aid battery sales increased 14.3% compared to fiscal 1997 due
primarily to increased distribution and the impact of the acquisitions of
Brisco and the battery distribution portion of Best Labs completed during
fiscal 1998.
Specialty battery sales increased $12.2 million to $16.6 million for
fiscal 1998 from $4.4 million for fiscal 1997. The DPP acquisition accounted
for approximately $9.8 million of the increase while the new photo, keyless
entry and medical battery products accounted for the remainder of the increase.
Lighting product sales increased $5.8 million, or 9.3%, to $68.4 million
for fiscal 1998 due primarily to new product launches and the impact of the
hurricane season.
Heavy duty battery sales decreased 14.0% compared to fiscal 1997 due
primarily to the continued decline in the market as consumers move toward
alkaline and away from heavy duty batteries.
Gross Profit. Gross profit increased $39.7 million, or 20.1%, in fiscal
1998 to $237.7 million from $198.0 million for fiscal 1997. Gross profit margin
increased to 48.0% in fiscal 1998 from 45.8% in the prior year. These increases
are attributed to increased unit sales, increased sales of higher margin
products and reduced manufacturing costs as a result of cost rationalization
initiatives.
22
<PAGE>
Selling Expense. Selling expense increased $26.8 million, or 21.9%, to
$148.9 million in fiscal 1998 from $122.1 million in fiscal 1997. As a
percentage of sales, selling expense increased to 30.0% in fiscal 1998 from
28.2% in the prior year. The increase in dollars and as a percent of sales is
due primarily to increased advertising and promotional spending to generate
increased sales. In addition, expenses related to gaining new distribution have
also increased compared to the prior year.
General and Administrative Expense. General and administrative expense
increased $3.7 million, or 11.5%, to $35.9 million in fiscal 1998 from $32.2
million in fiscal 1997. This increase was due primarily to information systems
improvements, increased expenses associated with being a publicly held company,
and increased expenses and amortization related to acquisitions.
Research and Development Expense. Research and development expense was
$6.2 million for fiscal 1998, approximately equal to fiscal 1997. As a
percentage of sales, research and development expense decreased slightly to
1.3% from 1.4% in the prior year.
Special Charges. The Company recorded Recapitalization and special
charges of $6.2 million in fiscal 1998 which includes $5.3 million associated
with the 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, $2.2 million associated with closing the
Company's Appleton, Wisconsin manufacturing plant and consolidating it into its
Portage, Wisconsin manufacturing plant, $2.0 million associated with
consolidating domestic battery packaging operations and outsourcing the
manufacture of heavy duty batteries, and $0.8 million associated with the
Company's Secondary Offering. These charges were partially offset by a $2.4
million gain on the sale of the Company's previously closed Kinston, North
Carolina facility and $1.7 million credit related to the settlement of deferred
compensation agreements with certain former employees and other miscellaneous
credits.
In fiscal 1997 the Company recorded special charges of $5.9 million
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. These charges were 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 $6.0 million, or
17.4%, to $40.5 million in fiscal 1998 from $34.5 million in fiscal 1997. This
increase was due primarily to increased sales and gross profit margins
partially offset by increased selling and general and administrative expense.
Interest Expense. Interest expense decreased $8.8 million, or 35.9%, to
$15.7 million in fiscal 1998 from $24.5 million in fiscal 1997. The decrease
was primarily a result of decreased indebtedness due to the IPO and the
inclusion in fiscal 1997 of a $2.0 million write-off of unamortized debt
issuance costs.
Other Expense (Income). Foreign exchange losses and interest income
resulted in net income of $(0.2) million in fiscal 1998. In fiscal 1997
interest income was offset by foreign exchange losses resulting in net expense
of $0.4 million.
Income Tax Expense. The Company's effective tax rate for fiscal 1998 was
33.9% compared to 35.6% for the prior year. The improved effective rate is
impacted by a lower state income tax rate and a lower foreign tax rate as
compared to the Company's statutory rate.
Extraordinary Item. The Company recorded extraordinary expense of $2.0
million, net of income tax, for the premium payment on the redemption of a
portion of the Company's Senior Subordinated Notes in fiscal 1998.
Net Income. Net income for fiscal 1998 increased $8.2 million ($10.2
million before extraordinary item), or 132.3%, to $14.4 million from $6.2
million in fiscal 1997. This increase reflects the impact of sales growth,
improved product mix of sales and improved margins.
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
23
<PAGE>
$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 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.
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
"Introduction-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
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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 ("FSC"), 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 pending sale of the Company.
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 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.
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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 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.
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
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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 totalling $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 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.
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.
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Liquidity and Capital Resources
For fiscal 1998, operating activities used $1.5 million of cash compared
to generating $35.7 million in fiscal 1997. In fiscal 1998 working capital
items, primarily receivables, inventories and other current assets, increased
$31.7 million to support the business growth. In fiscal 1997 the Company
decreased working capital and generated $17.2 million of cash. Cash costs
associated with the previously announced restructuring activities have been and
are expected to be funded with cash provided from operating activities.
Capital expenditures for fiscal 1998 were $15.9 million, an increase of
$5.0 million from fiscal 1997. This increase reflects continued spending on the
implementation of new computer systems and the down payment on a new alkaline
production line currently expected in fiscal 1999. Spending on the new computer
systems will continue in fiscal 1999 with implementation of this system planned
for mid-1999. Capital expenditures for fiscal 1999 are expected to increase to
approximately $24.0 million due to alkaline capacity expansion, alkaline
vertical integration programs, building expansion at the Company's Portage,
Wisconsin facility related to the restructuring of button cell manufacturing,
and the continued implementation of the new SAP computer system.
During fiscal 1998, the Company sold its previously closed Kinston, North
Carolina facility for approximately $3.3 million. In addition the Company made
the following acquisitions (i) Brisco for $4.9 million, (ii) DPP for $6.1
million (of which $4.6 million was cash), and (iii) the battery distribution
portion of Best Labs for $2.1 million (of which $1.7 million was cash).
During fiscal 1998 the Company's Board of Directors granted approximately
442,000 options to purchase shares of Common Stock to various members of
management and members of the Board of Directors under the 1996 Stock Option
Plan and the 1997 Incentive Plan. All grants have been at an exercise price
equal to the market price of the Common Stock on the date of grant which ranged
from $15.875 to $22.88 per share.
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.
The Company's current facilities include a revolving credit facility of $90.0
million of which $77.2 million was outstanding at September 30, 1998, with
approximately $5.8 million utilized for outstanding letters of credit and an
acquisition facility of $70.0 million of which $7.8 million was outstanding at
September 30, 1998. The Company's ability to borrow is limited by the terms of
its senior credit facilities and outstanding 101/4% Series B Senior
Subordinated Notes (the "Notes").
The Company has reached an agreement in principle to acquire 99.6% of the
outstanding common stock of ROV Limited, a leading battery manufacturer in Latin
America with 1997 sales of approximately $84 million, for approximately $120
million. The acquisition, which is subject to various conditions, including
completion of due diligence and lender and other consents, will be accounted for
as a purchase and is anticipated to close by the end of February 1999. The
acquisition is expected to be financed with a combination of the proceeds of an
equity offering and additional borrowings.
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 Item
3, "Legal Proceedings" 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 September 30, 1998 had reserved $1.5 million for known on-site and off-site
environmental liabilities. 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. The Company engages in hedging transactions in the ordinary course of
its business. See Note 2.q. to Notes to Consolidated Financial Statements.
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Year 2000
The Company has established a Year 2000 project (the "Year 2000 Project")
designed to remediate the impact of the Year 2000 issue on its hardware and
software systems as well as other business processes.
Project. The Company's Year 2000 Project addresses four major areas: (1)
core Information Technology ("IT") business systems including hardware and
application software, (2) other IT infrastructure systems including hardware
and application software, (3) non-IT systems including facilities, production,
research and development, and special purpose computer systems, and (4)
external providers of materials or services.
The project involves (1) inventories of systems or services (2) evaluation
of compliance (3) prioritization of non-compliant systems or services and (4)
remediation and testing involving repair or replacement of non-compliant
systems or services.
State of Readiness. The Company's legacy core IT business systems are
generally not Year 2000 compliant and would require substantial resources to
make them so. Core IT systems for North America are being replaced by an
integrated information system purchased from SAP that is Year 2000 compliant.
This system is being implemented primarily to achieve operational efficiencies
and, in addition, addresses Year 2000 issues. The selection and procurement
phase was completed in September 1997. The compliant hardware necessary to
operate SAP was installed in January 1998. The SAP software was configured by
November 1998 and will be gradually tested and implemented over the succeeding
six months, with conclusion of the implementation expected by mid-1999. The
process is being assisted by consulting services from SAP personnel. Core IT
systems for European operations are being modified with final testing scheduled
for December 1998.
Other IT infrastructure systems running support functions are generally
current technology although certain software applications will require
upgrading or replacement. Hardware for such systems is normally leased with all
existing leases of potentially non-compliant equipment expiring on or before
September 1999. Compliant replacements are being obtained continuously as the
leases expire. Software for such systems is being inventoried and evaluated by
third party specialists. This inventory and evaluation process is expected to
be complete by February 1999 with remediation expected by mid-1999.
Non-IT systems, such as systems to manage buildings (heating/cooling,
security, etc.), manufacturing systems (equipment involved directly in the
manufacture of products) and research and development systems (prototype
production, etc.) are generally not materially affected by the Year 2000 issue.
Some support systems, i.e. equipment involved indirectly in the manufacture of
products (monitoring, testing, etc.) require remediation. Non-IT systems were
inventoried and evaluated as of September 1998. Remediation of non-compliant
systems is occurring with the assistance of an outside consultant. Key systems
are expected to be compliant by March, 1999, with other systems compliant by
mid-1999. The Company currently expects to identify the state of Year 2000
compliance of all key suppliers by mid-1999. At that time, the Company will
seek to replace any key non-compliant suppliers with alternate Year 2000
compliant suppliers. See "--Contingency Plans."
Products manufactured and/or distributed by the Company do not utilize
programmable logic to function and thus are not affected by Year 2000 issues.
Costs to Address Year 2000 Issues. Expenditures directly related to
identification, evaluation and remediation of Year 2000 exposures were $0.2
million for fiscal 1998 with additional expenditures of $0.8 million projected
for fiscal 1999. These costs are not expected to be material to the Company's
financial position.
Capital expenditures for projects undertaken for operational efficiencies
but which also addressed Year 2000 issues (primarily SAP) amounted to $2.7
million for fiscal 1997, $3.3 million for fiscal 1998 with additional
expenditures of $4.2 million projected for fiscal 1999. Other expenditures
associated with these capital expenditures were $0.2 million in fiscal 1997,
$0.8 million in fiscal 1998 with additional expenditures of $1.4 million
projected for fiscal 1999.
Risk of Year 2000 Issues. The timing of a Year 2000-related disruption
would coincide with a seasonal low in the Company's business cycle and thus
have less impact on the business than it otherwise would during other parts of
the cycle. The Company estimates the most reasonably likely worst case Year
2000 scenarios as follows:
1. A portion of non-core IT systems experience temporary disruption. Such
disruption is not expected to have a material impact on the Company's
ability to function.
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2. A portion of manufacturing operations experience temporary disruption.
Such disruption is not expected to have a material impact on the
Company's ability to function.
3. A minor portion of the customer base experiences disruption. Such
disruption could result in a temporary slight reduction in sales
however, this reduction is not readily quantifiable.
4. A portion of the supplier base experiences disruption.
Contingency Plans. Although the Company has not yet developed a
contingency plan for each of the various most reasonably likely worst case
scenarios noted above, the Company would respond to these scenarios
respectively above as follows:
1. and 3. A contingency plan will be developed if the perceived risk
increases.
2. It is expected that normal safety stock levels would cover such a
scenario. The Company will determine the appropriate level based on
business conditions and perceived risk.
4. Unrelated to Year 2000, the Company maintains alternate suppliers in
the event of disruption of supply of a material or resource. It is
expected that it could source from alternates until the normal
supplier were back on-line.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, Reporting
Comprehensive Income, 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. SFAS No. 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. SFAS No. 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 SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, which is effective for financial
statements for periods beginning after December 15, 1997. SFAS No. 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 SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. This statement revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. This statement
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures. Restatement of
disclosures for earlier periods is required. This statement is effective for
the Company's financial statements for the year ended September 30, 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to record
derivatives on the balance sheet as assets and liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The Company is evaluating the effect
of this pronouncement on its consolidated financial statements. This statement
is effective for fiscal years beginning after June 15, 1999, with earlier
adoption encouraged. The Company will adopt this accounting standard as
required by October 1, 2000.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Factors
The Company has market risk exposure from changes in interest rates,
foreign currency exchange rates and commodity prices. Derivative financial
instruments are used by the Company, for purposes other than trading purposes,
to mitigate the risk from such exposures.
A discussion of the Company's accounting policies for derivative financial
instruments is included in Note 2 -- "Summary of Significant Accounting
Policies and Practices" in Notes to Consolidated Financial Statements.
Interest Rate Risk
The Company has bank lines of credit at variable interest rates. Interest
expense is primarily affected by the general level of U.S. interest rates,
LIBOR, IBOR and to a lesser extent European Base rates. The Company uses
interest rate swaps to manage such risk. The net amounts to be paid or received
under interest rate swap agreements 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 contract counterparties are
included in accrued liabilities or accounts receivable.
Foreign Exchange Risk
The Company is subject to risk from sales and loans to its subsidiaries as
well as sales to, purchases from and bank lines of credit with, third-party
customers, suppliers and creditors, respectively, denominated in foreign
currencies. Foreign currency sales are made primarily in Pounds Sterling,
Canadian Dollars, German Marks, French Francs, Italian Lira, Spanish Pesetas
and Dutch Guilders. Foreign currency purchases are made primarily in Pounds
Sterling, Canadian Dollars, Japanese Yen and German Marks. Foreign currency
credit lines are primarily in Pounds Sterling, German Marks and French Francs.
The Company manages its foreign exchange exposure from anticipated sales,
accounts receivable, intercompany loans, firm purchase commitments and credit
obligations through the use of naturally occurring offsetting positions
(borrowing in local currency), forward foreign exchange contracts and foreign
exchange rate swaps. The related amounts payable to, or receivable from, the
contract counterparties are included in accounts payable or accounts
receivable.
Commodity Price Risk
The Company is exposed to fluctuation in market prices for purchases of
zinc and silver used in the manufacturing process. The Company uses commodity
swaps, calls and puts to manage such risk. The maturity of, and the quantities
covered by, the contracts are closely correlated to the Company's anticipated
purchases of the commodities. The cost of the calls, and the premiums received
from the puts, are amortized over the life of the contracts and are recorded in
cost of goods sold, along with the effects of the swap, put and call contracts.
The related amounts payable to, or receivable from, the counterparties are
included in accounts payable or accounts receivable.
Sensitivity Analysis
The analysis below is hypothetical and should not be considered a
projection of future risks. Earnings projections are before tax.
At year-end, the potential change in fair value of outstanding interest
rate derivative instruments, assuming a 1% unfavorable shift in the underlying
interest rates would be a loss of $0.9 million. The net impact on reported
earnings, after also including the reduction in one year's interest expense on
the related debt due to the same shift in interest rates, would be immaterial.
At year-end, the potential change in fair value of outstanding foreign
exchange rate derivative instruments, assuming a 10% unfavorable change in the
underlying foreign exchange rates would be a loss of $2.0 million. The net
impact on future cash flows, after also including the gain in value on the
related accounts receivable and contractual payment obligations outstanding at
year-end due to the same change in exchange rates, would be a net gain of $0.7
million.
At year-end, the potential change in fair value of outstanding commodity
price derivative instruments, assuming a 10% unfavorable change in the
underlying commodity prices would be a loss of $0.7 million. The net
31
<PAGE>
impact on reported earnings, after also including the reduction in cost of one
year's purchases of the related commodities due to the same change in commodity
prices, would be immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required for this Item is included in this Annual Report
on Form 10-K on pages 41 through 79, inclusive and is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In June 1997, KPMG Peat Marwick LLP replaced Coopers & Lybrand L.L.P. (now
PricewaterhouseCoopers LLP) 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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information regarding each director and
executive officer of the Company as of October 1, 1998:
<TABLE>
<CAPTION>
Name Age Position and Offices
- ---------------------- ----- -----------------------------------------------------
<S> <C> <C>
David A. Jones 49 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 42 Executive Vice President and General Manager of
General Batteries and Lights
Kenneth V. Biller 50 Senior Vice President of Operations
Merrell M. Tomlin 46 Executive Vice President of Sales
Randall J. Steward 44 Senior Vice President of Finance and Chief Financial
Officer
James A. Broderick 55 Vice President, General Counsel and Secretary
Joseph W. Deering 58 Director
John S. Lupo 52 Director
Scott A. Schoen 40 Director
Thomas R. Shepherd 68 Director
Warren C. Smith, Jr. 42 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
32
<PAGE>
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 1996. 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. Warren is also a director for Bolder
Technologies Corporation.
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 Operations since August
1998. From January to August 1998 he was Senior Vice President of
Manufacturing/Supply Chain. 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 Company in 1972 and has held several positions,
including Director of Technology/Battery Products and Vice President of
Manufacturing.
Mr. Tomlin has been Executive Vice President of Sales of the Company since
October 1998. Mr. Tomlin joined the Company in October, 1996 as Senior Vice
President of Sales. 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 October 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. Deering has been a director since July of 1998 and has been President
for the food equipment group of Premark International, Incorporated since 1992.
Previously Mr. Deering served as President for Leucadia Manufacturing and
President and Chief Executive Officer for Tomkins Industries. Mr. Deering is
also a director for both Quadlux Inc. and Trion, Inc.
Mr. Lupo has been a director since July of 1998 and has been Executive
Vice President for sales and marketing for Bassett Furniture Industries, Inc.
since October 1998. From April 1998 to October 1998, Mr. Lupo served as a
consultant in the consumer products industry. Prior to that time and since
August 1996, Mr. Lupo served as Senior Vice President and Chief Operating
Officer for the international division of Walmart Stores, Inc. and, from
October 1990 to August 1996, as Senior Vice President-General Merchandise
Manager of Walmart Stores, Inc.
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
33
<PAGE>
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 several 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.
Board Committees and Terms of Office
The Board of Directors has established an audit committee (the "Audit
Committee") and a compensation committee (the "Compensation Committee"). The
members of the Audit Committee and the Compensation Committee are Messrs.
Schoen, Shepherd and Smith. The independent directors will be elected to the
Audit Committee and replace existing members.
The Company's Amended and Restated Articles of Incorporation provide that
the Board of Directors is classified into three classes, with the members of
the respective classes who are elected by the shareholders of the Company
serving for staggered three-year terms. The first class currently consists of
Messrs. Jones, Lonnebotn and Schoen, the second of Messrs. Warren and Shepherd
and the third of Messrs. Hussey and Smith, with the initial terms of the
directors comprising the classes expiring upon the election and qualification
of directors at the annual meetings of shareholders following the fiscal years
ended September 30, 1998, 1999 and 2000, respectively. In addition, Messrs.
Lupo and Deering were elected in fiscal 1998 by the Board of Directors of the
Company to two newly created vacancies to serve as directors of the Company
until the next annual meeting of shareholders. At each annual meeting of
shareholders, directors will be reelected or elected for full three-year terms.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors,
officers and persons who own more than 10% of a registered class of the
Company's equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Based solely upon review
of Forms 3, 4 and 5 (and amendments thereto) furnished to the Company during or
in respect of the fiscal year ended September 30, 1998, the Company is not
aware of any director or executive officer who has not timely filed reports
required by Section 16(a) of the Exchange Act during or in respect of such
fiscal year, except Randall J. Steward who filed one late Form 3, and David A.
Jones, who filed one late Form 4 covering two sales of securities of the
Company.
34
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid to the Chief Executive
Officer of the Company and the other four most highly compensated executive
officers of the Company during fiscal 1998, fiscal 1997 and the three month
Transition Period ended September 30, 1996 (the "Named Executive Officers") for
services rendered in all capacities to the Company.
<TABLE>
<CAPTION>
Other
Annual Securities
Compen- Underlying All Other
Name and Principal Position Fiscal Year Salary ($) Bonus ($) sation ($) Options (#) Compensation($)
- ---------------------------------- ------------------- ------------ ----------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
David A. Jones, 1998 $465,000 $250,000 $168,900(1) $71,500(2)
Chairman of the Board and 1997 400,000 218,500 65,800 84,204
Chief Executive Officer Transition Period 19,700 179,500 911,577
Kent J. Hussey, 1998 304,600 162,500 72,106 $475,800(3)
President and 1997 275,000 185,000 253,756
Chief Operating Officer
Roger F. Warren, 1998 270,000 108,000
President/International 1997 258,000 103,200 28,569
and Contract Micropower Transition Period 64,500 24,700 227,894 486,600(4)
Trygve Lonnebotn, 1998 251,000 100,400
Executive Vice President 1997 240,200 96,100 24,074
of Operations Transition Period 60,100 32,400 170,921 377,800(4)
Stephen P. Shanesy, 1998 235,000 94,000
Executive Vice President of 1997 154,900 140,000 137,024
Marketing and General Manager
of General Batteries and Lights
</TABLE>
- ----------------
(1) Includes approximately $70,000 related to interest on the Executive Note
(as defined herein) and $48,000 related to a Company provided condominium.
(2) Represents relocation payments.
(3) Represents relocation payments and compensation from the exercise of stock
options.
(4) Represents amounts paid by the Company in connection with the
Recapitalization.
Option Grants and Exercises
In connection with the Recapitalization, the Board adopted the Rayovac
Corporation 1996 Stock Option Plan (the "1996 Plan"). Pursuant to the 1996
Plan, options may be granted with respect to an aggregate of 3,000,000 shares
of Common Stock. At September 30, 1998 an aggregate of 2,199,209 options to
purchase shares of Common Stock at a weighted average exercise price of $4.90
per share, 911,577 of which have been granted to David A. Jones in accordance
with the terms of his employment agreement were outstanding. See "--Employment
Agreement." Pursuant to the Rayovac Corporation 1997 Stock Option Plan (the
"1997 Plan"), options to purchase an aggregate of 556,222 shares of Common
Stock were granted to certain management employees, which options were
immediately exercised or surrendered to the Company's Deferred Compensation
Plan as of such date.
The following table discloses the grants of stock options during fiscal
1998 to the Named Executive Officers.
Option/SAR Grants in Fiscal 1998
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
-------------------------------------------------------------- Value At Assumed
Number of Percent of Total Annual Rates of Stock
Securities Options/SARs Exercise Price Appreciation for
Underlying Granted to or Base Option Term
Options/SARs Employees in Price ----------------------------
Name Granted (#) Fiscal Year ($/Share) Expiration Date 5% ($) 10% ($)
- ------------------------ -------------- ----------------- ----------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kent J. Hussey ......... 72,106 16.3 $ 22.88 04/27/2008 $1,037,541 $2,614,371
</TABLE>
35
<PAGE>
The following table sets forth information concerning options to purchase
Common Stock held by the Named Executive Officers.
Aggregated Option Exercises In Fiscal 1998 And Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options at Options at
Acquired Value Fiscal Year End (#) Fiscal Year End ($)(1)
Name on Exercise Realized $ (Exercisable/Unexercisable) (Exercisable/Unexercisable)
- ---------------------------- ------------- ------------ ----------------------------- ----------------------------
<S> <C> <C> <C> <C>
David A. Jones ............. 0 $ -0- 364,630/546,947 $4,643,563/6,965,370
Roger F. Warren ............ 0 -0- 91,158/136,736 1,160,897/1,741,333
Trygve Lonnebotn ........... 0 -0- 68,368/2,553 870,666/32,512
Kent J. Hussey ............. 34,141 417,715 57,017/208,842 726,111/1,741,333
Stephen P. Shanesy ......... 0 -0- 45,579/68,368 580,449/870,666
</TABLE>
- ----------------
(1) These values are calculated using the $17-1/8 per share closing price of the
Common Stock as quoted on the NYSE on September 30, 1998.
Pension Plan
In fiscal 1997 the Company contributed to a defined benefit pension plan
covering all domestic non-union employees (the "Pension Plan"). On August 1,
1997 the Pension Plan assets were frozen and the Pension Plan was officially
terminated on October 1, 1997. The Company made no contributions to the Pension
Plan during fiscal 1998. Distribution of benefits due to participating
employees under the Pension Plan will commence during fiscal 1999.
Participating employees will generally have the following distribution options
with respect to these benefits: (1) rollover to an IRA or 401(k) plan, (2) a
lump sum distribution to the participant, subject to U.S. federal income tax
withholding, (3) a combination of a lump sum distribution and a distribution to
one or more IRAs, or (4) distribution to the participant as an immediate or
deferred annuity.
Compensation Committee Interlocks and Insider Participation
During fiscal 1998, the Compensation Committee of the Board of Directors
was composed of Scott A. Schoen, Thomas R. Shepherd and Warren C. Smith, Jr.
The Company and THL Co. (which together with its affiliates owns 42.2% of
the outstanding Common Stock) are parties to a Management Agreement entered
into in connection with the Recapitalization 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 12, 2001. Under the Management
Agreement and in connection with the closing of the Recapitalization, the
Company paid THL Co. and an affiliate an aggregate fee of $3.25 million (the
"THL Transaction Fee"). In consideration of the consulting and management
advisory services, the Company pays THL Co. and its affiliate an aggregate
annual fee of $360,000 plus expenses (the "Management Fee"). The Company
believes that this Management Agreement is on terms no less favorable to the
Company than could have been obtained from an independent third party.
In connection with the Recapitalization, the Lee Group, 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. Additionally,
the Shareholders Agreement provides that, subject to certain limitations, so
long as the Lee Group and their permitted transferees own at least 10% of the
shares of Common Stock acquired in the Recapitalization, the Lee Group shall
have "demand" registrations with respect to their shares of Common Stock. The
shareholders party to the Shareholders Agreement, including the Lee Group, are
also entitled, subject to certain limitations, to include shares of Common
Stock held by them in other registrations of equity securities of the Company
initiated by the Company for its own account or pursuant to a request for
registration by the Lee Group.
Employment Agreements
On April 27, 1998 the Company entered into an amended and restated
employment agreement with David A. Jones (the "Jones Employment Agreement") and
an employment agreement (as amended, the "Hussey Employment Agreement" and
together with the Jones Employment Agreement, the "Executive Employment
36
<PAGE>
Agreements") with Kent J. Hussey (together with Mr. Jones, the "Executives").
Under their respective employment agreements, Mr. Jones is entitled to a base
salary of $500,000 per annum and Mr. Hussey is entitled to a base salary of
$325,000 per annum (such base salaries may be increased from time to time at
the discretion of the Board of Directors) and each Executive is entitled to an
annual bonus based upon the Company achieving certain annual performance goals
established by the Board of Directors. Each Executive Employment Agreement has
a term of three years expiring on April 30, 2001, and the Hussey Employment
Agreement provides for automatic renewal for successive one year periods unless
terminated earlier upon 90 days prior written notice by either Mr. Hussey or
the Company. At any time each of the Executives has the right to resign and
terminate their respective Executive Employment Agreement upon 60 days notice.
Upon such resignation, the Company must pay to the resigning Executive any
unpaid base salary. The Executive Employment Agreements provide that, upon
termination of the Executive's employment for death or disability, the Company
will pay to the terminated Executive or such Executive's estate any unpaid base
salary, any accrued but unpaid bonus through the date of termination and a pro
rata portion of the bonus for such period, the Executive's base salary for a
period of 12 months in the case of Mr. Jones or 24 months in the case of Mr.
Hussey, and any other benefits until the earlier of the end of the term of the
agreement or 12 months in the case of Mr. Jones, or 24 months for Mr. Hussey,
in either case from the date of termination. In addition, the Jones Employment
Agreement also provides that Mr. Jones shall receive any additional salary due
until the earlier of the end of the term or 12 months from the date of
termination upon Mr. Jones' termination for death or disability. The Company
has the right to terminate employment for "cause" (as defined) and shall be
obligated to pay to the terminated Executive any unpaid base salary accrued
through the date of termination. In the event the Executive is terminated
without cause (as defined), the Company must pay to him any unpaid base salary,
any accrued but unpaid bonus through the date of termination and the
Executive's base salary, other benefits, and, in the case of Mr. Jones only,
any additional salary, until the earlier of the end of the term of the
agreement or 12 months in the case of Mr. Jones, or 24 months in the case of
Mr. Hussey, in either case from the date of termination.
The Executive Employment Agreements also provide that, during the term of
the agreement or the period of time served as a director, and for one year
thereafter for Mr. Jones, and for two years thereafter for Mr. Hussey, the
Executive shall not engage in or have any business which is involved in the
industries in which the Company is engaged. The Company has also granted to
Messrs. Jones and Hussey options to purchase, respectively, 911,577 and 227,894
shares of Common Stock at $4.39 per share (the market value on date of grant)
of which Mr. Hussey has exercised options to purchase 34,141 shares of Common
Stock. In addition, the Company has granted to Mr. Hussey options to purchase
72,106 shares of Common Stock at $22.88 per share (the market value on date of
grant). In each case, half of such options become exercisable at a rate of 20%
per year over a five-year period and the other half of which 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.
In connection with the Recapitalization, Mr. Jones individually also
purchased 227,895 shares of Common Stock at approximately $4.39 per share.
One-half of the purchase price was paid in cash and one-half with a promissory
note (the "Executive Note"). The Company holds the Executive Note in the
principal amount of $500,000 from Mr. Jones in connection with the purchase of
shares of Common Stock. Mr. Jones will receive additional salary at an initial
rate of $35,000 annually as long as the promissory note remains outstanding.
Severance Agreements
Each of Roger F. Warren, President/International and Contract Micropower,
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, and Merrell M. Tomlin, Executive Vice President of
Sales has entered into a severance agreement (each, a "Severance Agreement")
with the Company pursuant to which, in the event that his employment is
terminated during the term of the Severance Agreement (a) by the Company
without cause (as defined) or (b) by reason of death or disability (as
defined), the Company shall pay him an amount in cash equal to two (2) times
the sum of (i) his base salary as in effect for the fiscal year ending
immediately prior to the fiscal year in which such termination occurs and (ii)
the annual bonus (if any) earned by him pursuant to any annual bonus or
incentive plan maintained by the Company in respect of the fiscal year ending
immediately prior to the fiscal year in which such termination occurs, such
amount to be paid ratably monthly in arrears over the remaining term of the
Severance Agreement. In the event of such termination, the Company shall also
maintain for the twelve-month period following such termination insurance
benefits for such individual and his dependents similar to those provided
immediately prior to such termination. Under the
37
<PAGE>
Severance Agreements, each of Messrs. Warren, Shanesy and Tomlin has agreed
that for two years following the later of the end of the term of the Severance
Agreement or the date of termination, that he will not engage or have a
financial interest in any business which is involved in the industries in which
the Company is engaged. The initial term of each Severance Agreement is one
year with automatic one-year renewals thereafter, subject to thirty days notice
of non-renewal prior to the end of the then current term.
Director Compensation
Directors who are employees of the Company receive no compensation for
serving on the Board of Directors. Non-employee directors of the Company are
reimbursed for their out-of-pocket expenses in attending meetings of the Board
of Directors. Messrs. Lupo and Deering receive $5,000 per quarterly meeting in
their capacity as director. Messrs. Schoen, Shepherd and Smith receive no fees
in their capacities as directors. See Item 13, "Certain Relationships and
Related Transactions" for a description of certain other arrangements pursuant
to which THL Co., of which they are managing directors, receives compensation
from the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 22, 1998 (except as set
forth in the footnotes herein) certain information with respect to beneficial
ownership of the Common Stock by each (i) director, (ii) executive officer and
(iii) beneficial owner of more than 5% of the Company's outstanding Common
Stock known to the Company based on Securities and Exchange Commission filings
and other available information and by all directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
Shares of Common
Stock Beneficially
Owned (2)
-------------------------
Number Percentage
Names and Addresses(1) of Shares of Class
- -------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Thomas H. Lee Equity Fund III, L.P.(3)
75 State Street, Ste. 2600
Boston, MA 02109 ............................................ 9,928,579 36.1%
FMR Corp.(4)
82 Devonshire St.
Boston, MA 02109-3614 ....................................... 3,447,700 12.5
State of Wisconsin Investment Board(5)
121 E. Wilson St., P.O. Box 7842
Madison, WI 53707 ........................................... 1,996,600 7.3
Thomas H. Lee Foreign Fund III, L.P.(3)
75 State Street, Ste. 2600
Boston, MA 02109 ............................................ 615,051 2.2
THL--CCI Limited Partnership(6)
75 State Street, Ste. 2600
Boston, MA 02109 ............................................ 1,042,405 3.8
David A. Jones(7) ............................................ 405,141 1.5
Kent J. Hussey(8) ............................................ 90,967 *
Roger F. Warren(9) ........................................... 392,902 1.4
Stephen P. Shanesy(10) ....................................... 65,382 *
Kenneth V. Biller(11) ........................................ 96,787 *
Merrell M. Tomlin(12) ........................................ 49,095 *
James A. Broderick(13) ....................................... 141,476 *
Trygve Lonnebotn(14) ......................................... 311,190 1.1
Randall J. Steward(15) ....................................... 17,121 *
Scott A. Schoen(3)(16) ....................................... 50,036 *
Thomas R. Shepherd(16) ....................................... 26,061 *
Warren C. Smith, Jr.(3)(16) .................................. 41,703 *
Joseph W. Deering(18) ........................................ 7,000 *
John S. Lupo(17) ............................................. 2,000 *
All directors and executive officers of the Company as a group
(14 persons)(3)(16) ......................................... 1,696,861 6.0%
</TABLE>
- ----------------
*Less than 1%
38
<PAGE>
(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 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) Fidelity Management & Research Company ("Fidelity"), a wholly owned
subsidiary of FMR Corp. and an investment adviser registered under Section
203 of the Investment Advisers Act of 1940, is the beneficial owner of the
shares listed as a result of acting as investment adviser to various
investment companies, including Fidelity Contrafund which owns 2,678,500
shares, or 9.7%, of the Common Stock outstanding. FMR Corp., Edward C.
Johnson 3rd and members of the Edward C. Johnson 3rd family may also be
deemed to beneficially own the shares of Common Stock reported as being
beneficially owned by Fidelity. This disclosure is based on a Schedule 13G
filed on July 9, 1998 and on information provided by such entity to the
Company as of December 17, 1998.
(5) This disclosure is based on information provided by such entity to the
Company as of December 14, 1998.
(6) 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.
(7) Includes 364,630 shares subject to options which are currently exercisable.
Shares of Common Stock beneficially owned prior to the Offerings includes
2,957 shares representing Mr. Jones' proportional interest in the THL Fund.
Mr. Jones disclaims beneficial ownership of these shares.
(8) Includes 61,524 shares subject to options which are currently exercisable.
(9) Includes 91,158 shares subject to options which are currently exercisable.
(10) Includes 45,579 shares subject to options which are currently exercisable.
(11) Includes 45,579 shares subject to options which are currently exercisable.
(12) Includes 45,579 shares subject to options which are currently exercisable.
(13) Includes 20,000 shares subject to options which are currently exercisable.
(14) Includes 68,368 shares subject to options which are currently exercisable.
(15) Includes 7,121 shares subject to options which are currently exercisable.
(16) Represents the proportional interest of such individual in THL-CCI Limited
Partnership; in the case of Mr. Smith, also includes 9,786 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.
(17) Includes 2,000 shares subject to options which are currently exercisable.
(18) Represents shares subject to options which are currently exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and THL Co. (which, together with its affiliates owns 42.2% of
the outstanding Common Stock) are parties to a Management Agreement entered
into in connection with the Recapitalization 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 12, 2001. Under the Management
Agreement and in connection with the closing of the Recapitalization, the
Company paid THL Co. and an affiliate the THL Transaction Fee. In consideration
of the consulting and management advisory services, the Company pays THL Co.
and its affiliate the Management Fee. The Company believes that this Management
Agreement is on terms no less favorable to the Company than could have been
obtained from an independent third party.
The Company and David A. Jones are parties to the Jones Employment
Agreement pursuant to which Mr. Jones agreed to be the Chairman of the Board of
Directors and Chief Executive Officer of the Company. Mr. Jones also purchased
from the Company 227,895 shares of Common Stock with cash and a $500,000
promissory note held by the Company with interest payable at a rate of 7% per
annum and principal payable on the earliest of the following
39
<PAGE>
to occur: (i) the fifth anniversary of the note; (ii) the date on which (a) Mr.
Jones terminates his employment for any reason other than a Constructive
Termination (as defined in the Jones Employment Agreement) and (b) he is no
longer a director of the Company; or (iii) the date the Company terminates Mr.
Jones' employment for Cause (as defined in the Jones Employment Agreement).
Proceeds from any sale of Mr. Jones' shares must be used to immediately prepay,
in whole or in part, the principal amount of the promissory note outstanding
and any accrued and unpaid interest on the portion prepaid or the holder of the
promissory note may declare the entire principal amount of such note to be
immediately due and payable. Mr. Jones receives additional salary at an initial
rate of $35,000 annually during the period the promissory note is outstanding.
In addition, the Company and Kent J. Hussey are parties to the Hussey
Employment Agreement pursuant to which Mr. Hussey agreed to be President and
Chief Operating Officer of the Company. See Item 11, "Executive
Compensation--Employment Agreements."
The Company holds five year promissory notes dated March 17, 1997 from
Messrs. Hussey, Tomlin and Shanesy, in principal amounts of $75,000, $60,000
and $80,000, respectively, with interest payable at 8% per annum. Such notes
were incurred in connection with the purchase of shares of Common Stock by
Messrs. Hussey, Tomlin and Shanesy upon joining the Company. Mr. Hussey paid
the principal amount of his promissory note in fiscal 1998.
Pursuant to the 1997 Plan, on August 1, 1997, certain executive officers
of the Company, including Messrs. Jones, Hussey, Tomlin and Shanesy, exercised
options to purchase shares of Common Stock under the 1997 Plan with five-year
promissory notes held by the Company, in principal amounts of $250,000,
$50,000, $50,000 and $20,000, respectively, with interest payable at 8% per
annum. On September 15, 1997, certain other executive officers, including
Messrs. Warren, Lonnebotn, Shanesy and Hussey, exercised options under the 1997
Plan with, in the case of Messrs. Warren, Lonnebotn and Shanesy, five-year
promissory notes held by the Company, in principal amounts of $50,003, $46,079
and $30,002, respectively, with interest payable at 8% per annum and in the
case of Mr. Hussey, a non-interest bearing promissory note in the principal
amount of $36,000 held by the Company of which no principal amount remains
outstanding. Messrs. Jones, Hussey, Warren and Lonnebotn paid the principal
amounts of their August and September notes in fiscal 1998.
In connection with the Recapitalization, the Lee Group, 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. Additionally,
the Shareholders Agreement provides that, subject to certain limitations, so
long as the Lee Group and their permitted transferees own at least 10% of the
shares of Common Stock acquired in the Recapitalization, the Lee Group shall
have "demand" registrations. The shareholders party to the Shareholders
Agreement including the Lee Group are also entitled, subject to certain
limitations, to include shares of Common Stock held by them in other
registrations of equity securities of the Company initiated by the Company for
its own account or pursuant to a request for registration by the Lee Group.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of or are included in this
Annual Report on Form 10-K:
1. The financial statements listed in the Index to Consolidated Financial
Statements and Financial Statement Schedule, filed as part of this
Annual Report on Form 10-K.
2. The financial statement schedule listed in the Index to Consolidated
Financial Statements and Financial Statement Schedule, filed as part
of this Annual Report on Form 10-K.
3. The exhibits listed in the Exhibit Index filed as part of this Annual
Report on Form 10-K.
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company
during the last quarter of the fiscal year ended September 30, 1998.
40
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Independent Auditors' Report (KPMG Peat Marwick LLP) ............... 42
Independent Auditors' Report (Coopers & Lybrand L.L.P.) ............ 43
Consolidated Balance Sheets ........................................ 44
Consolidated Statements of Operations .............................. 45
Consolidated Statements of Cash Flows .............................. 46
Consolidated Statements of Shareholders' Equity (Deficit) .......... 47
Notes to Consolidated Financial Statements ......................... 48
Independent Auditors' Report ....................................... 78
Schedule II--Valuation and Qualifying Accounts ..................... 79
</TABLE>
41
<PAGE>
Independent Auditors' Report
The Board of Directors
Rayovac Corporation:
We have audited the accompanying consolidated balance sheets of Rayovac
Corporation and Subsidiaries as of September 30, 1997 and 1998, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for the years 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 audits. The accompanying
consolidated financial statements of Rayovac Corporation and Subsidiaries for
the year ended June 30, 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, expressed an unqualified opinion on those statements.
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 fiscal year 1997 and 1998 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
1998, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Milwaukee, Wisconsin
November 9, 1998, except as to note 19 which is as of
December 23, 1998
42
<PAGE>
Independent Auditors' Report
To the Board of Directors of
Rayovac Corporation
We have audited the accompanying consolidated statements of operations,
shareholders' equity (deficit), and cash flows of Rayovac Corporation and
Subsidiaries for the year 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 results of operations and cash
flows of Rayovac Corporation and Subsidiaries for the year ended June 30, 1996
and the period July 1, 1996 to September 30, 1996, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
November 22, 1996,
except for Note 2p
as to which the date is
April 1, 1998
43
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, September 30,
1997 1998
--------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 1,133 $ 1,594
Receivables:
Trade accounts receivable, net of allowance for doubtful
receivables of $1,221 and $1,356, respectively ........... 76,058 101,582
Other ..................................................... 3,079 2,753
Inventories ................................................. 58,551 62,762
Deferred income taxes ....................................... 9,099 7,991
Prepaid expenses and other .................................. 5,928 6,738
---------- ----------
Total current assets ................................... 153,848 183,420
---------- ----------
Property, plant and equipment, net .......................... 65,511 71,367
Deferred charges and other .................................. 7,713 23,646
Debt issuance costs ......................................... 9,277 7,908
---------- ----------
Total assets ........................................... $ 236,349 $ 286,341
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ........................ $ 23,880 $ 3,590
Accounts payable ............................................ 57,259 64,799
Accrued liabilities:
Wages and benefits ........................................ 9,343 10,080
Accrued interest .......................................... 5,613 3,020
Recapitalization and other special charges ................ 4,612 6,789
Other ..................................................... 19,324 13,485
---------- ----------
Total current liabilities .............................. 120,031 101,763
---------- ----------
Long-term debt, net of current maturities .................... 183,441 148,686
Employee benefit obligations, net of current portion ......... 11,291 10,433
Deferred income taxes ........................................ 735 1,988
Other ........................................................ 1,446 1,597
---------- ----------
Total liabilities ...................................... 316,944 264,467
---------- ----------
Shareholders' equity (deficit):
Common stock, $.01 par value, authorized 150,000 shares;
issued 50,000 and 56,907 shares, respectively; outstanding
20,581 and 27,471 shares, respectively .................... 500 569
Additional paid-in capital .................................. 15,974 103,304
Foreign currency translation adjustment ..................... 2,270 2,500
Notes receivable from officers/shareholders ................. (1,658) (890)
Retained earnings ........................................... 31,321 45,275
---------- ----------
48,407 150,758
Less stock held in trust for deferred compensation
plan, 160 and 24 shares, respectively ..................... (962) (412)
Less treasury stock, at cost, 29,419 and 29,436 shares,
respectively .............................................. (128,040) (128,472)
---------- ----------
Total shareholders' equity (deficit) ......................... (80,595) 21,874
---------- ----------
Total liabilities and shareholders' equity (deficit) ......... $ 236,349 $ 286,341
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Transition Year ended
Year ended Period ended September 30,
June 30, September 30, ------------------------------
1996 1996 1997 1998
------------ -------------- ------------- -----------
<S> <C> <C> <C> <C>
Net sales ......................................... $ 423,354 $ 101,880 $ 432,552 $495,733
Cost of goods sold ................................ 239,343 59,242 234,569 258,027
--------- --------- --------- --------
Gross profit .................................... 184,011 42,638 197,983 237,706
--------- --------- --------- --------
Operating expenses:
Selling .......................................... 116,525 27,796 122,055 148,875
General and administrative ....................... 31,767 8,628 32,205 35,877
Research and development ......................... 5,442 1,495 6,196 6,226
Recapitalization charges ......................... -- 12,326 -- (212)
Other special charges ............................ -- 16,065 3,002 6,395
--------- --------- --------- --------
153,734 66,310 163,458 197,161
--------- --------- --------- --------
Income (loss) from operations ................... 30,277 (23,672) 34,525 40,545
Interest expense .................................. 8,435 4,430 24,542 15,670
Other (income) expense, net ....................... 552 76 378 (155)
--------- --------- --------- --------
Income (loss) before income taxes and
extraordinary item ............................... 21,290 (28,178) 9,605 25,030
Income tax expense (benefit) ...................... 7,002 (8,904) 3,419 8,660
--------- --------- --------- --------
Income (loss) before extraordinary item ........... 14,288 (19,274) 6,186 16,370
Extraordinary item, loss on early
extinguishment of debt, net of income tax
benefit of $777 and $1,263, respectively ......... -- (1,647) -- (1,975)
--------- --------- --------- --------
Net income (loss) ............................... $ 14,288 $ (20,921) $ 6,186 $ 14,395
========= ========= ========= ========
Basic net income (loss) per common share:
Income (loss) before extraordinary item .......... $ 0.29 $ (0.44) $ 0.30 $ 0.62
Extraordinary item ............................... -- (0.04) -- (0.08)
--------- --------- --------- --------
Net income (loss) ............................... $ 0.29 $ (0.48) $ 0.30 $ 0.54
========= ========= ========= ========
Weighted average shares of common stock
outstanding ...................................... 49,643 43,820 20,530 26,477
========= ========= ========= ========
Diluted net income (loss) per common share:
Income (loss) before extraordinary item .......... $ 0.29 $ (0.44) $ 0.30 $ 0.58
Extraordinary item ............................... -- (0.04) -- (0.07)
--------- --------- --------- --------
Net income (loss) ............................... $ 0.29 $ (0.48) $ 0.30 $ 0.51
========= ========= ========= ========
Weighted average shares of common stock
and equivalents outstanding ...................... 49,643 43,820 20,642 28,091
========= ========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Transition Year ended
Year ended Period ended September 30,
June 30, September 30, ---------------------------
1996 1996 1997 1998
--------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................. $ 14,288 $ (20,921) $ 6,186 $ 14,395
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 -- 3,238
Amortization ................................................ 53 1,609 3,563 2,977
Depreciation ................................................ 11,932 3,279 11,308 10,873
Deferred income taxes ....................................... 3 (5,739) 652 2,361
Loss (gain) on disposal of fixed assets ..................... (108) 1,289 (326) (2,439)
Curtailment gain ............................................ -- -- (2,923) --
Settlement of deferred compensation agreement ............... -- -- -- (1,243)
Changes in assets and liabilities:
Accounts receivable ........................................ (6,091) (8,920) (14,665) (19,362)
Inventories ................................................ (1,779) (3,078) 11,987 (2,987)
Prepaid expenses and other assets .......................... 1,148 741 (563) (7,989)
Accounts payable and accrued liabilities ................... (1,601) (205) 30,776 (3,494)
Accrued recapitalization and other special charges ......... -- 14,942 (10,330) 2,177
--------- ---------- ---------- ----------
Net cash provided (used) by operating activities ........... 17,845 (1,130) 35,665 (1,493)
--------- ---------- ---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment .................... (6,646) (1,248) (10,856) (15,931)
Proceeds from sale of property, plant and equipment ........... 298 1,281 52 3,678
Payment for acquisitions, net of cash acquired ................ -- -- -- (11,124)
--------- ---------- ---------- ----------
Net cash provided (used) by investing activities ........... (6,348) 33 (10,804) (23,377)
--------- ---------- ---------- ----------
Cash flows from financing activities:
Reduction of debt ............................................. (104,526) (107,090) (135,079) (140,024)
Proceeds from debt financing .................................. 96,252 259,489 108,890 81,928
Cash overdraft ................................................ 2,339 (2,493) 164 (378)
Debt issuance costs ........................................... -- (14,373) -- (150)
Extinguishment of debt ........................................ -- (2,424) -- (3,238)
Proceeds from direct financing lease .......................... -- -- 100 200
Distributions from DISC ....................................... (5,187) (1,943) -- --
Proceeds on notes receivable from officers/shareholders ....... -- -- -- 768
Issuance of stock ............................................. -- -- 271 87,160
Acquisition of treasury stock ................................. (533) (127,925) (3,343) (343)
Exercise of stock options ..................................... -- -- 1,438 149
Payments on capital lease obligation .......................... (295) (84) (426) (720)
--------- ---------- ---------- ----------
Net cash provided (used) by financing activities ........... (11,950) 3,157 (27,985) 25,352
--------- ---------- ---------- ----------
Effect of exchange rate changes on cash and cash
equivalents ................................................... (2) 5 2 (21)
------------ ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ....... (455) 2,065 (3,122) 461
Cash and cash equivalents, beginning of period ................. 2,645 2,190 4,255 1,133
----------- ---------- ---------- ----------
Cash and cash equivalents, end of period ....................... $ 2,190 $ 4,255 $ 1,133 $ 1,594
=========== ========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................ $ 7,535 $ 7,977 $ 16,030 $ 16,767
Cash paid for income taxes .................................... 5,877 419 1,172 5,735
=========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
47
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, 1995 ...................... 50,000 $500 10 $ 5 $ 12,000 $1,979
------ ---- -- ---- -------- ------
Net income ..................................... -- -- -- -- -- --
Distributions from DISC ........................ -- -- -- -- -- --
Treasury stock acquired ........................ (500) -- -- -- -- --
Adjustment of additional minimum pension
liability ..................................... -- -- -- -- -- --
Translation adjustment ......................... -- -- -- -- -- (329)
------ ---- -- ---- -------- ------
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
------- ---- --- ----- -------- ------
Net income ..................................... -- -- -- -- -- --
Sale of common stock ........................... 6,823 68 -- -- 87,092 --
Sale of common stock by trust .................. -- -- -- -- -- --
Treasury stock acquired ........................ (27) -- -- -- -- --
Exercise of stock options ...................... 94 1 -- -- 238 --
Notes receivable from officers/shareholders .... -- -- -- -- -- --
Adjustment of additional minimum pension
liability ..................................... -- -- -- -- -- --
Translation adjustment ......................... -- -- -- -- -- 230
Unrealized gain on stock held in trust ......... -- -- -- -- -- --
------- ---- --- ----- -------- ------
Balances at September 30, 1998 ................. 27,471 $569 -- $-- $103,304 $2,500
======= ==== === ===== ======== ======
47
<CAPTION>
Notes
receivable Stock Shareholders'
officers/ Retained held in Treasury equity
shareholders earnings trust stock (deficit)
-------------- -------------- --------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1995 ...................... $ -- $ 39,103 $ -- $ -- $ 53,587
--------- --------- ------ ---------- ----------
Net income ..................................... -- 14,288 -- -- 14,288
Distributions from DISC ........................ -- (5,187) -- -- (5,187)
Treasury stock acquired ........................ -- -- -- (533) (533)
Adjustment of additional minimum pension
liability ..................................... -- (202) -- -- (202)
Translation adjustment ......................... -- -- -- -- (329)
--------- --------- ------ ---------- ----------
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)
--------- ----------- ------ ---------- ------------
Net income ..................................... -- 14,395 -- -- 14,395
Sale of common stock ........................... -- -- -- -- 87,160
Sale of common stock by trust .................. -- -- 817 -- 817
Treasury stock acquired ........................ -- -- -- (432) (432)
Exercise of stock options ...................... -- -- -- -- 239
Notes receivable from officers/shareholders .... 768 -- -- -- 768
Adjustment of additional minimum pension
liability ..................................... -- (441) -- -- (441)
Translation adjustment ......................... -- -- -- -- 230
Unrealized gain on stock held in trust ......... -- -- (267) -- (267)
--------- ----------- ------ ---------- ------------
Balances at September 30, 1998 ................. $ (890) $ 45,275 $ (412) $ (128,472) $ 21,874
========= =========== ====== ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended June 30, 1996, the Transition Period ended September 30,
1996, and the years ended September 30, 1997 and 1998
(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 $12,100 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 $7,100 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) $2,800 was paid in fiscal year 1997; (iii) $200 was paid in fiscal
year 1998; and, (iv) $200 is expected to be paid in fiscal 1999.
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.
48
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
2. Significant Accounting Policies and Practices--Continued
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 24% and 27% of the outstanding
trade receivables as of September 30, 1997 and 1998, respectively. The
Company derived 28%, 25%, 29% and 28% of its net sales during the year
ended June 30, 1996, the Transition Period, and the years ended September
30, 1997, and 1998, respectively, from the same three customers.
The Company has one customer that represented over 10% of its net
sales. The Company derived 18%, 18%, 20% and 19% of its net sales from
this customer during the year ended June 30, 1996, the Transition Period,
and the years ended September 30, 1997 and 1998, respectively.
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, each of which expire in 2000. The Company
also recently entered into a collective bargaining agreement with its
Hayward, California employees which expires in 2003. The Company also
entered into a collective bargaining agreement with its Washington,
United Kingdom employees which expires in December 1998.
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 $1,456 and $1,799 as of September 30, 1997 and 1998,
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>
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company evaluates recoverability of assets to
be held and used by comparing the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
i. Intangible Assets: Intangible assets are recorded at cost and are
amortized, using the straight-line method, over their estimated useful
lives. Excess cost over net asset value acquired (goodwill) is amortized
over 15 years and other intangibles are amortized over 3 to 17 years. The
Company assesses the recoverability of its goodwill by determining
whether the amortization of the goodwill balance over its remaining life
can be recovered through projected undiscounted future cash flows of the
acquired business. If projected future cash flows indicate that
unamortized goodwill will not be recovered, an adjustment would be made
to reduce the net goodwill to an amount equal to projected future cash
flows discounted at the Company's incremental borrowing rate. Cash flow
projections are based on trends of historical performance and
management's estimate of future performance, giving consideration to
existing and anticipated competitive and economic conditions.
j. Debt Issuance Costs: Debt issuance costs are capitalized and amortized
to interest expense over the lives of the related debt agreements.
49
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
2. Significant Accounting Policies and Practices--Continued
k. Accounts Payable: Included in accounts payable at September 30, 1997 and
1998, is approximately $5,476 and $5,098, respectively, of book
overdrafts on disbursement accounts which were replenished prior to the
presentation of checks for payment.
l. 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.
m. 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 ($750), ($70), ($639) and
($334) for the year ended June 30, 1996 the Transition Period, and the
years ended September 30, 1997 and 1998, respectively, are included in
other expense, net, in the Consolidated Statements of Operations.
n. Advertising Costs: The Company incurred expenses for advertising of
$29,976, $7,505, $24,326 and $33,441 in the year ended June 30, 1996, the
Transition Period, and the years ended September 30, 1997 and 1998,
respectively. The Company expenses advertising production costs the first
time the advertising takes place.
o. Research and Development Costs: Research and development costs are
charged to expense in the year they are incurred.
p. Earnings Per Share: The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings per Share ("EPS"), 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 SFAS No.
128. The difference between the number of shares used in the two
calculations is due to employee stock options.
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.
q. 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 accrued liabilities or accounts
receivable. The Company has entered into
50
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
2. Significant Accounting Policies and Practices--Continued
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 the unrealized portion
of this contract at September 30, 1998 is ($810).
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 September 30, 1998 is $4,195. The fair value at September 30,
1998 was ($288).
The Company enters into forward foreign exchange contracts to mitigate
the risk from 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
counterparties are included in accounts payable or accounts receivable.
The Company has $4,349 of forward exchange contracts at September 30,
1998. The fair value of the unrealized portion of the contracts at
September 30, 1998, approximated the contract value.
The Company also enters into forward foreign exchange contracts to
hedge the risk from anticipated settlement in local currencies of trade
sales. These contracts generally require the Company to exchange foreign
currencies for Pounds Sterling. The related amounts receivable from the
trade customers are included in accounts receivable. The Company has
approximately $4,860 of such forward exchange contracts at September 30,
1998. The fair value of the unrealized portion of the contracts at
September 30, 1998, approximated the contract value.
The Company enters into forward foreign exchange contracts to hedge the
risk from settlement in local currencies of trade purchases. These
contracts generally require the Company to exchange foreign currencies
for U.S. Dollars and Pounds Sterling. The Company has 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 $6,697 of such forward exchange
contracts outstanding at September 30, 1998. See related purchase
commitment discussed in the commitments and contingencies note. The fair
value at September 30, 1998 was ($466).
The Company is exposed to risk from fluctuating prices for zinc and
silver commodities used in the manufacturing process. The Company hedges
some of this risk through the use of commodity swaps, calls and puts. The
swaps effectively fix the floating price on a specified quantity of a
commodity through a specified date. Buying calls allows the Company to
purchase a specified quantity of a commodity for a fixed price through a
specified date. Selling puts allows the buyer of the put to sell a
specified quantity of a commodity to the Company for a fixed price
through a specific date. The maturity of, and the quantities covered by,
the contracts highly correlate to the Company's anticipated purchases of
the commodities. The cost of the calls, and the premiums received from
the puts, are amortized over the life of the contracts and are recorded
in cost of goods sold, along with the effects of the swap, put and call
contracts.
At September 30, 1998, the Company had entered into a series of swaps
for zinc with a contract value of $4,799 for the period September 1998
through September 1999. At September 30, 1998, the Company had purchased
a series of calls with a contract value of $1,177 and sold a series of
puts with a contact value of $1,086 for portions of the period from
September 1998 through March 1999, designed to set a ceiling and floor
price for zinc. While these transactions have no carrying value, the fair
value of the unrealized portion of these contracts was ($407) at
September 30, 1998.
51
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
2. Significant Accounting Policies and Practices--Continued
At September 30, 1998, the Company had entered into a series of swaps
for silver with a contract value of $1,970 for the period September 1998
through March 1999. While these transactions have no carrying value, the
fair value of the unrealized portion of these contracts at September 30,
1998 was ($109).
r. Environmental Expenditures: Environmental expenditures which 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.
s. Reclassification: Certain prior year amounts have been reclassified to
conform with the current year presentation.
t. Impact of Recently Issued Accounting Standards: In June 1997, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 130,
Reporting Comprehensive Income, 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. SFAS No. 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. SFAS No. 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 SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, which is effective for
financial statements for periods beginning after December 15, 1997. SFAS
No. 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 SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. This Statement revises
employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans.
This Statement standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures. Restatement of disclosures for earlier
periods is required. This Statement is effective for the Company's
financial statements for the year ended September 30, 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement requires companies to
record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. The
Company is evaluating the effect of this pronouncement on its
consolidated financial statements. This Statement is effective for fiscal
years beginning after June 15, 1999, with earlier adoption encouraged.
The Company will adopt this accounting standard as required by October 1,
2000.
52
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1998
--------------- --------------
<S> <C> <C>
Raw material ............ $23,291 $22,311
Work-in-process ......... 15,286 16,230
Finished goods .......... 19,974 24,221
------- -------
$58,551 $62,762
======= =======
</TABLE>
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1998
--------------- --------------
<S> <C> <C>
Land, building and improvements ......... $ 10,752 $ 12,208
Machinery, equipment and other .......... 120,894 122,914
Construction in process ................. 11,326 20,431
-------- --------
142,972 155,553
Less accumulated depreciation ........... 77,461 84,186
-------- --------
$ 65,511 $ 71,367
======== ========
</TABLE>
Machinery, equipment and other includes capitalized leases, net of
amortization, totaling $1,365 and $2,198 at September 30, 1997 and 1998,
respectively.
5. Intangible Assets
Intangible assets are as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1998
--------------- --------------
<S> <C> <C>
Excess cost over net asset value acquired (goodwill) ......... $2,134 $ 8,421
Proprietary technology ....................................... 525 525
Non-compete .................................................. -- 1,730
Underfunded pension .......................................... 1,237 2,335
------ -------
3,896 13,011
Less: accumulated amortization ............................... 1,713 932
------ -------
$2,183 $12,079
====== =======
</TABLE>
The increases in intangible assets from 1997 to 1998 were primarily due to
acquisitions offset by the write-off of goodwill from the 1998
restructuring. Intangible assets are included in deferred charges and other
in the accompanying consolidated balance sheets.
53
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
6. Debt
Debt consists of the following:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1998
--------------- --------------
<S> <C> <C>
Term loan facility ........................................... $100,500 $ --
Revolving credit facility .................................... 4,500 77,200
Acquisition Facility ......................................... -- 7,800
Series B Senior Subordinated Notes, due November 1,
2006, with interest at 10-1/4% payable semi-annually ........ 100,000 65,000
Capitalized lease obligations ................................ 866 1,435
Notes and obligations, weighted average interest rate of
8.48% at September 30, 1998 ................................. 1,455 841
-------- --------
207,321 152,276
Less current maturities ...................................... 23,880 3,590
-------- --------
Long-term debt ............................................... $183,441 $148,686
======== ========
</TABLE>
On September 12, 1996, the Company executed a Credit Agreement ("Old
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 Old Agreement provided for
senior bank facilities, including term and revolving credit facilities in an
aggregate amount of $170,000. The term facility included three tranches
totaling $105,000 and the revolving credit facility provided for aggregate
working capital loans up to $65,000 reduced by outstanding letters of credit
($10,000 limit) and other existing credit facilities and outstanding
obligations.
On December 30, 1997, the Company entered into an Amended and Restated
Credit Agreement ("Restated Agreement"). The Restated Agreement, led by
BancAmerica Robertson Stephens, provides for senior bank facilities, including
a revolving credit facility and an acquisition facility in an aggregate amount
of $160,000. Interest on borrowings is computed, at the Company's option, based
on the Bank of America's base rate, as defined ("Base Rate"), or the Interbank
Offering Rate ("IBOR").
The revolving credit facility provides for aggregate working capital loans
up to $90,000 through December 31, 2002, reduced by outstanding letters of
credit ($10,000 limit). Interest on borrowings is at the Base Rate per annum
(8.25% at September 30, 1998) or IBOR plus a margin (0.325% to 1.375%) per
annum (6.06% at September 30, 1998). The Company had outstanding letters of
credit of approximately $5,800 at September 30, 1998. A fee of .75% 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 is reduced by
$10,000, $15,000, and $15,000, respectively on December 31, 1999, 2000, and
2001.
The acquisition facility provides for aggregate qualifying acquisition
loans up to $70,000 through December 31, 1998. The facility provides for
quarterly amortization of the total amount of acquisition facility loans
outstanding as of December 31, 1998; ranging from 5% to 7.5% beginning March
31, 1999 through December 31, 2002. Interest on borrowings is at the Base Rate
per annum or IBOR plus a margin per annum (6.06% at September 30, 1998).
The Restated Agreement contains financial covenants with respect to
borrowings which include maintaining minimum interest coverage and maximum
leverage ratios. In addition, the Restated Agreement restricts the Company's
ability to incur additional indebtedness, create liens, make investments or
specified payments, give guarantees, pay dividends, and merge or acquire or
sell assets. The Company is in compliance with the restrictive covenants of the
Restated Agreement. The Company is required to pay a commitment fee (.125% to
.50%) per annum (.30% at September 30, 1998) on the average daily unused
portion of the facilities. The facilities' margin and commitment fee may be
adjusted if the Company's leverage ratio, as defined, increases or decreases.
Borrowings under the Agreement are collateralized by substantially all of the
assets of the Company.
54
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
6. Debt --Continued
The 10-1/4% Series B Senior Subordinated Notes ("Notes") will mature on
November 1, 2006. In connection with the Company's initial public offering of
common stock, $35,000 of the outstanding Notes were redeemed in December 1997.
The Company recorded the $3,238 premium paid as a result of the early
redemption as an extraordinary item. On or after November 1, 2001, the 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 Notes at a purchase price equal to 101% of the aggregate
principal amount. The Company is also required to offer to repurchase all or a
portion of the Notes upon consummation of an asset sale, as defined, in excess
of $5,000.
The terms of the 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
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
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 Notes (Nonguarantor Subsidiaries),
are directly and wholly owned by ROV. See note 20.
The aggregate scheduled maturities of debt are as follows:
<TABLE>
<S> <C>
Year ending September 30,
1999 ............................ $ 3,590
2000 ............................ 2,057
2001 ............................ 13,705
2002 ............................ 17,340
2003 ............................ 50,584
Thereafter ...................... 65,000
--------
$152,276
========
</TABLE>
In 1998, the Company entered into a capital lease with an aggregate
obligation of $1,255 related to certain computer hardware. Aggregate
capitalized lease obligations are payable in installments of $778 in 1999, $497
in 2000, and $160 in 2001. $388 payable in 1999 and $47 in 2000, is due in
Pounds Sterling.
The carrying values of the debt instruments noted above are approximately
97% of their estimated fair values.
7. 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).
55
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
7. Shareholders' Equity (Deficit) --Continued
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 trust exercised the options
and purchased 160 shares of the Company's common stock. In June 1998, the trust
sold 136 shares in connection with a secondary offering of common stock. The
remaining 24 shares held by the trust at September 30, 1998, are valued at $412
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 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.
On November 21, 1997, the Company completed an initial public offering
("IPO") of approximately 6,800 shares of Common Stock. The net proceeds of
approximately $87,900 after deducting the underwriting discounts and offering
expenses were used to repurchase $35,000 principal amount of Notes, pay the
associated premium, and repay approximately $49,700 of the Company's term loan
facility.
On June 3, 1998, the Thomas H. Lee Group and its affiliates sold
approximately 5,300 shares and certain Rayovac officers and employees sold
approximately 1,100 shares in a secondary offering of common stock. The Company
did not receive any proceeds from the sale of the shares but incurred expenses
for the offering of approximately $900.
8. Stock Option Plans
In 1996, the Company's Board of Directors ("Board") approved the Rayovac
Corporation 1996 Stock Option Plan ("1996 Plan"). Under the 1996 Plan, stock
options to acquire up to 3,000 shares of common stock, in the aggregate, may be
granted to select employees and directors of the Company 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 1996 Plan. As of September 30, 1998, there were
options with respect to 2,199 shares of common stock outstanding under the 1996
Plan.
In 1997, the Board adopted the 1997 Rayovac Incentive Plan ("Incentive
Plan"). 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
56
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
8. Stock Option Plans --Continued
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. The Incentive Plan expires in August 2007. As of September 30,
1998, there were options with respect to 362 shares of common stock outstanding
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
was $6.01. The 1997 Plan and each option granted thereunder expired November
30, 1997.
A summary of the status of the Company's plans is as follows:
<TABLE>
<CAPTION>
Transition Period Year ended Year ended
September 30, 1996 September 30, 1997 September 30, 1998
---------------------------- ---------------------------- ---------------------------
Weighted-average Weighted-average Weighted-average
Options exercise price Options exercise price Options exercise price
--------- ------------------ --------- ------------------ --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of period ............. -- $ -- 1,464 $ 4.30 2,318 $ 4.33
Granted ................ 1,464 4.30 1,410 5.03 442 20.52
Exercised .............. -- -- (556) 6.01 (107) 3.18
Forfeited .............. -- -- -- -- (92) 4.39
----- ----- ----- ------- ----- ------
Outstanding, end of
period ................ 1,464 $ 4.30 2,318 $ 4.33 2,561 $ 7.17
===== ====== ===== ======= ===== ======
Options exercisable,
end of period ......... 40 $ 1.14 496 $ 4.13 828 $ 4.47
===== ====== ===== ======= ===== ======
</TABLE>
The following table summarizes information about options outstanding and
outstanding and exercisable on September 30, 1998:
<TABLE>
<CAPTION>
Options outstanding
Options outstanding and exercisable
- ------------------------------------------------------------------- ---------------------
Weighted- Weighted- Weighted-
Number average average Number average
Range of of Remaining Exercise of Exercise
Exercise Prices Shares Contractual Life Price Shares Price
- --------------------- -------- ------------------ ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
$4.39 2,119 8 years $4.39 824 $4.39
$15.875-22.875 442 9.6 20.52 4 21.44
</TABLE>
The Company has adopted the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, and continues to apply Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its stock plans.
If the Company had elected to recognize compensation cost for all of the plans
based upon the fair value at the grant dates for awards under those plans,
consistent with the method prescribed by SFAS No. 123, net income and earnings
per share would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Transition Year ended September 30,
Period ended -----------------------------
September 30, 1996 1997 1998
-------------------- ----------- ------------
<S> <C> <C> <C>
Pro forma net income (loss) .............................. $ (21,035) $ 5,680 $ 13,723
Pro forma diluted net income (loss) per common share ..... $ (0.48) $ 0.28 $ 0.49
</TABLE>
57
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
8. Stock Option Plans --Continued
The fair value of the Company's stock options used to compute pro forma
net income (loss) and diluted net income (loss) per common share disclosures is
the estimated present value at grant date using the Black-Scholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Transition Year ended September 30,
Period ended --------------------------
September 30, 1996 1997 1998
-------------------- ---------- ----------
<S> <C> <C> <C>
Assumptions used:
Volatility ..................................... -- -- 26.2%
Risk-free interest rate ........................ 6.78% 6.78% 5.01%
Expected life .................................. 8 years 8 years 8 years
Dividend yield ................................. -- -- --
Weighted-average grant-date fair value of options
granted during period .......................... $ 1.92 $ 1.84 $6.34
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the opinion of
management, the existing models do not necessarily provide a reliable single
value of its options and may not be representative of the future effects on
reported net income or the future stock price of the Company. For purposes of
proforma disclosure, the estimated fair value of the options is amortized to
expense over the option's vesting period.
9. Income Taxes
Pretax income (loss) (income (loss) before income taxes and extraordinary
item) and income tax expense (benefit) consist of the following:
<TABLE>
<CAPTION>
Transition Years ended
Year ended Period ended September 30,
June 30, September 30, -------------------------
1996 1996 1997 1998
------------ -------------- --------- ----------
<S> <C> <C> <C> <C>
Pretax income (loss):
United States ..................... $17,154 $ (27,713) $6,214 $19,352
Outside the United States ......... 4,136 (2,889) 3,391 2,440
------- --------- ------ -------
Total pretax income (loss) ......... $21,290 $ (30,602) $9,605 $21,792
======= ========= ====== =======
Income tax expense (benefit):
Current:
Federal .......................... $ 5,141 $ (3,870) $2,926 $ 3,533
Foreign .......................... 1,469 (72) (176) 1,667
State ............................ 389 -- 17 (164)
------- --------- ------ -------
Total current ..................... 6,999 (3,942) 2,767 5,036
------- --------- ------ -------
Deferred:
Federal .......................... 54 (3,270) (842) 2,243
Foreign .......................... (57) (847) 809 (606)
State ............................ 6 (1,622) 685 724
------- --------- ------ -------
Total deferred .................... 3 (5,739) 652 2,361
------- --------- ------ -------
$ 7,002 $ (9,681) $3,419 $ 7,397
======= ========= ====== =======
</TABLE>
58
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
9. Income Taxes --Continued
The following reconciles the Federal statutory income tax rate with the
Company's effective tax rate:
<TABLE>
<CAPTION>
Transition Years ended
Year ended Period ended September 30,
June 30, September 30, ------------------------
1996 1996 1997 1998
------------ -------------- --------- ---------
<S> <C> <C> <C> <C>
Statutory Federal income tax rate ...................... 35.0% 35.0% 35.0% 35.0%
DISC/FSC commission income ............................. (5.2) 0.4 (1.2) (1.6)
Effect of foreign items and rate differentials ......... 1.0 (1.2) 0.3 0.8
State income taxes, net ................................ 1.1 3.9 4.9 4.1
Reduction of prior year tax provision .................. -- -- (3.0) (2.8)
Nondeductible recapitalization charges ................. -- (6.2) -- --
Other .................................................. 1.0 (0.3) (0.4) (1.6)
---- ---- ---- ----
32.9% 31.6% 35.6% 33.9%
==== ==== ==== ====
</TABLE>
The tax effects of temporary differences which give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1998
--------------- --------------
<S> <C> <C>
Current deferred tax assets:
Appleton/Madison Shutdown .......................... $ -- $ 1,182
Recapitalization charges ........................... 792 633
Inventories and receivables ........................ 1,495 1,259
Marketing and promotional accruals ................. 3,256 2,177
Employee benefits .................................. 1,509 1,211
Environmental accruals ............................. 679 589
Other .............................................. 1,368 940
-------- --------
Total current deferred tax assets ................. 9,099 7,991
-------- --------
Noncurrent deferred tax assets:
Employee benefits .................................. 4,214 2,316
State net operating loss carryforwards ............. 468 --
Package design expense ............................. 927 1,169
Promotional expense ................................ 594 360
Other .............................................. 1,753 2,688
-------- --------
Total noncurrent deferred tax assets .............. 7,956 6,533
-------- --------
Noncurrent deferred tax liabilities:
Property, plant, and equipment ..................... (8,651) (8,482)
Other .............................................. (40) (39)
-------- --------
Total noncurrent deferred tax liabilities ......... (8,691) (8,521)
-------- --------
Net noncurrent deferred tax liabilities ............. $ (735) $ (1,988)
======== ========
</TABLE>
During 1998, the Company utilized state net operating loss carryforwards
of approximately $6,000.
Provision has not been made for United States income taxes on a portion of
the undistributed earnings of the Company's foreign subsidiaries (approximately
$4,737 and $5,547 at September 30, 1997 and 1998, 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.
59
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
10. 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,
1999 .................... $ 6,958
2000 .................... 5,631
2001 .................... 5,137
2002 .................... 4,855
2003 .................... 4,545
Thereafter .............. 36,192
-------
$63,318
=======
</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 $481 subject to annual
inflationary increases. All of the leases expire during the years 1999 through
2013.
Total rental expenses was $8,213, $1,995, $8,126, and $7,397 for the year
ended June 30, 1996, the Transition Period, and the years ended September 30,
1997 and 1998, respectively.
11. Postretirement Pension Benefits
The Company has various defined benefit pension plans covering
substantially all of its domestic hourly employees and union members. Plans
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, as
amended.
The Company also has various nonqualified deferred compensation agreements
with certain of its employees. Under certain agreements, 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. Under the
other agreements the Company has agreed to pay such deferral amounts in up to
15 annual installments beginning on a date specified by the employee,
subsequent to retirement or disability, or to designated beneficiary upon
death. The Company established a rabbi trust to fund these agreements.
Net periodic pension cost for the aforementioned plans is summarized as
follows:
<TABLE>
<CAPTION>
Transition Years ended
Year ended Period ended September 30,
June 30, September 30, ---------------------------
1996 1996 1997 1998
------------ -------------- ----------- ----------
<S> <C> <C> <C> <C>
Service cost .................................. $1,501 $2,149 $1,705 $ 494
Interest cost ................................. 3,513 944 3,834 1,141
Actual return on plan assets .................. (7,880) (605) (6,191) (855)
Net amortization and deferral ................. 4,994 (166) 2,763 274
Curtailment gain .............................. -- -- (2,923) --
------ ---- ------ -----
Net periodic pension cost (benefit) ......... $2,128 $2,322 $ (812) $1,054
======== ====== ====== ======
</TABLE>
60
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
11. Postretirement Pension Benefits --Continued
The following tables set forth the plans' funded status:
<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>
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------
Assets exceed Accumulated
accumulated benefits
benefits exceed assets
--------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation ............................................ $33,853 $ 15,012
Accumulated benefit obligation ....................................... 33,853 16,346
======= ========
Projected benefit obligation .......................................... $33,853 $ 16,346
Plan assets at fair value, primarily listed stocks, bonds and
cash equivalents ..................................................... 33,853 9,698
------- --------
Projected benefit obligation (in excess of) less than plan assets ..... -- (6,648)
Unrecognized net loss (gain) .......................................... 133 247
Unrecognized net asset ................................................ (92) 2,776
Additional minimum liability .......................................... -- (3,025)
------- --------
Pension asset (liability) ........................................... $ 41 $ (6,650)
======= ========
</TABLE>
Assumptions used in accounting for the aforementioned plans were:
<TABLE>
<CAPTION>
Transition Years ended
Year ended Period ended September 30,
June 30, September 30, -----------------------
1996 1996 1997 1998
------------ -------------- -------- ---------
<S> <C> <C> <C> <C>
Discount rate used for funded status calculation ......... 7.5% 7.5% 7.5% 7.25%
Discount rate used for net periodic pension cost
calculations ......................................... 8.0 7.5 7.5 7.25
Rate of increase in compensation levels
(salaried plan only) ................................. 5.0 5.0 5.0 --
Expected long-term rate of return on assets ........... 9.0 9.0 9.0 9.0
</TABLE>
61
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
11. Postretirement Pension Benefits --Continued
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 statements of operations. Discount rates of 6.5%
and 6.58% were used in the accounting for the curtailed plans during the years
ended September 30, 1997 and 1998, respectively. The Company has recorded an
additional minimum pension liability of $1,486 and $3,025 at September 30, 1997
and 1998, respectively, to recognize the underfunded position of certain of its
benefits plans. An intangible asset of $1,237, and $2,335 at September 30, 1997
and 1998, 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 $249 at September 30, 1997 and $690
at September 30, 1998, 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. Effective
with the aforementioned curtailment of the two defined benefit plans for
salaried employees, benefits were increased under the defined contribution
plan. The Company contributes annually from 3% to 6% of participants'
compensation based on age, 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 year ended June 30, 1996, the
Transition Period, and the years ended September 30, 1997 and 1998, were
$1,000, $181, $914, and $1,821, respectively.
12. 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>
September 30, September 30,
1997 1998
--------------- --------------
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees ........................................... $ 722 $ 648
Fully eligible active participants ................. 813 733
Other active participants .......................... 869 837
-------- ------
Total APBO .......................................... 2,404 2,218
Unrecognized net loss ............................... (1,008) (464)
Unrecognized transition obligation .................. (591) (551)
-------- ------
Accrued postretirement benefit liability .......... $ 805 $1,203
======== ======
</TABLE>
Net periodic postretirement benefit cost includes the following
components:
<TABLE>
<CAPTION>
Transition Years ended
Year ended period ended September 30,
June 30, September 30, -------------------
1996 1996 1997 1998
------------ -------------- ------ -------
<S> <C> <C> <C> <C>
Service cost .......................................... $129 $58 $249 $245
Interest ........................................... 111 44 179 173
Net amortization and deferral ...................... 54 35 138 114
--- -- --- ---
Net periodic postretirement benefit cost ......... $294 $137 $566 $532
==== ==== ==== ====
</TABLE>
62
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
12. Other Postretirement Benefit Plan --Continued
For measurement purposes, annual rates of increase of 9.5%, 9.5%, 8.5%,
and 8.0% in the per capita costs of covered health care benefits were assumed
for the year ended June 30, 1996, the Transition Period, and the years ended
September 30, 1997 and 1998, respectively, 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, 1998, by $137 and the aggregate of the
service and interest cost components of net periodic postretirement benefit
cost for the year ended September 30, 1998, by $42. Discount rates of 7.5% and
7.25% were used to determine the accumulated postretirement benefit obligations
as of September 30, 1997 and 1998, respectively.
13. Business Segment and International Operations
Information about the Company's operations in different geographic areas
is summarized as follows:
<TABLE>
<CAPTION>
Transition Years ended
Year ended Period ended September 30,
June 30, September 30, -----------------------------
1996 1996 1997 1998
------------ -------------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers:
United States .................... $ 341,967 $ 82,329 $ 352,468 $ 412,366
Foreign:
Europe .......................... 64,432 15,304 62,546 67,624
Other ........................... 16,955 4,247 17,538 15,743
--------- --------- --------- ---------
Total ............................. $ 423,354 $ 101,880 $ 432,552 $ 495,733
========= ========= ========= =========
Transfers between geographic areas:
United States .................... $ 27,097 $ 7,432 $ 28,403 $ 26,401
Foreign:
Europe .......................... 730 422 1,459 1,433
--------- --------- --------- ---------
Total ............................. $ 27,827 $ 7,854 $ 29,862 $ 27,834
========= ========= ========= =========
Net sales:
United States .................... $ 369,065 $ 89,760 $ 380,872 $ 438,767
Foreign:
Europe .......................... 65,161 15,727 64,004 69,057
Other ........................... 16,955 4,247 17,538 15,743
Eliminations ..................... (27,827) (7,854) (29,862) (27,834)
--------- --------- --------- ---------
Total ............................. $ 423,354 $ 101,880 $ 432,552 $ 495,733
========= ========= ========= =========
Income (loss) from operations:
United States .................... $ 24,759 $ (20,983) $ 30,379 $ 36,981
Foreign:
Europe .......................... 5,002 (2,539) 3,759 3,490
Other ........................... 516 (150) 387 74
--------- --------- --------- ---------
Total ............................. $ 30,277 $ (23,672) $ 34,525 $ 40,545
========= ========= ========= =========
Total assets:
United States .................... $ 192,058 $ 213,327 $ 208,439 $ 259,476
Foreign:
Europe .......................... 33,719 35,065 32,137 34,902
Other ........................... 17,532 18,782 17,946 16,906
Eliminations ..................... (22,564) (23,886) (22,173) (24,943)
--------- --------- --------- ---------
Total ............................. $ 220,745 $ 243,288 $ 236,349 $ 286,341
========= ========= ========= =========
</TABLE>
63
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
14. Commitments and Contingencies
In March 1998, the Company entered into an agreement to purchase certain
equipment and to pay annual royalties. In connection with the 1998 agreement,
which supersedes previous agreements dated December 1991, and March 1994, the
Company committed to pay royalties of $2,000 in 1998 and 1999, $3,000 in 2000
through 2003, and $500 in each year thereafter, as long as the related
equipment patents are enforceable (2023). The Company incurred royalty expenses
of $2,000, $500, $2,000 and $2,000 for the year ended June 30, 1996, the
Transition Period, and the years ended September 30, 1997 and 1998,
respectively. Additionally, the Company has committed to purchase $7,500 of
production equipment and $600 of tooling at September 30, 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 $1,511, 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.
15. 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 and $408 for
the years ended September 30, 1997 and 1998, respectively.
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 non-competition 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 during the year ended September 1997.
The Company has notes receivable from officers in the amount of $1,261 and
$890 at September 30, 1997 and 1998, 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 had 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 were also classified as a reduction of shareholders' equity (deficit). The
short-term notes were repaid in November and December, 1997.
16. Other Special Charges
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
64
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
16. Other Special Charges --Continued
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; $1,100 was paid in fiscal 1998; and
$1,700 is expected to be paid thereafter.
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 completed 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 completed
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 1997 restructuring activities follows:
1997 Restructuring Summary
<TABLE>
<CAPTION>
Termination Other
benefits costs Total
------------- --------- -----------
<S> <C> <C> <C>
Expenses accrued ..................... $ 4,000 $ 600 $ 4,600
Change in estimate ................... 500 600 1,100
Expensed as incurred ................. -- 200 200
Expenditures ......................... (3,300) (700) (4,000)
-------- ------ --------
Balance at September 30, 1997 ......... 1,200 700 1,900
Change in estimate ................... (200) (400) (600)
Expenditures ......................... (1,000) (300) (1,300)
-------- ------ --------
Balance at September 30, 1998 ......... $ -- $ -- $ --
======== ====== ========
</TABLE>
During the year ended September 30, 1998, the Company recorded special
charges and credits as follows: (i) a credit of $1,243 related to the
settlement of deferred compensation agreements with certain former employees,
(ii) charges of $5,280 related to (a) the September 1998 closing of the
Company's Newton Aycliffe, United Kingdom, packaging facility, (b) the phasing
out of direct distribution through June 1998 in the United Kingdom, and (c) the
September 1998 closing of one of the Company's German sales offices, which
amounts include $1,771 of employee termination benefits for 73 employees,
$1,457 of lease cancellation costs, and $1,032 of equipment and intangible
asset write-offs, and $1,020 of other costs, (iii) charges of $2,184 related to
the closing by April 1999 of the Company's Appleton, Wisconsin, manufacturing
facility, which amount includes $1,449 of employee termination benefits for 153
employees, $200 of fixed asset write-offs and $535 of other costs, (iv) charges
of $1,963 related to the exit by March 1999 of certain manufacturing operations
at the Company's Madison, Wisconsin, facility, which amount includes $295 of
employee termination benefits for 29 employees, $1,256 of fixed asset
write-offs, and $412 of other costs, (v) a $2,435 gain on the sale of the
Company's previously closed Kinston, North Carolina, facility, (vi) charges of
$854 related to the secondary offering of the Company's common stock, and (vii)
miscellaneous credits of $420. A summary of the 1998 restructuring activities
follows:
65
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
16. Other Special Charges --Continued
1998 Restructuring Summary
<TABLE>
<CAPTION>
Termination Other
benefits costs Total
------------- ----------- -----------
<S> <C> <C> <C>
Expense accrued ...................... $ 3,700 $ 3,800 $ 7,500
Change in estimate ................... (100) 500 400
Expensed as incurred ................. 200 1,300 1,500
Cash expenditures .................... (1,500) (1,400) (2,900)
Non-cash charges ..................... -- (1,600) (1,600)
-------- -------- --------
Balance at September 30, 1998 ......... $ 2,300 $ 2,600 $ 4,900
======== ======== ========
</TABLE>
17. Acquisitions
The Company completed the following acquisitions in 1998, all of which
were accounted for as purchases.
On November 27, 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.
On March 13, 1998, 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 plus incentive payments which
were anticipated to total approximately $2,700. The initial $4,700 acquisition
price included $3,200 in cash (of which $500 was to be paid in cash after a
specified time period for resolution of acquisition related claims) and $1,500
of assumed bankers' acceptances. On June 29, 1998, the Company amended the
March 13, 1998 Stock Purchase Agreement which resulted in a payment of $1,900
to a former shareholder of DPP in return for the cancellation of future
incentive payments and settlement of the $500 payment for acquisition related
claims under the DPP Agreement.
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.
18. Quarterly Results (unaudited)
<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>
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------
December 27, March 28, June 27, September 30,
1997 1998 1998 1998
-------------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
Net sales ....................................... $149,995 $96,081 $111,054 $138,603
Gross profit .................................... 72,640 45,536 53,224 66,306
Income (loss) before extraordinary item ......... 8,534 (982) 3,849 4,969
Net income (loss) ............................... 6,559 (982) 3,849 4,969
Basic net income (loss) per share ............... 0.28 (0.04) 0.14 0.18
Diluted net income (loss) per share ............. 0.26 (0.04) 0.13 0.17
</TABLE>
66
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
19. Subsequent Event
The Company has reached an agreement in principle to acquire 99.6% of the
outstanding common stock of ROV Limited, a leading battery manufacturer in Latin
America with 1997 sales of approximately $84 million, for approximately $120
million. The acquisition, which is subject to various conditions, including
completion of due diligence and lender and other consents, will be accounted for
as a purchase and is anticipated to close by the end of February 1999. The
acquisition is expected to be financed with a combination of proceeds of an
equity offering and additional borrowings.
20. Condensed Consolidating 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 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.
67
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
20. Condensed Consolidating Financial Statements --Continued
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Guarantor Nonguarantor
Parent subsidiary subsidiaries Eliminations Consolidated
ASSETS ---------- ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents ............................... $ 1,355 $ 44 $ 195 $ -- $ 1,594
Receivables:
Trade accounts receivable, net of allowance for
doubtful receivables ................................. 82,635 -- 18,947 -- 101,582
Other .................................................. 9,476 41 489 (7,253) 2,753
Inventories ............................................. 53,120 -- 9,680 (38) 62,762
Deferred income taxes ................................... 7,578 342 71 -- 7,991
Prepaid expenses and other .............................. 5,783 -- 955 -- 6,738
-------- ------- ------- --------- --------
Total current assets ............................... 159,947 427 30,337 (7,291) 183,420
-------- ------- ------- --------- --------
Property, plant and equipment, net ...................... 66,174 -- 5,193 -- 71,367
Deferred charges and other .............................. 25,447 -- 5,481 (7,282) 23,646
Debt issuance costs ..................................... 7,908 -- -- -- 7,908
Investment in subsidiaries .............................. 17,229 16,724 -- (33,953) --
-------- ------- ------- --------- --------
Total assets ....................................... $276,705 $17,151 $41,011 $ (48,526) $286,341
======== ======= ======= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .................... $ 2,360 $ -- $ 2,247 $ (1,017) $ 3,590
Accounts payable ........................................ 58,398 -- 12,005 (5,604) 64,799
Accrued liabilities:
Wages and benefits ..................................... 8,521 -- 1,559 -- 10,080
Accrued interest ....................................... 2,989 -- 31 -- 3,020
Recapitalization and other special charges ............. 4,825 -- 1,964 -- 6,789
Other .................................................. 12,229 (308) 2,911 (1,347) 13,485
-------- ------- ------- --------- --------
Total current liabilities .......................... 89,322 (308) 20,717 (7,968) 101,763
-------- ------- ------- --------- --------
Long-term debt, net of current maturities ................ 149,441 -- 3,349 (4,104) 148,686
Employee benefit obligations, net of current portion ..... 10,433 -- -- -- 10,433
Deferred income taxes .................................... 2,434 230 22 (698) 1,988
Other .................................................... 1,398 -- 199 -- 1,597
-------- ------- ------- --------- --------
Total liabilities .................................. 253,028 (78) 24,287 (12,770) 264,467
-------- ------- ------- --------- --------
Shareholders' equity (deficit):
Common stock ............................................ 569 -- 12,072 (12,072) 569
Additional paid-in capital .............................. 103,304 3,525 750 (4,275) 103,304
Foreign currency translation adjustment ................. 2,500 2,500 2,500 (5,000) 2,500
Notes receivable from officers/shareholders ............. (890) -- -- -- (890)
Retained earnings ....................................... 47,078 11,204 1,402 (14,409) 45,275
------- ------ ------ ------- -------
152,561 17,229 16,724 (35,756) 150,758
Less stock held in trust for deferred
compensation plan ..................................... (412) -- -- -- (412)
Less treasury stock, at cost ............................ (128,472) -- -- -- (128,472)
-------- ------ ------ ------- --------
Total shareholders' equity ............................... 23,677 17,229 16,724 (35,756) 21,874
-------- ------ ------ ------- --------
Total liabilities and shareholders' equity ............... $276,705 $17,151 $41,011 $(48,526) $286,341
======== ======= ======= ======== ========
</TABLE>
68
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
20. Condensed Consolidating Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Guarantor Nonguarantor
Parent subsidiary subsidiaries Eliminations Consolidated
----------- ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales ......................................... $438,767 $ -- $84,786 $ (27,820) $495,733
Cost of goods sold ................................ 233,799 -- 51,912 (27,684) 258,027
-------- ------ ------- --------- --------
Gross profit .................................... 204,968 -- 32,874 (136) 237,706
-------- ------ ------- --------- --------
Operating expenses:
Selling .......................................... 131,396 -- 17,479 -- 148,875
General and administrative ....................... 28,830 (978) 8,097 (72) 35,877
Research and development ......................... 6,226 -- -- -- 6,226
Recapitalization charges ......................... (212) -- -- -- (212)
Other special charges ............................ 1,378 -- 5,017 -- 6,395
-------- ------ ------- --------- --------
167,618 (978) 30,593 (72) 197,161
-------- ------ ------- --------- --------
Income from operations .......................... 37,350 978 2,281 (64) 40,545
Interest expense .................................. 15,204 -- 466 -- 15,670
Equity in income of subsidiary .................... (888) (771) -- 1,659 --
Other (income) expense, net ....................... (994) 543 296 -- (155)
-------- ------ ------- --------- --------
Income before income taxes and extraordinary
item ............................................. 24,028 1,206 1,519 (1,723) 25,030
Income tax expense ................................ 7,594 318 748 -- 8,660
-------- ------ ------- --------- --------
Income (loss) before extraordinary item ........... 16,434 888 771 (1,723) 16,370
Extraordinary item, net of income tax benefit ..... (1,975) -- -- -- (1,975)
-------- ------ ------- --------- --------
Net income ...................................... $ 14,459 $ 888 $ 771 $ (1,723) $ 14,395
======== ====== ======= ========= ========
</TABLE>
69
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
20. Condensed Consolidating Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Guarantor Nonguarantor
Parent subsidiary subsidiaries Eliminations Consolidated
------------- ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by operating activities ..... $ (10,114) $(2) $ 2,703 $ 5,920 $ (1,493)
Cash flows from investing activities:
Purchases of property, plant and equipment .......... (14,395) -- (1,536) -- (15,931)
Proceeds from sale of property, plant and
equipment ......................................... 3,334 -- 344 -- 3,678
Payment for acquisitions ............................ (6,271) -- (4,853) -- (11,124)
---------- --- -------- -------- ----------
Net cash used by investing activities ................ (17,332) -- (6,045) -- (23,377)
---------- --- -------- -------- ----------
Cash flows from financing activities:
Reduction of debt ................................... (135,500) -- (4,524) -- (140,024)
Proceeds from debt financing ........................ 79,755 -- 8,093 (5,920) 81,928
Proceeds from issuance of common stock .............. 87,160 -- -- -- 87,160
Other ............................................... (3,247) -- (465) -- (3,712)
---------- --- -------- -------- ----------
Net cash provided by financing activities ............ 28,168 -- 3,104 (5,920) 25,352
---------- --- -------- -------- ----------
Effect of exchange rate changes on cash and
cash equivalents .................................... -- -- (21) -- (21)
---------- --- -------- -------- ----------
Net increase (decrease) in cash and cash
equivalents .................................. ..... 722 (2) (259) -- 461
Cash and cash equivalents, beginning of period ....... 633 46 454 -- 1,133
---------- ----- -------- -------- ----------
Cash and cash equivalents, end of period ............. $ 1,355 $44 $ 195 $ -- $ 1,594
========== ===== ======== ======== ==========
</TABLE>
70
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
20. Condensed Consolidating Financial Statements --Continued
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Guarantor Nonguarantor
Parent subsidiary 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 of allowance for
doubtful receivables ................................. 60,868 -- 15,190 -- 76,058
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 ............................... 128,769 1,090 32,945 (8,956) 153,848
-------- ------- ------- -------- --------
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 ....................................... $223,428 $16,717 $38,208 $(42,004) $236,349
======== ======= ======= ======== ========
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 .................................................. 15,650 226 3,448 -- 19,324
-------- ------- ------- -------- --------
Total current liabilities .......................... 106,042 376 22,148 (8,535) 120,031
-------- ------- ------- -------- --------
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 .................................. 302,284 606 22,589 (8,535) 316,944
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, at cost ............................ (128,040) -- -- -- (128,040)
-------- ------- ------- -------- --------
Total shareholders' equity (deficit) ..................... (78,856) 16,111 15,619 (33,469) (80,595)
-------- ------- ------- -------- --------
Total liabilities and shareholders' equity (deficit) ..... $223,428 $16,717 $38,208 $(42,004) $236,349
======== ======= ======= ======== ========
</TABLE>
71
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
20. Condensed Consolidating 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>
72
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
20. Condensed Consolidating 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 used by financing activities .................... (24,859) -- (3,126) -- (27,985)
-------- ----- ------- --- --------
Effect of exchange rate changes on cash and cash
equivalents ............................................. -- -- 2 -- 2
-------- ----- ------- --- --------
Net 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>
73
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
20. Condensed Consolidating Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Transition Period ended September 30, 1996
<TABLE>
<CAPTION>
Guarantor Nonguarantor
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>
74
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
20. Condensed Consolidating Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Transition Period ended September 30, 1996
<TABLE>
<CAPTION>
Guarantor Nonguarantor
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 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>
75
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
20. Condensed Consolidating Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Year ended June 30, 1996
<TABLE>
<CAPTION>
Guarantor Nonguarantor
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>
76
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
20. Condensed Consolidating Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year ended June 30, 1996
<TABLE>
<CAPTION>
Guarantor Nonguarantor
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 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 overdrafts ......................................... 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>
77
<PAGE>
Independent Auditors' Report
The Board of Directors
Rayovac Corporation:
On November 9, 1998, except as to note 19 which is as of December 23, 1998, we
reported on the consolidated balance sheets of Rayovac Corporation and
subsidiaries as of September 30, 1997 and 1998, and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
the years then ended, which are included in the 1998 Annual Report on Form
10-K. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement schedule
as of September 30, 1997 and 1998 and for the years then ended as listed in
Item 14. The financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Milwaukee, Wisconsin
November 9, 1998, except as to note 19 which is as of
December 23, 1998
78
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the fiscal years ended September 30, 1998 and 1997, the Transition Period
ended September 30, 1996 and the year ended June 30, 1996
(In thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------------------- ------------ ----------- ------------ --------------
Additions
Balance at Charged to
Beginning Costs and Balance at
Descriptions of Period Expenses Deductions End of Period
- ------------------------------------------- ------------ ----------- ------------ --------------
<S> <C> <C> <C> <C>
September 30, 1998:
Allowance for doubtful accounts .......... $1,221 $745 $610 $1,356
====== ==== ==== ======
September 30, 1997:
Allowance for doubtful accounts .......... $ 722 $617 $118 $1,221
====== ==== ==== ======
Transition Period Ended September 30, 1996:
Allowance for doubtful accounts .......... $ 786 $147 $211 $ 722
====== ==== ==== ======
June 30, 1996:
Allowance for doubtful accounts .......... $ 702 $545 $461 $ 786
====== ==== ==== ======
</TABLE>
See accompanying Independent Auditors' Report.
79
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
RAYOVAC CORPORATION
By: /s/ David A. Jones
----------------------------------
Name: David A. Jones
Title: Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: December 24, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of December 24, 1998.
<TABLE>
<CAPTION>
Signature Title
- ----------------------------- ---------------------------------------------------
<S> <C>
/s/ David A. Jones Chairman of the Board and Chief Executive Officer
- ------------------------- (Principal Executive Officer)
David A. Jones
/s/ Kent J. Hussey President and Chief Operating Officer and Director
- -------------------------
Kent J. Hussey
/s/ Roger F. Warren President-International/Micropower and Director
- -------------------------
Roger F. Warren
/s/ Trygve Lonnebotn Executive Vice President-Operations and Director
- -------------------------
Trygve Lonnebotn
/s/ Randall J. Steward Senior Vice President-Finance and Chief Financial
- ------------------------- Officer (Principal Financial Officer and Principal
Randall J. Steward Accounting Officer)
/s/ Scott A. Schoen Director
- -------------------------
Scott A. Schoen
/s/ Thomas R. Shepherd Director
- -------------------------
Thomas R. Shepherd
/s/ Warren C. Smith, Jr. Director
- -------------------------
Warren C. Smith, Jr.
/s/ Joseph W. Deering Director
- -------------------------
Joseph W. Deering
/s/ John S. Lupo Director
- -------------------------
John S. Lupo
</TABLE>
80
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
- ------------------- -------------------------------------------------------------------------------------------
<S> <C>
3.1+ Amended and Restated Articles of Incorporation of the Company.
3.2+ Amended and Restated By-laws of the Company.
4.1** Indenture, dated as of October 22, 1996, by and among the Company, ROV Holding, Inc.
and Marine Midland Bank, as trustee, relating to the Company's 101/4% Senior Subordinated
Notes due 2006.
4.2** Specimen of the Notes (included as an exhibit to Exhibit 4.1).
4.3**** Amended and Restated Credit Agreement, dated as of December 30, 1997 by and among the
Company, the lenders party thereto, Bank of America National Trust and Savings Association
("BofA") as Administrative Agent.
4.4** The Security Agreement dated as of September 12, 1996 by and among the Company, ROV
Holding, Inc. and BofA.
4.5** The Company Pledge Agreement dated as of September 12, 1996 by and between the
Company and BofA.
4.6*** Shareholders Agreement dated as of September 12, 1996 by and among the Company and
the shareholders of the Company referred to therein.
4.7*** Amendment to Rayovac Shareholders Agreement dated August 1, 1997 by and among the
Company and the shareholders of the Company referred to therein.
4.8* Specimen certificate representing the Common Stock.
10.1** Management Agreement, dated as of September 12, 1996, by and between the Company and
Thomas H. Lee Company.
10.2** Confidentiality, Non-Competition and No-Hire Agreement dated as of September 12, 1996
by and between the Company and Thomas F. Pyle.
10.3++ Amended and Restated Employment Agreement, dated as of April 27, 1998, by and between
the Company and David A. Jones.
10.4++ Employment Agreement, dated as of April 27, 1998, by and between the Company and
Kent J. Hussey.
10.5 Amendment to Employment Agreement, dated as of October 1, 1998, by and between the
Company and Kent J. Hussey.
10.6 Severance Agreement by and between the Company and Randall J. Steward.
10.7 Severance Agreement by and between the Company and Roger F. Warren.
10.8 Severance Agreement by and between the Company and Stephen P. Shanesy.
10.9 Severance Agreement by and between the Company and Merrell M. Tomlin.
10.10** Technology, License and Service Agreement between Battery Technologies (International)
Limited and the Company, dated June 1, 1991, as amended April 19, 1993 and
December 31, 1995.
10.11** Building Lease between the Company and SPG Partners, dated May 14, 1985, as amended
June 24, 1986 and June 10, 1987.
10.12*** Rayovac Corporation 1996 Stock Option Plan.
10.13*** Rayovac Corporation 1997 Stock Option Plan.
10.14* 1997 Rayovac Incentive Plan.
10.15* Rayovac Profit Sharing and Savings Plan.
10.16++++ Technical Collaboration, Sale and Supply Agreement dated as of March 5, 1998 by and
among the Company, Matsushita Battery Industrial Co., Ltd. and Matsushita Electric
Industrial Co., Ltd.
16+++ Letter re: change in certifying accountant.
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
- ---------------- ---------------------------------------
<S> <C>
21 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
</TABLE>
- ----------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-35181) filed with the Commission.
** Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-17895) filed with the Commission.
*** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 29, 1997 filed with the Commission on
August 13, 1997.
**** Incorporated by reference to the Company's Registration Statement on Form
S-3 (Registration No. 333-49281) filed with the Commission.
+ Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1997 filed with the Commission on
December 23, 1997.
++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 27, 1998 filed with the Commission on
August 4, 1998.
+++ Incorporated by reference to the Company's Current Report on Form 8-K/A
filed with the Commission on June 20, 1997.
++++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 28, 1998 filed with the Commission on
May 5, 1998.
82
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment is entered into, effective 1 October 1998, by and between Kent J.
Hussey (the "Executive") and Rayovac Corporation, a Wisconsin corporation (the
"Company").
Background
The Company desires to protect its confidential information and trade secrets
and to protect itself against competition from its key executives.
The Company and the Executive wish to amend the existing employment agreement
between themselves dated as of 27 April 1998 (the "Agreement").
Undertakings
Now therefore, the parties agree:
1. Section 5(b)(i) of the Agreement is hereby amended and restated in its
entirety to read as follows:
The Executive's Base Salary specified in Section 3(a) shall continue
to be paid in monthly installments until the first to occur of (i)
twenty-four (24) months following such termination or (ii) such time
as the Executive or the Executive's Estate breaches the provisions
of Sections 6 or 7 of this Agreement.
2. Section 5(b)(iii) of the Agreement is hereby amended and restated in its
entirety to read as follows:
<PAGE>
-2-
If the Executive's employment is terminated as a result of
disability, the Executive's additional benefits specified in Section
3(c) shall continue to be available to the Executive until the first
to occur of (i) the remaining period of the Term (or twenty-four
(24) months following such termination, if greater) or (ii) such
time as the Executive breaches the provisions of Sections 6 or 7 of
this Agreement; and
3. Section 5(c)(i) of the Agreement is hereby amended and restated in its
entirety to read as follows:
the Executive's Base Salary specified in Section 3(a) shall continue
to be paid in monthly installments until the first to occur of (i)
the remaining period of the Term (or twenty-four (24) months
following such termination, if greater) or (ii) such time as the
Executive breaches the provisions of Sections 6 or 7 of this
Agreement;
4. Section 5(c)(iii) of the Agreement is hereby amended and restated in its
entirety to read as follows:
the Executive's additional benefits specified in Section 3(c) shall
continue to be available to the Executive until the first to occur
of (i) twenty-four (24) months following such termination or (ii)
such time as the Executive breaches the provisions of Sections 6 or
7 of this Agreement;
5. The last sentence of Section 6(a) of the Agreement is hereby amended and
restated in its entirety to read as follows:
<PAGE>
-3-
The "Non-Competition Period" is (a) the longer of the Executive's
employment hereunder or time period which he serves as a director of
the Company plus (b) a period of two (2) years thereafter.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
RAYOVAC CORPORATION EXECUTIVE
By: /s/ David A. Jones /s/ Kent J. Hussey
---------------------------- --------------------------------
David A. Jones Kent J. Hussey
Chairman
SEVERANCE AGREEMENT
This Agreement, dated as of 1 October 1998, is made by and between Rayovac
Corporation (the "Company"), a Wisconsin corporation with its principal business
address at 601 Rayovac Drive, Madison, Wisconsin 53711, and Randall J. Steward,
an individual residing at 3024 Woodland Trail, Middleton, WI 53562 (the
"Executive").
BACKGROUND
The Executive has been, and continues to be, privy to important confidential
information of the Company, and has developed substantial skills and knowledge
related to the Company's industry, which skills and knowledge would be of
substantial value to the Company's competition.
The Company considers it essential to the best interests of its shareholders to
foster the continued employment of key managers, and to limit their ability to
compete with the Company after their employment terminates.
The Executive and the Company wish to execute this Agreement to formalize
additional terms of the Executive's employment.
UNDERTAKINGS
Now therefore, the parties agree:
1. Term of Agreement. The term of this Agreement (the "Term") shall commence
on the date hereof and shall continue in effect through 30 September 1999;
provided, however, that commencing on 1 October 1998
<PAGE>
and each year thereafter, the Term shall automatically extend one
additional year unless, not later than 30 days prior to the end of the
preceding Term, the Company or the Executive shall give notice not to
extend the Term.
2. Severance Payments.
2.1 If the Executive's employment is terminated during the Term (a) by the
Company without Cause (as defined below) or (b) by reason of death or
Disability (as defined below), then the Company shall pay the
Executive the amounts, and provide the Executive the benefits,
described in Section 2.2 (the "Severance Payments").
2.2 (a) The Company shall pay to the Executive as severance, an amount in
cash equal to two (2) times the sum of (i) the Executive's base salary
as in effect for the fiscal year ending immediately prior to the
fiscal year in which such termination occurs, and (ii) the annual
bonus (if any) earned by the Executive pursuant to any annual bonus or
incentive plan maintained by the Company in respect of the fiscal year
ending immediately prior to the fiscal year in which the termination
occurs, such cash amount to be paid to the Executive ratably monthly
in arrears over the Non-Competition Period (as defined below).
(b) For the 12-month period immediately following such termination,
the Company shall arrange to provide the Executive and his dependents
insurance benefits substantially similar to those provided to the
Executive and his dependents immediately prior to the date of
termination, at no greater cost to the Executive than the cost to the
Executive
<PAGE>
immediately prior to such date. Benefits otherwise receivable by the
Executive pursuant to this Section 2.2(b) shall cease immediately upon
the discovery by the Company of the Executive's breach of the
covenants contained in Sections 5 or 6 hereof. In addition, benefits
otherwise receivable by the Executive pursuant to this Section 2.2(b)
shall be reduced to the extent benefits of the same type are received
by or made available to the Executive during the 12-month period
following the Executive's termination of employment (and any such
benefits received by or made available to the Executive shall be
reported to the Company by the Executive); provided, however, that the
Company shall reimburse the Executive for the excess, if any, of the
cost of such benefits to the Executive over such cost immediately
prior to the date of termination.
2.3 Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state, or local law and
any additional withholding to which the Executive has agreed.
2.4 If the Executive's employment with the Company terminates during the
Term, the Executive shall not be required to seek other employment or
to attempt in any way to reduce any amounts payable to the Executive
by the Company pursuant to this Section 2.
3. Termination Procedures. During the Term, any purported termination of the
Executive's employment (other than by reason of death) shall be
communicated by written notice of termination from one party to the other
in accordance with Section 8 hereof. The notice of termination shall
indicate the specific termination provision in this Agreement relied upon
<PAGE>
and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment
under the provision so indicated.
4. No Rights to Employment. This Agreement shall not be construed as creating
an express or implied contract of employment, and except as otherwise
agreed in writing between the Executive and the Company and authorized by
the Board of Directors of the Company, the Executive shall not have any
right to be retained in the employ of the Company.
5. Executive's Covenant Not to Compete.
5.1 During the Non-Competition Period, the Executive will not, directly or
indirectly, in any capacity, either separately, jointly, or in
association with others, as an officer, director, consultant, agent,
employee, owner, principal, partner, or stockholder of any business,
or in any other capacity, engage or have a financial interest in any
business which is involved in the design, manufacturing, marketing, or
sale of batteries or battery operated lighting devices (excepting only
the ownership of not more than 5% of the outstanding securities of an
class listed on an exchange or the Nasdaq Stock Market). For purposes
of this Agreement, the "Non-Competition Period" means the period
beginning on the date hereof and continuing until the date which is
the two-year anniversary of the later to occur of (a) the end of the
Term and (b) the date of termination.
5.2 Without limiting the generality of Section 5.1 above, during the
Non-Competition Period the Executive will not, directly or indirectly,
in any capacity, either separately, jointly, or in association with
others, solicit or otherwise contact any of the Company's customers or
prospects that were customers or prospects
<PAGE>
of the Company at any time during the Non-Competition Period if such
solicitation or contact is for the general purpose of selling products
that satisfy the same general needs as any products that the Company
had available for sale to its customers or prospects during the
Non-Competition Period.
5.3 During the Non-Competition Period, the Executive shall not, other than
in connection with employment for the Company, solicit the employment
or services of any employee of the Company who is or was an employee
of the Company at any time during the Non-Competition Period. During
the Non-Competition Period, the Executive shall not hire any employee
of Company for any other business.
5.4 If a court determines that the foregoing restrictions are too broad or
otherwise unreasonable under applicable law, including with respect to
time or space, the court is hereby requested and authorized by the
parties to revise the foregoing restrictions to include the maximum
restrictions allowed under the applicable law.
5.5 For purposes of this Section 5 and Section 6, the "Company" refers to
the Company and any incorporated or unincorporated affiliates of the
Company.
6. Secret Processes and Confidential Information.
6.1 The Executive will hold in strict confidence and, except as the
Company may authorize or direct, not disclose to any person or use
(except in the performance of his services hereunder) any confidential
information or materials received by the Executive from
<PAGE>
the Company or any confidential information or materials of other
parties received by the Executive in connection with the performance
of his duties hereunder. For purposes of this Section 6.1,
confidential information or materials shall include existing and
potential customer information, existing and potential supplier
information, product information, design and construction information,
pricing and profitability information, financial information, sales
and marketing strategies and techniques, and business ideas or
practices. The restriction on the Executive's use or disclosure of the
confidential information or materials shall remain in force until such
information is of general knowledge in the industry through no fault
of the Executive or any agent of the Executive. The Executive also
will return to the Company promptly upon its request any Company
information or materials in the Executive's possession or under the
Executive's control.
6.2 The Executive will promptly disclose to the Company and to no other
person, firm or entity all inventions, discoveries, improvements,
trade secrets, formulas, techniques, processes, know-how and similar
matters, whether or not patentable and whether or not reduced to
practice, which are conceived or learned by the Executive during the
period of the Executive's employment with the Company, either alone or
with others, which relate to or result from the actual or anticipated
business or research of the Company or which result, to any extent,
from the Executive's use of the Company's premises or property
(collectively called the "Inventions"). The Executive acknowledges and
agrees that all Inventions shall be the sole property of the Company,
and the Executive hereby assigns to the Company all of the Executive's
rights and interests in and to all of the Inventions, it being
acknowledged and agreed by the Executive that all the
<PAGE>
Inventions are works made for hire. The Company shall be the sole
owner of all domestic and foreign rights and interests in the
Inventions. The Executive will assist the Company at the Company's
expense to obtain and from time to time enforce patents and copyrights
on the Inventions.
6.3 Upon the request of, and, in any event, upon termination of the
Executive's employment with the Company, the Executive shall promptly
deliver to the Company all documents, data, records, notes, drawings,
manuals, and all other tangible information in whatever form which
pertains to the Company, and the Executive will not retain any such
information or any reproduction or excerpt thereof.
7. Successors; Binding Agreement
7.1 In addition to any obligations imposed by law upon any successor to
the Company, the Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company to
expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. Failure of the
Company to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to the Severance Payments,
except that, for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the date
of termination. For purposes of this Agreement, "Company" shall mean
Rayovac Corporation, a Wisconsin corporation, and shall include any
successor to its business or assets
<PAGE>
which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
7.2 This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. If the Executive shall die while any amount would still be
payable to the Executive hereunder (other than amounts which, by their
terms, terminate upon the death of the Executive) if the Executive had
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to the
executors, personal representatives or administrators of the
Executive's estate.
8. Notices. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given (a) when delivered personally, (b) upon
confirmation of receipt when such notice or other communication is sent by
facsimile or telex, (c) one day after delivery to an overnight delivery
courier, or (d) on the fifth day following the date of deposit in the
United States mail if sent first class, postage prepaid, by registered or
certified mail.
9. Survival. The obligations of the Company and the Executive under this
Agreement which by their nature may require either partial or total
performance after the expiration of the Term (including, without
limitation, those under Sections 2, 5 and 6 hereof) shall survive such
expiration.
10. Amendment; Waiver. This Agreement may be amended, modified, superseded, or
canceled, and the terms hereof may be waived, only by a
<PAGE>
written instrument executed by all of the parties hereto or, in the case of
a waiver, by the party waiving compliance. The failure of any party at any
time or times to require performance of any provision hereof shall in no
manner affect the right at a later time to enforce the same. No waiver by
any party of the breach of any term or covenant contained in this
Agreement, whether by conduct or otherwise, in any one or more instances,
shall be deemed to be, or construed as, a further or continuing waiver of
any such breach, or a waiver of the breach of any other term or covenant
contained in this Agreement.
11. Equitable Relief. Breach of any provision of Sections 5 or 6 of this
Agreement would result in irreparable injuries to the Company, the remedy
at law for any such breach will be inadequate, and upon breach of such
provisions, the Company, in addition to all other available remedies, shall
be entitled as a matter of right to injunctive relief in any court of
competent jurisdiction without the necessity of proving the actual damage
to the Company.
12. Entire Agreement. This Agreement constitutes the entire understanding of
the parties hereto with respect to the subject matter hereof and supersedes
all prior negotiations, discussions, writings, and agreements between them.
13. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
14. Counterparts. This Agreement may be executed in two counterparts, each of
which shall be deemed to be an original but both of which together will
constitute one and the same instrument.
<PAGE>
15. Definitions. For purposes of this Agreement, the following terms shall have
the meanings indicated below:
(a) "Cause" for termination by the Company of the Executive's employment
shall mean (i) the commission by the Executive of any fraud,
embezzlement or other material act of dishonesty with respect to the
Company or any of its affiliates (including the unauthorized
disclosure of confidential or proprietary information of the Company
or any of its affiliates or subsidiaries); (ii) Executive's conviction
of, or plea of guilty or nolo contendere to, a felony or other crime
involving moral turpitude; (iii) Executive's willful misconduct; (iv)
willful failure or refusal by Executive to perform his duties and
responsibilities to the Company or any of its affiliates which failure
or refusal to perform is not remedied within 30 days after receipt of
a written notice from the Company detailing such failure or refusal to
perform; or (v) Executive's breach of any of the terms of this
Agreement or any other agreement between Executive and the Company
which breach is not cured within 30 days subsequent to notice from the
Company to Executive of such breach.
(b) "Disability" shall be deemed the reason for the termination by the
Company of the Executive's employment, if, as a result of the
Executive's inability to perform his duties by reason of any mental,
physical or other disability for a period of at least 6 consecutive
months (for purposes hereof, "disability" has the same meaning as in
the Company's disability policy), the Company shall have given the
Executive a notice of termination for Disability, and, within 30 days
after such notice of termination is given, the Executive shall not
have returned to the full-time performance of the Executive's duties.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
RAYOVAC CORPORATION EXECUTIVE
By: /s/ Kent J. Hussey /s/ Randall J. Steward
------------------ ----------------------
Kent J. Hussey Randall J. Steward
President
SEVERANCE AGREEMENT
This Agreement, dated as of 1 October 1998, is made by and between Rayovac
Corporation (the "Company"), a Wisconsin corporation with its principal business
address at 601 Rayovac Drive, Madison, Wisconsin 53711, and Roger F. Warren, an
individual residing at 505 Summit Road, Madison, WI 53704 (the "Executive").
BACKGROUND
The Executive has been, and continues to be, privy to important confidential
information of the Company, and has developed substantial skills and knowledge
related to the Company's industry, which skills and knowledge would be of
substantial value to the Company's competition.
The Company considers it essential to the best interests of its shareholders to
foster the continued employment of key managers, and to limit their ability to
compete with the Company after their employment terminates.
The Executive and the Company wish to execute this Agreement to formalize
additional terms of the Executive's employment.
UNDERTAKINGS
Now therefore, the parties agree:
1. Term of Agreement. The term of this Agreement (the "Term") shall commence
on the date hereof and shall continue in effect through 30 September 1999;
provided, however, that commencing on 1 October 1998 and each year
thereafter, the Term shall automatically extend one additional year unless,
not later than 30 days prior to the end of the preceding Term, the Company
or the Executive shall give notice not to extend the Term.
2. Severance Payments.
2.1 If the Executive's employment is terminated during the Term (a) by the
Company without Cause (as defined below) or (b) by reason of death or
Disability (as defined below), then the Company shall pay the
Executive the amounts, and provide the Executive the benefits,
described in Section 2.2 (the "Severance Payments").
<PAGE>
2.2 (a) The Company shall pay to the Executive as severance, an amount in
cash equal to two (2) times the sum of (i) the Executive's base salary
as in effect for the fiscal year ending immediately prior to the
fiscal year in which such termination occurs, and (ii) the annual
bonus (if any) earned by the Executive pursuant to any annual bonus or
incentive plan maintained by the Company in respect of the fiscal year
ending immediately prior to the fiscal year in which the termination
occurs, such cash amount to be paid to the Executive ratably monthly
in arrears over the Non-Competition Period (as defined below).
(b) For the 12-month period immediately following such termination,
the Company shall arrange to provide the Executive and his dependents
insurance benefits substantially similar to those provided to the
Executive and his dependents immediately prior to the date of
termination, at no greater cost to the Executive than the cost to the
Executive immediately prior to such date. Benefits otherwise
receivable by the Executive pursuant to this Section 2.2(b) shall
cease immediately upon the discovery by the Company of the Executive's
breach of the covenants contained in Sections 5 or 6 hereof. In
addition, benefits otherwise receivable by the Executive pursuant to
this Section 2.2(b) shall be reduced to the extent benefits of the
same type are received by or made available to the Executive during
the 12-month period following the Executive's termination of
employment (and any such benefits received by or made available to the
Executive shall be reported to the Company by the Executive);
provided, however, that the Company shall reimburse the Executive for
the excess, if any, of the cost of such benefits to the Executive over
such cost immediately prior to the date of termination.
2.3 Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state, or local law and
any additional withholding to which the Executive has agreed.
2.4 If the Executive's employment with the Company terminates during the
Term, the Executive shall not be required to seek other employment or
to attempt in any way to reduce any amounts payable to the Executive
by the Company pursuant to this Section 2.
3. Termination Procedures. During the Term, any purported termination of the
Executive's employment (other than by reason of death) shall be
communicated by written notice of termination from one party to the other
in accordance with Section 8 hereof. The notice of
<PAGE>
termination shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated.
4. No Rights to Employment. This Agreement shall not be construed as creating
an express or implied contract of employment, and except as otherwise
agreed in writing between the Executive and the Company and authorized by
the Board of Directors of the Company, the Executive shall not have any
right to be retained in the employ of the Company.
5. Executive's Covenant Not to Compete.
5.1 During the Non-Competition Period, the Executive will not, directly or
indirectly, in any capacity, either separately, jointly, or in
association with others, as an officer, director, consultant, agent,
employee, owner, principal, partner, or stockholder of any business,
or in any other capacity, engage or have a financial interest in any
business which is involved in the design, manufacturing, marketing, or
sale of batteries or battery operated lighting devices (excepting only
the ownership of not more than 5% of the outstanding securities of an
class listed on an exchange or the Nasdaq Stock Market). For purposes
of this Agreement, the "Non-Competition Period" means the period
beginning on the date hereof and continuing until the date which is
the two-year anniversary of the later to occur of (a) the end of the
Term and (b) the date of termination.
5.2 Without limiting the generality of Section 5.1 above, during the
Non-Competition Period the Executive will not, directly or indirectly,
in any capacity, either separately, jointly, or in association with
others, solicit or otherwise contact any of the Company's customers or
prospects that were customers or prospects of the Company at any time
during the Non-Competition Period if such solicitation or contact is
for the general purpose of selling products that satisfy the same
general needs as any products that the Company had available for sale
to its customers or prospects during the Non-Competition Period.
5.3 During the Non-Competition Period, the Executive shall not, other than
in connection with employment for the Company, solicit the employment
or services of any employee of the Company who is or was an employee
of the Company at any time during the Non-Competition Period. During
the Non-Competition Period, the Executive shall not hire any employee
of Company for any other business.
<PAGE>
5.4 If a court determines that the foregoing restrictions are too broad or
otherwise unreasonable under applicable law, including with respect to
time or space, the court is hereby requested and authorized by the
parties to revise the foregoing restrictions to include the maximum
restrictions allowed under the applicable law.
5.5 For purposes of this Section 5 and Section 6, the "Company" refers to
the Company and any incorporated or unincorporated affiliates of the
Company.
6. Secret Processes and Confidential Information.
6.1 The Executive will hold in strict confidence and, except as the
Company may authorize or direct, not disclose to any person or use
(except in the performance of his services hereunder) any confidential
information or materials received by the Executive from the Company or
any confidential information or materials of other parties received by
the Executive in connection with the performance of his duties
hereunder. For purposes of this Section 6.1, confidential information
or materials shall include existing and potential customer
information, existing and potential supplier information, product
information, design and construction information, pricing and
profitability information, financial information, sales and marketing
strategies and techniques, and business ideas or practices. The
restriction on the Executive's use or disclosure of the confidential
information or materials shall remain in force until such information
is of general knowledge in the industry through no fault of the
Executive or any agent of the Executive. The Executive also will
return to the Company promptly upon its request any Company
information or materials in the Executive's possession or under the
Executive's control.
6.2 The Executive will promptly disclose to the Company and to no other
person, firm or entity all inventions, discoveries, improvements,
trade secrets, formulas, techniques, processes, know-how and similar
matters, whether or not patentable and whether or not reduced to
practice, which are conceived or learned by the Executive during the
period of the Executive's employment with the Company, either alone or
with others, which relate to or result from the actual or anticipated
business or research of the Company or which result, to any extent,
from the Executive's use of the Company's premises or property
(collectively called the "Inventions"). The Executive acknowledges and
agrees that all Inventions shall be the sole property of the Company,
and the Executive hereby assigns to the Company all of the Executive's
rights and interests in and to all of the Inventions, it being
acknowledged and agreed by the Executive that all the Inventions are
works made for hire. The Company shall be the sole owner of all
domestic and foreign rights and interests in the Inventions.
<PAGE>
The Executive will assist the Company at the Company's expense to
obtain and from time to time enforce patents and copyrights on the
Inventions.
6.3 Upon the request of, and, in any event, upon termination of the
Executive's employment with the Company, the Executive shall promptly
deliver to the Company all documents, data, records, notes, drawings,
manuals, and all other tangible information in whatever form which
pertains to the Company, and the Executive will not retain any such
information or any reproduction or excerpt thereof.
7. Successors; Binding Agreement
7.1 In addition to any obligations imposed by law upon any successor to
the Company, the Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company to
expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. Failure of the
Company to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to the Severance Payments,
except that, for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the date
of termination. For purposes of this Agreement, "Company" shall mean
Rayovac Corporation, a Wisconsin corporation, and shall include any
successor to its business or assets which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
7.2 This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. If the Executive shall die while any amount would still be
payable to the Executive hereunder (other than amounts which, by their
terms, terminate upon the death of the Executive) if the Executive had
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to the
executors, personal representatives or administrators of the
Executive's estate.
8. Notices. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given (a) when delivered personally, (b) upon
confirmation of receipt when such notice or other communication is sent by
facsimile or telex, (c) one day after delivery to an overnight delivery
courier, or (d) on the fifth day
<PAGE>
following the date of deposit in the United States mail if sent first
class, postage prepaid, by registered or certified mail.
9. Survival. The obligations of the Company and the Executive under this
Agreement which by their nature may require either partial or total
performance after the expiration of the Term (including, without
limitation, those under Sections 2, 5 and 6 hereof) shall survive such
expiration.
10. Amendment; Waiver. This Agreement may be amended, modified, superseded, or
canceled, and the terms hereof may be waived, only by a written instrument
executed by all of the parties hereto or, in the case of a waiver, by the
party waiving compliance. The failure of any party at any time or times to
require performance of any provision hereof shall in no manner affect the
right at a later time to enforce the same. No waiver by any party of the
breach of any term or covenant contained in this Agreement, whether by
conduct or otherwise, in any one or more instances, shall be deemed to be,
or construed as, a further or continuing waiver of any such breach, or a
waiver of the breach of any other term or covenant contained in this
Agreement.
11. Equitable Relief. Breach of any provision of Sections 5 or 6 of this
Agreement would result in irreparable injuries to the Company, the remedy
at law for any such breach will be inadequate, and upon breach of such
provisions, the Company, in addition to all other available remedies, shall
be entitled as a matter of right to injunctive relief in any court of
competent jurisdiction without the necessity of proving the actual damage
to the Company.
12. Entire Agreement. This Agreement constitutes the entire understanding of
the parties hereto with respect to the subject matter hereof and supersedes
all prior negotiations, discussions, writings, and agreements between them.
13. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
14. Counterparts. This Agreement may be executed in two counterparts, each of
which shall be deemed to be an original but both of which together will
constitute one and the same instrument.
15. Definitions. For purposes of this Agreement, the following terms shall have
the meanings indicated below:
<PAGE>
(a) "Cause" for termination by the Company of the Executive's employment
shall mean (i) the commission by the Executive of any fraud,
embezzlement or other material act of dishonesty with respect to the
Company or any of its affiliates (including the unauthorized
disclosure of confidential or proprietary information of the Company
or any of its affiliates or subsidiaries); (ii) Executive's conviction
of, or plea of guilty or nolo contendere to, a felony or other crime
involving moral turpitude; (iii) Executive's willful misconduct; (iv)
willful failure or refusal by Executive to perform his duties and
responsibilities to the Company or any of its affiliates which failure
or refusal to perform is not remedied within 30 days after receipt of
a written notice from the Company detailing such failure or refusal to
perform; or (v) Executive's breach of any of the terms of this
Agreement or any other agreement between Executive and the Company
which breach is not cured within 30 days subsequent to notice from the
Company to Executive of such breach.
(b) "Disability" shall be deemed the reason for the termination by the
Company of the Executive's employment, if, as a result of the
Executive's inability to perform his duties by reason of any mental,
physical or other disability for a period of at least 6 consecutive
months (for purposes hereof, "disability" has the same meaning as in
the Company's disability policy), the Company shall have given the
Executive a notice of termination for Disability, and, within 30 days
after such notice of termination is given, the Executive shall not
have returned to the full-time performance of the Executive's duties.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
RAYOVAC CORPORATION EXECUTIVE
By: /s/ Kent J. Hussey /s/ Roger F. Warren
------------------ -------------------
Kent J. Hussey Roger F. Warren
President
SEVERANCE AGREEMENT
This Agreement, dated as of 1 October 1998, is made by and between Rayovac
Corporation (the "Company"), a Wisconsin corporation with its principal business
address at 601 Rayovac Drive, Madison, Wisconsin 53711, and Stephen P. Shanesy,
an individual residing at 7866 Black River Road, Verona, WI 53593 (the
"Executive").
BACKGROUND
The Executive has been, and continues to be, privy to important confidential
information of the Company, and has developed substantial skills and knowledge
related to the Company's industry, which skills and knowledge would be of
substantial value to the Company's competition.
The Company considers it essential to the best interests of its shareholders to
foster the continued employment of key managers, and to limit their ability to
compete with the Company after their employment terminates.
The Executive and the Company wish to execute this Agreement to formalize
additional terms of the Executive's employment.
UNDERTAKINGS
Now therefore, the parties agree:
1. Term of Agreement. The term of this Agreement (the "Term") shall commence
on the date hereof and shall continue in effect through 30 September 1999;
provided, however, that commencing on 1 October 1998 and each year
thereafter, the Term shall automatically extend one additional year unless,
not later than 30 days prior to the end of the preceding Term, the Company
or the Executive shall give notice not to extend the Term.
2. Severance Payments.
2.1 If the Executive's employment is terminated during the Term (a) by the
Company without Cause (as defined below) or (b) by reason of death or
Disability (as defined below), then the Company shall pay the
Executive the amounts, and provide the Executive the benefits,
described in Section 2.2 (the "Severance Payments").
<PAGE>
2.2 (a) The Company shall pay to the Executive as severance, an amount in
cash equal to two (2) times the sum of (i) the Executive's base salary
as in effect for the fiscal year ending immediately prior to the
fiscal year in which such termination occurs, and (ii) the annual
bonus (if any) earned by the Executive pursuant to any annual bonus or
incentive plan maintained by the Company in respect of the fiscal year
ending immediately prior to the fiscal year in which the termination
occurs, such cash amount to be paid to the Executive ratably monthly
in arrears over the Non-Competition Period (as defined below).
(b) For the 12-month period immediately following such termination,
the Company shall arrange to provide the Executive and his dependents
insurance benefits substantially similar to those provided to the
Executive and his dependents immediately prior to the date of
termination, at no greater cost to the Executive than the cost to the
Executive immediately prior to such date. Benefits otherwise
receivable by the Executive pursuant to this Section 2.2(b) shall
cease immediately upon the discovery by the Company of the Executive's
breach of the covenants contained in Sections 5 or 6 hereof. In
addition, benefits otherwise receivable by the Executive pursuant to
this Section 2.2(b) shall be reduced to the extent benefits of the
same type are received by or made available to the Executive during
the 12-month period following the Executive's termination of
employment (and any such benefits received by or made available to the
Executive shall be reported to the Company by the Executive);
provided, however, that the Company shall reimburse the Executive for
the excess, if any, of the cost of such benefits to the Executive over
such cost immediately prior to the date of termination.
2.3 Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state, or local law and
any additional withholding to which the Executive has agreed.
2.4 If the Executive's employment with the Company terminates during the
Term, the Executive shall not be required to seek other employment or
to attempt in any way to reduce any amounts payable to the Executive
by the Company pursuant to this Section 2.
3. Termination Procedures. During the Term, any purported termination of the
Executive's employment (other than by reason of death) shall be
communicated by written notice of termination from one party to the other
in accordance with Section 8 hereof. The notice of termination shall
<PAGE>
indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment
under the provision so indicated.
4. No Rights to Employment. This Agreement shall not be construed as creating
an express or implied contract of employment, and except as otherwise
agreed in writing between the Executive and the Company and authorized by
the Board of Directors of the Company, the Executive shall not have any
right to be retained in the employ of the Company.
5. Executive's Covenant Not to Compete.
5.1 During the Non-Competition Period, the Executive will not, directly or
indirectly, in any capacity, either separately, jointly, or in
association with others, as an officer, director, consultant, agent,
employee, owner, principal, partner, or stockholder of any business,
or in any other capacity, engage or have a financial interest in any
business which is involved in the design, manufacturing, marketing, or
sale of batteries or battery operated lighting devices (excepting only
the ownership of not more than 5% of the outstanding securities of an
class listed on an exchange or the Nasdaq Stock Market). For purposes
of this Agreement, the "Non-Competition Period" means the period
beginning on the date hereof and continuing until the date which is
the two-year anniversary of the later to occur of (a) the end of the
Term and (b) the date of termination.
5.2 Without limiting the generality of Section 5.1 above, during the
Non-Competition Period the Executive will not, directly or indirectly,
in any capacity, either separately, jointly, or in association with
others, solicit or otherwise contact any of the Company's customers or
prospects that were customers or prospects of the Company at any time
during the Non-Competition Period if such solicitation or contact is
for the general purpose of selling products that satisfy the same
general needs as any products that the Company had available for sale
to its customers or prospects during the Non-Competition Period.
5.3 During the Non-Competition Period, the Executive shall not, other than
in connection with employment for the Company, solicit the employment
or services of any employee of the Company who is or was an employee
of the Company at any time during the Non-Competition Period. During
the Non-Competition Period, the Executive shall not hire any employee
of Company for any other business.
<PAGE>
5.4 If a court determines that the foregoing restrictions are too broad or
otherwise unreasonable under applicable law, including with respect to
time or space, the court is hereby requested and authorized by the
parties to revise the foregoing restrictions to include the maximum
restrictions allowed under the applicable law.
5.5 For purposes of this Section 5 and Section 6, the "Company" refers to
the Company and any incorporated or unincorporated affiliates of the
Company.
6. Secret Processes and Confidential Information.
6.1 The Executive will hold in strict confidence and, except as the
Company may authorize or direct, not disclose to any person or use
(except in the performance of his services hereunder) any confidential
information or materials received by the Executive from the Company or
any confidential information or materials of other parties received by
the Executive in connection with the performance of his duties
hereunder. For purposes of this Section 6.1, confidential information
or materials shall include existing and potential customer
information, existing and potential supplier information, product
information, design and construction information, pricing and
profitability information, financial information, sales and marketing
strategies and techniques, and business ideas or practices. The
restriction on the Executive's use or disclosure of the confidential
information or materials shall remain in force until such information
is of general knowledge in the industry through no fault of the
Executive or any agent of the Executive. The Executive also will
return to the Company promptly upon its request any Company
information or materials in the Executive's possession or under the
Executive's control.
6.2 The Executive will promptly disclose to the Company and to no other
person, firm or entity all inventions, discoveries, improvements,
trade secrets, formulas, techniques, processes, know-how and similar
matters, whether or not patentable and whether or not reduced to
practice, which are conceived or learned by the Executive during the
period of the Executive's employment with the Company, either alone or
with others, which relate to or result from the actual or anticipated
business or research of the Company or which result, to any extent,
from the Executive's use of the Company's premises or property
(collectively called the "Inventions"). The Executive acknowledges and
agrees that all Inventions shall be the sole property of the Company,
and the Executive hereby assigns to the Company all of the Executive's
rights and interests in and to all of the Inventions, it being
acknowledged and agreed by the Executive that all the Inventions are
works made for hire. The Company shall be the sole owner of all
domestic and foreign rights and interests in the Inventions. The
<PAGE>
Executive will assist the Company at the Company's expense to obtain
and from time to time enforce patents and copyrights on the
Inventions.
6.3 Upon the request of, and, in any event, upon termination of the
Executive's employment with the Company, the Executive shall promptly
deliver to the Company all documents, data, records, notes, drawings,
manuals, and all other tangible information in whatever form which
pertains to the Company, and the Executive will not retain any such
information or any reproduction or excerpt thereof.
7. Successors; Binding Agreement
7.1 In addition to any obligations imposed by law upon any successor to
the Company, the Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company to
expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. Failure of the
Company to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to the Severance Payments,
except that, for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the date
of termination. For purposes of this Agreement, "Company" shall mean
Rayovac Corporation, a Wisconsin corporation, and shall include any
successor to its business or assets which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
7.2 This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. If the Executive shall die while any amount would still be
payable to the Executive hereunder (other than amounts which, by their
terms, terminate upon the death of the Executive) if the Executive had
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to the
executors, personal representatives or administrators of the
Executive's estate.
8. Notices. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given (a) when delivered personally, (b) upon
confirmation of receipt when such notice or other communication is sent by
facsimile or telex, (c) one day after delivery to an overnight delivery
courier, or (d) on the fifth day
<PAGE>
following the date of deposit in the United States mail if sent first
class, postage prepaid, by registered or certified mail.
9. Survival. The obligations of the Company and the Executive under this
Agreement which by their nature may require either partial or total
performance after the expiration of the Term (including, without
limitation, those under Sections 2, 5 and 6 hereof) shall survive such
expiration.
10. Amendment; Waiver. This Agreement may be amended, modified, superseded, or
canceled, and the terms hereof may be waived, only by a written instrument
executed by all of the parties hereto or, in the case of a waiver, by the
party waiving compliance. The failure of any party at any time or times to
require performance of any provision hereof shall in no manner affect the
right at a later time to enforce the same. No waiver by any party of the
breach of any term or covenant contained in this Agreement, whether by
conduct or otherwise, in any one or more instances, shall be deemed to be,
or construed as, a further or continuing waiver of any such breach, or a
waiver of the breach of any other term or covenant contained in this
Agreement.
11. Equitable Relief. Breach of any provision of Sections 5 or 6 of this
Agreement would result in irreparable injuries to the Company, the remedy
at law for any such breach will be inadequate, and upon breach of such
provisions, the Company, in addition to all other available remedies, shall
be entitled as a matter of right to injunctive relief in any court of
competent jurisdiction without the necessity of proving the actual damage
to the Company.
12. Entire Agreement. This Agreement constitutes the entire understanding of
the parties hereto with respect to the subject matter hereof and supersedes
all prior negotiations, discussions, writings, and agreements between them.
13. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
14. Counterparts. This Agreement may be executed in two counterparts, each of
which shall be deemed to be an original but both of which together will
constitute one and the same instrument.
15. Definitions. For purposes of this Agreement, the following terms shall have
the meanings indicated below:
<PAGE>
(a) "Cause" for termination by the Company of the Executive's employment
shall mean (i) the commission by the Executive of any fraud,
embezzlement or other material act of dishonesty with respect to the
Company or any of its affiliates (including the unauthorized
disclosure of confidential or proprietary information of the Company
or any of its affiliates or subsidiaries); (ii) Executive's conviction
of, or plea of guilty or nolo contendere to, a felony or other crime
involving moral turpitude; (iii) Executive's willful misconduct; (iv)
willful failure or refusal by Executive to perform his duties and
responsibilities to the Company or any of its affiliates which failure
or refusal to perform is not remedied within 30 days after receipt of
a written notice from the Company detailing such failure or refusal to
perform; or (v) Executive's breach of any of the terms of this
Agreement or any other agreement between Executive and the Company
which breach is not cured within 30 days subsequent to notice from the
Company to Executive of such breach.
(b) "Disability" shall be deemed the reason for the termination by the
Company of the Executive's employment, if, as a result of the
Executive's inability to perform his duties by reason of any mental,
physical or other disability for a period of at least 6 consecutive
months (for purposes hereof, "disability" has the same meaning as in
the Company's disability policy), the Company shall have given the
Executive a notice of termination for Disability, and, within 30 days
after such notice of termination is given, the Executive shall not
have returned to the full-time performance of the Executive's duties.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
RAYOVAC CORPORATION EXECUTIVE
By: /s/ Kent J. Hussey /s/ Stephen P. Shanesy
------------------ ----------------------
Kent J. Hussey Stephen P. Shanesy
President
SEVERANCE AGREEMENT
This Agreement, dated as of 1 October 1998, is made by and between Rayovac
Corporation (the "Company"), a Wisconsin corporation with its principal business
address at 601 Rayovac Drive, Madison, Wisconsin 53711, and Merrell M. Tomlin,
an individual residing at 3576 Timber Lane, Cross Plains, WI 53528 (the
"Executive").
BACKGROUND
The Executive has been, and continues to be, privy to important confidential
information of the Company, and has developed substantial skills and knowledge
related to the Company's industry, which skills and knowledge would be of
substantial value to the Company's competition.
The Company considers it essential to the best interests of its shareholders to
foster the continued employment of key managers, and to limit their ability to
compete with the Company after their employment terminates.
The Executive and the Company wish to execute this Agreement to formalize
additional terms of the Executive's employment.
UNDERTAKINGS
Now therefore, the parties agree:
1. Term of Agreement. The term of this Agreement (the "Term") shall commence
on the date hereof and shall continue in effect through 30 September 1999;
provided, however, that commencing on 1 October 1998 and each year
thereafter, the Term shall automatically extend one additional year unless,
not later than 30 days prior to the end of the preceding Term, the Company
or the Executive shall give notice not to extend the Term.
2. Severance Payments.
2.1 If the Executive's employment is terminated during the Term (a) by the
Company without Cause (as defined below) or (b) by reason of death or
Disability (as defined below), then the Company shall pay the
Executive the amounts, and provide the Executive the benefits,
described in Section 2.2 (the "Severance Payments").
<PAGE>
2.2 (a) The Company shall pay to the Executive as severance, an amount in
cash equal to two (2) times the sum of (i) the Executive's base salary
as in effect for the fiscal year ending immediately prior to the
fiscal year in which such termination occurs, and (ii) the annual
bonus (if any) earned by the Executive pursuant to any annual bonus or
incentive plan maintained by the Company in respect of the fiscal year
ending immediately prior to the fiscal year in which the termination
occurs, such cash amount to be paid to the Executive ratably monthly
in arrears over the Non-Competition Period (as defined below).
(b) For the 12-month period immediately following such termination,
the Company shall arrange to provide the Executive and his dependents
insurance benefits substantially similar to those provided to the
Executive and his dependents immediately prior to the date of
termination, at no greater cost to the Executive than the cost to the
Executive immediately prior to such date. Benefits otherwise
receivable by the Executive pursuant to this Section 2.2(b) shall
cease immediately upon the discovery by the Company of the Executive's
breach of the covenants contained in Sections 5 or 6 hereof. In
addition, benefits otherwise receivable by the Executive pursuant to
this Section 2.2(b) shall be reduced to the extent benefits of the
same type are received by or made available to the Executive during
the 12-month period following the Executive's termination of
employment (and any such benefits received by or made available to the
Executive shall be reported to the Company by the Executive);
provided, however, that the Company shall reimburse the Executive for
the excess, if any, of the cost of such benefits to the Executive over
such cost immediately prior to the date of termination.
2.3 Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state, or local law and
any additional withholding to which the Executive has agreed.
2.4 If the Executive's employment with the Company terminates during the
Term, the Executive shall not be required to seek other employment or
to attempt in any way to reduce any amounts payable to the Executive
by the Company pursuant to this Section 2.
3. Termination Procedures. During the Term, any purported termination of the
Executive's employment (other than by reason of death) shall be
communicated by written notice of termination from one party to the other
in accordance with Section 8 hereof. The notice of termination shall
<PAGE>
indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment
under the provision so indicated.
4. No Rights to Employment. This Agreement shall not be construed as creating
an express or implied contract of employment, and except as otherwise
agreed in writing between the Executive and the Company and authorized by
the Board of Directors of the Company, the Executive shall not have any
right to be retained in the employ of the Company.
5. Executive's Covenant Not to Compete.
5.1 During the Non-Competition Period, the Executive will not, directly or
indirectly, in any capacity, either separately, jointly, or in
association with others, as an officer, director, consultant, agent,
employee, owner, principal, partner, or stockholder of any business,
or in any other capacity, engage or have a financial interest in any
business which is involved in the design, manufacturing, marketing, or
sale of batteries or battery operated lighting devices (excepting only
the ownership of not more than 5% of the outstanding securities of an
class listed on an exchange or the Nasdaq Stock Market). For purposes
of this Agreement, the "Non-Competition Period" means the period
beginning on the date hereof and continuing until the date which is
the two-year anniversary of the later to occur of (a) the end of the
Term and (b) the date of termination.
5.2 Without limiting the generality of Section 5.1 above, during the
Non-Competition Period the Executive will not, directly or indirectly,
in any capacity, either separately, jointly, or in association with
others, solicit or otherwise contact any of the Company's customers or
prospects that were customers or prospects of the Company at any time
during the Non-Competition Period if such solicitation or contact is
for the general purpose of selling products that satisfy the same
general needs as any products that the Company had available for sale
to its customers or prospects during the Non-Competition Period.
5.3 During the Non-Competition Period, the Executive shall not, other than
in connection with employment for the Company, solicit the employment
or services of any employee of the Company who is or was an employee
of the Company at any time during the Non-Competition Period. During
the Non-Competition Period, the Executive shall not hire any employee
of Company for any other business.
<PAGE>
5.4 If a court determines that the foregoing restrictions are too broad or
otherwise unreasonable under applicable law, including with respect to
time or space, the court is hereby requested and authorized by the
parties to revise the foregoing restrictions to include the maximum
restrictions allowed under the applicable law.
5.5 For purposes of this Section 5 and Section 6, the "Company" refers to
the Company and any incorporated or unincorporated affiliates of the
Company.
6. Secret Processes and Confidential Information.
6.1 The Executive will hold in strict confidence and, except as the
Company may authorize or direct, not disclose to any person or use
(except in the performance of his services hereunder) any confidential
information or materials received by the Executive from the Company or
any confidential information or materials of other parties received by
the Executive in connection with the performance of his duties
hereunder. For purposes of this Section 6.1, confidential information
or materials shall include existing and potential customer
information, existing and potential supplier information, product
information, design and construction information, pricing and
profitability information, financial information, sales and marketing
strategies and techniques, and business ideas or practices. The
restriction on the Executive's use or disclosure of the confidential
information or materials shall remain in force until such information
is of general knowledge in the industry through no fault of the
Executive or any agent of the Executive. The Executive also will
return to the Company promptly upon its request any Company
information or materials in the Executive's possession or under the
Executive's control.
6.2 The Executive will promptly disclose to the Company and to no other
person, firm or entity all inventions, discoveries, improvements,
trade secrets, formulas, techniques, processes, know-how and similar
matters, whether or not patentable and whether or not reduced to
practice, which are conceived or learned by the Executive during the
period of the Executive's employment with the Company, either alone or
with others, which relate to or result from the actual or anticipated
business or research of the Company or which result, to any extent,
from the Executive's use of the Company's premises or property
(collectively called the "Inventions"). The Executive acknowledges and
agrees that all Inventions shall be the sole property of the Company,
and the Executive hereby assigns to the Company all of the Executive's
rights and interests in and to all of the Inventions, it being
acknowledged and agreed by the Executive that all the Inventions are
works made for hire. The Company shall be the sole owner of all
domestic and foreign rights and interests in the Inventions. The
<PAGE>
Executive will assist the Company at the Company's expense to obtain
and from time to time enforce patents and copyrights on the
Inventions.
6.3 Upon the request of, and, in any event, upon termination of the
Executive's employment with the Company, the Executive shall promptly
deliver to the Company all documents, data, records, notes, drawings,
manuals, and all other tangible information in whatever form which
pertains to the Company, and the Executive will not retain any such
information or any reproduction or excerpt thereof.
7. Successors; Binding Agreement
7.1 In addition to any obligations imposed by law upon any successor to
the Company, the Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company to
expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. Failure of the
Company to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to the Severance Payments,
except that, for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the date
of termination. For purposes of this Agreement, "Company" shall mean
Rayovac Corporation, a Wisconsin corporation, and shall include any
successor to its business or assets which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
7.2 This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. If the Executive shall die while any amount would still be
payable to the Executive hereunder (other than amounts which, by their
terms, terminate upon the death of the Executive) if the Executive had
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to the
executors, personal representatives or administrators of the
Executive's estate.
8. Notices. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given (a) when delivered personally, (b) upon
confirmation of receipt when such notice or other communication is sent by
facsimile or telex, (c) one day after delivery to an overnight delivery
courier, or (d) on the fifth day
<PAGE>
following the date of deposit in the United States mail if sent first
class, postage prepaid, by registered or certified mail.
9. Survival. The obligations of the Company and the Executive under this
Agreement which by their nature may require either partial or total
performance after the expiration of the Term (including, without
limitation, those under Sections 2, 5 and 6 hereof) shall survive such
expiration.
10. Amendment; Waiver. This Agreement may be amended, modified, superseded, or
canceled, and the terms hereof may be waived, only by a written instrument
executed by all of the parties hereto or, in the case of a waiver, by the
party waiving compliance. The failure of any party at any time or times to
require performance of any provision hereof shall in no manner affect the
right at a later time to enforce the same. No waiver by any party of the
breach of any term or covenant contained in this Agreement, whether by
conduct or otherwise, in any one or more instances, shall be deemed to be,
or construed as, a further or continuing waiver of any such breach, or a
waiver of the breach of any other term or covenant contained in this
Agreement.
11. Equitable Relief. Breach of any provision of Sections 5 or 6 of this
Agreement would result in irreparable injuries to the Company, the remedy
at law for any such breach will be inadequate, and upon breach of such
provisions, the Company, in addition to all other available remedies, shall
be entitled as a matter of right to injunctive relief in any court of
competent jurisdiction without the necessity of proving the actual damage
to the Company.
12. Entire Agreement. This Agreement constitutes the entire understanding of
the parties hereto with respect to the subject matter hereof and supersedes
all prior negotiations, discussions, writings, and agreements between them.
13. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
14. Counterparts. This Agreement may be executed in two counterparts, each of
which shall be deemed to be an original but both of which together will
constitute one and the same instrument.
15. Definitions. For purposes of this Agreement, the following terms shall have
the meanings indicated below:
<PAGE>
(a) "Cause" for termination by the Company of the Executive's employment
shall mean (i) the commission by the Executive of any fraud,
embezzlement or other material act of dishonesty with respect to the
Company or any of its affiliates (including the unauthorized
disclosure of confidential or proprietary information of the Company
or any of its affiliates or subsidiaries); (ii) Executive's conviction
of, or plea of guilty or nolo contendere to, a felony or other crime
involving moral turpitude; (iii) Executive's willful misconduct; (iv)
willful failure or refusal by Executive to perform his duties and
responsibilities to the Company or any of its affiliates which failure
or refusal to perform is not remedied within 30 days after receipt of
a written notice from the Company detailing such failure or refusal to
perform; or (v) Executive's breach of any of the terms of this
Agreement or any other agreement between Executive and the Company
which breach is not cured within 30 days subsequent to notice from the
Company to Executive of such breach.
(b) "Disability" shall be deemed the reason for the termination by the
Company of the Executive's employment, if, as a result of the
Executive's inability to perform his duties by reason of any mental,
physical or other disability for a period of at least 6 consecutive
months (for purposes hereof, "disability" has the same meaning as in
the Company's disability policy), the Company shall have given the
Executive a notice of termination for Disability, and, within 30 days
after such notice of termination is given, the Executive shall not
have returned to the full-time performance of the Executive's duties.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
RAYOVAC CORPORATION EXECUTIVE
By: /s/ Kent J. Hussey /s/ Merrell M. Tomlin
------------------ ---------------------
Kent J. Hussey Merrell M. Tomlin
President
Subsidiary Jurisdiction of Organization
- ---------- ----------------------------
ROV Holding, Inc. Delaware
Rayovac Europe B.V. Netherlands
Rayovac Far East Limited Hong Kong
Rayovac Canada Inc. Canada
Rayovac Europe Limited United Kingdom
Rayovac (UK) Limited United Kingdom
Rovcal, Inc. California
Consent of KPMG Peat Marwick LLP
The Board of Directors
Rayovac Corporation:
We consent to incorporation by reference in the registration statement on Form
S-3, of Rayovac Corporation of our reports dated November 9, 1998, except as to
note 19 which is as of December 23, 1998, relating to the consolidated balance
sheets of Rayovac Corporation and Subsidiaries as of September 30, 1997 and
1998, and the related consolidated statements of operations, shareholders'
equity (deficit), and cash flows and related financial statement schedule for
the years then ended, which reports appear or are incorporated by reference in
the September 30, 1998, Annual Report on Form 10-K of Rayovac Corporation.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Milwaukee, Wisconsin
December 23, 1998
Consent of Independent Auditors
We consent to incorporation by reference in the registration statements (File
Nos. 333-39239, 333-42443, 333-41815) on Form S-8 of Rayovac Corporation and
Subsidiaries of our report dated November 22, 1996, except for Note 2p as to
which the date is April 1, 1998, on our audits of the consolidated statements of
operations, shareholders' equity (deficit), and cash flows of the Rayovac
Corporation and Subsidiaries for the year ended June 30, 1996 and the period
July 1, 1996 to September 30, 1996, which report is included in this Annual
Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
December 23, 1998
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0
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