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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000.
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 001-13615
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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 ON
TITLE OF EACH CLASS 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 18, 2000, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $217,465,808. As of December 18, 2000,
there were outstanding 27,576,785 shares of the registrant's Common Stock, $0.01
par value.
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS.................................................... 2
ITEM 2. PROPERTIES.................................................. 14
ITEM 3. LEGAL PROCEEDINGS........................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 18
ITEM 6. SELECTED FINANCIAL DATA..................................... 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 30
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 31
ITEM 11. EXECUTIVE COMPENSATION...................................... 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 37
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.......................................... F-1
SIGNATURES.................................................. II-3
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PART 1
ITEM 1. BUSINESS
GENERAL
Rayovac is the leading value brand and the third largest domestic
manufacturer of general batteries. We are also the leading worldwide
manufacturer of hearing aid batteries and the leading U.S. manufacturer of
rechargeable household batteries and certain other specialty batteries,
including lantern batteries. In addition, we are a leading marketer of heavy
duty batteries and battery-powered lighting products.
Rayovac is a well-recognized brand name in the battery industry that was
first used as a trademark for batteries in 1921. We attribute the longevity and
strength of the Rayovac brand name to our high-quality products and to the
success of our marketing and merchandising initiatives.
We established our position as the leading value brand in the U.S. general
alkaline battery market by offering powerful solutions for our consumers,
customers and shareholders. Our solutions include:
- delivering the best value to consumers with competitive quality and
performance at a lower price
- partnering with our customers and providing category management with
innovative in-store merchandising, promotions and packaging that drive
profits
- providing long-term shareholder value by consistent performance
demonstrated by four years of record setting sales, income and earnings
per share growth, and we are positioned for continued growth
We have established our position as the leader in various specialty battery
niche markets through continuous technological advances, creative marketing, and
strong relationships with industry professionals and manufacturers.
Over the last several years we have broadened our distribution channels to
include mass merchandisers and warehouse clubs; food, drug, and convenience
stores; electronics specialty stores and department stores; hardware and
automotive centers; specialty retailers; hearing aid professionals; industrial
distributors; government agencies; e-tailers and original equipment
manufacturers. We market all of our branded products under the
Rayovac-Registered Trademark- name and selected products under sub-brand names
including MAXIMUM-Registered Trademark-, RENEWAL-Registered Trademark-, Loud 'n
Clear-Registered Trademark-, ProLine-Registered Trademark-, Rayovac
Ultra-Registered Trademark-, Workhorse-Registered Trademark-,
Roughneck-Registered Trademark-, Sportsman-Registered Trademark-, Air
4000-Registered Trademark-, XCell-Registered Trademark-, Extra-Registered
Trademark- and AIRPOWER-Registered Trademark-.
OPERATING SEGMENTS
Our business is organized according to three geographic regions: (1) North
America, (2) Latin America and (3) Europe and rest of world ("Europe/ROW").
Global and geographic strategic initiatives and financial objectives are
determined at the corporate level. Each operating segment is responsible for
implementing the defined strategic initiatives and achieving the financial
objectives. Each geographic region has a general manager responsible for all the
sales and marketing initiatives for all product lines within that region.
OUR BUSINESS STRATEGY
Our business strategy is centered around four key elements:
- continue to increase the consumer awareness of the Rayovac brand name by
focused marketing and advertising
- grow our 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
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- reduce costs by rationalizing manufacturing and distribution, better
utilizing existing plant capacity, outsourcing products where appropriate,
reducing working capital and corporate overhead as a percent of sales
- improve employee productivity by increasing training and education,
improving business processes and supporting a pay-for-performance culture.
To support our business strategy we have developed or implemented many
changes in the last several years.
ALIGNMENT OF SALES, MARKETING AND ADMINISTRATION WITH CUSTOMERS. In North
America, our marketing department, sales organization, supply chain and support
functions are aligned to better serve our diverse customer needs. We are
organized in customer-focused teams to serve the following distribution
channels: mass merchandisers and warehouse clubs, regional mass merchandiser,
home center, hardware, consumer retail, food and drug, consumer electronics,
hearing aid professionals, industrial, government and original equipment
manufacturers. Our sales growth is in part due to our dedicated teams focusing
on implementing channel-specific marketing strategies, sales promotions and
customer service initiatives.
SALES AND MARKETING PROGRAMS. We continue to implement broad new marketing
initiatives. In the last year we have (1) continued to use Michael Jordan in our
alkaline advertising and Arnold Palmer in our hearing aid advertising,
(2) continued to expand new packaging designs that enhance consumer convenience
via reclosable features, (3) continued to upgrade our alkaline, rechargeable and
hearing aid product performance, (4) continued to develop new innovative
lighting products to expand distribution.
RESTRUCTURING OF OUR OPERATIONS. Over the last several years we have
restructured our operations to maximize our production and capacity
efficiencies, reduce fixed costs, upgrade existing technology and equipment, and
improve customer service. Major elements of these initiatives include:
(1) consolidating our packaging operations at our Madison, Wisconsin plant,
(2) consolidating the worldwide manufacturing of certain heavy duty batteries in
Mexico, (3) closing certain of our existing manufacturing, packaging and
distribution facilities, and (4) discontinuing the manufacture of watch
batteries. We recorded a charge of $9.5 million in fiscal 1998 for the first
three initiatives listed. We recorded a charge of $3.4 million in fiscal 1999
for the watch battery discontinuation and the remaining costs associated with
the other plant closings.
WORLD CLASS INFORMATION SYSTEMS. Rayovac continues to build on its
successful implementation of SAP, our core business information software, with
the addition of a financial analysis data warehouse and significant improvements
to our warehouse automation. SAP and the additional integrated software packages
provide us with a single source of information, standardization of processes and
more readily available, timely information. The information services group is
aligned with the business teams, who provide the appropriate levels of focus and
collaborative efforts to deliver powerful solutions for the business.
OUR GROWTH STRATEGY
We believe that we have significant growth opportunities in our business. We
have developed strategies to increase our sales, profits and market share. Key
elements of our growth strategy are:
CONTINUE TO STRENGTHEN THE RAYOVAC BRAND NAME. We are committed to
continuing to strengthen the Rayovac brand name. The Rayovac brand name is
widely recognized in all markets where we compete. Over the last three years we
have seen our brand awareness improve and gain on the more highly advertised
Duracell and Energizer brands. To increase our brand awareness and perception of
quality, we continued an integrated advertising campaign using higher levels of
television and print media in North America to support our significant product
performance claims highlighting performance competitive with or superior to
competitive products. These performance claims are supported by new graphics,
new packaging, a new advertising campaign and retail promotions. These marketing
and advertising initiatives
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are designed to increase consumer awareness of the Rayovac brand and to increase
our retail sales by heightening customers' perceptions of the quality,
performance and value of our products. These initiatives have increased domestic
awareness of the Rayovac brand to over 85%, with strong quality and performance
perceptions.
EMPHASIZE OUR TOTAL SOLUTION. The general battery market is becoming
segmented with high performance batteries for high drain devices, standard
alkaline batteries for consumers everyday needs, and lower performing alkaline
products aimed at dollar stores and deep discounters. We believe that Rayovac is
uniquely positioned to provide the best solutions in this segmented market. We
offer Rayovac Rechargeable Nickel Metal Hydride (NiMh), which generally
outperforms alkaline competition in high drain devices such as digital cameras
and provides a great value for the consumer. Our Rayovac MAXIMUM battery, our
standard alkaline, offers competitive quality and performance at a lower price.
While the competition has focused on developing and promoting their batteries
for high drain devices, a relatively small share of the total battery demand, we
focus and position our products to appeal to the large segment of the population
that desires value brand products, which are similar in quality and performance
to the products of our major competitors. Rayovac has continued to focus on
providing consumers with improved performance in Rayovac MAXIMUM, retailers'
profits, value pricing for the consumer and innovative packaging designs that
benefit both the consumer and the retailer. The reclosable packages introduced
by Rayovac over the last two years provide the consumer with an efficient
storage unit and provide the retailer with a package that generates more profit.
EXPAND RETAIL DISTRIBUTION. We believe that our value brand positioning and
innovative merchandising programs make us an attractive supplier to all channels
of trade. We expanded our traditional focus on mass merchandisers to include
other retail channels. We reorganized our marketing, sales, and sales support
organizations by retail channel in order to increase our market share by
(1) gaining new customers, (2) selling existing customers a larger assortment of
products, (3) offering a selection of products with high sell-through and
(4) utilizing more aggressive and channel specific promotional programs. In the
last four years we have increased the number of stores in the United States
selling our products by over 60,000 stores. As of September 2000, Rayovac
products can be found in over 100,000 stores in the United States.
FURTHER CAPITALIZE ON WORLDWIDE LEADERSHIP IN HEARING AID BATTERIES. We
seek to increase our worldwide share in the hearing aid battery category by
capitalizing on our leading technology and dedicated sales and marketing
organization and through the completion of strategic acquisitions. We continue
to use Arnold Palmer as our spokesperson in our print media campaign for hearing
aid battery products. This past year we launched the new Rayovac Ultra Zinc Air
hearing aid battery which will last up to 30 percent longer than other zinc air
hearing aid batteries. This new hearing aid battery features patented zinc air
technology that maximizes performance of the battery cell as a result of unique
components and construction. This new product continues the Rayovac history of
innovation in the hearing aid industry. We also market hearing aid batteries in
multi-packaging designs in order to find better solutions to service the
consumer.
DEVELOP NEW MARKETS. We plan to continue to expand our business into new
markets for batteries and related products both domestically and internationally
by developing new products internally or potentially through selective
acquisitions. Our acquisitions may focus on expansion into new technologies,
product lines or geographic markets and may be of significant size. We may also
pursue joint ventures or other strategic marketing opportunities, where
appropriate to expand our markets or product offerings.
INCREASE PRESENCE IN LATIN AMERICAN & EUROPE. In Latin America, we
established a strong presence with the important acquisition of ROV Limited's
battery business in August 1999. The Latin American operations have an extensive
network of distribution and production facilities in Central America, the
Dominican Republic, Mexico, Venezuela, Argentina, and Chile. Rayovac has made
sizable distribution gains over the last year, adding over 500 major retail
accounts that represent more than 5,000 stores. We have also focused on
broadening distribution by appointing quality distributors throughout Latin
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America's secondary and rural markets, which house a significant number of the
region's retail outlets. We have added over 500 distributors who service over
50,000 small retail locations during the first year of owning this business. In
addition, we have expanded geographically in South America with our heavy duty
and alkaline products. We will continue to grow in Latin America through
continued geographic expansion and by increasing alkaline penetration,
introducing lighting and specialty products while continuing to offer a full
range of battery solutions that include heavy duty, alkaline and rechargeables.
The ROV Limited acquisition also allowed us to control the Rayovac brand
name for use worldwide except in Brazil. This will allow us additional marketing
opportunities in the Middle East, Africa, and selected Asian countries.
In Europe, we successfully increased our presence by implementing customer
and consumer solutions similar to North America. In the United Kingdom, Rayovac
now holds more than a 50 percent market share in the Do-It-Yourself distribution
channel and has gained chain-wide distribution in one of the United Kingdom's
largest grocery supermarket chains. Our plans to increase the scale of our
battery operations in Europe will be realized by leveraging our strong
relationships with global retailers and supporting our customers with innovative
packaging and merchandising programs.
PRODUCTS
We develop, manufacture and/or market a wide variety of batteries and
battery-powered lighting devices. Our broad line of products includes:
- general batteries, including alkaline, heavy duty, rechargeable alkaline
and nickel metal hydride batteries
- specialty batteries, including hearing aid, watch, photo, keyless entry,
and personal computer clock, memory back-up batteries, rechargeable
batteries for cordless telephones and chargers for rechargeable batteries
- lighting products and lantern batteries
Our general batteries (D, C, AA, AAA and 9-volt sizes) are used in devices
such as radios, remote controls, 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. Our button cell specialty
batteries are used in smaller devices, such as hearing aids and watches. Our
lithium coin cells are used in cameras, calculators, communication equipment,
medical instrumentation and personal computer clocks and memory back-up systems.
Our lantern batteries are used almost exclusively in battery-powered lanterns.
Our lighting products include flashlights, lanterns and similar portable
products.
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Net sales data for our products as a percentage of net sales for fiscal
1998, fiscal 1999 and fiscal 2000 are set forth below.
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PERCENTAGE OF COMPANY
NET SALES
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FISCAL YEAR ENDED
SEPTEMBER 30,
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PRODUCT TYPE 1998 1999 2000
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Battery Products:
Alkaline.................................................... 49.1% 50.1% 47.7%
Heavy Duty.................................................. 7.8 9.9 20.5
Rechargeables............................................... 5.4 4.5 4.6
Hearing Aid................................................. 14.8 13.3 9.6
Specialty and Other Batteries............................... 9.1 8.6 6.2
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Total..................................................... 86.2 86.4 88.6
Lighting Products and Lantern Batteries..................... 13.8 13.6 11.4
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Total..................................................... 100.0% 100.0% 100.0%
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A description of our major battery products including their typical uses is
set forth below.
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GENERAL BATTERIES HEARING AID OTHER SPECIALTY
BATTERIES BATTERIES
Technology: Alkaline Zinc Nickel Metal Zinc Air Lithium Silver Nickel
Hydride Metal
Hydride
Types/ Common -Disposable Heavy Duty Rechargeable -- -- -- Recharge-
Name: -Rechargeable (Zinc Chloride able
and Zinc
Carbon)
Brand; Rayovac; Rayovac Rayovac, Rayovac Rayovac; Loud 'n Rayovac Rayovac Rayovac
Sub-brand MAXIMUM, Ultra Clear, ProLine, Ultra
Names(1): RENEWAL Rechargeable Extra, Rayovac Recharge-
Ultra, Air 4000, able
XCell and
AIRPOWER
Sizes: D, C, AA, AAA, 9-volt(2) for both Alkaline and 5 sizes 5 primary 10 primary Packs
Zinc sizes sizes
AA, AAA, 9-volt for Nickel Metal Hydride
Typical Uses: All standard household applications including Hearing aids Personal Watches Cordless
electronic toys, pagers, CD and cassette computer phones
players, remote controls, digital cameras and a clocks and
wide variety of industrial applications memory
back-up
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LANTERN
BATTERIES
Technology: Zinc
Types/ Common Lantern
Name: (Alkaline, Zinc
Chloride and
Zinc Carbon)
Brand; Rayovac
Sub-brand
Names(1):
Sizes: Standard lantern
Typical Uses: Beam lanterns,
Camping lanterns
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(1) Rayovac also produces and supplies private label brands in selected
categories.
(2) Rayovac does not produce 9-volt rechargeable alkaline batteries.
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ALKALINE BATTERIES. We produce a full line of alkaline batteries, including
D, C, AA, AAA and 9-volt size batteries for both consumer and industrial
customers. Our alkaline batteries are marketed and sold primarily under the
Rayovac MAXIMUM brand, although we also engage 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,
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 and zinc
carbon batteries designed for low and medium-drain battery-powered devices such
as lanterns, flashlights, radios and remote controls. We currently source our
heavy duty batteries from our Mexico manufacturing facilities and outside
suppliers.
RECHARGEABLE BATTERIES. Our Renewal rechargeable battery is the only
rechargeable alkaline battery in the U.S. market. Renewal batteries offer a
value proposition to consumers because they can be recharged over 25 times,
providing many times the life of disposable alkaline batteries at a somewhat
higher retail price. The marketing message for rechargeable alkaline batteries
is focused primarily on their money-saving benefits as well as their
environmental benefits. Our battery charger is the only charger in the market
capable of charging rechargeable alkaline and nickel metal hydride batteries.
The addition of this feature, and our launch of NiMh batteries has fueled
significant growth in rechargeable batteries, as our NiMh batteries currently
provide double the performance of any alkaline battery in high drain devices
such as digital cameras. The rapid growth of digital cameras should drive
continued growth in this category in the future.
HEARING AID BATTERIES. We are currently the largest worldwide seller of
hearing aid batteries. Our strong market position is the result of (1) our
hearing aid battery products having advanced technological capabilities and
consistent product performance and (2) our strong distribution system and
extensive marketing program for these products. Hearing aid batteries are
produced in several sizes and are designed for use with various types and sizes
of hearing aids. We produce five sizes and two types of zinc air button cells
for use in hearing aids. We sell these batteries under the Rayovac Ultra, Loud
'n Clear, ProLine, Extra, XCell, Air 4000 and AIRPOWER brand names and under
several private labels, including Beltone, Miracle Ear, Siemens and Starkey. We
were the pioneer and currently are the leading manufacturer of the smallest (5A
and 10A size) hearing aid batteries. Zinc air is a highly reliable, high energy
density, lightweight battery system.
SPECIALTY AND OTHER BATTERIES. Our other specialty battery products include
non-hearing aid button cells, lithium coin cells, photo batteries, keyless entry
batteries, as well as rechargeable nickel metal hydride. We market button and
coin cells for watches, cameras, calculators, communications equipment and
medical instrumentation. Our 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. Our lithium coin cells have outstanding shelf life and
excellent performance. Our nickel metal hydride batteries are sourced for use in
cordless telephones.
LIGHTING PRODUCTS AND LANTERN BATTERIES. We are a leading marketer of
battery-powered lighting devices, including flashlights, lanterns and similar
portable products for the retail and industrial markets.
MERCHANDISING AND ADVERTISING
Over the last four years, we have continued to develop our merchandising and
advertising strategies. Key elements of our strategies include:
- building the awareness and image of the Rayovac brand name
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- focusing on the reformulated MAXIMUM alkaline product line
- improving consumer perceptions of the quality and performance of our
products
- upgrading and unifying product packaging and launching innovative new
reclosable packaging
- expanding on our position as the value brand
- regularly introducing new products, especially lighting products
We position our products to appeal to the large segment of the population
that desires value brand products which are of quality and performance similar
to the products of our major competitors in the general battery market, but
which are offered at a lower price. One pricing strategy we use to demonstrate
our value positioning is offering more batteries than our brand name competitors
for the same price. We also work 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.
NORTH AMERICA.
For the last four years we have focused our advertising efforts on the
MAXIMUM alkaline products. We promote our alkaline products with a major
national advertising campaign utilizing Michael Jordan as the spokesperson. This
campaign is designed to increase awareness of the Rayovac brand and to heighten
consumers' perceptions of the quality, performance and value of our products. We
conduct annual ad-tracking studies which have demonstrated that we are
significantly improving consumer perceptions on each of these measures, as well
as, overall awareness of the Rayovac brand.
To market our hearing aid battery products, we continue to use a 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 our hearing aid batteries. To reach the largest potential market for
hearing aid batteries, we have also developed a corporate print advertising
campaign to be used in selected publications. We pioneered the use of
multi-packs and intend to further expand multi-pack distribution in additional
professional and retail channels. We believe that we have developed strong
relationships with hearing aid manufacturers and audiologists, the primary
sellers of hearing aids, and will continue to seek opportunities to further
penetrate the professional market for hearing aid products.
We have redesigned our product graphics and packaging of other specialty
battery products to achieve a uniform brand appearance with our other products
and to generate greater brand awareness and loyalty. In addition, we plan to
continue to develop relationships with manufacturers of communications equipment
and other products in an effort to expand our share of the non-hearing aid
button cell market. For example, we are actively engaged in discussions with
several OEM companies to supply batteries for tire-pressure monitors. This could
be a fast growing market given current concerns with tire safety. We also
believe there is significant opportunity for growth in the photo and keyless
entry battery markets and we seek to further penetrate the replacement market
for these products.
We have established our position in the lighting products market based on
innovative product features, consistent product quality and creative product
packaging. In addition, we endeavor to regularly introduce new products to
stimulate consumer demand and promote impulse purchases. This year we launched
our line of Harley Davidson flashlights, as well as a line of Ducks Unlimited
flashlights featuring a compass that is built into the light. We continue to
focus significant energy on new product development for lighting products.
LATIN AMERICA.
We have accomplished a successful integration of the Latin America business
in the first year of ownership. Latin America has followed the North America
strategy of product positioning, pricing, and
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advertising and promotion programs. Significant new distribution was added in
the first year, over 500 major retail accounts have been added that represent
more than 5,000 stores. We have also added over 500 distributors who service
50,000 small retail locations.
We believe there are significant growth opportunities in Latin America
through the sale of our alkaline and heavy duty batteries, offering additional
Rayovac products through existing distribution channels and geographic
expansion. In addition, we have a manufacturing base in Latin America which
allows us to produce batteries and service retailers in this fast growing
region.
Currently less than 10 percent of our Latin America sales are from alkaline
products. We believe approximately 30 percent of all batteries sold in Latin
America are alkaline products, providing us with an opportunity to expand
alkaline sales. We also believe there are growth opportunities within current
distribution channels to sell additional Rayovac products.
This year we expanded geographically into the Southern region of South
America with our alkaline and heavy duty batteries. We will continue to build on
our strong market position for heavy duty batteries in Central America, the
Dominican Republic, Mexico, and Venezuela.
EUROPE/ROW.
Our marketing strategy in Europe is to capitalize on our strength in hearing
aid products, maintain our momentum in the Northern European market and partner
with our large global customers and expand distribution as they expand. We
continue to evaluate initiatives that would allow us to expand our current
distribution in the ROW market via strategic alliances.
We continue to support our leading hearing aid battery position in Europe
using our corporate advertising campaign featuring Arnold Palmer and our strong
relationship with manufacturers of hearing aids. Our momentum in parts of Europe
has been achieved through innovative packaging and merchandising solutions,
which we will use to expand distribution. We have successfully expanded
distribution in the past year with our unique reclosable packaging design.
SALES AND DISTRIBUTION
NORTH AMERICA.
We currently align our sales force by distribution channel. We maintain
separate sales forces primarily to service (1) our retail sales and distribution
channels and (2) our hearing aid professionals, industrial distributor and
original equipment manufacturer sales and distribution. In addition, we use a
network of independent brokers to service participants in selected distribution
channels.
Wal-Mart Stores, Inc., our largest mass merchandiser customer, represented
19%, 20% and 21% of our consolidated net sales in fiscal 1998, 1999 and 2000,
respectively. Our sales to Wal-Mart Stores, Inc. primarily occur in North
America.
LATIN AMERICA.
We align our sales force by distribution channel. As a result, we maintain
two separate sales groups: one group that directly services large retailers and
food and drug chains located mainly in urban areas and a second group that
services through distributors and wholesalers, secondary channels like photo,
grocery, hardware, stationary, industrial and other retailers located in both
urban and rural areas. This sales structure enables us to focus on the rapid
expansion of the alkaline category, while consolidating our leadership position
in the heavy duty category.
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EUROPE/ROW.
We maintain a separate sales force in Europe to promote the sale of all of
our products. Our European operations also adopt the successful strategies,
programs, unique products and category management expertise utilized in our
North American business.
MANUFACTURING AND RAW MATERIALS
We manufacture batteries in the United States, Latin America and the United
Kingdom. Our Latin American operations were part of the Latin America
acquisition in August 1999. In September 1999, we announced manufacturing
changes which included the discontinuation of silver cell manufacturing at our
Portage, Wisconsin, facility. In November 1999, we discontinued the
manufacturing operations at our Valencia, Venezuela, facility and transferred
this production to our Mexico City, Mexico, facility. In September 2000, we
shifted the majority of our heavy duty manufacturing to our Mexico City, Mexico
facility. Over the last four years, we have closed our Newton Aycliffe, United
Kingdom; Kinston, North Carolina; Appleton, Wisconsin; and Valencia, Venezuela,
facilities and shifted their manufacturing operations to our other facilities.
We have also outsourced the manufacture of certain battery and lighting
products. These efforts have increased our plant capacity utilization and
eliminated some of our underused manufacturing capacity.
During the past five years, we have expended significant resources on
capital improvements, including the modernization of many of our manufacturing
lines and manufacturing processes. These manufacturing improvements have enabled
us to increase the quality and service life of our alkaline and zinc air
batteries and to increase our manufacturing capacity. In 1999, we installed a
new high-speed alkaline battery production line at our Fennimore, Wisconsin,
plant. This line increased our production capacity for AA size batteries by 50%.
Since fiscal 1996, our investment in new manufacturing technology, modernization
and production capacity at our Fennimore plant has exceeded $20 million.
Zinc powder, electrolytic manganese dioxide powder and steel are the most
significant raw materials we use to manufacture batteries. There are a number of
worldwide sources for all necessary raw materials that we use to manufacture
batteries. We believe that we will continue to have access to adequate
quantities of these materials at competitive prices. Based on our anticipated
production requirements of zinc powder, we regularly engage 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
Research and development effort has continued to focus on alkaline and zinc
air but with some important contributions in other areas also. For alkaline,
Rayovac has continued to benefit from technology provided under our alkaline
battery technology agreement with Matsushita. For zinc air, a dedicated team of
scientists and engineers develop technology independently with the objective of
maintaining our leadership position in this area.
In March 2000 we upgraded our alkaline AAA product with the latest
technology from Matsushita. This upgrade resulted in significant performance
improvements. Additional improvements and cost reductions were achieved across
the product line through the efforts of Rayovac engineers and scientists.
In May 2000 we introduced upgraded zinc air products in four battery sizes.
These upgraded products deliver improved service life and were achieved in
addition to similar upgrades introduced last year. Our research and development
group continues to maintain close alliances with the developers of hearing aid
devices and worked in conjunction with these developers during 2000 on further
product enhancements that will be seen in the marketplace towards the end of
fiscal 2001.
10
<PAGE>
In addition to alkaline and zinc air, research and development efforts have
been applied to zinc chloride, lithium carbon fluoride and nickel metal hydride
battery chemistries. The presence of mercury and cadmium has been eliminated
from the zinc chloride C and D batteries manufactured by the Rayovac Latin
American operations. New products have been developed for lithium carbon
fluoride which have better temperature and rate performance. These batteries are
expected to find application in tire pressure sensors and other devices where
shelf life and stability are essential. In fiscal 2000, Rayovac began to commit
resources to nickel metal hydride research and development. These efforts are
expected to produce benefits during fiscal 2001 in the areas of batteries and
chargers.
Our research and development efforts in the lighting products and lantern
batteries category are focused on the development of new products. New product
introductions in fiscal 2000 included a range of Harley Davidson lights, a new
industrial light, and a compass light.
Our research and development group includes approximately 100 employees. The
expense for some of our research and development employees is funded by U.S
government contracts. Our expenditures for research and development were
approximately $10.8 million for fiscal 2000, $9.8 million for fiscal 1999 and
$9.4 million for fiscal 1998.
INFORMATION SYSTEMS
Our information technology strategy commits our Information Services (IS)
group to being an internal business partner providing value-added services
through cost effective application of technology to support our corporate
initiatives.
We align the IS activities with business teams and the strategic business
plan to leverage the cost of information technology ownership and focus the
resources where we can achieve the highest benefit. Process Facilitators work
directly with the business groups to identify process improvement opportunities,
promote teamwork, and assist the businesses in achieving their objectives.
SAP is our core business information system for North America. We use the
Microsoft Office suite of office automation products on all desktop computers.
Our North America year 2000 compliance initiatives were extremely successful and
we experienced no system availability disruptions. Year 2000 remediation on
Latin American and European systems was also very successful and no disruptions
were experienced in either environment. Our information systems are in position
to provide for a highly reliable, highly available computing environment. This
infrastructure has been engineered with the capability to grow as the business
grows, and to do so in a cost effective way.
A financial analysis data warehouse has been implemented. This environment
will incorporate all global financial reporting, be tightly integrated with SAP
and will support the corporate financial consolidations system.
PATENTS, TRADEMARKS AND LICENSES
Our success and ability to compete depends in part upon our technology. We
rely upon a combination of patent, trademark and trade secret laws, together
with licenses, confidentiality agreements and other contractual covenants, to
establish and protect our technology and other intellectual property rights.
We own or license 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, we
announced the extension of our existing alkaline battery technology agreement
with Matsushita. Under this agreement, we license Matsushita's highly advanced
designs, technology and manufacturing equipment, including all developments and
innovations to them, through March 2002. After that time, we are entitled to
license the technology as it exists at that date through March 2022.
11
<PAGE>
We also use a number of trademarks in our business, including
Rayovac-Registered Trademark-, MAXIMUM-Registered Trademark-,
Renewal-Registered Trademark-, Loud 'n Clear-Registered Trademark-,
ProLine-Registered Trademark-, Rayovac Ultra-Registered Trademark-, Air
4000-Registered Trademark-, Sportsman-Registered Trademark-,
XCell-Registered Trademark-, Extra-Registered Trademark-,
AIRPOWER-Registered Trademark-, Workhorse-Registered Trademark- and
Roughneck-Registered Trademark-. We rely on both registered and common law
trademarks in the United States to protect our trademark rights. The
Rayovac-Registered Trademark- mark also is registered in countries outside the
United States, including in Europe and the Far East. We do not have any right to
the trademark "Rayovac" in Brazil, where the mark is owned by an independent
third-party battery manufacturer. In addition, through our recent acquisition in
Latin America, we have re-acquired exclusive rights in many countries outside
the United States, including Latin America, other than Brazil, for the use of
the "Rayovac" trademark, in connection with zinc carbon and alkaline batteries
and certain lighting devices.
We also have obtained a non-exclusive license to use certain technology
underlying our rechargeable alkaline battery line to manufacture rechargeable
alkaline batteries in the United States, Puerto Rico and Mexico and to sell and
distribute batteries worldwide based on this licensed technology. This license
terminates with the expiration of the last-expiring patent covering the licensed
technology in 2015.
COMPETITION
We believe that the markets for our products are highly competitive.
Duracell and Energizer are our primary battery industry competitors in the U.S.
Both Duracell and Energizer have substantially greater financial and other
resources. They also have greater overall market share than we do. Because of
their greater market size, they have advantages in distribution and in
negotiating leverage with retailers. Private label offerings by major retailers,
by which the retailers purchase batteries from existing manufacturers and sell
under their own brands at non-premium prices, may also be a source of
competition. As currently reported by A.C. Nielsen, less than 2% of general
batteries sold in mass merchants and approximately 9% of general batteries sold
in all channels of trade in the U.S. are private label batteries.
In May 1998, Duracell introduced a new line of alkaline batteries under the
name Duracell Ultra in the AA and AAA size categories. This line was expanded in
1999 to include D, C, and 9-volt sizes. Duracell markets this line as providing
increased performance in certain high-drain battery-powered devices, including
cellular phones, digital cameras and palm-sized computers. With this product
Duracell has attempted to segment the alkaline battery market by positioning
this brand as a premium product priced at a significant premium to their
competitors as well as the Duracell regular battery brand. To date, this
initiative does not appear to have increased the total Duracell brand market
share as Duracell Ultra gains appear to have been offset by declines in the
regular Duracell "Coppertop" line.
In 2000, Energizer followed this strategy by launching Energizer E2. This
line also is premium priced to the regular Energizer product, and is positioned
as superior in performance to regular Energizer. It is premature to determine if
this will provide incremental volume to the total Energizer franchise. Energizer
has also increased efforts to obtain distribution behind a price brand--Eveready
Alkaline. The product has minimal advertising support, and competes primarily on
price. This initiative has been in place in Canada for a number of years with
limited success, and the current effort to expand in the U.S. has gained only
limited distribution.
Internationally, the general battery market has more competitors and is as
highly competitive as the U.S. market. Competition is centered around pricing,
product performance, promotion and distribution strategies.
Despite this competitive market, our unit and dollar general battery market
share in the U.S. has increased over last year both in the mass merchant and
total market as reported by A.C. Nielsen. We also continue to upgrade and invest
in our alkaline technology to remain competitive. We expect to continue to
invest in new upgrades for our alkaline product line over the next several years
to improve product performance and expand manufacturing capacity.
12
<PAGE>
ENVIRONMENTAL COMPLIANCE
Due to the nature of the operations we conduct, our 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 our facilities and off-site disposal
locations. Except as set forth herein under Item 3, "Legal Proceedings," we
believe that compliance with the federal, state, local and foreign regulations
to which we are subject will not have a material effect upon our capital
expenditures, earnings and competitive position. See Item 3 hereof for certain
additional information regarding environmental matters involving us included in
the description of legal proceedings.
EMPLOYEES
As of September 30, 2000, we had approximately 3,380 full-time employees. A
significant number of our factory employees are represented by eight labor
unions. We believe our relationship with our employees is good. There has not
been a work stoppage at a domestic facility since 1981 and since 1991 in the
United Kingdom. See Note 2(e) of Notes to Consolidated Financial Statements
filed herewith and incorporated by reference into Item 8 hereof.
SEASONALITY
Sales of our 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, our sales for the quarter ending on or
about December 31 have represented an average of 30% of our annual net sales.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality."
FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
Financial information pertaining to our business segments is set forth in
Note 12 of Notes to Consolidated Financial Statements filed herewith and
incorporated by reference into Item 8 hereof.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
Financial information pertaining to our foreign and domestic operations is
set forth in Note 12 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 or
otherwise made from time to time by Rayovac, including without limitation those
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 the Private Securities Litigation Reform Act of 1995.
These statements may be identified by such forward-looking language as
"expects," "anticipates," "intends," "believes," "will," "estimate," "should,"
"may," or other similar terms. In reviewing such information, you should note
that our actual results may differ materially from those set forth in such
forward-looking statements.
Important factors that could cause our actual results to differ materially
from those included in the forward-looking statements made herein include,
without limitation, (1) significant changes in consumer
13
<PAGE>
demand and buying practices for household batteries, hearing aid batteries or
other products we manufacture or sell in North America, Latin America or
Europe/ROW; (2) the loss of, or a significant reduction in, sales through a
significant retail customer; (3) the successful introduction or expansion of
competitive brands into the marketplace, including private label offerings;
(4) the introduction of new product features or new battery technologies by a
competitor; (5) promotional campaigns and spending by a competitor;
(6) difficulties or delays in the integration of operations of acquired
companies; (7) our ability to successfully implement manufacturing and
distribution cost efficiencies and improvements; (8) delays in manufacturing or
distribution due to work stoppages, problems with suppliers, natural causes or
other factors; (9) the enactment or imposition of unexpected environmental
regulations negatively impacting consumer demand for certain of our battery
products or increasing our cost of manufacture or distribution; (10) the costs
and effects of unanticipated legal, tax or regulatory proceedings; (11) the
effects of competitors' patents or other intellectual property rights;
(12) interest rate, exchange rate and raw material price fluctuations;
(13) impact of unusual items resulting from evaluation of business strategies,
acquisitions and divestitures and organizational structure; (14) changes in
accounting standards applicable to our business; and (15) the effects of changes
in trade, monetary or fiscal policies and regulations by governments in
countries where we do business.
Additional factors and assumptions that could generally cause our actual
results to differ materially from those included in the forward-looking
statements made herein include, without limitation, (1) our ability to develop
and introduce new products; (2) the effects of general economic conditions in
North America, Europe, Latin America or other countries where we do business,
including inflation, labor costs and stock market volatility; (3) the effects of
political or economic conditions, unrest or volatility in Latin America and
other international markets; (4) the sufficiency of our production and
distribution capacity to meet future demand for our products; (5) our ability to
keep pace with the product and manufacturing technological standards in our
industry; and (6) our ability to continue to penetrate and develop new
distribution channels for our 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 to differ materially from those projected. We assume no
obligations 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 our manufacturing
sites:
<TABLE>
<CAPTION>
LOCATION PRODUCT MANUFACTURED OWNED/LEASED SQUARE FEET
-------- ------------------------------------------------- ------------ -----------
<S> <C> <C> <C>
NORTH AMERICA:
Fennimore, WI............ Alkaline batteries and Renewal rechargeable
batteries Owned 176,000
Portage, WI.............. Zinc air button cells; lithium coin cells and
alkaline computer batteries Owned 101,000
Wonewoc, WI.............. Battery-powered lighting products and lantern
batteries Leased 90,000
LATIN AMERICA:
Mexico City, Mexico...... Zinc carbon batteries Owned 103,000
Tegucigalpa, Honduras.... Zinc carbon batteries Owned 35,000
Guatemala City,
Guatemala.............. Zinc carbon batteries Owned 105,000
Santo Domingo,
Dominican Republic..... Zinc carbon batteries Owned 57,000
EUROPE/ROW:
Washington, UK........... Zinc air button cells Leased 63,000
</TABLE>
We also lease approximately 250,000 square feet of space in Madison,
Wisconsin for our corporate headquarters and technology center.
14
<PAGE>
From fiscal 1996 through fiscal 2000 we have invested in improvements to our
major battery facilities. During this period, we invested over $20 million for
new technology, modernization and capacity expansion at our Fennimore,
Wisconsin, plant. In addition, in late 1999 we installed a new AA high speed
manufacturing line in our Fennimore, Wisconsin, manufacturing plant. This line
increased our production capacity for AA batteries by 50%. Additional
investments in zinc air battery production have helped us to increase output and
precision of assembly as well as to increase the capacity of critical component
manufacturing. Our investments in lithium battery production have been used to
build capacity for certain lithium coin cells. As part of our 1998 restructuring
plans, our Madison, Wisconsin, plant has phased out the manufacture of heavy
duty batteries, which are now sourced instead from Rayovac Latin American
manufacturing facilities and outside suppliers. During fiscal 1999, we closed
our Appleton, Wisconsin, plant and moved the operations to Portage, Wisconsin.
One of the two Appleton, Wisconsin, plant facility buildings is currently held
for sale; the other was sold during fiscal 2000. In November 1999 we
discontinued the manufacturing operations at our Valencia, Venezuela, facility
and transferred the production to our Mexico facility. The Valencia, Venezuela,
plant facility is currently held for sale.
The following table sets forth information regarding Rayovac's packaging and
distribution sites by segment:
<TABLE>
<CAPTION>
LOCATION OWNED/LEASED SQUARE FEET
-------- ------------ -----------
<S> <C> <C>
NORTH AMERICA:
Madison, WI................................................. Owned 158,000
Middleton, WI............................................... Leased 220,000
Lavergne, TN................................................ Leased 65,000
Hayward, CA................................................. Leased 38,000
Mississauga, Ontario, Canada................................ Leased 32,000
LATIN AMERICA:
Chiquimula, Guatemala....................................... Leased 6,000
Guatemala City, Guatemala................................... Leased 30,000
Quetzaltenango, Guatemala................................... Leased 5,000
San Jose, Costa Rica........................................ Leased 11,000
San Miguel, El Salvador..................................... Leased 10,000
San Pedro Sula, Honduras.................................... Leased 13,000
Santa Tecia, El Salvador.................................... Leased 15,000
Tegucigalpa, Honduras....................................... Leased 14,000
EUROPE/ROW:
Billinghausen, Germany...................................... Owned 5,000
</TABLE>
We believe that our facilities, in general, are adequate for our present and
currently foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
Our 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 our facilities and at
off-site disposal locations. Rayovac 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 Rayovac's management, we believe that we are substantially in
compliance with applicable environmental regulations at our facilities. There
are no pending proceedings against Rayovac alleging that we are or have been in
violation of environmental laws, and we are not aware of any such proceedings
contemplated by governmental
15
<PAGE>
authorities. We are, however, subject to certain proceedings under the
Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA")
or analogous state laws, as described below.
Rayovac 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 of our facilities have been in operation for decades and are constructed
on fill that includes, among other materials, used batteries containing various
heavy metals. We have 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 we are currently engaged in investigative or
remedial projects at a few of our facilities, we do not expect that such
projects will cause us to incur material expenditures.
Our former manganese processing facility in Covington, Tennessee was
accepted by the Tennessee Department of Environment and Conservation ("TDEC")
into TDEC's Voluntary Cleanup, Oversight and Assistance Program in
February 1999. Groundwater monitoring conducted pursuant to the post-closure
maintenance of solid waste at the facility, and recent groundwater testing
beneath former process areas of the facility, indicated elevated levels of
certain inorganic contaminants, particularly (but not exclusively) manganese, in
the groundwater underneath the facility. We have completed closure of lagoons on
the property and have completed the remediation of a stream that borders the
facility.
Under Tennessee's voluntary cleanup program, we negotiated a Consent Order
and Agreement with the TDEC, dated February 12, 1999, covering investigation,
and if necessary, remediation of the facility. Upon successful completion of the
requirements of the Consent Order and Agreement, we expect that no further
action will be required at the facility. While remediation costs are uncertain
at this time, we do not expect the matter to have a material adverse financial
impact on us.
Regarding off-site liabilities, Rayovac is also subject to several
proceedings related to our 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
"joint and several," so that a responsible party under CERCLA theoretically 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. We do not believe that any of our pending proceedings under CERCLA
or analogous state laws will have a material impact on our operations, financial
condition or liquidity, and we are not aware of any such matters contemplated by
governmental agencies that will have such an impact.
As of September 30, 2000, we have reserved $2.2 million for known on-site
and off-site environmental liabilities. We believe these reserves are adequate,
although there can be no assurance that this amount will ultimately be adequate
to cover such environmental liabilities. We may also 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 our facilities have been in operation for decades and, over such
time, we 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.
In August of 2000, we resolved and settled on mutually agreeable terms our
three hearing aid battery patent infringement lawsuits with The Gillette Company
and Duracell, Inc. Rayovac Corporation v. Duracell Incorporated and The Gillette
Company (Case No. 99-C-0272C 0 United States District Court for the Western
District of Wisconsin); The Gillette Company v. Rayovac Corporation, (Case
No. 99-CV-11555-PBS--United States District Court for the District of
Massachusetts); and The Gillette
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<PAGE>
Company v. Rayovac Corporation, et. al. (Docket No. 40148, District Court of
Dusseldorf, Germany). These three lawsuits involved allegations by both Rayovac
and Gillette/Duracell of patent infringement by the other party relating to
various hearing aid battery patents. The settlement included dismissals of all
three lawsuits with prejudice and did not require material expenditures by
either party.
In addition, we filed suit in October 2000 against one of our insurance
carriers seeking insurance coverage for environmental claims asserted against us
at a CERCLA site in Bergen County, New Jersey and the City Disposal Site in
Stoughton, Wisconsin. We settled both of these cases prior to fiscal 2000 and
are seeking recovery of amounts paid. The insurance recovery case, Rayovac
Corporation v. Employers Insurance of Wausau, (Case No. 99-CV-2339) is pending
in Dane County Circuit Court in Madison, Wisconsin and is in its early stages.
While we believe that we have meritorious claims for coverage of certain of the
environmental claims against us, there can be no assurance that our claim will
be successful.
Finally, we were one of the 109 named defendants in a patent infringement
lawsuit brought by the Lemelson Foundation Lemelson Medical, Educational &
Research Foundation, Limited Partnership v. Butler Manufacturing, et. al. (Case
No. IV00-0662-PHXSMM, District Court, Arizona). We were served with the
complaint in October 2000 and we settled this matter in November 2000. The
settlement included a dismissal of the lawsuit with prejudice, and did not
include a material expenditure by us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on July 20, 2000.
The directors standing for election were elected in an uncontested election. The
directors elected were Kent J. Hussey and Warren C. Smith Jr. Joseph W. Deering
also stood for re-election at the time of the proxy mailing, but he resigned
prior to the Annual Meeting due to health reasons and votes relating to his
re-election were of no effect. Mr. Hussey received 25,627,373 votes in favor of
his election and 78,313 votes were withheld. Mr. Smith received 25,626,473 votes
in favor of his election and 79,213 votes were withheld. In addition to the
election of directors, the Company submitted the ratification of the appointment
of KPMG LLP as our independent auditors to a vote of the shareholders. The vote
in favor of ratification was: For: 25,416,528; Against: 416,528; Abstained;
1,302.
17
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock, $0.01 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 November 30, 2000,
there were approximately 264 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>
HIGH LOW
-------- --------
<S> <C> <C>
FISCAL 2000
Quarter ended January 2, 2000............................... $26.75 $16.88
Quarter ended April 2, 2000................................. $26.00 $17.25
Quarter ended July 2, 2000.................................. $24.50 $16.88
Quarter ended September 30, 2000............................ $29.13 $16.88
FISCAL 1999
Quarter ended January 3, 1999............................... $28.00 $15.50
Quarter ended April 4, 1999................................. $28.63 $22.13
Quarter ended July 4, 1999.................................. $31.31 $20.31
Quarter ended September 30, 1999............................ $24.13 $18.81
</TABLE>
We have not declared or paid and do not anticipate paying cash dividends in
the foreseeable future, but intend to retain any future earnings for
reinvestment in our business. In addition, the Amended Credit Agreement and the
Notes (each as defined herein) restrict our ability to pay dividends to our
shareholders. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon our financial
condition, results of operations, capital requirements, contractual restrictions
and such other factors as the Board of Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data as of and for the three
fiscal years ended September 30, 1998, 1999 and 2000 is derived from our audited
consolidated financial statements 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 as of and for the Transition Period and the fiscal years ended
June 30, 1996 and September 30, 1997 is derived from our audited consolidated
financial statements which are not included herein. The following selected
financial data should be read in conjunction with our consolidated financial
statements and the
18
<PAGE>
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL TRANSITION TWELVE
YEAR PERIOD MONTHS FISCAL YEAR ENDED
ENDED ENDED ENDED SEPTEMBER 30,
JUNE 30, SEPTEMBER 30, SEPTEMBER 30, -----------------------------------------
1996 1996 1996 1997 1998 1999 2000
-------- ------------- ------------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................. $423.4 $101.9 $417.9 $432.6 $495.7 $ 564.3 $703.9
Cost of goods sold......................... 239.9 59.4 238.4 235.0 258.3 295.2 358.2
------ ------ ------ ------ ------ ------- ------
Gross profit............................... 183.5 42.5 179.5 197.6 237.4 269.1 345.7
Selling expense............................ 116.5 27.8 114.4 122.1 148.9 160.2 195.1
General and administrative expense......... 28.1 7.7 29.3 28.6 32.4 37.4 50.5
Research and development expense........... 8.6 2.3 8.8 9.4 9.4 9.8 10.8
Recapitalization and other special
charges(1)(2)(3)(4)...................... -- 28.4 28.4 3.0 6.2 8.1 --
------ ------ ------ ------ ------ ------- ------
Income (loss) from operations(5)........... 30.3 (23.7) (1.4) 34.5 40.5 53.6 89.3
Interest expense........................... 8.4 4.4 10.5 24.5 15.7 16.3 30.6
Other expense (income), net................ 0.6 0.1 0.5 0.4 (0.2) (0.3) 0.7
------ ------ ------ ------ ------ ------- ------
Income (loss) before income taxes and
extraordinary item....................... 21.3 (28.2) (12.4) 9.6 25.0 37.6 58.0
Income tax expense (benefit)............... 7.0 (8.9) (3.8) 3.4 8.6 13.5 19.6
------ ------ ------ ------ ------ ------- ------
Income (loss) before extraordinary item.... 14.3 (19.3) (8.6) 6.2 16.4 24.1 38.4
Extraordinary item(6)...................... -- (1.6) (1.6) -- (2.0) -- --
------ ------ ------ ------ ------ ------- ------
Net income (loss).......................... $ 14.3 $(20.9) $(10.2) $ 6.2 $ 14.4 $ 24.1 $ 38.4
====== ====== ====== ====== ====== ======= ======
Basic net income (loss) per common share
before extraordinary item................ $ 0.29 $(0.44) $(0.18) $ 0.30 $ 0.62 $ 0.88 $ 1.39
====== ====== ====== ====== ====== ======= ======
Diluted net income (loss) per common share
before extraordinary item................ $ 0.29 $(0.44) $(0.18) $ 0.30 $ 0.58 $ 0.83 $ 1.32
====== ====== ====== ====== ====== ======= ======
Basic net income (loss) per common share... $ 0.29 $(0.48) $(0.21) $ 0.30 $ 0.54 $ 0.88 $ 1.39
====== ====== ====== ====== ====== ======= ======
Diluted net income (loss) per common
share.................................... $ 0.29 $(0.48) $(0.21) $ 0.30 $ 0.51 $ 0.83 $ 1.32
====== ====== ====== ====== ====== ======= ======
Weighted average common shares............. 49.6 43.8 48.1 20.5 26.5 27.5 27.5
Weighted average common and common
equivalent shares........................ 49.6 43.8 48.1 20.6 28.1 29.2 29.1
OTHER FINANCIAL DATA:
Depreciation............................... $ 11.9 $ 3.3 $ 12.1 $ 11.3 $ 10.9 $ 11.9 $ 16.0
Capital expenditures....................... 6.6 1.2 8.4 10.9 15.9 24.1 19.0
Cash flows from operating activities....... 17.8 (1.1) 26.0 35.7 (1.5) 10.5 37.8
Cash flows from investing activities....... (6.3) 0.0 (7.3) (10.8) (23.4) (169.2) (17.9)
Cash flows from financing activities....... (12.0) 3.2 (16.8) (28.0) 25.4 168.0 (21.0)
EBITDA(7).................................. 41.7 (20.5) 10.2 45.5 53.0 67.4 108.6
</TABLE>
<TABLE>
<CAPTION>
FISCAL TRANSITION TWELVE
YEAR PERIOD MONTHS FISCAL YEAR ENDED
ENDED ENDED ENDED SEPTEMBER 30,
JUNE 30, SEPTEMBER 30, SEPTEMBER 30, -----------------------------------------
1996 1996 1996 1997 1998 1999 2000
--------- ------------- ------------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $ 63.2 $ 64.6 $ 64.6 $ 33.8 $ 81.6 $104.4 $104.7
Total assets.............................. 221.1 243.7 243.7 236.3 283.9 532.9 569.0
Total debt................................ 81.3 233.7 233.7 207.3 152.3 330.3 317.6
Shareholders' equity (deficit)............ 61.6 (85.7) (85.7) (80.6) 21.9 46.5 80.7
</TABLE>
------------------------------
(1) During the Transition Period, the Company recorded charges of $12.3 million
directly related to the 1996 recapitalization and other special charges of
$16.1 million. The $12.3 million included $5.0 million of fees and
$7.3 million of stock option compensation, severance payments and employment
contract settlements. Special charges of $16.1 million included
(i) $2.7 million related exiting certain manufacturing operations,
(ii) $1.7 million of charges to increase net deferred compensation plan
obligations to reflect curtailment of such plans, (iii) $1.5 million of
charges reflecting the present value of lease payments for land which had no
future productive purpose, (iv) $6.9 million in costs and assets write-downs
primarily related to changes in product pricing strategies and
(v) $3.3 million of employee termination benefits and other charges.
19
<PAGE>
(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) In the fiscal year ended September 30, 1999, the Company recorded special
charges of $8.1 million including (i) $2.5 million of employee termination
benefits related to organizational restructuring, (ii) $2.1 million of
charges associated with the termination of non-performing foreign
distributors and exiting the respective territory, (iii) $1.9 million of
costs related to the previously announced closing of the Appleton, Wisconsin
facility, (iv) $0.8 million related to the closing of the Newton Aycliffe,
United Kingdom facility, and (v) $0.8 million of one-time expenses
associated with the Latin American acquisition.
(5) Income (loss) from operations includes expenses related to the 1996
recapitalization and other special charges in the Transition Period ended
September 30, 1996 and the fiscal years ended September 30, 1997, 1998 and
1999. The special charge portion of cost of goods sold in fiscal 1999
relates to the discontinuation of silver cell manufacturing at the Company's
Portage, Wisconsin facility. Income from operations before these
non-recurring charges was as follows:
<TABLE>
<CAPTION>
FISCAL TRANSITION TWELVE
YEAR PERIOD MONTHS FISCAL YEAR ENDED
ENDED ENDED ENDED SEPTEMBER 30,
JUNE 30, SEPTEMBER 30, SEPTEMBER 30, -----------------------------------------
1996 1996 1996 1997 1998 1999 2000
--------- ------------- ------------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from operations............. $ 30.3 $(23.7) $(1.4) $34.5 $40.5 $53.6 $89.3
Other special charge portion of cost of
goods sold.............................. -- -- -- -- -- 1.3 --
Recapitalization and other special
charges................................. -- 28.4 28.4 3.0 6.2 8.1 --
------ ------ ----- ----- ----- ----- -----
Income from operations before
non-recurring charges................... $ 30.3 $ 4.7 $27.0 $37.5 $46.7 $63.0 $89.3
====== ====== ===== ===== ===== ===== =====
</TABLE>
(6) The 1996 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, have 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.
(7) EBITDA represents income from operations plus other (income) expense, net
plus depreciation and amortization (excluding amortization of debt issuance
costs). 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 herein may
not be comparable to other similarly titled measures of other companies.
EBITDA includes expenses related to the 1996 recapitalization and other
special charges in the Transition Period ended September 30, 1996 and the
fiscal years ended September 30, 1997, 1998 and 1999. EBITDA before these
non-recurring charges was as follows:
<TABLE>
<CAPTION>
FISCAL TRANSITION TWELVE
YEAR PERIOD MONTHS FISCAL YEAR ENDED
ENDED ENDED ENDED SEPTEMBER 30,
JUNE 30, SEPTEMBER 30, SEPTEMBER 30, -----------------------------------------
1996 1996 1996 1997 1998 1999 2000
-------- ------------- ------------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA..................................... $41.7 $(20.5) $10.2 $45.5 $53.0 $67.4 $108.6
Other special charges portion of cost of
goods sold............................... -- -- -- -- -- 1.3 --
Recapitalization and other special
charges.................................. -- 28.4 28.4 3.0 6.2 8.1 --
----- ------ ----- ----- ----- ----- ------
EBITDA before non-recurring charges........ $41.7 $ 7.9 $38.6 $48.5 $59.2 $76.8 $108.6
===== ====== ===== ===== ===== ===== ======
</TABLE>
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion in conjunction with the "Selected
Financial Data" and our consolidated financial statements and the related notes
thereto in the "Financial Statements" section of this report.
INTRODUCTION
Our operating performance depends upon a number of factors. The most
important of these factors are:
- general retailing trends, especially in the mass merchandiser segment of
the retail market
- our overall product mix among various specialty and general household
batteries and battery-powered lighting devices, which sell at different
price points and profit margins
- our overall competitive position, which is affected by both our and our
competitors' introduction of new products and promotions and our relative
pricing and battery performance
- changes in operating expenses
We manage our business according to the following geographic areas:
(1) North America, which includes the United States and Canada (2) Latin
America, which includes Mexico, Central America, South America and the Caribbean
and (3) Europe/Rest of World ("Europe/ROW"), which includes the United Kingdom,
Europe, and all other countries in which we do business.
Set forth below are specific developments that have affected and may
continue to affect our performance.
INVESTMENT IN FUTURE GROWTH OPPORTUNITIES. Since our 1996 recapitalization,
we have undertaken significant measures to pursue growth opportunities and
increase market share for our products worldwide. These measures include
(1) acquiring the consumer battery operations of ROV Limited in Latin America
and the Rayovac brand rights for battery products worldwide, with the exception
of Brazil, (2) developing new markets for our hearing aid battery products
through the acquisitions of Brisco and the battery distribution business of Best
Labs in 1998, (3) expanding distribution by gaining new customers and increasing
products sold to existing customers.
RESTRUCTURING OPERATIONS AND OTHER COST RATIONALIZATION INITIATIVES. In
September 1999, we announced a series of operational initiatives to take
advantage of global marketing opportunities afforded by our Latin America
acquisition. These initiatives included (1) the restructuring of the
organization to streamline and better serve global markets and improve our
overall operating efficiencies, (2) the restructuring of manufacturing
operations to position us for future growth and (3) the termination of certain
non-performing foreign distributors.
EXPANSION OF PRODUCTION CAPACITY. In fiscal 1999 we installed a new high
speed manufacturing line to increase our capacity for alkaline AA size batteries
by up to 50% at a cost of approximately $11.0 million. We also completed a
39,000 square foot expansion of our Portage, Wisconsin facility and consolidated
our Appleton, Wisconsin manufacturing operations into it. We continue to compare
our global production requirements against our global manufacturing capacity to
improve the efficiency of our operations.
COMPETITIVE POSITION. In June 1999, Ralston Purina Company announced that
it was spinning off its battery company segment. According to the Form 10-12B/A
filed in April 2000, the new company (Energizer Holdings, Inc.) started trading
on the New York Stock Exchange in April 2000. We do not believe this spin-off
a) will create any more favorable market conditions for Energizer than before
the spin-off or b) will have a significant adverse impact on our financial
performance.
21
<PAGE>
In 1998, Duracell introduced Duracell Ultra in the AA and AAA size
categories and this line was expanded in 1999 to include D, C, and 9-volt sizes.
Duracell has attempted to segment the alkaline battery market by positioning
this brand as a premium product priced at a significant premium to their
competitors as well as the Duracell regular battery brand.
In 2000, Energizer followed this strategy by launching Energizer E2. It is
premature to determine if this will provide incremental volume to the total
Energizer franchise. Energizer also increased efforts to obtain distribution
behind a price brand--Eveready Alkaline. The product has minimal advertising
support and competes primarily on price. This initiative has been in place in
Canada for a number of years with limited success and the current effort to
expand in the U.S. has gained only limited distribution.
SEASONAL PRODUCT SALES
Our sales are seasonal. Our highest sales occur in the fiscal quarter ending
on or about December 31 during the holiday season. In the quarter ending
September 30, 1999, our sales included approximately $15.8 million of sales from
the consumer battery business we acquired from ROV Limited. Our lowest sales
occur in the fiscal quarter ending on or about March 31. During the past three
completed fiscal years, our sales in the quarter ended on or about December 31
have represented an average of 30% of annual net sales. As a result of this
seasonality, our 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 our net sales for each of the periods presented.
<TABLE>
<CAPTION>
FISCAL YEAR
(IN MILLIONS)
------------------------------
FISCAL QUARTER ENDED 1998 1999 2000
-------------------- -------- -------- --------
<S> <C> <C> <C>
December............................................ $150.0 $160.5 $214.8
March............................................... 96.1 111.0 142.6
June................................................ 111.1 120.4 152.0
September........................................... 138.6 172.4 194.5
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain items
in our statement of operations to net sales for the periods presented:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales.............................. 100.0% 100.0% 100.0%
Cost of goods sold..................... 52.1 52.3 50.9
Gross profit........................... 47.9 47.7 49.1
Selling expenses....................... 30.0 28.4 27.7
General and administrative expense..... 6.6 6.6 7.2
Research and development expenses...... 1.9 1.7 1.5
Other special charges.................. 1.3 1.5 --
Income from operations................. 8.2% 9.5% 12.7%
</TABLE>
FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1999
HIGHLIGHTS OF CONSOLIDATED OPERATING RESULTS
NET SALES. Our net sales increased $139.6 million, or 24.7%, to
$703.9 million in fiscal 2000 from $564.3 million in the prior year. Significant
sales gains reflected the full year impact of the ROV Limited
22
<PAGE>
acquisition and strong sales increases in alkaline and rechargeable batteries in
North America partially offset by decreased sales of hearing aid batteries.
NET INCOME. Our net income for fiscal 2000 increased $14.3 million, or
59.3%, to $38.4 million from $24.1 million the previous year. This increase is
due primarily to the impact of increased sales, primarily reflecting the full
year impact of the ROV Limited acquisition, improved gross profit margins, lower
operating expenses as a percentage of net sales partially offset by higher
interest expense and unfavorable foreign exchange. The improvement in gross
profit margins is primarily attributed to previously announced cost
rationalization initiatives, a favorable shift in product mix, and absence of
special charges in fiscal 2000.
SEGMENT RESULTS. We evaluate segment profitability based on income from
operations before corporate expense which includes corporate purchasing expense,
general and administrative expense and research and development expense. All
depreciation and amortization included in income from operations is related to a
segment. Total segment assets are set forth in Note 12 of Notes to Consolidated
Financial Statements filed herewith.
NORTH AMERICA
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Revenue from external customers............................. $478.3 $535.8
Profitability............................................... 77.8 95.6
Profitability as a % of net sales........................... 16.3% 17.8%
</TABLE>
Our revenue from external customers increased $57.5 million, or 12.0%, to
$535.8 million in fiscal 2000 from $478.3 million the previous year due
primarily to increased sales of alkaline, rechargeable, and heavy duty batteries
partially offset by softness in hearing aid battery sales. Alkaline sales
increases of $51.2 million, or 19.8%, were driven by strong promotional
programs, new customers, expanded distribution with existing customers, and the
favorable impact of price increases. Rechargeable sales increases of
$6.9 million, or 29.7%, were primarily driven by the introduction of nickel
metal hydride (NiMh) rechargeable batteries at a major mass merchandiser. Heavy
duty sales increases of $3.1 million, or 8.6%, reflect the full year impact of
gaining exclusivity at a major mass merchandiser. Sales of hearing aid batteries
decreased $3.1 million, or 6.9%, primarily as the result of planned inventory
reduction at several professional and retail distribution accounts, a reduction
in promotional programs, and softness in the hearing aid device market.
Our profitability increased $17.8 million, or 22.9%, to $95.6 million in
fiscal 2000 from $77.8 million in fiscal 1999. This increase was primarily
attributed to sales volume increases, improved gross profit margins and
operating expenses that decreased as a percentage of sales. The improvement in
gross profit margins was primarily the result of previously announced cost
rationalization initiatives and a shift in product mix. Operating expenses
decreased as a percentage of sales primarily reflecting a gain recognized on the
sale of certain camcorder battery assets and corresponding license to utilize
the "Rayovac" trade name offset by higher promotional and distribution expenses.
LATIN AMERICA
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Revenue from external customers............................. $19.3 $112.2
Profitability............................................... 3.5 20.1
Profitability as a % of net sales........................... 18.1% 17.9%
</TABLE>
In August 1999, we acquired the consumer battery business of ROV Limited in
Latin America. ROV Limited was our customer before the acquisition. Total
revenue for the region for fiscal 1999 includes two
23
<PAGE>
months of sales for the Latin American business and ten months of sales to ROV
Limited as an external customer. The fiscal 1999 and fiscal 2000 sales in the
region are predominantly heavy duty batteries.
The sales growth in Latin America primarily reflects the full year impact of
the Latin America business, new distribution in Mexico, Central America, and the
southern region of South America, price increases in certain countries
implemented in the second quarter, and distribution of alkaline batteries and
lighting products in mass merchandiser chains.
Our profitability was $20.1 million, which was 17.9% of net sales for fiscal
2000. Our operating expense in Latin America was lower, as a percent of sales,
than in North America. This difference is attributed primarily to spending less
in marketing and advertising as a result of selling less alkaline and more heavy
duty batteries.
EUROPE/ROW
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Revenue from external customers............................. $66.7 $55.9
Profitability............................................... 9.9 6.1
Profitability as a % of net sales........................... 14.8% 10.9%
</TABLE>
Our revenue from external customers decreased $10.8 million, or 16.2%, to
$55.9 million in fiscal 2000 from $66.7 million the previous year due primarily
to the impacts of currency devaluation, the exit of certain private label
alkaline battery business in Europe, the termination of certain non-performing
foreign distributors, and sales volume softness in Europe negatively impacting
our hearing aid and watch battery business.
Our profitability decreased $3.8 million, or 38.4%, to $6.1 million
reflecting the impact of currency devaluation and higher operating expenses as a
percentage of sales partially offset by a favorable shift in product mix away
from our lower margin private label alkaline battery business.
CORPORATE EXPENSE. Our corporate expense increased $4.2 million, or 14.9%,
to $32.4 million in fiscal 2000 from $28.2 million the prior year. These
increases were primarily due to increased travel expense, higher legal fees
primarily attributable to our patent infringement lawsuit, higher professional
expenses, and increased research and development expenses. As a percentage of
total sales, our corporate expense was 4.6% compared to 5.0% in the previous
year.
SPECIAL CHARGES. In Fiscal 2000 we recorded no special charges.
In fiscal 1999, we recorded special charges of $8.1 million in addition to
the $1.3 million recorded in cost of sales. The $8.1 million includes
(1) $2.5 million associated with restructuring the organization to streamline
and better serve global markets and operating efficiencies, (2) $2.1 million
associated with the termination of non-performing foreign distributors and
exiting the respective territory, (3) $1.9 million of cost associated with the
previously announced closing of our Appleton, Wisconsin plant and its
consolidation into our Portage, Wisconsin facility, (4) $0.8 million of cost
associated with the closing of our Newton Aycliffe, United Kingdom, facility,
and (5) $0.8 million of one-time expenses associated with the Latin American
acquisition.
INCOME FROM OPERATIONS. Our income from operations increased
$35.7 million, or 66.6%, to $89.3 million in fiscal 2000 from $53.6 million the
previous year. This increase was primarily due to increased sales primarily
reflecting the Latin America acquisition and a strong North America business,
increased gross profit, and lower special charges partially offset by increased
operating expenses.
INTEREST EXPENSE. Interest expense increased $14.2 million, or 86.6%, to
$30.6 million in fiscal 2000 from $16.4 million in the prior year primarily due
to financing costs associated with the Latin America acquisition and higher
general market interest rates.
24
<PAGE>
INCOME TAX EXPENSE. Our effective tax rate for fiscal 2000 was 33.8%
compared to 35.8% for fiscal 1999. The rate in the current year was impacted by
a lower foreign tax rate primarily reflecting the impact of the Latin America
business.
FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1998
HIGHLIGHTS OF CONSOLIDATED OPERATING RESULTS
NET SALES. Our net sales increased $68.6 million, or 13.8%, to
$564.3 million in fiscal 1999 from $495.7 million in the prior year. Significant
sales gains were recorded in alkaline, heavy duty and specialty batteries and
lighting products, while sales of hearing aid batteries reflected a more modest
increase year over year.
NET INCOME. Our net income for fiscal 1999 increased $9.7 million, or
67.7%, to $24.1 million from $14.4 million the previous year. This increase is
due primarily to the impact of increased sales and reduced operating expenses as
a percentage of net sales.
NORTH AMERICA
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Revenue from external customers............................. $422.4 $478.3
Profitability............................................... 61.4 77.8
Profitability as a % of net sales........................... 14.5% 16.3%
</TABLE>
Our revenue from external customers increased $55.9 million, or 13.2%, to
$478.3 million in fiscal 1999 from $422.4 million the previous year due
primarily to increased sales of alkaline batteries, specialty batteries, and
lighting products. Alkaline sales increases were driven by strong promotional
programs, new customers, and expanded distribution with existing customers. A
full years' impact of our Direct Power Plus acquisition contributed to the
increase in sales of specialty batteries. Our sales of lighting products
increased due primarily to a strong hurricane season and continued growth in our
economy flashlight products.
Our profitability increased $16.4 million, or 26.7%, to $77.8 million in
fiscal 1999 from $61.4 million in fiscal 1998. This increase was primarily
attributed to the sales increase and net sales growing faster than expenses.
LATIN AMERICA
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Revenue from external customers............................. -- $19.3
Profitability............................................... -- 3.5
Profitability as a % of net sales........................... -- 18.1%
</TABLE>
In August 1999, we acquired the consumer battery business of ROV Limited in
Latin America. ROV Limited was our customer before the acquisition. Total
revenue for the region for fiscal 1999 includes two months of sales of the Latin
American business and ten months of sales to ROV Limited as an external
customer. Prior year sales in the region are included in North America. The
amount was not material.
Our profitability was $3.5 million, which was 18.1% of net sales for fiscal
1999. Our operating expense in Latin America was lower, as a percent of sales,
than in North America. This difference is attributed primarily to spending less
in marketing and advertising as a result of selling less alkaline and more zinc
carbon batteries.
25
<PAGE>
EUROPE/ROW
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Revenue from external customers............................. $73.4 $66.7
Profitability............................................... 9.1 9.9
Profitability as a % of net sales........................... 12.4% 14.8%
</TABLE>
Our revenue from external customers decreased $6.7 million, or 9.1%, to
$66.7 million in fiscal 1999 from $73.4 million the previous year, due primarily
to decreased sales of alkaline and heavy duty batteries. We have experienced
some lost distribution and discontinued some unprofitable private label
business.
Our profitability increased $0.8 million, or 8.8%, due primarily to improved
product mix and reduced operating expenses. Our restructuring program announced
in fiscal 1998 contributed to the reduced operating expenses in fiscal 1999.
CORPORATE EXPENSE. Our corporate expense increased $4.4 million, or 18.5%,
to $28.2 million in fiscal 1999 from $23.8 million the prior year. As a
percentage of total sales, our corporate expense was 5.0% compared to 4.8% in
the previous year. These increases were primarily due to increased travel
expense, professional fees related to the implementation of our new computer
systems, and increased research and development expense.
SPECIAL CHARGES. We recorded special charges of $8.1 million in fiscal 1999
in addition to the $1.3 million recorded in cost of sales. The $8.1 million
includes (1) $2.5 million associated with restructuring the organization to
streamline and better serve global markets and operating efficiencies,
(2) $2.1 million associated with the termination of non-performing foreign
distributors and exiting the respective territory, (3) $1.9 million of cost
associated with the previously announced closing of our Appleton, Wisconsin
plant and its consolidation into our Portage, Wisconsin facility,
(4) $0.8 million of cost associated with the closing of our Newton Aycliffe,
United Kingdom, facility, and (5) $0.8 million of one-time expenses associated
with the Latin American acquisition.
In fiscal 1998, we recorded net special charges of $6.2 million which
included $10.3 million related to (1) closing our Newton Aycliffe and Appleton
facilities, (2) phasing out direct distribution in the United Kingdom,
(3) consolidating domestic battery packaging and outsourcing the manufacture of
heavy duty batteries and (4) secondary offering expenses. These charges were
partially offset by a gain on the sale of our Kinston, North Carolina facility
and a credit related to the settlement of deferred compensation agreements with
certain former employees.
INCOME FROM OPERATIONS. Our income from operations increased
$13.1 million, or 32.3%, to $53.6 million in fiscal 1999 from $40.5 million the
previous year. This increase was primarily due to increased sales and gross
profit partially offset by increased expenses and special charges.
INTEREST EXPENSE. Interest expense increased $0.7 million, or 4.5%, to
$16.4 million in fiscal 1999 from $15.7 million in the prior year primarily due
to financing costs associated with the Latin American acquisition.
INCOME TAX EXPENSE. Our effective tax rate for fiscal 1999 was 35.8%
compared to 33.9% for fiscal 1998. The lower rate for fiscal 1998 was impacted
by a lower state tax rate and a lower foreign tax rate as compared to our U.S.
Federal statutory rate.
EXTRAORDINARY ITEM. We recorded extraordinary expense of $2.0 million, net
of tax, in fiscal 1998 for the premium payment on the redemption of a portion of
our Series B Senior Subordinated Notes.
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For fiscal 2000, our operating activities generated $37.8 million of cash,
compared to $10.5 million in fiscal 1999, an increase of $27.3 million.
Operating cash flow before working capital requirements increased
$22.0 million, or 54.6%, to $62.3 million from $40.3 million in the prior year
reflecting improvement in income from operations and higher non-cash expenses.
Non-cash expenses increased $7.7 million to $23.9 million from $16.2 million.
This increase is primarily the result of amortization of intangible assets that
were recognized as part of the Latin America acquisition and depreciation of the
SAP business enterprise system, which was installed in 1999. Working capital
increases in fiscal 2000 were $5.3 million less than in the previous year
primarily reflecting improvements in receivables partially offset by increased
investment in inventory reflecting the expanded distribution in Latin America.
Cash costs associated with our previously announced restructuring activities
have been, and are expected to be, funded with cash provided from operating
activities.
Capital expenditures for fiscal 2000 were $19.0 million, a decrease of
$5.1 million from fiscal 1999. Capital expenditures for fiscal 2000 included
spending for the down payment on a new alkaline line currently expected in
fiscal 2001 and zinc air technology improvements. Capital expenditures for
fiscal 2001 are expected to be approximately $27.0 million which will include
(1) one new alkaline production line at our Fennimore, Wisconsin, facility, and
(2) continued investments in computer systems to improve the productivity and
efficiency of our operations.
Late in fiscal 1999 we completed the acquisition of the consumer battery
operations in Latin America of ROV Limited for a purchase price of
$145.1 million, net of cash acquired. We financed the entire purchase price of
the acquisition with additional borrowings under amended senior credit
facilities.
The amended facilities we obtained in August 1999 replaced our existing
credit facilities with a $250.0 million five-year revolving credit facility and
a $75.0 million five-year amortizing term loan. The term facility provides for
quarterly amortization totaling $10.0 million in 2000, $15.0 million in 2001,
2002, and 2003, and $20.0 million in 2004. The fees associated with these
amended facilities have been capitalized along with the fees for the existing
facility and are being amortized over the term of the amended facilities.
Indebtedness under these amended facilities is secured and is guaranteed by
certain of our subsidiaries.
In addition, to facilitate our future growth, including the financing of our
acquisition in Latin America, we obtained the consent of the holders of our
10.25% Series B Senior Subordinated Notes due 2006 to certain amendments to the
indenture governing these notes. The amendments to the indenture provide, among
other things, that we may (1) make senior secured borrowings under our credit
facilities in an increased set amount without meeting certain financial tests,
(2) incur additional senior secured debt under our credit facilities above that
set amount, provided that we meet certain financial tests, (3) make investments
in foreign subsidiaries that are not guarantors of the Notes and (4) incur
additional indebtedness, on a secured basis, through our foreign subsidiaries.
The amendments are set forth in the Second Supplemental Indenture, dated
August 6, 1999 and made effective as of August 9, 1999, included as an exhibit
to our Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 9, 1999. The fees associated with the consent solicitation
are being amortized over the remaining life of the notes.
During fiscal 2000, our board of directors granted 729,500 options to
purchase shares of our common stock to various members of management under the
1996 Stock Option Plan and the 1997 Incentive Plan. All grants were at an
exercise price equal to the market price of our common stock on the date of
grant with prices ranging from $18.00 to $26.81 per share.
We believe our cash flow from operating activities and periodic borrowings
under our amended credit facilities will be adequate to meet our short-term and
long-term liquidity requirements of our existing business prior to the
expiration of those credit facilities, although no assurance can be given in
this regard.
27
<PAGE>
Our current facilities include a revolving credit facility of $250.0 million and
a $75.0 million term loan. As of September 30, 2000, $62.8 of the term loan was
outstanding and $175.7 million was outstanding under the revolving facility,
with approximately $16.0 million of the remaining availability utilized for
outstanding letters of credit.
We are subject to various federal, state, local and foreign environmental
laws and regulations in the jurisdictions in which we operate, 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. We do not currently anticipate any material adverse effect
on our operations or financial condition or any material capital expenditure as
a result of our efforts to comply with environmental laws. As of September 30,
2000, we had reserved $2.2 million for known on-site and off-site environmental
liabilities. Some risk of environmental liability is inherent in our business;
however, we cannot assure you that material environmental costs will not arise
in the future. See "Legal Proceedings".
We engage in hedging transactions in the ordinary course of our business.
See Note 2(q) to our consolidated financial statements.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by SFAS 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133, and SFAS 138, ACCOUNTING FOR CERTAIN
DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, is effective for the
Company as of October 1, 2000. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities measured at fair value. The
accounting for changes in the fair value of a derivative depends on the use of
the derivative. Adoption of these new accounting standards will result in a
cumulative after-tax reduction in other comprehensive income of approximately
$155 in the first quarter of fiscal 2001. The adoption will also result in $299
of hedge assets and $627 of hedge liabilities recorded on the balance sheet.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB 101). An amendment in
June 2000 delayed the effective date for the Company until the fourth quarter of
fiscal 2001, which is when the Company will adopt this bulletin. The impact of
adopting SAB 101 is still being evaluated and the Company does not currently
believe its adoption will have a material impact on the consolidated financial
statements.
In May 2000, the Financial Accounting Standards Board's Emerging Issues Task
Force (EITF) reached a consensus on Issue No. 00-14, "Accounting for Certain
Sales Incentives". This Issue addresses the recognition, measurement, and income
statement classification for various types of sales incentives including
discounts, coupons, rebates and free products. The Company will adopt this
consensus in the fourth quarter of fiscal 2001. The impact of this consensus on
the Company's consolidated financial statements is still being evaluated and the
Company does not currently believe its adoption will have a material impact on
the consolidated financial statements.
28
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK FACTORS
We have market risk exposure from changes in interest rates, foreign
currency exchange rates and commodity prices. We use derivative financial
instruments for purposes other than trading to mitigate the risk from such
exposures.
A discussion of our accounting policies for derivative financial instruments
is included in Note 2 "Significant Accounting Policies and Practices" in Notes
to our Consolidated Financial Statements.
INTEREST RATE RISK
We have bank lines of credit at variable interest rates. The general level
of U.S. interest rates, LIBOR, IBOR, and to a lesser extent European Base rates,
primarily affects interest expense. We use 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 counter-parties are included in accrued liabilities or
accounts receivable.
FOREIGN EXCHANGE RISK
We are subject to risk from sales and loans to our 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,
Euro, German Marks, French Francs, Italian Lira, Spanish Pesetas, Dutch
Guilders, Mexican Pesos, Guatemalan Quetzals, Dominican Pesos, Venezuelan
Bolivars, Argentine Pesos, Chilean Pesos and Honduran Lempira. Foreign currency
purchases are made primarily in Pounds Sterling, German Marks, French Francs,
Mexican Pesos, Dominican Pesos, Guatemalan Quetzals and Honduran Lempira. We
manage our 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, foreign exchange rate swaps and
foreign exchange options. The related amounts payable to, or receivable from,
the contract counter parties are included in accounts payable or accounts
receivable.
COMMODITY PRICE RISK
We are exposed to fluctuation in market prices for purchases of zinc used in
the manufacturing process. We use commodity swaps, calls and puts to manage such
risk. The maturity of, and the quantities covered by, the contracts are closely
correlated to our anticipated purchases of the commodities. The cost of 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.
As of September 30, 2000, 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 $1.2 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 a
net gain of $1.2 million.
29
<PAGE>
As of September 30, 2000, 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 $1.8 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
September 30, 2000 due to the same change in exchange rates, would be a net gain
of $1.4 million.
As of September 30, 2000, 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 $0.8 million. The net 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 a net gain of $0.6 million.
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 F-1 through F-40, inclusive and is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information, as of December 1, 2000, regarding
each of our directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES
---- -------- --------------------------------------------------
<S> <C> <C>
David A. Jones..................... 51 Chairman of the Board and Chief Executive Officer
Kent J. Hussey..................... 54 President, Chief Operating Officer and Director
Stephen P. Shanesy................. 44 Executive Vice President of Global Brand
Management
Merrell M. Tomlin.................. 48 Executive Vice President of Sales
Randall J. Steward................. 46 Executive Vice President of Administration and
Chief Financial Officer
Kenneth V. Biller.................. 52 Executive Vice President of Operations
Luis A. Cancio..................... 60 Executive Vice President--Latin America
Joseph W. Deering.................. 60 Director (resigned June 30, 2000)
John S. Lupo....................... 54 Director
Scott A. Schoen.................... 42 Director
Thomas R. Shepherd................. 70 Director
Warren C. Smith, Jr................ 44 Director
Philip F. Pellegrino............... 60 Director (elected November 7, 2000)
</TABLE>
Mr. Jones has served as Chairman of our Board of Directors and our Chief
Executive Officer since September 12, 1996. From September 1996 to April 1998,
Mr. Jones also served as our President. 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 United Industries Corp., Tyson
Foods, Inc. and SCI Systems, Inc. Mr. Jones has over 30 years of experience
working in the consumer products industry.
Mr. Hussey is a director of Rayovac and has served as our President and
Chief Operating Officer since April 1998. Prior to that time and since joining
us in October 1996, Mr. Hussey was the Executive Vice President of Finance and
Administration and the 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. Hussey also serves as a director of American Woodmark
Corporation.
Mr. Shanesy has been our Executive Vice President of Global Brand Management
since April 1998. Prior to that time and from December 1997, Mr. Shanesy has
served as our Senior Vice President of Marketing and the General Manager of
General Batteries and Lights. From December 1996 to December 1997, Mr. Shanesy
was our Senior Vice President of Marketing and the General Manager of General
Batteries. Prior to joining us, from 1993 to 1996, Mr. Shanesy was Vice
President of Marketing of Oscar Mayer.
Mr. Tomlin has been our Executive Vice President of Sales since
October 1998. Mr. Tomlin joined Rayovac in October 1996 as Senior Vice President
of Sales. From March 1996 to September 30, 1996,
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<PAGE>
Mr. Tomlin served as Vice President of 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 was named our Executive Vice President of Administration and
Chief Financial Officer in October 1999. Mr. Steward joined us in March of 1998
as our Senior Vice President of Corporate Development and was named Senior Vice
President of Finance and Chief Financial Officer in April 1998, a position he
held until October 1999. 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.
Mr. Biller was named our Executive Vice President of Operations in
October 1999. From August 1998 to October 1999, he was Senior Vice President of
Operations and was our Senior Vice President of Manufacturing/Supply Chain from
January to August 1998. Prior to that time and since 1996 he was our Senior Vice
President and General Manager of Lighting Products & Industrial and since 1995
was our Vice President and General Manager of Lighting Products & Industrial.
Mr. Biller joined us in 1972 and has held several positions with us, including
Director of Technology/Battery Products and Vice President of Manufacturing.
Mr. Cancio was named our Executive Vice President--Latin America on
October 15, 2000. He joined Rayovac in August 1999 as our Senior Vice President
and General Manager of Latin America and served in that position until his
October 15, 2000 promotion. In April 1997, Mr. Cancio became a founding
principal of XCELL Group LLC, a private investment firm, and remains a director
of that firm. From 1980 to 1996 he held positions of increasing responsibility
at Duracell International Inc., beginning as Vice President in Latin America and
ending his tenure as Senior Vice President in other international markets.
Mr. Deering was a director of Rayovac from July of 1998 until his retirement
from our Board of Directors on June 30, 2000. He served as President for the
food equipment group of Premark International, Incorporated from 1992 until his
retirement in December 1999. Previously, Mr. Deering served as President for
Leucadia Manufacturing and President and Chief Executive Officer for Tomkins
Industries. Mr. Deering is also a director of both Quadlux Inc. and Trion, Inc.
Mr. Lupo has been a director of Rayovac since July of 1998 and is a
principal in the consulting firm Renaissance Partners, LLC, which he joined in
February 2000. From October 1998 until November 1999, he served as Executive
Vice President for Sales and Marketing for Bassett Furniture Industries, Inc.
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 Wal-Mart Stores, Inc. From October 1990 to August 1996, Mr. Lupo served as
Senior Vice President--General Merchandise Manager of Wal-Mart Stores, Inc.
Mr. Schoen has been a director of Rayovac since our September 1996
recapitalization. He is a Managing Director of Thomas H. Lee Company, 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. Mr. Schoen is also a Trustee of the
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. He is also 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. Mr. Schoen
also is a director of Syratech Corporation, TransWestern Communications Corp.
and several private corporations.
Mr. Shepherd has been a director of Rayovac since our September 1996
recapitalization. He is a currently a Special Partner of Thomas H. Lee Company
and has been engaged as a consultant to Thomas H. Lee Company since 1986. In
addition, Mr. Shepherd is an Executive Vice President of Thomas H. Lee
32
<PAGE>
Advisors I and an officer of various other affiliates of Thomas H. Lee Company.
He is Chairman of TSG Equity Partners, LLC, and is also a director of The
Vermont Teddy Bear Co. Inc., and various private corporations.
Mr. Smith has been a director of Rayovac since September 1996 and has been
employed by Thomas H. Lee Co. since 1990 and currently serves as a Managing
Director of Thomas H. Lee Co. Mr. Smith also serves as a Managing Director of TH
Lee.Putnam Internet Fund Advisors, LLC, the general partner of TH Lee.Putnam
Internet Fund Advisors, L.P., the general partner of TH Lee.Putnam Internet
Partners, L.P. In addition, Mr. Smith is a Managing Director of TH Lee Global
Internet Advisors, LLC, the general partner of TH Lee Global Internet Managers,
L.P., which in turn serves as manager to TH Lee.Putnam Internet Partners, L.P.
In addition, Mr. Smith is a Vice President of Thomas H. Lee Advisor 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,
Eye Care Centers of America, Inc. and various private corporations.
Mr. Pellegrino has served as a director since November 7, 2000. He currently
serves as Senior Vice President and President of Sales for Kraft Foods and has
held that position since September 2000. From 1995 to September 2000, he served
as Senior Vice President of Sales and Customer Service for Kraft, a wholly owned
subsidiary of Philip Morris Companies, Inc. He has been employed by Kraft Foods
or its subsidiary Oscar Mayer since 1964 in various management and executive
positions.
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, 2000, 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 for
(i) the inadvertent late reporting by each of Kenneth V. Biller, John S. Lupo,
Stephen P. Shanesy, Randall J. Steward and Merrell M. Tomlin of one option
grant; (ii) the inadvertent late reporting by each of Joseph W. Deering and
John S. Lupo of two purchases of common stock and by Randall J. Steward of one
purchase of common stock; and (iii) the inadvertent late reporting by Kent J.
Hussey of one option exercise (and the related transfer of shares in payment of
tax). Each of these transactions were reported on the Form 5 filed for such
director or executive officer for the fiscal year ended September 30, 2000.
33
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid to our Chief Executive
Officer and the other four most highly compensated executive officers during
fiscal 2000, fiscal 1999 and fiscal 1998 (the "Named Executive Officers") for
services rendered in all capacities to the Company.
<TABLE>
<CAPTION>
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION FISCAL YEAR ($) ($) ($) (#) ($)
--------------------------- ----------- --------- -------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
David A. Jones, 2000 $500,000 $400,000 $267,800(1) $ 10,900(2)
Chairman of the Board and 1999 500,000 250,000 264,800(3) 12,700(4)
Chief Executive Officer...... 1998 465,000 250,000 168,900(5) 11,100(2)
Kent J. Hussey, 2000 350,000 46,000(6) 40,000 10,500(2)
President and Chief Operating 1999 325,000 412,500 14,300(4)
Officer...................... 1998 304,600 162,500 72,106 489,800(7)
Luis A. Cancio, 2000 286,000 50,000 14,000(2)
Executive Vice 1999 47,700 100,000 10,000(8)
President--Latin
America...................... 1998
Stephen P. Shanesy, 2000 265,000 35,000 6,800(2)
Executive Vice President of 1999 250,000 100,000 25,000 8,200(4)
Global Brand Management...... 1998 235,000 94,000 8,800(2)
Merrell M. Tomlin, 2000 250,000 35,000 8,500(2)
Executive Vice President of 1999 230,000 114,000 25,000 151,600(9)
Sales........................ 1998 197,500 82,000 48,900(10)
</TABLE>
------------------------------
(1) Includes approximately $70,000 related to a Company provided residence,
$70,000 related to interest on the Executive Note (as defined herein) and
$90,000 related to personal use of the Company aircraft.
(2) Represents contributions to 401K plan.
(3) Includes approximately $120,000 related to a Company provided residence,
$70,000 related to interest on the Executive Note (as defined herein) and
$50,000 related to personal use of the Company aircraft.
(4) Represents contributions to 401K plan and pension plan termination benefits.
(5) Includes approximately $70,000 related to interest on the Executive Note (as
defined herein) and $48,000 related to a Company provided condominium.
(6) Represents personal use of the Company aircraft and a Company provided
vehicle.
(7) Represents relocation payments, compensation from the exercise of stock
options and contributions to 401K plan.
(8) Represents relocation payments.
(9) Represents relocation payments, contributions to 401K plan and pension plan
termination benefits.
(10) Represents relocation payments and contributions to 401K plan.
OPTION GRANTS AND EXERCISES
In connection with the 1996 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, 2000 an aggregate of 1,987,718 options to
purchase shares of Common Stock at a weighted average exercise price of $6.41
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". In September 1997, the Board adopted the 1997 Rayovac Incentive Plan
("Incentive Plan"). Pursuant to the Incentive Plan, we may grant stock-based
awards, including options and restricted stock, to purchase up to 3,000,000
shares of Common Stock. At September 30, 2000 an aggregate of 1,288,489 options
at a weighted average exercise price of $21.00 were outstanding under the
Incentive Plan. Pursuant to the Rayovac Corporation 1997 Stock Option Plan (the
"1997 Plan"), options to purchase an aggregate of 556,222 shares of Common Stock
were granted to
34
<PAGE>
certain management employees, which options were immediately exercised or
surrendered to the Company's Deferred Compensation Plan as of such date.
The following table discloses the grants of stock options during fiscal 2000
to the Named Executive Officers.
OPTION GRANTS IN FISCAL 2000
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------ POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES PERCENT OF TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS EXERCISE PRICE APPRECIATION FOR
OPTIONS GRANTED TO OR BASE OPTION TERM
GRANTED EMPLOYEES IN PRICE -------------------------
NAME (#) FISCAL YEAR ($/SHARE) EXPIRATION DATE 5% ($) 10% ($)
---- ----------- ---------------- --------- --------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
David A. Jones................. -- -- -- -- -- --
Kent J. Hussey................. 40,000 5.5 $ 21.625 9/30/2009 $544,000 $1,378,600
Luis A. Cancio................. 50,000 6.9 $20.9375 4/28/2009 $658,375 $1,668,449
Stephen P. Shanesy............. 35,000 4.8 $ 21.625 9/30/2009 $476,000 $1,206,275
Merrell M. Tomlin.............. 35,000 4.8 $ 21.625 9/30/2009 $476,000 $1,206,275
</TABLE>
The following table sets forth information concerning options to purchase
Common Stock held by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN FISCAL 2000 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED VALUE FISCAL YEAR END (#) FISCAL YEAR END ($)(1)
NAME ON EXERCISE REALIZED $ (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
---- ----------- ---------- --------------------------- ---------------------------
<S> <C> <C> <C> <C>
David A. Jones................. -- -- 546,945/364,632 $6,965,345/4,643,589
Kent J. Hussey................. -- -- 134,143/171,716 1,306,573/1,160,872
Luis A. Cancio................. -- -- 12,500/137,500 0 / 0
Stephen P. Shanesy............. -- -- 73,368/100,579 875,341/599,149
Merrell M. Tomlin.............. -- -- 73,368/100,579 875,341/599,149
</TABLE>
--------------------------
(1) These values are calculated using the $17.125 per share closing price of the
Common Stock as quoted on the NYSE on September 30, 2000.
PENSION PLAN
In fiscal 1997 we contributed to a defined benefit pension plan covering all
domestic non-union employees (the "Pension Plan"). On August 1, 1997 the Pension
Plan accruals were frozen and the Pension Plan was officially terminated on
October 1, 1997. We made no contributions to the Pension Plan during fiscal
1998, 1999 or 2000. Distribution of benefits due to participating employees
under the Pension Plan was made during fiscal 1999. In fiscal 1999 and 2000, we
contributed to a defined contribution 401(k) plan covering domestic non-union
employees (the "401(k) Plan"). We made contributions allocated on the basis of
compensation and age as identified in the summary compensation table.
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
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<PAGE>
attending meetings of the Board of Directors. Messrs. Lupo and Deering received
$5,000 per quarterly meeting in their capacities as directors for fiscal year
2000. Commencing fiscal year 2001, Messrs. Lupo and Pellegrino will receive
$20,000 per year for their service, plus $1,000 per Board of Director meeting
each attends. In addition, each will receive $500 for each Board Committee
meeting each attends. 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 Messrs. Schoen and Smith are managing directors and
Mr. Shepherd is a special partner, receives compensation from the Company.
EMPLOYMENT AGREEMENTS
On October 1, 2000, we entered into amended and restated employment
agreements with David A. Jones (the "Jones Employment Agreement") and Kent J.
Hussey (the "Hussey Employment Agreement"), as well as Employment Agreements
with Stephen P. Shanesy, Merrell M. Tomlin and Luis A. Cancio (together with the
Jones Employment Agreement and the Hussey Employment Agreement, the "Executive
Employment Agreements") (the "Executives"). Under their respective employment
agreements, Mr. Jones is entitled to a base salary of $550,000 per annum,
Mr. Hussey is entitled to a base salary of $385,000 per annum, Mr. Shanesy and
Mr. Tomlin are each entitled to a base salary of $290,000 per annum and
Mr. Cancio is entitled to a base salary of $275,000 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.
The Jones Employment Agreement provides that he be paid a bonus of Four
Hundred Thousand Dollars ($400,000) in October, 2000 as compensation for past
services, and an additional bonus of Four Hundred Thousand Dollars ($400,000) on
September 30, 2003. In addition, the Jones Employment Agreement provides that
Mr. Jones will be granted the option to purchase his Company-owned home for a
nominal amount on April 30, 2003. In connection with the 1996 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. In the event of a "sale" of the Company (as
defined), Mr. Jones' right to receive the $400,000 bonus and his right to
acquire his home shall accelerate to the date of such "sale."
Each Executive Employment Agreement has a term of three years expiring on
September 30, 2003, and each Executive Employment Agreements other than the
Jones Employment Agreement each provide for automatic renewal for successive
one-year periods unless terminated earlier upon 90 days prior written notice by
either the Executive or the Company. Under the Executive Employment Agreements,
each of the Executives has the right to resign and terminate his respective
Executive Employment Agreement at any time upon 60 days notice. Upon such
resignation, we must pay to the resigning Executive any unpaid base salary.
The Jones Employment Agreement provides that, upon termination of Mr. Jones
for death or disability, we will pay him or his estate his base salary for the
next twenty-four (24) months and we will pay him two times the pro rata portion
of his annual bonus. In addition, we will pay him his "additional salary" for
the duration of the term of his agreement, and he shall be entitled to insurance
and other specified benefits for the greater of twenty-four (24) months or the
remainder of the term. In the event Mr. Jones is terminated "without cause" (as
defined), he shall be paid his base salary for the greater of twenty-four (24)
months or the remainder of the term, and he will continue to be paid his annual
bonus for the greater of twenty-four (24) months or the remainder of the term.
Mr. Jones shall also be entitled to receive his
36
<PAGE>
"additional salary" and insurance and other benefits for the greater of
twenty-four (24) months or the remainder of the term.
The Executive Employment Agreements, other than the Jones Employment
Agreement, provide that, upon termination of such Executive's employment without
cause or for death or disability, we will pay to the terminated Executive or
such Executive's estate two times the Executive's base salary and annual bonus,
to be paid out over the following twelve (12) months. In addition, each
Executive shall be entitled to receive insurance and other benefits for the
greater of twenty-four (24) months or the remainder of the term.
Each Executive Employment Agreement provides us with the right to terminate
the Executive's employment for "cause" (as defined), in which event we shall be
obligated to pay to the terminated Executive any unpaid base salary accrued
through the date of termination.
Each Executive Employment Agreement also provides that, during the term of
the agreement or the period of time served as an employee or director, and for
one year thereafter, the Executive shall not engage in or have any business
which is involved in the industries in which we are engaged.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 2000, 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 42.0% of
the outstanding Common Stock) are parties to a Management Agreement entered into
in connection with the 1996 recapitalization pursuant to which we have 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 1996 recapitalization, we 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, we pay THL
Co. and its affiliate an aggregate annual fee of $360,000 plus expenses (the
"Management Fee"). We believe that this Management Agreement is on terms no less
favorable to us than could have been obtained from an independent third party.
In connection with the 1996 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 1996 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our Common Stock as of October 31, 2000 by:
- each person who is known by us to beneficially own more than five percent
of the outstanding shares of our Common Stock;
- each of our directors and each named executive officer (as defined
herein); and
- all of our current directors and executive officers as a group.
37
<PAGE>
This information is based upon information received from or on behalf of the
individuals named herein.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Except as otherwise indicated, we believe
that each person or entity named in the table has sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned by
them, subject to applicable community property laws. The percentage of
beneficial ownership set forth below is based upon 27,572,256 shares of Common
Stock outstanding as of the close of business on October 31, 2000. In computing
the number of shares of Common Stock beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock that are subject to
options held by that person that are currently exercisable or exercisable within
60 days of October 31, 2000, are deemed outstanding. These shares are not,
however, deemed outstanding for the purpose of computing the percentage
ownership of any other person.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
NUMBER SUBJECT
NAMES AND ADDRESS OF BENEFICIAL OWNER OF SHARES TO OPTIONS(1) PERCENT
------------------------------------- --------- ------------- --------
<S> <C> <C> <C>
Thomas H. Lee Equity Fund III, L.P.(2)
75 State Street, Ste. 2600
Boston, MA 02109....................................... 9,928,579 -- 36.0%
Thomas H. Lee Foreign Fund III, L.P.(2)
75 State Street, Ste. 2600
Boston, MA 02109....................................... 615,051 -- 2.2
THL-CCI Limited Partnership(3)
75 State Street, Suite 2600
Boston, MA 02109....................................... 1,042,405 -- 3.8
FMR Corp.(4)
82 Devonshire Street
Boston, MA 02109-3614.................................. 2,136,950 -- 7.8
David A. Jones........................................... 109,294(5) 729,261 3.0
Kent J. Hussey........................................... 81,685(6) 197,734 1.0
Stephen P. Shanesy....................................... 52,941(7) 108,908 *
Merrell M. Tomlin........................................ 36,216(9) 108,908 *
Luis A. Cancio........................................... 34,979(8) 25,000 *
Scott A. Schoen(2)(10)................................... 50,036 -- *
Thomas R. Shepherd(2)(10)................................ 26,061 -- *
Warren C. Smith, Jr.(2)(10).............................. 41,703 -- *
Joseph W. Deering........................................ 10,000 3,000 *
John S. Lupo............................................. 2,500 4,000 *
Philip F. Pellegrino..................................... 1,000 -- *
All directors and executive officers of the Company as a
group
(13 persons)........................................... 578,235(11) 1,367,564 6.7
</TABLE>
------------------------
* Indicates less than 1% of the total number of outstanding shares of Common
Stock.
(1) Reflects the number of shares issuable upon the exercise of options
exercisable within 60 days of October 31, 2000.
38
<PAGE>
(2) 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 Thomas
H. Lee 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 these persons disclaims
beneficial ownership of all shares.
(3) 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. THL
Investment Management Corp. disclaims beneficial ownership of such shares.
Thomas H. Lee disclaims beneficial ownership of such shares except to the
extent of his direct pecuniary interest.
(4) FMR Corp. and related persons and entities reported on a Schedule 13G filed
on September 10, 2000 that they were the beneficial owners of 2,136,950
shares of the Company's Common Stock. This report indicates that FMR Corp.
has the sole or shared power to vote or direct the vote for none of such
shares and sole investment power for all of such shares.
(5) Includes 68,905 restricted shares whose restrictions have not lapsed as of
October 31, 2000 and 4,538 shares held in the Company's 401(k) plan. It also
includes 2,957 shares representing Mr. Jones' proportional interest in the
THL Fund, shares of which Mr. Jones disclaims beneficial ownership.
(6) Includes 48,234 restricted shares whose restrictions have not lapsed as of
October 31, 2000 and 1,008 shares held in the Company's 401(k) plan.
(7) Includes 33,138 restricted shares whose restrictions have not lapsed as of
October 31, 2000 and 692 shares held in the Company's 401(k) plan.
(8) Includes 31,387 restricted shares whose restrictions have not lapsed as of
October 31, 2000.
(9) Includes 32,700 restricted shares whose restrictions have not lapsed as of
October 31, 2000.
(10) Represents the proportional interest of such individual in THL-CCI Limited
Partnership. In the case of Mr. Smith, share amounts also include 9,786
shares which Mr. Smith may be deemed to beneficially own as a result of
Mr. Smith's childrens' proportional beneficial interest in THL-CCI Limited
Partnership.
(11) Includes 277,138 restricted shares whose restrictions have not lapsed as of
October 31, 2000 and 11,676 shares held in the Company's 401(k) plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Rayovac and THL Co. (which, together with its affiliates owns 42.0% of the
outstanding Common Stock) are parties to a Management Agreement entered into in
connection with the 1996 recapitalization pursuant to which we 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 1996, recapitalization, we paid THL Co. and
an affiliate a transaction fee. In consideration of the consulting and
management advisory services, we pay THL Co. and its affiliate a management fee.
We believe that this Management Agreement is on terms no less favorable to us
than could have been obtained from an independent third party.
Rayovac and David A. Jones are parties to the Jones Employment Agreement
pursuant to which Mr. Jones agreed to be our Chairman of the Board of Directors
and Chief Executive Officer. Mr. Jones also purchased from us 227,895 shares of
Common Stock with cash and a $500,000 promissory note held by us with interest
payable at a rate of 7% per annum and principal payable on the earliest of the
following to occur: (i) the fifth anniversary of the note; (ii) the date on
which (a) Mr. Jones terminates his employment
39
<PAGE>
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 we terminate 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 our President and Chief Operating Officer, and the Company is also party
to Executive Employment Agreements with Luis A. Cancio, Stephen P. Shanesy, and
Merrell M. Tomlin pursuant to which these executives agreed to be employed by
us. See Item 11, "Executive Compensation--Employment Agreements."
We hold five-year promissory notes dated March 17, 1997, from
Messrs. Tomlin and Shanesy, in principal amounts of $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. Tomlin and
Shanesy upon joining the Company. We also hold a five-year promissory note with
Mr. Hussey, dated April 1, 2000, in principal amount of $200,000 with interest
payable at 8% per annum.
Pursuant to the 1997 Plan, on August 1, 1997, certain executive officers of
the Company, including Messrs. Tomlin and Shanesy, exercised options to purchase
shares of Common Stock under the 1997 Plan with five-year promissory notes held
by us, in principal amounts of $50,000 and $20,000, respectively, with interest
payable at 8% per annum. On September 15, 1997, Mr. Shanesy exercised options
under the 1997 Plan with another five-year promissory note held by us, in the
principal amount of $30,002, with interest payable at 8% per annum.
On July 20, 2000, the Board of Directors authorized additional loans to
Messrs. Jones, Hussey, Shanesy, Tomlin, and Cancio up to the amount of
$1,950,000, $800,000, $200,000, $500,000, and $200,000, respectively. Interest
on these notes is to be adjusted annually to the IRS minimum rate for 3-5 year
maturities. These loans are secured by a security interest in shares of Rayovac
common stock (including vested options) owned by the borrower. On August 25,
2000, Messrs. Jones and Hussey executed five-year promissory notes in principal
amount of $1,500,000 and $200,000 respectively, under the loan program.
In connection with the 1996 recapitalization, the Lee Group, certain of our
other shareholders 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 1996 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 us for our own account or pursuant to a request for
registration by the Lee Group.
40
<PAGE>
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: On August 24, 1999, we filed a Current Report on
Form 8-K in connection with our acquisition of ROV Limited. The Form 8-K was
subsequently amended on October 26, 1999.
41
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Comprehensive Income............. F-5
Consolidated Statements of Shareholders' Equity............. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
Independent Auditors' Report................................ II-1
Schedule II Valuation and Qualifying Accounts............... II-2
</TABLE>
F-1
<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, 1999 and 2000, and the related
consolidated statements of operations, comprehensive income, shareholders'
equity, and cash flows for each of the years in the three-year period ended
September 30, 2000. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rayovac
Corporation and subsidiaries as of September 30, 1999 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended September 30, 2000 in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
Milwaukee, Wisconsin
November 3, 2000
F-2
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 2000
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 11,065 $ 9,757
Receivables:
Trade accounts receivable, net of allowance for doubtful
receivables of $1,253 and $1,020, respectively........ 138,155 147,767
Other................................................... 3,166 5,900
Inventories............................................... 81,618 100,676
Deferred income taxes..................................... 9,271 6,074
Prepaid expenses and other................................ 13,578 20,996
--------- ---------
Total current assets.................................. 256,853 291,170
--------- ---------
Property, plant and equipment, net.......................... 110,778 111,897
Deferred charges and other.................................. 24,146 33,781
Intangible assets........................................... 128,850 122,114
Debt issuance costs......................................... 12,274 10,054
--------- ---------
Total assets.......................................... $ 532,901 $ 569,016
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 22,895 $ 44,815
Accounts payable.......................................... 85,524 97,857
Accrued liabilities:
Wages and benefits...................................... 11,481 12,012
Accrued interest........................................ 5,109 5,790
Recapitalization and other special charges.............. 6,482 978
Other................................................... 20,966 25,028
--------- ---------
Total current liabilities............................. 152,457 186,480
Long-term debt, net of current maturities................... 307,426 272,815
Employee benefit obligations, net of current portion........ 12,860 15,365
Deferred income taxes....................................... 8,619 8,242
Other....................................................... 5,079 5,418
--------- ---------
Total liabilities..................................... 486,441 488,320
--------- ---------
Shareholders' equity:
Common stock, $.01 par value, authorized 150,000 shares;
issued 56,970 and 57,101 shares, respectively;
outstanding 27,490 and 27,570 shares, respectively...... 570 571
Additional paid-in capital................................ 103,577 104,197
Retained earnings......................................... 70,100 108,450
Accumulated other comprehensive income.................... 2,199 650
Notes receivable from officers/shareholders............... (890) (3,190)
--------- ---------
175,556 210,678
Less treasury stock, at cost, 29,480 and 29,531 shares,
respectively.............................................. (129,096) (129,982)
--------- ---------
Total shareholders' equity............................ 46,460 80,696
--------- ---------
Total liabilities and shareholders' equity............ $ 532,901 $ 569,016
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................... $495,733 $564,302 $703,933
Cost of goods sold.......................................... 258,293 293,858 358,226
Other special charges....................................... -- 1,300 --
-------- -------- --------
Gross profit................................................ 237,440 269,144 345,707
-------- -------- --------
Operating expenses:
Selling................................................... 148,875 160,223 195,067
General and administrative................................ 32,413 37,366 50,546
Research and development.................................. 9,424 9,785 10,763
Other special charges..................................... 6,183 8,132 --
-------- -------- --------
196,895 215,506 256,376
-------- -------- --------
Income from operations...................................... 40,545 53,638 89,331
Interest expense............................................ 15,670 16,354 30,626
Other (income) expense, net................................. (155) (314) 753
-------- -------- --------
Income before income taxes and extraordinary item........... 25,030 37,598 57,952
Income tax expense.......................................... 8,660 13,462 19,602
-------- -------- --------
Income before extraordinary item............................ 16,370 24,136 38,350
Extraordinary item, loss on early extinguishment of debt,
net of income tax benefit of $1,263....................... (1,975) -- --
-------- -------- --------
Net income.................................................. $ 14,395 $ 24,136 $ 38,350
======== ======== ========
Basic net income per common share:
Income before extraordinary item.......................... $ 0.62 $ 0.88 $ 1.39
Extraordinary item........................................ (0.08) -- --
-------- -------- --------
Net income.................................................. $ 0.54 $ 0.88 $ 1.39
======== ======== ========
Weighted average shares of common stock outstanding......... 26,477 27,486 27,504
======== ======== ========
Diluted net income per common share:
Income before extraordinary item.......................... $ 0.58 $ 0.83 $ 1.32
Extraordinary item........................................ (0.07) -- --
-------- -------- --------
Net income.................................................. $ 0.51 $ 0.83 $ 1.32
======== ======== ========
Weighted average shares of common stock and equivalents
outstanding............................................... 28,091 29,233 29,069
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $14,395 $24,136 $38,350
Other comprehensive income:
Foreign currency translation adjustment................... 230 166 (1,964)
Minimum pension liability adjustment...................... (678) 342 638
------- ------- -------
Other comprehensive (loss) income before tax................ (448) 508 (1,326)
Income tax benefit (expense) related to minimum pension
liability................................................. 237 (120) (223)
------- ------- -------
Comprehensive income, net of tax............................ $14,184 $24,524 $36,801
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMPREHENSIVE INCOME
------------------------------------
FOREIGN MINIMUM
COMMON STOCK ADDITIONAL CURRENCY PENSION
------------------- PAID-IN RETAINED TRANSLATION LIABILITY
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT ADJUSTMENT TOTAL
-------- -------- ---------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1997.... 20,581 $500 $ 15,974 $31,569 $ 2,270 $(248) $ 2,022
Net income........................ -- -- -- 14,395 -- -- --
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............... -- -- -- -- -- (441) (441)
Translation adjustment............ -- -- -- -- 230 -- 230
Unrealized (gain)/loss on stock
held in trust................... -- -- -- -- -- -- --
------ ---- -------- -------- ------- ----- -------
Balances at September 30, 1998.... 27,471 569 103,304 45,964 2,500 (689) 1,811
Net income........................ -- -- -- 24,136 -- -- --
Sale of common stock by trust..... -- -- -- -- -- -- --
Treasury stock acquired........... (20) -- -- -- -- -- --
Exercise of stock options......... 39 1 273 -- -- -- --
Adjustment of additional minimum
pension liability............... -- -- -- -- -- 222 222
Translation adjustment............ -- -- -- -- 166 -- 166
Unrealized (gain)/loss on stock
held in trust................... -- -- -- -- -- -- --
------ ---- -------- -------- ------- ----- -------
Balances at September 30, 1999.... 27,490 570 103,577 70,100 2,666 (467) 2,199
Net income........................ -- -- -- 38,350 -- -- --
Treasury stock acquired........... (51) -- -- -- -- -- --
Exercise of stock options......... 131 1 620 -- -- -- --
Notes receivable from
officers/shareholders........... -- -- -- -- -- -- --
Adjustment of additional minimum
pension liability............... -- -- -- -- -- 415 415
Translation adjustment............ -- -- -- -- (1,964) -- (1,964)
------ ---- -------- -------- ------- ----- -------
Balances at September 30, 2000.... 27,570 $571 $104,197 $108,450 $ 702 $ (52) $ 650
====== ==== ======== ======== ======= ===== =======
<CAPTION>
NOTES
RECEIVABLE FROM STOCK TOTAL
OFFICERS/ HELD IN TREASURY SHAREHOLDERS'
SHAREHOLDERS TRUST STOCK EQUITY
--------------- -------- --------- -------------
<S> <C> <C> <C> <C>
Balances at September 30, 1997.... $(1,658) $(962) $(128,040) $(80,595)
Net income........................ -- -- -- 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)
Translation adjustment............ -- -- -- 230
Unrealized (gain)/loss on stock
held in trust................... -- (267) -- (267)
------- ----- --------- --------
Balances at September 30, 1998.... (890) (412) (128,472) 21,874
Net income........................ -- -- -- 24,136
Sale of common stock by trust..... -- 394 -- 394
Treasury stock acquired........... -- -- (624) (624)
Exercise of stock options......... -- -- -- 274
Adjustment of additional minimum
pension liability............... -- -- -- 222
Translation adjustment............ -- -- -- 166
Unrealized (gain)/loss on stock
held in trust................... -- 18 -- 18
------- ----- --------- --------
Balances at September 30, 1999.... (890) -- (129,096) 46,460
Net income........................ -- -- -- 38,350
Treasury stock acquired........... -- -- (886) (886)
Exercise of stock options......... -- -- -- 621
Notes receivable from
officers/shareholders........... (2,300) -- -- (2,300)
Adjustment of additional minimum
pension liability............... -- -- -- 415
Translation adjustment............ -- -- -- (1,964)
------- ----- --------- --------
Balances at September 30, 2000.... $(3,190) $ -- $(129,982) $ 80,696
======= ===== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 14,395 $ 24,136 $ 38,350
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Extraordinary item, loss on early extinguishment of
debt.................................................. 3,238 -- --
Amortization............................................ 2,977 3,079 6,309
Depreciation............................................ 10,873 11,890 16,024
Deferred income taxes................................... 2,361 1,038 2,905
(Gain) loss on disposal of fixed assets................. (2,439) 162 (1,297)
Settlement of deferred compensation agreement........... (1,243) -- --
Changes in assets and liabilities, net of businesses
acquired:
Accounts receivable................................... (19,362) (29,267) (15,697)
Inventories........................................... (2,987) (4,667) (20,344)
Prepaid expenses and other assets..................... (7,989) (9,075) (5,416)
Accounts payable and accrued liabilities.............. (3,494) 12,242 22,126
Accrued recapitalization and other special charges.... 2,177 999 (5,147)
--------- --------- ---------
Net cash (used) provided by operating activities............ (1,493) 10,537 37,813
--------- --------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment................ (15,931) (24,113) (18,996)
Proceeds from sale of property, plant and equipment....... 3,678 26 1,051
Payment for acquisitions, net of cash acquired............ (11,124) (145,076) --
--------- --------- ---------
Net cash used by investing activities....................... (23,377) (169,163) (17,945)
--------- --------- ---------
Cash flows from financing activities:
Reduction of debt......................................... (140,024) (102,974) (215,394)
Proceeds from debt financing.............................. 81,928 275,125 203,189
Cash overdraft............................................ (378) 2,745 (4,971)
Debt issuance costs....................................... (150) (5,904) --
Premiums paid on extinguishment of debt................... (3,238) -- --
Proceeds from direct financing lease...................... 200 200 --
Proceeds from (advances for) notes receivable from
officers/shareholders................................... 768 -- (2,300)
Issuance of stock......................................... 87,160 -- --
Acquisition of treasury stock............................. (343) (390) (886)
Exercise of stock options................................. 149 40 621
Payments on capital lease obligation...................... (720) (794) (1,233)
--------- --------- ---------
Net cash provided (used) by financing activities.......... 25,352 168,048 (20,974)
--------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... (21) 49 (202)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 461 9,471 (1,308)
Cash and cash equivalents, beginning of year................ 1,133 1,594 11,065
--------- --------- ---------
Cash and cash equivalents, end of year...................... $ 1,594 $ 11,065 $ 9,757
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 16,767 $ 12,837 $ 27,691
Cash paid for income taxes................................ 5,735 11,114 14,318
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) DESCRIPTION OF BUSINESS
Rayovac Corporation and its wholly owned subsidiaries (Company) manufacture
and market batteries. Products include general (alkaline, rechargeables, heavy
duty, lantern and general purpose), button cell and lithium batteries. The
Company also produces a variety of battery powered lighting devices such as
flashlights and lanterns. The Company's products are sold primarily to retailers
in the United States, Canada, Latin America, Europe, and the Far East.
(2) SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR END
The consolidated financial statements include the financial statements of
Rayovac Corporation and its wholly owned subsidiaries and are prepared in
accordance with accounting principles generally accepted in the United States of
America. All intercompany transactions have been eliminated. The Company's
fiscal year ends September 30. References herein to 1998, 1999 and 2000 refer to
the fiscal years ended September 30, 1998, 1999 and 2000.
(b) REVENUE RECOGNITION
The Company recognizes revenue from product sales upon shipment to the
customer which is the point at which all risks and rewards of ownership of the
product is passed. The Company is not obligated to allow for returns.
(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.
At the beginning of 2000, the Company made certain changes in accounting
estimates including a change in the estimated useful life of permanent fixtures
provided to retail outlets which will now be amortized over an estimated useful
life of one to two years rather than expensed when shipped. In addition, the
Company now expenses maintenance materials when used rather than when purchased.
These changes in estimates increased 2000 net income by approximately $2,500.
(d) CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with original maturities of three
months or less to be cash equivalents.
(e) CONCENTRATIONS OF CREDIT RISK, MAJOR CUSTOMERS AND EMPLOYEES
The Company has one customer that represented over 10% of its net sales. The
Company derived 19%, 20% and 21% of its net sales from this customer during
1998, 1999 and 2000, respectively.
F-8
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
A significant number of the Company's factory employees are represented by
labor unions. The Company believes its relationship with its employees is good
and there have been no work stoppages involving Company employees since 1981 in
North America and since 1991 in the United Kingdom.
The Company has entered into collective bargaining agreements with
expiration dates as follows:
<TABLE>
<CAPTION>
LOCATION EXPIRATION DATE
-------- ---------------
<S> <C>
Washington, UK Production.................................. November 2000
Guatemala City, Guatemala.................................. March 2001
Mexico City, Mexico........................................ February 2002
Portage, WI................................................ July 2002
Hayward, CA................................................ May 2003
Madison, WI................................................ August 2003
Fennimore, WI.............................................. March 2005
</TABLE>
Approximately 46% of the total labor force is covered by collective
bargaining agreements. Bargaining agreements that expire in 2001 represent
approximately 4% of the total labor force. Negotiations are ongoing to extend
the agreement covering 21 employees at our Washington, UK production facility.
The existing agreement provides for automatic weekly renewals and the Company
anticipates an agreement will be finalized in the second quarter of fiscal 2001.
(f) DISPLAYS AND FIXTURES
The costs of temporary displays are capitalized and recorded as a prepaid
asset and charged to expense when shipped to a customer location. Permanent
fixtures are capitalized and amortized over an estimated useful life of one to
two years. Such prepaid assets amount to approximately $1,839 and $3,304 as of
September 30, 1999 and 2000, respectively.
(g) INVENTORIES
Inventories are stated at lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method for approximately 81% and 78% of the
inventories at September 30, 1999 and 2000, respectively. Costs for other
inventories have been determined primarily using the average cost 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.............................. 2-15 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
F-9
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
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 fair
value of net assets acquired (goodwill) is amortized over 15 to 40 years. The
trade name is being amortized over 40 years. Other intangibles are amortized
over 3 to 17 years. The Company assesses the recoverability of its intangible
assets by determining whether the amortization of the remaining balance over its
remaining life can be recovered through projected undiscounted future cash
flows. If projected future cash flows indicate that the unamortized carrying
value of intangible assets will not be recovered, an adjustment would be made to
reduce the carrying value 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.
(k) ACCOUNTS PAYABLE
Included in accounts payable at September 30, 1999 and 2000, is
approximately $7,843 and $2,456, respectively, of book overdrafts on
disbursement accounts which were replenished when checks were presented 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 carry forwards. 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 recorded as a
component of accumulated other comprehensive income. Exchange losses on foreign
currency transactions
F-10
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
aggregating $334, $708 and $1,334 for 1998, 1999 and 2000, respectively, are
included in other (income) expense, net, in the Consolidated Statements of
Operations.
(n) ADVERTISING COSTS
The Company incurred expenses for advertising of $33,441, $33,292 and
$34,011 in 1998, 1999 and 2000, 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) NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Basic net income per common share does not consider
common stock equivalents. Diluted net income per common share 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 net income per common share uses the "if converted" and
"treasury stock" methods to reflect dilution. The difference between the numbers
of shares used in the two calculations is due to assumed conversion of employee
stock options where the exercise price is less than the market price of the
underlying stock.
Net income per common share is calculated based upon the following shares:
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Basic............................................... 26,477 27,486 27,504
Effect of assumed conversion of stock options....... 1,614 1,747 1,565
------ ------ ------
Diluted............................................. 28,091 29,233 29,069
====== ====== ======
</TABLE>
(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 does not hold or issue derivative financial instruments
for trading purposes.
The Company uses interest rate swaps to manage its interest rate risk. The
net amounts to be paid or received under interest rate swap agreements
designated as hedges are accrued as interest rates change, and are recognized
over the life of the swap agreements, as an adjustment to interest expense from
the underlying debt to which the swap is designated. The related amounts payable
to, or receivable from, the counter-parties are included in accrued liabilities
or accounts receivable. The Company has entered into a series of interest rate
swap agreements which effectively fix the interest rate on floating rate debt at
a rate of 6.404% for a notional principal amount of $75,000 through
October 2002. The unrealized portion of the fair value of these contracts at
September 30, 2000 was $210.
F-11
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
The Company enters into forward foreign exchange contracts to mitigate the
risk from anticipated settlement in local currencies of inter-company purchases
and sales. These contracts generally require the Company to exchange foreign
currencies for U.S. dollars. The contracts are marked to market, and the related
adjustment is recognized in other expense (income). The related amounts payable
to, or receivable from, the counter-parties are included in accounts payable or
accounts receivable. The Company has $3,760 of such forward exchange contracts
at September 30, 2000. The unrealized portion of the fair value of the contracts
at September 30, 2000 was immaterial.
The Company 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 $1,466 of such forward
exchange contracts at September 30, 2000. The unrealized portion of the fair
value of the contracts at September 30, 2000, was $81.
The Company enters into forward foreign exchange contracts to hedge the risk
from anticipated settlement in local currencies of trade purchases. These
contracts generally require the Company to exchange foreign currencies for U.S.
Dollars. The Company has approximately $10,900 of such forward exchange
contracts denominated in Mexican Pesos at September 30, 2000. The unrealized
portion of the fair value of the contracts at September 30, 2000, was ($613).
The Company is exposed to risk from fluctuating prices for zinc 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, 2000, the Company
had entered into a series of swaps for zinc with a contract value of $7,843 for
the period October 2000 through September 2001. While these transactions have no
carrying value, the unrealized portion of the fair value of these contracts at
September 30, 2000, was immaterial.
(r) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments approximate the fair value of
those instruments except for the $65,000 of Senior Subordinated Notes due
November 2006 with interest payable semi-annually at 10 1/4%. The fair value of
these notes at September 30, 2000 was $66,944 (See also note 2(q)).
(s) 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.
F-12
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(t) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(u) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by SFAS 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133, and SFAS 138, ACCOUNTING FOR CERTAIN
DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, is effective for the
Company as of October 1, 2000. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities measured at fair value. The
accounting for changes in the fair value of a derivative depends on the use of
the derivative. Adoption of these new accounting standards will result in a
cumulative after-tax reduction in other comprehensive income of approximately
$155 in the first quarter of fiscal 2001. The adoption will also result in $299
of hedge assets and $627 of hedge liabilities recorded on the balance sheet.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB 101). An amendment in
June 2000 delayed the effective date for the Company until the fourth quarter of
2001, which is when the Company will adopt the bulletin. The impact of adopting
SAB 101 is still being evaluated and the Company does not currently believe its
adoption will have a material impact on the consolidated financial statements.
In May 2000, the Financial Accounting Standards Board's Emerging Issues Task
Force (EITF) reached a consensus on Issue No. 00-14, "Accounting for Certain
Sales Incentives". This Issue addresses the recognition, measurement, and income
statement classification for various types of sales incentives including
discounts, coupons, rebates and free products. The Company will adopt this
consensus in the fourth quarter of 2001. The impact of this consensus on the
Company's consolidated financial statements is still being evaluated and the
Company does not currently believe its adoption will have a material impact on
the consolidated financial statements.
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Raw material............................................. $29,014 $ 31,355
Work-in-process.......................................... 15,888 11,650
Finished goods........................................... 36,716 57,671
------- --------
$81,618 $100,676
======= ========
</TABLE>
F-13
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Land, building and improvements......................... $ 34,726 $ 37,638
Machinery, equipment and other.......................... 157,307 168,068
Construction in process................................. 26,328 23,159
-------- --------
218,361 228,865
Less accumulated depreciation........................... 107,583 116,968
-------- --------
$110,778 $111,897
======== ========
</TABLE>
Machinery, equipment and other includes capitalized leases, net of
amortization, totaling $1,913 and $1,283 at September 30, 1999 and 2000,
respectively.
(5) INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Excess cost over fair value of assets acquired
(goodwill)............................................ $ 36,874 $ 33,878
Trade name.............................................. 90,000 90,000
Non-competition agreement............................... 1,730 730
Underfunded pension..................................... 2,263 2,660
Proprietary technology.................................. 525 525
-------- --------
131,392 127,793
Less: Accumulated amortization.......................... 2,542 5,679
-------- --------
$128,850 $122,114
======== ========
</TABLE>
F-14
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Revolving credit facility............................... $181,300 $175,700
Term loan facility...................................... 75,000 62,830
Series B Senior Subordinated Notes, due November 1,
2006, with interest at 10 1/4% payable
semi-annually......................................... 65,000 65,000
Capitalized lease obligations........................... 1,098 1,019
Notes and obligations, weighted average interest rate of
8.49% at September 30, 2000........................... 7,923 13,081
-------- --------
330,321 317,630
Less current maturities................................. 22,895 44,815
-------- --------
Long-term debt.......................................... $307,426 $272,815
======== ========
</TABLE>
On September 12, 1996, the Company executed a Credit Agreement ("Old
Agreement") with 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 ("First Restated Agreement"). The First Restated Agreement
provided for senior bank facilities, including revolving and acquisition credit
facilities in an aggregate amount of $160,000. The revolving credit facility
provided for aggregate working capital loans up to $90,000 reduced by
outstanding letters of credit ($10,000 limit) and other existing credit
facilities and outstanding obligations. The acquisition facility provided for
aggregate qualifying acquisition loans up to $70,000.
On August 9, 1999, the Company entered into an Amended and Restated Credit
Agreement ("Second Restated Agreement"). The Second Restated Agreement provides
for senior bank facilities, including term and revolving credit facilities in an
aggregate amount of $325,000. Interest on borrowings is computed, at the
Company's option, based on the base rate, as defined ("Base Rate"), or the
Interbank Offering Rate ("IBOR"). The Company recorded $3,700 of fees paid as a
result of the amendments as a debt issuance cost which is being amortized over
the remaining life of the Second Restated Agreement.
The term facility initially totaled $75,000. The facility provides for
quarterly amortization totaling $10,000 in 2000, $15,000 in 2001, 2002 and 2003,
and $20,000 in 2004. The term facility also provides for annual prepayments,
over and above the normal amortization. Such payments would be a portion of
"Excess Cash Flow" (EBITDA less certain operating expenditures including
scheduled principal payments of long-term debt). The revolving credit facility
provides for aggregate working capital loans up to $250,000 reduced by
outstanding letters of credit (initially limited to $20,000) and other existing
credit facilities and outstanding obligations.
F-15
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) DEBT (CONTINUED)
On July 28, 2000, the Company Amended the Second Restated Agreement ("First
Amendment"). This First Amendment provides for letters of credit of up to
$40,000, loans to employees in the ordinary course of business of up to $10,000
and capital expenditures of up to $40,000 in fiscal years 2001, 2002 and 2003.
The Company recorded $25 of fees paid as a result of the amendment as a debt
issuance cost which is being amortized over the remaining life of the Second
Restated Agreement.
Interest on these borrowings is at the Base Rate plus a margin (0.00% to
0.75%) per annum (10.00% at September 30, 2000) or IBOR plus a margin (0.75% to
1.75%) per annum (8.27% at September 30, 2000). The Company had outstanding
letters of credit of approximately $15,970 at September 30, 2000. A fee (0.75%
to 1.75%) per annum (1.50% at September 30, 2000) is payable on the outstanding
letters of credit. The Company also incurs a fee of 0.25% per annum of the
average daily maximum amount available to be drawn on each letter of credit
issued. If an equity offering is not completed by September 30, 2002, the
revolving credit facility is reduced by $25,000 on September 30, 2002 and on
2003.
The Second Restated Agreement contains financial covenants with respect to
borrowings which include maintaining minimum interest coverage and maximum
leverage ratios. The limits imposed by such ratios vary depending on whether or
not the Company executes equity offerings during the term of the agreement. In
addition, the Second Restated Agreement restricts the Company's ability to incur
additional indebtedness, create liens, make investments or specified payments,
give guarantees, pay dividends, make capital expenditures, and merge or acquire
or sell assets. The Company is in compliance with the restrictive covenants of
the Second Restated Agreement. The Company is required to pay a commitment fee
(0.25% to 0.50%) per annum (0.375% at September 30, 2000) 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 Second Restated Agreement are collateralized by
substantially all of the assets of the Company.
The 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.
In connection with the acquisition of the consumer battery business of ROV
Limited ("Acquisition"), the Company obtained the consent of the holders of the
Notes to certain amendments to the Indenture governing these Notes. On
February 26, 1999 the Company entered into a Supplemental Indenture ("First
Supplemental Indenture") to allow the Company to finance the Acquisition
entirely with senior secured debt. The amendments were to become effective upon
the Company giving notice of its decision to consummate the Acquisition on or
before April 30, 1999. Such notice was not given and the First Supplemental
Indenture did not become effective.
On August 6, 1999 the Company entered into a Second Supplemental Indenture
("Second Supplemental Indenture") to allow the Company to finance the
Acquisition entirely with senior secured debt. As a result of The Second
Supplemental Indenture, in addition to ROV Holding, Inc., the Company's directly
and wholly owned subsidiaries Rovcal and Vidor Battery Company also became joint
and several guarantors. The Second Supplemental Indenture became effective upon
notice by the Company of its
F-16
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) DEBT (CONTINUED)
intent to proceed with the amendments. Such notice was given on August 9, 1999.
The Company recorded $2,200 of fees paid as a result of the amendments as a debt
issuance cost which is being amortized over the remaining life of the Notes.
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. The Company is in compliance
with the terms of the Notes. Payment obligations under the Notes are fully and
unconditionally guaranteed on a joint and several basis by the Company's
directly and wholly owned subsidiaries, ROV Holding, Inc., Rovcal, and Vidor
Battery Company, each a guarantor. Vidor Battery Company was dissolved and the
assets transferred to the Company on September 2, 1999. The foreign subsidiaries
of the Company currently do not guarantee the payment obligations under the
Notes (Nonguarantor Subsidiaries), and are wholly owned directly or indirectly
by ROV Holding, Inc. (See note 18).
The aggregate scheduled maturities of debt are as follows:
<TABLE>
<S> <C>
2001........................................................ 44,815
2002........................................................ 15,159
2003........................................................ 15,127
2004........................................................ 177,529
2005........................................................ --
Thereafter.................................................. 65,000
--------
$317,630
========
</TABLE>
In 2000, the Company entered into capital leases with an aggregate
obligation of $1,163. Aggregate capitalized lease obligations are payable in
installments of $713 in 2001, $159 in 2002, $127 in 2003 and $20 in 2004. $85
payable in each of 2001 and 2002 is due in Mexican Pesos. $126 payable in 2001
is due in Chilean Pesos.
The carrying values of the debt instruments noted above are approximately
99% of their estimated fair values.
F-17
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) SHAREHOLDERS' EQUITY
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, valued at $412,
were sold during 1999.
On November 21, 1997, the Company completed an initial public offering 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 30, 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 first 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, 2000, there were
options with respect to 1,988 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 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, 2000, there were options with
respect to 1,288 shares of common stock outstanding under the Incentive Plan.
F-18
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) STOCK OPTION PLANS (CONTINUED)
A summary of the status of the Company's plans is as follows:
<TABLE>
<CAPTION>
1998 1999 2000
------------------------- ------------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
-------- -------------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period...... 2,318 $ 4.33 2,561 $ 7.17 2,832 $ 9.14
Granted............................... 442 20.52 452 18.72 729 21.62
Exercised............................. (107) 3.81 (39) 4.39 (132) 4.71
Forfeited............................. (92) 4.39 (142) 5.18 (153) 8.39
----- ------ ----- ------ ----- ------
Outstanding, end of period............ 2,561 $ 7.17 2,832 $ 9.16 3,276 $12.15
===== ====== ===== ====== ===== ======
Options exercisable, end of period.... 828 $ 4.47 876 $ 6.05 1,325 $ 7.67
===== ====== ===== ====== ===== ======
</TABLE>
The following table summarizes information about options outstanding and
outstanding and exercisable as of September 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
OPTIONS OUTSTANDING AND EXERCISABLE
--------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
--------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$4.39 1,707 6 years $ 4.39 1,044 $ 4.39
$15.875 - $23.375 1,472 8.4 20.26 273 19.61
$23.6875 - $29.50 97 8.9 25.80 8 27.15
</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.
Accordingly, no compensation cost has been recognized for the stock option
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 per common
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Net income reported.............................. $14,395 $24,136 $38,350
Pro forma net income............................. $13,645 $22,697 $35,887
Pro forma basic net income per common share...... $ 0.52 $ 0.83 $ 1.30
Pro forma diluted net income per common share.... $ 0.49 $ 0.78 $ 1.23
</TABLE>
F-19
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
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 and diluted net income per common share disclosures is the estimated fair
value at grant date using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Assumptions used:
Volatility...................................... 26.2% 28.0% 28.6%
Risk-free interest rate......................... 5.01% 6.22% 6.17%
Expected life................................... 8 years 8 years 8 years
Dividend yield.................................. -- -- --
Weighted-average grant-date fair value of options
granted during period........................... $ 8.99 $ 9.15 $ 10.49
</TABLE>
The Black-Scholes option-pricing 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.
F-20
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) INCOME TAXES
Pretax income (income before income taxes and extraordinary item) and income
tax expense consist of the following:
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Pretax income:
United States.................................. $19,352 $26,929 $30,383
Outside the United States...................... 2,440 10,669 27,569
------- ------- -------
Total pretax income.............................. $21,792 $37,598 $57,952
======= ======= =======
Income tax expense (benefit):
Current:
Federal...................................... $ 3,533 $ 7,908 $ 7,850
Foreign...................................... 1,667 3,988 8,142
State........................................ (164) 528 705
------- ------- -------
Total current.................................. 5,036 12,424 16,697
------- ------- -------
Deferred:
Federal...................................... 2,243 784 2,032
Foreign...................................... (606) 55 731
State........................................ 724 199 142
------- ------- -------
Total deferred................................... 2,361 1,038 2,905
------- ------- -------
$ 7,397 $13,462 $19,602
======= ======= =======
</TABLE>
In June 1998, a tax benefit of $1,263 was recorded in conjunction with the
loss on early extinguishment of debt.
The following reconciles the Federal statutory income tax rate with the
Company's effective tax rate:
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Statutory Federal income tax rate....................... 35.0% 35.0% 35.0%
FSC benefit............................................. (1.6) (0.7) (0.6)
Effect of foreign items and rate differentials.......... 0.8 1.6 (0.9)
State income taxes, net................................. 4.1 1.2 1.0
Reduction of prior year tax provision................... (2.8) (2.0) (1.3)
Other................................................... (1.6) 0.7 0.6
---- ---- ----
33.9% 35.8% 33.8%
==== ==== ====
</TABLE>
F-21
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) INCOME TAXES (CONTINUED)
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,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Current deferred tax assets:
Other special charges................................. $ 2,205 $ 565
Inventories and receivables........................... 2,091 2,815
Marketing and promotional accruals.................... 1,009 3,492
Employee benefits..................................... 1,839 733
Environmental accruals................................ 874 600
Other................................................. 1,253 1,572
-------- --------
Total current deferred tax assets....................... 9,271 9,777
-------- --------
Current deferred tax liabilities:
Inventories........................................... -- (4,395)
Other................................................. -- (670)
-------- --------
Total current deferred tax liabilities.................. -- (5,065)
-------- --------
Net current deferred tax assets......................... $ 9,271 $ 4,712
======== ========
Noncurrent deferred tax assets:
Employee benefits..................................... 2,296 2,725
Package design expense................................ 1,279 1,226
Foreign tax credits................................... -- 1,096
Other................................................. 1,319 1,118
-------- --------
Total noncurrent deferred tax assets.................... 4,894 6,165
-------- --------
Noncurrent deferred tax liabilities:
Property, plant, and equipment........................ (12,923) (11,548)
Other................................................. (119) (1,111)
-------- --------
Total noncurrent deferred tax liabilities............... (13,042) (12,659)
-------- --------
Net noncurrent deferred tax liabilities................. $ (8,148) $ (6,494)
======== ========
</TABLE>
At September 30, 2000, net noncurrent deferred tax assets of $1,748 are
included in Deferred charges and other and net current deferred tax liabilities
of $1,362 are included in Other accrued liabilities on the Consolidated Balance
Sheets. At September 30, 1999, net noncurrent deferred tax assets of $471 are
included in Deferred charges and other on the Consolidated Balance Sheets.
During 2000, the Company utilized state net operating loss carry-forwards of
approximately $936. At September 30, 2000, the Company had no remaining state
net operating loss carry-forwards.
The Company believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the
deferred tax assets.
F-22
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) INCOME TAXES (CONTINUED)
Provision has not been made for United States income taxes on a portion of
the undistributed earnings of the Company's foreign subsidiaries (approximately
$9,084 and $25,115 at September 30, 1999 and 2000, 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.
(10) LEASES
Future minimum rental commitments under non-cancelable operating leases,
principally pertaining to land, buildings and equipment, are as follows:
<TABLE>
<S> <C>
2001....................................................... $ 6,099
2002....................................................... 5,409
2003....................................................... 4,552
2004....................................................... 3,556
2005....................................................... 3,453
Thereafter................................................. 20,871
-------
$43,940
=======
</TABLE>
The leases on the properties require annual lease payments of $3,229 subject
to annual inflationary increases. All of the leases expire during the years 2001
through 2014.
Total rental expenses were $7,397, $6,902, and $6,924 for 1998, 1999, and
2000 respectively.
(11) EMPLOYEE BENEFIT PLANS
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 practice 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.
OTHER BENEFITS
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
F-23
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(11) EMPLOYEE BENEFIT PLANS (CONTINUED)
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.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------- -------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year............... $ 50,198 $16,838 $ 2,218 $ 2,878
Service cost.......................................... 495 506 236 335
Interest cost......................................... 1,431 1,239 156 209
Amendments............................................ 34 860 -- (94)
Actuarial (gain) loss................................. (573) (1,039) 454 (230)
Benefits paid......................................... (34,747) (673) (186) (173)
-------- ------- ------- -------
Benefit obligation at end of year..................... $ 16,838 $17,731 $ 2,878 $ 2,925
======== ======= ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year........ $ 42,742 $ 9,955 $ -- $ --
Actual return on plan assets.......................... 735 604 -- --
Employer contribution................................. 1,357 1,493 186 173
Benefits paid......................................... (34,747) (673) (186) (173)
Plan expenses paid.................................... (132) (121) -- --
-------- ------- ------- -------
Fair value of plan assets at end of year.............. $ 9,955 $11,258 $ -- $ --
======== ======= ======= =======
Funded status........................................... $ (6,883) $(6,473) $(2,878) $(2,925)
Unrecognized net transition obligation................ 301 257 511 375
Unrecognized prior service cost....................... 2,235 2,861 -- --
Unrecognized net actuarial (gain) loss................ 191 (410) 895 609
Adjustment for minimum liability...................... (2,730) (2,712) -- --
-------- ------- ------- -------
Accrued benefit cost.................................. $ (6,886) $(6,477) $(1,472) $(1,941)
======== ======= ======= =======
Weighted-average assumptions:
Discount rate......................................... 7.5% 8.0% 7.25% 7.5%
Expected return on plan assets........................ 9.0% 8.5% 0.0% 0.0%
</TABLE>
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------------ ------------------------------
1998 1999 2000 1998 1999 2000
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost.................................. $ 569 $ 495 $ 506 $245 $236 $335
Interest cost................................. 3,783 1,431 1,239 173 156 209
Actual return on assets....................... (2,766) (735) (604) -- -- --
Amortization of prior service cost............ 201 233 234 -- -- --
Recognized net actuarial (gain) loss.......... (905) (347) (272) 114 63 96
------- ------ ------ ---- ---- ----
Net periodic benefit cost..................... $ 882 $1,077 $1,103 $532 $455 $640
======= ====== ====== ==== ==== ====
</TABLE>
F-24
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(11) EMPLOYEE BENEFIT PLANS (CONTINUED)
Pension plan assets and obligations are measured at June 30 each year. The
contributions to the pension plans between July 1 and September 30 were $898 and
$2,338 in 1999 and 2000, respectively.
During 1997, the Company merged two of its defined benefit plans and ceased
future benefit accruals. In 1999, the merged plans were liquidated and $34,120
in benefits were paid out.
The Company has recorded an additional minimum pension liability of $2,730
and $2,712 at September 30, 1999 and 2000, respectively, to recognize the under
funded position of certain of its benefit plans. An intangible asset of $2,263
and $2,660 at September 30, 1999 and 2000, 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 $467 at September 30, 1999 and $52 at September 30, 2000, has been
recorded as a component of accumulated other comprehensive income.
The Company sponsors a defined contribution pension plan for its domestic
salaried employees, which allows participants to make contributions by salary
reduction pursuant to Section 401(k) of the Internal Revenue Code. The Company
contributes annually 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 years ended September 30, 1999 and 2000, were
$2,013 and $2,171, respectively.
For measurement purposes, annual rates of increase of 8.0% in the per capita
costs of covered health care benefits were assumed for 1998, 1999 and 2000,
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, 2000, by $191 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the year ended
September 30, 2000, by $58. A discount rate of 7.25% and 7.5% was used to
determine the accumulated postretirement benefit obligations as of
September 30, 1999 and 2000, respectively.
(12) SEGMENT INFORMATION
The Company manages operations in three reportable segments based upon
geographic area. North America includes the United States and Canada; Latin
America includes Mexico, Central America, and South America; Europe/Rest of
World ("Europe/ROW") includes the United Kingdom, Europe and all other countries
in which the Company does business.
The Company manufactures and markets dry cell batteries including alkaline,
zinc carbon, alkaline rechargeable, hearing aid, and other specialty batteries
and lighting products throughout the world. These product lines are sold in all
geographic areas except Latin America where revenues have historically been
derived primarily from zinc carbon and some alkaline batteries.
Net sales and cost of sales to other segments have been eliminated. The
gross contribution of inter segment sales is included in the segment selling the
product to the external customer. Segment revenues are based upon the geographic
area in which the product is sold.
The reportable segment profits do not include interest expense, interest
income, and income tax expense. Also, not included in the reportable segments,
are corporate expenses including corporate
F-25
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(12) SEGMENT INFORMATION (CONTINUED)
purchasing expense, general and administrative expense and research and
development expense. All depreciation and amortization included in income from
operations is related to reportable segments. Costs are identified to reportable
segments or corporate, according to the function of each cost center.
The reportable segment assets do not include cash, deferred tax benefits,
investments, long term intercompany receivables, most deferred charges, and
miscellaneous assets. All capital expenditures are related to reportable
segments. Variable allocations of assets are not made for segment reporting.
Wal-Mart Store, Inc., the Company's largest mass merchandiser customer,
represented 19%, 20% and 21% of its net sales during 1998, 1999, and 2000,
respectively, primarily in North America.
REVENUES FROM EXTERNAL CUSTOMERS
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
North America................................. $422,350 $478,336 $535,839
Latin America................................. -- 19,273 112,179
Europe/ROW.................................... 73,383 66,693 55,915
-------- -------- --------
Total segments................................ $495,733 $564,302 $703,933
======== ======== ========
</TABLE>
INTER SEGMENT REVENUES
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
North America.................................... $17,091 $17,162 $23,563
Latin America.................................... -- -- 1,293
Europe/ROW....................................... 1,432 1,096 1,058
------- ------- -------
Total segments................................... $18,523 $18,258 $25,914
======= ======= =======
</TABLE>
DEPRECIATION AND AMORTIZATION
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
North America.................................... $ 9,920 $11,430 $13,266
Latin America.................................... -- 703 5,253
Europe/ROW....................................... 2,410 1,324 1,504
------- ------- -------
Total segments................................... $12,330 $13,457 $20,023
======= ======= =======
</TABLE>
F-26
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(12) SEGMENT INFORMATION (CONTINUED)
SEGMENT PROFIT
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
North America................................... $61,352 $77,785 $ 95,561
Latin America................................... -- 3,535 20,061
Europe/ROW...................................... 9,129 9,942 6,085
------- ------- --------
Total segments.................................. 70,481 91,262 121,707
Corporate expenses.............................. 23,753 28,192 32,376
Special charges................................. 6,183 9,432 --
Interest expense................................ 15,670 16,354 30,626
Other (income) expense net...................... (155) (314) 753
------- ------- --------
Income before income taxes and extraordinary
items......................................... $25,030 $37,598 $ 57,952
======= ======= ========
</TABLE>
SEGMENT ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
North America................................. $227,163 $280,394 $294,210
Latin America................................. -- 177,135 199,865
Europe/ROW.................................... 34,479 33,790 31,233
-------- -------- --------
Total segments................................ 261,642 491,319 525,308
Corporate..................................... 22,217 41,582 43,708
-------- -------- --------
Total assets at year end...................... $283,859 $532,901 $569,016
======== ======== ========
</TABLE>
EXPENDITURES FOR SEGMENT ASSETS
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
North America.................................... $14,529 $22,678 $14,668
Latin America.................................... -- 622 3,448
Europe/ROW....................................... 1,402 813 880
------- ------- -------
Total segments................................... $15,931 $24,113 $18,996
======= ======= =======
</TABLE>
F-27
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(12) SEGMENT INFORMATION (CONTINUED)
PRODUCT LINE REVENUES
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Alkaline...................................... $243,400 $282,700 $335,500
Heavy Duty.................................... 38,800 55,700 144,400
Rechargeables................................. 26,800 25,600 32,200
Hearing Aid batteries......................... 73,400 74,900 67,800
Specialty and Other batteries................. 44,900 48,400 43,400
Lighting products and Lantern Batteries....... 68,400 77,000 80,600
-------- -------- --------
Total revenues from external customers........ $495,700 $564,300 $703,900
======== ======== ========
</TABLE>
(13) COMMITMENTS AND CONTINGENCIES
In March 1998, the Company entered into an agreement to purchase certain
equipment and to pay annual royalties. In connection with this 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 2002, and $500 in each year thereafter, as long as the related equipment
patents are enforceable (2022). The Company incurred royalty expenses of $2,000
for 1998, 1999 and $2,250 for 2000. Additionally, the Company has committed to
purchase $83 of tooling at September 30, 2000.
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 $2,167, which may result from resolution of these matters,
will not have a material adverse effect on the financial condition, liquidity,
or cash flow of the Company.
The Company has certain other contingent liabilities with respect to
litigation, claims and contractual agreements arising in the ordinary course of
business. In the opinion of management, such contingent liabilities are not
likely to have a material adverse effect on the financial condition, liquidity
or cash flow of the Company.
(14) RELATED PARTY TRANSACTIONS
The Company and Thomas H. Lee Company (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. The Company paid THL Co. aggregate fees and expenses of $408,
$437 and $458 for 1998, 1999 and 2000, respectively.
F-28
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) RELATED PARTY TRANSACTIONS (CONTINUED)
The Company has notes receivable from officers in the amount of $890 and
$3,190 at September 30, 1999 and 2000, respectively, generally payable in FY2002
through FY2005, which bear interest at 6.6% to 8.0%. 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.
(15) OTHER SPECIAL CHARGES
During the period from July 1, 1996 through September 30, 1996, the Company
recorded special charges as follows: (i) $2,700 of charges related to the exit
of certain manufacturing operations, (ii) $1,700 of charges to increase net
deferred compensation plan obligations to reflect curtailment of such plans;
(iii) $1,500 of charges reflecting the present value of lease payments for land
which management has determined will not be used for any future productive
purpose; (iv) $6,900 in costs and asset write-downs principally related to
changes in product pricing strategies adopted by management subsequent to the
Recapitalization; and (v) $3,300 of employee termination benefits and other
charges. Payment for these costs was or is expected to be as follows: $7,700 was
paid prior to September 30, 1996; $5,600 was paid in 1997; $1,100 was paid in
1998; $700 was paid in 1999; $200 was paid in 2000 and $800 is expected to be
paid thereafter. Future payments are primarily environmental-related costs of a
former manufacturing site.
During 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 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 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 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 million 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 September 30, 1997....................... $ 1,200 $ 700 $ 1,900
Change in estimate............................. (200) (400) (600)
Expenditures................................... (1,000) (300) (1,300)
------- ----- -------
Balance September 30, 1998....................... $ -- $ -- $ --
======= ===== =======
</TABLE>
F-29
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(15) OTHER SPECIAL CHARGES (CONTINUED)
During 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 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 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:
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 September 30, 1998..................... $ 2,300 $ 2,600 $ 4,900
Change in estimate........................... (500) -- (500)
Expensed as incurred......................... 300 2,800 3,100
Cash expenditures............................ (2,000) (4,500) (6,500)
Non-cash charges............................. -- (900) (900)
------- ------- -------
Balance September 30, 1999..................... $ 100 $ -- $ 100
Cash expenditures............................ (100) -- (100)
------- ------- -------
Balance September 30, 2000..................... $ -- $ -- $ --
======= ======= =======
</TABLE>
During 1999, the Company recorded special charges as follows: (i) $2,528 of
employee termination benefits for 43 employees related to organizational
restructuring in the U.S. and Europe, (ii) $1,300 of charges related to the
discontinuation of the manufacturing of silver-oxide cells at the Company's
Portage, Wisconsin, facility, and (iii) $2,100 of charges related to the
termination of non-performing foreign distributors. The Company also recognized
special charges of $803 related to the investigation of financing
F-30
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(15) OTHER SPECIAL CHARGES (CONTINUED)
options and developing organizational strategies for the Latin American
acquisition. A summary of the 1999 restructuring activities follows:
1999 RESTRUCTURING SUMMARY
<TABLE>
<CAPTION>
TERMINATION OTHER
BENEFITS COSTS TOTAL
----------- -------- --------
<S> <C> <C> <C>
Expense accrued................................ $ 2,500 $ 3,400 $ 5,900
Cash expenditures.............................. (200) -- (200)
------- ------- -------
Balance September 30, 1999..................... $ 2,300 $ 3,400 $ 5,700
Change in estimate............................. -- 100 100
Cash expenditures.............................. (2,200) -- (2,200)
Non cash charges............................... -- (3,300) (3,300)
------- ------- -------
Balance September 30, 2000..................... $ 100 $ 200 $ 300
======= ======= =======
</TABLE>
(16) ACQUISITIONS AND DIVESTITURES
On August 9, 1999, the Company acquired the consumer battery business of ROV
Limited for approximately $145,100, net of cash. These operations market and
manufacture a line of general batteries under the Rayovac name in many Latin
American countries. They also market and distribute batteries to other countries
in South America, the Middle East, Africa and selected Asian countries. These
operations had calendar 1998 sales of $97,000. This acquisition provides Rayovac
with control of the Rayovac brand rights for battery products worldwide, except
for Brazil. The acquisition has been accounted for by the purchase method and,
accordingly, the results of operations of the acquired business for the period
from August 9, 1999 through September 30, 1999 have been included in Rayovac
Corporation's consolidated financial statements. The trade name, valued at
$90,000, was recorded as an intangible asset. The excess of the purchase price
over the fair value of the net identifiable assets acquired of $28,424 has been
recorded as goodwill. The trade name and goodwill are being amortized on a
straight-line basis over the estimated useful life of 40 years.
In September 2000, the Company entered into an asset purchase agreement and
a license agreement with a Hong Kong company to sell certain inventory and for
the exclusive right to use the Rayovac trade name for the manufacture, sale and
distribution of the Company's camcorder battery product line. In exchange for
the license, the Company received a $6,000 promissory note, payable over five
years, and will receive a royalty on future sales of camcorder batteries. The
Company will receive a minimum royalty of $100 over the balance of the license
arrangement and will receive a variable royalty on sales of camcorder batteries.
The company has no substantive future obligation relative to this agreement. As
a result of this transaction, the Company recognized a pre-tax gain on the sale
of the trade name licensing rights of $1,997, net of write-off of related
tangible and intangible assets.
F-31
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(17) QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
JANUARY 3, APRIL 4, JULY 4, SEPTEMBER 30,
1999 1999 1999 1999
---------- -------- -------- -------------
<S> <C> <C> <C> <C>
Net sales......................................... $160,542 $110,969 $120,440 $172,351
Gross profit...................................... 78,683 52,312 57,073 81,076
Net income........................................ 9,992 3,063 6,151 4,930
Basic net income per common share................. 0.36 0.11 0.22 0.19
Diluted net income per common share............... 0.34 0.10 0.21 0.18
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
JANUARY 2, APRIL 2, JULY 2, SEPTEMBER 30,
2000 2000 2000 2000
---------- -------- -------- -------------
<S> <C> <C> <C> <C>
Net sales......................................... $214,790 $142,596 $152,000 $194,547
Gross profit...................................... 103,961 69,864 74,698 97,184
Net income........................................ 13,919 3,651 8,078 12,702
Basic net income per common share................. 0.51 0.13 0.29 0.46
Diluted net income per common share............... 0.48 0.13 0.28 0.44
</TABLE>
(18) CONSOLIDATING FINANCIAL STATEMENTS
The following condensed consolidating financial data illustrates the
composition of the consolidated financial statements. Investments in
subsidiaries are accounted for using the equity method for purposes of the
consolidating presentation. Earnings of subsidiaries are therefore reflected in
the Company's and Guarantor Subsidiaries' investment accounts and earnings. The
principal elimination entries eliminate investments in subsidiaries and
intercompany balances and transactions. Separate financial statements of the
Guarantor Subsidiaries are not presented because management has determined that
such financial statements would not be material to investors. There are no
components of other comprehensive income related to the Guarantor Subsidiaries.
F-32
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(18) CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 2,691 $ 44 $ 7,022 $ -- $ 9,757
Receivables:
Trade accounts receivable, net of
allowance for doubtful receivables...... 91,053 36,131 46,662 (26,079) 147,767
Other..................................... 4,368 -- 1,532 -- 5,900
Inventories................................. 67,447 -- 33,354 (125) 100,676
Deferred income taxes....................... 4,544 342 1,188 -- 6,074
Prepaid expenses and other.................. 14,509 -- 6,487 -- 20,996
--------- -------- -------- --------- ---------
Total current assets...................... 184,612 36,517 96,245 (26,204) 291,170
Property, plant and equipment, net............ 79,348 48 32,501 -- 111,897
Deferred charges and other.................... 29,997 274 4,367 (857) 33,781
Intangible assets............................. 91,981 -- 30,321 (188) 122,114
Debt issuance costs........................... 10,054 -- -- -- 10,054
Investment in subsidiaries.................... 127,635 92,121 -- (219,756) --
--------- -------- -------- --------- ---------
Total assets.............................. $ 523,627 $128,960 $163,434 $(247,005) $ 569,016
========= ======== ======== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt........ $ 31,588 $ -- $ 13,362 $ (135) $ 44,815
Accounts payable............................ 88,560 -- 34,450 (25,153) 97,857
Accrued liabilities:
Wages and benefits........................ 9,556 -- 2,456 -- 12,012
Accrued Interest.......................... 5,703 -- 87 -- 5,790
Recapitalization and other special
charges................................. 978 -- -- -- 978
Other................................... 12,710 1,325 10,953 40 25,028
--------- -------- -------- --------- ---------
Total current liabilities............... 149,095 1,325 61,308 (25,248) 186,480
Long-term debt, net of current maturities..... 273,445 -- 171 (801) 272,815
Employee benefit obligations, net of current
portion..................................... 15,365 -- -- -- 15,365
Deferred income taxes......................... 2,558 -- 5,684 -- 8,242
Other......................................... 1,268 -- 4,150 -- 5,418
--------- -------- -------- --------- ---------
Total liabilities....................... 441,731 1,325 71,313 (26,049) 488,320
Shareholders' equity:
Common stock................................ 570 1 12,072 (12,072) 571
Additional paid-in capital.................. 104,079 62,788 54,898 (117,568) 104,197
Retained earnings........................... 109,769 64,144 24,449 (89,912) 108,450
Accumulated other comprehensive income...... 650 702 702 (1,404) 650
Notes receivable from
officers/shareholders..................... (3,190) -- -- -- (3,190)
--------- -------- -------- --------- ---------
211,878 127,635 92,121 (220,956) 210,678
Less treasury stock, at cost................ (129,982) -- -- -- (129,982)
--------- -------- -------- --------- ---------
Total shareholders' equity................ 81,896 127,635 92,121 (220,956) 80,696
--------- -------- -------- --------- ---------
Total liabilities and shareholders'
equity.................................. $ 523,627 $128,960 $163,434 $(247,005) $ 569,016
========= ======== ======== ========= =========
</TABLE>
F-33
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(18) CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales........................... $509,729 $ 43,479 $187,445 $(36,720) $703,933
Cost of goods sold.................. 248,581 42,175 103,962 (36,492) 358,226
-------- -------- -------- -------- --------
Gross profit.................... 261,148 1,304 83,483 (228) 345,707
Operating expenses:
Selling........................... 156,298 662 38,268 (161) 195,067
General and administrative........ 46,517 (11,791) 16,753 (933) 50,546
Research and development.......... 10,646 -- 117 -- 10,763
Other special charges............. (250) -- 250 -- --
-------- -------- -------- -------- --------
213,211 (11,129) 55,388 (1,094) 256,376
-------- -------- -------- -------- --------
Income from operations.......... 47,937 12,433 28,095 866 89,331
Interest expense.................... 30,109 -- 548 (31) 30,626
Equity in profit of subsidiary...... (29,685) (17,354) -- 47,039 --
Other (income) expense, net......... (844) (134) 1,556 175 753
-------- -------- -------- -------- --------
Income before income taxes.......... 48,357 29,921 25,991 (46,317) 57,952
Income tax expense.................. 10,729 236 8,637 -- 19,602
-------- -------- -------- -------- --------
Net income........................ $ 37,628 $ 29,685 $ 17,354 $(46,317) $ 38,350
======== ======== ======== ======== ========
</TABLE>
F-34
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(18) CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by
operating activities............. $ 41,211 $(3) $ 4,453 $(7,848) $ 37,813
Cash flows from investing
activities:
Purchases of property, plant and
equipment...................... (14,668) -- (4,328) -- (18,996)
Proceeds from sale of property,
plant, and equipment........... 1,051 -- -- -- 1,051
--------- --- -------- ------- ---------
Net cash used by investing
activities....................... (13,617) -- (4,328) -- (17,945)
Cash flows from financing
activities:
Reduction of debt................ (199,970) -- (15,424) -- (215,394)
Proceeds from debt financing..... 182,274 -- 12,966 7,949 203,189
Cash overdraft and other......... (8,578) -- (91) (100) (8,769)
--------- --- -------- ------- ---------
Net cash used by financing
activities....................... (26,274) -- (2,549) 7,849 (20,974)
Effect of exchange rate changes on
cash and cash equivalents........ -- -- (202) -- (202)
--------- --- -------- ------- ---------
Net increase (decrease) in cash and
cash equivalents................. 1,320 (3) (2,626) 1 (1,308)
Cash and cash equivalents,
beginning of year................ 1,371 47 9,648 (1) 11,065
--------- --- -------- ------- ---------
Cash and cash equivalents, end of
year............................. $ 2,691 $44 $ 7,022 $ -- $ 9,757
========= === ======== ======= =========
</TABLE>
F-35
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(18) CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 1,371 $ 47 $ 9,648 $ (1) $ 11,065
Receivables:
Trade accounts receivable, net of
allowance for doubtful receivables...... 97,746 17,978 35,158 (12,727) 138,155
Other..................................... 1,642 -- 1,524 -- 3,166
Inventories................................. 58,980 -- 23,419 (781) 81,618
Deferred income taxes....................... 6,338 342 2,591 -- 9,271
Prepaid expenses and other.................. 11,574 -- 2,004 -- 13,578
--------- -------- -------- --------- ---------
Total current assets.................... 177,651 18,367 74,344 (13,509) 256,853
Property, plant and equipment, net............ 77,224 69 33,485 -- 110,778
Deferred charges and other.................... 24,792 50,000 2,536 (53,182) 24,146
Intangible assets............................. 53,517 -- 76,462 (1,129) 128,850
Debt issuance costs........................... 12,274 -- -- -- 12,274
Investment in subsidiaries.................... 144,915 76,731 -- (221,646) --
--------- -------- -------- --------- ---------
Total assets............................ $ 490,373 $145,167 $186,827 $(289,466) $ 532,901
========= ======== ======== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt........ $ 14,936 $ -- $ 8,951 $ (992) $ 22,895
Accounts payable............................ 74,595 -- 22,902 (11,973) 85,524
Accrued liabilities:
Wages and benefits........................ 8,709 -- 2,772 -- 11,481
Accrued interest.......................... 4,975 -- 134 -- 5,109
Recapitalization and other special
charges................................. 6,426 -- 56 -- 6,482
Other..................................... 14,293 (188) 13,359 (6,498) 20,966
--------- -------- -------- --------- ---------
Total current liabilities............... 123,934 (188) 48,174 (19,463) 152,457
Long-term debt, net of current maturities..... 308,135 -- 52,182 (52,891) 307,426
Employee benefit obligations, net of current
portion..................................... 12,860 -- -- -- 12,860
Deferred income taxes......................... 2,179 440 6,000 -- 8,619
Other......................................... 1,339 -- 3,740 -- 5,079
--------- -------- -------- --------- ---------
Total liabilities....................... 448,447 252 110,096 (72,354) 486,441
Shareholders' equity:
Common stock................................ 570 1 12,072 (12,073) 570
Additional paid-in capital.................. 103,459 107,788 54,897 (162,567) 103,577
Retained earnings........................... 65,684 34,459 7,095 (37,138) 70,100
Accumulated other comprehensive income...... 2,199 2,667 2,667 (5,334) 2,199
Notes receivable from
officers/shareholders..................... (890) -- -- -- (890)
--------- -------- -------- --------- ---------
171,022 144,915 76,731 (217,112) 175,556
Less treasury stock, at cost................ (129,096) -- -- -- (129,096)
Total shareholders' equity.............. 41,926 144,915 76,731 (217,112) 46,460
--------- -------- -------- --------- ---------
Total liabilities and shareholders'
equity................................ $ 490,373 $145,167 $186,827 $(289,466) $ 532,901
========= ======== ======== ========= =========
</TABLE>
F-36
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(18) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales........................... $460,511 $ 37,848 $94,456 $(28,513) $564,302
Cost of goods sold.................. 231,818 36,712 53,531 (28,203) 293,858
Other special charges............... 1,300 -- -- -- 1,300
-------- -------- ------- -------- --------
Gross profit.................. 227,393 1,136 40,925 (310) 269,144
Operating expenses:
Selling........................... 139,464 646 20,113 -- 160,223
General and administrative........ 39,747 (10,879) 8,570 (72) 37,366
Research and development.......... 9,765 -- 20 -- 9,785
Other special charges............. 7,344 -- 788 -- 8,132
-------- -------- ------- -------- --------
196,320 (10,233) 29,491 (72) 215,506
-------- -------- ------- -------- --------
Income from operations........ 31,073 11,369 11,434 (238) 53,638
Interest expense.................... 15,727 -- 996 (369) 16,354
Equity in profit of subsidiary...... (16,797) (5,693) -- 22,490 --
Other (income) expense, net......... (1,126) (347) 790 369 (314)
-------- -------- ------- -------- --------
Income before income taxes.......... 33,269 17,409 9,648 (22,728) 37,598
Income tax expense.................. 8,895 612 3,955 -- 13,462
-------- -------- ------- -------- --------
Net income........................ $ 24,374 $ 16,797 $ 5,693 $(22,728) $ 24,136
======== ======== ======= ======== ========
</TABLE>
F-37
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(18) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities........................ $ 4,230 $ 2 $ 7,542 $ (1,237) $ 10,537
Cash flows from investing
activities:
Purchases of property, plant and
equipment....................... (22,671) -- (1,442) -- (24,113)
Proceeds from sale of property,
plant, and equipment............ 26 -- -- -- 26
Payment for acquisitions, net of
cash acquired................... (149,145) -- (100,076) 104,145 (145,076)
--------- --- --------- --------- ---------
Net cash used by investing
activities........................ (171,790) -- (101,518) 104,145 (169,163)
--------- --- --------- --------- ---------
Cash flows from financing
activities:
Reduction of debt................. (96,310) -- (7,900) 1,236 (102,974)
Proceeds from debt financing...... 267,673 -- 111,597 (104,145) 275,125
Other............................. (3,786) -- (317) -- (4,103)
--------- --- --------- --------- ---------
Net cash provided by financing
activities........................ 167,577 -- 103,380 (102,909) 168,048
--------- --- --------- --------- ---------
Effect of exchange rate changes on
cash and cash equivalents......... -- -- 49 -- 49
--------- --- --------- --------- ---------
Net increase in cash and cash
equivalents....................... 17 2 9,453 (1) 9,471
Cash and cash equivalents, beginning
of year........................... 1,354 45 195 -- 1,594
--------- --- --------- --------- ---------
Cash and cash equivalents, end of
year.............................. $ 1,371 $47 $ 9,648 $ (1) $ 11,065
========= === ========= ========= =========
</TABLE>
F-38
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(18) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS TOTAL
-------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............................ $438,767 $ -- $84,786 $(27,820) $495,733
Cost of goods sold................... 234,065 -- 51,912 (27,684) 258,293
-------- ------ ------- -------- --------
Gross profit................... 204,702 -- 32,874 (136) 237,440
Operating expenses:
Selling............................ 131,396 -- 17,479 -- 148,875
General and administrative......... 25,366 (978) 8,097 (72) 32,413
Research and development........... 9,424 -- -- -- 9,424
Other special charges.............. 1,166 -- 5,017 -- 6,183
-------- ------ ------- -------- --------
167,352 (978) 30,593 (72) 196,895
-------- ------ ------- -------- --------
Income from operations......... 37,350 978 2,281 (64) 40,545
Interest expense..................... 15,204 -- 466 -- 15,670
Equity in profit 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 taxes......................... 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>
F-39
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(18) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS TOTAL
--------- ---------- ------------ ------------ ------------
<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 year............................ 633 46 454 -- 1,133
--------- --- ------- ------- ---------
Cash and cash equivalents, end of
year............................... $ 1,355 $44 $ 195 $ -- $ 1,594
========= === ======= ======= =========
</TABLE>
F-40
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Rayovac Corporation:
On November 3, 2000, we reported on the consolidated balance sheets of
Rayovac Corporation and subsidiaries as of September 30, 1999 and 2000, and the
related consolidated statements of operations, comprehensive income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 2000, which are included in the 2000 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 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 LLP
KPMG LLP
Milwaukee, Wisconsin
November 3, 2000
II-1
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ---------- ---------- ----------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTIONS OF PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
September 30, 2000:
Allowance for doubtful accounts................... $1,253 $583 $816 $1,020
====== ==== ==== ======
September 30, 1999:
Allowance for doubtful accounts................... $1,356 $750 $853 $1,253
====== ==== ==== ======
September 30, 1998:
Allowance for doubtful accounts................... $1,221 $745 $610 $1,356
====== ==== ==== ======
</TABLE>
See accompanying Independent Auditors' Report
II-2
<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.
DATE: December 19, 2000
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/s/ DAVID A. JONES
--------------------------------- Chairman of the Board and Chief Executive Officer
David A. Jones (PRINCIPAL EXECUTIVE OFFICER)
/s/ KENT J. HUSSEY
--------------------------------- President and Chief Operating Officer and Director
Kent J. Hussey
/s/ RANDALL J. STEWARD
--------------------------------- Executive VP Administration and Chief Financial Officer
Randall J. Steward (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
/s/ JOHN S. LUPO
--------------------------------- Director
John S. Lupo
/s/ PHILIP F. PELLEGRINO
--------------------------------- Director
Philip F. Pellegrino
/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.
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
2.1++++ Share Purchase Agreement made as of June 11, 1999, by and
among the Company, Vidor Battery Company, Rayovac Latin
America, Ltd., the shareholders of ROV Limited, ROV Limited,
ESB ROV Ltd., Duranmas, S.A., certain second-tier
subsidiaries of ROV Limited, Ray-O-Vac Overseas Corporation,
and Alfredo J. Diez and Richard T. Doyle, Jr., as selling
group representatives.
2.2++++ Form of Stock Purchase Agreement entered into on or around
June 11, 1999, by and among the Company, Rayovac Latin
America, Ltd. and certain persons who hold minority
interests in certain of the operating subsidiaries of
Ray-O-Vac Overseas Corporation.
3.1+ Amended and Restated Articles of Incorporation of the
Company.
3.2****** Amended and Restated By-laws of the Company, as amended
through May 17, 1999.
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 10 1/4% Senior
Subordinated Notes due 2006.
4.2****** First Supplemental Indenture, dated as of February 26, 1999,
by and among the Company, ROV Holding, Inc. and HSBC Bank
USA (formerly known as Marine Midland Bank) as trustee,
relating to the Company's 10 1/4% Senior Subordinated Notes
due 2006.
4.3++++ Second Supplemental Indenture, dated as of August 6, 1999,
by and among the Company, ROV Holding, Inc. and HSBC Bank
USA (formerly known as Marine Midland Bank) as trustee,
relating to the Company's 10 1/4% Senior Subordinated Notes
due 2006.
4.4** Specimen of the Notes (included as an exhibit to Exhibit
4.1)
4.5**** Amended and Restated Credit Agreement, dated as of December
30, 1997, by and among the Company, the lenders party
thereto and Bank of America National Trust and Savings
Association ("BofA"), as Administrative Agent.
4.6++++ Second Amended and Restated Credit Agreement, dated as of
August 9, 1999, by and among the Company, the lenders party
thereto and Bank of America, NA as Administrative Agent.
4.7 The First Amendment dated as of July 28, 2000 to the Second
Amendment and Restated Credit Agreement, dated as of August
9, 1999, by and among the Company, the lenders party thereto
and Bank of America, NA as Administrative Agent.
4.8** The Security Agreement, dated as of September 12, 1996, by
and among the Company, ROV Holding, Inc. and BofA.
4.9** The Company Pledge Agreement, dated as of September 12,
1996, by and between the Company and BofA.
4.10*** Shareholders Agreement, dated as of September 12, 1996, by
and among the Company and the shareholders of the Company
referred to therein.
4.11*** Amendment No. 1 to Rayovac Shareholders Agreement dated
August 1, 1997, by and among the Company and the
shareholders of the Company referred to therein.
4.12***** Amendment No. 2 to Rayovac Shareholders Agreement, dated as
of January 8, 1999, by and among the Company and the
Shareholders of the Company referred to therein.
4.13* 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
October 1, 2000, by and between the Company and David A.
Jones.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
10.4 Amended and Restated Employment Agreement, dated as of
October 1, 2000, by and between the Company and Kent J.
Hussey
10.5 Employment Agreement, dated as of October 1, 2000, by and
between the Company and Randall J. Steward.
10.6 Employment Agreement, dated as of October 1, 2000, by and
between the Company and Kenneth V. Biller.
10.7 Employment Agreement, dated as of October 1, 2000, by and
between the Company and Stephen P. Shanesy.
10.8 Employment Agreement, dated as of October 1, 2000, by and
between the Company and Merrell M. Tomlin.
10.9 Employment Agreement, dated as of October 1, 2000, by and
between the Company and Luis A. Cancio.
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***** Amendment, dated December 31, 1998, between the Company and
SPG Partners, to the Building Lease, between the Company and
SPG Partners, dated May 14, 1985.
10.13*** Rayovac Corporation 1996 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.
21 Subsidiaries of the Company.
23 Consent of KPMG 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 Quarterly Report on Form 10-Q
for the quarterly period ended January 3, 1999, filed with the
Commission on February 17, 1999.
****** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended April 4, 1999, filed with the Commission
on May 17, 1999.
+ 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 Quarterly Report on Form 10-Q
for the quarterly period ended March 28, 1998, filed with the Commission
on May 5, 1998.
++++ Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Commission on August 24, 1999, as subsequently amended on
October 26, 1999.
