<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 2, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 001-13615
---------
Rayovac Corporation
--------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 22-2423556
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
601 Rayovac Drive, Madison, Wisconsin 53711
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(608) 275-3340
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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 ( )
The number of shares outstanding of the Registrant's common stock, $.01
par value, as of August 11, 2000, was 27,523,362.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
July 2, 2000 and September 30, 1999
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
-ASSETS-
Current assets:
Cash and cash equivalents $ 8,929 $ 11,065
Receivables 109,583 141,321
Inventories 110,749 82,418
Prepaid expenses and other 22,871 22,849
--------- ---------
Total current assets 252,132 257,653
Property, plant and equipment, net 110,377 110,778
Deferred charges and other, net 35,550 36,420
Intangible assets, net 126,436 128,850
--------- ---------
Total assets $ 524,495 $ 533,701
========= =========
-LIABILITIES AND SHAREHOLDERS' EQUITY -
Current liabilities:
Current maturities of long-term debt $ 30,094 $ 22,895
Accounts payable 77,534 85,524
Accrued liabilities:
Wages and benefits and other 32,117 37,556
Recapitalization and other special charges 1,116 7,282
--------- ---------
Total current liabilities 140,861 153,257
Long-term debt, net of current maturities 284,514 307,426
Employee benefit obligations, net of current portion 14,987 12,860
Other 13,588 13,698
--------- ---------
Total liabilities 453,950 487,241
Shareholders' equity:
Common stock, $.01 par value, authorized 150,000 shares;
issued 57,002 and 56,970 shares respectively;
outstanding 27,523 and 27,490 shares, respectively 570 570
Additional paid-in capital 103,758 103,577
Retained earnings 95,748 70,100
Accumulated other comprehensive income: 655 2,199
Notes receivable from officers/shareholders (1,090) (890)
--------- ---------
199,641 175,556
Less treasury stock, at cost, 29,479 and 29,480
shares, respectively (129,096) (129,096)
--------- ---------
Total shareholders' equity 70,545 46,460
--------- ---------
Total liabilities and shareholders' equity $ 524,495 $ 533,701
========= =========
</TABLE>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS.
2
<PAGE>
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine month periods ended July 2, 2000 and July 4, 1999
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------------------- ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 152,000 $ 120,440 $ 509,386 $ 391,951
Cost of goods sold 77,302 63,367 260,863 203,883
--------- --------- --------- ---------
Gross profit 74,698 57,073 248,523 188,068
Selling 39,241 33,105 139,785 113,148
General and administrative 13,109 8,423 38,395 25,144
Research and development 2,580 2,383 7,872 7,235
Other special charges - 834 - 2,220
--------- --------- --------- ---------
Total operating expenses 54,930 44,745 186,052 147,747
Income from operations 19,768 12,328 62,471 40,321
Interest expense 7,727 3,638 22,979 10,778
Other expense (income), net (387) (834) 33 (452)
--------- --------- --------- ---------
Income before income taxes 12,428 9,524 39,459 29,995
Income tax expense 4,350 3,373 13,811 10,789
--------- --------- --------- ---------
Net income $ 8,078 $ 6,151 $ 25,648 $ 19,206
========= ========= ========= =========
BASIC EARNINGS PER SHARE
Weighted average shares of common stock outstanding 27,511 27,488 27,497 27,485
Net Income $ 0.29 $ 0.22 $ 0.93 $ 0.70
DILUTED EARNINGS PER SHARE
Weighted average shares outstanding
and equivalents outstanding 29,044 29,305 29,069 29,262
Net Income $ 0.28 $ 0.21 $ 0.88 $ 0.66
</TABLE>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
<PAGE>
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine month periods ended July 2, 2000 and July 4, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 25,648 $ 19,206
Non-cash adjustments to net income:
Amortization 4,795 1,938
Depreciation 11,954 8,506
Other non-cash adjustments 4,690 (220)
Net changes in assets and liabilities (9,866) (18,828)
--------- ---------
Net cash provided by operating activities 37,221 10,602
Cash flows from investing activities:
Purchases of property, plant and equipment (12,452) (16,370)
Proceeds from sale of property, plant and equipment 407 26
--------- ---------
Net cash used by investing activities (12,045) (16,344)
Cash flows from financing activities:
Reduction of debt (150,663) (5,515)
Proceeds from debt financing 130,395 11,234
Cash overdraft and other (6,886) (200)
--------- ---------
Net cash provided (used) by financing activities (27,154) 5,519
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents (158) 13
--------- ---------
Net decrease in cash and cash equivalents (2,136) (210)
Cash and cash equivalents, beginning of period 11,065 1,594
--------- ---------
Cash and cash equivalents, end of period $ 8,929 $ 1,384
========= =========
</TABLE>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
<PAGE>
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1 SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: These financial statements have been prepared by
Rayovac Corporation (the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission (the
"SEC") and, in the opinion of the Company, include all adjustments (all
of which are normal and recurring in nature) necessary to present
fairly the financial position of the Company at July 2, 2000, results
of operations for the three and nine month periods ended July 2, 2000,
and July 4, 1999, and cash flows for the nine month periods ended July
2, 2000, and July 4, 1999. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. These condensed
consolidated financial statements should be read in conjunction with
the audited financial statements and notes thereto as of September 30,
1999. Certain prior year amounts have been reclassified to conform with
the current year presentation.
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 for
the period October 1999 through October 2002. The unrealized portion of
the fair value of these contracts at July 2, 2000 was $1,014.
The Company has entered into a set of foreign exchange put and call
option contracts for the period December 1999 through September 2000 to
hedge the risk from settlement of US Dollar-denominated debt with
Mexican Pesos. Buying a Peso put allows the Company to exchange a
specified quantity of Pesos for U.S. Dollars with the seller of the put
at a fixed exchange rate through a specified date. Selling a Peso put
allows the buyer of the put to exchange a specified quantity of Pesos
for U.S. Dollars with the Company at a fixed exchange rate through a
specified date. Selling a Peso call allows the buyer of the call to
exchange a specified quantity of Pesos for U.S. Dollars with the
Company at a fixed exchange rate through a specified date. The set of
contracts effectively fixes the exchange rate for Pesos to Dollars to a
range with a ceiling determined by the strike rate of the call sold,
and a floor determined by the strike rate of the put purchased but
further limited to the strike rate of the put sold. If the actual
market rate of exchange declines past the strike rate of the put sold,
the benefit of the put purchased is gradually offset to zero at which
point the Company is effectively exposed to fluctuation in the
Peso/U.S. Dollar rate as though no hedge contract existed. The cost of
the first put and premiums received from sale of the second put and the
call, are amortized over the life of the contracts and are recorded as
an adjustment to foreign exchange gains or losses to income. 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 $5,000 of such option
contracts at July 2, 2000. The unrealized portion of the fair value of
these contracts at July 2, 2000 was immaterial.
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
5
<PAGE>
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 $5,394 of such forward
exchange contracts at July 2, 2000. The unrealized portion of the fair
value of the contracts at July 2, 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 $2,940 of such forward exchange contracts at July 2,
2000. The unrealized portion of the fair value of the contracts at July
2, 2000, was $42.
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
$10,100 of such forward exchange contracts denominated in Mexican Pesos
at July 2, 2000. The unrealized portion of the fair value of the
contracts at July 2, 2000, was ($89).
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 July 2, 2000, the Company had entered into a series of
swaps for zinc with a contract value of $7,303 for the period June 2000
through March 2001. While these transactions have no carrying value,
the unrealized portion of the fair value of these contracts at July 2,
2000, was $168.
In June 1998, Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities" was
issued. The Company will adopt SFAS No. 133, as amended by SFAS No. 137
and SFAS No. 138, on October 1, 2000. Although the Company continues to
review the effect of the implementation of SFAS No. 133, the Company
does not currently believe its adoption will have a material impact on
its financial position or overall trends in results of operations and
does not believe adoption will result in significant changes to its
financial risk management practices. However, the impact of adoption of
SFAS No. 133 on the Company's results of operations is dependent upon
the fair values of the Company's derivatives and related financial
instruments at the date of adoption and could result in more pronounced
quarterly fluctuations in other income and expense.
2 INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JULY 2, 2000 SEPTEMBER 30, 1999
------------ ------------------
<S> <C> <C>
Raw material..................................... $ 32,252 $29,287
Work-in-process.................................. 18,377 16,077
Finished goods................................... 60,120 37,054
-------- -------
$110,749 $82,418
======== =======
</TABLE>
6
<PAGE>
3 OTHER COMPREHENSIVE INCOME
Comprehensive income and the components of other comprehensive income
(loss) for the three and nine months ended July 2, 2000 and
July 4, 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------ -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income......................................... $8,078 $6,151 $25,648 19,206
Other comprehensive (loss) income:
foreign currency translation..................... (657) 40 (1,544) (607)
------ ------ ------- -------
Comprehensive income............................... $7,421 $6,191 $24,104 $18,599
====== ====== ======= =======
</TABLE>
4 NET INCOME PER COMMON SHARE
Net income per common share for the three months and nine months ended
July 2, 2000 and July 4, 1999 is calculated based upon the following shares:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------ -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic............................................... 27,511 27,488 27,497 27,485
Effect of assumed conversion of options............. 1,533 1,817 1,572 1,777
------ ------ ------ ------
Diluted............................................. 29,044 29,305 29,069 29,262
====== ====== ====== ======
</TABLE>
5 COMMITMENTS AND CONTINGENCIES
In March 1998, the Company entered into an agreement to purchase
certain equipment and to pay annual royalties. In connection with the
1998 agreement, which supersedes previous agreements dated December
1991, and March 1994, the Company committed to pay royalties of $2,000
in 1998 and 1999, $3,000 in 2000 through 2002, and $500 in each year
thereafter, as long as the related equipment patents are enforceable,
up to Year 2022. The Company incurred royalty expenses of $2,000 for
1997, 1998 and 1999. Additionally, the Company has committed to
purchase $102 of tooling at July 2, 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 at various
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 $2,112, 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.
7
<PAGE>
6 OTHER
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 options and developing
organizational strategies for the Latin American acquisition.
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
------- -------- -------
Cash expenditures....................... (1,200) -- (1,200)
Non-cash charges........................ -- (2,800) (2,800)
------- -------- -------
Balance January 2, 2000................... $ 1,100 $ 600 $ 1,700
------- -------- -------
Cash expenditures....................... (500) (100) (600)
Non-cash expenditures................... -- (500) (500)
------- -------- -------
Balance April 2, 2000..................... $ 600 $ -- $ 600
------- -------- -------
Cash expenditures....................... (500) -- (500)
------- -------- -------
Balance July 2, 2000...................... $ 100 $ -- $ 100
======== ======== ========
</TABLE>
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 by 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:
8
<PAGE>
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 July 2, 2000....................... $ -- $ -- $ --
======= ======= ========
</TABLE>
7 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.
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
purchasing expense, general and administrative expense and research and
development expense. Research and development depreciation and
amortization costs are reflected as corporate expense. All other
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.
Variable allocations of revenues and costs are not made for segment
reporting.
The reportable segment assets do not include cash, deferred tax
benefits, investments, long term inter company 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.
9
<PAGE>
<TABLE>
<CAPTION>
REVENUES FROM EXTERNAL THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
CUSTOMERS ------------------------- ------------------------
JULY 2, 2000 JULY 4, 1999 JULY 2, 2000 JULY 4, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
North America......................... $112,866 $104,651 $383,301 $340,649
Latin America......................... 27,073 1,092 83,096 3,323
Europe/ROW............................ 12,061 14,697 42,989 47,979
-------- -------- -------- --------
Total segments........................ $152,000 $120,440 $509,386 $391,951
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
INTER SEGMENT REVENUES THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
------------------------- ------------------------
JULY 2, 2000 JULY 4, 1999 JULY 2, 2000 JULY 4, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
North America......................... $ 4,665 $ 3,377 $ 17,309 $ 13,811
Latin America......................... 208 -- 208 --
Europe/ROW............................ 327 121 642 663
-------- -------- -------- --------
Total segments........................ $ 5,200 $ 3,498 $ 18,159 $ 14,474
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SEGMENT PROFIT THREE MONTH PERIODS ENDED NINE MONTH PERIOD ENDED
------------------------- -----------------------
JULY 2, 2000 JULY 4, 1999 JULY 2, 2000 JULY 4, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
North America......................... $ 22,361 $ 16,598 $ 66,729 $ 54,259
Latin America......................... 4,952 381 15,115 970
Europe/ROW............................ 627 2,621 4,661 6,772
-------- -------- -------- --------
Total segments........................ 27,940 19,600 86,505 62,001
Corporate............................. 8,172 6,438 24,034 19,460
Special charges....................... -- 834 -- 2,220
Interest expense...................... 7,727 3,638 22,979 10,778
Other (income) expense, net........... (387) (834) 33 (452)
-------- -------- -------- --------
Income before income taxes............ $ 12,428 $ 9,524 $ 39,459 $ 29,995
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SEGMENT ASSETS JULY 2, 2000 JULY 4, 1999
------------ ------------
<S> <C> <C>
North America.......................................................... $265,999 $244,331
Latin America.......................................................... 192,606 --
Europe/ROW............................................................. 27,825 28,634
-------- --------
Total segments......................................................... $486,430 $272,965
Corporate.............................................................. 38,065 26,592
-------- --------
Total assets at period end............................................. $524,495 $299,557
======== ========
</TABLE>
8 GUARANTOR SUBSIDIARIES (ROV HOLDING, INC. AND ROVCAL, INC.)
The following condensed consolidating financial data illustrate the
composition of the consolidated financial statements. Investments in
subsidiaries are accounted for by the Company and the Guarantor
Subsidiaries using the equity method for purposes of the consolidating
presentation. Earnings of subsidiaries are therefore reflected in the
Company's and Guarantor Subsidiarys' investment accounts and earnings.
The
10
<PAGE>
principal elimination entries eliminate investments in subsidiaries and
inter-company 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.
11
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
As of July 2, 2000
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
-ASSETS-
Current assets:
Cash and cash equivalents $ 1,005 $ 47 $ 7,877 $ - $ 8,929
Receivables 57,707 32,538 38,403 (19,065) 109,583
Inventories 80,178 - 30,927 (356) 110,749
Prepaid expenses and other 17,920 (328) 5,279 - 22,871
--------- --------- --------- --------- ---------
Total current assets 156,810 32,257 82,486 (19,421) 252,132
Property, plant and equipment, net 76,990 54 33,333 - 110,377
Deferred charges and other, net 33,874 - 2,534 (858) 35,550
Intangible assets, net 95,162 - 31,462 (188) 126,436
Investment in subsidiaries 122,703 90,679 - (213,382) -
--------- --------- --------- --------- ---------
Total assets $ 485,539 $ 122,990 $ 149,815 $(233,849) $ 524,495
========= ========= ========= ========= =========
-LIABILITIES AND SHAREHOLDERS' EQUITY-
Current liabilities:
Current maturities of long-term debt $ 18,431 $ - $ 11,779 $ (116) $ 30,094
Accounts payable 70,011 - 25,984 (18,461) 77,534
Accrued liabilities:
Wages and benefits and other 20,278 (153) 11,955 37 32,117
Recapitalization and other special charges 1,116 - - - 1,116
--------- --------- --------- --------- ---------
Total current liabilities 109,836 (153) 49,718 (18,540) 140,861
Long-term debt, net of current maturities 285,125 - 189 (800) 284,514
Employee benefit obligations, net of current portion 14,987 - - - 14,987
Other 3,919 440 9,229 - 13,588
--------- --------- --------- --------- ---------
Total liabilities 413,867 287 59,136 (19,340) 453,950
Shareholders' equity:
Common stock 569 1 12,072 (12,072) 570
Additional paid-in capital 103,640 62,788 54,897 (117,567) 103,758
Retained earnings 96,994 58,793 22,589 (82,628) 95,748
Accumulated other comprehensive income 655 1,121 1,121 (2,242) 655
Notes receivable from officers/shareholders (1,090) - - - (1,090)
--------- --------- --------- --------- ---------
200,768 122,703 90,679 (214,509) 199,641
Less treasury stock, at cost (129,096) - - - (129,096)
--------- --------- --------- --------- ---------
Total shareholders' equity 71,672 122,703 90,679 (214,509) 70,545
--------- --------- --------- --------- ---------
Total liabilities and shareholders' equity $ 485,539 $ 122,990 $ 149,815 $(233,849) $ 524,495
========= ========= ========= ========= =========
</TABLE>
12
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the three month period ended July 2, 2000
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS TOTAL
------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 106,547 $ 9,158 $ 43,451 $ (7,156) $ 152,000
Cost of goods sold 51,532 8,883 23,944 (7,057) 77,302
--------- --------- --------- --------- ---------
Gross profit 55,015 275 19,507 (99) 74,698
Selling 30,083 163 9,094 (99) 39,241
General and administrative 12,399 (2,443) 2,966 187 13,109
Research and development 2,549 - 31 - 2,580
--------- --------- --------- --------- ---------
Total operating expenses 45,031 (2,280) 12,091 88 54,930
Income from operations 9,984 2,555 7,416 (187) 19,768
Interest expense 7,412 - 315 - 7,727
Equity in profit of subsidiary (8,075) (6,148) - 14,223 -
Other (income) expense, net (348) (138) (49) 148 (387)
--------- --------- --------- --------- ---------
Income before income taxes 10,995 8,841 7,150 (14,558) 12,428
Income tax expense 2,582 766 1,002 - 4,350
--------- --------- --------- --------- ---------
Net income $ 8,413 $ 8,075 $ 6,148 $ (14,558) $ 8,078
========= ========= ========= ========= =========
</TABLE>
13
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine month period ended July 2, 2000
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 364,869 $ 30,937 $ 139,447 $ (25,867) $ 509,386
Cost of goods sold 178,560 30,009 78,059 (25,765) 260,863
--------- --------- --------- --------- ---------
Gross profit 186,309 928 61,388 (102) 248,523
Selling 111,811 493 27,592 (111) 139,785
General and administrative 37,441 (8,409) 10,296 (933) 38,395
Research and development 7,789 - 83 - 7,872
--------- --------- --------- --------- ---------
Total operating expenses 157,041 (7,916) 37,971 (1,044) 186,052
Income from operations 29,268 8,844 23,417 942 62,471
Interest expense 22,452 - 558 (31) 22,979
Equity in profit of subsidiary (24,334) (15,494) - 39,828 -
Other (income) expense, net (871) (137) 863 178 33
--------- --------- --------- --------- ---------
(2,753) (15,631) 1,421 39,975 23,012
Income before income taxes 32,021 24,475 21,996 (39,033) 39,459
Income tax expense 7,168 141 6,502 - 13,811
--------- --------- --------- --------- ---------
Net income $ 24,853 $ 24,334 $ 15,494 $ (39,033) $ 25,648
========= ========= ========= ========= =========
</TABLE>
14
<PAGE>
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Nine month period ended July 2, 2000
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS TOTAL
------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by operating activities $ 34,489 $ - $ 5,698 ($ 2,966) $ 37,221
Cash flows from investing activities:
Purchases of property, plant and equipment (8,978) - (3,474) - (12,452)
Proceeds from sale of property, plant, and equip 407 - - - 407
--------- --------- --------- --------- ---------
Net cash used by investing activities (8,571) - (3,474) - (12,045)
Cash flows from financing activities:
Reduction of debt (135,770) - (14,893) - (150,663)
Proceeds from debt financing 116,353 - 11,075 2,967 130,395
Cash overdraft and other (6,867) - (19) - (6,886)
--------- --------- --------- --------- ---------
Net cash provided (used) by financing activities (26,284) - (3,837) 2,967 (27,154)
Effect of exchange rate changes on cash and cash
equivalents - - (158) - (158)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents (366) - (1,771) 1 (2,136)
Cash and cash equivalents, beginning of period 1,371 47 9,648 (1) 11,065
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period $ 1,005 $ 47 $ 7,877 $ - $ 8,929
========= ========= ========= ========= =========
</TABLE>
15
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FISCAL QUARTER AND NINE MONTHS ENDED JULY 2, 2000 COMPARED TO
FISCAL QUARTER AND NINE MONTHS ENDED JULY 4, 1999
NET SALES. Net sales for the three months ended July 2, 2000 (the
"Fiscal 2000 Quarter") increased $31.6 million, or 26.2%, to $152.0 million from
$120.4 million in the three months ended July 4, 1999 (the "Fiscal 1999
Quarter"). The increase was driven by increased sales of alkaline and
rechargeable alkaline batteries, plus an additional $27.1 million in sales in
Latin America, which was the result of acquiring the Latin America battery
business from ROV Limited in August, 1999, partially offset by lower sales of
hearing aid batteries.
Net sales for the nine months ended July 2, 2000 (the "Fiscal 2000 Nine
Months") increased $117.4 million, or 29.9%, to $509.4 million from $392.0
million in the nine months ended July 4, 1999 (the "Fiscal 1999 Nine Months").
The increase was driven by increased sales of alkaline batteries, rechargeable
alkaline batteries and lighting products plus an additional $83.1 million in
sales in Latin America.
NET INCOME. Net income for the Fiscal 2000 Quarter increased $1.9
million, or 30.6%, to $8.1 million from $6.2 million in the Fiscal 1999 Quarter.
The increase reflects the impact of the Latin America acquisition, sales growth
in North America, improved gross profit margins, partially offset by weakness in
Europe/Rest of World and increased operating and interest expense.
Net income for the Fiscal 2000 Nine Months increased $6.4 million, or
33.3%, to $25.6 million from $19.2 million in the Fiscal 1999 Nine Months. The
increase reflects the impact of the Latin America acquisition, improved gross
profit margins, partially offset by increased operating and interest expense.
SEGMENT RESULTS. 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. 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.
<TABLE>
<CAPTION>
FISCAL QUARTER NINE MONTHS
-------------- -----------
NORTH AMERICA 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue from external customers......................... $112.9 $104.6 $383.3 $340.7
Profitability........................................... 22.4 16.6 66.7 54.3
Profitability as a % of net sales....................... 19.8% 15.9% 17.4% 15.9%
Assets.................................................. 266.0 244.3 266.0 244.3
</TABLE>
Our sales to external customers increased $8.3 million, or 7.9%, to
$112.9 million in the Fiscal 2000 Quarter from $104.6 million the previous year
due primarily to increased sales of alkaline and rechargeable alkaline
batteries. Alkaline sales increases of $6.5 million, or 11.8%, were driven by
new customers and expanded distribution with existing customers. Rechargeable
alkaline batteries sales increases of $3.3 million, or 62.5%, were primarily
driven by the introduction of Nickel Metal Hydride (NIMH) rechargeable batteries
at a major mass merchandiser. Hearing aid batteries sales were slightly below
last year, experiencing a sales decrease of $0.2 million, or 2.3%, primarily
reflecting continued softness in the overall hearing aid device category.
In the Fiscal 2000 Nine Months, our sales to external customers
increased $42.6 million, or 12.5%, to $383.3 million from $340.7 million the
previous year due primarily to increased sales of alkaline batteries, lighting
products, heavy duty batteries and rechargeable alkaline batteries partially
offset by lower sales of hearing aid batteries.
16
<PAGE>
Alkaline sales increases of $36.1 million, or 19.9%, were driven by new
customers, expanded distribution with existing customers, and strong promotional
programs. Sales of lighting products increased $5.0 million, 9.6%, due primarily
to the ongoing introduction of new products combined with expanded distribution
with new and existing accounts. Exclusive distribution to a major mass
merchandiser contributed to the increase in sales of heavy duty batteries of
$3.2 million, or 12.2%. Rechargeable alkaline sales increases of $4.9 million,
or 27.7%, were driven by the introduction of NiMH and strong promotions with a
major mass merchandiser. Sales of hearing aid batteries decreased $3.7 million,
or 11.0%, primarily as a result of planned inventory reduction at several
professional and retail distribution accounts, a reduction in promotional
programs, and softening in the hearing aid device marketplace.
Our profitability increased $5.8 million, or 34.9%, to $22.4 million in
the Fiscal 2000 Quarter from $16.6 million in the Fiscal 1999 Quarter and $12.4
million, or 22.8%, to $66.7 million in the Fiscal 2000 Nine Months from $54.3
million in the Fiscal 1999 Nine Months. These increases were primarily
attributed to the sales increase and improved gross profit margins reflecting
previously announced cost rationalization initiatives, increased volume, and a
shift in product mix partially offset by increased distribution and promotional
costs.
Our assets increased $21.7 million, or 8.9%, to $266.0 million from
$244.3 million the previous year due primarily to an increase in inventories
supporting sales growth and new product introductions, ongoing capital programs,
partially offset by a decrease in accounts receivable reflecting timing of
customer payments.
<TABLE>
<CAPTION>
FISCAL QUARTER NINE MONTHS
-------------- -----------
LATIN AMERICA 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue from external customers........................ $27.1 $1.1 $83.1 $3.3
Profitability.......................................... 5.0 0.4 15.1 1.0
Profitability as a % of net sales...................... 18.5% 36.4% 18.2% 30.3%
Assets................................................. 192.6 -- 192.6 --
</TABLE>
ROV Limited was one of our customers prior to the acquisition. Revenues
for the region for the Fiscal 1999 Quarter and Nine Months represents sales to
ROV Limited as an external customer. Our increase in assets is attribitable to
the acquisition, in August 1999, of the consumer battery business of ROV Limited
in Latin America.
The Fiscal 2000 Quarter and Fiscal 2000 Nine Months sales in the region
are primarily heavy duty batteries. The Fiscal 2000 Quarter and Fiscal 2000 Nine
Months sales benefited from price increases in certain countries implemented in
the second quarter, new distribution of alkaline batteries in mass merchandiser
chains, and expansion of distribution into the southern region of South America.
For the Fiscal 2000 Quarter, our profitability was $5.0 million, which
was 18.5% of net sales, and represents an increase of $4.6 million from the
Fiscal 1999 Quarter. Profitability in the Fiscal 2000 Nine Months was $15.1
million, which was 18.2% of net sales, and represents an increase of $14.1
million from the Fiscal 1999 Nine Months.
<TABLE>
<CAPTION>
FISCAL QUARTER NINE MONTHS
-------------- -----------
EUROPE/ROW 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue from external customers.......................... $12.1 $14.7 $43.0 $48.0
Profitability............................................ 0.6 2.6 4.7 6.8
Profitability as a % of net sales........................ 5.0% 17.7% 10.9% 14.2%
Assets................................................... 27.8 28.6 27.8 28.6
</TABLE>
Our sales to external customers decreased $2.6 million, or 17.7%, to
$12.1 million in the Fiscal 2000 Quarter from $14.7 million the previous year
due primarily to the impacts of currency devaluation, the exit of certain
private label battery alkaline business in Europe, and the termination of
certain non-performing foreign distributors in September of 1999.
17
<PAGE>
In the Fiscal 2000 Nine Months, our sales to external customers
decreased $5.0 million, or 10.4%, to $43.0 million from $48.0 million the
previous year due primarily the impacts of currency devaluation, a decision to
exit certain private label alkaline battery business in Europe, termination of
certain non-performing foreign distributors, and sales volume softness in Europe
negatively impacting our hearing aid battery and watch battery business.
Our profitability decreased $2.0 million, or 76.9%, in the Fiscal 2000
Quarter and $2.1 million, or 30.9%, in the Fiscal 2000 Nine Months reflecting
the impact of currency devaluation, lower gross profit margins, unfavorable
shift in product mix, and higher operating expenses as a percentage of sales.
Our assets decreased $0.8 million, or 2.8%, to $27.8 million from $28.6
million the previous year due primarily to a decrease in inventories and other
assets reflecting weaker sales in the Fiscal 2000 Quarter.
CORPORATE EXPENSE. Our corporate expense increased $1.8 million, or
28.1%, to $8.2 million in the Fiscal 2000 Quarter from $6.4 million the previous
year and $4.5 million, or 23.1%, to $24.0 million in the Fiscal 2000 Nine Months
from $19.5 million the previous year. These increases were primarily due to
increased legal expenses, research and development expenses and depreciation
costs related to the operation of our new computer systems. The increase in
legal expenses primarily reflects costs incurred in the patent infringement
lawsuit against Duracell Incorporated and the Gillette Company. As a percentage
of total sales, our corporate expense was 5.3% in the Fiscal 2000 Quarter and
Fiscal 1999 Quarter and 4.7% in the Fiscal 2000 Nine Months compared to 5.0% in
the previous year reflecting leveraging fixed costs over greater sales volume.
SPECIAL CHARGES. We recorded no special charges in the Fiscal 2000
Quarter or Fiscal 2000 Nine Months. Special charges of $0.8 million were
recognized in the Fiscal 1999 Quarter primarily reflecting costs associated with
the closing of our Appleton, Wisconsin facility. Special charges of $2.2 million
were recognized in the Fiscal 1999 Nine Months related to the closings of our
Appleton, Wisconsin, facility; Newton Aycliffe, United Kingdom facility; and the
consolidation of battery packaging operations at our Madison, Wisconsin,
facility.
INCOME FROM OPERATIONS. Our income from operations increased $7.5
million, or 61.0%, to $19.8 million in the Fiscal 2000 Quarter from $12.3
million the previous year and increased $22.2 million, or 55.1%, to $62.5
million in the Fiscal 2000 Nine Months from $40.3 million the previous year.
These increases were primarily due to increased profitability in North America
and Latin America, which includes the Latin American acquisition, partially
offset by weakness in Europe/ROW and increased corporate expenses.
INTEREST EXPENSE. Interest expense increased $4.1 million to $7.7
million in the Fiscal 2000 Quarter from $3.6 million in the prior year and $12.2
million to $23.0 million in the Fiscal 2000 Nine Months from $10.8 million in
the prior year. These increases were primarily due to higher debt load
associated with the Latin American acquisition, higher working capital
requirements to meet expanding sales growth, and an increase in general market
interest rates.
INCOME TAX EXPENSE. Our effective tax rate was 35.0% for the Fiscal
2000 Quarter compared to 35.4% in the Fiscal 1999 Quarter and 35.0% in the
Fiscal 2000 Nine Months compared to 36.0% for the Fiscal 1999 Nine Months. The
lower rate this year is primarily attributable to more foreign income which is
taxed at a lower effective tax rate than in the United States.
LIQUIDITY AND CAPITAL RESOURCES
For the Fiscal 2000 Nine Months, operating activities provided $37.2
million in net cash compared with $10.6 million for Fiscal 1999 Nine Months.
Operating cash flow before working capital requirements generated $47.1 million
in cash flow compared to $29.4 million in the year ago nine months reflecting
improvement in income from operations and higher non-cash expenses. Non-cash
expenses increased $11.2 million to $21.4 million in the Fiscal 2000 Nine Months
from $10.2 million in the Fiscal 1999 Nine Months. This increase is the result
of amortization of intangible assets that were recognized as part of the Latin
American acquisition, depreciation on the SAP business enterprise system, which
was installed in fiscal year 1999, and the impact of lower deferred tax assets.
Working capital increases used cash of $9.9 million in the Fiscal 2000 Nine
Months, which was approximately $9.0 million lower than
18
<PAGE>
the Fiscal 1999 Nine Months. The improvement in working capital primarily
reflects a larger investment in inventories in Latin America and North America
to support sales expansion offset by a larger decrease in receivables than was
experienced in the Fiscal 1999 Nine Months primarily reflecting improved
receivable collections in North America. Cash costs associated with the
restructuring activities announced in Fiscal 1999 have been and are expected to
be funded with cash provided from operations.
Net cash used by investing activities decreased $4.3 million versus the
same period a year ago primarily reflecting lower capital expenditures. Capital
expenditures for the Fiscal 2000 Nine Months were approximately $12.5 million, a
decrease of $3.9 million from the Fiscal 1999 Nine Months. Expenditures in the
current year were primarily for improvements to alkaline battery manufacturing
and information systems hardware and software. The Company currently expects
capital spending for Fiscal 2000 to be approximately $23.0 million due to
alkaline capacity expansion, alkaline vertical integration programs, and
enhancements to our warehouse and distribution systems.
During the Fiscal 2000 Nine Months we granted approximately 0.7 million
options to purchase shares of common stock to various employees of the company.
All grants have been at an exercise price equal to the market price of the
common stock on the date of the grant.
The Company believes that cash flow from operating activities and
periodic borrowings under its amended credit facilities will be adequate to meet
the Company's short-term and long-term liquidity requirements prior to the
maturity of those credit facilities, although no guarantee can be given in this
regard. The Company's current credit facilities include a revolving credit
facility of $250.0 million and term loan of $75.0 million. As of July 2, 2000,
$65.3 million of the term loan remained outstanding and $171.5 million was
outstanding under the revolving facility with approximately $16.0 million of the
remaining availability utilized for outstanding letters of credit.
ITEM 3. 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 1 "Significant Accounting Policies and
Practices" in Notes to our Condensed 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 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
19
<PAGE>
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 July 2, 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 $1.8 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 $0.7 million.
As of July 2, 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 $2.5 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
July 2, 2000 due to the same change in exchange rates, would be a net loss of
$0.2 million.
As of July 2, 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 $0.5 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 $1.1 million.
FORWARD LOOKING STATEMENTS
Certain of the information contained in this Form 10-Q, including
without limitation statements made under Part I, Item 1, "Financial Statements"
and Part I, Item 2, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Part I, Item 3, "Quantitative and Qualitative
Disclosures about Market Risk" which are not historical facts, may include
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In reviewing such
information, 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 demand for
household or hearing aid batteries; (2) the loss of, or a significant reduction
in, sales through a significant retail customer; (3) the introduction of new
product features or new battery technology by a competitor; (4) the enactment of
unexpected environmental regulations negatively impacting consumer demand for
certain of our battery products; (5) difficulties or delays in the integration
of operations of acquired companies; (6) residual Year 2000 problems of the
Company or of our customers or suppliers which may make it difficult or
impossible to fulfill their commitments to us; and (7) currency fluctuations in
significant international markets.
20
<PAGE>
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
the United States or abroad, (3) the sufficiency of our production capacity to
meet future demand for our products, (4) our ability to keep pace with the
technological standards in our industry (5) 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 Form 10-Q 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
obligation to update these forward-looking statements to reflect actual results
or changes in factors or assumptions affecting such forward-looking statements.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
There have been no significant changes in the status of Rayovac's legal
proceedings since the filing of Rayovac's Annual Report on Form 10-K for its
fiscal year ended September 30, 1999 ("1999 Form 10-K") except as follows.
In our patent infringement lawsuit against Duracell Incorporated and
The Gillette Company (Rayovac Corporation v. Duracell Incorporated and The
Gillette Company, Case No. 99-C-0272C O, United States District Court for the
Western District of Wisconsin) as described in our 1999 Form 10-K, the jury
returned a verdict on May 30, 2000 in favor of Gillette/Duracell invalidating
the three Rayovac patents at issue, and the Court entered judgment to that
effect on June 23, 2000. We have filed a motion to overturn the verdict as well
as to grant us judgment in our favor as a matter of law, and Gillette/Duracell
has filed a motion seeking recovery of its costs and attorneys' fees. Both
motions are pending.
In addition, on May 8, 2000 and prior to the jury trial in the case
described above, Gillette filed a lawsuit in the German court system alleging
that we and one of our distributors infringed the German counterpart of
Gillette's U.S. patent at issue in The Gillette Company v. Rayovac Corporation
(Case No. 99-CV-11555-PBS-United States District Court for the District of
Massachusetts) as further described in our 1999 Form 10-K. We have not yet been
served with the lawsuit, but we intend to deny all material allegations and
vigorously defend ourselves in this action.
We have also learned that we have been named as one of many defendants
in a patent infringement lawsuit filed by The Lemelson Foundation on June 30,
2000, alleging we have infringed various machine vision and bar code scanning
patents. We have not yet been served with the lawsuit, but we intend to deny all
material allegations and vigorously defend ourselves in this action.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
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 or
Administrative Agent.
4.7** The Security Agreement, dated as of September 12,
1996, by and among the Company, ROV Holding, Inc. and
BofA.
4.8** The Company Pledge Agreement, dated as of September
12, 1996, by and between the Company and BofA.
4.9*** Shareholders Agreement, dated as of September 12,
1996, by and among the Company and the shareholders
of the Company referred to therein.
4.10*** 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.
4.11***** Amendment No. 2 to Rayovac Shareholders Agreement,
dated as of April 8, 1999, by and among the Company
and the Shareholders of the Company referred to
therein.
4.12* Specimen certificate representing the Common Stock.
27 Financial Data Schedule.
----------------
* 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
22
<PAGE>
period ended April 4, 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 Current Report on
Form 8-K filed with the Commission on August 24, 1999, as
subsequently amended on October 26, 1999.
(b) Reports on Form 8-K: On October 26, 1999, we filed two current
reports on Form 8-K/A. Amendment number one provided information
required by Item 7 of our Form 8-K originally filed on
August 9, 1999 in connection with our Latin American acquisition.
Amendment number two amended and supplemented certain of the
exhibits thereto.
23
<PAGE>
Signatures
Pursuant to the requirements 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: August 15, 2000
RAYOVAC CORPORATION
By: /s/ RANDY STEWARD
-----------------
Randall J. Steward
Executive Vice President of Administration
and Chief Financial Officer
24
