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 December 30, 2001
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 February 8, 2002, was 32,019,100.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 30, 2001 and September 30, 2001
(Unaudited)
(In thousands)
-ASSETS-
DECEMBER 30, 2001 SEPTEMBER 30, 2001
----------------- ------------------
Current assets:
Cash and cash equivalents $ 18,788 $ 11,358
Receivables 167,157 190,128
Inventories 82,981 91,311
Prepaid expenses and other 39,629 31,674
----------------- ------------------
Total current assets 308,555 324,471
Property, plant and equipment, net 106,485 107,257
Deferred charges and other, net 38,975 37,080
Intangible assets, net 118,910 119,074
----------------- ------------------
Total assets $ 572,925 $ 587,882
================= ==================
-LIABILITIES AND SHAREHOLDERS' EQUITY-
Current liabilities:
Current maturities of long-term debt $ 22,297 $ 24,436
Accounts payable 91,465 103,373
Accrued liabilities:
Wages and benefits and other 38,927 32,232
Other special charges 4,005 5,883
----------------- ------------------
Total current liabilities 156,694 165,924
Long-term debt, net of current maturities 223,753 233,541
Employee benefit obligations, net of current portion 20,708 19,648
Other 12,175 11,184
----------------- ------------------
Total liabilities 413,330 430,297
Shareholders' equity:
Common stock, $.01 par value, authorized 150,000
shares; issued 61,555 and 61,579 shares,
respectively; outstanding 32,019 and 32,043
shares, respectively 616 616
Additional paid-in capital 180,346 180,752
Retained earnings 120,386 119,984
Accumulated other comprehensive loss (5,290) (6,868)
Notes receivable from officers/shareholders (3,865) (3,665)
----------------- ------------------
292,193 290,819
Less Treasury stock, at cost, 29,536 shares (130,070) (130,070)
Less: Unearned restricted stock compensation (2,528) (3,164)
----------------- ------------------
Total shareholders' equity 159,595 157,585
----------------- ------------------
Total liabilities and shareholders' equity $ 572,925 $ 587,882
================= ==================
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS.
2
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three month period ended December 30, 2001 and December 31, 2000
(Unaudited)
(In thousands)
THREE MONTHS
----------------------------------------
2002 2001
----------------------------------------
Net sales $ 182,351 $ 183,559
Cost of goods sold 93,601 91,506
Special charges - 16,030
------------------- -----------------
Gross profit 88,750 76,023
Selling 53,159 53,957
General and administrative 28,833 12,423
Research and development 3,218 3,015
------------------- -----------------
Total operating expenses 85,210 69,395
Income from operations 3,540 6,628
Interest expense 4,169 8,192
Other (income) expense, net (782) 952
------------------- -----------------
Income (loss) before income taxes 153 (2,516)
Income tax benefit (249) (750)
------------------- -----------------
Net income (loss) $ 402 $ (1,766)
=================== =================
BASIC EARNINGS PER SHARE
Weighted average shares
and equivalents outstanding 31,780 27,574
Net income (loss) $ 0.01 $ (0.06)
=================== =================
DILUTED EARNINGS PER SHARE
Weighted average shares
and equivalents outstanding 32,412 27,574
Net income (loss) $ 0.01 $ (0.06)
=================== =================
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three month period ended December 30, 2001 and December 31, 2000
(Unaudited)
(In thousands)
THREE MONTHS
----------------------------------------
2002 2001
----------------------------------------
Cash flows from operating activities:
Net income (loss) $ 402 $ (1,766)
Non-cash adjustments to net income:
Amortization 539 1,457
Depreciation 4,832 4,526
Other non-cash adjustments (4,852) 1,810
Net changes in assets and liabilities 23,245 6,467
------------------- -----------------
Net cash provided by operating activities 24,166 12,494
Cash flows from investing activities:
Purchases of property, plant and equipment (3,862) (1,496)
------------------- -----------------
Net cash used by investing activities (3,862) (1,496)
Cash flows from financing activities:
Reduction of debt (72,656) (117,600)
Proceeds from debt financing 60,500 108,687
Issuance of common stock 7 0
Other (341) (560)
------------------- -----------------
Net cash used by financing activities (12,490) (9,473)
Effect of exchange rate changes on cash and
cash equivalents (384) 10
------------------- -----------------
Net increase in cash and cash equivalents 7,430 1,535
Cash and cash equivalents, beginning of period 11,358 9,757
------------------- -----------------
Cash and cash equivalents, end of period $ 18,788 $ 11,292
=================== =================
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
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 (which are normal and
recurring in nature) necessary to present fairly the financial position of
the Company at December 30, 2001, results of operations and cash flows for
the three month periods ended December 30, 2001, and December 31, 2000.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America 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, 2001. Certain
prior year amounts have been reclassified to conform with the current year
presentation.
SHIPPING AND HANDLING COSTS: The Company incurred shipping and handling
costs of $6,996 and $7,319 for the three months ended December 30, 2001 and
December 31, 2000, respectively, which are included in selling expense.
CONCENTRATION OF CREDIT RISK: Trade receivables potentially subject the
Company to credit risk. The Company extends credit to its customers based
upon an evaluation of the customer's financial condition and credit history
and generally does not require collateral. The Company monitors our
customer's credit and financial conditions based on changing economic
conditions and will make adjustments to credit policies as required. The
Company has historically incurred minimal credit losses but recently
experienced a significant loss resulting from the bankruptcy filing of a
major retailer in the United States.
The Company has a broad range of customers including many large retail
outlet chains, one of which accounts for a significant percentage of our
sales volume. This major customer represented approximately 18% and 17%,
respectively, of receivables as of December 30, 2001 and September 30, 2001.
Approximately 25% of the Company's sales occur outside of North America, and
these sales and related receivables are subject to varying degrees of
credit, currency, political and economic risk. The Company monitors these
risks and makes appropriate provisions for collectability based on an
assessment of the risks present. The Argentine Peso devaluation did not have
a significant impact on the Company's estimate of collectability or
financial position.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS: Effective October 1, 2001, the
Company adopted Statement of Financial Accounting Standards (SFAS) 141,
BUSINESS COMBINATIONS, and SFAS 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
Statement 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001, as well as all
purchase method business combinations completed after June 30, 2001.
Statement 141 also specifies criteria that intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill. Statement 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead
tested for impairment at least annually in accordance with the provisions of
Statement 142. Statement 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with Statement 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Upon the transition to
Statement 142, no goodwill was deemed to be impaired.
5
An identification of the impacts to date of adopting Statements 141 and 142
follows:
THREE MONTHS ENDING
-------------------
DECEMBER 30, 2001 DECEMBER 31, 2000
----------------- -----------------
Reported net income (loss)........................................ $402 ($1,766)
Add back: Goodwill amortization, net of tax of $0................. -- 278
Add back: Trade name amortization, net of tax of $214............. -- 349
---- -------
Adjusted net income (loss)........................................ $402 ($1,139)
==== ========
BASIC EARNINGS PER SHARE:
------------------------
Reported net income (loss)........................................ $0.01 ($0.06)
Goodwill amortization............................................. -- 0.01
Trade name amortization........................................... -- 0.01
---- -------
Adjusted net income (loss)........................................ $0.01 ($0.04)
===== =======
DILUTED EARNINGS PER SHARE:
--------------------------
Reported net income (loss)........................................ $0.01 ($0.06)
Goodwill amortization............................................. -- 0.01
Trade name amortization........................................... -- 0.01
---- -------
Adjusted net income (loss)........................................ $0.01 ($0.04)
===== =======
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
swaps are designated as cash flow hedges with the fair value recorded in
Other Comprehensive Income ("OCI") and as a hedge asset or liability, as
applicable. The swaps settle periodically in arrears with the related
amounts for the current settlement period payable to, or receivable from,
the counter-parties included in accrued liabilities or accounts receivable
and recognized in earnings as an adjustment to interest expense from the
underlying debt to which the swap is designated. During the three months
ended December 30, 2001, $1,075 of pretax derivative losses from such hedges
were recorded as an adjustment to interest expense. At December 30, 2001,
the Company had a portfolio of interest rate swaps outstanding which
effectively fixes the interest rates on floating rate debt at rates as
follows: 6.404% for a notional principal amount of $75,000 through October
2002, 4.458% for a notional principal amount of $70,000 from October 2002
through July 2004 and 3.736% for a notional principal amount of $100,000
through August 2004. The derivative net losses on these contracts recorded
in OCI at December 30, 2001 was an after-tax loss of $861.
The Company enters into forward and swap foreign exchange contracts, to
hedge the risk from forecasted settlement in local currencies of
intercompany purchases and sales, trade sales, and trade purchases. These
contracts generally require the Company to exchange foreign currencies for
U.S. dollars or Pounds Sterling. These contracts are designated as cash flow
hedges with the fair value recorded in OCI and as a hedge asset or
liability, as applicable. Once the forecasted transaction has been
recognized as a purchase or sale and a related liability or asset recorded
in the balance sheet, the gain or loss on the related derivative hedge
contract is reclassified from OCI into earnings as an offset to the change
in value of the liability or asset. During the three months ended December
30, 2001, $17 of pretax derivative losses were recorded as an adjustment to
earnings for cash flow hedges related to an asset or liability. During the
three months ended December 30, 2001, $57 of pretax derivative gains were
recorded as an adjustment to earnings for forward and swap contracts settled
at maturity. At December 30, 2001, the Company had a series of swap
contracts outstanding with a contract value of $987. The derivative net gain
on these contracts recorded in OCI at December 30, 2001 was an after-tax
gain of $23.
6
The Company periodically enters into forward foreign exchange contracts, to
hedge the risk from changes in fair value from unrecognized firm purchase
commitments. These firm purchase commitments generally require the Company
to exchange U.S. dollars for foreign currencies. These hedge contracts are
designated as fair value hedges with the fair value recorded in earnings on
a pretax basis and as a hedge asset or liability, as applicable. To the
extent effective, changes in the value of the forward contracts recorded in
earnings will be offset by changes in the value of the hedged item, also
recorded in earnings on a pretax basis and as an asset or liability, as
applicable. Once the firm purchase commitment has been consummated, the firm
commitment asset or liability balance will be reclassified as an addition to
or subtraction from, the carrying value of the purchased asset. The Company
previously entered into a series of forward contracts through October 2001
to hedge the exposure from a firm commitment to purchase certain battery
manufacturing equipment denominated in Japanese Yen. During the three months
ended December 30, 2001, $63 of pretax derivative gains were recorded as an
adjustment to earnings for fair value hedges of this firm purchase
commitment and $63 of pretax losses were recorded as an adjustment to
earnings for changes in fair value of this firm purchase commitment. During
the three months ended December 30, 2001 $78 of pretax derivative losses
were recorded as an adjustment to earnings for fair value hedges of this
firm purchase commitment that were settled at maturity and $78 of pretax
gains were recorded as an adjustment to earnings for payments made against
this firm purchase commitment.
The Company is exposed to risk from fluctuating prices for zinc used in the
manufacturing process. The Company hedges a portion of this risk through the
use of commodity swaps. The swaps are designated as cash flow hedges with
the fair value recorded in OCI and as a hedge asset or liability, as
applicable. The fair value of the swaps is reclassified from OCI into
earnings when the hedged purchase of zinc metal-based items also affects
earnings. The swaps effectively fix the floating price on a specified
quantity of a commodity through a specified date. During the three months
ended December 30, 2001, $877 of pretax derivative losses were recorded as
an adjustment to cost of sales for swap contracts settled at maturity. At
December 30, 2001, the Company had a series of swap contracts outstanding
through August 2003 with a contract value of $10,661. The derivative net
losses on these contracts recorded in OCI at December 30, 2001 was an
after-tax loss of $957.
2 INVENTORIES
Inventories consist of the following:
DECEMBER 30, 2001 SEPTEMBER 30, 2001
----------------- ------------------
Raw material........................................ $24,101 $24,271
Work-in-process..................................... 17,643 14,015
Finished goods...................................... 41,237 53,025
------ ------
$82,981 $91,311
======= =======
3 ACQUIRED INTANGIBLE ASSETS AND GOODWILL
DECEMBER 30, 2001 SEPTEMBER 30, 2001
----------------- ------------------
GROSS GROSS
CARRYING ACCUMULATED NET CARRYING ACCUMULATED NET
AMORTIZED INTANGIBLE ASSETS AMOUNT AMORTIZATION INTANGIBLE AMOUNT AMORTIZATION INTANGIBLE
--------------------------- ------ ------------ ---------- ------ ------------ ----------
Non-compete agreement................... $700 $525 $175 $700 $490 $210
Proprietary technology.................. 525 283 242 525 275 250
----- ---- ------ ------ ---- ------
$1,225 $808 $ 417 $1,225 $765 $ 460
====== ==== ====== ====== ==== ======
PENSION INTANGIBLES
-------------------
Under-funded pension.................... $ 3,081 $ - $ 3,081 $ 3,081 $ - $ 3,081
======= ====== ======= ======= ====== =======
UNAMORTIZED INTANGIBLE ASSETS
Trade name.............................. $90,000 $4,875 $85,125 $90,000 $4,875 $85,125
======= ====== ======= ======= ====== =======
7
GOODWILL NORTH AMERICA LATIN AMERICA EUROPE/ROW TOTAL
-------- ------------- ------------- ---------- -----
Balance as of October 1, 2001, net............ $1,035 $26,884 $2,489 $30,408
Effect of translation......................... (23) -- (98) (121)
------ ------- ------ -------
Balance as of December 30, 2001, net........ $1,012 $26,884 $2,391 $30,287
====== ======= ====== =======
The non-compete agreement is being amortized on a straight-line basis over 5
years. The proprietary technology assets are being amortized on a
straight-line basis over 15 to 17 years.
The trade name and Latin America segment goodwill are associated with the
1999 acquisition of ROV Limited and were being amortized on a straight-line
basis over 40 years. The North America segment goodwill is associated with
the 1998 acquisition of Best Labs and was being amortized on a straight-line
basis over 15 years. The Europe/ROW segment goodwill is associated with the
1998 acquisition of Brisco GmbH in Germany and was being amortized on a
straight-line basis over 15 years.
Pursuant to Statement 142, the Company ceased amortizing goodwill assets on
October 1, 2001. Upon initial application of Statement 142, the Company
reassessed the useful lives of its intangible assets and deemed only the
trade name to have an indefinite useful life because it is expected to
generate cash flows indefinitely. Based on this, the Company ceased
amortizing the trade name on October 1, 2001 also.
The amortization expense and net income for the three months ended is as
follows:
THREE MONTHS ENDING
-------------------
DECEMBER 30, 2001 DECEMBER 31, 2000
----------------- -----------------
AMORTIZATION EXPENSE
--------------------
Goodwill amortization................................ $-- $278
Trade name amortization.............................. -- 563
Non-compete and proprietary technology............... 43 43
------- ---------
$43 $884
======= =========
Net income (loss).................................... $402 ($1,766)
======= =========
4 OTHER COMPREHENSIVE INCOME
Comprehensive income and the components of other comprehensive income for
the three months ended December 30, 2001 and December 31, 2000 are as
follows:
THREE MONTHS ENDING
-------------------
DECEMBER 30, 2001 DECEMBER 31, 2000
----------------- -----------------
Net income (loss).................................... $402 ($1,766)
Other comprehensive income (loss):
Foreign currency translation...................... 380 307
Net unrealized loss on available for sale
securities........................................ (99) --
Cumulative effect of change in accounting principle -- (150)
Net unrealized gain (loss) on derivative
instruments....................................... 1,297 (711)
-------- --------
Comprehensive income (loss).......................... $1,980 ($2,320)
======== ========
8
5 NET INCOME PER COMMON SHARE
Net income per common share for the three months ended December 30, 2001 and
December 31, 2000 is calculated based upon the following shares:
THREE MONTHS ENDING
-------------------
DECEMBER 30, 2001 DECEMBER 31, 2000
----------------- -----------------
Basic............................................... 31,780 27,574
Effect of restricted stock and assumed
conversion of options .............................. 632 --
-------- --------
Diluted............................................. 32,412 27,574
======== =======
The effect of restricted stock and unexercised stock options outstanding for
the three month period ending December 31, 2000 were excluded from the
diluted EPS calculation, as their effect was anti-dilutive.
6 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 1999, $2,250 for 2000 and $3,000 for
2001. At December 30, 2001, the Company had commitments of approximately
$1,042 for the acquisition of inventory and manufacturing equipment, all of
which are expected to be incurred in calendar 2002.
The Company has provided for the estimated costs associated with
environmental remediation activities at some of its current and former
manufacturing sites. In addition, the Company, together with other parties,
has been designated a potentially responsible party of various third-party
sites on the United States EPA National Priorities List (Superfund). The
Company provides for the estimated costs of investigation and remediation of
these sites when such losses are probable and the amounts can be reasonably
estimated. The actual cost incurred may vary from these estimates due to the
inherent uncertainties involved. The Company believes that any additional
liability in excess of the amounts provided of $1,759, 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 OTHER
During Fiscal 2001, the Company recorded special charges related to: (i) an
organizational restructuring in the U.S, (ii) manufacturing and distribution
cost rationalization initiatives in the Company's Tegucigalpa, Honduras and
Mexico City, Mexico manufacturing facilities and in the Company's European
operations, (iii) the closure of the Company's Wonewoc, Wisconsin,
manufacturing facility, (iv) the rationalization of uneconomic manufacturing
processes at the Company's Fennimore, Wisconsin, manufacturing facility, and
rationalization of packaging operations and product lines, and (v) costs
associated with the Company's June 2001 secondary offering. The amount
recorded includes $10,100 of employee termination benefits for approximately
570 employees, $10,200 of equipment, inventory, and other asset write-offs,
and $2,000 of other expenses. A summary of the 2001 restructuring activities
follows:
9
2001 RESTRUCTURING SUMMARY
TERMINATION OTHER
BENEFITS COSTS TOTAL
----------- ----- -----
Expense accrued............................................... $5,000 $11,000 $16,000
Change in estimate............................................ 4,400 100 4,500
Expense as incurred........................................... 700 1,100 1,800
Cash expenditures............................................. (5,800) (1,300) (7,100)
Non-cash charges.............................................. -- (9,300) (9,300)
------ ------- -------
Balance September 30, 2001.................................... $4,300 $1,600 $5,900
Cash expenditures............................................. (1,300) (100) (1,400)
Non-cash charges.............................................. -- (100) (100)
------ ------ ------
Balance December 30, 2001..................................... $3,000 $1,400 $4,400
====== ====== ======
8 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.
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. All
depreciation and amortization included in income from operations is related
to corporate or 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. Capital expenditures are related to reportable
segments or corporate. Variable allocations of assets are not made for
segment reporting.
REVENUES FROM EXTERNAL CUSTOMERS THREE MONTH PERIODS ENDED
-------------------------
DECEMBER 30, 2001 DECEMBER 31, 2000
----------------- -----------------
North America................................. $142,244 $136,869
Latin America................................. 26,396 33,806
Europe/ROW.................................... 13,711 12,884
-------- --------
Total segments................................ $182,351 $183,559
======== ========
INTER SEGMENT REVENUES THREE MONTH PERIODS ENDED
-------------------------
DECEMBER 30, 2001 DECEMBER 31, 2000
----------------- -----------------
North America................................. $10,177 $8,212
Latin America................................. 1,777 1,418
Europe/ROW.................................... 442 599
-------- ---
Total segments................................ $12,396 $10,229
======== =======
10
SEGMENT PROFIT THREE MONTH PERIODS ENDED
-------------------------
DECEMBER 30, 2001 DECEMBER 31, 2000
----------------- -----------------
North America................................. $7,355 $22,427
Latin America................................. 3,642 6,909
Europe/ROW.................................... 1,144 175
------ ---
Total segments................................ 12,141 29,511
Corporate..................................... 8,601 6,853
Special charges............................... -- 16,030
Interest expense.............................. 4,169 8,192
Other (income) expense, net................... (782) 952
------ ---
Income (loss) before income taxes and
extraordinary item......................... $153 ($2,516)
====== ========
THREE MONTH PERIODS ENDED
----------------------------------------
SEGMENT ASSETS DECEMBER 30, 2001 DECEMBER 31, 2000
----------------- -----------------
North America................................. $272,300 $259,926
Latin America................................. 212,265 208,730
Europe/ROW.................................... 32,432 31,413
-------- ------
Total segments................................ $516,997 $500,069
Corporate..................................... 55,928 51,150
-------- ------
Total assets at period end.................... $572,925 $551,219
======== ========
9 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 Subsidiary's' investment accounts and earnings. The principal
elimination entries eliminate investments in subsidiaries and inter-company
balances and transactions. Separate financial statements of the Guarantor
Subsidiaries are not presented because management has determined that such
financial statements would not be material to investors.
11
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 30, 2001
(Unaudited)
(In thousands)
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------- ------------ ------------
-ASSETS-
Current assets:
Cash and cash equivalents $ 11,759 $ 44 $ 6,985 $ - $ 18,788
Receivables 64,416 51,985 72,171 (21,415) 167,157
Inventories 58,633 - 27,157 (2,809) 82,981
Prepaid expenses and other 29,291 342 9,996 - 39,629
------ ------------ ------------- ------------ ------------
Total current assets 164,099 52,372 116,309 (24,224) 308,555
Property, plant and equipment, net 77,956 30 28,499 - 106,485
Deferred charges and other, net 58,353 631 3,023 (23,032) 38,975
Intangible assets, net 89,823 - 29,275 (188) 118,910
Investments in subsidiaries 151,075 98,397 - (249,472) -
-------- ---------- ------------- ------------ ------------
Total assets $541,306 $151,429 $177,106 $(296,916) $ 572,925
======== ========== ============= ============ ============
-LIABILITIES AND SHAREHOLDERS' EQUITY-
Current liabilities:
Current maturities of long-term debt 18,446 $ - $ 11,290 $ (7,439) $ 22,297
Accounts payable 79,610 - 26,028 (14,173) 91,465
Accrued liabilities:
Wages benefits and other 28,300 113 10,514 - 38,927
Other special charges 3,934 - 71 - 4,005
------- ------------ ------------- ------------ ------------
Total current liabilities 130,290 113 47,903 (21,612) 156,694
Long term debt, net of current maturities 223,741 - 23,044 (23,032) 223,753
Employee benefit obligations, net of current portion 20,192 - 516 - 20,708
Other 4,439 241 7,495 - 12,175
-------- ------------ ------------- ------------ ------------
Total liabilities 378,662 354 78,958 (44,644) 413,330
Shareholders' equity:
Common stock 615 1 12,072 (12,072) 616
Additional paid-in capital 180,227 62,788 54,154 (116,823) 180,346
Retained earnings 123,590 90,117 33,448 (126,769) 120,386
Accumulated other comprehensive loss (5,325) (1,831) (1,526) 3,392 (5,290)
Notes receivable from officers/shareholders (3,865) - - - (3,865)
-------- ------------ ------------- ------------ ------------
295,242 151,075 98,148 (252,272) 292,193
Less treasury stock, at cost (130,070) - - - (130,070)
Less unearned restricted stock compensation (2,528) - - - (2,528)
-------- ------------ ------------- ------------ ------------
Total shareholders' equity 162,644 151,075 98,148 (252,272) 159,595
-------- ------------ ------------- ------------ ------------
Total liabilities & shareholders' equity $541,306 $151,429 $177,106 $(296,916) $ 572,925
======== ============ ============= ============ ============
12
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the three month period Ended December 30, 2001
(In thousands)
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------- ------------ ------------
Net sales $140,760 $ 11,381 $ 46,486 $ (16,276) $ 182,351
Cost of goods sold 68,408 11,039 29,220 (15,066) 93,601
Special charges 81 - (81) - -
------- ------------ ------------- ------------ -----------
Gross profit 72,271 342 17,347 (1,210) 88,750
Selling expense 43,564 162 9,728 (295) 53,159
General and administrative 27,924 (2,932) 3,841 - 28,833
Research and development 3,218 - - - 3,218
------- ------------ ------------- ------------ -----------
Total operating expenses 74,706 (2,770) 13,569 (295) 85,210
(Loss) income from operations (2,435) 3,112 3,778 (915) 3,540
Interest expense 4,004 - 704 (539) 4,169
Equity income (5,966) (2,610) - 8,576 -
Other income, net (836) (357) (378) 789 (782)
------- ------------ ------------- ------------ ------------
Income before income taxes 363 6,079 3,452 (9,741) 153
Income tax (benefit) expense (1,204) 113 842 - (249)
------- ------------ ------------- ------------ ------------
Net Income $ 1,567 $ 5,966 $ 2,610 $ (9,741) $ 402
======= ============ ============= ============ ============
13
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the three month period Ended December 30, 2001
(Unaudited)
(In thousands)
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------- ------------ ------------
Net cash provided (used) by operating activities $26,489 $ (2) $ (2,447) $ 126 $ 24,166
Cash flows from investing activities:
Purchases of property, plant and equipment (3,451) - (411) - (3,862)
------ ------------ ------------- ------------ ------------
Net cash used by investing activities (3,451) - (411) - (3,862)
Cash flows from financing activities:
Reduction of debt (74,334) - 1,678 - (72,656)
Proceeds from debt financing 60,500 - - - 60,500
Issuance of stock 7 - - 7
Other (301) (291) 251 (341)
------ ------------ ------------- ------------ ------------
Net cash (used) provided by financing activities (14,128) - 1,387 251 (12,490)
Effect of exchange rate changes on cash and cash
equivalents - - (7) (377) (384)
------ ------------ ------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 8,910 (2) (1,478) - 7,430
Cash and cash equivalents, beginning of period 2,849 46 8,463 - 11,358
------ ------------ ------------- ------------ ------------
Cash and cash equivalents, end of period $11,759 $ 44 $ 6,985 $ - $ 18,788
====== ============ ============= ============ ============
14
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FISCAL QUARTER ENDED DECEMBER 30, 2001 COMPARED TO
FISCAL QUARTER ENDED DECEMBER 31, 2000
NET SALES. Net sales for the three months ended December 30, 2001 (the
"Fiscal 2002 Quarter") decreased $1.2 million, or 0.7%, to $182.4 million from
$183.6 million in the three months ended December 31, 2000 (the "Fiscal 2001
Quarter"). The sales decline reflects continued economic weakness in the Latin
America region, partially offset by gains due primarily to product line
extension in North America.
NET INCOME. Net income for the Fiscal 2002 Quarter increased $2.2
million to $0.4 million from a ($1.8) million loss in the Fiscal 2001 Quarter.
The increase primarily reflects a reduction in interest expense primarily
attributable to the retirement of $65.0 million in Senior Subordinated Notes
following the June 2001 stock offering. A bad debt reserve of $10.0 million, net
of tax, related to the bankruptcy filing of a major customer was recognized in
the Fiscal 2002 Quarter, while the Fiscal 2001 Quarter's results reflected a
special charge reserve of $10.5 million, net of tax.
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/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.
FISCAL QUARTER
NORTH AMERICA 2002 2001
---- ----
Revenue from external customers..................... $142.3 $136.9
Profitability....................................... 7.4 22.4
Profitability as a % of net sales................... 5.2% 16.4%
Assets.............................................. $272.3 $259.9
Our sales to external customers increased $5.4 million, or 3.9%, to
$142.3 million in the Fiscal 2002 Quarter from $136.9 million the previous year
due primarily to strong sales of alkaline batteries and lighting products
partially offset by weakness in heavy duty and specialty batteries. Alkaline
sales increases were primarily attributable to new distribution, while lighting
products increases were primarily attributable to product line extension and the
introduction of new products. Heavy duty sales decreases reflect a
discontinuation of certain products at certain stores of a major retailer.
Specialty batteries sales decreases versus last year primarily reflect a decline
in camcorder battery sales, due to the transition to a licensing agreement with
our Hong Kong licensee, as well as a reduction of lithium battery sales due to
continued softness in demand from OEM customers in the PC, telecommunications
and electronics industries.
Our profitability decreased $15.0 million, or 67.0%, to $7.4 million in
the Fiscal 2002 Quarter from $22.4 million in the Fiscal 2001 Quarter. The
decrease in profitability in the Fiscal 2002 Quarter was attributable to a $16.1
million bad debt reserve attributable to the bankrupcty filing of a major
customer. Excluding the impact of this reserve, profitability increased $1.1
million, or 4.9%, versus the previous year's quarter due to the sales expansion
partially offset by higher marketing and selling expenses. Our profitability
margins, excluding the bad debt reserve, increased 10 basis points to 16.5% from
16.4% in the previous year. The increase primarily reflects lower operating
expenses as a percentage of sales partially offset by a reduction in gross
profit margins reflecting a shift in customer mix.
15
Our assets increased $12.4 million, or 4.8%, to $272.3 million in the
Fiscal 2002 Quarter from $259.9 million the previous year. The increase was
primarily attributable to capital investments in alkaline manufacturing capacity
and an increase in accounts receivable partially offset by lower inventories.
FISCAL QUARTER
LATIN AMERICA 2002 2001
---- ----
Revenue from external customers.................... $26.4 $33.8
Profitability...................................... 3.6 6.9
Profitability as a % of net sales.................. 13.6% 20.4%
Assets............................................. $212.3 $208.7
Our sales to external customers decreased $7.4 million, or 21.9% to
$26.4 million in the Fiscal 2002 Quarter from $33.8 million the previous year
due primarily to decreased sales of zinc carbon batteries slightly offset by
increased sales of alkaline batteries. Zinc carbon battery sales were affected
by the slowing economic environment and the unfavorable impacts of currency
devaluation. Alkaline sales increases in the Fiscal 2002 Quarter were driven by
growth in Central America and Andean regions reflecting volume increases with
our existing customer base.
Our profitability declined $3.3 million, or 47.8%, in the Fiscal 2002
Quarter. The decrease in profitability versus the Fiscal 2001 Quarter was
primarily attributable to the sales and gross profit margin decline, partially
offset by a reduction in operating expenses primarily reflecting the adoption of
SFAS 142 which resulted in a reduction of amortization expense. The Argentine
Peso devaluation did not have a significant impact on the operating results for
the Fiscal 2002 Quarter.
Our profitability margins in the Fiscal 2002 Quarter decreased 680
basis points primarily due to unfavorable product line mix compounded by our
relatively fixed operating expenses spread over lower sales.
Our assets increased $3.6 million, or 1.7%, to $212.3 million in the
Fiscal 2002 Quarter from $208.7 million the previous year. Increases in accounts
receivable, reflecting longer terms associated with distribution at larger
retail accounts and general economic weakness, were partially offset by
decreases in inventory in Mexico and decreased property, plant & equipment
reflecting the sale of our Honduras manufacturing facility.
FISCAL QUARTER
EUROPE/ROW 2002 2001
---- ----
Revenue from external customers................... $13.7 $12.9
Profitability..................................... 1.1 0.2
Profitability as a % of net sales................. 8.0% 1.6%
Assets............................................ $32.4 $31.4
Our sales to external customers increased $0.8 million, or 6.2%, to
$13.7 million in the Fiscal 2002 Quarter from $12.9 million the previous year
primarily reflecting strong sales of hearing aid batteries compounded by the
favorable impacts of currency valuation.
Our profitability increased $0.9 million to $1.1 million in the Fiscal
2002 Quarter. The increase in profitability in the Fiscal 2002 Quarter primarily
reflects lower selling expenses reflecting a favorable shift in customer mix and
lower promotional expenses. Our profitability margin increase, as a percentage
of sales, in the Fiscal 2002 Quarter is primarily driven by our favorable
selling expenses.
Our assets increased $1.0 million, or 3.2%, to $32.4 million from $31.4
million the previous year due primarily to an increase in accounts receivable,
primarily reflecting the sales increase partially offset by a decrease in
inventory.
CORPORATE EXPENSE. Our corporate expense increased $1.7 million, or
24.6%, to $8.6 million in the Fiscal 2002 Quarter from $6.9 million in the
Fiscal 2001 Quarter. The increase was primarily attributable to the accrual of
management incentives, which were unearned in the previous year, and increased
technology spending. As a
16
percentage of total sales, our corporate expense was 4.7% and 3.8% in the Fiscal
2002 and Fiscal 2001 Quarters, respectively.
SPECIAL CHARGES. The Company did not incur special charges in the
Fiscal 2002 Quarter. The Fiscal 2001 Quarter reflects $16.0 million in special
charges primarily associated with expenses for the shutdown of our Wonewoc,
Wisconsin, manufacturing facility and restructuring initiatives in Latin America
and North America.
INCOME FROM OPERATIONS. Our income from operations decreased $3.1
million, or 47.0%, to $3.5 million in the Fiscal 2002 Quarter from $6.6 million
the previous year. The decrease was primarily attributable to the profitability
decline in Latin America. A bad debt reserve of $16.1 million associated with
the bankruptcy filing of a major customer was recognized in the Fiscal 2002
Quarter, while the Fiscal 2001 Quarter's results reflected a special charge
reserve of $16.0 million.
INTEREST EXPENSE. Interest expense decreased $4.0 million to $4.2
million in the Fiscal 2002 Quarter from $8.2 million in the Fiscal 2001 Quarter
due to the retirement of $65.0 million in Senior Subordinated Notes following
the June 2001 stock offering combined with lower effective interest rates.
OTHER (INCOME) EXPENSE. Other (income) expense increased $1.7 million
to income of ($0.8) million in the Fiscal 2002 Quarter. The increase in the
Fiscal 2002 Quarter was attributable to foreign exchange gains versus
significant foreign exchange losses in the previous year, primarily attributable
to Mexico, in addition to higher interest income.
INCOME TAX EXPENSE. Our effective tax rate, excluding the tax benefit
associated with the increased bad debt reserve, was 36.0% for the Fiscal 2002
Quarter, compared to 29.8% in the Fiscal 2001 Quarter. Excluding the impact of
special charges, the comparable Fiscal 2001 Quarter's effective tax rate was
35.0%.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
Effective October 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) 141, BUSINESS COMBINATIONS, and SFAS 142, GOODWILL
AND OTHER INTANGIBLE ASSETS. Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
as well as all purchase method business combinations completed after June 30,
2001. Statement 141 also specifies criteria that intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill. Statement 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 also requires that intangible assets with estimable useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with Statement 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS
TO BE DISPOSED OF.
The adoption of Statement 142 resulted in an increase to pre-tax income
of $0.8 million ($0.6 million after-tax) versus the previous year's quarter. The
increase is attributable to the discontinuation of amortization of the trade
name and Latin America, North America, and Europe/ROW segment goodwill. These
assets were being amortized on a straight line basis over 15 to 40 years. Upon
initial application of Statement 142, the Company reassessed the useful lives of
its intangible assets and deemed only the trade name to have an indefinite
useful life because it is expected to generate cash flows indefinitely. The
unamortized book value of these assets is $112.0 million. Upon the transition to
Statement 142, no goodwill was deemed to be impaired.
LIQUIDITY AND CAPITAL RESOURCES
For the Fiscal 2002 Quarter, operating activities provided $24.2
million in net cash compared with $12.5 million the previous year. Operating
cash flow increases versus the previous year primarily reflect the reduction of
interest payments due to the retirement of $65.0 million in Senior Subordinated
Notes following the June 2001 stock offering as well as a lower investment in
working capital versus the comparable period a year ago.
Net cash used by investing activities increased $2.4 million versus the
same period a year ago reflecting an increase in capital expenditures.
Expenditures in the Fiscal 2002 Quarter were primarily for improvements to
alkaline
17
battery manufacturing. Capital expenditures for fiscal 2002 are expected to be
approximately $20.0 million which will include continued performance upgrades to
our alkaline and zinc air manufacturing and packaging operations and continued
investment in technology.
During the Fiscal 2002 Quarter we granted approximately 0.9 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.
As a result of the bad debt reserve for Kmart receivables in the
quarter ended December 30, 2001, the Company was out of compliance with the
leverage ratio covenant of its senior bank credit agreement ("Second Amended
and Restated Credit Agreement"). On February 12, 2002, the Company amended
the Second Amended and Restated Credit Agreement ("Fourth Amendment") which
placed it in compliance with an amended leverage ratio based on an amended
definition of EBITDA (see Exhibit 4.11). The Company will record $0.2 million
of fees paid as a result of the amendment as a debt issuance cost which will
be amortized over the remaining life of the agreement.
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 December 30,
2001, $31.0 million of the term loan remained outstanding and $203.0 million was
outstanding under the revolving facility with approximately $10.1 million of the
remaining availability utilized for outstanding letters of credit.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2000, the Emergency Issues Task Foce (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. In July 2001, the EITF delayed the
implementation of EITF 00-14 until no later than quarters beginning after
December 15, 2001. The Company is required to adopt this consensus in the
second fiscal quarter of 2002. The Company does not believe its adoption will
have a material impact on the consolidated financial statements other than
the reclassification of certain selling expenses to cost of sales or a
reduction of revenue.
In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration to a Purchaser of the
Vendor's Products or Services". This Issue addresses when consideration from a
vendor to a retailer or distributor in connection with the purchase of the
vendor's products to promote sales of the vendor's products should be classified
in the vendor's income statement as a reduction of revenue or expense. The
Company is required to adopt this consensus in the second fiscal quarter of
2002. The Company does not believe its adoption will have a material impact on
the consolidated financial statements, other than the reclassification of
certain selling expenses to cost of sales or a reduction in revenue.
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" 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.
18
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 December 30, 2001, 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 $4.7 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 $2.2 million.
As of December 30, 2001, 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
$0.1 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 December 30, 2001 due to the same change in exchange rates, would
be a net gain of $0.5 million.
As of December 30, 2001, the potential change in fair value of
outstanding commodity price derivative instruments, assuming a 10% unfavorable
change in the underlying commodity prices would be a loss of $0.7 million. The
net 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 $0.1 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 the Private Securities
Litigation Reform Act, as amended. 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 and
19
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; (6) our ability to continue to penetrate and develop new distribution
channels for our products; and (7) various other factors, including those
discussed herein and those set forth in our most recent Annual Report on Form
10-K and the prospectus supplement for our most recent public offering of common
stock. 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 obligations 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, 2001.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
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******* Third Supplemental Indenture, dated as of June 13, 2001,
by and among the Company, ROV Holding, Inc., ROVCAL, 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.
4.5** Specimen of the Notes (included as an exhibit to Exhibit
4.1)
4.6**** 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.
4.7++++ 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.
4.8+++++ The First Amendment dated as of July 28, 2000 to the
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.
4.9+++++++ The Second Amendment dated as of December 31, 2000 to the
Second Amended and Restated Credit Agreement, dated as of
August 9, 1999, by and among the Company, various
financial institutions, and Bank of America, N.A. as
Administrative Agent.
4.10++++++++ The Third Amendment dated as of June 11, 2001, to the
Second Amended and Restated Credit Agreement, dated as of
August 9, 1999, by and among the Company, various
financial institutions, and Bank of America, NA as
Administrative Agent.
4.11 The Fourth Amendment dated as of February 12, 2002, to
the Second Amended and Restated Credit Agreement, dated
as of August 9, 1999, by and among the Company, various
financial institutions, and Bank of America, N.A. as
Administrative Agent.
4.12** The Security Agreement, dated as of September 12, 1996,
by and among the Company, ROV Holding, Inc. and Bank of
America, NA.
4.13** The Company Pledge Agreement, dated as of September 12,
1996, by and between the Company and Bank of America, NA.
21
4.14*** Shareholders Agreement, dated as of September 12, 1996,
by and among the Company and the shareholders of the
Company referred to therein.
4.15*** 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.
4.16***** 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.
4.17++++++ Amendment No. 3 to Rayovac Shareholders Agreement dated
January 1, 2001, by and among the Company and the
shareholders of the Company referred to therein.
4.18 Amendment No. 4 to Rayovac Shareholders Agreement dated
February 8, 2002, by and among the Company and the
Shareholders of the Company referred to therein.
4.19* 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.
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 Kenneth V. Biller.
10.6+++++ Employment Agreement, dated as of October 1, 2000, by and
between the Company and Stephen P. Shanesy.
10.7+++++ Employment Agreement, dated as of October 1, 2000, by and
between the Company and Merrell M. Tomlin.
10.8+++++ Employment Agreement, dated as of October 1, 2000, by and
between the Company and Luis A. Cancio.
10.9** 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.
10.10** Building Lease between the Company and SPG Partners dated
May 14, 1985, as amended June 24, 1986, and June 10,
1987.
10.11***** 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.
10.12*** Rayovac Corporation 1996 Stock Option Plan.
10.13* 1997 Rayovac Incentive Plan.
10.14* Rayovac Profit Sharing and Savings Plan.
10.15+++ 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.
--------------
* 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.
22
*** 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 Report on Form
8-K filed with the Commission on June 19, 2001.
+ 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.
+++++ Incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30,
2000, filed with the Commission on December 19, 2000.
++++++ Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
December 31, 2000, filed with the Commission on February
14, 2001.
+++++++ Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March
31, 2001, filed with the Commission on May 14, 2001.
++++++++ Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended July
1, 2001, filed with the Commission on August 9, 2001.
(b) Reports on Form 8-K. The Company has not filed any reports on Form 8-K
during the three month period ended December 30, 2001.
23
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: February 13, 2002
RAYOVAC CORPORATION
By: /s/ Kent J. Hussey
-------------------------------------
Kent J. Hussey
President and Chief Financial Officer
24