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 March 28, 1998
--------------
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 333-17895
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)
(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 per share, as of May 5, 1998, was 27,432,238.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RAYOVAC CORPORATION
Condensed Consolidated Balance Sheets
As of March 28, 1998 and September 30, 1997
(In thousands, except per share amounts)
-ASSETS-
March 28, 1998 September 30, 1997
-------------- ------------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 3,672 $ 1,133
Receivables 69,079 79,669
Inventories 61,254 58,551
Prepaid expenses and other 14,434 15,027
-------- ---------
Total current assets 148,439 154,380
Property, plant and equipment, net 66,889 65,511
Deferred charges and other 26,075 16,990
-------- ---------
Total assets $241,403 $ 236,881
======== =========
-LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)-
Current liabilities:
Current maturities of long-term debt $ 4,329 $ 23,880
Accounts payable 50,891 57,259
Accrued liabilities:
Wages and benefits and other 28,067 34,812
Recapitalization and other special charges 9,856 4,612
-------- ---------
Total current liabilities 93,143 120,563
Long-term debt, net of current maturities 125,148 183,441
Employee benefit obligations, net of current portion 6,738 11,291
Other 4,160 2,181
-------- ---------
Total liabilities 229,189 317,476
Shareholders' equity (deficit):
Common stock, $.01 par value, authorized 150,000 and 90,000 shares
respectively; issued 56,873 and 50,000 shares respectively;
outstanding 27,432 and 20,581 shares, respectively 569 500
Additional paid-in capital 103,155 15,974
Foreign currency translation adjustments 2,307 2,270
Notes receivable from officers/shareholders (1,361) (1,658)
Retained earnings 36,898 31,321
-------- ---------
141,568 48,407
Less stock held in trust for deferred compensation
plan, 160 shares (962) (962)
Less treasury stock, at cost, 29,441 and 29,419
shares, respectively (128,392) (128,040)
-------- ---------
Total shareholders' equity (deficit) 12,214 (80,595)
-------- --------
Total liabilities and shareholders' equity (deficit) $241,403 $ 236,881
======== ==========
See accompanying notes which are an integral part of these statements.
RAYOVAC CORPORATION
Condensed Consolidated Statements of Operations
For the three month and six month periods ended
March 28, 1998 and March 29, 1997
(Unaudited)
(In thousands, except per share amounts)
THREE MONTHS SIX MONTHS
------------ ----------
1998 1997 1998 1997
---- ---- ---- ----
Net sales $ 96,081 $ 83,632 $ 246,076 $ 225,554
Cost of goods sold 50,545 47,123 127,900 126,142
-------- -------- --------- ---------
Gross profit 45,536 36,509 118,176 99,412
Selling 28,204 22,592 73,676 61,272
General and administrative 9,102 7,660 17,363 15,264
Research and development 1,509 1,520 3,034 3,430
Other special charges 5,236 1,754 4,017 4,717
-------- -------- --------- ---------
Total operating expenses 44,051 33,526 98,090 84,683
Income from operations 1,485 2,983 20,086 14,729
Other expense (income):
Interest expense 3,291 5,472 8,315 13,446
Other expense (income) (126) 300 (359) 314
-------- -------- --------- ---------
3,165 5,772 7,956 13,760
Income (loss) before income taxes and extraordinary item (1,680) (2,789) 12,130 969
Income tax expense (benefit) (698) (1,069) 4,578 309
-------- -------- --------- ---------
Income (loss) before extraordinary item (982) (1,720) 7,552 660
Extraordinary item, loss on early extinguishment of debt,
net of income tax benefit of $1,263 -- -- 1,975 --
-------- -------- --------- ---------
Net income (loss) $ (982) $ (1,720) $ 5,577 $ 660
======== ======== ========= =========
Average shares outstanding 27,432 20,485 25,476 20,478
Basic earnings per share
Income (loss) before extraordinary item $ (0.04) $ (0.08) $ 0.30 $ 0.03
Extraordinary item -- -- (0.08) --
-------- ------- --------- ---------
Net income (loss) $ (0.04) $ (0.08) $ 0.22 $ 0.03
======== ======= ========= =========
Average shares outstanding and common stock equivalents 27,432 20,485 27,006 20,507
Diluted earnings per share
Income (loss) before extraordinary item $ (0.04) $ (0.08) $ 0.28 $ 0.03
Extraordinary item -- -- (0.07) --
-------- ------- --------- ---------
Net income (loss) $ (0.04) $ (0.08) $ 0.21 $ 0.03
======== ======= ========= =========
See accompanying notes which are an integral part of these statements.
RAYOVAC CORPORATION
Condensed Consolidated Statements of
Cash Flows For the six month periods ended March 28, 1998 and March 29, 1997
(Unaudited)
(In thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 5,577 $ 660
Non-cash adjustments to net income:
Amortization 1,675 2,772
Depreciation 5,811 5,892
Other non-cash adjustments (3,453) (330)
Net changes in other assets and liabilities,
net of effects from acquisitions (5,239) 26,234
---------- ---------
Net cash provided by operating activities 4,371 35,228
Cash flows from investing activities:
Purchases of property, plant and equipment (6,676) (2,625)
Proceeds from sale of property, plant and equipment 3,292 --
Payment for acquisitions (7,508) --
Other - (215)
---------- ---------
Net cash used by investing activities (10,892) (2,840)
Cash flows from financing activities:
Reduction of debt (137,987) (140,004)
Proceeds from debt financing 59,859 112,243
Proceeds from issuance of common stock 87,268 --
Other (73) 265
---------- ---------
Net cash provided (used) by financing activities 9,067 (27,496)
---------- ---------
Effect of exchange rate changes on cash and cash
equivalents (7) 3
---------- ---------
Net increase in cash and cash equivalents 2,539 4,895
Cash and cash equivalents, beginning of period 1,133 4,255
---------- ---------
Cash and cash equivalents, end of period $ 3,672 $ 9,150
========== =========
See accompanying notes which are an integral part of these statements.
RAYOVAC CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
1 SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: These financial statements have been prepared by
Rayovac Corporation (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC") and, in the
opinion of the Company, include all adjustments (all of which are normal and
recurring in nature) necessary to present fairly the financial position of the
Company at March 28, 1998, results of operations for the three and six month
periods ended March 28, 1998 and March 29, 1997, and cash flows for the six
month periods ended March 28, 1998 and March 29, 1997. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such SEC rules and regulations.
These condensed consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto as of
September 30, 1997.
Derivative Financial Instruments: Derivative financial instruments are used by
the Company principally in the management of its interest rate, foreign
currency and raw material price exposures.
The Company uses interest rate swaps to manage its interest rate risk. The net
amounts to be paid or received under interest rate swap agreements designated
as hedges are accrued as interest rates change and are recognized over the
life of the swap agreements, as an adjustment to interest expense from the
underlying debt to which the swap is designated. The related amounts payable
to, or receivable from, the counter-parties are included in accrued
liabilities or accounts receivable. The Company has entered into an interest
rate swap agreement which effectively fixes the interest rate on floating rate
debt at a rate of 6.16% for a notional principal amount of $62,500 through
October 1999. The fair value of this contract at March 28, 1998 was ($382).
The Company has entered into an amortizing cross currency interest rate swap
agreement related to financing the acquisition of Brisco (as defined herein).
The agreement effectively fixes the interest and foreign exchange on floating
rate debt denominated in U.S. Dollars at a rate of 5.34% denominated in German
Marks. The unamortized notional principal amount at March 28, 1998 is
approximately $4,700. The fair value at March 28, 1998 approximated the
contract value.
The Company enters into forward foreign exchange contracts relating to the
anticipated settlement in local currencies of intercompany purchases and
sales. These contracts generally require the Company to exchange foreign
currencies for U.S. dollars. The contracts are marked to market and the
related adjustment is recognized in other expense (income). The related
amounts payable to, or receivable from, the counter-parties are included in
accounts payable, or accounts receivable. The Company has approximately $7,700
of such forward exchange contracts at March 28, 1998. The fair value at March
28, 1998, approximated the contract value.
The Company has also entered into foreign exchange contracts to hedge payment
obligations denominated in Japanese Yen under a commitment to purchase certain
production equipment from Matsushita. The Company has approximately $6,700 of
such forward exchange contracts outstanding at March 28, 1998. The fair value
at March 28, 1998 approximated the contract value.
The Company is exposed to risk from fluctuating prices for commodities used in
the manufacturing process. The Company hedges some of this risk through the
use of commodity swaps, calls and puts. The Company has entered into commodity
swap agreements which effectively fix the floating price on a specified
quantity of zinc through a specified date. The Company is buying calls, which
allow the Company to purchase a specified quantity of zinc through a specified
date for a fixed price, and writing puts, which allow the buyer to sell to the
Company a specified quantity of zinc through a specified date at a fixed
price. The maturity of, and the quantities covered by, the contracts highly
correlate to the Company's anticipated purchases of the commodity. The cost of
the calls, and the premiums received from the puts, are amortized over the
life of the agreements and are recorded in cost of goods sold, along with the
effect of the swap, put and call agreements. At March 28, 1998, the Company
had entered into a series of swap agreements with a contract value of
approximately $3,200 for the period from April through December of 1998. At
March 28, 1998, the Company had purchased a series of calls with a contract
value of approximately $3,000 and sold a series of puts with a contract value
of approximately $2,800 for the period from April 1998 through March 1999
designed to set a ceiling and floor price. While these transactions have no
carrying value, the fair value of these contracts was approximately ($600) at
March 28, 1998.
2 INVENTORIES
Inventories consist of the following (in thousands):
March 28, 1998 September 30, 1997
-------------- ------------------
Raw material $20,450 $23,291
Work-in-process 16,478 15,286
Finished goods 24,326 19,974
------- -------
$61,254 $58,551
======= =======
3 EARNINGS PER SHARE DISCLOSURE
Earnings per share is calculated based upon the following:
Three Months Ended March 28, 1998 Three Months Ended March 29, 1997
--------------------------------------------- ----------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Loss before extraordinary
item ($982) ($1,720)
Basic EPS
Loss available to common
shareholders ($982) 27,432 ($0.04) ($1,720) 20,485 ($0.08)
======= =======
Diluted EPS
Loss available to common
shareholders plus assumed
conversion ($982) 27,432 ($0.04) ($1,720) 20,485 ($0.08)
====== ====== ======= ======== ====== =======
The effect of unexercised stock options outstanding for the three month
periods ending March 28, 1998 and March 29, 1997, were excluded from the
diluted EPS calculations as their effect was anti-dilutive. These options may
dilute EPS in the future.
Six Months Ended March 28, 1998 Six Months Ended March 29, 1997
--------------------------------------------- ----------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Income before extraordinary
item $7,552 $660
Basic EPS
Income available to common
shareholders 7,552 25,476 $0.30 660 20,478 $0.03
===== =====
Effect of Dilutive Securities
Stock Options 1,530 29
----- ------
Diluted EPS
Income available to common
shareholders plus assumed
conversion $7,552 27,006 $0.28 $660 20,507 $0.03
====== ====== ===== ==== ====== =====
4 COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements to purchase certain equipment and to
pay annual royalties. In a December 1991 agreement, the Company committed to
pay annual royalties of $1.5 million for the first five years, beginning in
1993, plus $0.5 million for each year thereafter, as long as the related
equipment patents are enforceable (2012). In a March 1994 agreement, the
Company committed to pay $0.5 million in 1994 and annual royalties of $0.5
million for five years beginning in 1995. In a March 1998 agreement which
supersedes the previous agreements, the Company committed to pay $2.0 million
in 1998 and 1999, $3.0 million in 2000 through 2002 and $0.5 million in each
year thereafter, as long as the related equipment patents are enforceable
(2022). Additionally, the Company has committed to purchase tooling of $0.7
million related to this equipment.
The Company has provided for the estimated costs associated with environmental
remediation activities at some of its current and former manufacturing sites.
In addition, the Company, together with other parties, has been designated a
potentially responsible party of various third-party sites on the United
States EPA National Priorities List (Superfund). The Company provides for the
estimated costs of investigation and remediation of these sites when such
losses are probable and the amounts can be reasonably estimated. The actual
cost incurred may vary from these estimates due to the inherent uncertainties
involved. The Company believes that any additional liability in excess of the
amounts provided of $1.6 million, which may result from resolution of these
matters, will not have a material adverse effect on the financial condition,
liquidity, or cash flows of the Company.
5 OTHER
During the 1998 Fiscal First Quarter, the Company recorded a pre-tax credit of
$1.2 million related to the buyout of deferred compensation agreements with
certain former employees.
On November 28, 1997 the Company acquired Brisco GmbH in Germany and Brisco
B.V. in Holland (collectively "Brisco"), a distributor of hearing aid
batteries for $4.9 million. Brisco recorded calendar 1997 sales of $4.5
million.
In the 1998 Fiscal Second Quarter, the Company recorded special charges and
credits including severance, outplacement service, other employee benefits,
and asset write-downs related to the following: (i) $3.7 million for exit of
certain manufacturing operations at the Company's Madison,
Wisconsin, and Appleton, Wisconsin, facilities and consolidating domestic
battery packaging operations, (ii) $3.9 million for the closing of the
Company's Newton Aycliffe, U.K., packaging facility, phasing out direct
distribution in the U.K., and closing one of the Company's German sales
offices, and (iii) a $2.4 million gain on the disposition of the Company's
Kinston, North Carolina, previously closed facility.
In the 1998 Fiscal Second Quarter, the Company acquired Direct Power Plus of
New York ("DPP"), a full line marketer of rechargeable batteries and
accessories for cellular phones and video camcorders for $4.7 million. DPP
recorded sales of $2.2 million in the 1998 Fiscal Second Quarter.
6 SUBSEQUENT EVENTS
On March 30, 1998 the Company acquired the battery distribution portion of
Best Labs, St. Petersburg, Florida, a distributor of hearing aid batteries and
a manufacturer of hearing instruments for $2.1 million. The acquired portion
of Best Labs had net sales of approximately $2.6 million in calendar 1997.
On April 3, 1998 the Company announced the filing of a registration statement
with the SEC for a secondary offering of 6.5 million shares of common stock.
The Company will not receive any proceeds from the sale of shares in the
offering but will pay expenses for the offering estimated at $0.8 million. Of
the shares being offered, 5.5 million will be offered by Thomas H. Lee Group
and its affiliates and 1.0 million by certain Rayovac officers and employees.
The registration statement has not yet become effective. These securities may
not be sold nor any offers to buy be accepted prior to the time the
registration statement becomes effective.
7 GUARANTOR SUBSIDIARY
The following condensed consolidating financial data illustrates the
composition of the consolidated financial statements. Investments in
subsidiaries are accounted for by the Company and the Guarantor Subsidiary
using the equity method for purposes of the consolidating presentation.
Earnings of subsidiaries are therefore reflected in the Company's and
Guarantor Subsidiary's investment accounts and earnings. The principal
elimination entries eliminate investments in subsidiaries and inter-company
balances and transactions. Separate financial statements of the Guarantor
Subsidiary are not presented because management has determined that such
financial statements would not be material to investors.
RAYOVAC CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
As of March 28, 1998
(In thousands)
-ASSETS-
Guarantor Nonguarantor Consolidated
Parent Subsidiary Subsidiaries Eliminations Total
--------- ------------- ---------------- -------------- -------------
Current assets:
Cash and cash equivalents $ 2,148 $ 46 $ 1,478 $ -- $ 3,672
Receivables 61,208 584 15,131 (7,844) 69,079
Inventories 48,728 -- 12,639 (113) 61,254
Prepaid expenses and other 12,462 342 1,630 -- 14,434
--------- -------- ------- --------- --------
Total current assets 124,546 972 30,878 (7,957) 148,439
Property, plant and equipment, net 61,530 -- 5,359 -- 66,889
Deferred charges and other 26,045 -- 4,996 (4,966) 26,075
Investment in subsidiaries 14,799 13,969 -- (28,768) --
--------- -------- ------- --------- --------
Total assets $ 226,920 $ 14,941 $41,233 $(41,691) $241,403
========= ======== ======= ======== ========
-LIABILITIES AND SHAREHOLDERS' EQUITY-
Current liabilities:
Current maturities of long-term debt $ 3,135 $ -- $ 2,175 $ (981) $ 4,329
Accounts payable 43,419 -- 14,193 (6,721) 50,891
Accrued liabilities:
Wages and benefits and other 24,599 (88) 3,547 9 28,067
Recapitalization and other special charges 6,478 -- 3,378 -- 9,856
--------- -------- ------- --------- --------
Total current liabilities 77,631 (88) 23,293 (7,693) 93,143
Long-term debt, net of current maturities 124,901 -- 3,783 (3,536) 125,148
Employee benefit obligations, net of current portion 6,738 -- - -- 6,738
Other 3,742 230 188 -- 4,160
--------- -------- ------- --------- --------
Total liabilities 213,012 142 27,264 (11,229) 229,189
Shareholders' equity :
Common stock 569 -- 12,072 (12,072) 569
Additional paid-in capital 103,155 3,525 750 (4,275) 103,155
Foreign currency translation adjustment 2,307 2,307 2,307 (4,614) 2,307
Notes receivable from officers/shareholders (1,361) -- -- -- (1,361)
Retained earnings 38,592 8,967 (1,160) (9,501) 36,898
--------- -------- ------- --------- --------
143,262 14,799 13,969 (30,462) 141,568
Less stock held in trust for deferred compensation (962) -- - - (962)
Less treasury stock (128,392) -- - - (128,392)
--------- -------- ------- --------- --------
Total shareholders' equity 13,908 14,799 13,969 (30,462) 12,214
--------- -------- ------- --------- --------
Total liabilities and shareholders' equity $ 226,920 $ 14,941 $41,233 $ (41,691) $241,403
========= ======== ======= ========= ========
RAYOVAC CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
For the three month period ended March 28, 1998
(In thousands)
Guarantor Nonguarantor Consolidated
Parent Subsidiary Subsidiaries Eliminations Total
---------- ------------- ---------------- ---------------- ----------------
Net sales $ 83,519 $ -- $19,237 $(6,675) $ 96,081
Cost of goods sold 45,535 -- 11,689 (6,679) 50,545
-------- ------- ------- ------- --------
Gross profit 37,984 -- 7,548 4 45,536
Selling 24,277 -- 3,927 -- 28,204
General and administrative 7,340 (245) 2,025 (18) 9,102
Research and development 1,509 -- -- -- 1,509
Other special charges 1,274 -- 3,962 -- 5,236
-------- ------- ------- ------- --------
Total operating expenses 34,400 (245) 9,914 (18) 44,051
Income(loss) from operations 3,584 245 (2,366) 22 1,485
Other expense (income):
Interest expense 3,211 -- 83 (3) 3,291
Equity in profit of subsidiary 1,531 1,826 -- (3,357) --
Other expense (income) (148) 6 13 3 (126)
-------- ------- ------- ------- --------
Loss before income taxes
and extraordinary item (1,010) (1,587) (2,462) 3,379 (1,680)
Income taxes (benefit) (6) (56) (636) -- (698)
-------- ------- ------- ------- --------
Loss before extraordinary item (1,004) (1,531) (1,826) 3,379 (982)
Extraordinary item -- -- -- -- --
-------- ------- ------- ------- --------
Net loss $ (1,004) $(1,531) $(1,826) $ 3,379 $ (982)
======== ======= ======= ======= ========
RAYOVAC CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
For the six month period ended March 28, 1998
(In thousands)
Guarantor Nonguarantor Consolidated
Parent Subsidiary Subsidiaries Eliminations Total
--------- ---------------- -------------- -------------- -------------
Net sales $216,426 $ -- $ 44,036 $(14,386) $ 246,076
Cost of goods sold 114,446 -- 27,849 (14,395) 127,900
-------- ------- -------- -------- ---------
Gross profit 101,980 -- 16,187 9 118,176
Selling 63,708 -- 9,968 -- 73,676
General and administrative 13,598 (476) 4,277 (36) 17,363
Research and development 3,034 -- -- -- 3,034
Other special charges 55 -- 3,962 -- 4,017
-------- ------- -------- -------- ---------
Total operating expenses 80,395 (476) 18,207 (36) 98,090
Income(loss) from operations 21,585 476 (2,020) 45 20,086
Other expense (income):
Interest expense 8,075 -- 240 -- 8,315
Equity in profit of subsidiary 1,349 1,687 -- (3,036) --
Other expense (income) (344) (4) (11) -- (359)
-------- ------- -------- -------- ---------
9,080 1,683 229 (3,036) 7,956
Income(loss) before income taxes
and extraordinary item 12,505 (1,207) (2,249) 3,081 12,130
Income taxes (benefit) 4,998 142 (562) -- 4,578
-------- ------- -------- -------- ---------
Income (loss) before
extraordinary item 7,507 (1,349) (1,687) 3,081 7,552
Extraordinary item 1,975 -- -- -- 1,975
-------- ------- -------- -------- ---------
Net income(loss) $ 5,532 $(1,349) $ (1,687) $ 3,081 $ 5,577
======== ======= ======== ======== =========
RAYOVAC CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
For the six month period ended March 28, 1998
(In thousands)
Guarantor Nonguarantor Consolidated
Parent Subsidiary Subsidiaries Eliminations Total
----------- ------------ -------------- -------------- -------------
Net cash provided (used) by operating activities $ (3,380) $-- $ 3,233 $ 4,518 $ 4,371
Cash flows from investing activities:
Purchases of property, plant and equipment (5,839) -- (837) -- (6,676)
Proceeds from sale of property, plant, and equip. 3,292 -- -- -- 3,292
Payment for acquisitions (2,655) -- (4,853) -- (7,508)
--------- --- ------- ------- --------
Net cash used by investing activities (5,202) -- (5,690) -- (10,892)
Cash flows from financing activities:
Reduction of debt (135,500) -- (2,487) -- (137,987)
Proceeds from debt financing 58,193 -- 6,184 (4,518) 59,859
Proceeds from issuance of common stock 87,268 -- -- -- 87,268
Other 136 -- (209) -- (73)
--------- --- ------- ------- --------
Net cash provided by financing activities 10,097 -- 3,488 (4,518) 9,067
Effect of exchange rate changes on cash and cash
equivalents -- -- (7) -- (7)
--------- -- ------- ------- --------
Net increase in cash and cash equivalents 1,515 -- 1,024 -- 2,539
Cash and cash equivalents, beginning of period 633 46 454 -- 1,133
--------- --- ------- ------- --------
Cash and cash equivalents, end of period $ 2,148 $46 $ 1,478 $ -- $ 3,672
========= === ======= ======= ========
Item 2. Managment's Discussion and Analysis of Financial Condition and Results
of Operations
Net Sales. The net sales of the Company increased $12.5 million, or 15.0%
to $96.1 million in the three months ended March 28, 1998 (the "1998 Fiscal
Quarter"), from $83.6 million in the three months ended March 29, 1997 (the
"1997 Fiscal Quarter"). The increase was due primarily to increased sales of
alkaline general battery products, specialty battery products, and lighting
products somewhat offset by the continued decline in the heavy duty battery
market.
Alkaline general battery sales in the 1998 Fiscal Quarter exceeded the 1997
Fiscal Quarter by approximately 38%, or $10.9 million. This increase can be
attributed to strong promotional programs, a price increase implemented in the
summer of 1997, sales to new customers, and increased volume with existing
customers all of which resulted in increased market share for the 1998 Fiscal
Quarter.
Within specialty battery products, hearing aid battery sales increased
approximately 6% in the 1998 Fiscal Quarter due primarily to growth in the
market and the November, 1997 acquisition of Brisco. Also, the Company acquired
the retail portion of the business of DPP which recorded $2.2 million of
specialty battery sales during the 1998 Fiscal Quarter.
Lighting product sales increased approximately 11% in the 1998 Fiscal Quarter
primarily due to increased promotional emphasis, sales to new customers, and the
impact of a major ice storm in Canada.
For the six months ended March 28, 1998, net sales were $246.1 million, an
increase of $20.5 million, or 9.1%, from $225.6 million for the six months ended
March 29, 1997. Increased sales of alkaline batteries, hearing aid batteries,
and specialty batteries were somewhat offset by the continuing decline in the
domestic market for heavy duty batteries.
Gross Profit. Gross profit increased $9.0 million, or 24.7%, to $45.5
million in the 1998 Fiscal Quarter, from $36.5 million in the 1997 Fiscal
Quarter, primarily as a result of increased sales of higher margin alkaline
batteries and decreased sales of lower margin heavy duty batteries. Gross profit
margins increased to 47.3% in the 1998 Fiscal Quarter from 43.7% in the 1997
Fiscal Quarter due primarily to the change in the sales mix toward alkaline and
away from heavy duty batteries, the alkaline price increase implemented in the
summer of 1997, and alkaline manufacturing cost improvements.
For the six months ended March 28, 1998, gross profit increased 18.9%, or $18.8
million to $118.2 million from $99.4 million in the six months ended March 29,
1997 due primarily to increased sales of alkaline general battery products. This
also favorably impacted gross margins increasing to 48.0% for the six months
from 44.1% for the six months ended March 29, 1997. Gross profit margins were
also favorably impacted by the alkaline cost improvements and price increase
mentioned above.
Selling Expense. Selling expense increased $5.6 million, or 24.8% to
$28.2 million in the 1998 Fiscal Quarter from $22.6 million in the 1997 Fiscal
Quarter. The increase in dollars and as a percent of sales is due primarily to
increased advertising and promotional spending to generate the increased
alkaline battery sales. Selling expense as a percent of net sales increased to
29.3% in the 1998 Fiscal Quarter from 27.0% in the 1997 Fiscal Quarter. In
addition, selling expense was low during the 1997 Fiscal Quarter while a new
advertising agency and promotional strategies were under review.
For the six months ended March 28, 1998, selling expense increased $12.4
million, or 20.2%, to $73.7 million from $61.3 million for the six months ended
March 29, 1997. As a percentage of net sales selling expense increased to 29.9%
from 27.2% due primarily to increased advertising and promotional expense.
General and Administrative Expense.General and administrative expense
increased $1.4 million, or 18.2%, to $9.1 million in the 1998 Fiscal Quarter
from $7.7 million in the 1997 Fiscal Quarter primarily as a result of higher
costs associated with information system improvements worldwide and increased
expenses associated with being a publicly held company.
For the six months ended March 28, 1998, general and administrative expense
increased $2.1 million, or 13.7%, to $17.4 million from $15.3 million for the
six months ended March 29, 1997 due primarily to increased information systems
expense.
Research and Development Expense. Research and development expense was $1.5
million for the 1998 Fiscal Quarter, approximately equal to the 1997 Fiscal
Quarter. For the six months ended March 28, 1998, research and development
expense decreased $0.4 million to $3.0 million from $3.4 million for the six
months ended March 29, 1997.
Other Special Charges. In the 1998 Fiscal Quarter, the Company recorded net
charges of $5.2 million including (i) a $1.7 million charge associated with
consolidating domestic battery packaging operations and outsourcing the
manufacture of heavy duty batteries, (ii) a $2.0 million charge associated with
closing the Company's Appleton, WI, manufacturing plant and consolidating it
into its Portage, WI, manufacturing plant, (iii) a $3.9 million charge
associated with closing the Company's Newton Aycliffe, U.K., facility, phasing
out direct distribution in the U.K. and closing one of the Company's German
sales offices, and (iv) a $2.4 million gain on the sale of the Company's
previously closed Kinston, North Carolina facility. The Company expects to
record an additional $2.0 million of costs in subsequent periods related to
these restructuring and cost rationalization initiatives. In the 1997 Fiscal
Quarter, the Company recorded charges of $1.8 million in connection with the
closing of its Kinston, North Carolina, facility.
For the six months ended March 28, 1998, the Company recorded net charges of
$4.0 million. This includes the $5.2 million charge recorded in the 1998 Fiscal
Quarter offset by income of $1.2 million in connection with the buy-out of
deferred compensation agreements with certain former employees. For the six
months ended March 29, 1997, the Company recorded charges of $4.7 million for
organizational restructuring in the U.S., the discontinuation of certain
manufacturing operations in the U.K., and the closing of its Kinston, North
Carolina, facility.
Income From Operations. Income from operations decreased $1.5 million
to $1.5 million in the 1998 Fiscal Quarter from $3.0 million in the 1997 Fiscal
Quarter. The increased special charges in 1998 over 1997 more than offset the
increased income generated by the sales and gross profit improvements. Income
from operations before special charges increased $1.9 million, or 39.6%, to $6.7
million in the 1998 Fiscal Quarter from $4.8 million for the 1997 Fiscal
Quarter.
For the six months ended March 28, 1998, income from operations increased 36.7%,
or $5.4 million to $20.1 million from $14.7 million for the six months ended
March 29, 1997. This increase is due primarily to increased sales and gross
profit offset by increased selling and general and administrative expense.
Income from operations before special charges increased $4.7 million, or 24.2%,
to $24.1 million for the six months ended March 28, 1998 from $19.4 million for
the six months ended March 29, 1997.
Interest Expense. Interest expense decreased $2.2 million, or 40%, to $3.3
million in the 1998 Fiscal Quarter from $5.5 million in the 1997 Fiscal Quarter.
This decrease is primarily as a result of decreased indebtedness due to the
application of proceeds of the Company's initial public offering of common stock
completed in November 1997 (the "IPO"). For the six months ended March 28, 1998,
interest expense decreased $5.1 million, or 38.1%, to $8.3 million from $13.4
million in the six months ended March 29, 1997. In addition to the effects of
the IPO on 1998, the 1997 interest expense included a $2.0 million write-off of
unamortized debt issuance costs.
Other Expense (Income). Other expense (income) for the 1998 Fiscal Quarter
includes $(0.1) million of interest income and foreign exchange gain. The 1997
Fiscal Quarter included $0.3 million of net expense attributed to foreign
exchange losses somewhat offset by interest income. For the six months ended
March 28, 1998, interest income and foreign exchange gain totaled $(0.4) million
compared to $0.3 million net expense in the six months ended March 29, 1997
attributed to foreign exchange losses partially offset by interest income.
Income Tax Expense (Benefit). The Company's effective tax rate for the 1998
Fiscal Quarter was (41.5)% compared to (38.3)% for the 1997 Fiscal Quarter
primarily due to the benefit of the Company's Foreign Sales Corporation ("FSC")
impacting the 1998 rate more than the 1997 rate. For the six months ended March
28, 1998, the Company's effective tax rate was 37.7% compared to 31.9% for the
six months ended March 29, 1997. The more favorable tax rate in 1997 is due
primarily to the FSC benefiting 1997 more than 1998.
Extraordinary Item. In the six months ended March 28, 1998, the Company
recorded extraordinary expense of $2.0 million net of income taxes for the
premium payment on the redemption of a portion of the Company's Senior
Subordinated Notes.
Net Income (Loss). Net income (loss) for the 1998 Fiscal Quarter was $(1.0)
million, a $0.7 million improvement from $(1.7) million for the 1997 Fiscal
Quarter.
For the six months ended March 28, 1998, net income was $5.6 million after the
$2.0 million extraordinary item compared to $0.7 million for the six months
ended March 29, 1997.
Liquidity and Capital Resources
For the six months ended March 28, 1998, net cash provided by operating
activities decreased $30.8 million to $4.4 million from $35.2 million for the
six months ended March 29, 1997. The decrease was due primarily to inventory
levels increasing this year to support the growth in the business where as last
year a significant reduction in excess inventory was experienced.
Capital expenditures for the six months ended March 28, 1998 were $6.7
million, an increase of $4.1 million from $2.6 million in the six months ended
March 29, 1997. This increase reflects continued spending on the implementation
of new computer systems in fiscal 1998 and the down payment on a new alkaline
production line for one of the manufacturing facilities. The Company currently
expects capital spending for fiscal 1998 to be approximately $18.0 million due
to alkaline capacity expansion and the continued implementation of the new SAP
computer system.
The SAP system is also expected to substantially address the Year 2000
issue. The Company has established an internal project team to identify,
correct, and test the remaining systems for Year 2000 compliance. The Company
expects to incur internal staff costs as well as consulting and other expenses.
Management currently estimates completion of Year 2000 compliance in mid-1999 at
an estimated cost of $1.0 million in addition to the SAP system implementation.
The Company presently believes that the Year 2000 issue will not pose
significant operational problems for the Company's computer systems after
modifications to existing software and the conversion to new software. However,
there can be no assurance that unforeseen difficulties will not arise for any of
the Company, its customers or vendors and that related costs will not thereby be
incurred.
In March 1998, the Company sold its Kinston, North Carolina, facility for
approximately $3.3 million. The Company also acquired DPP for $4.7 million plus
incentive payments over four years which are anticipated to total approximately
$2.7 million. The initial $4.7 million includes $3.2 million cash (of which
$0.5 million is to be paid in cash after a specified time period for resolution
of acquisition related claims), and $1.5 million of assumed bankers acceptances.
In November 1997, the Company acquired Brisco for approximately $4.9
million. Brisco packages and distributes hearing aid batteries in customized
packaging to hearing health care professionals.
The Company believes that cash flow from operating activities and periodic
borrowings under its existing credit facilities will be adequate to meet the
Company's short-term and long-term liquidity requirements prior to maturity of
those credit facilities, although no assurance can be given in this regard. The
Company's current credit facilities include a revolving credit facility of $90.0
million of which $56.1 million was outstanding at March 28, 1998, with
approximately $5.8 million utilized for outstanding letters of credit and an
acquisition facility of $70.0 million of which $4.2 million was outstanding at
March 28, 1998.
Subsequent Events
On March 30, 1998 the Company acquired the battery distribution portion of
Best Labs, St. Petersburg, Florida, a distributor of hearing aid batteries and a
manufacturer of
hearing instruments. The acquired portion of Best Labs had net sales of
approximately $2.6 million in calendar 1997.
Impact of Recently Issued Accounting Standards
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits
("FAS No. 132"), which standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable. FAS No. 132 is
effective for fiscal years beginning after December 15, 1997. Restatement of
disclosures for earlier periods provided for comparative purposes is required
unless the information is not readily available. The Company is evaluating the
effect of this pronouncement on its consolidated financial statements.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
- ------- -----------
3.1* Amended and Restated Articles of Incorporation of the Company
3.2* Amended and Restated By-Laws of the Company
4.1** Indenture, dated as of October 22, 1996, by and among the
Company, ROV Holding, Inc. and Marine Midland Bank, as
trustee, relating to the Company's 10 1/4% Senior
Subordinated Notes due 2006.
4.2** Specimen of the Notes (included as an exhibit to Exhibit 4.1).
4.3++ Amended and Restated Credit Agreement, dated as of December 30, 1997,
among the Company, the lenders party thereto and Bank of America
National Trust and Savings Association ("BofA"), as Administrative
Agent.
4.4** The Security Agreement dated as of September 12, 1996 by and among the
Company, ROV Holding, Inc. and BofA.
4.5** The Company Pledge Agreement dated as of September 12, 1996 by and
between the Company and BofA.
4.6*** Shareholders Agreement dated as of September 12, 1996 by and among the
Company and the shareholders of the Company referred to therein.
4.7*** Amendment to Rayovac Shareholders Agreement dated August 1, 1997 by and
among the Company and the shareholders of the Company referred to
therein.
4.8+ Specimen certificate representing the Common Stock.
10.1** Management Agreement, dated as of September 12, 1996, by and between
the Company and Thomas H. Lee Company.
10.2** Confidentially, Non-Competition and No-Hire Agreement dated as of
September 12, 1996 by and between the Company and Thomas F. Pyle.
10.3** Employment Agreement, dated as of September 12, 1996, by
and between the Company and David A. Jones, including the
Full Recourse Promissory Note, dated September 12, 1996 by
David A. Jones in favor of the Company.
10.4** Severance Agreement by and between the Company and Trygve Lonnebotn.
10.5** Severance Agreement by and between the Company and Kent J. Hussey.
10.6** Severance Agreement by and between the Company and Roger F. Warren
10.7*** Severance Agreement by and between the Company and Stephen P. Shanesy
10.8*** Severance Agreement by and between the Company and Merrell M. Tomlin
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*** Rayovac Corporation 1996 Stock Option Plan.
10.12*** Rayovac Corporation 1997 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 March 5,
1998 by and among the Company, Matsushita Battery Industrial Co., Ltd.
and Matsushita Electric Industrial Co., Ltd.
27 Financial Data Schedule
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* 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 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-1 (Registration No. 333-35181) filed with the Commission.
++ Incorporated by reference to the Company's Registration Statement on
Form S-3 (Registration No. 333-49281) filed with the Commission.
(b) Reports on Form 8-K. The Company did not file any reports on
Form 8-K during the 1998 Fiscal Quarter.
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: May 5, 1998
RAYOVAC CORPORATION
By: /s/ Randall J. Steward
--------------------------------
Randall J. Steward
Senior Vice President of Finance
and Chief Financial Officer
By: /s/ James A. Broderick
--------------------------------
James A. Broderick
Vice President, General Counsel
and Secretary