UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 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 No.)
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 August 4, 1998, was 27,441,266.
1
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
RAYOVAC CORPORATION
Condensed Consolidated Balance Sheets
As of June 27, 1998 and September 30, 1997
(In thousands, except per share amounts)
-ASSETS-
June 27, 1998 September 30, 1997
------------- ------------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,624 $ 1,133
Receivables 76,547 79,669
Inventories 63,357 58,551
Prepaid expenses and other 15,223 15,027
------------------------ ------------------------
Total current assets 156,751 154,380
Property, plant and equipment, net 68,595 65,511
Deferred charges and other 28,439 16,990
------------------------ ------------------------
Total assets $ 253,785 $ 236,881
======================== ========================
-LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)-
Current liabilities:
Current maturities of long-term debt $ 1,875 $ 23,880
Accounts payable 48,127 57,259
Accrued liabilities:
Wages and benefits and other 24,633 34,812
Recapitalization and other special charges 8,176 4,612
------------------------ ------------------------
Total current liabilities 82,811 120,563
Long-term debt, net of current maturities 140,244 183,441
Employee benefit obligations, net of current portion 8,111 11,291
Other 3,571 2,181
------------------------ ------------------------
Total liabilities 234,737 317,476
Shareholders' equity (deficit):
Common stock, $.01 par value, authorized 150,000 and 90,000 shares
respectively; issued 56,885 and 50,000 shares respectively;
outstanding 27,441 and 20,581 shares, respectively 569 500
Additional paid-in capital 105,097 15,974
Foreign currency translation adjustments 2,238 2,270
Notes receivable from officers/shareholders (986) (1,658)
Retained earnings 40,747 31,321
------------------------ ------------------------
147,665 48,407
Less stock held in trust for deferred compensation
plan, 24 and 160 shares, respectively (145) (962)
Less treasury stock, at cost, 29,444 and 29,419
shares, respectively (128,472) (128,040)
------------------------ ------------------------
Total shareholders' equity (deficit) 19,048 (80,595)
------------------------ ------------------------
Total liabilities and shareholders' equity (deficit) $253,785 $236,881
======================== ========================
See accompanying notes which are an integral part of these statements.
2
RAYOVAC CORPORATION
Condensed Consolidated Statements of Operations
For the three month and nine month periods ended June 27, 1998 and June 28, 1997
(Unaudited)
(In thousands, except per share amounts)
THREE MONTHS NINE MONTHS
------------ -----------
1998 1997 1998 1997
---- ---- ---- ----
Net sales $ 111,054 $ 95,466 $ 357,130 $ 321,021
Cost of goods sold 57,830 52,217 185,730 178,359
------------- ----------- ----------- ------------
Gross profit 53,224 43,249 171,400 142,662
Selling 31,835 25,837 105,511 87,110
General and administrative 9,179 7,335 26,542 22,599
Research and development 1,537 1,351 4,571 4,781
Other special charges 985 223 5,002 4,940
------------- ----------- ----------- ------------
Total operating expenses 43,536 34,746 141,626 119,430
Income from operations 9,688 8,503 29,774 23,232
Other expense (income):
Interest expense 3,501 5,438 11,816 18,884
Other expense (income) 24 (107) (335) 207
------------- ----------- ----------- ------------
3,525 5,331 11,481 19,091
Income before income taxes and extraordinary item 6,163 3,172 18,293 4,141
Income tax expense 2,314 520 6,892 829
------------- ----------- ----------- ------------
Income before extraordinary item 3,849 2,652 11,401 3,312
Extraordinary item, loss on early extinguishment of debt,
net of income tax benefit of $1,263 -- -- 1,975 --
------------- ----------- ----------- ------------
Net income $ 3,849 $ 2,652 $ 9,426 $ 3,312
============= =========== =========== ============
Average shares outstanding 27,435 20,581 26,136 20,513
Basic earnings per share
Income before extraordinary item $ 0.14 $ 0.13 $ 0.44 $ 0.16
Extraordinary item -- -- (0.08) --
------------- ----------- ----------- ------------
Net income $ 0.14 $ 0.13 $ 0.36 $ 0.16
============= =========== =========== ============
Average shares and common stock equivalents outstanding 29,226 20,611 27,743 20,542
Diluted earnings per share
Income before extraordinary item $ 0.13 $ 0.13 $ 0.41 $ 0.16
Extraordinary item -- -- (0.07) --
------------- ----------- ----------- ------------
Net income $ 0.13 $ 0.13 $ 0.34 $ 0.16
============= =========== =========== ============
See accompanying notes which are an integral part of these statements.
3
RAYOVAC CORPORATION
Condensed Consolidated Statements
of Cash Flows For the nine month periods
ended June 27, 1998 and June 28, 1997
(Unaudited)
(In thousands)
1998 1997
Cash flows from operating activities:
Net income $ 9,426 $ 3,312
Non-cash adjustments to net income:
Amortization 2,331 3,171
Depreciation 8,513 8,678
Other non-cash adjustments (2,190) (885)
Net changes in other assets and liabilities,
net of effects from acquisitions (24,967) 18,350
--------- ---------
Net cash (used) provided by operating activities (6,887) 32,626
Cash flows from investing activities:
Purchases of property, plant and equipment (11,666) (5,074)
Proceeds from sale of property, plant and equipment 3,327 50
Payment for acquisitions (9,224) -
Other - (215)
--------- ---------
Net cash used by investing activities (17,563) (5,239)
Cash flows from financing activities:
Reduction of debt (139,644) (140,949)
Proceeds from debt financing 73,959 113,573
Proceeds from issuance of common stock 90,024 -
Other 625 486
--------- ---------
Net cash provided (used) by financing activities 24,964 (26,890)
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents (23) 4
--------- ---------
Net increase in cash and cash equivalents 491 501
Cash and cash equivalents, beginning of period 1,133 4,255
--------- ---------
Cash and cash equivalents, end of period $ 1,624 $ 4,756
========= =========
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 (all
of which are normal and recurring in nature) necessary to present
fairly the financial position of the Company at June 27, 1998, results
of operations for the three and nine month periods ended June 27, 1998
and June 28, 1997, and cash flows for the nine month periods ended June
27, 1998 and June 28, 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 June 27, 1998
was ($425).
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 June 27, 1998 is approximately $4,500. The fair
value at June 27, 1998 was $98.
The Company enters into forward foreign exchange contracts to mitigate
the risk from anticipated settlement in local currencies of
intercompany purchases and sales. These contracts generally require the
Company to exchange foreign currencies for U.S. dollars. The contracts
are marked to market and the related adjustment is recognized in other
expense (income). The related amounts payable to, or receivable from,
the counter-parties are included in accounts payable, or accounts
receivable. The Company has approximately $5,300 of such forward
exchange contracts at June 27, 1998. The fair value at June 27, 1998,
approximated the contract value.
The Company also enters into forward foreign exchange contracts to
hedge the risk from anticipated settlement in local currencies of trade
sales. These contracts generally require the Company to exchange
foreign currencies for Pounds Sterling. The related amounts receivable
from the trade customers are included in accounts receivable. The
Company has approximately $4,000 of such forward exchange contracts at
June 27, 1998. The fair value at June 27, 1998 was ($76).
The Company enters into forward foreign exchange contracts to hedge the
risk from settlement in local currencies of trade purchases. These
contracts generally require the Company to exchange foreign currencies
for U.S. Dollars or Pounds Sterling. The Company has entered into
foreign exchange contracts to hedge payment obligations denominated in
Japanese Yen under a commitment to purchase certain production
equipment from Matsushita. The Company has approximately $6,700 of such
forward exchange contracts outstanding at June 27, 1998. The fair value
at June 27, 1998 was ($666).
5
The Company is exposed to risk from fluctuating prices for zinc and
silver commodities used in the manufacturing process. The company
hedges some of this risk through the use of commodity swaps, calls and
puts. The swaps effectively fix the floating price on a specified
quantity of a commodity through a specified date. Buying calls allows
the Company to purchase a specified quantity of a commodity for a fixed
price through a specified date. Selling puts allows the buyer of the
put to sell a specified quantity of a commodity to the Company for a
fixed price through a specific date. The maturity of, and the
quantities covered by, the contracts highly correlate to the Company's
anticipated purchases of the commodities. The cost of the calls and the
premiums received from the puts are amortized over the life of the
contracts and are recorded in cost of goods sold, along with the
effects of the swap, put and call contracts.
At June 27, 1998, the Company had entered into a series of swaps for
zinc with a contract value of approximately $5,800 for the period June
1998 through September 1999. At June 27, 1998, the Company had
purchased a series of calls with a contract value of approximately
$2,400 and sold a series of puts with a contract value of approximately
$2,200 for portions of the period from June 1998 through March 1999,
designed to set a ceiling and floor price for zinc. While these
transactions have no carrying value, the fair value of these contracts
was approximately ($800) at June 27, 1998.
At June 27, 1998, the Company had entered into a series of swaps for
silver with a contract value of approximately $1,100 for the period
June 1998 through September 1998. While these transactions have no
carrying value, the fair value of these contracts at June 27, 1998
approximated the contract value.
2 INVENTORIES
Inventories consist of the following:
June 27, 1998 September 30, 1997
-------------- ------------------
Raw material $22,241 $23,291
Work-in-process 17,803 15,286
Finished goods 23,314 19,974
------- -------
$63,357 $58,551
======= =======
3 EARNINGS PER SHARE DISCLOSURE
Earnings per share is calculated based upon the following:
Three Months Ended June 27, 1998 Three Months Ended June 28, 1997
---------------------------------------- ---------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Income before
extraordinary $3,849 $2,652
item
Basic EPS
Income available to common
shareholders $3,849 27,435 $0.14 $2,652 20,581 $0.13
------ ----- ------ -----
Effect of Dilutive
Securities
Stock Options 1,791 30
------ ------
Diluted EPS
Income available to common
shareholders plus assumed
conversion $3,849 29,226 $0.13 $2,652 20,611 $0.13
====== ====== ===== ====== ====== =====
6
Nine Months Ended June 27, 1998 Nine Months Ended June 28, 1997
---------------------------------------- ----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Income before extraordinary
item $11,401 $3,312
Basic EPS
Income available to common
shareholders 11,401 26,136 $0.44 3,312 20,513 $0.16
------- ----- ------ -----
Effect of Dilutive
Securities
Stock Options 1,607 29
------ ------
Diluted EPS
Income available to common
shareholders plus assumed
conversion $11,401 27,743 $0.41 $3,312 20,542 $0.16
======= ====== ===== ====== ====== =====
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 $0.6 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 $1.5 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.
In the 1998 Fiscal Second Quarter the Company recorded special charges
and credits as follows: (i) $3.9 million related to (a) the closing by
September 1998 of the Company's Newton Aycliffe, United Kingdom,
packaging facility, (b) the phasing out of direct distribution by June
1998 in the United Kingdom, and (c) the closing before the end of
fiscal 1998 of one of the Company's German sales offices, which amount
includes $1.8 million of employee termination benefits for 73
employees, $1.0 million of lease cancellation costs, and $1.0 million
of equipment and intangible asset write-offs, (ii) $2.0 million related
to the closing by April 1999 of the Company's Appleton, Wisconsin,
manufacturing facility, which amount includes $1.6 million of employee
termination benefits for 141 employees, $0.2 million of asset
write-offs and $0.2 million of other costs, (iii) $1.7 million related
to the exit by January 1999 of certain manufacturing operations at the
Company's Madison, Wisconsin, facility, which amount includes $0.3
million of employee termination benefits for 34 employees, $1.3 million
of asset write-offs, and $0.1 million of other costs, and (iv) a $2.4
million gain on the sale of the Company's previously closed Kinston,
North Carolina, facility.
7
1998 Restructuring Summary
Termination Other
Benefits Costs Total
----------- ----- -----
Expense accrued $3.7 $3.8 $7.5
---- ---- ----
Balance 3/28/98 $3.7 $3.8 $7.5
==== ==== ====
Change in estimate -- -- --
Expensed as incurred -- 0.2 0.2
Expenditures (0.7) (1.4) (2.1)
---- ---- ----
Balance 6/27/98 3.0 2.6 5.6*
==== ==== ====
*The Company anticipates the amounts will be paid by the end of
fiscal 1999.
During the year ended September 30, 1997, the Company recorded special
charges as follows: (i) $2.5 million of charges related to the exit by
early fiscal 1998 of certain manufacturing and distribution operations
at the Company's Kinston, North Carolina facility, which amount
includes $1.1 million of employee termination benefits for 137
employees, (ii) $1.4 million of employee termination benefits for 71
employees related to organizational restructuring in Europe and the
exit of certain manufacturing operations in the Company's Newton
Aycliffe, United Kingdom facility which the Company expects to complete
in fiscal 1998, (iii) $2.0 million of charges for employee termination
benefits for 77 employees related to organizational restructuring in
the United States which the Company expects to complete in fiscal 1998.
The number of employees anticipated to be terminated was approximately
equal to the actual numbers referenced above. The charges were
partially offset by a $2.9 million gain related to the curtailment of
the Company's defined benefit pension plan covering all domestic
non-union employees. A summary of the restructuring activities follows.
1997 Restructuring Summary
Termination Other
Benefits Costs Total
----------- ----- -----
Expenses accrued $4.0 $0.6 $4.6
Change in estimate 0.5 0.6 1.1
Expensed as incurred -- 0.2 0.2
Expenditures (3.3) (0.7) (4.0)
---- ---- ----
Balance 9/30/97 $1.2 $0.7 $1.9
==== ==== ====
Change in estimate -- -- --
Expensed as incurred -- -- --
Expenditures (0.7) -- (0.7)
---- ---- ----
Balance 12/27/97 $0.5 $0.7 $1.2
==== ==== ====
Change in estimate (0.1) (0.4) (0.5)
Expensed as incurred -- -- --
Expenditures (0.2) (0.2) (0.4)
---- ---- ----
Balance 3/28/98 $0.2 $0.1 $0.3
==== ==== ====
8
Change in estimate -- -- --
Expensed as incurred -- -- --
Expenditures -- (0.1) (0.1)
---- ---- ----
Balance 6/27/98 $0.2 -- $0.2
==== ==== ====
In the 1998 Fiscal First Quarter, 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 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 and $4.4 million in
the 1998 Fiscal Second Quarter and Third Quarter respectively.
In the 1998 Fiscal Third Quarter, 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. Also in the
quarter, the Thomas H. Lee Group and its affiliates sold approximately
5.3 million shares and certain Rayovac officers and employees sold
approximately 1.1 million shares in a secondary offering of common
stock. The Company did not receive any proceeds from the sale of the
shares but incurred expenses for the offering of approximately $0.8
million.
6 SUBSEQUENT EVENTS
On June 29, 1998, the Company amended their March 13, 1998 Stock
Purchase Agreement (the "DPP Agreement") for Direct Power Plus, Inc.
("DPP"), a full line marketer of rechargeable batteries and accessories
for cellular phones and video camcorders. This amendment resulted in a
payment of $1.4 million on June 30, 1998 to a former shareholder of DPP
in return for the cancellation of future incentive payments under the
DPP Agreement.
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.
9
RAYOVAC CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
As of June 27, 1998
(In thousands)
-ASSETS-
Guarantor Nonguarantor Consolidated
Parent Subsidiary Subsidiaries Eliminations Total
---------- ----------- ------------ ------------ ------------
Current assets:
Cash and cash equivalents $ 863 $ 45 $ 716 $ -- $ 1,624
Receivables 67,475 843 15,463 (7,234) 76,547
Inventories 52,046 -- 11,315 (4) 63,357
Prepaid expenses and other 13,776 342 1,105 -- 15,223
---------- ----------- ------------ ------------ ------------
Total current assets 134,160 1,230 28,599 (7,238) 156,751
Property, plant and equipment, net 63,596 -- 4,999 -- 68,595
Deferred charges and other 28,204 -- 4,863 (4,628) 28,439
Investment in subsidiaries 15,582 13,977 -- (29,559) --
---------- ----------- ------------ ------------ ------------
Total assets $ 241,542 $ 15,207 $ 38,461 $ (41,425) $ 253,785
========== =========== ============ ============ ============
-LIABILITIES AND SHAREHOLDERS' EQUITY-
Current liabilities:
Current maturities of long-term debt $ 690 $ -- $ 2,132 $ (947) $ 1,875
Accounts payable 43,116 -- 10,949 (5,938) 48,127
Accrued liabilities:
Wages and benefits and other 20,089 (605) 5,143 6 24,633
Recapitalization and other special charges 5,558 -- 2,618 -- 8,176
---------- ----------- ------------ ------------ ------------
Total current liabilities 69,453 (605) 20,842 (6,879) 82,811
Long-term debt, net of current maturities 140,106 -- 3,454 (3,316) 140,244
Employee benefit obligations, net of current portion 8,111 -- -- -- 8,111
Other 3,153 230 188 -- 3,571
---------- ----------- ------------ ------------ ------------
Total liabilities 220,823 (375) 24,484 (10,195) 234,737
Shareholders' equity:
Common stock 569 -- 12,072 (12,072) 569
Additional paid-in capital 105,097 3,525 750 (4,275) 105,097
Foreign currency translation adjustment 2,238 2,238 2,238 (4,476) 2,238
Notes receivable from officers/shareholders (986) -- - -- (986)
Retained earnings 42,418 9,819 (1,083) (10,407) 40,747
---------- ----------- ------------ ------------ ------------
149,336 15,582 13,977 (31,230) 147,665
Less stock held in trust for deferred compensation (145) -- -- -- (145)
Less treasury stock (128,472) -- -- -- (128,472)
---------- ----------- ------------ ------------ ------------
Total shareholders' equity 20,719 15,582 13,977 (31,230) 19,048
---------- ----------- ------------ ------------ ------------
Total liabilities and shareholders' equity $ 241,542 $ 15,207 $ 38,461 $ (41,425) $ 253,785
========== =========== ============ ============ ============
10
RAYOVAC CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
For the three month period ended June 27, 1998
(In thousands)
Guarantor Nonguarantor Consolidated
Parent Subsidiary Subsidiaries Eliminations Total
----------- ----------- ------------- ------------- -----------
Net sales $97,832 $ -- $19,171 $(5,949) $111,054
Cost of goods sold 52,491 -- 11,293 (5,954) 57,830
----------- ----------- ------------- ------------- -----------
Gross profit 45,341 -- 7,878 5 53,224
Selling 28,081 -- 3,754 -- 31,835
General and administrative 7,017 (264) 2,444 (18) 9,179
Research and development 1,537 -- -- -- 1,537
Other special charges 800 -- 185 -- 985
----------- ----------- ------------- ------------- -----------
Total operating expenses 37,435 (264) 6,383 (18) 43,536
Income from operations 7,906 264 1,495 23 9,688
Other expense:
Interest expense 3,358 -- 143 -- 3,501
Equity in profit of subsidiary (852) (77) -- 929 -
Other expense, net (152) 7 169 -- 24
----------- ----------- ------------- ------------- -----------
Income before income taxes
and extraordinary item 5,552 334 1,183 (906) 6,163
Income taxes 1,726 (518) 1,106 -- 2,314
----------- ----------- ------------- ------------- -----------
Income before
extraordinary item 3,826 852 77 (906) 3,849
Extraordinary item -- -- -- -- --
Net income $ 3,826 $852 $ 77 $ (906) $ 3,849
=========== =========== ============= ============= ===========
11
RAYOVAC CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
For the nine month period ended June 27, 1998
(In thousands)
Guarantor Nonguarantor Consolidated
Parent Subsidiary Subsidiaries Eliminations Total
----------- ------------ ------------ ------------ ------------
Net sales $ 314,258 $ -- $ 63,207 $ (20,335) $ 357,130
Cost of goods sold 166,937 -- 39,142 (20,349) 185,730
----------- ------------ ------------ ------------ ------------
Gross profit 147,321 -- 24,065 14 171,400
Selling 91,789 -- 13,722 -- 105,511
General and administrative 20,615 (740) 6,721 (54) 26,542
Research and development 4,571 -- -- -- 4,571
Other special charges 855 -- 4,147 -- 5,002
----------- ------------ ------------ ------------ ------------
Total operating expenses 117,830 (740) 24,590 (54) 141,626
Income (loss) from operations 29,491 740 (525) 68 29,774
Other expense (income):
Interest expense 11,433 -- 383 -- 11,816
Equity in profit of subsidiary 497 1,610 -- (2,107) --
Other expense (income) (496) 3 158 -- (335)
----------- ------------ ------------ ------------ ------------
11,434 1,613 541 (2,107) 11,481
Income (loss) before income taxes
and extraordinary item 18,057 (873) (1,066) 2,175 18,293
Income taxes 6,724 (376) 544 -- 6,892
----------- ------------ ------------ ------------ ------------
Income (loss) before
extraordinary item 11,333 (497) (1,610) 2,175 11,401
Extraordinary item 1,975 -- -- -- 1,975
----------- ------------ ------------ ------------ ------------
Net income (loss) $ 9,358 $ (497) $ (1,610) $ 2,175 $ 9,426
=========== ============ ============ ============ ============
12
RAYOVAC CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
For the nine month period ended June 27, 1998
(In thousands)
Guarantor Nonguarantor Consolidated
Parent Subsidiary Subsidiaries Eliminations Total
---------- ---------- ------------ ------------ ------------
Net cash provided (used) by operating activities $ (14,049) $ (1) $ 2,900 $ 4,263 $ (6,887)
Cash flows from investing activities:
Purchases of property, plant and equipment (10,697) -- (969) -- (11,666)
Proceeds from sale of property, plant, and equip. 3,327 -- -- -- 3,327
Payment for acquisitions (4,371) -- (4,853) -- (9,224)
Net cash used by investing activities (11,741) -- (5,822) -- (17,563)
Cash flows from financing activities:
Reduction of debt (135,659) -- (3,985) -- (139,644)
Proceeds from debt financing 71,030 -- 7,192 (4,263) 73,959
Proceeds from issuance of common stock 90,024 -- -- -- 90,024
Other 625 -- -- -- 625
---------- --------- ------------ ------------ ------------
Net cash provided by financing activities 26,020 -- 3,207 (4,263) 24,964
Effect of exchange rate changes on cash and cash
equivalents -- -- (23) -- (23)
---------- --------- ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 230 (1) 262 -- 491
Cash and cash equivalents, beginning of period 633 46 454 -- 1,133
---------- --------- ------------ ------------ ------------
Cash and cash equivalents, end of period $ 863 $ 45 $ 716 $ -- $ 1,624
========== ========= ============ ============ ============
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Fiscal Quarter and Nine Months Ended June 27, 1998 Compared to
Fiscal Quarter and Nine Months Ended June 28, 1997.
Net Sales. Net sales for the three months ended June 27, 1998 (the
"1998 Fiscal Quarter") increased $15.6 million, or 16.3%, to $111.1 million from
$95.5 million in the three months ended June 28, 1997 (the "1997 Fiscal
Quarter"). The increase was driven by increased sales of alkaline, alkaline
rechargeable, hearing aid and specialty batteries somewhat offset by the
continued decline in the domestic heavy duty battery market.
Alkaline sales in the 1998 Fiscal Quarter increased 19.1%, or $7.8 million, to
$48.7 million from $40.9 million in the same period a year ago. This growth was
driven by strong promotional programs, new customers, and expanded distribution
with existing customers which resulted in increased market share. Alkaline
rechargeable sales in the 1998 Fiscal Quarter increased 45.7% to $6.7 million
due primarily to increased distribution of rechargeables with a major retailer
of rechargeables. Hearing aid battery sales increased 18.9% in the 1998 Fiscal
Quarter due primarily to market growth, increased distribution and the
acquisitions of Brisco and Best Labs.
Within specialty batteries, the acquisition of Direct Power Plus ("DPP") in the
prior quarter resulted in approximately $4.4 million of increased sales in the
1998 Fiscal Quarter over the comparable prior year period.
Heavy duty sales decreased $2.0 million for the 1998 Fiscal Quarter to $7.7
million from $9.3 million in the 1997 Fiscal Quarter. The Company believes that
retailers continue to de-emphasize the heavy duty category, reducing or
eliminating distribution. To date, the Company has been able to replace most of
the lost distribution with its alkaline product.
For the nine months ended June 27, 1998 (the "1998 nine months"), net sales were
$357.1 million, up $36.1 million, or 11.2%, from $321.0 million for the
comparable prior year period. The increased sales were due primarily to
alkaline, hearing aid, and specialty batteries somewhat offset by declines in
heavy duty batteries.
Alkaline sales for the 1998 nine months increased 23.6%, or $32.9 million, to
$172.3 million from $139.4 million in the comparable period of the prior year.
Strong promotions, new customers, and increased distribution in existing
customers were the primary drivers of the increased alkaline sales.
Hearing aid sales through June 1998, increased 12.4% compared to the same period
in the prior year due primarily to the impact of the Brisco and Best Labs
acquisitions and strong growth in the market.
Specialty battery sales for the nine months ended June 1998 increased $9.6
million to $11.7 million. The DPP acquisition accounted for $6.5 million of the
increase while the new photo and keyless entry product lines accounted for $2.7
million.
14
Gross Profit. Gross Profit for the 1998 Fiscal Quarter increased $10.0
million, or 23.1%, to $53.2 million from $43.2 million in the 1997 Fiscal
Quarter due primarily to sales volume increases and the shift in sales to higher
margin alkaline batteries away from lower margin heavy duty batteries. Gross
profit margins increased to 47.9% in the 1998 Fiscal Quarter from 45.2%,
primarily as a result of the improving product mix (more alkaline) and continued
alkaline manufacturing cost improvements.
For the nine months ended June 1998, gross profit increased $28.8 million, or
20.2%, to $171.4 million from $142.6 million for the comparable prior year
period. As a percentage of sales, gross profit increased to 48.0% from 44.4% for
the comparable prior year period. These increases reflect the 1997 price
increase on alkaline, improved sales mix (more alkaline), and continuing
alkaline manufacturing cost improvements.
Selling Expense. Selling expense for the 1998 Fiscal Quarter increased
$6.0 million, or 23.3%, to $31.8 million from $25.8 million in the comparable
prior year quarter. As a percent of sales, selling expense increased to 28.6% in
the 1998 quarter from 27.0% 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 increased sales. Expenses related to gaining
new distribution have also increased compared to the prior year.
For the nine months ended June 1998, selling expense increased $18.4 million, or
21.1%, to $105.5 million from $87.1 million. As a percent of sales, selling
expense increased to 29.5% from 27.1% due primarily to continued increased
advertising and promotional expense.
General and Administrative Expense. General and administrative expense
increased $1.9 million, or 26.0%, to $9.2 million in the 1998 Fiscal Quarter
from $7.3 million in the prior year period primarily as a result of increased
costs associated with information systems improvements. In addition, the 1997
Fiscal Quarter included a $0.5 million gain on the disposal of excess
manufacturing equipment.
For the nine months ended June 1998, general and administrative expense
increased $3.9 million, or 17.3%, to $26.5 million from $22.6 million for the
comparable prior year period. This increase is primarily due to information
system improvements, increased expenses associated with being a publicly held
company, acquisitions, and the gain on equipment disposal mentioned above.
Research and Development Expense. Research and development expense was
$1.5 million for the 1998 Fiscal Quarter, up $0.1 million from the 1997 Fiscal
Quarter. For the nine months ended June 1998, research and development expense
decreased $0.2 million, or 4.2%, to $4.6 million from $4.8 million for the
comparable prior year period primarily due to battery tester development expense
in the prior year that was discontinued.
Other Special Charges. The Company recorded $1.0 million of special
charges during the 1998 Fiscal Quarter which includes $0.8 million related to
the expenses incurred by the Company in connection with a secondary offering of
the Company's stock and $0.2 million of costs related to previously announced
restructuring activities. In the 1997 Fiscal Quarter, the Company recorded
charges of $0.2 million related to the closing of its North Carolina facility.
15
Through the first nine months of Fiscal 1998, the Company recorded $5.0 million
of special charges. In addition to the $1.0 million recorded this quarter, $7.6
million was recorded for the restructuring of domestic and international
operations announced in March 1998 offset by a $2.4 million gain on the sale of
the Company's previously closed North Carolina facility and income of $1.2
million in connection with the buy-out of deferred compensation agreements with
certain former employees. For the nine months ended June 1997, the Company
recorded charges of $4.9 million for organizational restructuring in the U.S.,
the discontinuation of certain manufacturing operations in the U.K., and the
closing of the North Carolina facility.
Income From Operations. Income from operations increased $1.2 million,
or 14.1%, to $9.7 million in the 1998 Fiscal Quarter from $8.5 million in the
1997 Fiscal Quarter. Increased income generated by sales and gross profit
improvements was somewhat offset by the increased operating expenses necessary
to generate the increased sales. Income from operations before special charges
increased $2.0 million, or 23.0%, to $11.7 million for the 1998 Fiscal Quarter
from $9.7 million in the 1997 Fiscal Quarter.
For the nine months ended June 1998, income from operations increased $6.6
million, or 28.4%, to $29.8 million from $23.2 million for the comparable prior
year period. This increase is due primarily to increased sales and gross profit
margins offset by increased selling and general and administrative expense. As a
percent of sales income from operations increased to 8.3% from 7.2% for the nine
months driven by improved gross profit margins.
Interest Expense. Interest expense decreased $1.9 million, or 35.2%, to
$3.5 million for the 1998 Fiscal Quarter from $5.4 million for the 1997 Fiscal
Quarter. The decrease is primarily a result of decreased indebtedness due to the
Company's initial public offering ("IPO") completed in November 1997.
For the nine months ended June 1998, interest expense decreased $7.1 million, or
37.6%, to $11.8 million from $18.9 million for the comparable prior year period.
In addition to the effects of the IPO, the decrease was also impacted by the
inclusion in 1997 of a $2.0 million write-off of unamortized debt issuance
costs.
Other Expense (Income). Interest income was offset by foreign exchange
loss for the 1998 Fiscal Quarter. In the 1997 Fiscal Quarter interest income and
foreign exchange gain equaled $0.1 million.
For the nine months ended June 1998, interest income was $0.3 million, up $0.1
million from the prior year. Foreign exchange losses of $0.4 million in the
prior year nine month period were not repeated in the current year nine month
period.
16
Income Tax Expense. The Company's effective tax rate for the 1998
Fiscal Quarter was 37.5% compared to 16.4% for the 1997 Fiscal Quarter. The 1998
rate includes the non-deductibility of $0.8 million of secondary offering
expenses offset by a favorable true-up of the tax provision related to the
Company's September 1997 tax return. The 1997 rate includes favorable impacts
due to the true-up of the tax provision related to the Company's June 1996 tax
return and certain tax benefits related to a U.K. excess equipment sale.
For the nine months ended June 1998 the Company's effective tax rate was 37.7%
compared to 20.0% for the comparable prior year period. The prior year period
effective rate includes favorable impacts of the 1996 tax return and the U.K.
equipment sale as discussed above. The impact is slightly less than for the
quarter because it is spread over nine versus three months earnings.
Extraordinary Item. For the nine months ended June 1998, the Company
recorded extraordinary expense of $2.0 million, net of income tax, for the
premium payment on the redemption of a portion of the Company's Senior
Subordinated Notes.
Net Income. Net income for the 1998 Fiscal Quarter was $3.9 million, a
$1.2 million, or 44.4%, improvement from $2.7 million for the 1997 Fiscal
Quarter due primarily to increased income from operations and decreased interest
expense as discussed above.
For the nine months ended June 1998 net income increased $6.1 million, or
184.8%, to $9.4 million from $3.3 million in the comparable prior year period
even after the $2.0 million extraordinary item discussed above. This reflects
the impact of top line sales growth, improved product mix of sales and
improvement in margins.
Liquidity and Capital Resources
For the nine months ended June 1998, operating activities used $6.9
million of cash compared to generating $32.6 million for the nine months ending
June 1997. During the nine months of fiscal 1998, cash flow from operating
activities before working capital requirements generated $18.1 million compared
to $14.3 million in the comparable prior year period. Working capital used $25.0
million of cash in the 1998 period primarily due to lower current liabilities
and increased inventories. During the 1997 period working capital generated
$18.3 million primarily from decreased inventories. Costs associated with
announced restructuring activities have been and are expected to be funded with
cash provided from operating activities.
Capital expenditures for the nine months ended June 1998 were $11.7
million, an increase of $6.6 million from $5.1 million for the comparable prior
year period. This increase reflects continued spending on the implementation of
new computer systems and the down payment on a new alkaline production line. The
Company currently expects capital spending for fiscal 1998 to be approximately
$18.0 million due to alkaline capacity expansion, building expansion at the
Company's Portage, Wisconsin, facility related to the restructuring of button
cell manufacturing, and the continued implementation of the new SAP computer
system.
17
The SAP system is also expected to substantially address the Company's
Year 2000 issue. The Company has an internal project team identifying,
correcting, and testing 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 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.
During the nine months ended June 1998 the Company's Board of Directors
granted approximately 438,000 stock options to various members of management
under the 1996 Stock Option Plan and the 1997 Rayovac Incentive Plan. All grants
have been at market price on the effective date of grant which ranged from
$15.875 to $22.88 per share.
On March 30, 1998, the Company acquired the battery distribution
portion of Best Labs, St. Petersburg, Florida, for $2.1 million of which $1.7
million was cash and $0.4 million was a trade receivable owed by Best Labs to
the Company which was offset.
The Company also acquired DPP and Brisco during the nine months of
fiscal 1998 for $4.7 million and $4.9 million respectively of which $7.6 million
is cash already paid and $0.5 million will be paid after a specified time for
resolution of related claims. The Company also sold its previously closed North
Carolina facility for approximately $3.3 million during the 1998 nine month
period.
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 that
regard. The Company's current credit facilities include a revolving credit
facility of $90.0 million of which $68.8 million was outstanding at June 27,
1998, with approximately $3.2 million utilized for outstanding letters of credit
and an acquisition facility of $70.0 million of which $5.9 million was
outstanding at June 27, 1998.
Impact of Recently Issued Accounting Standards
In March 1998 the Emerging Issues Task Force ("EITF") reached a consensus on
Issue 97-14, "Accounting for Deferred Compensation Arrangements Where Amounts
Earned Are Held in a Rabbi Trust and Invested". The Company has such a trust
which held approximately 160,000 shares of the Company's common stock which
holdings may be diversified among other investment options. During the third
fiscal quarter of 1998 the trust sold approximately 136,000 shares of the
Company's stock as part of the secondary offering. The proceeds have been
diversified among other investment options within the trust. Currently the
Company has recorded a deferred compensation liability equal to the historical
cost of all shares, approximately $1.0 million, all of which relate to awards
made prior to the EITF March consensus. The EITF is expected to discuss
transition treatment for deferred compensation awards prior to March at a future
meeting. It is therefore uncertain what treatment may be required. The Company
may be required to mark the deferred
18
compensation liability to market by recording compensation expense. The Company
estimates this could result in a charge to earnings, net of tax, of
approximately $1.4 million.
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** Confidentiality, 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
19
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 of March 5, 1998 by
and among the Company, Matsushita Battery Industrial Co., Ltd. and Matsushita
Electric Industrial Co., Ltd.
10.16 Amended and Restated Employment Agreement, dated as of April 27, 1998, by and
between the Company and David A. Jones.
10.17 Employment Agreement, dated as of April 27, 1998, by and between the Company and
Kent J. Hussey.
10.18 Severance Agreement by and between the Company and Randall J. Steward.
27 Financial Data Schedule.
- ------------------
* 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.
20
*** 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.
+++ 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.
(b) Reports on Form 8-K. The Company filed a report on Form 8-K on June
15, 1998 discussing the potential effect on the Company of the Emerging Issues
Task Force's consensus on Issue 97-14, "Accounting for Deferred Compensation
Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested."
21
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: August 4, 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
22