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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___________ to _________.
Commission File No. 333-17895
RAYOVAC CORPORATION
(Exact name of registrant as specified in its charter)
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Wisconsin 22-2423556
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
601 Rayovac Drive 53711-2497
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (608) 275-3340
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ----------------------------------- ------------------------------
Common Stock, Par Value $.01 New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
On December 16, 1997, the aggregate market value of the voting stock held
by non-affiliates of the registrant was $139,733,719. As of December 16, 1997,
there were outstanding 27,403,938 shares of the registrant's Common Stock,
$0.01 par value.
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TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS ...................................................... 3
ITEM 2. PROPERTIES ................................................... 10
ITEM 3. LEGAL PROCEEDINGS ............................................. 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS ...... 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ......................................... 13
ITEM 6. SELECTED FINANCIAL DATA ....................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................... 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ... 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA .................. 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ................................... 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS ........................... 26
ITEM 11. EXECUTIVE COMPENSATION ....................................... 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ........................................... 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............... 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K .............................................. 34
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE ......................................... 35
SIGNATURES ................................................. 72
2
PART I
ITEM 1. BUSINESS
General
Rayovac Corporation ("Rayovac" or the "Company") is the leading value
brand and the third largest domestic manufacturer of general batteries
(including alkaline, heavy duty and rechargeable alkaline), and is the leading
worldwide manufacturer of hearing aid batteries. The Company is also the
leading domestic manufacturer of rechargeable household batteries, heavy duty
batteries and certain other specialty batteries, including lantern batteries
and lithium batteries for personal computer clocks and memory backup. Rayovac
was established in 1906 and is a Wisconsin corporation.
The Company has established its position as the leading value brand in the
U.S. general alkaline battery market by focusing on the mass merchandiser
channel. The Company achieved this position by (i) offering batteries with
quality and performance substantially equivalent to batteries offered by its
principal competitors at a lower price, (ii) emphasizing innovative in-store
merchandising programs, and (iii) offering retailers attractive margins. The
Company has established its position as the leader in various specialty battery
niche markets through (i) continual technological advances, (ii) creative
distribution and marketing, and (iii) strong relationships with industry
professionals and manufacturers. The Company sells and distributes its products
in several channels including mass merchandisers, food and convenience stores,
drug and specialty retailers, hardware/home centers, department stores, hearing
aid professionals, industrial and government/OEM. The Company markets all of
its branded products under the Rayovac[RegTM] name and selected products under
sub-brand names such as MAXIMUM[TM], Renewal[RegTM], Loud'n Clear[RegTM],
ProLine[RegTM], Lifex[TM], Power Station[RegTM], Workhorse[RegTM], and
Roughneck[RegTM].
In September 1996, the Company and all of the shareholders of the Company
completed a recapitalization of the Company (the "Recapitalization"), which
resulted in, among other things, the Thomas H. Lee Equity Fund III, L.P. (the
"Lee Fund") and certain other affiliates of Thomas H. Lee Company ("THL Co.";
the Lee Fund and such other affiliates being referred to herein as the "Lee
Group") acquiring control of the Company.
Upon consummation of the Recapitalization, the Company changed its fiscal
year end from June 30 to September 30. For clarity of presentation and
comparison, references to fiscal 1995 and fiscal 1996 are to the Company's
fiscal years ended June 30, 1995 and June 30, 1996, respectively, references to
the "Transition Period ended September 30, 1996" and the "Transition Period"
are to the period from July 1, 1996 to September 30, 1996 and references to
fiscal 1997 are to the Company's fiscal year ended September 30, 1997.
Upon completion of the Recapitalization, David A. Jones was hired as Chief
Executive Officer of the Company to implement a new business strategy focused
on (i) reinvigorating the Rayovac brand name by raising consumer brand
awareness through, among other things, focused marketing and advertising, (ii)
growing Rayovac's market share by expanding distribution into new channels,
increasing sales to under-penetrated channels and customers, launching new
products, and selectively pursuing acquisitions and alliances, (iii) reducing
costs by rationalizing manufacturing and distribution, better utilizing
existing plant capacity, outsourcing products where appropriate, reducing
working capital, and downsizing corporate overhead, and (iv) improving employee
productivity by reorganizing workflow to support the business units,
implementing modern information systems, increasing training and education, and
implementing a pay-for-performance culture.
To implement its new strategy, the Company has, among other things,
strengthened its senior management team, reorganized sales, marketing and
administration by distribution channel, launched new sales and marketing
programs, outsourced certain non-manufacturing operations, rationalized
manufacturing and other costs and reorganized its information systems.
Growth Strategy
Rayovac believes it has significant growth opportunities in its businesses
and has developed corporate and market segment strategies aimed at increasing
sales, profits and market share. Key elements of the Company's growth strategy
are as follows:
Reinvigorate the Rayovac Brand Name. The brand, originally introduced in
1921, has wide recognition in all markets where the Company competes, but has
lower awareness than other more highly advertised brands. The
3
Company is committed to reinvigorating the Rayovac brand name after many years
of underdevelopment. The Company has initiated an integrated advertising
campaign designed to increase awareness of the Rayovac brand and to heighten
customers' perceptions of the quality, performance and value of Rayovac
products. The Company intends to continue building its brand name to increase
sales of all its products. In 1997, the Company launched a reformulated
alkaline battery, Rayovac MAXIMUM, supported by new graphics, new packaging, a
new advertising campaign, and aggressive introductory retail promotions. This
focused marketing approach is specifically designed to raise consumer awareness
and increase retail sales.
Leverage Value Brand Position. Rayovac believes it has a unique position
in the general battery market as the value brand in an industry in which the
leading three brands (Duracell, Energizer and Rayovac) account for
approximately 90% of sales. The Company's strategy is to provide products of
quality and performance equal to its major competitors in the general battery
market at a lower price, appealing to a large segment of the population
desiring a value brand. To demonstrate its value positioning, Rayovac offers
comparable battery packages at a lower price or, in some cases, more batteries
for the same price.
Expand Retail Distribution. Historically the Company had focused its sales
and marketing efforts on the mass merchandiser channel. As a result, the
Company has achieved a 19% share of domestic alkaline battery unit sales
through mass merchandisers. However, this narrow focus contributed to much
lower market share in all other retail channels which represent a market of
$1.7 billion or 70% of the general battery market. The Company has reorganized
its marketing, sales, and sales representative organizations by channel in
order to grow market share by (i) gaining new customers, (ii) penetrating
existing customers with a larger assortment of products, (iii) introducing new
products, and (iv) utilizing more aggressive and channel specific promotional
programs.
Further Capitalize on Worldwide Leadership in Hearing Aid Batteries. The
Company seeks to increase its market share in the hearing aid battery segment
by leveraging its leading technology and its dedicated and focused sales and
marketing organizations. Rayovac plans to continue to utilize Arnold Palmer as
its spokesperson in its print media campaign and has also recently introduced
large multi-packs of hearing aid batteries which have rapidly gained consumer
favor.
Reposition the Renewal Rechargeable Alkaline Battery. The Company's
Renewal rechargeable battery is the only rechargeable alkaline battery in the
U.S. market. Since the Recapitalization, management has lowered the price of
Renewal rechargers to encourage consumers to purchase the system and shifted
Renewal's marketing message from its environmental benefits to its money-saving
benefits.
Introduce New Niche Products. The Company has developed leading positions
in several important niche markets, including those for lantern batteries and
lithium coin cells for personal computer memory back-up. The Company intends to
continue selectively pursuing opportunities to exploit under-served niche
markets, as well as further develop recent initiatives including the sales and
marketing of photo and keyless entry batteries. In the lighting products
segment, the Company plans to introduce a number of attractively designed new
products and intends to bring new products to the market in the future on a
regular cycle. New products have been proven to be a key element in gaining
market share for lighting products.
Develop New Markets. The Company intends to leverage its existing
resources to expand its business into new markets for batteries and related
products both domestically and internationally. The Company expects to pursue a
strategy of selective acquisitions and regularly considers potential
acquisition candidates. These acquisitions may focus on expansion into new
geographic markets, technologies or product lines and, in addition, such
acquisitions may be of a significant size and could involve domestic or
international parties.
Products
Rayovac develops, manufactures and markets a wide variety of batteries and
battery-powered lighting devices. The Company's broad line of products includes
(i) general batteries (including alkaline, heavy duty and rechargeable alkaline
batteries) and specialty batteries (including hearing aid, watch, photo,
keyless entry, and personal computer clock and memory back-up batteries) and
(ii) lighting products and lantern batteries. General batteries (D, C, AA, AAA
and 9-volt sizes) are used in devices such as radios, remote controls, personal
radios and cassette players, pagers, portable compact disc players, electronic
and video games and battery-powered toys, as well as a variety of
battery-powered industrial applications. Of the Company's specialty batteries,
button cells are used in smaller devices (such as hearing aids and watches),
lithium coin cells are used in cameras, calculators, communication equipment,
medical instrumentation and personal computer clocks and memory back-up
systems, and lantern
4
batteries are used almost exclusively in battery-powered lanterns. The
Company's lighting products include flashlights, lanterns and similar portable
products.
The following table indicates the percentage of the Company's net sales
attributable to the product types listed for the periods presented.
Percentage of Company Net Sales
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Fiscal Year June 30, Transition Fiscal Year
----------------------- Period Ended Ended
September 30, September 30,
1995 1996 1996 1997
Product Type ---------- ---------- --------------- --------------
Battery Products:
Alkaline .................................... 43.4% 43.6% 41.4% 45.0%
Heavy Duty .................................... 14.1 12.2 12.7 10.4
Rechargeable Batteries ........................ 5.6 7.1 5.1 5.5
Hearing Aid ................................. 12.7 14.6 14.3 14.8
Other Specialty Batteries ..................... 10.0 8.6 10.1 9.8
----- ----- ----- -----
Total ....................................... 85.8 86.1 83.6 85.5
Lighting Products and Lantern Batteries ...... 14.2 13.9 16.4 14.5
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Total ....................................... 100.0% 100.0% 100.0% 100.0%
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Battery Products
A description of the Company's major battery products including their
typical uses is set forth below.
General Batteries Hearing Aid Other Specialty Batteries Lantern
Batteries Batteries
Technology Alkaline Zinc Zinc Air Lithium Silver Zinc
Types/ - Disposable - Heavy Duty -- -- -- Lantern (Zinc
Common - Rechargeable (Zinc Chloride) Chloride and
Name: Zinc Carbon)
Brand; Rayovac; MAXIMUM, Rayovac Rayovac; Loud'n Rayovac; Lifex Rayovac Rayovac
Sub-brand Renewal, Power Clear, ProLine
Names(1): Station
Sizes: D, C, AA, AAA, 9-volt(2) for both 5 sizes 5 primary sizes 10 primary sizes Standard
Alkaline and Zinc lantern
Typical All standard household applications Hearing Personal com- Watches and Beam lanterns
Uses: including pagers, personal radios aids puter clocks and calculators Camping
and cassette players, remote con- memory back-up lanterns
trols and a wide variety of
industrial applications
(1) The Company also produces and supplies private label brands in selected
categories.
(2) The Company does not produce 9-volt rechargeable batteries.
Alkaline Batteries. Rayovac produces a full line of alkaline batteries
including D, C, AA, AAA and 9-volt size batteries for both consumers and
industrial customers. The Company's alkaline batteries are marketed and sold
primarily under the Rayovac MAXIMUM brand, although the Company also engages in
limited private label manufacture of alkaline batteries. AA and AAA size
batteries are often used with smaller electronic devices such as remote
controls, photography equipment, personal radios and cassette players, pagers,
portable compact disc players and electronic and video games. C and D size
batteries are generally used in devices such as flashlights, lanterns, radios,
cassette players and battery-powered toys. 9-volt size batteries are generally
used in fire alarms, smoke detectors and communication devices.
Heavy Duty Batteries. Heavy duty batteries include zinc chloride batteries
designed for low and medium-drain devices such as lanterns, flashlights, radios
and remote controls. The Company produces a full line of heavy duty batteries,
although AA, C and D size heavy duty batteries together accounted for 90% of
the Company's heavy duty battery unit sales in fiscal 1997.
Generally, the size of the heavy duty battery market has been decreasing
because of increased sales of alkaline batteries for uses traditionally served
by non-alkaline batteries.
5
Rechargeable Batteries. The Company's Renewal rechargeable battery is the
only rechargeable alkaline battery in the U.S. market. Since the
Recapitalization, management has lowered the price of Renewal rechargers to
encourage consumers to purchase the system and shifted Renewal's marketing
message from its environmental benefits to its money-saving benefits. Certain
technology underlying the Company's Renewal line of rechargeable alkaline
batteries could be made available to the Company's competitors under certain
circumstances.
Hearing Aid Batteries. The Company was the largest worldwide seller of
hearing aid batteries in fiscal 1997. This strong market position is the result
of hearing aid battery products with advanced technological capabilities,
consistent product performance, a strong distribution system and an extensive
marketing program. Hearing aid batteries are produced in several sizes and are
designed for use with various types and sizes of hearing aids. The Company
produces five sizes and two types of zinc air button cells for use in hearing
aids, which are sold under the Loud'n Clear and ProLine brand names and under
several private labels, including Beltone, Miracle Ear and Siemens. Zinc air is
a highly reliable, high energy density, lightweight battery system with
performance superior to that of traditional hearing aid batteries. The Company
was the pioneer and currently is the leading manufacturer of the smallest (5A
and 10A size) hearing aid batteries.
Other Specialty Batteries. The Company's other specialty battery products
include non-hearing aid button cells, lithium coin cells, photo batteries and
keyless entry batteries. The Company produces button and coin cells for
watches, cameras, calculators, communications equipment and medical
instrumentation. The Company's Lifex lithium coin cells are high-quality
lithium batteries with certain performance advantages over other lithium
battery systems. These products are used in calculators and personal computer
clocks and memory back-up systems. Lifex lithium coin cells have outstanding
shelf life and excellent performance. The Company believes that the market for
lithium personal computer memory back-up batteries has significant growth
potential due to growth in the personal computer market.
Battery Merchandising and Advertising
Alkaline and Rechargeable Batteries. Since the Recapitalization, the
Company has substantially revised its merchandising and advertising strategies
for general batteries. Key elements of the Company's strategies include:
building the awareness and image of the Rayovac brand name; focusing on the
reformulated MAXIMUM alkaline product line; improving consumer perceptions of
the quality and performance of the Company's products; upgrading and unifying
product packaging; and solidifying the Company's position as the value brand by
offering batteries of equal quality and performance at a lower price than those
offered by its principal competitors. The Company's strategy is to provide
products of quality and performance equal to its major competitors in the
general battery market at a lower price, appealing to a large segment of the
population desiring a value brand. To demonstrate its value positioning,
Rayovac offers comparable battery packages at a lower price or, in some cases,
more batteries for the same price. The Company also works with individual
retail channel participants to develop unique merchandising programs and
promotions and to provide retailers with attractive profit margins to encourage
retailer brand support.
In the three fiscal years prior to the Recapitalization, the Company spent
substantially all of its advertising budget on its Renewal product line. The
Company's current advertising campaign designed by Young & Rubicam, the
Company's new advertising agency, has shifted advertising efforts to the
Company's MAXIMUM alkaline products. In addition, the Company is launching its
first major national advertising campaign. The campaign is designed to increase
awareness of the Rayovac brand and to heighten customers' perceptions of the
quality, performance and value of Rayovac products. The Company has engaged
Michael Jordan as a spokesperson for its general battery products under a
contract which extends through 2004.
The Company substantially overhauled its marketing strategy for its
Renewal rechargeable batteries in 1997 to focus on the economic advantages of
Renewal rechargeable batteries and to position the rechargers at lower, more
attractive price points. As part of its marketing strategy for its rechargeable
batteries, the Company actively pursues OEM arrangements and other alliances
with major electronic device manufacturers.
Hearing Aid Batteries. To market and distribute its hearing aid battery
products, the Company continues to use a highly successful national print
advertising campaign featuring Arnold Palmer. The Company also pioneered the
use of multipacks and intends to further expand multipack distribution in
additional professional and retail channels. Additionally, the Company believes
that it has developed strong relationships with hearing aid manufacturers and
audiologists, the primary purveyors of hearing aids, and seeks to further
penetrate the professional market. The Company
6
has also established relationships with major Pacific Rim hearing aid battery
distributors to take advantage of anticipated global market growth.
Other Specialty Batteries. The Company's marketing strategies for its
other specialty batteries focus on leveraging the Company's brand name and
strong market position in hearing aid batteries to promote its specialty
battery products. The Company has redesigned its product graphics and packaging
of its other specialty battery products to achieve a uniform brand appearance
with the Company's other products and generate greater brand awareness and
loyalty. In addition, the Company plans to continue to develop relationships
with manufacturers of communications equipment and other products in an effort
to expand its share of the non-hearing aid button cell market. The Company
believes there to be significant opportunity for growth in the photo and
keyless entry battery markets and seeks to further penetrate the replacement
market for these products.
With regard to lithium coin cells, the Company seeks to further penetrate
the OEM portable personal computer market, as well as to broaden its customer
base by focusing additional marketing and distribution efforts on
telecommunication and medical equipment manufacturers.
Lighting Products and Lantern Batteries
Products
The Company markets battery-powered lighting devices, including
flashlights, lanterns and similar portable products for the retail and
industrial markets. Rayovac has established a strong position in these markets
based on innovative product features, consistent product quality and creative
product packaging. In addition, the Company endeavors to regularly introduce
new products to stimulate consumer demand and promote impulse purchases.
The Company also produces a wide range of consumer and industrial lantern
batteries. This market has experienced a decline in recent years due to the
declining use of this product for highway construction barricades.
Merchandising and Advertising
The Company's marketing strategy for its lighting products and lantern
batteries focuses on leveraging the Company's strong brand name, regularly
introducing new products, utilizing innovative packaging and merchandising
programs, and promoting impulse buying and gift purchases.
Sales and Distribution
General
After the Recapitalization, the Company reorganized its sales force by
distribution channel. As a result of this reorganization, the Company maintains
separate U.S. sales forces primarily to service its retail sales and
distribution channels and its hearing aid professionals, industrial and OEM
sales and distribution channels. In addition, the Company utilizes a network of
independent brokers to service participants in selected distribution channels.
In conjunction with its broader cost rationalization initiatives, the Company
has reduced the number of independent brokers and sales agents from over 100 to
approximately 50. With respect to sales of the Company's hearing aid batteries,
while most of the Company's sales have historically been through hearing aid
professionals, the Company is actively engaged in efforts to increase sales
through retail channels. In addition, the Company maintains its own sales force
of approximately 30 employees in Europe which promotes the sale of all of the
Company's products.
Retail
The primary retail distribution channels for the Company's products
include: mass merchandisers (both national and regional); food and convenience
stores; drug and specialty retailers; hardware/home centers; department stores;
automotive aftermarket dealers; military sales; and catalog showrooms. The
Company works closely with individual retailers to develop unique product
promotions and to provide them with the opportunity for attractive profit
margins to encourage brand support.
The Company's sales efforts in the retail channel focus primarily on sales
and distribution to national mass merchandisers, in particular the Wal-Mart,
Kmart and Target chains, which collectively accounted for 29% of the Company's
net sales in fiscal 1997. Wal-Mart, the Company's largest retailer customer,
accounted for 20% of the Company's net sales in fiscal 1997. The Company's
sales strategy for these and other mass merchandisers includes increasing
market share for all of the Company's products through the use of account
specific programs and a separate sales and marketing team dedicated to these
large retailers.
7
Industrial and OEM
In the industrial battery market, the Company services three sales and
distribution channels: contract sales to governments and related agencies;
maintenance repair organizations (including buying groups); and office product
supply companies. The primary products sold to this market include alkaline,
heavy duty, and lantern batteries and flashlights. Maintenance repair
organizations, the largest of which is W.W. Grainger (to whom the Company is a
major supplier of battery and lighting products), generally sell to contractors
and manufacturers. The office product supply channel includes sales to both
professional and retail companies in the office product supply business.
In the OEM sales channel, the Company actively pursues OEM arrangements
and other alliances with major electronic device manufacturers for its
rechargeable batteries. The Company also utilizes the OEM channel for the sale
and distribution of its hearing aid batteries through strong relationships it
has developed with hearing aid manufacturers. The Company plans to continue to
develop relationships with manufacturers of communications equipment and other
products in an effort to expand its share of the non-hearing aid button cell
market. With regard to lithium coin cells, the Company utilizes the OEM channel
in the portable personal computer, telecommunications and medical equipment
markets.
Manufacturing and Raw Materials
The Company manufactures batteries in the United States and the United
Kingdom. Since the Recapitalization, the Company has shifted manufacturing
operations from its Newton Aycliffe, United Kingdom and Kinston, North Carolina
facilities to other facilities of the Company and outsourced the manufacture of
certain lighting products. These efforts have increased plant capacity
utilization and eliminated some of the Company's underutilized manufacturing
capacity. Management believes that the Company's manufacturing capacity is
sufficient to meet its anticipated production requirements for the foreseeable
future.
The most significant raw materials used by the Company to manufacture
batteries are zinc powder, electrolytic manganese dioxide powder, graphite and
steel. There are a number of worldwide sources for all necessary raw materials,
and management believes that Rayovac will continue to have access to adequate
quantities of such materials at competitive prices.
Research and Development
The Company's research and development strategy is to purchase or license
state-of-the-art manufacturing technology from third parties and to develop
such technology through the Company's own research and development efforts. The
Company's research and development efforts with respect to battery products
focus primarily on performance and cost improvements of existing products and
technologies. In recent years, these efforts have led to advances in alkaline,
heavy duty and lithium chemistries, as well as zinc air hearing aid batteries
and enhancements of licensed rechargeable alkaline technology. The Company's
research and development efforts in the lighting products and lantern batteries
segment are focused on the development of new products.
The Company believes that continued development efforts are important in
light of the continually evolving nature of battery technology and credits the
competitive performance of its products to its recent development efforts. In
the hearing aid battery segment, the Company's research and development group
maintains close alliances with the developers of hearing aid devices and often
works in conjunction with these developers in preparing new product designs.
The success of these efforts is most recently demonstrated by the Company's
development of the two smallest (5A and 10A size) hearing aid batteries.
Further, the Company continues to partner with the U.S. government in research
efforts to develop new battery technology. The Company's research and
development group includes approximately 95 employees, the expense for some of
whom is funded by U.S. government research contracts.
The Company's expenditures for research and development were approximately
$6.2 million, $1.5 million, $5.4 million and $5.0 million for fiscal 1997, the
Transition Period, fiscal 1996 and fiscal 1995, respectively.
Information Systems
The Company has completed an initial reorganization of its information
systems function by (i) hiring an experienced Chief Information Officer, (ii)
outsourcing mainframe computer operations, and (iii) completing an enterprise
software system analysis and selection. The Company has purchased from SAP and
begun implementing an enterprise-wide, integrated information system to upgrade
and modernize its business operations, the majority
8
of which will be substantially implemented by late 1998. When fully
implemented, this system is expected to reduce cycle times, lower manufacturing
and administrative costs, improve both asset and employee productivity and
address the Year 2000 issue.
Patents, Trademarks and Licenses
The Company's success and ability to compete depends in part upon its
technology. The Company relies upon a combination of patent, trademark and
trade secret laws, together with licenses, confidentiality agreements and other
contractual covenants, to establish and protect its technology and other
intellectual property rights.
The Company owns or licenses from third parties a considerable number of
patents and patent applications throughout the world, primarily for battery
product improvements, additional features and manufacturing equipment.
The Company also uses a number of trademarks in its business, including
Rayovac[RegTM], MAXIMUM[TM], Renewal[RegTM], Loud'n Clear[RegTM], Power
Station[RegTM], ProLine[RegTM], Lifex[TM], Smart Pack[RegTM], Smart[TM] Strip,
Workhorse[RegTM] and Roughneck[RegTM]. The Company relies on both registered
and common law trademarks in the United States to protect its trademark rights.
The Rayovac[RegTM] mark is also registered in countries outside the United
States, including in Europe and the Far East. The Company does not have any
right to the trademark "Rayovac" in Brazil, where the mark is owned by an
independent third-party battery manufacturer. In addition, ROV Limited, a third
party unaffiliated with the Company, has an exclusive, perpetual, royalty-free
license for the use of certain of the Company's trademarks (including the
"Rayovac" mark) in connection with zinc carbon and alkaline batteries and
certain lighting devices in many countries outside the United States, including
Latin America.
The Company has obtained a non-exclusive license to use certain technology
underlying its rechargeable battery line to manufacture such batteries in the
United States, Puerto Rico and Mexico and to sell and distribute batteries
based on the licensed technology worldwide. This license terminates with the
expiration of the last-expiring patent covering the licensed technology. In
addition, in the conduct of its business, the Company relies upon other
licensed technology in the manufacture of its products. See Note 13 to Notes to
Consolidated Financial Statements.
Competition
The Company believes that the markets for its products are highly
competitive. In the U.S. battery industry, the Company competes primarily with
two well established companies, Duracell International Inc., a subsidiary of
The Gillette Company ("Duracell"), and Eveready Battery Company, Inc., a
subsidiary of Ralston Purina Company and producer of Energizer brand batteries
("Energizer"), each of which has substantially greater financial and other
resources and greater overall market share than the Company. Although other
competitors have sought to enter this market, the Company believes that new
market entrants would need significant financial and other resources to develop
brand recognition and the distribution capability necessary to serve the U.S.
marketplace. Substantial capital expenditures would be required to establish
U.S. battery manufacturing operations, although potential competitors could
import their products into the U.S. market. The Company and its primary
competitors enjoy significant advantages in having established brand
recognition and distribution channels.
In the U.S. market for general batteries competition is based on brand
name recognition, perceived quality, price, performance, product packaging and
design innovation, as well as creative marketing, promotion and distribution
strategies. In comparison to the U.S. battery market, the international general
battery market has more competitors, is as highly competitive and has similar
methods of competition.
Competition in the hearing aid battery industry is based upon reliability,
performance, quality, product packaging and brand name recognition. The
Company's primary competitors in the hearing aid battery industry include
Duracell, Energizer and Panasonic. The battery-powered lighting device industry
is also very competitive and includes a greater number of competitors
(including Black & Decker, Mag-Lite and Energizer) than the U.S. battery
industry.
Environmental Compliance
Due to the nature of the operations conducted by the Company, the
Company's facilities are subject to a broad range of federal, state, local and
foreign legal and regulatory provisions relating to the environment, including
those regulating the discharge of materials into the environment, the handling
and disposal of solid and hazardous substances and wastes and the remediation
of contamination associated with releases of hazardous substances at Company
facilities and off-site disposal locations. Except as set forth herein under
Item 3, "Legal Proceedings," Rayovac believes that compliance with
9
the federal, state, local and foreign provisions to which it is subject will
not have a material effect upon its capital expenditures, earnings and
competitive position. See Item 3 hereof for certain additional information
regarding environmental matters involving the Company included in the
description of legal proceedings.
Employees
As of September 30, 1997 the Company had approximately 2,300 employees.
Seasonality
Sales of the Company's products are seasonal, with the highest sales
occurring in the fiscal quarter ending on or about December 31, during the
holiday season. During the past four fiscal years, the Company's sales in the
quarter ending on or about December 31 have represented an average of 33% of
annual net sales. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality."
Financial Information about Foreign and Domestic Operations
Financial information pertaining to the Company's foreign and domestic
operations is set forth in Note 12 of Notes to Consolidated Financial
Statements filed herewith and incorporated by reference into Item 8 hereof.
Forward Looking Statements
Certain of the information contained in this Annual Report on Form 10-K,
including without limitation statements made under this Part I, Item 1,
"Business" and Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which are not historical facts,
may include "forward-looking statements" within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In
reviewing such information, it should be kept in mind that the Company's actual
results may differ materially from those set forth in such forward-looking
statements.
Important factors that could cause the Company's actual results to differ
materially from those included in the forward-looking statements made herein
include, without limitation, (i) significant changes in consumer demand for
household or hearing aid batteries in the United States or Europe; (ii) the
loss of or a significant reduction in sales through a significant retailer
customer; (iii) the introduction of new product features or new battery
technology by a competitor; (iv) the enactment of unexpected environmental
regulations negatively impacting consumer demand for certain of the Company's
battery products; (v) difficulties or delays in the integration of operations
of acquired companies; and (vi) currency fluctuations in significant
international markets.
Additional factors and assumptions that could generally cause the Company's
actual results to differ materially from those included in the forward-looking
statements made herein include, without limitation, the Company's ability to
develop and introduce new products, the effects of general economic conditions
in the United States or abroad, the sufficiency of the Company's production
capacity to meet future demand for its products, the Company's ability to keep
pace with the technological standards in its industry and the Company's ability
to continue to penetrate and develop new distribution channels for its products.
Other factors and assumptions not identified above were also involved in the
derivation of the forward-looking statements contained in this Annual Report on
Form 10-K and the failure of such other assumptions to be realized, as well as
other factors, may also cause actual results to differ materially from those
projected. The Company assumes no obligation to update these forward-looking
statements to reflect actual results or changes in factors or assumptions
affecting such forward-looking statements.
ITEM 2. PROPERTIES
The following table sets forth information regarding the Company's six
manufacturing sites in the United States and the United Kingdom:
Location Product Owned/Leased Square Feet
Fennimore, WI Alkaline batteries and Renewal rechargeable batteries Owned 176,000
Madison, WI Heavy duty/general purpose batteries Owned 158,000
Portage, WI Zinc air and silver button cells Owned 62,000
Appleton, WI Lithium coin cells and alkaline computer batteries Owned 60,600
Wonewoc, WI Battery-powered lighting products and lantern batteries Leased 60,000
Washington, UK Mercuric oxide and zinc air button cells Leased 63,000
10
The Company has recently shifted manufacturing operations from its Newton
Aycliffe, United Kingdom and Kinston, North Carolina facilities to other
facilities of the Company and outsourced the manufacture of certain lighting
products. The following table sets forth information regarding the Company's
four packaging and distribution sites in the United States and the United
Kingdom, all of which are leased:
Location Square Feet
Middleton, WI 220,000
Laverne, TN 73,000
Hayward, CA 30,000
Newton Aycliffe, UK 75,000
The Company leases approximately 250,000 square feet of space in Madison,
Wisconsin for its corporate headquarters and technology center. See Note 9 of
Notes to Consolidated Financial Statements. The Company believes that its
facilities, in general, are adequate for its present and currently foreseeable
needs.
ITEM 3. LEGAL PROCEEDINGS
The Company's facilities are subject to a broad range of federal, state,
local and foreign laws and regulations relating to the environment, including
those governing discharges to the air and water and land, the handling and
disposal of solid and hazardous substances and wastes, and the remediation of
contamination associated with releases of hazardous substances at Company
facilities and at off-site disposal locations. The Company has a proactive
environmental management program that includes the use of periodic
comprehensive environmental audits to detect and correct practices that violate
environmental laws or are inconsistent with best management practices. Based on
information currently available to Company management, the Company believes
that it is substantially in compliance with applicable environmental
regulations at its facilities, although no assurance can be provided with
respect to such compliance in the future. There are no pending proceedings
against the Company alleging that the Company is or has been in violation of
environmental laws, and the Company is not aware of any such proceedings
contemplated by governmental authorities. The Company is, however, subject to
certain proceedings under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") or analogous state laws, as described
below.
The Company has from time to time been required to address the effect of
historic activities on the environmental condition of its properties, including
without limitation the effect of releases from underground storage tanks.
Several Company facilities have been in operation for decades and are
constructed on fill that includes, among other materials, used batteries
containing various heavy metals. The Company has accepted a deed restriction on
one such property in lieu of conducting remedial activities, and may consider
similar actions at other properties if appropriate. Although the Company is
currently engaged in remedial projects at a few of its facilities, the Company
does not expect that such projects will cause it to incur material
expenditures. Nonetheless, the Company has not conducted invasive testing to
identify all potential risks and, given the age of the Company's facilities and
the nature of the Company's operations, there can be no assurance that the
Company will not incur material liabilities in the future with respect to its
current or former facilities.
The Company has been notified that its former manganese processing
facility in Covington, Tennessee is being evaluated by the Tennessee Department
of Environment and Conservation ("TDEC") for a determination as to whether the
facility should be added to the National Priorities List as a Superfund site
pursuant to CERCLA. Groundwater monitoring conducted pursuant to the
post-closure maintenance of solid waste lagoons on site, and recent groundwater
testing beneath former process areas on site, indicate that there are elevated
levels of certain inorganic contaminants, particularly (but not exclusively)
manganese, in the groundwater underneath the site. The Company has completed
closure of the aforementioned lagoons and has completed the remediation of a
stream that borders the site. The Company cannot predict the outcome of TDEC's
investigation of the site and there can be no assurance that the Company will
not incur material liabilities in the future with respect to this site.
The Company has been and is subject to several proceedings related to its
disposal of industrial and hazardous waste at off-site disposal locations,
under CERCLA or analogous state laws that hold persons who "arranged for" the
disposal or treatment of such substances strictly liable for the costs incurred
in responding to the release or threatened release of hazardous substances from
such sites. Current and former owners and operators of such sites, and
transporters of waste who participated in the selection of such sites, are also
strictly liable for such costs.
11
Liability under CERCLA is generally "joint and several," so that a responsible
party under CERCLA may be held liable for all of the costs incurred at a
particular site. However, as a practical matter, liability at such sites
generally is allocated among all of the viable responsible parties. Some of the
most significant factors for allocating liabilities to persons that disposed of
wastes at Superfund sites are the relative volume of waste such persons sent to
the site and the toxicity of their waste streams. Other than the Velsicol
Chemical and Morton International proceedings described below (as to which
there is insufficient information to make a judgment as to the likelihood of a
material impact on the Company's operations, financial condition or liquidity
at this time), the Company does not believe that any of its pending proceedings
under CERCLA or analogous state laws, either individually or in the aggregate,
will have a material impact on the Company's operations, financial condition or
liquidity, and the Company is not aware of any such matters contemplated by
governmental agencies that will have such an impact. However, the Company may
be named as a potentially responsible party ("PRP") at additional sites in the
future, and the costs associated with such additional or existing sites may be
material. In addition, certain of the Company's facilities have been in
operation for decades and, over such time, the Company and other prior
operators of such facilities have generated and disposed of wastes which are or
may be considered hazardous such as cadmium and mercury utilized in the battery
manufacturing process.
The Company has been named as a defendant in two lawsuits in connection
with a Superfund site located in Bergen County, New Jersey (Velsicol Chemical
Corporation, et al, v. A.E. Staley Manufacturing Company, et al., and Morton
International, Inc. v. A.E. Staley Manufacturing Company, et al., United States
District Court for the District of New Jersey, filed July 29, 1996). The
Company is one of almost one hundred defendants named in these cases. Both
cases involve contamination at a former mercury processing plant. One case was
brought by the current owner and the other case by a former owner. The
complaints in the two cases are identical, with four counts alleging claims for
contribution under CERCLA, the New Jersey Spill Act, the Federal Declaratory
Judgment Act and the common law. The plaintiffs allege that the Company
arranged for the treatment or disposal of hazardous substances at the site.
Consequently, the plaintiffs allege, the Company is liable to them for
contribution toward the costs of investigating and remediating the site.
No ad damnum is specified in either complaint. The Remedial
Investigation/Feasibility Study ("RI/FS") of the site has just begun.
Plaintiff's counsel estimates the cost of the RI/FS to be $4 million. There is
no estimate at this juncture as to the potential cost of remediation. The
Company is one of approximately 75 defendants who allegedly arranged for
treatment or disposal at the site. The remaining defendants are former owners
or operators of the site and adjacent industrial facilities which allegedly
contributed to the contamination. Evidence developed in discovery to date
indicates that while the Company was a customer of the facility, the
relationship was of relatively brief duration. The cost to remediate the Bergen
County Site has not been determined and the Company cannot predict the outcome
of these proceedings.
There can be no assurances that additional proceedings relating to
off-site disposal locations will not arise in the future or that such
proceedings will not have a material adverse effect on the Company's business,
financial condition or results of operations. The discovery of previously
unknown contamination of property underlying or in the vicinity of the
Company's manufacturing facilities could require the Company to incur material
unforeseen expenses. Occurrences of any such events may have a material adverse
effect on the Company's financial condition. As of September 30, 1997, the
Company has reserved $1.8 million for known on-site and off-site environmental
liabilities. The Company believes these reserves are adequate, although there
can be no assurance that this amount will be adequate to cover such matters.
Other than the Velsicol Chemical and Morton International proceedings, the
Company is not party to any legal proceedings which, in the opinion of
management of the Company, are material to the Company's business or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, $.01 par value per share (the "Common Stock"),
is traded on the New York Stock Exchange (the "NYSE") under the symbol "ROV."
The Common Stock commenced public trading on November 21, 1997. For the period
November 21, 1997 through December 18, 1997, the high and low per share sales
prices for the Common Stock were $17 3/4 and $15 1/2, respectively. As of
December 16, 1997, there were approximately 136 holders of record of Common
Stock based upon data provided by the transfer agent for the Common Stock.
The Company has not declared or paid and does not anticipate paying cash
dividends in the foreseeable future, but intends to retain any future earnings
for reinvestment in its business. In addition, the Credit Agreement and the
Notes (each as defined herein) restrict the Company's ability to pay dividends
to its shareholders. Any future determination to pay cash dividends will be at
the discretion of the Board of Directors and will be dependent upon the
Company's financial condition, results of operations, capital requirements,
contractual restrictions and such other factors as the Board of Directors deems
relevant.
Recent Sales of Unregistered Securities
During fiscal 1997, the Company made the following sales of its securities
that were not registered under the Securities Act of 1933, as amended (the
"Securities Act") in reliance on the exemption provided therefrom by Section
4(2) of the Securities Act.
1. 101/4% Senior Subordinated Notes
On October 22, 1996, the Company issued and sold $100.0 million aggregate
principal amount of its 101/4% Senior Subordinated Notes due 2006 (the "Old
Notes"). The Old Notes were not registered under the Securities Act in reliance
on the exemption provided by Section 4(2) thereof as an offer and sale of
securities which does not involve a public offering. The Old Notes were
initially sold to Donaldson, Lufkin & Jenrette Securities Corporation and EA
Securities, Inc., as initial purchasers, and have been subsequently offered and
sold in the United States only (a) to "Qualified Institutional Buyers" (as
defined in Rule 144A under the Securities Act) and (b) to a limited number of
other institutional "Accredited Investors" (as defined in Rule 501a(1), (2),
(3) or (7) under the Securities Act) in reliance on Rule 144A under the
Securities Act.
2. On March 17, 1997, the Company issued and sold from treasury at a price
of $4.39 per share 34,169, 36,447 and 27,335 shares of Common Stock to Kent J.
Hussey, Stephen P. Shanesy and Merrell M. Tomlin, respectively, and 6,000 and
7,000 shares of Common Stock to Stephen L. Tuscic and Arthur S. Homa,
respectively. These securities were not registered under the Securities Act in
reliance on the exemption provided by Section 4(2) thereof as an offer and sale
of securities which does not involve a public offering.
3. In connection with the purchase by the Company and the Lee Group of
shares of Common Stock from Thomas F. Pyle, Jr., former Chairman, President and
Chief Executive Officer of the Company as of August 1, 1997, the Company
adopted the Rayovac Corporation 1997 Stock Option Plan (the "1997 Plan"). The
1997 Plan provides for the grant of options to purchase an aggregate of 665,000
shares of Common Stock to employees of the Company at a specified management
level and above to provide an incentive to such employees to remain in the
Company's employ and to increase their efforts for the success of the Company
by offering them an opportunity to increase their proprietary interest in the
Company. The 1997 Plan is administered by David Jones as administrator (the
"Administrator").
Pursuant to the 1997 Plan, as of August 1, 1997, options to purchase an
aggregate of 500,868 shares of Common Stock were granted at a price of $6.01
per share to certain management employees of the Company. Such options were
immediately exercised or surrendered to the Company's Deferred Compensation
Plan as of such date and the proceeds from the exercise or surrender thereof
were used to fund the Company's purchase of shares of Common Stock from the
former Chairman, President and Chief Executive Officer of the Company occurring
as of such date. On September 15, 1997, options to purchase 55,354 shares were
granted at a price of $6.01 per share to certain management employees,
immediately exercised or surrendered to the Deferred Compensation Plan and the
proceeds used to fund the Company's purchase of Common Stock from another
former executive officer of the Company.
13
Use of Proceeds
On March 11, 1997, pursuant to its registration statement on Form S-1
(Commission File No. 333-17895, declared effective on February 7, 1997), the
Company consummated the registered exchange offer (the "Exchange Offer") of an
aggregate principal amount of $100,000,000 of its 101/4% Series B Senior
Subordinated Notes due 2006 (the "Notes") for a like principal amount of the
then issued and outstanding Old Notes with the holders thereof. The Company
received no proceeds from the Exchange Offer of the Notes for the Old Notes.
In connection with the Exchange Offer, the Company registered an aggregate
principal amount of $100,000,000 of the Notes with an aggregate offering price,
before expenses, of $100,000,000. Expenses incurred by the Company in
connection with the Exchange Offer totaled approximately $100,000. The Exchange
Offer was conducted by the Company and did not involve any underwriters.
On November 26, 1997, pursuant to its registration statement on Form S-1
(Commission File No. 333-35181, declared effective on November 20, 1997), the
Company consummated its initial public offering of 7,705,000 shares (including
1,005,000 shares sold by certain existing shareholders of the Company pursuant
to the exercise of over-allotment options granted by such shareholders to the
underwriters) of its Common Stock at a price of $14.00 per share, before the
underwriters' discount (the "Underwritten Offering"). Concurrently the Company
sold 122,507 shares of Common Stock in a direct offering (the "Direct Offering"
and, together with the Underwritten Offering, the "Offerings") to certain
employee participants in the Company's Profit Sharing and Savings Plan at a
price of $13.58 per share. No underwriting discount was paid in connection with
the Direct Offering, which was conducted by the Company.
The net proceeds to the Company from the Offerings were approximately
$87.6 million after deducting the underwriting discounts applicable to the
Underwritten Offering and estimated offering expenses. The Company received no
proceeds from the sale by certain existing shareholders of the Company of the
shares subject to the over-allotment options granted to the underwriters. The
managing underwriters for the Underwritten Offering were Merrill Lynch & Co.,
Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette Securities Corporation,
and Smith Barney Inc.
The Company registered 7,975,000 shares of its Common Stock, with an
aggregate offering price, before underwriting discounts and expenses, of
$111,650,000. Expenses incurred by the Company in connection with the Offerings
totaled $7,866,000, comprised of $6,566,000 for underwriting discounts and
approximately $1,300,000 for certain other expenses.
In connection with the exercise of over-allotment options granted to the
underwriters by certain existing shareholders of the Company, such shareholders
sold an aggregate of 1,005,000 shares in the Underwritten Offering with an
aggregate offering price, before underwriting discounts and expenses, of
$14,070,000.
Of the net proceeds to the Company from the Offerings, approximately $38.2
million is being used to redeem or repurchase approximately $35.0 million
principal amount of the Notes and pay the associated premium, and approximately
$49.4 million will be used to repay term loans provided pursuant to a Credit
Agreement, dated as of September 12, 1996 by and among the Company, Bank of
America National Trust and Savings Association and DLJ Capital Funding, Inc.
(the "Credit Agreement"), incurred in connection with the Recapitalization. The
Notes bear interest at a rate of 101/4%, payable semiannually, and mature on
November 1, 2006. The term loans under the Credit Agreement consist of a
six-year Tranche A term loan of $55.0 million, a seven-year Tranche B term loan
of $25.0 million and an eight-year Tranche C term loan of $25.0 million
(collectively, the "Term Loan Facility"). Borrowings under the Credit Agreement
bear interest, in each case at the Company's option, as follows: (i) with
respect to the Tranche A loans, at Bank of America National Trust and Savings
Association's base rate plus 1.50% per annum, or at IBOR plus 2.50% per annum;
(ii) with respect to the Tranche B loans, at Bank of America National Trust and
Savings Association's base rate plus 2.00% per annum, or at IBOR plus 3.00% per
annum; and (iii) with respect to the Tranche C loans, at Bank of America
National Trust and Savings Association's base rate plus 2.25% per annum, or at
IBOR plus 3.25% per annum. The Credit Agreement requires the Company to apply
50% of the proceeds of the Offerings not used to redeem or repurchase Notes to
repayment of indebtedness under the Credit Agreement, pro rata among the
tranches except as may be otherwise agreed.
Certain of the expenses incurred by the Company in connection with the
Underwritten Offering in the form of underwriting discounts were paid to
members of the underwriting syndicate which are controlled by the Lee Group,
the beneficial owner of more than 10% of the Company's outstanding Common
Stock.
14
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data as of and for the two
fiscal years ended June 30, 1996, the Transition Period ended September 30,
1996 and the fiscal year ended September 30, 1997 is derived from the audited
consolidated financial statements of the Company, together with the notes
thereto, included elsewhere in this Annual Report on Form 10-K. The selected
historical financial data as of and for the twelve months ended September 30,
1996 is derived from the unaudited condensed consolidated financial statements
of the Company and, in the opinion of management, includes all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
financial position and results of operations as of the date and for the period
indicated which are not included herein. The selected historical financial data
of the Company as of and for the two fiscal years ended June 30, 1993 and June
30, 1994 is derived from audited consolidated financial statements of the
Company which are not included herein. The following selected financial data
should be read in conjunction with the Company's consolidated financial
statements and the related notes thereto and the information contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
This financial data, as well as all other financial data set forth herein,
gives effect to the reclassification by the Company of certain promotional
expenses, previously reported as a reduction of net sales, to selling expense.
The amounts which have been reclassified are $19.0 million, $17.5 million,
$24.2 million, and $24.0 million for the fiscal years ended June 30, 1993,
1994, 1995, and 1996, respectively, $6.9 million for the Transition Period
ended September 30, 1996, $24.1 million for the twelve months ended September
30, 1996 and $28.7 million for the fiscal year ended September 30, 1997. The
Company believes that this reclassification is consistent with the method used
by other consumer products companies.
Fiscal Year Ended June 30,
--------------------------------------------
1993 1994 1995 1996
---------- ----------- ---------- ----------
(In millions, except per share data)
Statement of Operations Data:
Net sales .............................. $ 372.4 $ 403.7 $ 415.2 $ 423.4
Cost of goods sold ..................... 201.4 234.9 237.1 239.4
------- ------- ------- -------
Gross profit ........................... 171.0 168.8 178.1 184.0
Selling expense ........................ 98.8 121.3 108.7 116.5
General and administrative expense ...... 35.4 29.4 32.9 31.8
Research and development expense ......... 5.6 5.7 5.0 5.4
Recapitalization and other special
charges(1)(2) ........................... -- 1.5 -- --
------- ------- ------- -------
Income (loss) from operations(3)(4) ...... 31.2 10.9 31.5 30.3
Interest expense ........................ 6.0 7.7 8.6 8.4
Other expense (income), net ............ 1.2 (0.6) 0.3 0.6
------- ------- ------- -------
Income (loss) before income taxes
and extraordinary item .................. 24.0 3.8 22.6 21.3
Income tax expense (benefit) ............ 9.0 (0.6) 6.2 7.0
------- ------- ------- -------
Income (loss) before extraordinary
item .................................... 15.0 4.4 16.4 14.3
Extraordinary item(5) .................. -- -- -- --
------- ------- ------- -------
Net income (loss) ........................ $ 15.0 $ 4.4 $ 16.4 $ 14.3
======= ======= ======= =======
Net income (loss) per common share
before extraordinary item ............... $ 0.29 $ 0.08 $ 0.32 $ 0.28
======== ======= ======== =======
Net income (loss) per common
share(6) .............................. $ 0.29 $ 0.08 $ 0.32 $ 0.28
======== ======= ======== =======
Weighted average common and
common equivalent shares ............... 51.6 51.6 51.6 51.1
Other Financial Data:
Depreciation ........................... $ 7.4 $ 10.3 $ 11.0 $ 11.9
Capital expenditures(7) .................. 30.3 12.5 16.9 6.6
Cash flows from operating activities . 15.8 (18.7) 35.5 17.8
EBITDA(8) .............................. 39.3 21.2 41.3 42.2
Balance Sheet Data:
Working capital ........................ $ 31.6 $ 63.6 $ 55.9 $ 63.2
Total assets ........................... 189.0 222.4 220.6 221.1
Total debt .............................. 74.1 109.0 88.3 81.3
Shareholders' equity (deficit) ......... 36.7 37.9 53.6 61.6
Transition Twelve Months Fiscal Year
Period Ended Ended Ended
September 30, September 30, September 30,
1996 1996 1997
------------------ ------------------ --------------
Statement of Operations Data:
Net sales .............................. $101.9 $417.9 $ 432.6
Cost of goods sold ..................... 59.3 237.9 234.6
------- -------- -------
Gross profit ........................... 42.6 180.0 198.0
Selling expense ........................ 27.8 114.4 122.1
General and administrative expense ...... 8.6 33.0 32.2
Research and development expense ......... 1.5 5.6 6.2
Recapitalization and other special
charges(1)(2) ........................... 28.4 28.4 3.0
------- -------- -------
Income (loss) from operations(3)(4) ...... (23.7) (1.4) 34.5
Interest expense ........................ 4.4 10.5 24.5
Other expense (income), net ............ 0.1 0.5 0.4
------- -------- -------
Income (loss) before income taxes
and extraordinary item .................. (28.2) (12.4) 9.6
Income tax expense (benefit) ............ (8.9) (3.8) 3.4
------- -------- -------
Income (loss) before extraordinary
item .................................... (19.3) (8.6) 6.2
Extraordinary item(5) .................. (1.6) (1.6) --
------- -------- -------
Net income (loss) ........................ $(20.9) $(10.2) $ 6.2
======= ======== =======
Net income (loss) per common share
before extraordinary item ............... $(0.42) $(0.17) $ 0.28
======= ======== =======
Net income (loss) per common
share(6) .............................. $(0.46) $(0.21) $ 0.28
======= ======== =======
Weighted average common and
common equivalent shares ............... 45.5 49.7 22.2
Other Financial Data:
Depreciation ........................... $ 3.3 $ 12.1 $ 11.3
Capital expenditures(7) .................. 1.2 8.4 10.9
Cash flows from operating activities . (1.1) 26.0 35.7
EBITDA(8) .............................. (20.4) 10.7 45.8
Balance Sheet Data:
Working capital ........................ $ 64.6 $ 64.6 $ 33.8
Total assets ........................... 243.7 243.7 236.9
Total debt .............................. 233.7 233.7 207.3
Shareholders' equity (deficit) ......... (85.7) (85.7) (80.6)
(footnotes on following page)
15
- ------------
(1) During the Transition Period, the Company recorded charges of $12.3 million
directly related to the Recapitalization and other special charges of
$16.1 million. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(2) In the fiscal year ended September 30, 1997, the Company recorded other
special charges of $5.9 million offset by a special credit of $2.9 million
which was related to the curtailment of the Company's defined benefit
pension plan covering all domestic non-union employees. The special
charges related to organizational restructuring in the United States, the
discontinuation of certain manufacturing operations at the Company's
Newton Aycliffe, United Kingdom facility and the discontinuation of
operations at the Company's facility in Kinston, North Carolina.
(3) Income (loss) from operations includes expenses incurred during the
Fennimore Expansion (as defined herein), and Recapitalization and other
special charges in fiscal 1994, the Transition Period Ended September 30,
1996, and the fiscal year ended September 30, 1997. Income from operations
before these non-recurring charges was as follows:
Fiscal Year Ended June 30, Transition Twelve Months Fiscal Year
-------------------------------- Period Ended Ended Ended
September 30, September 30, September 30,
1993 1994 1995 1996 1996 1996 1997
------- -------- ------- ------- --------------- --------------- --------------
(In millions)
Income (loss) from operations ...... $31.2 $ 10.9 $31.5 $30.3 $ (23.7) $ (1.4) $ 34.5
Fennimore Expansion ............... -- 9.5 -- -- -- -- --
Recapitalization and other special
charges ........................... -- 1.5 -- -- 28.4 28.4 3.0
----- ------ ----- ----- ------- ------ ------
Income from operations before non-
recurring charges ............... $31.2 $ 21.9 $31.5 $30.3 $ 4.7 $ 27.0 $ 37.5
===== ====== ===== ===== ======= ====== ======
(4) Income from operations in fiscal 1994 was impacted by increased selling
expenses due to higher advertising and promotion expenses related to the
Renewal Introduction (as defined herein). In addition, income from
operations was impacted by non-recurring costs of $9.5 million in
connection with the Fennimore Expansion including $8.4 million of
increased cost of goods sold and $1.1 million of increased general and
administrative expenses, and other special charges of approximately $1.5
million related to a plan to reduce the Company's cost structure and to
improve productivity through an approximate 2.5% reduction in headcount on
a worldwide basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Introduction."
(5) The Recapitalization of the Company included repayment of certain
outstanding indebtedness, including prepayment fees and penalties. Such
prepayment fees and penalties of $2.4 million, net of income tax benefit
of $0.8 million, has been recorded as an extraordinary item in the
Consolidated Statement of Operations for the Transition Period ended
September 30, 1996.
(6) Net income (loss) per share data has been computed using the weighted
average number of shares of common and common equivalent shares from stock
options (when dilutive using the treasury stock method). Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletin No. 83,
common stock warrants and options issued during the twelve-month period
immediately preceding the Offerings have been included in the calculation
as if they were outstanding for all periods presented (even if
antidilutive, using the treasury stock method and the initial public
offering price).
(7) From fiscal 1993 through fiscal 1995 the Company invested an aggregate of
$32.7 million in connection with the Fennimore Expansion, including $19.7
million incurred in fiscal 1993. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Introduction."
(8) EBITDA represents income from operations plus depreciation and amortization
(excluding amortization of debt issuance costs) and reflects an adjustment
of income from operations to eliminate the establishment and subsequent
reversal of two reserves ($0.7 million established in fiscal 1993 and
reversed in fiscal 1995, and $0.5 million established in fiscal 1992 and
reversed in fiscal 1995). The Company believes that EBITDA and related
measures are commonly used by certain investors and analysts to analyze
and compare, and provide useful information regarding, the Company's
ability to service its indebtedness. However, the following factors should
be considered in evaluating such measures: EBITDA and related measures (i)
should not be considered in isolation, (ii) are not measures of
performance calculated in accordance with generally accepted accounting
principles ("GAAP"), (iii) should not be construed as alternatives or
substitutes for income from operations, net income or cash flows from
operating activities in analyzing the Company's operating performance,
financial position or cash flows (in each case, as determined in
accordance with GAAP) and (iv) should not be used as indicators of the
Company's operating performance or measures of its liquidity.
Additionally, because all companies do not calculate EBITDA and related
measures in a uniform fashion, the calculations presented in this Annual
Report on Form 10-K may not be comparable to other similarly titled
measures of other companies.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
information included in Item 6, "Selected Financial Data" and the Company's
combined consolidated financial statements and the related notes thereto,
included elsewhere herein.
Introduction
Effective as of September 12, 1996, the Company, all of the shareholders
of the Company, the Lee Fund and other affiliates of THL Co. completed the
Recapitalization pursuant to which, among other things: (i) the Company
obtained senior financing under the Credit Agreement in an aggregate amount of
$170.0 million, of which $131.0 million was borrowed at the closing of the
Recapitalization, including $26.0 million under the Revolving Credit Facility;
(ii) the Company obtained $100.0 million in financing through the issuance of
bridge notes (the "Bridge Notes"); (iii) the Company redeemed a portion of the
shares of Common Stock held by Thomas F. Pyle, Jr., the former President and
Chief Executive Officer of the Company; (iv) the Lee Group purchased for cash
shares of Common Stock owned by shareholders of the Company (a group consisting
of current and former directors and management of the Company and the Thomas
Pyle and Judith Pyle Charitable Remainder Trust (the "Pyle Trust")) which
resulted in a change of control of the Company; and (v) the Company repaid
certain of its outstanding indebtedness, including prepayment fees and
penalties. The Bridge Notes were subsequently repaid with the proceeds of the
sale of the Old Notes, which were later exchanged for a like principal amount
of the Notes.
Upon completion of the Recapitalization, the Company changed its fiscal
year end from June 30 to September 30. For clarity of presentation and
comparison, references herein to fiscal 1994, fiscal 1995 and fiscal 1996 are
to the Company's fiscal years ended June 30, 1994, June 30, 1995 and June 30,
1996, respectively, and references to the "Transition Period ended September
30, 1996" and the "Transition Period" are to the period from July 1, 1996 to
September 30, 1996. References to fiscal 1997 are to the Company's fiscal year
ended September 30, 1997.
The Company's operating performance depends on a number of factors, the
most important of which are: (i) general retailing trends, especially in the
mass merchandise segment of the retail market; (ii) the Company's overall
product mix among various specialty and general household batteries and
battery-powered lighting devices, which sell at different price points and
profit margins; (iii) the Company's overall competitive position, which is
affected by both the introduction of new products and promotions by the Company
and its competitors and the Company's relative pricing and battery performance;
and (iv) changes in operating expenses. Set forth below are specific
developments that have affected and may continue to affect the Company's
performance.
Investment in Future Growth Opportunities. Since the Recapitalization, the
Company has undertaken significant measures to pursue growth opportunities and
increase the Company's market share for its products. These measures included
the launch of a new integrated advertising campaign which shifted expenditures
from the Renewal line to the Rayovac brand name. The Company also introduced
new product graphics and packaging designed to build the awareness and image of
the Rayovac brand name and leverage the Company's value brand position. See
"Business--Growth Strategy."
Cost Rationalization Initiatives. Following the Recapitalization, the
Company initiated significant measures to rationalize the Company's
manufacturing, distribution and general overhead costs. The initiatives
relating to manufacturing activities included discontinuing certain
manufacturing operations at the Company's Newton Aycliffe, United Kingdom
facility and closing the Company's Kinston, North Carolina facility. In
addition, the Company implemented a significant organizational restructuring in
the United States and the United Kingdom and eliminated costs associated with
the use of a corporate aircraft. These cost rationalization initiatives
resulted in cash costs of approximately $6.3 million for fiscal 1996 and fiscal
1997 and are expected to result in annual savings of approximately $8.6
million.
Expansion of Production Facility. From fiscal 1993 through fiscal 1995
the Company invested an aggregate of $32.7 million in the modernization and
expansion of its production lines at its Fennimore, Wisconsin facility (the
"Fennimore Expansion") at which the Company manufactures all of its alkaline
products. As a result of the Fennimore Expansion, the Company replaced
substantially all of its alkaline battery manufacturing equipment with
state-of-the-art technology which more than doubled the Company's aggregate
capacity for AA and AAA size alkaline batteries. This investment also resulted
in a reformulation of the Company's alkaline batteries so as to be
17
mercury-free, better performing and higher quality. The Fennimore Expansion
resulted in $9.5 million of non-recurring costs in fiscal 1994. Such costs
included increased raw material costs incurred pursuant to the terms of
equipment purchase agreements entered into in connection with the Fennimore
Expansion which required the Company to source material from specified foreign
vendors at an increased cost. These incremental costs decreased in fiscal 1996
as a result of the increased use of lower-cost domestic raw material sources to
replace the foreign vendor sourcing, which replacement was substantially
completed in fiscal 1997.
Effect of Recapitalization. The Recapitalization of the Company, which was
completed on September 12, 1996, resulted in non-recurring charges of $12.3
million which were recognized in the Transition Period, including (i) $5.0
million of advisory, legal and consulting fees and (ii) $7.3 million of stock
option compensation, severance payments and employment contract settlements for
the benefit of certain current and former officers, directors and management of
the Company. In connection with the Recapitalization, the Company incurred
other non-recurring special charges of $16.1 million recognized in the
Transition Period, including (i) $2.7 million of charges related to the
discontinuation of manufacturing operations at the Company's Newton Aycliffe,
United Kingdom facility; (ii) $1.7 million of charges for deferred compensation
plan obligations to former officers of the Company resulting from the
curtailment of the plan; (iii) $1.5 million of charges reflecting the present
value of lease payments for land which new management determined would not be
used for any future productive purpose; (iv) $5.6 million in costs and asset
writedowns principally related to changes in pricing strategies for Power
Station, the Renewal recharging system; and (v) $4.6 million of termination
benefits and other charges.
Renewal Product Line. In fiscal 1994, the Company introduced the Renewal
rechargeable battery, the first alkaline rechargeable battery sold in the
United States (the "Renewal Introduction"). The Company incurred significant
advertising and promotional expense related to Renewal of $26.0 million in
fiscal 1994, $15.7 million in fiscal 1995 and $20.3 million in fiscal 1996,
with the fiscal 1996 increase largely due to the Company's new promotional
campaign featuring basketball superstar Michael Jordan.
Since the Recapitalization, the Company has significantly revised its
marketing and advertising strategies for the Renewal product line. Management
believes that continued improvement in consumer awareness of the value and
money-saving benefits of Renewal over conventional disposable alkaline
batteries will be necessary to further expand the Company's market for
Renewal. Although the percentage of the Company's advertising budget allocated
to the Renewal product line has decreased, the Company has begun aggressively
marketing Renewal's money-saving benefit over disposable alkaline batteries and
performance advantage over rechargeable nickel cadmium batteries and has
lowered the prices of the recharger system for Renewal. Due to the historically
high levels of investment associated with Renewal, the Renewal product line has
been unprofitable. However, initiatives implemented by the Company's new
management team resulted in the Renewal product line becoming profitable in the
fourth quarter of fiscal 1997.
Seasonality
The Company's sales are seasonal, with the highest sales occurring in the
fiscal quarter ending on or about December 31, during the holiday season.
During the past four fiscal years, the Company's sales in the quarter ended on
or about December 31 have represented an average of 33% of annual net sales. As
a result of this seasonality, the Company's working capital requirements and
revolving credit borrowings are typically higher in the third and fourth
calendar quarters of each year. The following table sets forth the Company's
net sales for each of the periods presented.
Fiscal Quarter Ended
----------------------------------------------------------------------------------------------------------
December 30, March 30, June 30, September 30, December 28, March 29, June 29, September 30,
1995 1996 1996 1996 1996 1997 1997 1997
-------------- ----------- ---------- --------------- -------------- ----------- ---------- --------------
(In millions)
Net sales ...... $140.9 $80.5 $94.6 $101.9 $141.9 $83.6 $95.5 $111.5
Results of Operations
This financial data, as well as all other data set forth herein, gives
effect to the reclassification by the Company of certain promotional expenses,
previously reported as a reduction of net sales, to selling expense. The
amounts which have been reclassified are $24.2 million and $24.0 million for
the years ended June 30, 1995 and 1996, respectively, $6.7 million for the
three months ended September 30, 1995, $6.9 million for the Transition Period
ended September 30, 1996, $24.1 million for the twelve months ended September
30, 1996 and $28.7 million for the fiscal year ended September 30, 1997. The
Company believes that this reclassification is consistent with the method used
by other consumer products companies.
18
The following table sets forth the percentage relationship of certain
items in the Company's statement of operations to net sales for the periods
presented:
Fiscal Year Ended June Transition Twelve
30, Three Months Period Months Fiscal
----------------------- Ended Ended Ended Year Ended
September 30, September 30, September 30, September 30,
1995 1996 1995 1996 1996 1997
----------- ----------- --------------- --------------- --------------- --------------
Net sales ..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ............ 57.1 56.5 59.7 58.2 56.9 54.2
----- ----- ----- ----- ----- -----
Gross profit .................. 42.9 43.5 40.3 41.8 43.1 45.8
Selling expense ............... 26.2 27.5 27.9 27.3 27.4 28.2
General and administrative
expense ........................ 7.9 7.5 6.9 8.4 7.9 7.5
Research and development
expense ........................ 1.2 1.3 1.2 1.5 1.3 1.4
Recapitalization and other
special charges ............... -- -- -- 27.9 6.8 0.7
----- ----- ----- ----- ----- -----
Income (loss) from operations . 7.6% 7.2% 4.3% (23.3%) (0.3%) 8.0%
Fiscal Year Ended September 30, 1997 Compared to Twelve Months Ended September
30, 1996
Net Sales. The Company's net sales increased $14.7 million, or 3.5%, to
$432.6 million in fiscal 1997 from $417.9 million in the twelve months ended
September 30, 1996, primarily due to higher sales of alkaline batteries and
lithium batteries, offset in part by decreases in sales of heavy duty
batteries, lantern batteries and Renewal rechargeables. In the last quarter of
fiscal 1997, net sales increased $9.6 million, or 9.4%, to $111.5 million from
$101.9 million in the Transition Period, primarily due to higher sales of
alkaline batteries attributed to the introduction of a 4% price increase on
alkaline batteries in the U.S. phased in beginning May 1997, significant
promotional programs, and sales to new accounts.
Sales of alkaline batteries increased as a result of the launch of a new
integrated advertising campaign emphasizing the alkaline brand, new product
graphics and packaging (designed to build brand awareness and the Company's
value brand position), and strong promotional programs in the Company's fourth
fiscal quarter. The Company also gained significant new distribution on the
strength of this program.
Lithium sales increased primarily due to increased sales of computer clock
and memory back-up batteries to Compaq Computers and SGS Thomson, two of the
Company's larger OEM (Original Equipment Manufacturers) customers.
Sales of heavy duty and lantern batteries decreased primarily due to
declines in the market as consumers move toward alkaline batteries away from
heavy duty batteries. Lantern battery volume was also adversely impacted by the
migration to reflective tape in place of flashing lights on construction
barricades.
Hearing aid battery sales increased as a result of continued growth in the
overall hearing aid battery market. The Company's market leadership position in
this product line has resulted in new distribution gains in the retail channel,
the fastest growing channel for hearing aid batteries as consumers shift their
purchases toward this channel.
Net sales of lighting products increased slightly over the prior twelve
months due primarily to growth in key mass merchandiser accounts and wholesale
clubs.
Dollar sales of Renewal rechargeables were down approximately 12% due
primarily to the Company's decision to decrease prices of the chargers by 33%
in the first quarter of fiscal 1997 to reposition the product and encourage
consumers to purchase the system. Unit sales of chargers and batteries combined
were approximately 7% higher than the prior twelve months.
Gross Profit. Gross profit increased $18.0 million, or 10.0%, to $198.0
million in fiscal 1997 from $180.0 million for the twelve months ended
September 30, 1996. Gross profit as a percentage of net sales increased to
45.8% in fiscal 1997 from 43.1% in the prior twelve months. These increases are
attributed to increased sales of higher margin alkaline batteries, the
introduction of a 4% price increase on alkaline batteries in the U.S. phased in
beginning May 1997, and lower manufacturing costs as a result of cost
rationalization initiatives. Gross profit increased $12.7 million, or 29.8%, to
$55.3 million in the three months ended September 30, 1997 from $42.6 million
in the Transition Period, for these same reasons.
19
Selling Expense. Selling expense increased $7.7 million, or 6.7%, to
$122.1 million in fiscal 1997 from $114.4 million in the twelve months ended
September 30, 1996 due primarily to increased marketing expense to support the
launch of the Company's new graphics and packaging and increased consumer
promotions on the old graphics and packaging to help retailers promote this
product. These increases were partially offset by reduced advertising expense
while the Company developed its new advertising program. Selling expense
increased as a percentage of net sales to 28.2% in fiscal 1997 from 27.4% in
the prior twelve months because of increased marketing expenses.
General and Administrative Expense. General and administrative expense
decreased $0.8 million, or 2.4%, to $32.2 million in fiscal 1997 from $33.0
million in the twelve months ended September 30, 1996 due in part to cost
rationalization initiatives which included the elimination of the use of a
corporate aircraft. These decreases were partially offset by the expense
related to a new management incentive program implemented for fiscal 1997.
There were no management incentives earned during the twelve months ended
September 30, 1996. As a percentage of net sales, general and administrative
expense decreased to 7.5% in fiscal 1997 from 7.9% in the prior twelve months.
Research and Development Expense. Research and development expense
increased $0.6 million, or 10.7%, to $6.2 million for fiscal 1997 from $5.6
million for the twelve months ended September 30, 1996 due primarily to the
development of an on-the-label battery tester which the Company decided not to
introduce.
Recapitalization and Other Special Charges. During fiscal 1997, the
Company recorded special charges of $3.0 million compared to $28.4 million
recorded in the twelve months ended September 30, 1996 as discussed above under
"Effect of Recapitalization." The current year amount represents the net
charges for organizational restructuring in the United States, the
discontinuation of certain manufacturing operations at the Company's Newton
Aycliffe, United Kingdom facility and the discontinuation of certain
manufacturing operations at the Company's facility in Kinston, North Carolina
partially offset by a credit of $2.9 million related to the curtailment of the
Company's defined benefit pension plan covering all domestic non-union
employees.
Income from Operations. Income from operations increased $35.9 million to
$34.5 million in fiscal 1997 from a loss of $(1.4) million for the twelve
months ended September 30, 1996. The Company's Recapitalization and other
special charges decrease of $25.4 million in combination with increased gross
profits were partially offset by increased operating expenses related to the
new marketing and advertising programs discussed above.
Interest Expense. Interest expense increased $14.0 million to $24.5
million in fiscal 1997 from $10.5 million in the prior twelve months due
primarily to increased indebtedness associated with the Recapitalization and a
write-off of $2.0 million of unamortized debt issuance costs related to the
Bridge Notes the Company issued in September 1996 which were refinanced in
fiscal 1997.
Net Income. Net income increased $16.4 million to $6.2 million in fiscal
1997 from a net loss of $(10.2) million in the twelve months ended September
30, 1996 primarily due to increased income from operations as discussed above
partially offset by increased interest expense due to the Recapitalization. The
Company's effective tax rate for fiscal 1997 was 35.6% compared to an effective
tax benefit rate of 31.0% for the prior twelve months due primarily to some of
the Recapitalization expenses in the prior twelve months being non-tax
deductible and the tax benefits of Rayovac International Corporation, a
domestic international sales corporation ("DISC") owned by the shareholders in
the prior twelve months. The DISC was terminated in August 1996 and replaced
with Rayovac Foreign Sales Corporation, a foreign sales corporation ("FSC"), in
fiscal 1997 which generated fewer tax benefits in fiscal 1997.
Net income for the prior twelve months also decreased $1.6 million
resulting from an extraordinary loss on the early retirement of debt related to
the Recapitalization.
Fiscal Year Ended September 30, 1997 Compared to Transition Period Ended
September 30, 1996
Results of operations for fiscal 1997 include amounts for a twelve-month
period, while results for the Transition Period include amounts for a
three-month period. Results (in terms of dollars) for these periods are not
directly comparable. Accordingly, management's discussion and analysis for
these periods is generally based upon a comparison of specified results as a
percentage of net sales.
Net Sales. The Company's net sales increased $330.7 million to $432.6
million in fiscal 1997 from $101.9 million in the Transition Period due
primarily to fiscal 1997 including twelve months compared to three months in
the Transition Period. Sales during the Transition Period were unfavorably
impacted by the pending sale of the Company.
20
Gross Profit. Gross profit increased $155.4 million to $198.0 million in
fiscal 1997 from $42.6 million in the Transition Period. As a percentage of net
sales, gross profit increased to 45.8% in fiscal 1997 from 41.8% in the
Transition Period due to selling more higher margin products like alkaline and
hearing aid batteries in fiscal 1997, the alkaline price increase discussed
above, and lower manufacturing costs attributed to cost rationalization
initiatives.
Selling Expense. Selling expense increased $94.3 million to $122.1 million
in fiscal 1997 from $27.8 million in the Transition Period. As a percentage of
net sales, selling expense increased to 28.2% in fiscal 1997 from 27.3% in the
Transition Period due to increased promotional spending to support the new
alkaline battery graphics and packaging, the new advertising program to build
brand awareness and increased spending to gain new distribution.
General and Administrative Expense. General and administrative expense
increased $23.6 million to $32.2 million in fiscal 1997 from $8.6 million in
the Transition Period. As a percentage of net sales, general and administrative
expense decreased to 7.5% in fiscal 1997 from 8.4% in the Transition Period
attributed to the effects of cost rationalization initiatives.
Research and Development Expense. Research and development expense
increased $4.7 million to $6.2 million in fiscal 1997 from $1.5 million in the
Transition Period. As a percentage of net sales, research and development
expense decreased slightly to 1.4% in fiscal 1997 from 1.5% in the Transition
Period due primarily to the effects of the cost rationalization initiatives.
Recapitalization and Other Special Charges. Recapitalization and other
special charges decreased by $25.4 million, or 89.4%, to $3.0 million in fiscal
1997 from $28.4 million in the Transition Period which is explained above in
the discussion of fiscal 1997 compared to the twelve months ended September 30,
1996.
Income (loss) from Operations. Income (loss) from operations increased
$58.2 million to $34.5 million in fiscal 1997 from $(23.7) million in the
Transition Period. As a percentage of net sales, income (loss) from operations
increased to 8.0% in fiscal 1997 from (23.3)% in the Transition Period for the
reasons discussed above.
Net Income (loss). Net income (loss) for fiscal 1997 increased $27.1
million to $6.2 million from $(20.9) million in the Transition Period. As a
percentage of net sales, net income (loss) increased to 1.4% in fiscal 1997
from (20.5)% in the Transition Period primarily due to significant
Recapitalization and other special charges in the Transition Period. In
addition, an extraordinary loss on the early retirement of debt decreased net
income in the Transition Period by $1.6 million, net of income taxes. The
effective tax rate for fiscal 1997 was 35.6% compared to 31.6% in the
Transition Period due primarily to some of the Recapitalization expenses being
non-tax deductible in the Transition Period.
Transition Period Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
Net Sales. The Company's net sales decreased $5.4 million, or 5.0%, to
$101.9 million in the Transition Period from $107.3 million in the three months
ended September 30, 1995 (the "Prior Fiscal Year Period") primarily due to
decreased sales to the food and drug store retail channels and the Company
having made sales to certain retail customers in connection with promotional
orders after the Transition Period which were made during the Prior Fiscal Year
Period.
Gross Profit. Gross profit decreased $0.6 million, or 1.4%, to $42.6
million in the Transition Period from $43.2 million in the Prior Fiscal Year
Period, primarily as a result of decreased sales in the Transition Period, as
discussed above. Gross profit increased as a percentage of net sales to 41.8%
in the Transition Period from 40.3% in the Prior Fiscal Year Period due
primarily to a lower proportion of promotion sales as discussed above.
Selling Expense. Selling expense decreased $2.1 million, or 7.0%, to $27.8
million in the Transition Period from $29.9 million in the Prior Fiscal Year
Period, primarily due to decreased advertising expense in the Transition
Period.
General and Administrative Expense. General and administrative expense
increased $1.2 million, or 16.2%, to $8.6 million in the Transition Period from
$7.4 million in the Prior Fiscal Year Period, primarily as a result of the
Company having incurred certain expenditures during the Transition Period which
were incurred subsequent to the Prior Fiscal Year Period.
21
Research and Development Expense. Research and development expense
increased $0.2 million, or 15.4%, to $1.5 million in the Transition Period from
$1.3 million in the Prior Fiscal Year Period, primarily as a result of
increased product development efforts.
Recapitalization and Other Special Charges. During the Transition Period,
the Company recorded charges of $28.4 million, including non-recurring charges
related to the Recapitalization and other special charges.
Non-recurring charges of $12.3 million related to the Recapitalization
include (i) $5.0 million of advisory, legal and consulting fees and (ii) $7.3
million of stock option compensation, severance payments and employment
contract settlements for the benefit of certain present and former officers,
directors and management of the Company.
Other special charges of $16.1 million include (i) $2.7 million of charges
related to the discontinuation of manufacturing operations at the Company's
Newton Aycliffe, United Kingdom facility; (ii) $1.7 million of charges for
deferred compensation plan obligations to former officers of the Company
resulting from the curtailment of the plan; (iii) $1.5 million of charges
reflecting the present value of lease payments for land which new management
determined would not be used for any future productive purpose; (iv) $5.6
million in costs and asset writedowns principally related to changes in Renewal
Power Station pricing strategies adopted by new management subsequent to the
Recapitalization and prior to September 30, 1996; and (v) $4.6 million of
termination benefits and other charges.
Income (loss) from Operations. Income (loss) from operations decreased
$28.3 million to $(23.7) million in the Transition Period from $4.6 million in
the Prior Fiscal Year Period for the reasons discussed above.
Net Income (loss). Net income (loss) for the Transition Period decreased
$22.3 million to $(20.9) million from $1.4 million in the Prior Fiscal Year
Period, primarily because of non-recurring charges related to the
Recapitalization and other special charges discussed above. In addition,
amortization of deferred finance charges related to the Bridge Notes and an
extraordinary loss on the early retirement of debt decreased net income in the
Transition Period by $2.6 million, net of income taxes.
Transition Period Ended September 30, 1996 Compared to Fiscal Year Ended June
30, 1996
Results of operations for the Transition Period Ended September 30, 1996
include amounts for a three-month period, while results for the fiscal year
ended June 30, 1996 include amounts for a twelve-month period. Results (in
terms of dollar amounts) for these periods are not directly comparable.
Accordingly, management's discussion and analysis for these periods is
generally based upon a comparison of specified results as a percentage of net
sales.
Net Sales. The Company's net sales decreased $321.5 million, or 75.9%, to
$101.9 million in the Transition Period from $423.4 million in fiscal 1996
because the Transition Period included only three months of net sales as
compared to twelve months in fiscal 1996. Overall pricing was relatively
constant between the two periods.
Gross Profit. Gross profit decreased $141.4 million, or 76.8%, to $42.6
million in the Transition Period from $184.0 million in fiscal 1996. As a
percentage of net sales, gross profit decreased to 41.8% in the Transition
Period from 43.5% in fiscal 1996, primarily because the products sold during
the Transition Period carried a higher average unit cost than the overall
average unit cost of products sold in fiscal 1996 due to seasonal sales trends.
Selling Expense. Selling expense decreased $88.7 million, or 76.1%, to
$27.8 million in the Transition Period from $116.5 million in fiscal 1996. As a
percentage of net sales, selling expenses decreased to 27.3% in the Transition
Period from 27.5% in fiscal 1996, primarily as a result of decreased
advertising expense in the Transition Period.
General and Administrative Expense. General and administrative expense
decreased $23.2 million, or 73.0%, to $8.6 million in the Transition Period
from $31.8 million in fiscal 1996. As a percentage of net sales, general and
administrative expense increased to 8.4% in the Transition Period from 7.5% in
fiscal 1996, primarily as a result of the effects of seasonal sales trends in
the Transition Period.
Research and Development Expense. Research and development expense
decreased $3.9 million, or 72.2%, to $1.5 million in the Transition Period from
$5.4 million in fiscal 1996. As a percentage of net sales, research and
development expense increased to 1.5% in the Transition Period from 1.3% in
fiscal 1996, primarily as a result of increased support for ongoing product
development efforts.
Recapitalization and Other Special Charges. During the Transition Period
ended September 30, 1996, the Company recorded charges totalling $28.4 million,
including non-recurring charges related to the Recapitalization
22
and other special charges. Non-recurring charges of $12.3 million related to
the Recapitalization include (i) $5.0 million of advisory, legal and consulting
fees and (ii) $7.3 million of stock option compensation, severance payments and
employment contract settlements for the benefit of certain present and former
officers, directors and management of the Company.
Other special charges of $16.1 million include (i) $2.7 million of charges
related to the discontinuation of manufacturing operations at the Company's
Newton Aycliffe, United Kingdom facility; (ii) $1.7 million of charges for
deferred compensation plan obligations to former officers of the Company
resulting from the curtailment of the plan; (iii) $1.5 million of charges
reflecting the present value of lease payments for land which new management
determined would not be used for any future productive purpose; (iv) $5.6
million in costs and asset writedowns principally related to changes in Renewal
Power Station pricing strategies adopted by new management subsequent to the
Recapitalization and prior to September 30, 1996; and (v) $4.6 million of
termination benefits and other charges.
Income (loss) from Operations. Income (loss) from operations decreased
$54.0 million, or 178.2%, to $(23.7) million in the Transition Period from
$30.3 million in fiscal 1996. As a percentage of net sales, income (loss) from
operations decreased to (23.3)% in the Transition Period from 7.2% in fiscal
1996 for the reasons discussed above.
Net Income (loss). Net income (loss) decreased $35.2 million, or 246.2%,
to $(20.9) million for the Transition Period from $14.3 million in fiscal 1996.
As a percentage of net sales, net income (loss) decreased to (20.5)% in the
Transition Period from 3.4% in fiscal 1996, primarily because of non-recurring
charges related to the Recapitalization and other special charges discussed
above. In addition, amortization of deferred finance charges related to the
Bridge Notes and an extraordinary loss on the early retirement of debt
decreased net income in the Transition Period by $2.6 million, net of income
taxes.
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
Net Sales. The Company's net sales increased $8.2 million, or 2.0%, to
$423.4 million in fiscal 1996 from $415.2 million in fiscal 1995, primarily due
to higher unit sales of hearing aid batteries, Renewal rechargeable batteries
and alkaline batteries, offset in part by decreases in unit sales of heavy duty
and lantern batteries. Overall pricing was relatively constant between the two
periods. Sales of hearing aid batteries increased as a result of unit sales
growth in the overall hearing aid battery market as well as increased
penetration by the Company's Loud'n Clear line of hearing aid batteries and the
introduction of a new miniature size battery, used in hearing aids that fit
completely in the ear. Unit sales of Renewal rechargeable alkaline batteries
increased as a result of increased consumer awareness of the benefits of
Renewal over nickel-cadmium household rechargeable batteries and disposable
batteries and as replacement sales increased to retailers who had sold through
their high levels of fiscal 1995 Renewal inventory. The Company's unit sales of
alkaline batteries increased as the Company participated to a certain extent in
the continued overall growth in the market for alkaline batteries. Unit sales
of heavy duty batteries decreased due to the continued worldwide migration away
from heavy duty batteries and toward alkaline batteries while unit sales of
lantern batteries also decreased due to an overall decline in the lantern
battery market.
Gross Profit. Gross profit increased $5.9 million, or 3.3%, to $184.0
million in fiscal 1996 from $178.1 million in fiscal 1995. Gross profit
increased as a percentage of net sales to 43.5% in fiscal 1996 from 42.9% in
fiscal 1995. These increases are primarily attributable to increased sales of
higher margin products such as Renewal rechargeable batteries and hearing aid
batteries. In addition, the Company experienced manufacturing cost
improvements, particularly for alkaline battery raw materials related to the
Fennimore Expansion as discussed above.
Selling Expense. Selling expense increased $7.8 million, or 7.2%, to
$116.5 million in fiscal 1996 from $108.7 million in fiscal 1995. Selling
expense as a percentage of net sales increased to 27.5% in 1996 from 26.2% in
1995. These increases are primarily attributable to increased advertising costs
to promote the Renewal product line as discussed above.
General and Administrative Expense. General and administrative expense
decreased $1.1 million, or 3.3%, to $31.8 million in fiscal 1996 from $32.9
million in fiscal 1995. General and administrative expense as a percentage of
net sales decreased from 7.9% in fiscal 1995 to 7.5% in fiscal 1996. These
decreases occurred primarily because the $4.0 million payment of management
incentives in 1995 was not repeated in fiscal 1996.
23
Research and Development Expense. Research and development expense
increased $0.4 million, or 8.0%, to $5.4 million in fiscal 1996 from $5.0
million in fiscal 1995 as a result of continued support for ongoing product
development efforts.
Income from Operations. Income from operations decreased $1.2 million, or
3.8%, to $30.3 million, or 7.2% of net sales in fiscal 1996, from $31.5
million, or 7.6% of net sales, in fiscal 1995 for the reasons discussed above.
Net Income. Net income decreased $2.1 million, or 12.8%, to $14.3 million
for fiscal 1996 from $16.4 million in fiscal 1995, principally as a result of
decreased income from operations and higher effective tax rates, which
increased from 27.4% in 1995 to 32.9% in 1996. The Company's effective income
tax rates in fiscal 1996 and fiscal 1995 were impacted by the income tax
benefits of Rayovac International Corporation, a domestic international sales
corporation ("DISC") owned by the Company's shareholders, and fiscal 1995 was
also impacted by the utilization of a foreign net operating loss carryforward.
Liquidity and Capital Resources
For fiscal 1997, net cash provided by operating activities increased $9.7
million to $35.7 million from $26.0 million for the prior twelve months due
primarily to increased focus on working capital management and increased
earnings from operations partially offset by the payment of Recapitalization
and other special charges accrued during the prior twelve months.
Capital expenditures for fiscal 1997 were $10.9 million, an increase of
$2.5 million from the prior twelve months, due primarily to new computer
information systems purchased in September 1997. Capital expenditures for
fiscal 1996 and the Transition Period reflected maintenance level spending.
Spending will continue on the new computer systems in fiscal 1998 with
implementation currently planned in calendar 1998. Capital expenditures for
fiscal 1998 are expected to increase to approximately $23.0 million due to
alkaline capacity expansion, alkaline vertical integration programs, and the
new computer information systems.
Since the Recapitalization, the Company's primary capital requirements
have been for debt service, working capital, and capital expenditures. 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 the 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
$65.0 million of which $4.5 million was outstanding at September 30, 1997, and
approximately $0.6 million was utilized for outstanding letters of credit.
After giving effect to the initial public offering and the application of net
proceeds therefrom, the Company will have approximately $50.9 million
outstanding under the term loans pursuant to the Company's credit facilities
which will be subject to quarterly amortization.
On November 28, 1997 the Company acquired Brisco G.M.B.H. in Germany and
Brisco B.V. in Holland. Brisco packages and distributes hearing aid batteries
in unique, customized, environmentally-friendly packaging to hearing health
care professionals in Germany and Holland, as well as other European countries.
Brisco recorded sales of $4.5 million in calendar 1996.
The Company periodically assesses its outstanding debt arrangements and is
in the process of renegotiating its existing debt agreements on terms more
favorable to the Company as a result of the consummation of the Offerings in
November 1997.
The Company is subject to various federal, state, local and foreign
environmental laws and regulations in the jurisdictions in which it operates,
including laws and regulations relating to discharges to air, water and land,
the handling and disposal of solid and hazardous waste and the cleanup of
properties affected by hazardous substances. Except for liabilities related to
the Velsicol Chemical and Morton International proceedings described under Item
3, "Legal Proceedings" as to which the Company cannot predict the impact of
such liabilities, the Company does not currently anticipate any material
adverse effect on its operations or financial condition or any material capital
expenditure as a result of its efforts to comply with environmental laws and as
of September 30, 1997 had reserved $1.8 million for known on-site and off-site
environmental liabilities. Some risk of environmental liability is inherent in
the Company's business, however, and there can be no assurance that material
environmental costs will not arise in the future. The Company has been
identified as a PRP under CERCLA or similar state laws with respect to the past
disposal of waste and is a party to two lawsuits as to which there is
insufficient information to make a judgment as to the likelihood of a material
impact on the Company's operations, financial condition or liquidity at this
time.
24
The Company may be named as a PRP at additional sites in the future, and the
costs associated with such additional or existing sites may be material. In
addition, certain of the Company's facilities have been in operation for
decades and, over such time, the Company and other prior operators of such
facilities have generated and disposed of wastes which are or may be considered
hazardous such as cadmium and mercury utilized in the battery manufacturing
process. The Company engages in hedging transactions in the ordinary course of
its business. See Note 2.o. to Notes to Consolidated Financial Statements.
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("FAS
128"). FAS 128 will be effective for periods ending after December 15, 1997,
and specifies the computation, presentation, and disclosure requirements for
earnings per share. Adoption of this accounting standard is not expected to
have a material effect on the earnings per share computations of the Company
assuming the current capital structure.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("FAS 130"), which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported
in a financial statement that is displayed with the same prominence as other
financial statements. FAS 130 requires that an enterprise (i) classify items of
other comprehensive income by their nature in a financial statement and (ii)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in-capital in the equity section of the
balance sheet. FAS 130 is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. The Company is evaluating the effect of
this pronouncement on its consolidated financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("FAS 131"), which is effective for financial statements for periods beginning
after December 15, 1997. FAS 131 establishes standards for the way public
business enterprises are to report information about operating segments in
annual financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The Company is evaluating the effect of this pronouncement on its
consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required for this Item is included in this Annual Report
on Form 10-K on pages 35 through 71, inclusive and is incorporated herein by
reference.
25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In June 1997, KPMG Peat Marwick LLP replaced Coopers & Lybrand L.L.P. as
the Company's independent accountants. The decision to engage KPMG Peat Marwick
LLP was made with the approval of the Company's Audit Committee.
The Company believes, and it has been advised by Coopers & Lybrand L.L.P.
that it concurs in such belief, that, during the period of its engagement, the
Company and Coopers & Lybrand L.L.P. did not have any disagreement on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of Coopers & Lybrand L.L.P., would have caused it to make
reference in connection with its report on the Company's financial statements
to the subject matter of the disagreement.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information regarding each director and
executive officer of the Company as of October 1, 1997:
Name Age Position and Offices
- ---------------------- ----- --------------------------------------------------------
David A. Jones 48 Chairman of the Board, Chief Executive Officer and
President
Kent J. Hussey 51 Executive Vice President of Finance and Administration,
Chief Financial Officer and Director
Roger F. Warren 56 President/International and Contract Micropower and
Director
Trygve Lonnebotn 60 Executive Vice President of Operations and Director
Stephen P. Shanesy 41 Senior Vice President of Marketing and General Manager
of General Batteries
Kenneth V. Biller 49 Senior Vice President and General Manager of Lighting
Products & Industrial
Merrell M. Tomlin 44 Senior Vice President of Sales
James A. Broderick 54 Vice President, General Counsel and Secretary
Scott A. Schoen 39 Director
Thomas R. Shepherd 67 Director
Warren C. Smith, Jr. 41 Director
Mr. Jones has served as the Chairman of the Board of Directors, Chief
Executive Officer and President of the Company since September 12, 1996.
Between February 1995 and March 1996, Mr. Jones was Chief Operating Officer,
Chief Executive Officer and Chairman of the Board of Directors of Thermoscan,
Inc. From 1989 to September 1994, he served as President and Chief Executive
Officer of The Regina Company, a manufacturer of vacuum cleaners and other
floor care equipment. Mr. Jones has over 25 years of experience working in the
consumer durables industry, most recently in management of operations,
manufacturing and marketing.
Mr. Hussey is a director of the Company and has served as Executive Vice
President of Finance and Administration and Chief Financial Officer since
October 1, 1996. Prior to that time and since 1994, Mr. Hussey was Vice
President and Chief Financial Officer of ECC International, a producer of
industrial minerals and specialty chemicals, and from 1991 to July 1994 he
served as Vice President and Chief Financial Officer of The Regina Company.
Mr. Warren is a director of the Company and has served as
President/International and Contract Micropower of the Company since 1995. Mr.
Warren joined the Company in 1985 and has held several positions including
Executive Vice President and General Manager and Senior Vice President and
General Manager/International.
Mr. Lonnebotn is a director of the Company and, since 1985, has served as
Executive Vice President of Operations. He joined Rayovac in 1965.
26
Mr. Shanesy is the Senior Vice President of Marketing and the General
Manager of General Batteries of the Company. From 1991 to 1995, Mr. Shanesy was
Vice President of Marketing of Oscar Mayer. Prior to that time and since 1983,
Mr. Shanesy held various marketing positions with Kraft Foods.
Mr. Biller has been the Senior Vice President and General Manager of
Lighting Products & Industrial since 1996. Prior to such time he was Vice
President and General Manager of Lighting Products & Industrial since 1995. Mr.
Biller joined the Company in 1972 and has held several positions, including
Director of Technology/Battery Products and Vice President of Manufacturing.
Mr. Tomlin is the Senior Vice President of Sales of the Company. From
March 1996 to September 30, 1996, Mr. Tomlin served as Vice President Sales of
Braun of North America/Thermoscan and from August 1995 to March 1996, he served
as Vice President Sales of Thermoscan, Inc. Prior to that time, Mr. Tomlin was
Vice President of Sales of various divisions of Casio Electronics.
Mr. Broderick is Vice President, General Counsel and Secretary for Rayovac
and has held these positions since 1985.
Mr. Schoen has been a director of the Company since the Recapitalization
and is a managing director of THL Co., which he joined in 1986. In addition,
Mr. Schoen is a Vice President of Thomas H. Lee Advisors I and Thomas H. Lee
Advisors II. He is also a director of First Alert, Inc., Signature Brands,
U.S.A., Inc. and various private corporations.
Mr. Shepherd has been a director of the Company since the Recapitalization
and is a managing director of THL Co. and has been engaged as a consultant to
THL Co. since 1986. In addition, Mr. Shepherd is an Executive Vice President of
Thomas H. Lee Advisors I and an officer of various other THL Co. affiliates. He
is also a director of General Nutrition Companies, Inc. and various private
corporations and Chairman of Signature Brands, U.S.A., Inc.
Mr. Smith has been director of the Company since the Recapitalization and
is a managing director of THL Co. and has been employed by THL Co. since 1990.
In addition, Mr. Smith is a Vice President of Thomas H. Lee Advisors II. He is
also a director of Finlay Enterprises, Inc., Finlay Fine Jewelry Corporation
and various private corporations.
The Company anticipates that it will designate two additional, independent
persons to the Board of Directors.
Board Committees and Terms of Office
The Board of Directors has established an audit committee (the "Audit
Committee") and a compensation committee (the "Compensation Committee"). The
members of the Audit Committee and the Compensation Committee are Messrs.
Schoen, Shepherd and Smith. The independent directors will be elected to the
Audit Committee and replace existing members.
The Company's Amended and Restated Articles of Incorporation provide that
the Board of Directors is classified into three classes, with the members of
the respective classes serving for staggered three-year terms. The first class
consists of Messrs. Jones, Lonnebotn and Schoen, the second of Messrs. Warren
and Shepherd and the third of Messrs. Hussey and Smith, with the initial terms
of the directors comprising the classes expiring upon the election and
qualification of directors at the annual meetings of shareholders following the
fiscal years ended September 30, 1998, 1999 and 2000, respectively. At each
annual meeting of shareholders, directors will be reelected or elected for full
three-year terms.
27
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid to the Chief Executive
Officer of the Company and the other four most highly compensated executive
officers of the Company during fiscal 1997, the three month Transition Period
ended September 30, 1996 and fiscal 1996 (the "Named Executive Officers") for
services rendered in all capacities to the Company.
Other
Annual Securities
Compen- Underlying All Other
Name and Principal Position Fiscal Year Salary ($) Bonus ($) sation ($) Options (#) Compensation($)
- ------------------------------- ------------------- ------------ ----------- ------------ ------------- ----------------
David A. Jones, 1997 $400,000 $218,500 $65,800 84,204
Chairman of the Board, Transition Period 19,700 179,500 911,577
Chief Executive Officer
and President
Kent J. Hussey, 1997 275,000 185,000 253,756 $ 57,000(1)
Executive Vice President of
Finance and Administration
and Chief Financial Officer
Roger F. Warren, 1997 258,000 103,200 28,569
President/International Transition Period 64,500 24,700 227,894 486,600(2)
and Contract Micropower 1996 248,100
Trygve Lonnebotn, 1997 240,200 96,100 24,074
Executive Vice President Transition Period 60,100 32,400 170,921 377,800(2)
of Operations 1996 231,000
Stephen P. Shanesy, 1997 154,900 140,000 137,024
Senior Vice President of
Marketing and General Manager
of General Batteries
- ----------------
(1) Represents relocation payments.
(2) Represents amounts paid by the Company in connection with the
Recapitalization.
28
Option Grants and Exercises
In connection with the Recapitalization, the Board adopted the Rayovac
Corporation 1996 Stock Option Plan (the "1996 Plan"). Pursuant to the 1996
Plan, options may be granted with respect to an aggregate of 3,000,000 shares
of Common Stock. The Board of Directors has granted an aggregate of 2,318,127
options to purchase shares of Common Stock at a weighted average exercise price
of $4.33 per share, 911,577 of which have been granted to David A. Jones in
accordance with the terms of his employment agreement. See "--Employment
Agreement." Pursuant to the 1997 Plan, options to purchase an aggregate of
556,222 shares of Common Stock were granted to certain management employees,
which options were immediately exercised or surrendered to the Company's
Deferred Compensation Plan as of such date.
The following table discloses the grants of stock options during fiscal
1997 to the Named Executive Officers.
Option/SAR Grants in Fiscal 1997
Individual Grants
-------------------------------------------------------------- Potential Realizable
Value At Assumed
Number of Percent of Total Annual Rates of Stock
Securities Options/SARs Exercise Price Appreciation for
Underlying Granted to or Base Option Term
Options/SARs Employees in Price ----------------------
Name Granted (#) Fiscal Year ($/Share) Expiration Date 5% ($) 10% ($)
- -------------------------- -------------- ----------------- ----------- ----------------- ---------- -----------
David A. Jones ......... 84,204(1) 6.0 $6.01 11/30/1997 $ 8,434 $ 16,869
Roger F. Warren ......... 28,569(1) 2.0 6.01 11/30/1997 2,862 5,723
Trygve Lonnebotn ......... 24,074(1) 1.7 6.01 11/30/1997 2,411 4,823
Kent J. Hussey ......... 227,894 16.2 4.39 10/01/2006 629,181 1,594,467
25,862(1) 1.8 6.01 11/30/1997 2,591 5,181
Stephen P. Shanesy ...... 113,947 8.1 4.39 10/01/2006 314,590 797,234
23,077(1) 1.6 6.01 11/30/1997 2,312 4,623
- ----------------
(1) These options granted under the 1997 Plan were exercised immediately upon
grant.
The following table sets forth information concerning options to purchase
Common Stock held by the Named Executive Officers.
Aggregated Option Exercises In Fiscal 1997 And Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options at Options at
Acquired Value Fiscal Year End (#) 12/16/97 ($)(2)
Name on Exercise Realized $ (1) (Exercisable/Unexercisable) (Exercisable/Unexercisable)
- -------------------------- ------------- ---------------- ----------------------------- ----------------------------
David A. Jones ......... 84,204 $-0- 182,315/729,262 $2,093,888/$8,375,574
Roger F. Warren ......... 28,569 -0- 45,579/182,315 523,475/2,093,888
Trygve Lonnebotn ......... 24,074 -0- 34,184/136,737 392,603/1,570,424
Kent J. Hussey ......... 25,862 -0- 45,579/182,315 523,475/2,093,888
Stephen P. Shanesy ...... 23,077 -0- 22,789/91,158 261,732/1,046,950
- ----------------
(1) These options granted under the 1997 Plan were immediately exercised and no
value was received by the Named Executive Officers.
(2) These values are calculated using the $15 7/8 per share closing price of the
Common Stock as quoted on the NYSE on December 16, 1997. The fair market
value of the securities underlying such options as of the end of fiscal
1997, prior to the consummation of the Company's initial public offering,
would have been $6.01 per share.
Pension Plan
In addition to the remuneration set forth above, the Company contributed
in fiscal 1997 to a defined benefit pension plan covering all domestic
non-union employees (the "Pension Plan"). The table below sets forth the
approximate maximum retirement benefits for employees retiring during 1997,
subject to limitations, if any, imposed by law, payable under the Pension Plan
to persons whose Final Average Compensation (as defined herein) is in the
classification indicated.
29
PENSION PLAN TABLE
YEARS OF SERVICE
Remuneration 5 15 20 25 30 35
- ---------------------- -------- --------- --------- --------- --------- --------
$130,000 ............ $6,800 $20,100 $26,800 $33,500 $40,200 $46,800
160,000 ............ 8,600 25,600 34,100 42,500 51,000 59,400
175,000 ............ 8,600 25,600 34,100 42,500 51,000 59,400
200,000 ............ 8,600 25,600 34,100 42,500 51,000 59,400
300,000 ............ 8,600 25,600 34,100 42,500 51,000 59,400
400,000 ............ 8,600 25,600 34,100 42,500 51,000 59,400
500,000 ............ 8,600 25,600 34,100 42,500 51,000 59,400
The annual actuarial valuation of the Pension Plan is performed using the
Unit Credit Cost Method as the actuarial cost method under which the Company's
contributions are determined for all participants as a group. Allocations of
the Company's contribution to individual participants are not readily
available. Remuneration under the Pension Plan is calculated on the basis of
the employee's highest average compensation for the highest five years during
the last ten years of service ("Final Average Compensation") subject to any
applicable limit on credited compensation imposed by the Internal Revenue Code
of 1986, as amended (the "Required Maximum"). Compensation for purposes of the
Pension Plan means compensation listed in the "Salary" and "Bonus" columns of
the compensation table included in Item 11, "Executive Compensation." Benefits
payable under the Pension Plan are subject to offset by up to 50% of the
benefits to be received by a participant from Social Security. Effective July
31, 1997, the Company curtailed the Pension Plan.
The table below sets forth certain information relating to the Pension
Plan with respect to the Named Executive Officers. Remuneration covered by the
Pension Plan for each of the Named Executive Officers currently is limited to
the Required Maximum.
1997 Remuneration Credited Years
Name Covered by Plan of Service
-------------------------- ------------------- ---------------
David A. Jones ......... $160,000 1
Kent J. Hussey ......... 160,000 1
Roger F. Warren ......... 160,000 13
Trygve Lonnebotn ......... 160,000 32
Stephen P. Shanesy ...... 160,000 1
Compensation Committee Interlocks and Insider Participation
During fiscal 1997, the Compensation Committee of the Board of Directors
was composed of Scott A. Schoen, Thomas R. Shepherd and Warren C. Smith, Jr.
The Company and THL Co. (which together with its affiliates owns 61.5% of
the outstanding Common Stock) are parties to a Management Agreement entered
into in connection with the Recapitalization pursuant to which the Company has
engaged THL Co. to provide consulting and management advisory services for an
initial period of five years through September 12, 2001. Under the Management
Agreement and in connection with the closing of the Recapitalization, the
Company paid THL Co. and an affiliate an aggregate fee of $3.25 million (the
"THL Transaction Fee"). In consideration of the consulting and management
advisory services, the Company pays THL Co. and its affiliate an aggregate
annual fee of $360,000 plus expenses (the "Management Fee"). The Company
believes that this Management Agreement is on terms no less favorable to the
Company than could have been obtained from an independent third party.
In connection with the Recapitalization, the Lee Group, certain other
shareholders of the Company and the Company entered into the Shareholders
Agreement. The Shareholders Agreement provides for certain restrictions on
transfer of the shares beneficially owned by the parties thereto. Additionally,
the Shareholders Agreement provides that, subject to certain limitations, so
long as the Lee Group and their permitted transferees own at least 10% of the
shares of Common Stock acquired in the Recapitalization, the Lee Group shall be
entitled to three "demand" registrations which may be exercised at any time.
The shareholders party to the Shareholders Agreement, including the Lee Group,
are also entitled, subject to certain limitations, to include shares of Common
Stock held by them in other registrations of equity securities of the Company
initiated by the Company for its own account or pursuant to a request for
registration by the Lee Group.
30
Employment Agreement
Under the employment agreement between David A. Jones and the Company (the
"Jones Employment Agreement"), Mr. Jones is entitled to a salary of $400,000
per annum (which may be increased from time to time at the discretion of the
Board of Directors) and an annual bonus based upon the Company achieving
certain annual performance goals established by the Board of Directors. The
Jones Employment Agreement became effective on September 12, 1996 for a term of
three years expiring on September 30, 1999 which automatically renews for
successive one year periods unless terminated earlier upon 90 days prior
written notice by either party. At any time Mr. Jones has the right to resign
and terminate the agreement upon 60 days notice. Upon such resignation, the
Company must pay to Mr. Jones any unpaid base salary and any accrued but unpaid
bonus through the date of resignation. The agreement provides that, upon the
termination of Mr. Jones' employment for death or disability, the Company will
pay to Mr. Jones or his estate any unpaid base salary, any accrued but unpaid
bonus through the date of termination and a pro rata portion of the bonus for
such period. The Company has the right to terminate employment for "cause" (as
defined) and shall be obligated to pay to Mr. Jones any unpaid base salary to
the date of termination. In the event Mr. Jones is terminated without cause (as
defined), the Company must pay to him any unpaid base salary, any accrued but
unpaid bonus through the date of termination and Mr. Jones' base salary and any
additional salary until the earlier of the end of the term of the agreement or
12 months from the date of termination as well as other benefits under the
agreement.
The agreement also provides that, during the term of the agreement or the
period of time served as a director, and for one year thereafter, Mr. Jones
shall not engage in or have a financial interest in any business which is
involved in the industries in which the Company is engaged. The Company has
also granted Mr. Jones options to purchase 911,577 shares of Common Stock at
$4.39 per share, half of which become exercisable at a rate of 20% per year
over a five-year period and the other half of which become exercisable at the
end of ten years with accelerated vesting over each of the next five fiscal
years if the Company achieves certain performance goals. In connection with the
Recapitalization, Mr. Jones individually also purchased 227,895 shares of
Common Stock at approximately $4.39 per share. One-half of the purchase price
was paid in cash and one-half with a promissory note. The Company holds this
promissory note in the principal amount of $500,000 from Mr. Jones in
connection with the purchase of shares of Common Stock. Mr. Jones will receive
additional salary of $35,000 annually as long as the promissory note remains
outstanding.
Severance Agreements
Each of Kent J. Hussey, Executive Vice President of Finance and
Administration and Chief Financial Officer, Roger F. Warren,
President/International and Contract Micropower, Trygve Lonnebotn, Executive
Vice President of Operations, Stephen P. Shanesy, Senior Vice President of
Marketing and General Manager of General Batteries, and Merrell M. Tomlin,
Senior Vice President of Sales has entered into a severance agreement (each, a
"Severance Agreement") with the Company pursuant to which, in the event that
his employment is terminated during the term of the Severance Agreement (a) by
the Company without cause (as defined) or (b) by reason of death or disability
(as defined), the Company shall pay him an amount in cash equal to the sum of
(i) his base salary as in effect for the fiscal year ending immediately prior
to the fiscal year in which such termination occurs and (ii) the annual bonus
(if any) earned by him pursuant to any annual bonus or incentive plan
maintained by the Company in respect of the fiscal year ending immediately
prior to the fiscal year in which such termination occurs, such amount to be
paid ratably monthly in arrears over the remaining term of the Severance
Agreement. In the event of such termination, the Company shall also maintain
for the twelve-month period following such termination insurance benefits for
such individual and his dependents similar to those provided immediately prior
to such termination. Under the Severance Agreements, each of Messrs. Hussey,
Warren, Lonnebotn, Shanesy and Tomlin has agreed that for one year following
the later of the end of the term of the Severance Agreement or the date of
termination, that he will not engage or have a financial interest in any
business which is involved in the industries in which the Company is engaged.
The initial term of each Severance Agreement is one year with automatic
one-year renewals thereafter, subject to thirty days notice of non-renewal
prior to the end of the then current term.
Director Compensation
Directors who are employees of the Company receive no compensation for
serving on the Board of Directors. Non-employee directors of the Company are
reimbursed for their out-of-pocket expenses in attending meetings of the Board
of Directors. Messrs. Schoen, Shepherd and Smith receive no fees in their
capacities as directors. See Item 13, "Certain Relationships and Related
Transactions" for a description of certain other arrangements pursuant to which
THL Co., of which they are managing directors, receives compensation from the
Company.
31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 16, 1997 certain information
with respect to beneficial ownership of the Common Stock by each (i) director,
(ii) executive officer and (iii) beneficial owner of more than 5% of the
Company's outstanding Common Stock known to the Company based on Securities and
Exchange Commission filings and other available information and by all
directors and executive officers of the Company as a group.
Shares of Common
Stock Beneficially
Owned(2)
--------------------------
Number of Percentage
Name and Address(1) Shares of Class
- ----------------------------------------------- ------------ -----------
Thomas H. Lee Equity Fund III, L.P.(3) ...... 14,437,064 52.7%
75 State Street, Ste. 2600
Boston, MA 02109
Thomas H. Lee Foreign Fund III, L.P.(3) ...... 894,341 3.3
75 State Street, Ste. 2600
Boston, MA 02109
THL-CCI Limited Partnership(4) ............... 1,515,753 5.5
75 State Street, Ste. 2600
Boston, MA 02109
David A. Jones(5) ........................... 482,073 1.7
Kent J. Hussey(6) ........................... 95,610 *
Roger F. Warren(7) ........................... 583,883 2.1
Stephen P. Shanesy(8) ........................ 82,313 *
Kenneth V. Biller(9) ........................ 134,403 *
Merrell M. Tomlin(10) ........................ 66,830 *
James A. Broderick(11) ........................ 231,399 *
Trygve Lonnebotn(12) ........................ 468,468 1.7
Scott A. Schoen(3)(13) ........................ 72,756 *
Thomas R. Shepherd(13) ........................ 37,894 *
Warren C. Smith, Jr.(3)(13) .................. 60,640 *
All directors and executive officers of the
Company as a group (11 persons)(3)(13) ...... 2,316,269 8.3%
*Less than 1%.
(1) Addresses are given only for beneficial owners of more than 5% of the
outstanding shares of Common Stock.
(2) Unless otherwise noted, the nature of beneficial ownership is sole voting
and/or investment power, except to the extent authority is shared by
spouses under applicable law. Shares of Common Stock not outstanding but
deemed beneficially owned by virtue of the right of a person or group to
acquire them within 60 days are treated as outstanding only for purposes
of determining the number and percent of outstanding shares of Common
Stock owned by such person or group.
(3) THL Equity Advisors III Limited Partnership ("Advisors"), the general
partner of the Lee Fund and Thomas H. Lee Foreign Fund III, L.P., THL
Equity Trust III ("Equity Trust"), the general partner of Advisors, Thomas
H. Lee, Scott A. Schoen, Warren C. Smith, Jr. and other managing directors
of THL Co., as Trustees of Equity Trust, and Thomas H. Lee as sole
shareholder of Equity Trust, may be deemed to be beneficial owners of the
shares of Common Stock held by such Funds. Each of such persons maintains
a principal business address at Suite 2600, 75 State Street, Boston, MA
02109. Each of such persons disclaims beneficial ownership of all shares.
(4) THL Investment Management Corp., the general partner of THL-CCI Limited
Partnership, and Thomas H. Lee, as director and sole shareholder of THL
Investment Management Corp., may also be deemed to be beneficial owners of
the shares of Common Stock held by THL-CCI Limited Partnership. Each of
such persons maintains a principal business address at Suite 2600, 75
State Street, Boston, MA 02109.
(5) Includes 4,299 shares representing Mr. Jones' proportional interest in the
Lee Fund before giving effect to the allocation of fees and obligations to
the Lee Fund which allocation would reduce the number of shares
representing Mr. Jones' proportional interest in the Lee Fund. Mr. Jones
disclaims beneficial ownership of these shares. Also includes 182,315
shares subject to options which are currently exercisable and 42,606
shares allocated for the account of such individual pursuant to the
Deferred Compensation Plan.
(6) Includes 45,579 shares subject to options which are currently exercisable
and 8,419 shares allocated for the account of such individual pursuant to
the Deferred Compensation Plan.
32
(7) Includes 45,579 shares subject to options which are currently exercisable
and 16,922 shares allocated for the account of such individual pursuant to
the Deferred Compensation Plan.
(8) Includes 22,789 shares subject to options which are currently exercisable
and 14,757 shares allocated for the account of such individual pursuant to
the Deferred Compensation Plan.
(9) Includes 22,789 shares subject to options which are currently exercisable
and 12,134 shares allocated for the account of such individual pursuant to
the Deferred Compensation Plan.
(10) Includes 22,789 shares subject to options which are currently exercisable
and 8,386 shares allocated for the account of such individual pursuant to
the Deferred Compensation Plan.
(11) Includes 10,000 shares subject to options which are currently exercisable
and 7,974 shares allocated for the account of such individual pursuant to
the Deferred Compensation Plan.
(12) Includes 34,184 shares subject to options which are currently exercisable
and 15,754 shares allocated for the account of such individual pursuant to
the Deferred Compensation Plan.
(13) Represents the proportional interest of such individual in THL-CCI Limited
Partnership; in the case of Mr. Smith, also includes 14,229 shares which
Mr. Smith may be deemed to beneficially own as a result of Mr. Smith's
children's proportional beneficial interest in THL-CCI Limited
Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and THL Co. (which, together with its affiliates owns 61.5% of
the outstanding Common Stock) are parties to a Management Agreement entered
into in connection with the Recapitalization pursuant to which the Company has
engaged THL Co. to provide consulting and management advisory services for an
initial period of five years through September 12, 2001. Under the Management
Agreement and in connection with the closing of the Recapitalization, the
Company paid THL Co. and an affiliate the THL Transaction Fee. In consideration
of the consulting and management advisory services, the Company pays THL Co.
and its affiliate the Management Fee. The Company believes that this Management
Agreement is on terms no less favorable to the Company than could have been
obtained from an independent third party.
The Company and David A. Jones are parties to the Jones Employment
Agreement pursuant to which Mr. Jones agreed to be the Chairman of the Board of
Directors, Chief Executive Officer and President of the Company. Mr. Jones also
purchased from the Company 227,895 shares of Common Stock with cash and a
$500,000 promissory note held by the Company with interest payable at a rate of
7% per annum and principal payable on the earliest of the following to occur:
(i) the fifth anniversary of the note; (ii) the date on which (a) Mr. Jones
terminates his employment for any reason other than a Constructive Termination
(as defined in the Jones Employment Agreement) and (b) he is no longer a
director of the Company; or (iii) the date the Company terminates Mr. Jones'
employment for Cause (as defined in the Jones Employment Agreement). Proceeds
from any sale of Mr. Jones' shares must be used to immediately prepay, in whole
or in part, the principal amount of the promissory note outstanding and any
accrued and unpaid interest on the portion prepaid or the holder of the
promissory note may declare the entire principal amount of such note to be
immediately due and payable. Mr. Jones receives additional salary of $35,000
annually during the period the promissory note is outstanding. See Item 11,
"Executive Compensation--Employment Agreement."
The Company holds five year promissory notes dated March 17, 1997 from
Messrs. Hussey, Tomlin and Shanesy, in principal amounts of $75,000, $60,000
and $80,000, respectively, with interest payable at 8% per annum. Such notes
were incurred in connection with the purchase of shares of Common Stock by
Messrs. Hussey, Tomlin and Shanesy upon joining the Company.
Pursuant to the 1997 Plan, on August 1, 1997, certain executive officers
of the Company, including Messrs. Jones, Hussey, Tomlin and Shanesy, exercised
options to purchase shares of Common Stock under the 1997 Plan with five-year
promissory notes held by the Company, in principal amounts of $250,000,
$50,000, $50,000 and $20,000, respectively, with interest payable at 8% per
annum. On September 15, 1997, certain other executive officers, including
Messrs. Warren, Lonnebotn, Shanesy and Hussey, exercised options under the 1997
Plan with, in the case of Messrs. Warren, Lonnebotn and Shanesy, five-year
promissory notes held by the Company, in principal amounts of $50,003, $46,079
and $30,002, respectively, with interest payable at 8% per annum and in the
case of Mr. Hussey, a non-interest bearing promissory note in the principal
amount of $36,000 held by the Company of which no principal amount remains
outstanding. No principal amounts have been paid to date on such other notes.
33
In connection with the Recapitalization, the Lee Group, certain other
shareholders of the Company and the Company entered into the Shareholders
Agreement. The Shareholders Agreement provides for certain restrictions on
transfer of the shares beneficially owned by the parties thereto. Additionally,
the Shareholders Agreement provides that, subject to certain limitations, so
long as the Lee Group and their permitted transferees own at least 10% of the
shares of Common Stock acquired in the Recapitalization, the Lee Group shall be
entitled to three "demand" registrations which may be exercised at any time.
The shareholders party to the Shareholders Agreement including the Lee Group
are also entitled, subject to certain limitations, to include shares of Common
Stock held by them in other registrations of equity securities of the Company
initiated by the Company for its own account or pursuant to a request for
registration by the Lee Group.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of or are included in this
Annual Report on Form 10-K:
1. The financial statements listed in the Index to Consolidated Financial
Statements and Financial Statement Schedule, filed as part of this
Annual Report on Form 10-K.
2. The financial statement schedule listed in the Index to Consolidated
Financial Statements and Financial Statement Schedule, filed as part
of this Annual Report on Form 10-K.
3. The exhibits listed in the Exhibit Index filed as part of this Annual
Report on Form 10-K.
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company
during the last quarter of the fiscal year ended September 30, 1997.
34
RAYOVAC CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page
-----
Independent Auditors' Report .................................... 36
Report of Independent Accountants .............................. 37
Consolidated Balance Sheets .................................... 38
Consolidated Statements of Operations ........................... 39
Consolidated Statements of Cash Flows ........................... 40
Consolidated Statements of Shareholders' Equity (Deficit) ...... 41
Notes to Consolidated Financial Statements ..................... 42
Independent Auditors' Report .................................... 70
Schedule II--Valuation and Qualifying Accounts .................. 71
35
Independent Auditors' Report
The Board of Directors
Rayovac Corporation:
We have audited the accompanying consolidated balance sheet of Rayovac
Corporation and Subsidiaries as of September 30, 1997, and the related
consolidated statements of operations, shareholders' deficit, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The accompanying consolidated
financial statements of Rayovac Corporation and Subsidiaries as of June 30,
1996 and September 30, 1996, and for each of the years ended June 30, 1995 and
1996, and the transition period from July 1, 1996 to September 30, 1996, were
audited by other auditors whose report thereon dated November 22, 1996,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the fiscal year 1997 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Rayovac Corporation and Subsidiaries as of September 30, 1997, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Milwaukee, Wisconsin
October 28, 1997
36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Rayovac Corporation
We have audited the accompanying combined consolidated balance sheets of
Rayovac Corporation and Subsidiaries as of June 30, 1996 and September 30,
1996, and the related combined consolidated statements of operations,
shareholders' equity (deficit), and cash flows for each of the two years in the
period ended June 30, 1996 and the period July 1, 1996 to September 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Rayovac Corporation and Subsidiaries as of June 30, 1996 and September 30,
1996, and the results of their operations and their cash flows for each of the
two years in the period ended June 30, 1996 and the period July 1, 1996 to
September 30, 1996, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
November 22, 1996
37
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
June 30, September 30, September 30,
1996 1996 1997
------------ --------------- --------------
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 2,190 $ 4,255 $ 1,133
Receivables:
Trade accounts receivable, net of allowance for doubtful
receivables of $786, $722 and $1,221, respectively ...... 55,830 62,320 76,590
Other ................................................... 2,322 4,156 3,079
Inventories ................................................ 66,941 70,121 58,551
Deferred income taxes ....................................... 5,861 9,158 9,099
Prepaid expenses and other ................................. 4,975 4,864 5,928
-------- ---------- ----------
Total current assets ................................. 138,119 154,874 154,380
-------- ---------- ----------
Property, plant and equipment, net ........................... 73,181 68,640 65,511
Deferred charges and other ................................. 9,655 7,413 7,713
Debt issuance costs .......................................... 173 12,764 9,277
-------- ---------- ----------
Total assets .......................................... $221,128 $ 243,691 $ 236,881
======== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ........................ $ 11,631 $ 8,818 $ 23,880
Accounts payable .......................................... 38,695 46,921 57,259
Accrued liabilities:
Wages and benefits ....................................... 6,126 5,894 9,343
Accrued interest .......................................... 1,890 631 5,613
Recapitalization and other special charges ............... -- 14,942 4,612
Other ................................................... 16,557 13,019 19,856
-------- ---------- ----------
Total current liabilities .............................. 74,899 90,225 120,563
-------- ---------- ----------
Long-term debt, net of current maturities .................. 69,718 224,845 183,441
Employee benefit obligations, net of current portion ......... 12,141 12,138 11,291
Deferred income taxes ....................................... 2,584 142 735
Other ...................................................... 162 2,061 1,446
-------- ---------- ----------
Total liabilities .................................... 159,504 329,411 317,476
-------- ---------- ----------
Shareholders' equity (deficit):
Common stock, $.01 par value, authorized 90,000 shares;
issued 50,000 shares; outstanding 49,500, 20,470 and
20,581 shares, respectively .............................. 500 500 500
Rayovac International Corporation common stock, $.50 value,
authorized 18 shares; issued and outstanding 10 shares at
June 30, 1996 ............................................. 5 -- --
Additional paid-in capital ................................. 12,000 15,970 15,974
Foreign currency translation adjustment ..................... 1,650 1,689 2,270
Notes receivable from officers/shareholders ............... -- (500) (1,658)
Retained earnings .......................................... 48,002 25,143 31,321
-------- ---------- ----------
62,157 42,802 48,407
Less stock held in trust for deferred compensation
plan, 160 shares .......................................... -- -- (962)
Less treasury stock, at cost, 500, 29,530 and 29,419 shares,
respectively ............................................. (533) (128,522) (128,040)
-------- ---------- ----------
Total shareholders' equity (deficit) ........................ 61,624 (85,720) (80,595)
-------- ---------- ----------
Total liabilities and shareholders' equity (deficit) ......... $221,128 $ 243,691 $ 236,881
======== ========== ==========
See accompanying notes to consolidated financial statements.
38
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
Year ended June 30, Transition
----------------------- Period ended Year ended
September 30, September 30,
1995 1996 1996 1997
---------- ---------- --------------- --------------
Net sales .................................... $415,224 $423,354 $ 101,880 $432,552
Cost of goods sold ........................... 237,126 239,343 59,242 234,569
-------- -------- --------- --------
Gross profit ................................. 178,098 184,011 42,638 197,983
-------- -------- --------- --------
Operating expenses:
Selling ....................................... 108,703 116,525 27,796 122,055
General and administrative .................. 32,861 31,767 8,628 32,205
Research and development ..................... 5,005 5,442 1,495 6,196
Recapitalization charges ..................... -- -- 12,326 --
Other special charges ........................ -- -- 16,065 3,002
-------- -------- --------- --------
146,569 153,734 66,310 163,458
-------- -------- --------- --------
Income (loss) from operations ............... 31,529 30,277 (23,672) 34,525
Interest expense .............................. 8,644 8,435 4,430 24,542
Other expense, net ........................... 230 552 76 378
-------- -------- --------- --------
Income (loss) before income taxes and
extraordinary item ........................... 22,655 21,290 (28,178) 9,605
Income tax expense (benefit) .................. 6,247 7,002 (8,904) 3,419
-------- -------- --------- --------
Income (loss) before extraordinary item ...... 16,408 14,288 (19,274) 6,186
Extraordinary item, loss on early
extinguishment of debt, net of income tax
benefit of $777 .............................. -- -- (1,647) --
-------- -------- --------- --------
Net income (loss) ........................... $ 16,408 $ 14,288 $ (20,921) $ 6,186
======== ======== ========= ========
Net income (loss) per common share:
Income (loss) before extraordinary item ...... $ 0.32 $ 0.28 $ (0.42) $ 0.28
Extraordinary item ........................... -- -- ( 0.04) --
-------- -------- --------- --------
Net income (loss) ........................... $ 0.32 $ 0.28 $ (0.46) $ 0.28
======== ======== ========= ========
Weighted average shares of common stock
outstanding ................................. 51,648 51,148 45,469 22,179
======== ======== ========= ========
See accompanying notes to consolidated financial statements.
39
RAYOVAC CORPORATIONAND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
Year ended June 30, Transition
----------------------------- Period ended Year ended
September 30, September 30,
1995 1996 1996 1997
------------- --------------- --------------- --------------
Cash flows from operating activities:
Net income (loss) ................................................ $ 16,408 $ 14,288 $ (20,921) $ 6,186
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Recapitalization and other special charges ..................... -- -- 13,449 --
Extraordinary item, loss on early extinguishment of debt ...... -- -- 2,424 --
Amortization of debt issuance costs ........................... 103 53 1,609 3,563
Depreciation ................................................... 11,024 11,932 3,279 11,308
Deferred income taxes .......................................... 346 3 (5,739) 652
Loss (gain) on disposal of fixed assets ........................ 110 (108) 1,289 (326)
Curtailment gain ............................................. -- -- -- (2,923)
Changes in assets and liabilities:
Accounts receivable .......................................... (2,537) (6,166) (8,940) (14,794)
Inventories ................................................... 9,004 (1,779) (3,078) 11,987
Prepaid expenses and other .................................... (990) 1,148 741 (563)
Accounts payable and accrued liabilities ..................... 2,051 (1,526) (185) 30,905
Accrued recapitalization and other special charges ............ -- -- 14,942 (10,330)
---------- --------- ---------- ----------
Net cash provided (used) by operating activities ............ 35,519 17,845 (1,130) 35,665
---------- --------- ---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment ..................... (16,938) (6,646) (1,248) (10,856)
Proceeds from sale of property, plant and equipment ............ 139 298 1,281 52
---------- --------- ---------- ----------
Net cash provided (used) by investing activities ............ (16,799) (6,348) 33 (10,804)
---------- --------- ---------- ----------
Cash flows from financing activities:
Reduction of debt ................................................ (106,383) (104,526) (107,090) (135,079)
Proceeds from debt financing .................................... 85,698 96,252 259,489 108,890
Cash overdraft ................................................... 3,925 2,339 (2,493) 164
Debt issuance costs ............................................. -- -- (14,373) --
Extinguishment of debt .......................................... -- -- (2,424) --
Proceeds from direct financing lease ........................... -- -- -- 100
Distributions from DISC .......................................... (1,500) (5,187) (1,943) --
Issuance of stock ................................................ -- -- -- 271
Acquisition of treasury stock .................................... -- (533) (127,925) (3,343)
Exercise of stock options ....................................... -- -- -- 1,438
Payments on capital lease obligation ........................... -- (295) (84) (426)
---------- --------- ---------- ----------
Net cash provided (used) by financing activities ............ (18,260) (11,950) 3,157 (27,985)
---------- --------- ---------- ----------
Effect of exchange rate changes on cash and cash
equivalents ...................................................... (345) (2) 5 2
---------- ------------ ---------- ----------
Net increase (decrease) in cash and cash equivalents . 115 (455) 2,065 (3,122)
Cash and cash equivalents, beginning of period .................. 2,530 2,645 2,190 4,255
---------- ----------- ---------- ----------
Cash and cash equivalents, end of period ........................ $ 2,645 $ 2,190 $ 4,255 $ 1,133
========== =========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest .......................................... $ 8,789 $ 7,535 $ 7,977 $ 16,030
Cash paid for income taxes ....................................... 8,821 5,877 419 1,172
========== =========== ========== ==========
See accompanying notes to consolidated financial statements.
40
RAYOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands, except per share amounts)
41
Rayovac
International
Corporation
common stock
Common Stock (DISC) Foreign
--------------------- ----------------- Additional currency
paid-in translation
Shares Amount Shares Amount capital adjustment
------------ -------- -------- -------- ------------ -------------
Balances at June 30, 1994 .................. 50,000 $500 10 $ 5 $12,000 $1,555
------ ---- -- --- ------- ------
Net income ................................. -- -- -- -- -- --
Distributions from DISC ..................... -- -- -- -- -- --
Translation adjustment ..................... -- -- -- -- -- 424
Adjustment of additional minimum pension
liability ................................. -- -- -- -- -- --
------ ---- -- --- ------- ------
Balances at June 30, 1995 .................. 50,000 500 10 5 12,000 1,979
------ ---- -- --- ------- ------
Net income ................................. -- -- -- -- -- --
Distributions from DISC ..................... -- -- -- -- -- --
Translation adjustment ..................... -- -- -- -- -- (329)
Adjustment of additional minimum pension
liability ................................. -- -- -- -- -- --
Treasury stock acquired ..................... (500) -- -- -- -- --
------ ---- -- --- ------- ------
Balances at June 30, 1996 .................. 49,500 500 10 5 12,000 1,650
------ ---- -- --- ------- ------
Net loss .................................... -- -- -- -- -- --
Common stock acquired in Recapitalization ... (29,030) -- -- -- -- --
Exercise of stock options .................. -- -- -- -- 3,970 --
Increase in cost of existing treasury stock -- -- -- -- -- --
Note receivable from officers/shareholders ... -- -- -- -- -- --
Termination of DISC ........................ -- -- (10) (5) -- --
Translation adjustment ..................... -- -- -- -- -- 39
------- ---- --- ----- ------- ------
Balances at September 30, 1996 ............... 20,470 500 -- -- 15,970 1,689
------- ---- --- ----- ------- ------
Net income ................................. -- -- -- -- -- --
Sale of common stock ........................ 111 -- -- -- 4 --
Treasury stock acquired ..................... (556) -- -- -- -- --
Exercise of stock options and sale of common
stock to trust .............................. 556 -- -- -- -- --
Notes receivable from officers/shareholders -- -- -- -- -- --
Adjustment of additional minimum pension
liability ................................. -- -- -- -- -- --
Translation adjustment ..................... -- -- -- -- -- 581
------- ---- --- ----- ------- ------
Balances at September 30, 1997 ............... 20,581 $500 -- $-- $15,974 $2,270
======= ==== === ===== ======= ======
Notes Total
receivable Stock shareholders'
officers/ Retained held in Treasury equity
shareholders earnings trust stock (deficit)
-------------- -------------- --------- ------------- --------------
Balances at June 30, 1994 .................. $ -- $ 23,862 $ -- $ -- $ 37,922
-------- --------- ------ ---------- ---------
Net income ................................. -- 16,408 -- -- 16,408
Distributions from DISC ..................... -- (1,500) -- -- (1,500)
Translation adjustment ..................... -- -- -- -- 424
Adjustment of additional minimum pension
liability ................................. -- 333 -- -- 333
-------- --------- ------ ---------- ---------
Balances at June 30, 1995 .................. -- 39,103 -- -- 53,587
-------- --------- ------ ---------- ---------
Net income ................................. -- 14,288 -- -- 14,288
Distributions from DISC ..................... -- (5,187) -- -- (5,187)
Translation adjustment ..................... -- -- -- -- (329)
Adjustment of additional minimum pension
liability ................................. -- (202) -- -- (202)
Treasury stock acquired ..................... -- -- -- (533) (533)
-------- --------- ------ ---------- ---------
Balances at June 30, 1996 .................. -- 48,002 -- (533) 61,624
-------- --------- ------ ---------- ---------
Net loss .................................... -- (20,921) -- -- (20,921)
Common stock acquired in Recapitalization ... -- -- -- (127,425) (127,425)
Exercise of stock options .................. -- -- -- -- 3,970
Increase in cost of existing treasury stock -- -- -- (564) (564)
Note receivable from officers/shareholders ... (500) -- -- -- (500)
Termination of DISC ........................ -- (1,938) -- -- (1,943)
Translation adjustment ..................... -- -- -- -- 39
-------- --------- ------ ---------- ---------
Balances at September 30, 1996 ............... (500) 25,143 -- (128,522) (85,720)
-------- --------- ------ ---------- ---------
Net income ................................. -- 6,186 -- -- 6,186
Sale of common stock ........................ -- -- -- 482 486
Treasury stock acquired ..................... -- -- -- (3,343) (3,343)
Exercise of stock options and sale of common
stock to trust .............................. -- -- (962) 3,343 2,381
Notes receivable from officers/shareholders (1,158) -- -- -- (1,158)
Adjustment of additional minimum pension
liability ................................. -- (8) -- -- (8)
Translation adjustment ..................... -- -- -- -- 581
-------- ----------- ------ ---------- -----------
Balances at September 30, 1997 ............... $ (1,658) $ 31,321 $ (962) $ (128,040) $ (80,595)
======== =========== ====== ========== ===========
See accompanying notes to consolidated financial statements.
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
1. Description of Business and Recapitalization
Rayovac Corporation and its wholly owned subsidiaries (Company)
manufacture and market a variety of battery types including general (alkaline,
rechargeables, heavy duty, lantern and general purpose), button cell and
lithium. The Company also produces a variety of lighting devices such as
flashlights and lanterns. The Company's products are sold primarily to
retailers in the United States, Canada, Europe, and the Far East.
Effective as of September 12, 1996, the Company, all of the shareholders
of the Company, Thomas H. Lee Equity Fund III L.P. (Lee Fund) and other
affiliates of Thomas H. Lee Company (THL Co.) completed a recapitalization of
the Company (Recapitalization) pursuant to which: (i) the Company obtained
senior financing in an aggregate of $170,000, of which $131,000 was borrowed at
the closing of the Recapitalization; (ii) the Company obtained $100,000 in
financing through the issuance of senior subordinated increasing rate notes of
the Company (Bridge Notes); (iii) the Company redeemed a portion of the shares
of common stock held by the former President and Chief Executive Officer of the
Company; (iv) the Lee Fund and other affiliates of THL Co. purchased for cash
shares of common stock owned by shareholders of the Company; and (v) the
Company repaid certain of its outstanding indebtedness, including prepayment
fees and penalties. The prepayment fees and penalties paid have been recorded
as an extraordinary item in the Consolidated Statements of Operations. Other
non-recurring charges of $12,300 related to the Recapitalization were also
expensed, including $2,200 in advisory fees paid to the financial advisor to
the Company's selling shareholders; various legal and consulting fees of
$2,800; and $7,300 of stock option compensation, severance payments and
employment contract settlements for the benefit of certain present and former
officers, directors and management of the Company. Payment for these costs was
or is expected to be as follows: (i) $8,900 was paid prior to September 30,
1996; (ii) $2,815 was paid in fiscal year 1997 and (iii) $585 is expected to be
paid in fiscal year 1998.
In 1996, the Company changed its fiscal year end from June 30 to September
30. For clarity of presentation herein, the period from July 1, 1996, to
September 30, 1996 is referred to as the "Transition Period Ended September 30,
1996" or "Transition Period."
2. Significant Accounting Policies and Practices
a. Principles of Combination and Consolidation: The consolidated financial
statements include the financial statements of Rayovac Corporation and
its wholly owned subsidiaries. Rayovac International Corporation, a
Domestic International Sales Corporation (DISC) which was owned by the
Company's shareholders, was combined with Rayovac Corporation through
August 1996, when the DISC was terminated and the net assets distributed
to its shareholders. All intercompany transactions have been eliminated.
For reporting purposes, all financial statements are referred to as
"consolidated" financial statements.
b. Revenue Recognition: The Company recognizes revenue from product sales
upon shipment to the customer.
c. Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
d. Cash Equivalents: For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
e. Concentrations of Credit Risk, Major Customers and Employees: The
Company's trade receivables are subject to concentrations of credit risk
as three principal customers accounted for 26%, 24% and 24% of the
outstanding trade receivables as of June 30, 1996, and September 30, 1996
and 1997, respectively. The Company derived 28%, 28%, 25% and 29% of its
net sales during the years ended June 30, 1995
42
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
2. Significant Accounting Policies and Practices--Continued
and 1996, the Transition Period, and the year ended September 30, 1997,
respectively, from the same three customers.
The Company has one customer that represented over 10% of its net
sales. The Company derived 16%, 18%, 18%, and 20% of its net sales from
this customer during the years ended June 30, 1995 and 1996, the
Transition Period, and the year ended September 30, 1997, respectively.
A significant number of the Company's factory employees are represented
by one of four labor unions. The Company has recently entered into
collective bargaining agreements with its Madison and Fennimore,
Wisconsin employees each of which expires in 2000. The Company's
collective bargaining agreement with 24 of its Washington, United Kingdom
employees is scheduled to expire in December 1997. In addition, the
Company's collective bargaining agreements with its 5 Hayward, California
and 203 Portage, Wisconsin employees are scheduled to expire in May and
July 1998, respectively. The Company believes its relationship with its
employees is good and there have been no work stoppages involving Company
employees since 1981.
f. Displays and Fixtures: The costs of displays and fixtures are
capitalized and recorded as a prepaid asset and charged to expense when
shipped to a customer location. Such prepaid assets amount to
approximately $1,068, $730 and $1,456 as of June 30, 1996, and September
30, 1996 and 1997, respectively.
g. Inventories: Inventories are stated at lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
h. Property, Plant and Equipment: Property, plant and equipment are stated
at cost. Depreciation on plant and equipment is calculated on the
straight-line method over the estimated useful lives of the assets.
Depreciable lives by major classification are as follows:
Building and improvements ............ 20-30 years
Machinery, equipment and other ...... 5-20 years
i. Debt Issuance Costs: Debt issuance costs are capitalized and amortized
to interest expense over the lives of the related debt agreements.
j. Accounts Payable: Included in accounts payable at June 30, 1996, and
September 30, 1996 and 1997, is approximately $7,805, $5,312, and $5,476,
respectively, of book overdrafts on disbursement accounts which were
replenished prior to the presentation of checks for payment.
k. Income Taxes: Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
l. Foreign Currency Translation: Assets and liabilities of the Company's
foreign subsidiaries are translated at the rate of exchange existing at
year-end, with revenues, expenses, and cash flows translated at the
average of the monthly exchange rates. Adjustments resulting from
translation of the financial statements are accumulated as a separate
component of shareholders' equity (deficit). Exchange gains (losses) on
foreign currency transactions aggregating ($112), ($750), ($70), and
($639) for the years ended June 30, 1995 and 1996, the Transition Period,
and the year ended September 30, 1997, respectively, are included in
other expense, net, in the Consolidated Statements of Operations.
43
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
2. Significant Accounting Policies and Practices--Continued
m. Advertising Costs: The Company incurred expenses for advertising of
$25,556, $29,976, $7,505 and $24,326 in the years ended June 30, 1995
and 1996, the Transition Period, and the year ended September 30, 1997,
respectively. The Company expenses advertising production costs as such
costs are incurred.
n. Net Income (Loss) Per Share: Net income (loss) per share data has been
computed using the weighted average number of shares of common stock and
common equivalent shares from stock options (when dilutive using the
treasury stock method). Stock options issued during the 12-month period
prior to the Company's proposed initial public offering have been
included in the calculation as if they were outstanding for all periods
presented (even if antidilutive using the treasury stock method and the
anticipated initial public offering price). Net income (loss) per share
on a historical basis (per APB 15) was $0.33, $0.29, and $(0.48) for
fiscal 1995, 1996, and the Transition Period, respectively.
o. 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
counterparties are included in accounts payable 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 notional principal amount of $62,500 through October 1999. The
fair value of this contract at September 30, 1997 is ($159).
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, net. The
related amounts payable to, or receivable from, the counterparties are
included in accounts payable or accounts receivable. The Company has
approximately $3,100 of forward exchange contracts at September 30, 1997.
The fair value at September 30, 1997, 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 calls and puts. 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 put and
call agreements. At September 30, 1997, the Company has purchased a
series of calls with a contract value of approximately $2,800 and sold a
series of puts with a contact value of approximately $2,400 for the
period from October through March designed to set a ceiling and floor
price. While these transactions have no carrying value, the fair value of
these contracts was approximately $138 at September 30, 1997. The Company
has a receivable at September 30, 1997, of approximately $222 in the
accompanying consolidated balance sheet from the settlement of September
contracts.
These fair values represent the estimated amount the Company would
receive or pay to terminate agreements at September 30, 1997, taking into
consideration current market rates and the current credit worthiness of
the counterparties based on dealer quotes. The Company may be exposed to
credit loss in
44
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
2. Significant Accounting Policies and Practices--Continued
the event of nonperformance by the counterparties to these contracts, but
does not anticipate such nonperformance.
p. Environmental Expenditures: Environmental expenditures that relate to
current ongoing operations or to conditions caused by past operations are
expensed. The Company determines its liability on a site by site basis
and records a liability at the time when it is probable and can be
reasonably estimated. The estimated liability is not reduced for possible
recoveries from insurance carriers.
q. Stock Split: In September 1996, the Company's Board of Directors
declared a five-for-one stock split. A total of 16,376 additional shares
were issued in conjunction with the stock split to shareholders of
record. All applicable share and per share amounts herein have been
restated to reflect the stock split retroactively.
r. Reclassification: Certain prior year amounts have been reclassified to
conform with the current year presentation.
The Company has reclassified certain promotional expenses, previously
reported as a reduction of net sales, to selling expense. The amounts
which have been reclassified are $24,236 and $23,970 for the years ended
June 30, 1995 and 1996, respectively, $6,899 for the Transition Period
ended September 30, 1996, and $28,702 for the year ended September 30,
1997.
s. Impact of Recently Issued Accounting Standards: In February 1997, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share (FAS 128). FAS 128 will
be effective for periods ending after December 15, 1997, and specifies
the computation, presentation, and disclosure requirements for earnings
per share. Adoption of this accounting standard is not expected to have a
material effect on the earnings per share computations of the Company
assuming the current capital structure.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income (FAS 130), which
establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
All items that are required to be recognized under accounting standards
as components of comprehensive income are to be reported in a financial
statement that is displayed with the same prominence as other financial
statements. FAS 130 requires that an enterprise (i) classify items of
other comprehensive income by their nature in a financial statement, and
(ii) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital in the
equity section of the balance sheet. FAS 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is
required. The Company is evaluating the effect of this pronouncement on
its consolidated financial statements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information (FAS 131), which is effective for financial
statements for periods beginning after December 15, 1997. FAS 131
establishes standards for the way public business enterprises are to
report information about operating segments in annual financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Company is evaluating the effect of this pronouncement on
its consolidated financial statements.
45
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
3. Inventories
Inventories consist of the following:
June 30, September 30, September 30,
1996 1996 1997
---------- --------------- --------------
Raw material ......... $24,238 $25,300 $23,291
Work-in-process ...... 19,081 14,651 15,286
Finished goods ...... 23,622 30,170 19,974
-------- ------- -------
$66,941 $70,121 $58,551
======== ======= =======
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
June 30, September 30, September 30,
1996 1996 1997
---------- --------------- --------------
Land, building and improvements ...... $15,469 $ 16,824 $ 10,752
Machinery, equipment and other ...... 117,248 117,754 120,894
Construction in process ............... 5,339 6,232 11,326
------- -------- --------
138,056 140,810 142,972
Less accumulated depreciation ......... 64,875 72,170 77,461
------- -------- --------
$73,181 $ 68,640 $ 65,511
======= ======== ========
5. Debt
Debt consists of the following:
June 30, September 30, September 30,
1996 1996 1997
---------- --------------- --------------
Term loan facility ....................................... $ -- $105,000 $ 100,500
Revolving credit facility ................................. -- 23,500 4,500
Series B Senior Subordinated Notes, due November 1,
2006, with interest at 101/4% payable semi-annually ...... -- -- 100,000
Bridge Notes ............................................. -- 100,000 --
Debt paid September 1996 due to Recapitalization:
Senior Secured Notes due 1997 through 2002 ............... 29,572 -- --
Subordinated Notes due through 2003 ..................... 7,270 -- --
Revolving credit facility ................................. 39,250 -- --
Notes payable in Pounds Sterling to a foreign bank, due
on demand, with interest at bank's base rate plus
1.87% ................................................... 1,242 939 --
Capitalized lease obligation .............................. 1,330 1,246 866
Notes and obligations, weighted average interest rate of
5.24% at September 30, 1997 .............................. 2,685 2,978 1,455
-------- -------- ---------
81,349 233,663 207,321
Less current maturities .................................... 11,631 8,818 23,880
-------- -------- ---------
Long-term debt ............................................. $69,718 $224,845 $ 183,441
======== ======== =========
46
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
5. Debt --Continued
On September 12, 1996, the Company executed a Credit Agreement (Agreement)
arranged by BA Securities, Inc., Donaldson, Lufkin & Jenrette Securities
Corporation and certain of its affiliates for a group of financial institutions
and other accredited investors. The Agreement provides for senior bank
facilities, including term and revolving credit facilities in an aggregate
amount of $170,000. Interest on borrowings is computed, at the Company's
option, based on the Bank of America Illinois' base rate, as defined, (Base
Rate) or the Interbank Offering Rate (IBOR).
The term loan facility includes: (i) Tranche A term loan of $55,000,
quarterly amortization ranging from $1,000 to $3,750 beginning December 31,
1996, through September 30, 2002, interest at the Base Rate plus 1.5% per annum
or at IBOR plus 2.5% per annum (8.49% at September 30, 1997); (ii) Tranche B
term loan of $25,000, quarterly amortization amounts of $62.5 during each of
the first six years and $5,875 in the seventh year beginning December 31, 1996,
through September 30, 2003, interest at the Base Rate plus 2.0% per annum, or
IBOR plus 3.0% per annum (8.93% at September 30, 1997); (iii) Tranche C term
loan of $25,000, quarterly amortization of $62.5 during each of the first seven
years and $5,812.5 during the eighth year beginning December 31, 1996, through
September 30, 2004; interest at the Base Rate plus 2.25% per annum or IBOR plus
3.25% per annum (9.10% at September 30, 1997).
The revolving credit facility provides for aggregate working capital loans
up to $65,000 through September 30, 2002, reduced by outstanding letters of
credit ($10,000 limit), and other existing credit facilities and outstanding
obligations (approximately $5,000 at September 30, 1997). Interest on
borrowings is at the Base Rate plus 1.5% per annum or IBOR plus 2.5% per annum
(10.0% at September 30, 1997). The Company had outstanding letters of credit of
approximately $631 at September 30, 1997. A fee of 2.5% per annum is payable on
the outstanding letters of credit. The Company also incurs a fee of .25% per
annum of the average daily maximum amount available to be drawn on each letter
of credit issued. The revolving credit facility must be reduced for 30
consecutive days to no more than $5,000 for the fiscal year ending September
30, 1998, and to zero for any fiscal year thereafter.
The Agreement contains financial covenants with respect to borrowings
which include fixed charge coverage, adjusted net worth, and minimum earnings
before interest, income taxes, depreciation, amortization. In addition, the
Agreement restricts capital expenditures and the payment of dividends. The
Company is required to pay a commitment fee of 0.50% per annum on the average
daily unused portion of the revolving credit facility. The Tranche A term loan
and the revolving credit facility interest rates may be adjusted downward if
the Company's leverage ratio, as defined, decreases. Borrowings under the
Agreement are collateralized by substantially all the assets of the Company.
The Agreement also contains certain mandatory prepayment provisions, one of
which requires the Company to pay down $14.5 million by December 29, 1997 due
to excess cash flow generated as of September 30, 1997.
On October 22, 1996, the Company completed a private debt offering of
101/4% Senior Subordinated Notes due in 2006 (Old Notes) pursuant to an
Indenture. In March 1997, the Company exchanged the Old Notes for 101/4% Series
B Senior Subordinated Notes due in 2006 (New Notes) registered with the
Securities and Exchange Commission. The terms of the New Notes are identical in
all material respects to terms of the Old Notes. On or after November 1, 2001
or in certain circumstances, after a public offering of equity securities of
the Company, the New Notes will be redeemable at the option of the Company, in
whole or in part, at prescribed redemption prices plus accrued and unpaid
interest.
Upon a change in control, the Company shall be required to repurchase all
or any part of the New Notes at a purchase price equal to 101% of the aggregate
principal amount. The Company is also required to repurchase all or a portion
of the New Notes upon consummation of an asset sale, as defined, in excess of
$5,000.
The terms of the New Notes restrict or limit the ability of the Company
and its subsidiaries to, among other things, (i) pay dividends or make other
restricted payments, (ii) incur additional indebtedness and issue preferred
47
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
5. Debt --Continued
stock, (iii) create liens, (iv) incur dividend and other payment restrictions
affecting subsidiaries, (v) enter into mergers, consolidations, or sales of all
or substantially all of the assets of the Company, (vi) make asset sales, (vii)
enter into transactions with affiliates, and (viii) issue or sell capital stock
of wholly owned subsidiaries of the Company. Payment obligations under the New
Notes are fully and unconditionally guaranteed on a joint and several basis by
the Company's directly and wholly owned subsidiary, ROV Holding, Inc. (ROV or
Guarantor Subsidiary). The foreign subsidiaries of the Company, which do not
guarantee the payment obligations under the New Notes (Nonguarantor
Subsidiaries), are directly and wholly owned by ROV. See note 17.
The proceeds from the new Notes were used to pay down the Bridge Notes.
The Bridge Notes bore interest at prime plus 3.5%.
The aggregate scheduled maturities of debt are as follows:
Year ending September 30,
1998 .............................. $ 23,880
1999 .............................. 12,441
2000 .............................. 10,500
2001 .............................. 12,500
2002 .............................. 15,500
Thereafter ........................ 132,500
--------
$207,321
========
The capitalized lease obligation is payable in Pounds Sterling in
installments of $425 in 1998 and $441 in 1999.
The carrying values of the debt instruments noted above are approximately
96% of their estimated fair values.
6. Shareholders' Equity (Deficit)
During the year ended June 30, 1996, the former principal shareholder of
the Company granted an officer and a director options to purchase 235 shares of
common stock owned by the shareholder personally at exercise prices per share
ranging from $3.65 to $5.77 (the book values per share at the respective dates
of grant). These options were exercised in conjunction with the
Recapitalization and resulted in a charge to earnings of approximately $3,970
during the Transition Period and an increase in additional paid-in capital in
the Consolidated Statements of Shareholders' Equity (Deficit).
Treasury stock acquired during the year ended June 30, 1996 was subject to
an agreement which provided the selling shareholder with additional
compensation for the common stock sold if a change in control occurred within a
specified period of time. As a result of the Recapitalization, the selling
shareholder was entitled to an additional $564, which is reflected as an
increase in treasury stock in the Consolidated Statements of Shareholders'
Equity (Deficit).
Retained earnings includes DISC retained earnings of $1,594 at June 30,
1996. In August 1996, the DISC was terminated and the net assets were
distributed to its shareholders.
In January 1997, the Company established a trust to fund future payments
under a deferred compensation plan. Certain employees eligible to participate
in the plan assigned stock options to the plan. The plan exercised the options
and purchased 160 shares of the Company's common stock. Shares issued to the
trust are valued at $962 and are reflected as a reduction of stockholders'
equity in the consolidated balance sheet.
The Company and the former principal shareholder of the Company, entered
into a Stock Sale Agreement, dated as of August 1, 1997 pursuant to which the
former principal shareholder sold 2,023 shares of common stock at $6.01 per
share to the Company and to the Thomas H. Lee Equity Fund III, L.P. (the "Lee
Fund") and certain other affiliates of Thomas H. Lee Company ("THL Co.," the
Lee Fund and such other affiliates being referred to
48
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
6. Shareholders' Equity (Deficit) --Continued
herein as the "Lee Group"). The Stock Sale Agreement provides that, among other
things, if (i) the Company enters into a business combination or other
transaction with a third party whereby less than a majority of the outstanding
capital stock of the surviving entity is owned by the Lee Group, and (ii) such
business combination or other transaction is the result of negotiations or
discussions entered into prior to December 31, 1997 and such combination is
consummated prior to June 30, 1998, then the Lee Group will remit to the former
principal shareholder all amounts, if any, received by the Lee Group (or any
affiliated transferee of shares owned by the Lee Group) from the sale of the
shares of common stock to such third party in excess of $6.01 per share. In
September 1997, another former shareholder sold 205 shares of common stock to
the Company and the Lee Group under similar terms.
On October 22, 1997, the shareholders of the Company approved the
authorization of 5,000 shares of Preferred Stock, $.01 par value, and an
increase in authorized shares of Common Stock from 90,000 to 150,000.
7. Stock Option Plans
Effective September 1996, the Company's Board of Directors (Board)
approved the Rayovac Corporation 1996 Stock Option Plan (1996 Plan) which is
intended to afford an incentive to select employees and directors of the
Company to promote the interests of the Company. Under the 1996 Plan, stock
options to acquire up to 3,000 shares of common stock, in the aggregate, may be
granted under either or both a time-vesting or a performance-vesting formula at
an exercise price equal to the market price of the common stock on the date of
grant. The time-vesting options become exercisable primarily in equal 20%
increments over a five year period. The performance-vesting options become
exercisable at the end of ten years with accelerated vesting over each of the
next five years if the Company achieves certain performance goals. Accelerated
vesting may occur upon sale of the Company, as defined in the Plan.
On September 3, 1997, the Board adopted the 1997 Rayovac Incentive Plan
(Incentive Plan) which was approved by the Shareholders on October 22, 1997 and
expires in August 2007. The Incentive Plan replaces the 1996 Plan and no
further awards will be granted under the 1996 Plan other than awards of options
for shares up to an amount equal to the number of shares covered by options
that terminate or expire prior to being exercised. Under the Incentive Plan,
the Company may grant to employees and non-employee directors stock options,
stock appreciation rights (SARs), restricted stock, and other stock-based
awards, as well as cash-based annual and long-term incentive awards.
Accelerated vesting will occur in the event of a change in control, as defined
in the Incentive Plan. Up to 3,000 shares of common stock may be issued under
the Incentive Plan.
During 1997, the Company adopted the Rayovac Corporation 1997 Stock Option
Plan (1997 Plan). Under the 1997 Plan, stock options to acquire up to 665
shares of common stock, in the aggregate, may be granted. The exercise price is
$6.01. The 1997 Plan and each option granted thereunder expire no later than
November 30, 1997.
A summary of the status of the Company's plan is as follows:
Transition period ended Year ended
September 30, 1996 September 30, 1997
------------------------------ -----------------------------
Weighted-average Weighted-average
Options exercise price Options exercise price
--------- ------------------ --------- -----------------
Outstanding, beginning of period ......... -- $ -- 1,464 $ 4.39
Granted ................................. 1,464 4.30 1,410 5.03
Exercised .............................. -- -- (556) 6.01
----- ----- ----- ------
Outstanding, end of period ............... 1,464 $4.30 2,318 $ 4.33
===== ===== ===== ======
Options exercisable, end of period ...... 40 $1.14 496 $ 4.13
===== ===== ===== ======
The stock options outstanding on September 30, 1997, have a
weighted-average remaining contractual life estimated at 9.5 years.
49
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
7. Stock Option Plans --Continued
Transition
period ended Year ended
September 30, 1996 September 30, 1997
-------------------- -------------------
Weighted-average grant-date
fair value of options granted during period ...... $1.92 $1.84
Assumptions used:
Risk-free interest rate ........................... 6.78% 6.78%
Expected life .................................... 8 years 8 years
The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized in the Consolidated
Statements of Operations. Had the Company recognized compensation expense
determined on the fair value at the grant dates for awards under the plans
consistent with the method prescribed by FASB Statement No. 123, Accounting for
Stock Based Compensation (SFAS No. 123), the Company's net income (loss) and
net income (loss) per share, on a pro forma basis, for the Transition Period
and the year ended September 30, 1997, would have been ($21,035) and ($0.46)
per share and $5,680 and $0.26 per share, respectively. The effects of applying
FASB 123 may not be representative of the effects on reported net income (loss)
for future years.
8. Income Taxes
Pretax income (loss) (income (loss) before income taxes and extraordinary
item) and income tax expense (benefit) consist of the following:
Years ended
June 30, Transition Year
------------------------- period ended ended
September 30, September 30,
1995 1996 1996 1997
----------- ----------- --------------- --------------
Pretax income (loss):
United States .................. $16,505 $17,154 $ (27,713) $6,214
Outside the United States ...... 6,150 4,136 (2,889) 3,391
------- ------- --------- ------
Total pretax income (loss) ...... $22,655 $21,290 $ (30,602) $9,605
======= ======= ========= ======
Income tax expense (benefit):
Current:
Federal ........................ $ 3,923 $ 5,141 $ (3,870) $2,926
Foreign ........................ 797 1,469 (72) (176)
State ........................ 1,181 389 -- 17
------- ------- --------- ------
Total current 5,901 6,999 (3,942) 2,767
------- ------- --------- ------
Deferred:
Federal ........................ 799 54 (3,270) (842)
Foreign ........................ (544) (57) (847) 809
State ........................ 91 6 (1,622) 685
------- ------- --------- ------
Total deferred .................. 346 3 (5,739) 652
------- ------- --------- ------
$ 6,247 $ 7,002 $ (9,681) $3,419
======= ======= ========= ======
50
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
8. Income Taxes --Continued
The following reconciles the Federal statutory income tax rate with the
Company's effective tax rate:
Years ended
June 30, Transition Year
--------------------- period ended ended
September 30, September 30,
1995 1996 1996 1997
--------- --------- --------------- --------------
Statutory Federal income tax rate ..................... 35.0% 35.0% 35.0% 35.0%
DISC/FSC commission income ........................... (5.9) (5.2) 0.4 (1.2)
Effect of foreign items and rate differentials ...... (4.0) 1.0 (1.2) 0.3
State income taxes, net .............................. 3.6 1.1 3.9 4.9
Reduction of prior year tax provision ............... -- -- -- (3.0)
Nondeductible recapitalization charges ............... -- -- (6.2) --
Other ................................................ (1.1) 1.0 (0.3) (0.4)
---- ---- ---- ----
27.6% 32.9% 31.6% 35.6%
==== ==== ==== ====
The components of the net deferred tax asset and types of significant
basis differences were as follows:
June 30, September 30, September 30,
1996 1996 1997
------------ --------------- --------------
Current deferred tax assets:
Recapitalization charges ........................ $ -- $ 2,991 $ 792
Inventories and receivables ..................... 1,395 1,407 1,495
Marketing and promotional accruals ............... 1,498 1,252 3,256
Employee benefits .............................. 1,554 1,780 1,509
Environmental accruals ........................... 420 752 679
Other .......................................... 994 976 1,368
-------- -------- --------
Total current deferred tax assets ............... 5,861 9,158 9,099
-------- -------- --------
Noncurrent deferred tax assets:
Employee benefits .............................. 3,053 4,504 4,214
State net operating loss carryforwards ......... -- 1,249 468
Package design expense ........................... 532 523 927
Promotional expense .............................. 784 854 594
Other .......................................... 1,516 1,475 1,753
-------- -------- --------
Total noncurrent deferred tax assets ............ 5,885 8,605 7,956
-------- -------- --------
Noncurrent deferred tax liabilities:
Property, plant, and equipment .................. (8,430) (8,708) (8,651)
Other .......................................... (39) (39) (40)
-------- -------- --------
Total noncurrent deferred tax liabilities ...... (8,469) (8,747) (8,691)
-------- -------- --------
Net noncurrent deferred tax liabilities ......... $ (2,584) $ (142) $ (735)
======== ======== ========
At September 30, 1997, the Company has operating loss carryforwards for
state income tax purposes of approximately $6,000, which expire generally in
years through 2012.
During 1995, the Company used approximately $3,200 of foreign net
operating loss carryforwards for which a deferred tax asset had not been
recognized in prior years due to uncertainty regarding future earnings of the
subsidiaries to which the carryforwards related. As a result, the Company
reversed the valuation allowance of $1,240 recorded at June 30, 1994, in 1995.
51
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
8. Income Taxes --Continued
Provision has not been made for United States income taxes on a portion of
the undistributed earnings of the Company's foreign subsidiaries (approximately
$4,342, $4,216, and $4,737 at June 30, 1996, and September 30, 1996 and 1997,
respectively), either because any taxes on dividends would be offset
substantially by foreign tax credits or because the Company intends to reinvest
those earnings. Such earnings would become taxable upon the sale or liquidation
of these foreign subsidiaries or upon remittance of dividends. It is not
practicable to estimate the amount of the deferred tax liability on such
earnings.
9. Leases
Future minimum rental commitments under noncancelable operating leases,
principally pertaining to land, buildings and equipment, are as follows:
Year ending September 30,
1998 .................. $ 6,828
1999 .................. 5,404
2000 .................. 4,455
2001 .................. 4,012
2002 .................. 4,017
Thereafter ............ 34,112
-------
$58,828
=======
The above lease commitments include payments under leases for the
corporate headquarters facilities and other properties from partnerships in
which one of the Company's former shareholders is a partner. Annual minimum
rental commitments on the headquarters facility of $2,817 are subject to an
adjustment based upon changes in the Consumer Price Index. The leases on the
other properties require annual lease payments of $470 subject to annual
inflationary increases. All of the leases expire during the years 1998 through
2013.
Total rental expense was $8,189, $8,213, $1,995, and $8,126, for the years
ended June 30, 1995 and 1996, the Transition Period, and the year ended
September 30, 1997, respectively.
10. Postretirement Pension Benefits
The Company has various defined benefit pension plans covering
substantially all of its domestic employees. Plans covering salaried employees
provide pension benefits that are based on the employee's average compensation
for the five years which yield the highest average during the 10 consecutive
years prior to retirement. Plans covering hourly employees and union members
generally provide benefits of stated amounts for each year of service. The
Company's policy is to fund pension costs at amounts within the acceptable
ranges established by the Employee Retirement Income Security Act of 1974.
The Company also has nonqualified deferred compensation agreements with
certain of its employees under which the Company has agreed to pay certain
amounts annually for the first 15 years subsequent to retirement or to a
designated beneficiary upon death. It is management's intent that life
insurance contracts owned by the Company will fund these agreements.
52
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
10. Postretirement Pension Benefits --Continued
Net periodic pension cost for the aforementioned plans is summarized as
follows:
Years ended
June 30, Transition Year
------------------------- period ended ended
September 30, September 30,
1995 1996 1996 1997
----------- ----------- --------------- --------------
Service cost ................................. $1,711 $1,501 $2,149 $1,705
Interest cost .............................. 3,390 3,513 944 3,834
Actual return on plan assets ............... (2,054) (7,880) (605) (6,191)
Net amortization and deferral ............... (708) 4,994 (166) 2,763
Curtailment gain ........................... -- -- -- (2,923)
-------- -------- ------ --------
Net periodic pension cost (benefit) ...... $ 2,339 $ 2,128 $2,322 $ (812)
======== ======== ====== ========
The following tables set forth the plans' funded status:
June 30, 1996
--------------------------------
Assets exceed Accumulated
accumulated benefits
benefits exceed assets
--------------- --------------
Actuarial present value of benefit obligations:
Vested benefit obligation .......................................... $ 24,927 $ 19,138
Accumulated benefit obligation .................................... 25,576 19,932
======== =========
Projected benefit obligation ....................................... $ 31,462 $ 19,932
Plan assets at fair value, primarily listed stocks, bonds and
cash equivalents ................................................... 32,297 9,349
-------- ---------
Projected benefit obligation (in excess of) less than plan assets ... 835 (10,583)
Unrecognized net gain ............................................. (2,341) (893)
Unrecognized net obligation (asset) ................................. (211) 4,711
Additional minimum liability ....................................... -- (3,823)
-------- ---------
Pension liability ................................................ $ (1,717) $ (10,588)
======== =========
September 30, 1996
--------------------------------
Assets exceed Accumulated
accumulated benefits
benefits exceed assets
--------------- --------------
Actuarial present value of benefit obligations:
Vested benefit obligation .......................................... $ 25,273 $ 19,495
Accumulated benefit obligation .................................... 25,930 20,305
======== =========
Projected benefit obligation ....................................... $ 31,910 $ 20,305
Plan assets at fair value, primarily listed stocks, bonds and
cash equivalents ................................................... 32,341 9,364
-------- ---------
Projected benefit obligation (in excess of) less than plan assets ... 431 (10,941)
Unrecognized net gain ............................................. (2,147) (832)
Unrecognized net obligation (asset) ................................. (208) 2,894
Additional minimum liability ....................................... -- (2,067)
Contribution ...................................................... 86 756
-------- ---------
Pension liability ................................................ $ (1,838) $ (10,190)
======== =========
53
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
10. Postretirement Pension Benefits --Continued
September 30, 1997
--------------------------------
Assets exceed Accumulated
accumulated benefits
benefits exceed assets
--------------- --------------
Actuarial present value of benefit obligations:
Vested benefit obligation .......................................... $ 42,696 $ 13,326
Accumulated benefit obligation .................................... 43,046 13,704
======== =========
Projected benefit obligation ....................................... $ 43,046 $ 13,704
Plan assets at fair value, primarily listed stocks, bonds and
cash equivalents ................................................... 43,212 3,098
-------- ---------
Projected benefit obligation (in excess of) less than plan assets ... 166 (10,606)
Unrecognized net loss (gain) ....................................... (1,194) 1
Unrecognized net asset ............................................. 1,028 1,476
Additional minimum liability ....................................... -- (1,486)
-------- ---------
Pension liability ................................................ $ -- $ (10,615)
======== =========
Assumptions used in accounting for the aforementioned plans were:
Years ended
June 30, Transition Year
--------------- period ended ended
September 30, September 30,
1995 1996 1996 1997
------ ------ --------------- --------------
Discount rate used for funded status calculation ...... 8.0% 7.5% 7.5% 7.5%
Discount rate used for net periodic pension cost
calculations ....................................... 7.5 8.0 7.5 7.5
Rate of increase in compensation levels
(salaried plan only) .............................. 5.5 5.0 5.0 5.0
Expected long-term rate of return on assets ......... 9.0 9.0 9.0 9.0
During the year ended September 30, 1997, the Company merged two of its
defined benefit plans and ceased future benefit accruals. The Company
recognized a $2,923 curtailment gain, which is included in other special
charges in the consolidated statement of operations. A discount rate of 6.5%
was used in the accounting for the curtailed plans. The Company has recorded an
additional minimum pension liability of $3,823, $2,067, and $1,486 at June 30,
1996, and September 30, 1996 and 1997, respectively, to recognize the
underfunded position of certain of its benefits plans. An intangible asset of
$3,582, $1,826, and $1,232 at June 30, 1996, and September 30, 1996 and 1997,
respectively, equal to the unrecognized prior service cost of these plans, has
also been recorded. The excess of the additional minimum liability over the
unrecognized prior service cost of $241 at June 30 and September 30, 1996, and
$249 at September 30, 1997, respectively, has been recorded as a reduction of
shareholders' equity (deficit).
The Company sponsors a defined contribution pension plan for its domestic
salaried employees which allows participants to make contributions by salary
reduction pursuant to Section 401(k) of the Internal Revenue Code. The Company
contributes annually 1% of participants' compensation, and may make additional
discretionary contributions. The Company also sponsors defined contribution
pension plans for employees of certain foreign subsidiaries. Company
contributions charged to operations, including discretionary amounts, for the
years ended June 30, 1995 and 1996, the Transition Period, and September 30,
1997, were $1,273, $ 1,000, $181, and $914, respectively.
54
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
11. Other Postretirement Benefit Plan
The Company provides certain health care and life insurance benefits to
eligible retired employees. Participants earn retiree health care benefits
after reaching age 45 over the next 10 succeeding years of service and remain
eligible until reaching age 65. The plan is contributory; retiree contributions
have been established as a flat dollar amount with contribution rates expected
to increase at the active medical trend rate. The plan is unfunded. The Company
is amortizing the transition obligation over a 20-year period.
The following sets forth the plan's funded status reconciled with amounts
reported in the Company's consolidated balance sheets:
June 30, September 30, September 30,
1996 1996 1997
---------- --------------- --------------
Accumulated postretirement benefit obligation (APBO):
Retirees .......................................... $ 723 $ 687 $ 722
Fully eligible active participants ............... 805 820 813
Other active participants ........................ 896 970 869
------- -------- --------
Total APBO .......................................... 2,424 2,477 2,404
Unrecognized net loss .............................. (1,269) (1,246) (1,008)
Unrecognized transition obligation .................. (641) (631) (591)
------- -------- --------
Accrued postretirement benefit liability ......... $ 514 $ 600 $ 805
======= ======== ========
Net periodic postretirement benefit cost includes the following
components:
Years ended
June 30, Transition Year
--------------- period ended ended
September 30, September 30,
1995 1996 1996 1997
------ ------ --------------- --------------
Service cost ....................................... $110 $129 $58 $249
Interest ....................................... 85 111 44 179
Net amortization and deferral .................. 40 54 35 138
---- ---- ---- ----
Net periodic postretirement benefit cost ...... $235 $294 $137 $566
==== ==== ==== ====
For measurement purposes, a 9.5% annual rate of increase in the per capita
costs of covered health care benefits was assumed for fiscal 1996 and 1997,
gradually decreasing to 5.5%. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation as of September 30,
1997, by $148 and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost for the year ended September 30, 1997,
by $40. A discount rate of 7.5% was used to determine the accumulated
postretirement benefit obligation.
55
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
12. Business Segment and International Operations
Information about the Company's operations in different geographic areas
is summarized as follows:
Years ended
June 30, Transition Year
------------------------- period ended ended
September 30, September 30,
1995 1996 1996 1997
------------ ------------ --------------- --------------
Net sales to unaffiliated customers:
United States .................. $ 337,888 $ 341,967 $ 82,329 $ 352,468
Foreign:
Europe ........................ 60,696 64,432 15,304 62,546
Other ........................... 16,640 16,955 4,247 17,538
--------- --------- --------- ---------
Total ........................... $ 415,224 $ 423,354 $ 101,880 $ 432,552
========= ========= ========= =========
Transfers between geographic areas:
United States .................. $ 26,928 $ 27,097 $ 7,432 $ 28,403
Foreign:
Europe ........................ 1,637 730 422 1,459
Other ........................... 49 -- -- --
--------- --------- --------- ---------
Total ........................... $ 28,614 $ 27,827 $ 7,854 $ 29,862
========= ========= ========= =========
Net sales:
United States .................. $ 364,816 $ 369,065 $ 89,760 $ 380,872
Foreign:
Europe ........................ 62,333 65,161 15,727 64,004
Other ........................... 16,689 16,955 4,247 17,538
Eliminations ..................... (28,614) (27,827) (7,854) (29,862)
--------- --------- --------- ---------
Total ........................... $ 415,224 $ 423,354 $ 101,880 $ 432,552
========= ========= ========= =========
Income (loss) from operations:
United States .................. $ 24,335 $ 24,759 $ (20,983) $ 30,379
Foreign:
Europe ........................ 5,410 5,002 (2,539) 3,759
Other ........................... 1,784 516 (150) 387
--------- --------- --------- ---------
Total ........................... $ 31,529 $ 30,277 $ (23,672) $ 34,525
========= ========= ========= =========
Total assets:
United States .................. $ 189,557 $ 192,441 $ 213,730 $ 208,971
Foreign:
Europe ........................ 34,345 33,719 35,065 32,137
Other ........................... 16,093 17,532 18,782 17,946
Eliminations ..................... (19,405) (22,564) (23,886) (22,173)
--------- --------- --------- ---------
Total ........................... $ 220,590 $ 221,128 $ 243,691 $ 236,881
========= ========= ========= =========
13. 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 $1,500 in January 1992 and annual royalties of $1,500 for the first five
years, beginning in 1993, plus $500 for each year thereafter, as long as the
related equipment patents are enforceable. In a March 1994 agreement, the
Company committed to pay $500 in April 1994 and annual royalties
56
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
13. Commitments and Contingencies --Continued
of $500 for five years beginning in 1995. Additionally, the Company has
committed to purchase tooling of $957 related to this equipment, $66 for other
tooling, at an unspecified date in the future and purchase manganese ore
amounting to $120 by March 1998.
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 $1,787, which may result from
resolution of these matters, will not have a material adverse effect on the
financial condition, liquidity, or cash flow of the Company.
The Company has certain other contingent liabilities with respect to
litigation, claims and contractual agreements arising in the ordinary course of
business. In the opinion of management, such contingent liabilities are not
likely to have a material adverse effect on the financial condition, liquidity
or cash flow of the Company.
14. Related Party Transactions
The Company and THL Co. are parties to a Management Agreement pursuant to
which the Company has engaged THL Co. to provide consulting and management
advisory services for an initial period of five years through September 2001.
In consideration of ongoing consulting and management advisory services, the
Company will pay THL Co. an aggregate annual fee of $360 plus expenses. Under
the Management Agreement and in connection with the closing of the
Recapitalization, the Company paid THL Co. and an affiliate $3,250 during the
Transition Period. The Company paid THL Co. aggregate fees of $386 for the year
ended September 30, 1997.
The Company and a shareholder of the Company (the principal shareholder
prior to the Recapitalization) are parties to agreements which include a
consulting arrangement and noncompetition provisions. Terms of the agreements
required the shareholder to provide consulting services for an annual fee of
$200 plus expenses. The term of these agreements runs concurrent with the
Management Agreement, subject to certain conditions as defined in the
agreements. The Consulting Agreement was terminated August 1, 1997. The Company
paid the shareholder $175 for the year ended September 1997.
The Company has notes receivable from officers in the amount of $500 and
$1,261 at September 30, 1996 and 1997, respectively, generally payable in five
years, which bear interest at 7% to 8%. Since the officers utilized the
proceeds of the notes to purchase common stock of the Company, directly or
through the exercise of stock options, the notes have been recorded as a
reduction of shareholders' equity (deficit). The Company has short-term notes
receivable from employees of $397 at September 30, 1997 which were used to
purchase common stock of the Company, through the exercise of stock options,
and are also classified as a reduction of shareholders' equity (deficit).
15. Other Special Charges
During the year ended September 30, 1997, the Company recorded special
charges as follows: (i) $3,900 of charges related to the exit of certain
manufacturing operations at the Company's Newton Aycliffe, United Kingdom and
Kinston, North Carolina facilities which include severance, outplacement
service, other employee benefits and asset write-downs and (ii) $2,000 of
charges for organization restructuring in the United States relating to
severance, outplacement service, and other employee benefits. These charges are
partially offset by a $2,900 gain related to the curtailment of the Company's
defined benefit pension plan covering all domestic non-union employees. The
Company paid $4,000 of these costs in fiscal 1997 and $1,900 is expected to be
paid thereafter.
57
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
15. Other Special Charges--Continued
During the Transition Period, the Company recorded special charges as
follows: (i) $2,700 of charges related to the exit of certain manufacturing
operations, (ii) $1,700 of charges to increase net deferred compensation plan
obligations to reflect curtailment of such plans; (iii) $1,500 of charges
reflecting the present value of lease payments for land which management has
determined will not be used for any future productive purpose; (iv) $6,900 in
costs and asset write-downs principally related to changes in product pricing
strategies adopted by management subsequent to the Recapitalization; and (v)
$3,300 of employee termination benefits and other charges. Payment for these
costs was or is expected to be as follows: $7,700 was paid prior to September
30, 1996; $5,600 was paid in fiscal 1997; and $2,800 is expected to be paid
thereafter.
16. Quarterly Results (unaudited)
Quarter Ended
----------------------------------------------------------
December 30, March 30, June 29, September 30,
1995 1996 1996 1996
-------------- ----------- ---------- --------------
Net sales ....................................... $140,707 $80,563 $94,731 $101,880
Gross profit ................................. 63,219 34,672 39,495 42,638
Income (loss) before extraordinary item ...... 6,059 310 4,361 (19,274)
Net income (loss) ........................... 6,059 310 4,361 (20,921)
Net income (loss) per share .................. 0.12 0.01 0.09 (0.46)
Quarter Ended
----------------------------------------------------------
December 28, March 29, June 29, September 30,
1996 1997 1997 1997
-------------- ----------- ---------- --------------
Net sales ........................... $141,922 $83,633 $95,466 $111,531
Gross profit ..................... 62,903 36,510 43,249 55,321
Net income (loss) ............... 2,380 (1,720) 2,652 2,874
Net income (loss) per share ...... 0.11 (0.08) 0.12 0.13
17. Consolidated Financial Statements
The following condensed consolidating financial data illustrates the
composition of the consolidated financial statements. Investments in
subsidiaries are accounted for by the Company on an unconsolidated basis (the
Company and the DISC) 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 intercompany 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.
58
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1997
Guarantor
Parent subisidiary
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 633 $ 46
Receivables:
Trade accounts receivable, net ........................... 61,400 --
Other ................................................... 8,500 702
Inventories ............................................. 45,003 --
Deferred income taxes .................................... 8,664 342
Prepaid expenses and other .............................. 5,101 --
---------- -------
Total current assets ................................. 129,301 1,090
---------- -------
Property, plant and equipment, net ........................ 60,860 --
Deferred charges and other ................................. 8,411 --
Debt issuance costs ....................................... 9,277 --
Investment in subsidiaries ................................. 16,111 15,627
---------- -------
Total assets ....................................... $ 223,960 $16,717
========== =======
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ..................... $ 22,000 $ --
Accounts payable .......................................... 50,797 150
Accrued liabilities:
Wages and benefits ....................................... 7,766 --
Accrued interest ....................................... 5,594 --
Recapitalization and other special charges ............... 4,235 --
Other ................................................... 16,182 226
---------- -------
Total current liabilities ........................... 106,574 376
---------- -------
Long-term debt, net of current maturities .................. 183,441 --
Employee benefit obligations, net of current portion ...... 11,291 --
Deferred income taxes .................................... 554 --
Other ...................................................... 956 230
---------- -------
Total liabilities .................................... 302,816 606
---------- -------
Shareholders' equity (deficit):
Common stock ............................................. 500 --
Additional paid-in capital .............................. 15,974 3,525
Foreign currency translation adjustment .................. 2,270 2,270
Notes receivable from officers/shareholders ............... (1,658) --
Retained earnings ....................................... 33,060 10,316
---------- -------
50,146 16,111
Less stock held in trust for deferred compensation . (962) --
Less treasury stock ....................................... (128,040) --
---------- -------
Total shareholders' equity (deficit) ..................... (78,856) 16,111
---------- -------
Total liabilities and shareholders' equity (deficit) ...... $ 223,960 $16,717
========== =======
Nonguarantor
subsidiaries Eliminations Consolidated
-------------- -------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 454 $ -- $ 1,133
Receivables:
Trade accounts receivable, net ........................... 15,190 -- 76,590
Other ................................................... 2,659 (8,782) 3,079
Inventories ............................................. 13,722 (174) 58,551
Deferred income taxes .................................... 93 -- 9,099
Prepaid expenses and other .............................. 827 -- 5,928
------- --------- ----------
Total current assets ................................. 32,945 (8,956) 154,380
------- --------- ----------
Property, plant and equipment, net ........................ 4,651 -- 65,511
Deferred charges and other ................................. 612 (1,310) 7,713
Debt issuance costs ....................................... -- -- 9,277
Investment in subsidiaries ................................. -- (31,738) --
------- --------- ----------
Total assets ....................................... $38,208 $ (42,004) $ 236,881
======= ========= ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ..................... $ 1,880 $ -- $ 23,880
Accounts payable .......................................... 14,847 (8,535) 57,259
Accrued liabilities:
Wages and benefits ....................................... 1,577 -- 9,343
Accrued interest ....................................... 19 -- 5,613
Recapitalization and other special charges ............... 377 -- 4,612
Other ................................................... 3,448 -- 19,856
------- --------- ----------
Total current liabilities ........................... 22,148 (8,535) 120,563
------- --------- ----------
Long-term debt, net of current maturities .................. -- -- 183,441
Employee benefit obligations, net of current portion ...... -- -- 11,291
Deferred income taxes .................................... 181 -- 735
Other ...................................................... 260 -- 1,446
------- --------- ----------
Total liabilities .................................... 22,589 (8,535) 317,476
------- --------- ----------
Shareholders' equity (deficit):
Common stock ............................................. 12,072 (12,072) 500
Additional paid-in capital .............................. 750 (4,275) 15,974
Foreign currency translation adjustment .................. 2,270 (4,540) 2,270
Notes receivable from officers/shareholders ............... -- -- (1,658)
Retained earnings ....................................... 527 (12,582) 31,321
------- --------- ----------
15,619 (33,469) 48,407
Less stock held in trust for deferred compensation . -- -- (962)
Less treasury stock ....................................... -- -- (128,040)
------- --------- ----------
Total shareholders' equity (deficit) ..................... 15,619 (33,469) (80,595)
------- --------- ----------
Total liabilities and shareholders' equity (deficit) ...... $38,208 $ (42,004) $ 236,881
======= ========= ==========
59
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
Guarantor Nonguarantor
Parent subsidiary subsidiaries Eliminations Consolidated
------------ ------------ -------------- -------------- -------------
Net sales ..................... $380,872 $ -- $81,542 $ (29,862) $432,552
Cost of goods sold ............ 212,861 -- 52,180 (30,472) 234,569
-------- -------- ------- --------- --------
Gross profit .................. 168,011 -- 29,362 610 197,983
-------- -------- ------- --------- --------
Operating expenses:
Selling ........................ 104,685 -- 17,370 -- 122,055
General and administrative ... 26,039 (817) 5,655 1,328 32,205
Research and development ...... 6,196 -- -- -- 6,196
Other special charges ......... 1,348 -- 1,654 -- 3,002
-------- -------- ------- --------- --------
138,268 (817) 24,679 1,328 163,458
-------- -------- ------- --------- --------
Income from operations ...... 29,743 817 4,683 (718) 34,525
Interest expense ............... 24,118 -- 424 -- 24,542
Equity in income of subsidiary (3,475) (2,948) -- 6,423 --
Other (income) expense, net ... (590) 6 962 -- 378
-------- -------- ------- --------- --------
Income before income taxes ...... 9,690 3,759 3,297 (7,141) 9,605
Income tax expense ............ 2,786 284 349 -- 3,419
-------- -------- ------- --------- --------
Net income .................. $ 6,904 $ 3,475 $ 2,948 $ (7,141) $ 6,186
======== ======== ======= ========= ========
60
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1997
Guarantor Nonguarantor
Parent subsidiary subsidiaries Eliminations Consolidated
------------ ------------ -------------- -------------- -------------
Net cash provided (used) by operating activities $ 34,436 $ (11) $ 1,240 $-- $ 35,665
Cash flows from investing activities:
Purchases of property, plant and equipment ...... (10,113) -- (743) -- (10,856)
Proceeds from sale of property, plant and
equipment .................................... 52 -- -- -- 52
Sale (purchase) of equipment and technology ...... (1,866) -- 1,866 -- --
--------- ----- --------- ------ ----------
Net cash provided (used) by investing activities (11,927) -- 1,123 -- (10,804)
--------- ----- --------- ------ ----------
Cash flows from financing activities:
Reduction of debt .............................. (123,489) -- (11,590) -- (135,079)
Proceeds from debt financing ..................... 100,000 -- 8,890 -- 108,890
Cash overdrafts ................................. 164 -- -- -- 164
Proceeds from direct financing lease ............ 100 -- -- -- 100
Issuance of stock .............................. 271 -- -- -- 271
Acquisition of treasury stock .................. (3,343) -- -- -- (3,343)
Exercise of stock options ........................ 1,438 -- -- -- 1,438
Payments on capital lease obligations ............ -- -- (426) -- (426)
--------- ----- --------- ------ ----------
Net cash provided (used) by financing activities (24,859) -- (3,126) -- (27,985)
--------- ----- --------- ------ ----------
Effect of exchange rate changes on cash and
cash equivalents ................................. -- -- 2 -- 2
--------- ----- --------- ------ ----------
Net increase (decrease) in cash and cash
equivalents .................................... (2,350) (11) (761) -- (3,122)
Cash and cash equivalents, beginning of period ... 2,983 57 1,215 -- 4,255
--------- ----- --------- ------ ----------
Cash and cash equivalents, end of period ......... $ 633 $ 46 $ 454 $-- $ 1,133
========= ===== ========= ======= ==========
61
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 1996
Guarantor
Parent subsidiary
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 2,983 $ 57
Receivables:
Trade accounts receivable, net ........................... 45,614 --
Other ................................................... 15,128 162
Inventories ............................................. 57,615 --
Deferred income taxes .................................... 7,888 1,026
Prepaid expenses and other .............................. 3,457 --
---------- -------
Total current assets ................................. 132,685 1,245
---------- -------
Property, plant and equipment, net ........................ 61,495 --
Deferred charges and other ................................. 6,815 --
Debt issuance costs ....................................... 12,764 --
Investment in subsidiaries ................................. 12,056 12,098
---------- -------
Total assets ....................................... $ 225,815 $13,343
========== =======
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ..................... $ 4,500 $ --
Accounts payable .......................................... 40,830 597
Accrued liabilities:
Wages and benefits ....................................... 4,759 --
Accrued interest ....................................... 618 --
Recapitalization and other special charges ............ 11,645 --
Other ................................................... 10,043 484
---------- -------
Total current liabilities ........................... 72,395 1,081
---------- -------
Long-term debt, net of current maturities .................. 223,990 --
Employee benefit obligations, net of current portion ...... 12,138 --
Deferred income taxes .................................... (64) 206
Other ...................................................... 2,061 --
---------- -------
Total liabilities .................................... 310,520 1,287
Shareholders' equity (deficit):
Common stock ............................................. 500 --
Additional paid-in capital .............................. 15,970 3,525
Foreign currency translation adjustment .................. 1,689 1,689
Notes receivable from officers/shareholders ............... (500) --
Retained earnings ....................................... 26,158 6,842
---------- -------
43,817 12,056
Less treasury stock, at cost .............................. (128,522) --
---------- -------
Total shareholders' equity (deficit) ..................... (84,705) 12,056
---------- -------
Total liabilities and shareholders' equity (deficit) ...... $ 225,815 $13,343
========== =======
Nonguarantor Combined
subsidiaries Eliminations consolidated
-------------- -------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 1,215 $ -- $ 4,255
Receivables:
Trade accounts receivable, net ........................... 16,706 -- 62,320
Other ................................................... 95 (11,229) 4,156
Inventories ............................................. 13,303 (797) 70,121
Deferred income taxes .................................... 244 -- 9,158
Prepaid expenses and other .............................. 1,407 -- 4,864
-------- -------- ----------
Total current assets ................................. 32,970 (12,026) 154,874
-------- -------- ----------
Property, plant and equipment, net ........................ 7,145 -- 68,640
Deferred charges and other ................................. 598 -- 7,413
Debt issuance costs ....................................... -- -- 12,764
Investment in subsidiaries ................................. -- (24,154) --
-------- -------- ----------
Total assets ....................................... $ 40,713 $(36,180) $ 243,691
======== ======== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ..................... $ 4,318 $ -- $ 8,818
Accounts payable .......................................... 16,505 (11,011) 46,921
Accrued liabilities:
Wages and benefits ....................................... 1,135 -- 5,894
Accrued interest ....................................... 13 -- 631
Recapitalization and other special charges ............ 3,297 -- 14,942
Other ................................................... 2,492 -- 13,019
-------- -------- ----------
Total current liabilities ........................... 27,760 (11,011) 90,225
-------- -------- ----------
Long-term debt, net of current maturities .................. 855 -- 224,845
Employee benefit obligations, net of current portion ...... -- -- 12,138
Deferred income taxes .................................... -- -- 142
Other ...................................................... -- -- 2,061
-------- -------- ----------
Total liabilities .................................... 28,615 (11,011) 329,411
Shareholders' equity (deficit):
Common stock ............................................. 12,072 (12,072) 500
Additional paid-in capital .............................. 750 (4,275) 15,970
Foreign currency translation adjustment .................. 1,689 (3,378) 1,689
Notes receivable from officers/shareholders ............... -- -- (500)
Retained earnings ....................................... (2,413) (5,444) 25,143
-------- -------- ----------
12,098 (25,169) 42,802
Less treasury stock, at cost .............................. -- -- (128,522)
-------- -------- ----------
Total shareholders' equity (deficit) ..................... 12,098 (25,169) (85,720)
-------- -------- ----------
Total liabilities and shareholders' equity (deficit) ...... $ 40,713 $(36,180) $ 243,691
======== ======== ==========
62
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Transition period ended September 30, 1996
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
------------ -------------- -------------- -------------- -------------
Net sales ........................... $ 89,760 $ -- $ 19,974 $ (7,854) $ 101,880
Cost of goods sold .................. 53,480 -- 13,470 (7,708) 59,242
--------- ------- -------- -------- ---------
Gross profit ........................ 36,280 -- 6,504 (146) 42,638
--------- ------- -------- -------- ---------
Operating expenses:
Selling .............................. 23,539 -- 4,257 -- 27,796
General and administrative ......... 6,508 2 2,109 9 8,628
Research and development ............ 1,495 -- -- -- 1,495
Recapitalization charges ............ 12,326 -- -- -- 12,326
Other special charges ............... 12,768 - 3,297 -- 16,065
--------- ------- -------- -------- ---------
56,636 2 9,663 9 66,310
--------- ------- -------- -------- ---------
Loss from operations ............... (20,356) (2) (3,159) (155) (23,672)
Interest expense ..................... 4,320 -- 110 -- 4,430
Equity in loss of subsidiary ......... 2,508 2,611 -- (5,119) --
Other (income) expense, net ......... (170) (162) 408 -- 76
--------- --------- -------- -------- ---------
Loss before income taxes and
extraordinary item .................. (27,014) (2,451) (3,677) 4,964 (28,178)
Income tax (benefit) expense ......... (7,895) 57 (1,066) -- (8,904)
--------- --------- -------- -------- ---------
Loss before extraordinary item ...... (19,119) (2,508) (2,611) 4,964 (19,274)
Extraordinary item, loss on early
extinguishment of debt, net of income
tax benefit of $777 .................. (1,647) -- -- -- (1,647)
--------- --------- -------- -------- ---------
Net loss ........................... $ (20,766) $(2,508) $ (2,611) $ 4,964 $ (20,921)
========= ========= ======== ======== =========
63
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Transition period ended September 30, 1996
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
------------ ------------ -------------- -------------- -------------
Net cash provided (used) by operating activities ...... $ (2,078) $16 $ 932 $-- $ (1,130)
Cash flows from investing activities: ..................
Purchases of property, plant and equipment ............ (912) -- (336) -- (1,248)
Proceeds from sale of property, plant and
equipment .......................................... 1,281 -- -- -- 1,281
--------- --- -------- ------ ----------
Net cash provided (used) by investing activities ...... 369 -- (336) -- 33
--------- --- -------- ------ ----------
Cash flows from financing activities:
Reduction of debt .................................... (104,138) -- (2,952) -- (107,090)
Proceeds from debt financing ........................ 256,500 -- 2,989 -- 259,489
Cash overdraft ....................................... (2,493) -- -- -- (2,493)
Debt issuance costs ................................. (14,373) -- -- -- (14,373)
Extinguishment of debt .............................. (2,424) -- -- -- (2,424)
Distributions from DISC .............................. (1,943) -- -- -- (1,943)
Acquisition of treasury stock ........................ (127,925) -- -- -- (127,925)
Payments on capital lease obligation .................. -- -- (84) -- (84)
--------- --- -------- ------ ----------
Net cash provided (used) by financing activities ...... 3,204 -- (47) -- 3,157
--------- --- -------- ------ ----------
Effect of exchange rate changes on cash and cash
equivalents .......................................... -- -- 5 -- 5
--------- --- -------- ------ ----------
Net increase (decrease) in cash and cash
equivalents ....................................... 1,495 16 554 -- 2,065
Cash and cash equivalents, beginning of period ......... 1,488 41 661 -- 2,190
--------- --- -------- ------ ----------
Cash and cash equivalents, end of period ............... $ 2,983 $57 $ 1,215 $-- $ 4,255
========= === ======== ====== ==========
64
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 1996
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
------------ ------------ -------------- -------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 1,488 $ 41 $ 661 $ -- $ 2,190
Receivables:
Trade accounts receivable, net ........................... 40,138 -- 15,692 -- 55,830
Other ................................................... 11,434 318 780 (10,210) 2,322
Inventories ............................................. 54,486 -- 12,951 (496) 66,941
Deferred income taxes .................................... 5,439 179 243 -- 5,861
Prepaid expenses and other .............................. 3,415 -- 1,560 -- 4,975
-------- ------- ------- --------- --------
Total current assets ................................. 116,400 538 31,887 (10,706) 138,119
-------- ------- ------- --------- --------
Property, plant and equipment, net ........................ 65,747 -- 7,434 -- 73,181
Deferred charges and other ................................. 9,047 -- 608 -- 9,655
Debt issuance costs ....................................... 173 -- -- -- 173
Investment in subsidiaries ................................. 14,524 14,670 -- (29,194) --
-------- ------- ------- --------- --------
Total assets ....................................... $205,891 $15,208 $39,929 $ (39,900) $221,128
======== ======= ======= ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities: .......................................
Current maturities of long-term debt ..................... $ 7,350 $ -- $ 4,281 $ -- $ 11,631
Accounts payable .......................................... 32,906 492 15,145 (9,848) 38,695
Accrued liabilities:
Wages and benefits ....................................... 5,077 -- 1,049 -- 6,126
Accrued interest ....................................... 1,850 -- 40 -- 1,890
Other ................................................... 12,768 (14) 3,803 -- 16,557
-------- ------- ------- --------- --------
Total current liabilities ........................... 59,951 478 24,318 (9,848) 74,899
-------- ------- ------- --------- --------
Long-term debt, net of current maturities .................. 68,777 -- 941 -- 69,718
Employee benefit obligations, net of current portion ...... 12,141 -- -- -- 12,141
Deferred income taxes .................................... 2,378 206 -- -- 2,584
Other ...................................................... 162 -- -- -- 162
-------- ------- ------- --------- --------
Total liabilities .................................... 143,409 684 25,259 (9,848) 159,504
-------- ------- ------- --------- --------
Shareholders' equity (deficit): ...........................
Common stock ............................................. 500 -- 12,072 (12,072) 500
Rayovac International Corporation common stock ............ 5 -- -- -- 5
Additional paid-in capital .............................. 12,000 3,525 750 (4,275) 12,000
Foreign currency translation adjustment .................. 1,650 1,650 1,650 (3,300) 1,650
Retained earnings ....................................... 48,860 9,349 198 (10,405) 48,002
-------- ------- ------- --------- --------
63,015 14,524 14,670 (30,052) 62,157
Less treasury stock, at cost .............................. (533) -- -- -- (533)
Total shareholders' equity (deficit) ..................... 62,482 14,524 14,670 (30,052) 61,624
-------- ------- ------- --------- --------
Total liabilities and shareholders' equity (deficit) ...... $205,891 $15,208 $39,929 $ (39,900) $221,128
======== ======= ======= ========= ========
65
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Year ended June 30, 1996
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
------------ ------------ -------------- -------------- -------------
Net sales ..................... $369,065 $ -- $82,116 $ (27,827) $423,354
Cost of goods sold ............ 213,349 -- 53,846 (27,852) 239,343
-------- -------- ------- --------- --------
Gross profit .................. 155,716 -- 28,270 25 184,011
-------- -------- ------- --------- --------
Operating expenses:
Selling ........................ 99,486 -- 17,039 -- 116,525
General and administrative ... 25,967 12 5,775 13 31,767
Research and development ...... 5,442 -- -- -- 5,442
-------- -------- ------- --------- --------
130,895 12 22,814 13 153,734
-------- -------- ------- --------- --------
Income (loss) from operations 24,821 (12) 5,456 12 30,277
Interest expense ............... 7,731 -- 704 -- 8,435
Equity in income of subsidiary (2,507) (2,167) -- 4,674 --
Other (income) expense, net ... (51) (570) 1,173 -- 552
-------- -------- ------- --------- --------
Income before income taxes ...... 19,648 2,725 3,579 (4,662) 21,290
Income tax expense ............ 5,372 218 1,412 -- 7,002
-------- -------- ------- --------- --------
Net income ..................... $ 14,276 $ 2,507 $ 2,167 $ (4,662) $ 14,288
======== ======== ======= ========= ========
66
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year ended June 30, 1996
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
----------- ------------ -------------- -------------- ---------------
Net cash provided (used) by operating activities ...... $ 14,449 $ (292) $ 3,688 $-- $ 17,845
Cash flows from investing activities:
Purchases of property, plant and equipment ............ (6,558) -- (88) -- (6,646)
Proceeds from sale of property, plant and
equipment .......................................... 298 -- -- 298
-------- ------ -------- ---------
Net cash provided (used) by investing activities ...... (6,260) -- (88) -- (6,348)
-------- ------ -------- ------ ---------
Cash flows from financing activities:
Reduction of debt .................................... (97,627) -- (6,899) -- (104,526)
Proceeds from debt financing ........................ 93,600 -- 2,652 -- 96,252
Cash overdraft ....................................... 2,339 -- -- -- 2,339
Distributions from DISC .............................. (5,187) -- -- -- (5,187)
Intercompany dividends .............................. -- 130 (130) -- --
Acquisition of treasury stock ........................ (533) -- -- -- (533)
Payments on capital lease obligation .................. -- -- (295) -- (295)
-------- ------ -------- ------ ---------
Net cash provided (used) by financing activities ...... (7,408) 130 (4,672) -- (11,950)
-------- ------ -------- ------ ---------
Effect of exchange rate changes on cash and cash
equivalents .......................................... -- -- (2) -- (2)
-------- ------ ---------- ------ ----------
Net increase (decrease) in cash and cash
equivalents .......................................... 781 (162) (1,074) -- (455)
Cash and cash equivalents, beginning of period ......... 707 203 1,735 -- 2,645
-------- ------ --------- ------ -----------
Cash and cash equivalents, end of period ............... $ 1,488 $ 41 $ 661 $-- $ 2,190
======== ====== ========= ====== ===========
67
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Year ended June 30, 1995
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
------------ ------------ -------------- -------------- -------------
Net sales ........................... $364,816 $ -- $79,022 $ (28,614) $415,224
Cost of goods sold .................. 214,119 -- 51,781 (28,774) 237,126
-------- -------- ------- --------- --------
Gross profit ........................ 150,697 -- 27,241 160 178,098
-------- -------- ------- --------- --------
Operating expenses:
Selling ........................... 93,935 -- 14,768 -- 108,703
General and administrative ......... 27,556 (651) 5,872 84 32,861
Research and development ............ 5,005 -- -- -- 5,005
-------- -------- ------- --------- --------
126,496 (651) 20,640 84 146,569
-------- -------- ------- --------- --------
Income from operations ............ 24,201 651 6,601 76 31,529
Interest expense ..................... 7,889 -- 755 -- 8,644
Equity in income of subsidiary ...... (5,520) (4,928) -- 10,448 --
Other (income) expense, net ......... (116) (319) 665 -- 230
-------- -------- ------- --------- --------
Income before income taxes............ 21,948 5,898 5,181 (10,372) 22,655
Income tax expense .................. 5,616 378 253 -- 6,247
-------- -------- ------- --------- --------
Net income ........................ $16,332 $ 5,520 $ 4,928 $ (10,372) $ 16,408
======== ======== ======= ========= ========
68
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(In thousands, except per share amounts)
17. Consolidated Financial Statements --Continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year ended June 30, 1995
Guarantor Nonguarantor Combined
Parent subsidiary subsidiaries Eliminations consolidated
------------ ------------ -------------- -------------- -------------
Net cash provided (used) by operating activities ...... $ 32,394 $ (3,823) $ 3,737 $ 3,211 $ 35,519
Cash flows from investing activities:
Purchases of property, plant and equipment ............ (14,288) -- (2,650) -- (16,938)
Proceeds from sale of property, plant and
equipment .......................................... 139 -- -- -- 139
-------- -------- -------- -------- ----------
Net cash (used) by investing activities ............... (14,149) -- (2,650) -- (16,799)
-------- -------- -------- -------- ----------
Cash flows from financing activities:
Reduction of debt .................................... (100,536) -- (5,847) -- (106,383)
Proceeds from debt financing ........................ 79,749 -- 5,223 726 85,698
Cash overdraft ....................................... 3,925 -- -- -- 3,925
Distributions from DISC .............................. (1,500) -- -- -- (1,500)
Intercompany dividends .............................. -- 3,899 (3,899) -- --
-------- -------- -------- -------- ----------
Net cash provided (used) by financing activities ...... (18,362) 3,899 (4,523) 726 (18,260)
======== ======== ======== ======== ==========
Effect of exchange rate changes on cash and cash
equivalents .......................................... -- -- 3,592 (3,937) (345)
-------- -------- -------- -------- ----------
Net increase (decrease) in cash and cash
equivalents .......................................... (117) 76 156 -- 115
Cash and cash equivalents, beginning of period ......... 824 127 1,579 -- 2,530
-------- -------- -------- -------- ----------
Cash and cash equivalents, end of period ............... $ 707 $ 203 $ 1,735 $ -- $ 2,645
======== ======== ======== ======== ==========
69
Independent Auditors' Report
The Board of Directors
Rayovac Corporation:
Under date of October 28, 1997, we reported on the consolidated balance sheets
of Rayovac Corporation and subsidiaries as of September 30, 1997, and the
related consolidated statements of operations, shareholders' deficit, and cash
flows for the year then ended. In connection with our audit of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule as listed in Item 14(a). This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement
schedule based on our audit.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Milwaukee, Wisconsin
October 28, 1997
70
RAYOVAC CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the fiscal year ended September 30, 1997, the Transition Period ended
September 30, 1996
and the years ended June 30, 1995 and 1996
(In thousands)
Column A Column B Column C Column D Column E
- ------------------------------------------- ------------ ----------- ------------ --------------
Additions
Balance at Charged to
Beginning Costs and Balance at
Descriptions of Period Expenses Deductions End of Period
- ------------------------------------------- ------------ ----------- ------------ --------------
September 30, 1997:
Allowance for doubtful accounts ......... $722 $617 $118 $1,221
==== ==== ==== ======
Transition Period Ended September 30, 1996:
Allowance for doubtful accounts ......... $786 $147 $211 $ 722
==== ==== ==== ======
June 30, 1996:
Allowance for doubtful accounts ......... $702 $545 $461 $ 786
==== ==== ==== ======
June 30, 1995:
Allowance for doubtful accounts ......... $831 $714 $843 $ 702
==== ==== ==== ======
See accompanying Independent Auditors' Report.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
RAYOVAC CORPORATION
By: /s/ David A. Jones
---------------------------------
Name: David A. Jones
Title: Chairman of the Board,
Chief Executive Officer and
President
(Principal Executive Officer)
Date: December 22, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of December 22, 1997.
Signature Title
- ----------------------------- ----------------------------------------------------
/s/ David A. Jones Chairman of the Board, Chief Executive Officer and
- ------------------------- President (Principal Executive Officer)
David A. Jones
/s/ Kent J. Hussey Executive Vice President of Finance and
- ------------------------- Administration, Chief Financial Officer, and
Kent J. Hussey Director (Principal Financial Officer and
Principal Accounting Officer)
/s/ Roger F. Warren President/International and Contract Micropower
- ------------------------- and Director
Roger F. Warren
/s/ Trygve Lonnebotn Executive Vice President of Operations and
- ------------------------- Director
Trygve Lonnebotn
/s/ Scott A. Schoen Director
- -------------------------
Scott A. Schoen
/s/ Thomas R. Shepherd Director
- -------------------------
Thomas R. Shepherd
/s/ Warren C. Smith, Jr. Director
- -------------------------
Warren C. Smith, Jr.
72
EXHIBIT INDEX
Exhibit Number 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 101/4% Senior Subordinated
Notes due 2006.
4.2 ** Specimen of the Notes (included as an exhibit to Exhibit 4.1).
4.3 ** Credit Agreement, dated as of September 12, 1996 by and among the Company, the lenders
party thereto, Bank of America National Trust and Savings Association ("BofA") and DLJ
Capital Funding, Inc. (the "Credit Agreement").
4.4 ** Amendment No. 1 to the Credit Agreement dated as of October 23, 1996.
4.5 ** The Security Agreement dated as of September 12, 1996 by and among the Company, ROV
Holding, Inc. and BofA.
4.6 ** The Company Pledge Agreement dated as of September 12, 1996 by and between the
Company and BofA.
4.7 *** Shareholders Agreement dated as of September 12, 1996 by and among the Company and
the shareholders of the Company referred to therein.
4.8 *** Amendment to Rayovac Shareholders Agreement dated August 1, 1997 by and among the
Company and the shareholders of the Company referred to therein.
4.9 * 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 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.
16+ Letter re: change in certifying accountant.
21** Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Coopers & Lybrand L.L.P.
73
- ----------------
* Incorporated by reference to the Company's Registration Statement on Form S-1
(Registration No. 333-35181) filed with the Commission.
** Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-17895) filed with the Commission.
*** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 29, 1997 filed with the Commission on
August 13, 1997.
+ Incorporated by reference to the Company's Current Report on Form 8-K/A filed
with the Commission on June 20, 1997.
74
AMENDED AND
RESTATED ARTICLES OF INCORPORATION
OF
RAYOVAC CORPORATION
----------------------------------
The following Amended and Restated Articles of Incorporation
("Restated Articles") of Rayovac Corporation, a Wisconsin corporation (the
"Corporation"), were duly adopted in accordance with and pursuant to Sections
180.1003 and 180.1007 of the Wisconsin Business Corporation Law (the "WBCL") ,
Chapter 180 of the Wisconsin Statutes ("Chapter 180"), and amend, supersede and
restate the Corporation's existing Restated Articles of Incorporation.
ARTICLE I
The name of the Corporation is RAYOVAC CORPORATION.
ARTICLE II
The period of existence of the Corporation shall be perpetual.
ARTICLE III
The purpose or purposes for which the Corporation is organized
is to carry on and engage in any lawful activity within the purposes for which
corporations may be organized under Chapter 180.
ARTICLE IV
The aggregate number of shares of capital stock which the
Corporation shall have the authority to issue is (i) one hundred and fifty
million (150,000,000) shares of common stock, each having a par value of one
penny ($.01) ("Common Stock"), and (ii) five million (5,000,000) shares of
preferred stock, each having a par value of one penny ($.01) ("Preferred
Stock").
ARTICLE V
The Board of Directors is expressly authorized to provide for
the issuance of all or any shares of the Preferred Stock in one or more classes
or series, and to fix for each such class or series such voting powers, full or
limited, or no voting powers, and such distinctive designations, preferences,
and relative,
participating, optional or other special rights, and such qualifications,
limitations or restrictions thereof, as shall be stated and expressed in the
resolution or resolutions adopted by the Board of Directors providing for the
issuance of such class or series and as may be permitted by the WBCL, including,
without limitation, the authority to provide that any such class or series may
be (a) subject to redemption at such time or times and at such price or prices;
(b) entitled to receive dividends (which may be cumulative or non-cumulative) at
such rates, on such conditions, and at such times, and payable in preference to,
or in such relation to, the dividends payable on any other class or classes or
any other series; (c) entitled to such rights upon the dissolution of, or upon
any distribution of the assets of, the Corporation; or (d) convertible into, or
exchangeable for, shares of any other class or classes of stock, or of any other
series of the same or any other class or classes of stock, of the Corporation at
such price or prices or at such rates of exchange and with such adjustments; all
as may be stated in such resolution or resolutions.
ARTICLE VI
No holder of any class of stock of the Corporation shall,
because of such holder's ownership of said stock, have any pre-emptive or other
right to purchase, or subscribe for, or take any part of any class of stock, or
any part of any notes, debentures, bonds or other securities convertible into or
carrying options or warrants to purchase any class of stock of the Corporation.
ARTICLE VII
(a) The number of directors constituting the Board of
Directors of the Corporation shall be such number (one or more) as is fixed from
time to time by the By-laws of the Corporation.
(b) The directors shall be divided into three classes,
designated Class I, Class II and Class III. Each class shall consist, as nearly
as may be possible, of one-third of the total number of directors constituting
the entire Board of Directors. The initial division of the Board of Directors
into classes shall be made by the decision of the affirmative vote of a majority
of the entire Board of Directors. Each director shall serve for a term ending on
the date of the third annual meeting of shareholders following the annual
meeting at which such director was elected and until his successor is duly
elected and duly qualified; provided, however, that each initial director of the
first class shall hold office until the date of the annual meeting of
shareholders held in 1999 and until his successor is duly elected and duly
qualified, each initial director of the second class shall hold office until the
date of the annual meeting of shareholders held in 2000 and until his successor
is duly
2
elected and duly qualified, and each initial director of the third class shall
hold office until the date of the annual meeting of shareholders held in 2001
and until his successor is duly elected and duly qualified. If the number of
directors is changed, any increase or decrease shall be apportioned among the
classes so as to maintain the number of directors in each class as nearly equal
as possible, and any additional director of any class elected to fill a vacancy
resulting from an increase in such class shall hold office for a term that shall
coincide with the remaining term of that class, but in no case will a decrease
in the number of directors shorten the term of any incumbent director. A
director shall hold office until the annual meeting for the year in which his
term expires and until his successor shall be duly elected and shall duly
qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office. Any vacancy on the Board of Directors
that results from an increase in the number of directors may be filled by a
majority of the directors then in office, provided that a quorum is present, and
any other vacancy occurring in the Board of Directors may be filled by a
majority of the directors then in office, even if less than a quorum, or by a
sole remaining director. Any director elected to fill a vacancy not resulting
from an increase in the number of directors shall have the same remaining term
as that of his predecessor.
Any director may be removed from office as a director, but
only for cause, by the affirmative vote of holders of at least two-thirds
(66 2/3%) of the voting power of shares entitled to vote at an election of
directors.
Notwithstanding the foregoing, whenever the holders of any one
or more classes or series of Preferred Stock issued by the Corporation shall
have the right, voting separately by class or series, to elect directors at an
annual or special meeting of shareholders, the election, term of office, filling
of vacancies, removal and other features of such directorships shall be governed
by the terms of the instrument creating such class or series of Preferred Stock,
and such directors so elected shall not be divided into classes pursuant to this
Article SEVENTH unless expressly provided by such terms.
(c) The presence of a majority of the total number of
directors shall constitute a quorum for the transaction of business and, except
as otherwise provided herein or in the By-laws of the Corporation, the vote of a
majority of such quorum shall be required in order for the Board of Directors to
act.
3
ARTICLE VIII
Any action required or permitted to be taken by the
shareholders of the Corporation must be effected at a duly called annual or
special meeting of shareholders of the Corporation. The shareholders shall not
have the power to consent in writing to the taking of any action.
ARTICLE IX
Unless otherwise required by law, special meetings of
shareholders, for any purpose or purposes, may be called only by (i) the
Chairman of the Board of Directors, if there be one, (ii) the President, (iii)
any Vice President, if there be one, (iv) the Secretary or (v) any Assistant
Secretary, if there be one, and shall be called by any such officer at the
request in writing of a majority of the Board of Directors. The shareholders
shall not have the power to call a special meeting of shareholders of the
Corporation.
ARTICLE X
The address of the registered office of the Corporation is 601
Rayovac Drive, P.O. Box 4960, Madison, Wisconsin 53711-0960, in Dane County and
the name of the Corporation's registered agent at such address is David A.
Jones.
ARTICLE XI
These Restated Articles of Incorporation may be amended
pursuant to the By-laws of the Corporation and in the manner authorized by law
at the time of amendment.
ARTICLE XII
If any of the Corporation's shareholders enter into one or
more agreements with the Corporation that impose limitations on the transfer of
shares of the Corporation's Common Stock or that otherwise provide for the
purchase and sale of outstanding shares upon the happening of certain events and
contingencies, each such agreement shall be binding on the parties to the
agreement in all respects, and any attempted transfer of shares in violation of
the agreement's terms and provisions shall be void and ineffective in all
respects. If any such agreement so provides, all persons who subsequently
acquire shares shall be bound by the agreement's terms and provisions as if they
were signatories to the agreement.
4
AMENDED AND
RESTATED BY-LAWS
OF
RAYOVAC CORPORATION
(hereinafter called the "Corporation")
ARTICLE I. OFFICES
1.1 Principal and Business Offices. The Corporation may have
such principal and other business offices, either within or without the State of
Wisconsin, as the Board of Directors may designate or as the business of the
Corporation may require from time to time.
1.2 Registered Office. The registered office of the
Corporation required by the Wisconsin Business Corporation Law to be maintained
in the State of Wisconsin may be, but need not be, identical with the principal
office in the State of Wisconsin, and the address of the registered office may
be changed from time to time by the Board of Directors or by the registered
agent. The business office of the registered agent of the Corporation shall be
identical to such registered office.
ARTICLE II. SHAREHOLDERS
2.1 Annual Meeting. The annual meeting of shareholders shall
be held on such date and at such time as shall be designated from time to time
by the Board of Directors and stated in the notice of the meeting, at which
meeting the shareholders shall elect directors, and transact such other business
as may properly be brought before the meeting. Written notice of the annual
meeting stating the place, date and hour of the meeting shall be given to each
shareholder entitled to vote at such meeting not less than ten nor more than
sixty days before the date of the meeting.
2.2 Special Meeting. Special meetings of the shareholders, for
any purpose or purposes, unless otherwise prescribed by statute or the Articles
of Incorpora-
tion, may be called only by (i) the Chairman of the Board of Directors, if there
be one, (ii) the President, (iii) any Vice President, if there be one, (iv) the
Secretary or (v) any Assistant Secretary, if there be one, and shall be called
by any such officer at the request in writing of a majority of the Board of
Directors. Shareholders shall not be entitled to call a Special Meeting of the
shareholders, nor to require the Board of Directors to call such a special
meeting. Special meetings of the shareholders may be held on any date, at any
time and at any place within or without the State of Wisconsin as shall be
determined by the Board of Directors. Written notice of a special meeting
stating the place, date and hour of the meeting and the purpose or purposes for
which the meeting is called shall be given not less than ten nor more than sixty
days before the date of the meeting to each shareholder entitled to vote at such
meeting.
2.3 Place of Meeting. The Board of Directors may designate any
place, either within or without the State of Wisconsin, as the place of meeting
for any annual meeting or for any special meeting called by the Board of
Directors. A waiver of notice signed by all shareholders entitled to vote at a
meeting may designate any place, either within or without the State of
Wisconsin, as the place for the holding of such meeting. If no designation is
made, or if a special meeting be otherwise called, the place of meeting shall be
the principal business office of the Corporation in the State of Wisconsin or
such other suitable place in the county of such principal office as may be
designated by the person calling such meeting, but any meeting may be adjourned
to reconvene at any place designated by the holders of a majority of the votes
represented thereat.
2.4 Closing of Transfer Books or Fixing of Record Date. For
the purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or shareholders entitled to
receive payment of any dividend, or in order to make a determination of
shareholders for any other proper purpose, the Board of Directors may provide
that the stock transfer books shall be closed for a stated period but not to
exceed, in any case, fifty days. If the stock transfer books shall be closed for
the purpose of determining shareholders entitled to notice of or to
2
vote at a meeting of shareholders, such books shall be closed for at least ten
days immediately preceding such meeting. In lieu of closing the stock transfer
books, the Board of Directors may fix in advance a date as the record date for
any such determination of shareholders, such date in any case to be not more
than fifty days and, in case of a meeting of shareholders, not less than ten
days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken. If the stock transfer books are
not closed and no record date is fixed for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders, or shareholders
entitled to receive payment of a dividend, the close of business on the date on
which notice of the meeting is mailed or on the date on which the resolution of
the Board of Directors declaring such dividend is adopted, as the case may be,
shall be the record date for such determination of shareholders. When a
determination of shareholders entitled to vote at any meeting of shareholders
has been made as provided in this section, such determination shall be applied
to any adjournment thereof except where the determination has been made through
the closing of the stock transfer books and the stated period of closing has
expired.
2.5 Voting Records. The officer or agent having charge of the
stock transfer books for shares of the Corporation shall, before each meeting of
shareholders, make a complete record of the shareholders entitled to vote at
such meeting, or any adjournment thereof, arranged in alphabetical order, and
indicating the address of each shareholder, the number of shares of each class
of capital stock of the Corporation entitled to vote registered in the name of
such shareholder and the total number of votes to which each shareholder is
entitled. Such record shall be produced and kept open at the time and place of
the meeting and shall be subject to the inspection of any shareholder during the
whole time of the meeting for any purpose germane to the meeting. The original
stock transfer books shall be prima facie evidence as to who are the
shareholders entitled to examine such record or transfer books or to vote at any
meeting of shareholders. Failure to comply with the requirements of this section
shall not affect the validity of any action taken at such meeting.
3
2.6 Quorum. Except as otherwise provided in the Articles of
Incorporation, a quorum shall exist at a meeting of shareholders if shares of
the Corporation holding a majority of the votes entitled to be cast at such
meeting are represented in person or by proxy at such meeting of shareholders,
but in no event shall a quorum consist of less than one-third of the shares
entitled to vote at the meeting. If a quorum is present, the affirmative vote of
the holders of a majority of the votes represented at the meeting in person or
by proxy voting together as a single class shall be the act of the shareholders,
unless the vote of a greater number or voting by classes is required by law or
the Articles of Incorporation. If a quorum shall fail to attend any meeting, the
presiding officer at the meeting may adjourn the meeting to another place, date
or time. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified.
2.7 Conduct of Meeting. The Chairman of the Board, and in his
absence, the President, and in their absence, any person chosen by the
shareholders present shall call the meeting of the shareholders to order and
shall act as chairman of the meeting, and the Secretary of the Corporation shall
act as secretary of all meetings of the shareholders, but, in the absence of the
Secretary, the presiding officer may appoint any other person to act as
secretary of the meeting.
2.8 Proxies. At all meetings of shareholders, a shareholder
entitled to vote may vote in person or by proxy appointed in writing by the
shareholder or by his duly authorized attorney in fact. Such proxy shall be
filed with the Secretary of the Corporation before or at the time of the
meeting. Unless otherwise provided in the proxy, a proxy may be revoked at any
time before it is voted, either by written notice filed with the Secretary or
the acting secretary of the meeting or by oral notice given by the shareholder
to the presiding officer during the meeting. The presence of a shareholder who
has filed his proxy shall not of itself constitute a revocation. No proxy shall
be valid after eleven months from the date of its execution, unless otherwise
provided in the proxy. The Board of Directors shall have the
4
power and authority to make rules establishing presumptions as to the validity
and sufficiency of proxies.
2.9 Voting of Shares. Each outstanding share shall be entitled
to one vote upon each matter submitted to a vote at a meeting of shareholders,
except to the extent that voting rights of the shares of any class or classes
are enlarged, limited or denied by the Articles of Incorporation.
2.10 Voting of Shares by Certain Holders.
(a) Other Corporations. Shares standing in the name
of another corporation may be voted either in person or by proxy, by the
president of such corporation or any other officer appointed by such president.
A proxy executed by any principal officer of such other corporation or assistant
thereto shall be conclusive evidence of the signer's authority to act, in the
absence of express notice to this Corporation, given in writing to the Secretary
of this Corporation, of the designation of some other person by the board of
directors or the bylaws of such other corporation.
(b) Legal Representatives and Fiduciaries. Shares
held by any administrator, executor, guardian, conservator, trustee in
bankruptcy, receiver, or assignee for creditors may be voted by him, either in
person or by proxy, without a transfer of such shares into his name provided
that there is filed with the Secretary before or at the time of meeting proper
evidence of his incumbency and the number of shares held. Shares standing in the
name of a fiduciary may be voted by him, either in person or by proxy. A proxy
executed by a fiduciary, shall be conclusive evidence of the signer's authority
to act, in the absence of express notice to this Corporation, given in writing
to the Secretary of this Corporation, that such manner of voting is expressly
prohibited or otherwise directed by the document creating the fiduciary
relationship.
(c) Pledgees. A shareholder whose shares are pledged
shall be entitled to vote such shares until the shares have been transferred
into the name of the pledgee, and thereafter the pledgee shall be entitled to
vote the shares so transferred.
5
(d) Treasury Stock and Subsidiaries. Neither treasury
shares, nor shares held by another corporation if a majority of the shares
entitled to vote for the election of directors of such other corporation is held
by this Corporation, shall be voted at any meeting or counted in determining the
total number of votes represented at such a meeting, but shares of its own issue
held by this Corporation in a fiduciary capacity, or held by such other
corporation in a fiduciary capacity, may be voted and shall be counted in
determining the total number of votes represented at such a meeting.
(e) Minors. Shares held by a minor may be voted by
such minor in person or by proxy and no such vote shall be subject to
disaffirmance or avoidance, unless prior to such vote the Secretary of the
Corporation has received written notice or has actual knowledge that such
shareholder is a minor.
(f) Incompetents and Spendthrifts. Shares held by an
incompetent or spendthrift may be voted by such incompetent or spendthrift in
person or by proxy and no such vote shall be subject to disaffirmance or
avoidance, unless prior to such vote the Secretary of the Corporation has actual
knowledge that such shareholder has been adjudicated an incompetent or
spendthrift or actual knowledge of filing of judicial proceedings for
appointment of a guardian.
(g) Joint Tenants. Shares registered in the names of
two or more individuals who are named in the registration as joint tenants may
be voted in person or by proxy signed by any one or more of such individuals if
either (i) no other such individual or his legal representative is present and
claims the right to participate in the voting of such shares or prior to the
vote files with the Secretary of the Corporation a contrary written voting
authorization or direction or written denial of authority of the individual
present or signing the proxy proposed to be voted or (ii) all such other
individuals are deceased and the Secretary of the Corporation has no actual
knowledge that the survivor has been adjudicated not to be the successor to the
interests of those deceased.
2.11 Waiver of Notice by Shareholders. Whenever any notice
whatsoever is required to be given to any
6
shareholder of the Corporation under the Articles of Incorporation or By-Laws or
any provision of law, a waiver thereof in writing, signed at any time, whether
before or after the time of the meeting, by the shareholder entitled to such
notice, shall be deemed equivalent to the giving of such notice; provided that
such waiver in respect to any matter of which notice is required under any
provision of the Wisconsin Business Corporation Law, shall contain the same
information as would have been required to be included in such notice, except
the time and place of meeting.
2.12 No Action by Consent of Shareholders in Lieu of Meeting.
Any action required or permitted to be taken by the shareholders of the
Corporation must be effected at a duly constituted annual or special meeting of
such shareholders and may not be effected by any consent in writing by such
shareholders.
2.13 Nomination of Directors. Only persons who are nominated
in accordance with the following procedures shall be eligible for election as
directors of the Corporation. Nominations of persons for election as directors
of the Corporation may be made at a meeting of shareholders only (i) by or at
the direction of the Board of Directors, (ii) by any nominating committee or
person appointed by the Board of Directors or (iii) by any shareholder of the
Corporation entitled to vote for the election of directors at the meeting who
complies with the notice procedures set forth in this Section 2.13. Such
nominations, other than those made by or at the direction of the Board of
Directors or by any nominating committee or person appointed by the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the Corporation. To be timely, a shareholder's notice shall be delivered to
or mailed and received at the principal executive offices of the Corporation not
less than 50 days nor more than 75 days prior to the meeting at which directors
will be elected; provided, however, that in the event that less than 65 days'
notice or prior public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder to be timely must be so received not
later than the close of business on the 15th day following the day on which such
notice of the date of the meeting was mailed or such public disclosure was made,
whichever
7
first occurs. Such shareholder's notice to the Secretary shall set forth (a) as
to each person whom the shareholder proposes to nominate for election or
re-election as a director, (i) the name, business address and residence of the
person, (ii) the principal occupation or employment of the person, (iii) the
class and number of shares of capital stock of the Corporation that are
beneficially owned by the person and (iv) any other information relating to the
person that is required to be disclosed in solicitations for proxies for
election of directors pursuant to Rule 14a under the Securities Exchange Act of
1934, as now or hereafter amended; and (b) as to the shareholder giving the
notice, (i) the name and record address of such shareholder and (ii) the class
and number of shares of capital stock of the Corporation that are beneficially
owned by such shareholder. The Corporation may require any proposed nominee to
furnish such other information as may reasonably be required by the Corporation
to determine the eligibility of such proposed nominee to serve as a director of
the Corporation. No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth herein.
The presiding officer at the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the foregoing procedures, and if he should so determine, he
shall so declare to the meeting and such nomination shall be disregarded.
2.14 Other Business. To be properly brought before a meeting
of shareholders, business must be either (a) specified in the notice of meeting
(or any supplement thereto) given by or at the direction of the Board of
Directors, (b) otherwise properly brought before the meeting by or at the
direction of the Board of Directors or (c) otherwise properly brought before the
meeting by a shareholder. In addition to any other applicable requirements, for
business to be properly brought before a meeting by a shareholder, the
shareholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a shareholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation, not
less than 50 days nor more than 75 days prior to the meeting; provided, however,
that in the event that less than 65 days'
8
notice or prior public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder to be timely must be so received not
later than the close of business on the 15th day following the day on which such
notice of the date of the meeting was mailed or such public disclosure was made,
whichever first occurs. A shareholder's notice to the Secretary shall set forth
with respect to each matter the shareholder proposes to bring before the
meeting, (i) a brief description of the business desired to be brought before
the meeting and the reasons for conducting such business at the meeting, (ii)
the name and record address of the shareholder proposing such business, (iii)
the class and number of shares of capital stock of the Corporation that are
beneficially owned by such shareholder and others known by such shareholder to
support the proposal of such business and (iv) any material interest of such
shareholder and other supporters referred to in the preceding clause (iii) in
such proposed business.
Notwithstanding anything in the By-Laws to the contrary, no
business shall be conducted at any meeting except in accordance with the
procedures set forth in this Section 2.14, provided, however, that nothing in
this Section 2.14 shall be deemed to preclude discussion by any shareholder of
any business properly brought before any meeting.
The presiding officer at the meeting shall, if the facts
warrant, determine and declare to the meeting that the business was not properly
brought before the meeting in accordance with the provisions of this Section
2.14, and if he should so determine, he shall so declare to the meeting, and any
such business not properly brought before the meeting shall not be transacted.
ARTICLE III. BOARD OF DIRECTORS
3.1 General Powers and Number. The business and affairs of the
Corporation shall be managed by its Board of Directors. The number of directors
of the Corporation shall be nine (9).
3.2 Tenure and Qualifications. Each director shall serve for a
term ending on the date of the third annual meeting of shareholders following
the annual meeting at which such director was elected and until his
9
successor is duly elected and duly qualified, or until his prior death,
resignation or removal from office. A director may be removed from office as a
director, but only for cause, by the affirmative vote of holders of at least
two-thirds (66 2/3%) of the voting power of shares entitled to vote at an
election of directors. A director may resign at any time by filing his written
resignation with the Secretary of the Corporation. Directors need not be
residents of the State of Wisconsin or shareholders of the Corporation. A
director, other than the Chairman of the Board, who is an officer of the
Corporation and who shall retire or otherwise terminate employment as such
officer shall automatically be retired as a director of the Corporation and
thereafter shall not be eligible for re-election as a director.
3.3 Meetings. The Board of Directors of the Corporation may
hold meetings, both regular and special, either within or without the State of
Wisconsin. Regular meetings of the Board of Directors may be held at such time
and at such place as may from time to time be determined by the Board of
Directors and, unless required by resolution of the Board of Directors, without
notice. Special meetings of the Board of Directors may be called by the Chairman
of the Board of Directors, the Vice Chairman, if there be one, or a majority of
the directors then in office. Notice thereof stating the place, date and hour of
the meeting shall be given to each director either by mail not less than
forty-eight (48) hours before the date of the meeting, by telephone, facsimile
or telegram on twenty-four (24) hours' notice, or on such shorter notice as the
person or persons calling such meeting may deem necessary or appropriate in the
circumstances.
3.4 Quorum. Except as otherwise provided by law or by the
Articles of Incorporation or these By-Laws, a majority of the directors shall
constitute a quorum for the transaction of business at any meeting of the Board
of Directors, but a majority of the directors present (though less than such
quorum) may adjourn the meeting from time to time without further notice.
3.5 Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors,
10
unless the act of a greater number is required by law or by the Articles of
Incorporation or these By-Laws.
3.6 Conduct of Meetings. The Chairman of the Board, and in his
absence, any director chosen by the directors present, shall call meetings of
the Board of Directors to order and shall act as chairman of the meeting. The
Secretary of the Corporation shall act as secretary of all meetings of the Board
of Directors but in the absence of the Secretary, the presiding officer may
appoint any Assistant Secretary or any director or other persons present to act
as secretary of the meeting.
3.7 Vacancies. Except as otherwise provided in the Articles of
Incorporation, any vacancy occurring in the Board of Directors, including a
vacancy created by an increase in the number of directors, shall be filled until
the next succeeding annual election by the affirmative vote of a majority of the
directors then in office, though less than a quorum of the Board of Directors;
provided, that in case of a vacancy created by the removal of a director by vote
of the shareholders, the shareholders shall have the right to fill such vacancy
at the same meeting or any adjournment thereof in accordance with the Articles
of Incorporation.
3.8 Compensation. The Board of Directors, by affirmative vote
of a majority of the directors then in office, and irrespective of any personal
interest of any of its members, may establish reasonable compensation of all
directors for services to the Corporation as directors, officers or otherwise,
or may delegate such authority to an appropriate committee. The Board of
Directors also shall have authority to provide for or delegate authority to an
appropriate committee to provide for reasonable pensions, disability or death
benefits, and other benefits or payments, to directors, officers and employees
and to their estates, families, dependents or beneficiaries on account of prior
services rendered by such directors, officers and employees to the Corporation.
3.9 Presumption of Assent. A director of the Corporation who
is present at a meeting of the Board of Directors or a committee thereof of
which he is a member at which action on any corporate matter is taken shall be
presumed to have assented to the action taken unless his
11
dissent shall be entered in the minutes of the meeting or unless he shall file
his written dissent to such action with the person acting as the secretary of
the meeting before the adjournment thereof or shall forward such dissent by
registered mail to the Secretary of the Corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply to a director
who voted in favor of such action.
3.10 Committees. The Board of Directors by resolution adopted
by the affirmative vote of a majority of the number of directors then in office
may designate one or more committees, each committee to consist of three or more
directors elected by the Board of Directors, which, to the extent provided in
said resolution as initially adopted, and as thereafter supplemented or amended
by further resolution adopted by a like vote, shall have and may exercise, when
the Board of Directors is not in session, the powers of the Board of Directors
in the management of the business and affairs of the Corporation, except action
in respect to dividends to shareholders, election of the principal officers or
the filling of vacancies in the Board of Directors or committees created
pursuant to this section. The Board of Directors may elect one or more of its
members as alternate members of any such committee who may take the place of any
absent member or members at any meeting of such committee, upon request by the
Chairman of the Board or upon request by the chairman of such meeting. Each such
committee shall fix its own rules governing the conduct of its activities and
shall make such reports to the Board of Directors of its activities as the Board
of Directors may request.
3.11 Unanimous Consent Without Meeting. Any action required or
permitted by the Articles of Incorporation or By-Laws or any provision of law to
be taken by the Board of Directors at a meeting or by resolution may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the directors then in office.
3.12 Telephonic Meetings. Unless otherwise provided by the
Certificate of Incorporation or these By-Laws, members of the Board of Directors
of the Corporation, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Direc-
12
tors or such committee by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
Section 3.14 shall constitute presence in person at such meeting.
ARTICLE IV. OFFICERS
4.1 Number. The principal officers of the Corporation shall be
a Chairman of the Board, a President, a number of Vice Presidents as shall be
determined by the Board of Directors from time to time, a Secretary, and a
Treasurer, each of whom shall be elected by the Board of Directors. The Board of
Directors may from time to time elect or appoint such officers and assistant
officers as may be deemed necessary. Any number of offices may be held by the
same person.
4.2 Election and Term of Office. The officers of the
Corporation to be elected by the Board of Directors shall be elected annually by
the Board of Directors at the first meeting of the Board of Directors held after
each annual meeting of the shareholders. If the election of officers shall not
be held at such meeting, such election shall be held as soon thereafter as
conveniently may be. Each officer shall hold office until his successor shall be
duly elected or until his prior death, resignation or removal. Any officer may
resign at any time upon written notice to the Corporation. Failure to elect
officers shall not dissolve or otherwise affect the Corporation.
4.3 Removal. Any officer or agent may be removed by the Board
of Directors at any time by the affirmative vote of a majority of the Board of
Directors, but such removal shall be without prejudice to the contract rights,
if any, of the person so removed. Election or appointment shall not of itself
create contract rights.
4.4 Vacancies. A vacancy in any principal office because of
death, resignation, removal, disqualification or otherwise, shall be filled by
the Board of Directors for the unexpired portion of the term.
4.5 Chairman of the Board. The Chairman of the Board shall be
elected or appointed by, and from the
13
membership of the Board of Directors. He shall, when present, preside at all
meetings of the shareholders and of the Board of Directors. He shall perform
such other duties and functions as shall be assigned to him from time to time by
the Board of Directors or in these By-Laws. Except where by law the signature of
the President of the Corporation is required, the Chairman of the Board shall
possess the same power and authority to sign, execute and acknowledge, on behalf
of the Corporation, all deeds, mortgages, bonds, stock certificates, contracts,
leases, reports and all other documents or instruments necessary or proper to be
executed in the course of the Corporation's regular business, or which shall be
authorized by resolution of the Board of Directors; and except as otherwise
provided by law or by the Board of Directors, he may authorize the President or
any Vice President or other officer or agent of the Corporation to sign, execute
and acknowledge such documents or instruments in his place and stead. During the
absence or disability of the President, or while that office is vacant, the
Chairman of the Board shall exercise all of the powers and discharge all of the
duties of the President.
4.6 President. The President shall be the chief executive
officer and chief operations officer of the Corporation and, subject to the
control of the Board of Directors, shall in general determine the direction and
goals of the Corporation and supervise and control all of the business,
operations and affairs of the Corporation. He shall have authority, subject to
such rules as may be prescribed by the Board of Directors, to appoint such
agents and employees of the Corporation as he may deem necessary, to prescribe
their powers, duties and compensation, and to delegate authority to them. Such
agents and employees shall hold office at the discretion of the President. He
shall have authority, co-equal with the Chairman of the Board, to sign, execute
and acknowledge, on behalf of the Corporation, all deeds, mortgages, bonds,
stock certificates, contracts, leases, reports and all other documents or
instruments necessary or proper to be executed in the course of the
Corporation's regular business, or which shall be authorized by resolution of
the Board of Directors; and, except as otherwise provided by law or by the Board
of Directors, he may authorize any Vice President or any other officer or agent
of the Corporation to sign, execute and acknowledge such docu-
14
ments or instruments in his place and stead. In general, he shall perform all
duties incident to the office of chief executive officer, chief operating
officer and President and such other duties as may be prescribed by the Board of
Directors from time to time.
4.7 Vice Presidents. In the absence of the Chairman of the
Board and the President or in the event of their deaths, inability or refusal to
act, or in the event for any reason it shall be impracticable for the Chairman
of the Board or President to act personally, the Vice President (or in the event
thereby more than one Vice President, the Vice Presidents in the order
designated by the Board of Directors, or in the absence of any designation, then
in the order of their election) shall perform the duties of the Chairman of the
Board and/or President (as the case may be), and when so acting, shall have all
the powers of and be subject to all the restrictions upon the Chairman of the
Board or President (as the case may be). Any Vice President may sign, with the
Secretary or Assistant Secretary, certificates for shares of the Corporation;
and shall perform such other duties and have such authority as from time to time
may be delegated or assigned to him by the Chairman of the Board, President or
Board of Directors. The execution of any instrument of the Corporation by any
Vice President shall be conclusive evidence, as to third parties, of his
authority to act in the stead of the Chairman of the Board and/or the President.
4.8 Secretary. The Secretary shall: (a) keep the minutes of
the meeting of the shareholders and the Board of Directors in one or more books
provided for that purpose; (b) attest instruments to be filed with the Secretary
of State; (c) see that all notices are duly given in accordance with the
provisions of these By-Laws or as required by law; (d) be custodian of the
corporate records; (e) keep or arrange for the keeping of a register of the post
office address of each shareholder which shall be furnished to the Secretary by
such shareholders; (f) sign with the Chairman of the Board or the President,
certificates for shares of the Corporation, the issuance of which shall have
been authorized by resolution of the Board of Directors; (g) have general charge
of the stock transfer books of the Corporation; and (h) in general perform all
duties incident to the office of the Secretary and have such other duties and
exercise such author-
15
ity as from time to time may be delegated or assigned to him by the Chairman of
the Board, the President or by the Board of Directors.
4.9 Treasurer. The Treasurer shall: (a) have charge and
custody of and be responsible for all funds and securities of the Corporation;
(b) receive and give receipts from moneys due and payable to the Corporation
from any source whatsoever, and deposit all such moneys in the name of the
Corporation in such banks, trust companies or other depositories as shall be
selected by the Corporation; and (c) in general perform all of the duties and
exercise such other authority as from time to time may be delegated or assigned
to him by the Chairman of the Board, the Vice Chairman of the Board or the
President or by the Board of Directors. If required by the Board of Directors,
the Treasurer shall give a bond for the faithful discharge of his duties in such
sum and with such surety or sureties as the Board of Directors shall determine.
4.10 Assistant Secretaries and Assistant Treasurers. There
shall be such number of Assistant Secretaries and Assistant Treasurers as the
Board of Directors may from time to time authorize. The Assistant Secretaries
may sign with the Chairman of the Board or the President certificates for shares
of the Corporation the issuance of which shall have been authorized by a
resolution of the Board of Directors. The Assistant Treasurers shall
respectively, if required by the Board of Directors, give bonds for the faithful
discharge of their duties in such sums and with such sureties as the Board of
Directors shall determine. The Assistant Secretaries and Assistant Treasurers,
in general, shall perform such duties and have such authority as shall from time
to time be delegated or assigned to them by the Secretary or the Treasurer,
respectively, or by the Chairman of the Board, the President or by the Board of
Directors.
4.11 Other Assistants; Acting Officers; Other Officers. The
Board of Directors shall have the power to appoint any person to act as
assistant to any officer, or as agent for the Corporation in his stead, or to
perform the duties of such officer whenever for any reason it is impracticable
for such officer to act personally, and such assistant or acting officer or
other agent so ap-
16
pointed by the Board of Directors shall have the power to perform all the duties
of the office to which he is so appointed to be an assistant, or as to which he
is so appointed to act, except as such power may be otherwise defined or
restricted by the Board of Directors. Such other officers as the Board of
Directors may choose shall perform such duties and have such powers as from time
to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and powers.
4.12 Salaries. The salaries of the principal officers shall be
fixed from time to time by the Board of Directors or by a duly authorized
committee thereof, and no officer shall be prevented from receiving such salary
by reason of the fact that he is also a director of the Corporation.
ARTICLE V. CONTRACTS; SPECIAL CORPORATE ACTS
5.1 Contracts. The Board of Directors may authorize any
officer or officers, agent or agents, to enter into any contract or execute or
deliver any instrument in the name of and on behalf of the Corporation, and such
authorization may be general or confined to specific instances. In the absence
of other designation, all deeds, mortgages and instruments of assignment or
pledge made by the Corporation shall be executed in the name of the Corporation
by the Chairman of the Board or the President or one of the Vice Presidents and
by the Secretary, an Assistant Secretary, the Treasurer or an Assistant
Treasurer; and when so executed no other party to such instrument or any third
party shall be required to make any inquiry into the authority of the signing
officer or officers.
5.2 Voting of Securities Owned by this Corporation. Powers of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the President or any Vice President and any
such officer may, in the name of and on behalf of the Corporation, take all such
action as any such officer may deem advisable to vote in person or by proxy at
any meeting of security
17
holders of any corporation in which the Corporation may own securities and at
any such meeting shall possess and may exercise any and all rights and power
incident to the ownership of such securities and which, as the owner thereof,
the Corporation might have exercised and possessed if present. The Board of
Directors may, by resolution, from time to time confer like powers upon any
other person or persons.
ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 Certificates for Shares. Certificates representing shares
of the Corporation shall be in such form, consistent with law, as shall be
determined by the Board of Directors. Such certificates shall be signed by the
Chairman of the Board and by the Secretary or an Assistant Secretary. All
certificates for shares shall be consecutively numbered or otherwise identified.
The name and address of the person to whom the shares represented thereby are
issued, with the number of shares and date of issue, shall be entered on the
stock transfer books of the Corporation. All certificates surrendered to the
Corporation for transfer shall be cancelled and no new certificate shall be
issued until the former certificate for a like number of shares shall have been
surrendered and cancelled, except as provided in Section 6.6.
6.2 Facsimile Signatures and Seal. The signature of the
Chairman of the Board and the Secretary or Assistant Secretary upon a
certificate may be facsimiles if the certificate is manually signed on behalf of
a transfer agent, or a registrar, other than the Corporation itself or an
employee of the Corporation. The Corporation shall have a corporate seal.
6.3 Signature by Former Officers. In case any officer, who has
signed or whose facsimile signature has been placed upon any certificate for
shares, shall have ceased to be such officer before such certificate is issued,
it may be issued by the Corporation with the same effect as if he were such
officer at the date of its issue.
6.4 Transfer of Shares. Prior to due presentment of a
certificate for shares for registration of transfer, the Corporation may treat
the registered owner of such shares as the person exclusively entitled to
18
vote, to receive notifications and otherwise to have and exercise all the rights
and powers of an owner. Where a certificate for shares is presented to the
Corporation with a request to register for transfer, the Corporation shall not
be liable to the owner or any other person suffering loss as a result of such
registration of transfer if (a) there were on or with the certificate the
necessary endorsements, and (b) the Corporation had no duty to inquire into
adverse claims or has discharged any such duty. The Corporation may require
reasonable assurance that said endorsements are genuine and effective and in
compliance with such other regulations as may be prescribed by or under the
authority of the Board of Directors.
6.5 Lost, Destroyed or Stolen Certificates. Where the owner
claims that his certificate for shares has been lost, destroyed or wrongfully
taken, a new certificate shall be issued in place thereof if the owner (a) so
requests before the Corporation has notice that such shares have been acquired
by a bona fide purchaser, and (b) files with the Corporation a sufficient
indemnity bond, and (c) satisfies such other reasonable requirements as may be
prescribed by or under the authority of the Board of Directors.
6.6 Consideration for Shares. The shares of the Corporation
may be issued for such consideration as shall be fixed from time to time by the
Board of Directors, provided that any shares having a par value shall not be
issued for a consideration less than the par value thereof. The consideration to
be paid for shares may be paid in whole or in part, in money, in other property,
tangible or intangible, or in labor or services actually performed for the
Corporation. When payment of the consideration for which shares are to be issued
shall have been received by the Corporation, such shares shall be deemed to be
fully paid and nonassessable by the Corporation. No certificate shall be issued
for any share until such share is fully paid.
6.7 Stock Regulations. The Board of Directors shall have the
power and authority to make all such further rules and regulations not
inconsistent with the statutes of the State of Wisconsin as it may deem
expedient concerning the issue, transfer and registration of certificates
representing shares of the Corporation.
19
ARTICLE VII. AMENDMENTS
7.1 By Shareholders. Except as otherwise provided in the
Articles of Incorporation, these By-Laws may be altered, amended or repealed and
new By-Laws may be adopted by the shareholders by affirmative vote of not less
than a majority of the votes represented in person or by proxy entitled to be
cast therefor at any annual or special meeting of the shareholders at which a
quorum is in attendance.
7.2 By Directors. Except as otherwise provided in the Articles
of Incorporation, these By-Laws may also be altered, amended or repealed and new
By-Laws may be adopted by the Board of Directors by affirmative vote of a
majority of the number of directors present at any meeting at which a quorum is
in attendance; but no By-Law adopted by the shareholders shall be amended or
repealed by the Board of Directors if the By-Law so adopted so provides.
7.3 Implied Amendments. Any action taken or authorized by the
shareholders or by the Board of Directors, which would be inconsistent with the
By-Laws then in effect but is taken or authorized by affirmative vote of not
less than the number of shares or the number of directors required to amend the
By-Laws so that the By-Laws would be consistent with such action, shall be given
the same effect as though the By-Laws had been temporarily amended or suspended
so far, but only so far, as is necessary to permit the specific action so taken
or authorized.
ARTICLE VIII. INDEMNIFICATION
8.1 Certain Definitions. All capitalized terms used in this
Article VIII and not otherwise hereinafter defined in this Section 8.1 shall
have the meaning set forth in Section 180.042 of the Statute. The following
capitalized terms (including any plural forms thereof) used in this Article VIII
shall be defined as follows:
(a) "Affiliate" shall include, without limitation,
any corporation, partnership, joint venture, employee benefit plan, trust or
other enterprise that directly or indirectly through one or more interme-
20
diaries, controls or is controlled by, or is under common control with, the
Corporation.
(b) "Authority" shall mean the entity selected by the
Director or Officer to determine his or her right to indemnification pursuant to
Section 8.4.
(c) "Board" shall mean the entire then elected and
serving board of directors of the Corporation, including all members thereof who
are Parties to the subject Proceeding or any related Proceeding.
(d) "Breach of Duty" shall mean the Director or
Officer breached or failed to perform his or her duties to the Corporation and
his or her breach of or failure to perform those duties is determined, in
accordance with Section 8.4, to constitute misconduct under Section
180.044(2)(a) 1, 2, 3 or 4 of the Statute.
(e) "Corporation" as used herein and as defined in
the Statute and incorporated by reference into the definitions of certain other
capitalized terms used herein, shall mean this Corporation, including, without
limitation, any successor corporation or entity to this Corporation by way of
merger, consolidation or acquisition of all or substantially all of the capital
stock or assets of this Corporation.
(f) "Director or Officer" shall have the meaning set
forth in the Statute; provided, that, for purposes of this Article VIII, it
shall be conclusively presumed that any Director or Officer serving as a
director, officer, partner, trustee, member of any governing or decision-making
committee, employee or agent of an Affiliate shall be so serving at the request
of the Corporation.
(g) "Disinterested Quorum" shall mean a quorum of the
Board who are not Parties to the subject Proceeding or any related Proceeding.
(h) "Party" shall have the meaning set forth in the
Statute; provided, that, for purposes of this Article VIII, the term "Party"
shall also include any Director or Officer who is or was a witness in a
Proceeding at a time when he or she has not otherwise been formally named a
Party thereto.
21
(i) "Proceeding" shall have the meaning set forth in
the Statute; provided, that, for purposes of this Article VIII, the term
"Proceeding" shall also include all Proceedings (i) brought under (in whole or
in part) the Securities Act of 1933, as amended, the Securities Exchange Act of
1934, as amended, their respective state counterparts, and/or any rule or
regulation promulgated under any of the foregoing; (ii) brought before an
Authority or otherwise to enforce rights hereunder; (iii) any appeal from a
Proceeding; and (iv) any Proceeding in which the Director or Officer is a
plaintiff or petitioner because he or she is a Director or Officer; provided,
however, that such Proceeding is authorized by a majority vote of a
Disinterested Quorum.
(j) "Statute" shall mean Sections 180.042 through
180.059, inclusive, of the Wisconsin Business Corporation Law, Chapter 180 of
the Wisconsin Statutes, as the same shall then be in effect, including any
amendments thereto, but, in the case of any such amendment, only to the extent
such amendment permits or requires the Corporation to provide broader
indemnification rights than the Statute permitted or required the Corporation to
provide prior to such amendment.
8.2 Mandatory Indemnification. To the fullest extent permitted
or required by the Statute, the Corporation shall indemnify a Director or
Officer against all Liabilities incurred by or on behalf of such Director or
Officer in connection with a Proceeding in which the Director or Officer is a
Party because he or she is a Director or Officer.
8.3 Procedural Requirements.
(a) A Director or Officer who seeks indemnification
under Section 8.2 shall make a written request therefor
to the Corporation. Subject to Section 8.3(b), within sixty days of the
Corporation's receipt of such request, the Corporation shall pay or reimburse
the Director or Officer for the entire amount of Liabilities incurred by the
Director or Officer in connection with the subject Proceeding (net of any
Expenses previously advanced pursuant to Section 8.5).
(b) No indemnification shall be required to be paid
by the Corporation pursuant to Sec-
22
tion 8.2 if, within such sixty-day period, (i) a Disinterested Quorum, by a
majority vote thereof, determines that the Director or Officer requesting
indemnification engaged in misconduct constituting a Breach of Duty or (ii) a
Disinterested Quorum cannot be obtained.
(c) In either case of nonpayment pursuant to Section
8.3(b), the Board shall immediately authorize by resolution that an Authority,
as provided in Section 8.4, determine whether the Director's or Officer's
conduct constituted a Breach of Duty and, therefore, whether indemnification
should be denied hereunder.
(d) (i) If the Board does not authorize an Authority
to determine the Director's or Officer's right to indemnification hereunder
within such sixty-day period and/or (ii) if indemnification of the requested
amount of Liabilities is paid by the Corporation, then it shall be conclusively
presumed for all purposes that a Disinterested Quorum has determined that the
Director or Officer did not engage in misconduct constituting a Breach of Duty
and, in the case of subsection (i) above (but not subsection (ii)),
indemnification by the Corporation of the requested amount of Liabilities shall
be paid to the Director or Officer immediately.
8.4 Determination of Indemnification.
(a) If the Board authorizes an Authority to determine
a Director's or Officer's right to indemnification pursuant to Section 8.3, then
the Director or Officer requesting indemnification shall have the absolute
discretionary authority to select one of the following as such Authority:
(i) An independent legal counsel;
provided, that such counsel shall be mutually selected by such Director
or Officer and by a majority vote of a Disinterested Quorum or, if a
Disinterested Quorum cannot be obtained, then by a majority vote of the
Board;
(ii) A panel of three arbitrators selected
from the panels of arbitrators of the American Arbitration Association
in Madison, Wisconsin; provided, that (A) one arbitrator shall be
selected by such Director
23
or Officer, the second arbitrator shall be selected by a majority vote
of a Disinterested Quorum or, if a Disinterested Quorum cannot be
obtained, then by a majority vote of the Board, and the third
arbitrator shall be selected by the two previously selected
arbitrators, and (B) in all other respects, such panel shall be
governed by the American Arbitration Association's then existing
Commercial Arbitration Rules; or
(iii) A court pursuant to and in
accordance with Section 180.051 of the Statute.
(b) In any such determination by the selected
Authority there shall exist a rebuttable presumption that the Director's or
Officer's conduct did not constitute a Breach of Duty and that indemnification
against the requested amount of Liabilities is required. The burden of rebutting
such a presumption by clear and convincing evidence shall be on the Corporation
or such other party asserting that such indemnification should not be allowed.
(c) The Authority shall make its determination within
sixty days of being selected and shall submit a written opinion of its
conclusion simultaneously to both the Corporation and the Director or Officer.
(d) If the Authority determines that indemnification
is required hereunder, the Corporation shall pay the entire requested amount of
Liabilities (net of any Expenses previously advanced pursuant to Section 8.5),
including interest thereon at a reasonable rate, as determined by the Authority,
within ten days of receipt of the Authority's opinion; provided, that, if it is
determined by the Authority that a Director or Officer is entitled to
indemnification as to some claims, issues or matters, but not as to other
claims, issues or matters, involved in the subject Proceeding, the Corporation
shall be required to pay (as set forth above) only the amount of such requested
Liabilities as the Authority shall deem appropriate in light of all of the
circumstances of such Proceeding.
24
(e) The determination by the Authority that
indemnification is required hereunder shall be binding upon the Corporation
regardless of any prior determination that the Director or Officer engaged in a
Breach of Duty.
(f) All Expenses incurred in the determination
process under this Section 8.4 by either the Corporation or the Director or
Officer, including, without limitation, all Expenses of the selected Authority,
shall be paid by the Corporation.
8.5 Mandatory Allowance of Expenses.
(a) The Corporation shall pay or reimburse, within
ten days after the receipt of the Director's or Officer's written request
therefor, the reasonable Expenses of the Director or Officer as such Expenses
are incurred; provided, the following conditions are satisfied:
(i) The Director or Officer furnishes to
the Corporation an executed written certificate affirming his or her
good faith belief that he or she has not engaged in misconduct which
constitutes a Breach of Duty; and
(ii) The Director or Officer furnishes to
the Corporation an unsecured executed written agreement to repay any
advances made under this Section 8.5 if it is ultimately determined by
an Authority that he or she is not entitled to be indemnified by the
Corporation for such Expenses pursuant to Section 8.4.
(b) If the Director or Officer must repay any
previously advanced Expenses pursuant to this Section 8.5, such Director or
Officer shall not be required to pay interest on such amounts.
8.6 Indemnification and Allowance of Expenses of Certain
Others.
(a) The Corporation shall indemnify a director or
officer of an Affiliate (who is not otherwise serving as a Director or Officer)
against all Liabilities, and shall advance the reasonable Expenses,
25
incurred by such director or officer in a Proceeding to the same extent
hereunder as if such director or officer incurred such Liabilities because he or
she was a Director or Officer, if such director or officer is a Party thereto
because he or she is or was a director or officer of the Affiliate.
(b) The Board may, in its sole and absolute
discretion as it deems appropriate, pursuant to a majority vote thereof,
indemnify against Liabilities incurred by, and/or provide for the allowance of
reasonable Expenses of, an employee or authorized agent of the Corporation
acting within the scope of his or her duties as such and who is not otherwise a
Director or Officer.
8.7 Insurance. The Corporation may purchase and maintain
insurance on behalf of a Director or Officer or any individual who is or was an
employee or authorized agent of the Corporation against any Liability asserted
against or incurred by such individual in his or her capacity as such or arising
from his or her status as such, regardless of whether the Corporation is
required or permitted to indemnify against any such Liability under this Article
VIII.
8.8 Notice to the Corporation. A Director or Officer shall
promptly notify the Corporation in writing when he or she has actual knowledge
of a Proceeding which may result in a claim of indemnification against
Liabilities or allowance of Expenses hereunder, but the failure to do so shall
not relieve the Corporation of any liability to the Director or Officer
hereunder unless the Corporation shall have been irreparably prejudiced by such
failure (as determined by an Authority selected pursuant to Section 8.4(a)).
8.9 Severability. If any provision of this Article VIII
shall be deemed invalid or inoperative, or if a court of competent jurisdiction
determines that any of the provisions of this Article VIII contravene public
policy, this Article VIII shall be construed so that the remaining provisions
shall not be affected, but shall remain in full force and effect, and any such
provisions which are invalid or inoperative or which contravene public policy
shall be deemed, without further action or deed by or on behalf of the
Corporation, to be modified,
26
amended and/or limited, but only to the extent necessary to render the same
valid and enforceable.
8.10 Nonexclusivity of Article VIII. The rights of a
Director or Officer (or any other person) granted under this Article VIII shall
not be deemed exclusive of any other rights to indemnification against
Liabilities or advancement of Expenses which the Director or Officer (or such
other person) may be entitled to under any written agreement, Board resolution,
vote of shareholders of the Corporation or otherwise, including, without
limitation, under the Statute. Nothing contained in this Article VIII shall be
deemed to limit the Corporation's obligations to indemnify against Liabilities
or advance Expenses to a Director or Officer under the Statute.
8.11 Contractual Nature of Article VIII; Repeal or
Limitation of Rights. This Article VIII shall be deemed to be a contract between
the Corporation and each Director and Officer and any repeal or other limitation
of this Article VIII or any repeal or limitation of the Statute or any other
applicable law shall not limit any rights of indemnification against Liabilities
or allowance of Expenses then existing or arising out of events, acts or
omissions occurring prior to such repeal or limitation, including, without
limitation, the right to indemnification against Liabilities or allowance of
Expenses for Proceedings commenced after such repeal or limitation to enforce
this Article VIII with regard to acts, omissions or events arising prior to such
repeal or limitation.
27
The Board of Directors
Rayovac Corporation
We consent to incorporation by reference in the registration statements
(Nos. 333-39239, 333-42443, 333-41815) on Form S-8 of Rayovac Corporation of our
reports dated October 28, 1997, relating to the consolidated balance sheet of
Rayovac Corporation and subsidiaries as of September 30, 1997, and the related
consolidated statements of operations, shareholders' deficit, and cash flows for
the year ended September 30, 1997, and related schedule, which reports appear in
the September 30, 1997 annual report on Form 10-K of Rayovac Corporation.
/s/ KPMG Peat Marwick LLP
Milwaukee, Wisconsin
December 19, 1997
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Annual Report on Form 10-K of our
report dated November 22, 1996, on our audits of the consolidated financial
statements of Rayovac Corporation as of September 30, 1996 and June 30, 1996,
and for the period July 1, 1996 to September 30, 1996 and each of the two years
in the period ended June 30, 1996.
/s/ Coopers & Lybrand L.L.P.
Milwaukee, Wisconsin
December 22, 1997
