UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 1, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number 001-13615 --------- Rayovac Corporation -------------------------- (Exact name of registrant as specified in its charter) Wisconsin 22-2423556 ----------------------- ------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 601 Rayovac Drive, Madison, Wisconsin 53711 ----------------------------------------- (Address of principal executive offices) (Zip Code) (608) 275-3340 -------------------------------------------- (Registrant's telephone number, including area code) Not Applicable -------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ( X ) No ( ) The number of shares outstanding of the Registrant's common stock, $.01 par value, as of August 1, 2001, was 32,038,821.
RAYOVAC CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS July 1, 2001 and September 30, 2000 (Unaudited) (In thousands) JULY 1, 2001 SEPTEMBER 30, 2000 --------------------- ------------------------ -ASSETS- Current assets: Cash and cash equivalents $ 10,260 $ 9,757 Receivables 153,720 153,667 Inventories 92,313 100,676 Prepaid expenses and other 37,868 27,070 --------------------- ------------------------ Total current assets 294,161 291,170 Property, plant and equipment, net 108,013 111,897 Deferred charges and other, net 39,994 43,835 Intangible assets, net 119,418 122,114 --------------------- ------------------------ Total assets $ 561,586 $ 569,016 ===================== ======================== -LIABILITIES AND SHAREHOLDERS' EQUITY - Current liabilities: Current maturities of long-term debt $ 25,075 $ 44,815 Accounts payable 98,441 97,857 Accrued liabilities: Wages and benefits and other 30,515 42,830 Recapitalization and other special charges 4,931 978 ---------------------- ------------------------ Total current liabilities 158,962 186,480 Long-term debt, net of current maturities 217,816 272,815 Employee benefit obligations, net of current portion 16,345 15,365 Other 12,480 13,660 ---------------------- ------------------------ Total liabilities 405,603 488,320 Shareholders' equity: Commonstock, $.01 par value, authorized 150,000 shares; issued 61,574 and 57,101 shares, respectively; outstanding 32,038 and and 27,570 shares, respectively 616 571 Additional paid-in capital 181,019 104,197 Retained earnings 113,531 108,450 Accumulated other comprehensive (loss) income (1,889) 650 Notes receivable from officers/shareholders (3,665) (3,190) -------------------- ----------------------- 289,612 210,678 Less Treasury stock, at cost, 29,536 and 29,531 shares, respectively (130,070) (129,982) Less: Unearned restricted stock compensation (3,559) - -------------------- ----------------------- Total shareholders' equity 155,983 80,696 -------------------- ----------------------- Total liabilities and shareholders' equity $ 561,586 $ 569,016 ==================== ======================= 2
RAYOVAC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the three and nine month periods ended July 1, 2001 and July 2, 2000 (Unaudited) (In thousands) THREE MONTHS NINE MONTHS ---------------------------------- ---------------------------- 2001 2000 2001 2000 ----------------- -------------- ------------- -------------- Net sales $ 159,132 $ 150,351 487,883 $ 501,839 Cost of goods sold 81,951 77,302 249,260 260,863 Special charges 2,279 - 18,539 - ----------------- -------------- ------------- -------------- Gross profit 74,902 73,049 220,084 240,976 Selling 42,757 37,592 137,463 132,238 General and administrative 9,893 13,109 33,912 38,395 Research and development 2,990 2,580 9,010 7,872 Other special charges 300 - 300 - ----------------- -------------- ------------- -------------- Total operating expenses 55,940 53,281 180,685 178,505 Income from operations 18,962 19,768 39,399 62,471 Interest expense 7,017 7,727 22,391 22,979 Other (income) expense, net (180) (387) 953 33 ----------------- -------------- ------------- -------------- Income before income taxes and extraordinary item 12,125 12,428 16,055 39,459 Income tax expense 4,053 4,350 5,624 13,811 ----------------- -------------- ------------- -------------- Income before extraordinary item 8,072 8,078 10,431 25,648 Extraordinary item, loss on early extinguishment of debt, net of income tax benefit of $3,279 (5,350) - (5,350) - ----------------- -------------- ------------- -------------- Net Income $ 2,722 $ 8,078 $ 5,081 $ 25,648 ================= ============== ============= ============== BASIC EARNINGS PER SHARE Weighted average shares and equivalents outstanding 28,080 27,511 27,743 27,497 Income before extraordinary item $ 0.29 $ 0.29 $ 0.38 $ 0.93 Extraordinary item (0.19) - (0.20) - ----------------- -------------- ------------- -------------- Net income $ 0.10 $ 0.29 $ 0.18 $ 0.93 ================= ============== ============= ============== DILUTED EARNINGS PER SHARE Weighted average shares and equivalents outstanding 29,128 29,044 28,776 29,069 Income before extraordinary item $ 0.28 $ 0.28 $ 0.36 $ 0.88 Extraordinary item (0.19) - (0.18) - ----------------- -------------- ------------- -------------- Net income $ 0.09 $ 0.28 $ 0.18 $ 0.88 ================= ============== ============= ============== SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS. 3
RAYOVAC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine month periods ended July 1, 2001 and July 2, 2000 (Unaudited) (In thousands) NINE MONTHS -------------------------------------------------- 2001 2000 ---------------- ---------------- Cash flows from operating activities: Net income $ 5,081 $ 25,648 Non-cash adjustments to net income: Extraordinary item, loss on early retirement of debt 8,628 - Amortization 4,329 4,795 Depreciation 12,849 11,954 Other non-cash adjustments 4,685 4,690 Net changes in assets and liabilities (7,956) (16,021) ---------------- ---------------- Net cash provided by operating activities 27,616 31,066 Cash flows from investing activities: Purchases of property, plant and equipment (15,215) (12,452) Purchases of investments (799) - Proceeds from sale of investments 1,361 - Proceeds from sale of property, plant and equipment 509 407 ---------------- ---------------- Net cash used by investing activities (14,144) (12,045) Cash flows from financing activities: Reduction of debt (320,619) (150,663) Early retirement of debt (69,693) - Proceeds from debt financing 310,601 130,395 Issuance of common stock 67,781 181 Other (1,246) (912) ---------------- ---------------- Net cash used by financing activities (13,176) (20,999) Effect of exchange rate changes on cash and cash equivalents 207 (158) ---------------- ---------------- Net increase in cash and cash equivalents 503 (2,136) Cash and cash equivalents, beginning of period 9,757 11,065 ---------------- ---------------- Cash and cash equivalents, end of period $ 10,260 $ 8,929 ================ ================= SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS. 4
RAYOVAC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1 SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: These financial statements have been prepared by Rayovac Corporation (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") and, in the opinion of the Company, include all adjustments (which are normal and recurring in nature) necessary to present fairly the financial position of the Company at July 1, 2001, results of operations for the three and nine month periods ended July 1, 2001, and July 2, 2000, and cash flows for the nine month periods ended July 1, 2001 and July 2, 2000. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto as of September 30, 2000. Certain prior year amounts have been reclassified to conform with the current year presentation. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS: In January 2001, the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) reached a consensus on Issue 3 of EITF 00-22, "Accounting for "Points" and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future". Issue 3 addresses the recognition, measurement, and income statement classification for offers to a customer to rebate or refund a specified amount of cash that may be redeemed if the customer completes a specified volume of transactions. The consensus was effective for quarters ending after February 15, 2001. The Company adopted the consensus reached on Issue 3, in the second fiscal quarter of 2001. The adoption and subsequent restatement of the Fiscal 2000 three and nine month periods resulted in the reclassification of certain selling expenses as a reduction in revenue of $1,649 and $7,547, respectively. The reclassifications had no impact on pre-tax income, net income, or earnings per share. DERIVATIVE FINANCIAL INSTRUMENTS: Derivative financial instruments are used by the Company principally in the management of its interest rate, foreign currency and raw material price exposures. The Company does not hold or issue derivative financial instruments for trading purposes. The Company uses interest rate swaps to manage its interest rate risk. The swaps are designated as cash flow hedges with the fair value recorded in Other Comprehensive Income ("OCI") and as a hedge asset or liability, as applicable. The swaps settle periodically in arrears with the related amounts for the current settlement period payable to, or receivable from, the counter-parties included in accrued liabilities or accounts receivable and recognized in earnings as an adjustment to interest expense from the underlying debt to which the swap is designated. During the three and nine month periods ended July 1, 2001, $326 and $368, respectively, of pretax derivative losses from such hedges were recorded as an adjustment to interest expense. At July 1, 2001, the Company had a series of interest rate swap agreements outstanding which effectively fix the interest rate on floating rate debt at a rate of 6.404% for a notional principal amount of $75,000 through October 2002 and a series of interest rate swap agreements outstanding which effectively fix the interest rate on floating rate debt at a rate of 4.99% for a notional principal amount of $25,000 through December 2001. The derivative net losses on these contracts recorded in OCI at July 1, 2001 was an after-tax loss of $1,310. The Company enters into forward and swap foreign exchange contracts, to hedge the risk from forecasted settlement in local currencies of intercompany purchases and sales, trade sales, and trade purchases. These contracts generally require the Company to exchange foreign currencies for U.S. dollars or Pounds Sterling. These contracts are designated as cash flow hedges with the fair value recorded in OCI and as a hedge asset or liability, as applicable. Once the forecasted transaction has been recognized as a purchase or sale and a related liability or asset recorded in the balance sheet, the gain or loss on the related derivate hedge contract is 5
reclassified from OCI into earnings as an offset to the change in value of the liability or asset. During the three and nine month periods ended July 1, 2001, $56 and $3, respectively, of pretax derivative gains were recorded as an adjustment to earnings for cash flow hedges related to an asset or liability. During the three and nine month periods ended July 1, 2001, $327 and $908, respectively, of pretax derivative losses were recorded as an adjustment to earnings for forward and swap contracts settled at maturity. At July 1, 2001, the Company had a series of forward and swap contracts outstanding with a contract value of $4,485. The derivative net gain on these contracts recorded in OCI at July 1, 2001 was an after-tax gain of $56. The Company periodically enters into forward foreign exchange contracts, to hedge the risk from changes in fair value from unrecognized firm purchase commitments. These firm purchase commitments generally require the Company to exchange U.S. dollars for foreign currencies. These hedge contracts are designated as fair value hedges with the fair value recorded in earnings on a pretax basis and as a hedge asset or liability, as applicable. To the extent effective, changes in the value of the forward contracts recorded in earnings will be offset by changes in the value of the hedged item, also recorded in earnings on a pretax basis and as an asset or liability, as applicable. Once the firm purchase commitment has been consummated, the firm commitment asset or liability balance will be reclassified as an addition to or subtraction from, the carrying value of the purchased asset. The Company has entered into a series of forward contracts for the period July 2001 through October 2001 to hedge the exposure from a firm commitment to purchase certain battery manufacturing equipment denominated in Japanese Yen. During the three and nine month periods ended July 1, 2001, $433 of pretax derivative gains and $289 of pretax derivative losses, respectively, were recorded as an adjustment to earnings for fair value hedges of this firm purchase commitment and $433 of pretax losses and $289 of pretax gains, respectively, were recorded as an adjustment to earnings for changes in fair value of this firm purchase commitment. During the three and nine month periods ended July 1, 2001, $314 of pretax derivative losses were recorded as an adjustment to earnings for fair value hedges of this firm purchase commitment that were settled at maturity and $314 of pretax gains were recorded as an adjustment to earnings for payments made against this firm purchase commitment. At July 1, 2001, the series of outstanding forward contracts for this firm purchase commitment had a contract value of $3,170. The Company is exposed to risk from fluctuating prices for zinc used in the manufacturing process. The Company hedges a portion of this risk through the use of commodity swaps. The swaps are designated as cash flow hedges with the fair value recorded in OCI and as a hedge asset or liability, as applicable. The fair value of the swaps is reclassified from OCI into earnings when the hedged purchase of zinc metal-based items also affects earnings. The swaps effectively fix the floating price on a specified quantity of a commodity through a specified date. During the three and nine month periods ended July 1, 2001, $373 and $653, respectively, of pretax derivative losses were recorded as an adjustment to cost of sales for swap contracts settled at maturity. At July 1, 2001, the Company had a series of swap contracts outstanding through September 2002 with a contract value of $12,057. The derivative net losses on these contracts recorded in OCI at July 1, 2001 was an after-tax loss of $1,077. 2 INVENTORIES Inventories consist of the following: JULY 1, 2001 SEPTEMBER 30, 2000 ------------ ------------------ Raw material..................................... $28,864 $31,355 Work-in-process.................................. 18,129 11,650 Finished goods................................... 45,320 57,671 ------ -------- $92,313 $100,676 ======= ======== 6
3 OTHER COMPREHENSIVE INCOME Comprehensive income and the components of other comprehensive income for the three and nine months ended July 1, 2001 and July 2, 2000 are as follows: THREE MONTHS NINE MONTHS ------------ ----------- 2001 2000 2001 2000 ---- ---- ---- ---- Net income........................................... $2,722 $8,078 $5,081 $25,648 Other comprehensive income (loss): Foreign currency translation....................... 44 (657) (312) (1,544) Net unrealized gain on available for sale securities......................................... 105 -- 105 -- Cumulative effect of change in accounting principle -- -- (150) -- Net loss on derivative instruments................. (490) -- (2,182) -- ----- -- ------- -- Comprehensive income................................. $2,381 $7,421 $2,542 $24,104 ====== ====== ====== ======= 4 NET INCOME PER COMMON SHARE Net income per common share for the three and nine months ended July 1, 2001 and July 2, 2000 is calculated based upon the following shares: THREE MONTHS NINE MONTHS ------------ ----------- 2001 2000 2001 2000 ---- ---- ---- ---- Basic............................................... 28,080 27,511 27,743 27,497 Effect of assumed conversion of options............. 1,048 1,533 1,033 1,572 ----- ----- ----- ----- Diluted............................................. 29,128 29,044 28,776 29,069 ====== ====== ====== ====== 5 SHAREHOLDERS' EQUITY On June 22, 2001, the Company completed a primary offering of 3,500 shares of Common Stock. The net proceeds of approximately $64,500, after deducting the underwriting discounts and offering expenses, were used to repurchase approximately $64,800 principal amount of 10-1/4% Series B Senior Subordinated Notes. Concurrently, the Thomas H. Lee Group and its affiliates sold approximately 4,200 shares and certain Rayovac officers and employees sold approximately 900 shares in a secondary offering of common stock. The Company did not receive any proceeds from the sale of the secondary offering shares but incurred expenses for the offering of approximately $300 which are included in Other Special Charges. 6 COMMITMENTS AND CONTINGENCIES In March 1998, the Company entered into an agreement to purchase certain equipment and to pay annual royalties. In connection with this 1998 agreement, which supersedes previous agreements dated December 1991, and March 1994, the Company committed to pay royalties of $2,000 in 1998 and 1999, $3,000 in 2000 through 2002, and $500 in each year thereafter, as long as the related equipment patents are enforceable (2022). The Company incurred royalty expenses of $2,000 for 1998, 1999 and $2,250 for 2000. At July 1, 2001, the Company had commitments of approximately $3,170 for the acquisition of manufacturing equipment, all of which is expected to be incurred in calendar 2001. 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 7
List (Superfund). The Company provides for the estimated costs of investigation and remediation of these sites when such losses are probable and the amounts can be reasonably estimated. The actual cost incurred may vary from these estimates due to the inherent uncertainties involved. The Company believes that any additional liability in excess of the amounts provided of $2,776, which may result from resolution of these matters, will not have a material adverse effect on the financial condition, liquidity, or cash flow of the Company. The Company has certain other contingent liabilities with respect to litigation, claims and contractual agreements arising in the ordinary course of business. In the opinion of management, such contingent liabilities are not likely to have a material adverse effect on the financial condition, liquidity or cash flow of the Company. 7 OTHER During Fiscal 2001, the Company recorded special charges related to: (i) an organizational restructuring in the U.S, (ii) manufacturing and distribution cost rationalization initiatives in the Company's Tegucigalpa, Honduras and Mexico City, Mexico manufacturing facilities and in our European operations, (iii) the closure of the Company's Wonewoc, Wisconsin, manufacturing facility, (iv) the rationalization of uneconomic manufacturing processes at the Company's Fennimore, Wisconsin, manufacturing facility, and rationalization of packaging operations and product lines, and (v) costs associated with our June 2001 secondary offering. The amount recorded includes $7,100 of employee termination benefits for approximately 500 employees, $10,600 of equipment, inventory, and other asset write-offs, and $1,100 of other expenses. A summary of the 2001 restructuring activities follows: 2001 RESTRUCTURING SUMMARY TERMINATION OTHER BENEFITS COSTS TOTAL -------- ----- ----- Expense accrued............................................... $5,000 $11,000 $16,000 ------ ------- ------- Balance December 31, 2000..................................... $5,000 $11,000 $16,000 Expense as incurred........................................... 100 200 300 Cash expenditures............................................. (800) (200) (1,000) Non cash charges.............................................. -- (3,000) (3,000) ------ ------- ------- Balance April 1, 2001......................................... $4,300 $8,000 $12,300 Change in estimate............................................ 2,000 (100) 1,900 Expense as incurred........................................... -- 200 200 Cash expenditures............................................. (3,100) -- (3,100) Non cash charges.............................................. -- (3,000) (3,000) ------ ------- ------- Balance July 1, 2001.......................................... $3,200 $5,100 $8,300 ====== ====== ====== During 1999, the Company recorded special charges as follows: (i) $2,528 of employee termination benefits for 43 employees related to organizational restructuring in the U.S. and Europe, (ii) $1,300 of charges related to the discontinuation of the manufacturing of silver-oxide cells at the Company's Portage, Wisconsin, facility, and (iii) $2,100 of charges related to the termination of non-performing foreign distributors. The Company also recognized special charges of $803 related to the investigation of financing options and developing organizational strategies for the Latin American acquisition. A summary of the 1999 restructuring activities follows: 8
1999 RESTRUCTURING SUMMARY TERMINATION OTHER BENEFITS COSTS TOTAL -------- ----- ----- Expense accrued............................................... $2,500 $3,400 $5,900 Cash expenditures............................................. (200) -- (200) ----- ------ ----- Balance September 30, 1999.................................... $2,300 $3,400 $5,700 Change in estimate............................................ -- 100 100 Cash expenditures............................................. (2,200) -- (2,200) Non cash charges.............................................. -- (3,300) (3,300) ------ ------- ------- Balance September 30, 2000.................................... $100 $200 $300 Cash expenditures............................................. (100) -- (100) Non cash charges.............................................. -- (200) (200) ------ ----- ----- Balance July 1, 2001.......................................... $-- $-- $-- ====== ====== ===== 8 SEGMENT INFORMATION The Company manages operations in three reportable segments based upon geographic area. North America includes the United States and Canada; Latin America includes Mexico, Central America, and South America; Europe/Rest of World ("Europe/ROW") includes the United Kingdom, Europe and all other countries in which the Company does business. The Company manufactures and markets dry cell batteries including alkaline, zinc carbon, alkaline rechargeable, hearing aid, and other specialty batteries and lighting products throughout the world. Net sales and cost of sales to other segments have been eliminated. The gross contribution of inter segment sales is included in the segment selling the product to the external customer. Segment revenues are based upon the geographic area in which the product is sold. The reportable segment profits do not include interest expense, interest income, and income tax expense. Also, not included in the reportable segments, are corporate expenses including corporate purchasing expense, general and administrative expense and research and development expense. All depreciation and amortization included in income from operations is related to corporate or reportable segments. Costs are identified to reportable segments or corporate, according to the function of each cost center. The reportable segment assets do not include cash, deferred tax benefits, investments, long-term intercompany receivables, most deferred charges, and miscellaneous assets. Capital expenditures are related to reportable segments or corporate. Variable allocations of assets are not made for segment reporting. REVENUES FROM EXTERNAL CUSTOMERS THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED ------------------------- ------------------------ JULY 1, 2001 JULY 2, 2000 JULY 1, 2001 JULY 2, 2000 ------------ ------------ ------------ ------------ North America............................. $119,005 $111,530 $361,867 $377,496 Latin America............................. 29,062 27,369 89,425 83,597 Europe/ROW................................ 11,065 11,452 36,591 40,746 ------ ------ ------ ------ Total segments............................ $159,132 $150,351 $487,883 $501,839 ======== ======== ======== ======== 9
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED ------------------------- ------------------------ JULY 1, 2001 JULY 2, 2000 JULY 1, 2001 JULY 2, 2000 ------------ ------------ ------------ ------------ INTER SEGMENT REVENUES North America............................. $6,724 $4,665 $23,664 $17,309 Latin America............................. 2,711 208 7,167 208 Europe/ROW................................ 574 327 1,755 642 --- --- ----- --- Total segments............................ $10,009 $5,200 $32,586 $18,159 ======= ====== ======= ======= SEGMENT PROFIT THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED ------------------------- ------------------------ JULY 1, 2001 JULY 2, 2000 JULY 1, 2001 JULY 2, 2000 ------------ ------------ ------------ ------------ North America................................ $22,347 $21,338 $61,095 $63,901 Latin America................................ 3,529 5,036 14,949 15,324 Europe/ROW................................... 1,583 628 2,876 4,664 ----- --- ----- ----- Total segments............................... 27,459 27,002 78,920 83,889 Corporate.................................... 5,918 7,234 20,682 21,418 Special charges.............................. 2,579 -- 18,839 -- Interest expense............................. 7,017 7,727 22,391 22,979 Other (income) expense, net.................. (180) (387) 953 33 ----- ----- --- -- Income before income taxes and extraordinary item...................................... $12,125 $12,428 $16,055 $39,459 ======= ======= ======= ======= SEGMENT ASSETS JULY 1, 2001 JULY 2, 2000 ------------ ------------ North America................................ $283,809 $266,140 Latin America................................ 207,786 192,606 Europe/ROW................................... 27,360 27,824 ------ ------ Total segments............................... 518,955 486,570 Corporate.................................... 42,631 37,925 ------ ------ Total assets at period end................... $561,586 $524,495 ======== ======== 9 GUARANTOR SUBSIDIARIES (ROV HOLDING, INC. AND ROVCAL, INC.) The following condensed consolidating financial data illustrate the composition of the consolidated financial statements. Investments in subsidiaries are accounted for by the Company and the Guarantor Subsidiaries using the equity method for purposes of the consolidating presentation. Earnings of subsidiaries are therefore reflected in the Company's and Guarantor Subsidiary's' investment accounts and earnings. The principal elimination entries eliminate investments in subsidiaries and inter-company balances and transactions. Separate financial statements of the Guarantor Subsidiaries are not presented because management has determined that such financial statements would not be material to investors. 10
RAYOVAC CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET As of July 1, 2001 (Unaudited) (In thousands) GUARANTOR NONGUARANTOR CONSOLIDATED PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL ---------- -------------- -------------- -------------- ------------ -ASSETS- Current assets: Cash and cash equivalents $ 1,814 $ 48 $ 8,398 $ - $ 10,260 Receivables 69,230 45,414 59,072 (19,996) 153,720 Inventories 65,359 - 27,053 (99) 92,313 Prepaid expenses and other 25,255 342 12,271 - 37,868 ---------- -------------- -------------- -------------- ------------ Total current assets 161,658 45,804 106,794 (20,095) 294,161 Property, plant and equipment, net 77,113 37 30,863 - 108,013 Deferred charges and other, net 57,490 274 2,412 (20,182) 39,994 Intangible assets, net 90,096 - 29,510 (188) 119,418 Investments in subsidiaries 143,063 99,049 - (242,112) - ---------- -------------- -------------- -------------- ------------ Total assets $ 529,420 $ 145,164 $ 169,579 $ (282,577) $ 561,586 ========== ============== ============== ============== ============ -LIABILITIES AND SHAREHOLDERS' EQUITY- Current liabilities: Current maturities of long-term debt $ 23,282 $ - $ 8,979 $ (7,186) $ 25,075 Accounts payable 87,461 16 23,392 (12,428) 98,441 Accrued liabilities: Wages benefits and other 17,256 2,085 11,174 - 30,515 Recapitalization and other special charges 4,931 - - - 4,931 ---------- -------------- -------------- -------------- ------------ Total current liabilities 132,930 2,101 43,545 (19,614) 158,962 Long term debt, net of current maturities 218,511 - 18,490 (19,185) 217,816 Employee benefit obligations, net of current portion 15,744 - 601 - 16,345 Other 4,586 - 7,894 - 12,480 ---------- -------------- -------------- -------------- ------------ Total liabilities 371,771 2,101 70,530 (38,799) 405,603 Shareholders' equity: Common stock 615 1 12,072 (12,072) 616 Additional paid-in capital 180,901 62,788 54,904 (117,574) 181,019 Retained earnings 114,959 80,440 33,593 (115,461) 113,531 Accumulated other comprehensive loss (1,532) (166) (1,520) 1,329 (1,889) Notes receivable from officers/shareholders (3,665) - - - (3,665) ---------- -------------- -------------- -------------- ------------ 291,278 143,063 99,049 (243,778) 289,612 Less treasury stock, at cost (130,070) - - - (130,070) Less unearned restricted stock compensation (3,559) - - - (3,559) ---------- -------------- -------------- -------------- ------------ Total shareholders' equity 157,649 143,063 99,049 (243,778) 155,983 ---------- -------------- -------------- -------------- ------------ Total liabilities & shareholders' equity $ 529,420 $ 145,164 $ 169,579 $ (282,577) $ 561,586 ========== ============== ============== ============== ============ 11
RAYOVAC CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the three month period ended July 1, 2001 (Unaudited) (In thousands) GUARANTOR NONGUARANTOR CONSOLIDATED PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL ---------- -------------- -------------- -------------- ------------ Net sales $ 113,453 $ 10,917 $ 47,216 $ (12,454) $ 159,132 Cost of goods sold 54,536 10,589 28,837 (12,011) 81,951 Special charges 287 - 1,992 - 2,279 ---------- -------------- -------------- -------------- ------------ Gross profit 58,630 328 16,387 (443) 74,902 Selling expense 32,781 167 9,852 (43) 42,757 General and administrative 10,356 (2,714) 2,251 - 9,893 Research and development 2,990 - - - 2,990 Other special charges 300 - - - 300 ---------- -------------- -------------- -------------- ------------ Total operating expenses 46,427 (2,547) 12,103 (43) 55,940 Income from operations 12,203 2,875 4,284 (400) 18,962 Interest expense 6,656 - 1,152 (791) 7,017 Equity income (4,948) (1,878) - 6,826 - Other (income) expense, net (639) (429) 97 791 (180) ---------- -------------- -------------- -------------- ------------ Income before income taxes and extraordinary item 11,134 5,182 3,035 (7,226) 12,125 Income tax expense 2,662 234 1,157 - 4,053 ---------- -------------- -------------- -------------- ------------ Income before extraordinary item 8,472 4,948 1,878 (7,226) 8,072 Extraordinary item, loss on early extinguishment of debt, net of income tax benefit of $3,279 (5,350) - - - (5,350) ---------- -------------- -------------- -------------- ------------ Net Income $ 3,122 $ 4,948 $ 1,878 $ (7,226) $ 2,722 ========== ============== ============== ============== ============ 12
RAYOVAC CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the nine month period ended July 1, 2001 (Unaudited) (In thousands) GUARANTOR NONGUARANTOR CONSOLIDATED PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL ---------- -------------- -------------- -------------- ------------ Net sales $ 349,922 $ 32,730 $ 146,836 $ (41,605) $ 487,883 Cost of goods sold 171,131 31,748 87,286 (40,905) 249,260 Special charges 16,346 - 2,193 - 18,539 ---------- -------------- -------------- -------------- ------------ Gross profit 162,445 982 57,357 (700) 220,084 Selling expense 105,932 521 31,210 (200) 137,463 General and administrative 32,321 (8,377) 9,968 - 33,912 Research and development 9,010 - - - 9,010 Other special charges 300 - - - 300 ---------- -------------- -------------- -------------- ------------ Total operating expenses 147,563 (7,856) 41,178 (200) 180,685 Income from operations 14,882 8,838 16,179 (500) 39,399 Interest expense 21,280 - 2,522 (1,411) 22,391 Equity income (16,963) (8,155) - 25,118 - Other (income) expense, net (1,368) (427) 1,337 1,411 953 ---------- -------------- -------------- -------------- ------------ Income before income taxes and extraordinary item 11,933 17,420 12,320 (25,618) 16,055 Income tax expense 1,002 457 4,165 - 5,624 ---------- -------------- -------------- -------------- ------------ Income before extraordinary item 10,931 16,963 8,155 (25,618) 10,431 Extraordinary item, loss on early extinguishment of debt, net of income tax benefit of $3,279 (5,350) - - - (5,350) ---------- -------------- -------------- -------------- ------------ Net Income $ 5,581 $ 16,963 $ 8,155 $ (25,618) $ 5,081 ========== ============== ============== ============== ============ 13
RAYOVAC CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS For the nine month period ended July 1, 2001 (Unaudited) (In thousands) GUARANTOR NONGUARANTOR CONSOLIDATED PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL ---------- -------------- -------------- -------------- ------------ Net cash provided by operating activities $ 21,623 $ 10 $ 5,983 $ - $ 27,616 Cash flows from investing activities: Purchases of property, plant and equipment (14,007) - (1,208) - (15,215) Purchases of investments (500) - (299) - (799) Proceeds from sale of investments - - 1,361 - 1,361 Proceeds from sale of property, plant, and equipment 487 - 22 - 509 ----------- ---------- ------------- --------- -------------- Net cash used by investing activities (14,020) (14,144) Cash flows from financing activities: Reduction of debt (316,094) - (4,525) - (320,619) Extinguishment of debt (69,693) - - - (69,693) Proceeds from debt financing 310,601 - - - 310,601 Issuance of stock 67,781 - - - 67,781 Other (1,075) (6) (165) - (1,246) ----------- ---------- ------------- --------- -------------- Net cash used by financing activities (8,480) (6) (4,690) - (13,176) Effect of exchange rate changes on cash and cash equivalents - - 207 - 207 ----------- ---------- ------------- --------- -------------- Net (decrease) increase in cash and cash equivalents (877) 4 1,376 - 503 Cash and cash equivalents, beginning of period 2,691 44 7,022 - 9,757 ----------- ---------- ------------- --------- -------------- Cash and cash equivalents, end of period $ 1,814 $ 48 $ 8,398 $ - $ 10,260 =========== ========== ============= ========= ============== 14
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FISCAL QUARTER AND NINE MONTHS ENDED JULY 1, 2001 COMPARED TO FISCAL QUARTER AND NINE MONTHS ENDED JULY 2, 2000 NET SALES. Net sales for the three months ended July 1, 2001 (the "Fiscal 2001 Quarter") increased $8.7 million, or 5.8%, to $159.1 million from $150.4 million in the three months ended July 2, 2000 (the "Fiscal 2000 Quarter"). The increase was driven by growth in alkaline battery sales attributable to new distribution, product line expansion, promotional timing, and growth in the OEM trade channel. Partially offsetting the alklaine battery increases were decreases in lighting products primarily reflecting reduced sales in North America attributable to hurricane shipments in the Fiscal 2000 Quarter and general market softness compounded by lower sales of specialty batteries to OEM customers in the PC, telecommunications and electronics industries and softness in rechargeable sales. Net sales for the nine months ended July 1, 2001 (the "Fiscal 2001 Nine Months") decreased $13.9 million, or 2.8%, to $487.9 million from $501.8 million in the nine months ended July 2, 2000 (the "Fiscal 2000 Nine Months"). Increases in hearing aid batteries and alkaline sales were offset by decreased lighting products sales, softness in sales of specialty batteries to OEM customers in the PC, telecommunications and electronics industries, and the transition to the camcorder license arrangement. NET INCOME. Net income for the Fiscal 2001 Quarter decreased $5.4 million to $2.7 million from $8.1 million in the Fiscal 2000 Quarter. The decrease reflects an extraordinary loss of $5.4 million, net of tax, resulting from the premium on the repurchase of $64.8 million of Senior Subordinated Notes following the Company's secondary offering in June 2001 and related write-off of unamortized debt issuance costs. Restructuring charges and expenses associated with our June 2001 secondary offering were offset by income from sales growth in North America. Net income for the Fiscal 2001 Nine Months decreased $20.5 million to $5.1 million from $25.6 million in the Fiscal 2000 Nine Months. The decrease reflects the impact of a $18.5 million pretax restructuring charge, a $5.4 million extraordinary loss, net of tax, and sales softness in North America and Europe/ROW partially offset by sales growth in Latin America. SEGMENT RESULTS. The Company manages operations in three reportable segments based upon geographic area. North America includes the United States and Canada; Latin America includes Mexico, Central America, and South America; Europe/ROW includes the United Kingdom, Europe and all other countries in which the company does business. We evaluate segment profitability based on income from operations before corporate expense which includes corporate purchasing expense, general and administrative expense and research and development expense. FISCAL QUARTER NINE MONTHS -------------- -------------- NORTH AMERICA 2001 2000 2001 2000 ---- ---- ---- ---- Revenue from external customers........ $119.0 $111.5 $361.9 $377.5 Profitability.......................... 22.4 21.4 61.1 63.9 Profitability as a % of net sales...... 18.8% 19.2% 16.9% 16.9% Assets................................. $283.8 $266.1 $283.8 $266.1 Our sales to external customers increased $7.5 million, or 6.7%, to $119.0 million in the Fiscal 2001 Quarter from $111.5 million the previous year due primarily to strong sales of alkaline, heavy duty, and hearing aid batteries partially offset by weakness in specialty batteries, lighting products, and rechargeable batteries. Alkaline sales increases of $15.0 million, or 24.9%, were primarily attributable to strong sales at retail, distribution gains, and product line expansion compounded by strong sales in the OEM trade channel partially offset by weakness in the food and drug trade channels. Heavy duty sales increases of $1.5 million, or 17.9%, were primarily driven by product line expansion at retail. Hearing aid battery sales increases of $0.6 million, or 6.1%, primarily reflect strong growth in the 15
professional hearing aid trade channel and expanded retail distribution. Specialty batteries sales decreases versus last year primarily reflect softness in camcorder battery and lithium battery sales of $2.6 million and $1.9 million, respectively. These decreases reflect the transition to the camcorder licensing agreement with our Hong Kong licensee and general softness in demand from OEM customers in the PC, telecommunications and electronics industries. Lighting product sales decreases of $3.1 million, or 17.7%, were driven by general weakness in the lights category. Rechargeable battery sales decreases of $2.1 million, or 25.0%, were driven by promotional timing and our inability to anniversary an initial sell-in last year to a major mass retailer. In the Fiscal 2001 Nine Months, our sales to external customers decreased $15.6 million, or 4.1%, to $361.9 million from $377.5 million the previous year. Increased sales of hearing aid, alkaline, and heavy duty batteries were offset by decreased sales of lighting products and specialty batteries. Lighting product sales decreases of $13.4 million, or 23.8%, were driven by weakness in the lights and lantern battery category reflecting the impact of the Y2K phenomenon. Specialty batteries sales versus last year primarily reflect softness in camcorder battery and lithium battery sales of $5.8 and $8.0 million, respectively, reflecting the transition to a licensing agreement and general softness in lithium battery demand from OEM customers in the PC, telecommunications and electronics industries. Hearing aid battery sales increases of $4.8 million, or 16.5%, primarily reflect strength in the professional channel and expanded retail distribution in Fiscal 2001. Alkaline sales increases of $3.6 million, or 1.7%, were driven by distribution gains, product line expansion, and strong sales in the mass merchandiser and OEM trade channels partially offset by the impacts of Y2K on sales volumes and lower promotional activity at certain food retailers this year. Heavy duty sales increases of $3.0 million, or 10.3%, primarily reflect product line expansion at retail. Our profitability increased $1.0 million, or 4.7%, to $22.4 million in the Fiscal 2001 Quarter from $21.4 million in the Fiscal 2000 Quarter. The increase in profitability in the Fiscal 2001 Quarter was primarily attributable to the sales expansion partially offset by higher selling and distribution expenses. Our profitability margins decreased 40 basis points to 18.8% from 19.2% in the previous year. The decrease primarily reflects higher operating expenses as a percentage of sales partially offset by improved gross profit margins. In the Fiscal 2001 Nine Months, our profitability decreased $2.8 million, or 4.4%, to $61.1 million from $63.9 million. The decrease in profitability in the Fiscal 2001 Nine Months was primarily attributable to the sales shortfall partially offset by improved gross profit margins, reflecting a favorable product mix, price increases and operating expense decreases. Our profitability margins were unchanged from the previous year. Our assets increased $17.7 million, or 6.7%, to $283.8 million in the Fiscal 2001 Quarter from $266.1 million the previous year. The increase was primarily attributable to an increase in accounts receivable partially offset by lower inventories. FISCAL QUARTER NINE MONTHS --------------- --------------- LATIN AMERICA 2001 2000 2001 2000 ---- ---- ---- ---- Revenue from external customers........ $29.0 $27.4 $89.4 $83.6 Profitability.......................... 3.5 5.0 14.9 15.3 Profitability as a % of net sales...... 12.1% 18.2% 16.7% 18.3% Assets................................. $207.8 $192.6 $207.8 $192.6 Our sales to external customers increased $1.6 million, or 5.8% to $29.0 million in the Fiscal 2001 Quarter from $27.4 million and increased $5.8 million, or 6.9% to $89.4 million in the Fiscal 2001 Nine Months from $83.6 million the previous year due primarily to increased sales of alkaline batteries partially offset by lower sales of zinc carbon batteries affected by a slowing economic environment and the unfavorable impacts of currency devaluation of $0.2 million and $1.6 million, respectively. Alkaline sales increases of $1.3 million and $6.1 million in the Fiscal 2001 Quarter and Nine Months, respectively, were driven by new distribution in mass merchandiser chains compounded by expansion into the Southern region of South America in Fiscal 2000. Heavy duty battery sales were relatively unchanged for the Fiscal 2001 Quarter and Nine Months versus last year. Our profitability declined $1.5 million, or 30.0%, in the Fiscal 2001 Quarter and decreased $0.4 million, or 2.6% in the Fiscal 2001 Nine Months versus the Fiscal 2000 Nine Months. The decrease in profitability versus the Fiscal 2000 Quarter primarily reflects higher operating expenses reflecting expansion into the 16
Southern region of South America and higher costs associated with our Mexican operations. The operating expense increases reflect our ongoing expansion in the Southern region and an increase in Mexico reflecting increased marketing and promotional expenses associated with new distribution at larger retail accounts. The decrease in profitability in the Fiscal 2001 Nine Months is primarily attributable to the higher operating expenses reflecting the expansion into the Southern region of South America in Fiscal 2000 partially offset by of increased sales and gross profit. Our profitability margins in the Fiscal 2001 Quarter decreased 610 basis points primarily reflecting an increase in operating expenses compounded by weakness in gross profit margins. The operating expense increase primarily reflects increases in the Southern region of South America and in Mexico. Our profitability margins in the Fiscal 2001 Nine Months decreased 160 basis points primarily reflecting an increase in operating expense attributable to a full year impact of expansion into the Southern region of South America compounded by an increase in expenses associated with new distribution at larger retail accounts, partially offset by improved gross profit margins. Our assets increased $15.2 million, or 7.9%, to $207.8 million in the Fiscal 2001 Quarter from $192.6 million the previous year. The increase was primarily attributable to an increase in accounts receivable of $19.5 million reflecting longer terms associated with distribution at larger retail accounts and general economic weakness partially offset by a decrease in inventory of $3.9 million reflecting improved inventory management in Mexico. FISCAL QUARTER NINE MONTHS -------------- ------------- EUROPE/ROW 2001 2000 2001 2000 ---- ---- ---- ---- Revenue from external customers.......... $11.1 $11.5 $36.6 $40.7 Profitability............................ 1.6 0.6 2.9 4.7 Profitability as a % of net sales........ 14.4% 5.2% 7.9% 11.6% Assets................................... $27.4 $27.8 $27.4 $27.8 Our sales to external customers decreased $0.4 million, or 3.5%, to $11.1 million in the Fiscal 2001 Quarter from $11.5 million and decreased $4.1 million, or 10.1%, to $36.6 million in the Fiscal 2001 Nine Months from $40.7 million the previous year primarily reflecting the impacts of currency devaluation of $0.8 million and $3.8 million, respectively. Excluding the effects of foreign exchange, Europe/ROW for the Fiscal 2001 Quarter experienced volume gains in alkaline and hearing aid battery sales. Our profitability increased $1.0 million to $1.6 million in the Fiscal 2001 Quarter and decreased $1.8 million to $2.9 million in the Fiscal 2001 Nine Months. The increase in profitability in the Fiscal 2001 Quarter primarily reflects lower selling expenses reflecting changes in estimated costs of promotional programs. The profitability decrease in the Fiscal 2001 Nine Months reflects the impact of currency devaluation on gross profit compounded by higher selling and distribution expenses. Our profitability margin increase, as a percentage of sales, in the Fiscal 2001 Quarter is primarily driven by our favorable selling expenses and the profitability margin decrease, as a percentage of sales, in the Fiscal 2001 Nine Months, is attributable to the fixed nature of our expenses over lower sales volumes. Our assets decreased $0.4 million, or 1.4%, to $27.4 million from $27.8 million the previous year due primarily to a decrease in inventory reflecting improvements in inventory management and a decrease in accounts receivable. CORPORATE EXPENSE. Our corporate expense decreased $1.3 million, or 18.1%, to $5.9 million in the Fiscal 2001 Quarter from $7.2 million in the Fiscal 2000 Quarter and $0.7 million, or 3.3%, to $20.7 million in the Fiscal 2001 Nine Months from $21.4 million in the Fiscal 2000 Nine months. These decreases were primarily attributable to lower management incentives, legal expenses, a gain on the sale of an investment partially offset by higher research and development expenses reflecting an increase in technology spending. As a percentage of total sales, our corporate expense was 3.7% and 4.8% in the Fiscal 2001 and Fiscal 2000 Quarters and was 4.2% and 4.3% in the Fiscal 2001 and Fiscal 2000 Nine Months, respectively. 17
SPECIAL CHARGES. The Company recorded special charges of $2.6 million in the Fiscal 2001 Quarter primarily reflecting expenses associated with the shutdown of the Company's Wonewoc, Wisconsin, manufacturing facility and restructuring initiatives in Latin America and the U.S. In the Fiscal 2001 Nine Months, the Company recorded special charges related to: (i) an organizational restructuring in the U.S, (ii) manufacturing and distribution cost rationalization initiatives in the Company's Tegucigalpa, Honduras and Mexico City, Mexico manufacturing facilities and in our European operations, (iii) the closure of the Company's Wonewoc, Wisconsin, manufacturing facility, (iv) the rationalization of uneconomic manufacturing processes at the Company's Fennimore, Wisconsin, manufacturing facility, and rationalization of packaging operations and product lines, (v) and costs associated with our secondary offering in June 2001. The amount recorded includes $7.1 million of employee termination benefits for approximately 500 employees, $10.6 million of equipment, inventory, and other asset write-offs, and $1.1 million of other expenses. INCOME FROM OPERATIONS. Our income from operations decreased $0.8 million, or 4.0%, to $19.0 million in the Fiscal 2001 Quarter from $19.8 million the previous year. The decrease was attributable to special charges of $2.6 million partially offset by improved profitability in North America and Europe/ROW. Excluding the impact of the special charges, income from operations increased $1.8 million, or 9.1%. In the Fiscal 2001 Nine Months, our income from operations decreased $23.1 million, or 37.0%, to $39.4 million from $62.5 million the previous year. These decreases were primarily due to special charges of $18.8 million, decreased profitability in North America, Latin America, and Europe/ROW. Excluding the impact of the special charges, income from operations decreased $4.3 million, or 6.9%. INTEREST EXPENSE. Interest expense decreased $0.7 million to $7.0 million in the Fiscal 2001 Quarter and decreased $0.6 million to $22.4 million Fiscal 2001 Nine Months versus the comparable periods in the prior year due primarily to lower effective interest rates. OTHER (INCOME) EXPENSE. Other (income) expense decreased $0.2 million to a $0.2 million net income in the Fiscal 2001 Quarter. The decrease in the net income in the Fiscal 2001 Quarter primarily reflects foreign exchange losses partially offset by higher interest income. In the Fiscal 2001 Nine Months other (income) expense increased to a $0.9 million net expense primarily reflecting foreign exchange losses, primarily in Latin America, partially offset by higher interest income. INCOME TAX EXPENSE. Our effective tax rate was 33.4% for the Fiscal 2001 Quarter which brought the Fiscal 2001 Nine Months rate to 35.0%, equal to last year's rate for the Fiscal 2000 Nine Months. EXTRAORDINARY ITEM. In the Fiscal 2001 Quarter, the Company recorded an extraordinary loss of $5.4 million, net of tax, resulting from the premium on the repurchase of $64.8 million Senior B Subordinated Notes and the related write-off of unamortized debt issuance costs. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS Effective October 1, 2000, the Company adopted SFAS 133, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the change in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (OCI) and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. The adoption of SFAS 133 resulted in a pre-tax reduction to OCI of $0.3 million ($0.2 million after tax). The reduction to OCI is primarily attributable to losses of approximately $0.5 million for foreign exchange forward cash flow hedges partially offset by gains of approximately $0.2 million on interest rate swap cash flow hedges. The net derivative losses included in OCI as of October 1, 2000 will be reclassified into earnings during the twelve months ending September 30, 2001. 18
In January 2001, the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) reached a consensus on Issue 3 of EITF Issue 00-22, "Accounting for "Points" and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future". Issue 3 addresses the recognition, measurement, and income statement classification for offers to a customer to rebate or refund a specified amount of cash that may be redeemed if the customer completes a specified volume of transactions. The consensus was effective for quarters ending after February 15, 2001. The Company adopted the consensus reached on Issue 3, in the second fiscal quarter of 2001. The adoption and subsequent restatement of the Fiscal 2001 and Fiscal 2000 Quarter and Nine Months resulted in the reclassification of certain selling expenses as a reduction in revenue and had no impact on pre-tax income, net income, or earnings per share. LIQUIDITY AND CAPITAL RESOURCES For the Fiscal 2001 Nine Months, operating activities provided $27.6 million in net cash compared with $31.1 million the previous year. Operating cash flow decreases versus the previous year primarily reflect lower operating earnings attributable to our decrease in sales partially offset by working capital which was $3.7 million lower than the previous year. The lower investment in working capital versus the comparable period a year ago primarily reflects lower inventory investments and higher special charge restructuring liabilities partially offset by increased accounts receivable and prepaid expenses and a decrease in accounts payable. Net cash used by investing activities increased $2.1 million versus the same period a year ago primarily reflecting an increase in capital expenditures partially offset by proceeds from the sale of investments and property, plant, and equipment. Expenditures in the current year were primarily for improvements to alkaline battery manufacturing and information systems hardware and software. The Company currently expects capital spending for Fiscal 2001 to be approximately $20.0 million primarily due to alkaline battery manufacturing. During the Fiscal 2001 Nine Months we granted approximately 0.8 million options to purchase shares of common stock to various employees of the company. All grants have been at an exercise price equal to the market price of the common stock on the date of the grant. We also granted approximately 277,000 shares of restricted stock on October 1, 2000, from the 1997 incentive plan, to certain members of management. Approximately 210,000 of these shares will vest on September 30, 2003 provided the recipient is still employed by the Company. The remainder vests one third each year for the next three years. The total market value of the restricted shares on date of grant totaled approximately $4.7 million and has been recorded as restricted stock as a separate component of shareholders' equity. Unearned compensation is being amortized to expense over the three-year vesting period. The Company believes that cash flow from operating activities and periodic borrowings under its amended credit facilities will be adequate to meet the Company's short-term and long-term liquidity requirements prior to the maturity of those credit facilities, although no guarantee can be given in this regard. The Company's current credit facilities include a revolving credit facility of $250.0 million and term loan of $75.0 million. As of July 1, 2001, $37.8 million of the term loan remained outstanding and $195.2 million was outstanding under the revolving facility with approximately $13.3 million of the remaining availability utilized for outstanding letters of credit. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition" (SAB 101). The SAB summarizes certain of the SEC's views in applying U.S. generally accepted accounting principles to revenue recognition in financial statements. In June 2000, the SEC issued SAB 101B, which delays the implementation date of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. In October 2000, the SEC issued frequently asked questions and answers about how guidance in accounting standards and SAB 101 would apply to particular transactions. The amendment in June 2000 delayed the effective date for the Company until the fourth fiscal quarter of 2001, which is when the Company will adopt the bulletin. The adoption will not have a material impact on the consolidated financial statements. In May 2000, the EITF reached a consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives". This Issue addresses the recognition, measurement, and income statement classification for various types of sales incentives 19
including discounts, coupons, rebates and free products. In July 2001, the EITF delayed the implementation of EITF 00-14 until no later than quarters beginning after December 15, 2001. The Company is required to adopt this consensus in the second fiscal quarter of 2002. The impact of this consensus on the Company's consolidated financial statements is still being evaluated. The Company does not currently believe its adoption will have a material impact on the consolidated financial statements other than the reclassification of certain selling expenses to cost of sales or a reduction of revenue. In July and September 2000, the EITF reached a consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." This Issue addresses the income statement classification for shipping and handling fees and costs. The Company will adopt this consensus in the fourth fiscal quarter of 2001. The impact of this consensus on the Company's consolidated financial statements is still being evaluated. The adoption will not have a material impact on the consolidated financial statements. In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor Income Statement Characterization of Consideration to a Purchaser of the Vendor's Products or Services". This Issue addresses when consideration from a vendor to a retailer or distributor in connection with the purchase of the vendor's products to promote sales of the vendor's products should be classified in the vendor's income statement as a reduction of revenue or expense. The Company is required to adopt this consensus in the second fiscal quarter of 2002. The Company does not currently believe its adoption will have a material impact on the consolidated financial statements, other than the reclassification of certain selling expenses to cost of sales or a reduction in revenue. On July 20, 2001, the FASB issued Statement No. 141, BUSINESS COMBINATIONS, and Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement 141 requires that all business combinations be accounted for under a single method -- the purchase method. Use of the pooling-of-interests method no longer is permitted. Statement 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. Statement 142 requires that goodwill and intangible assets with an indefinite life no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill and intangible assets with an indefinite life acquired in a transaction completed prior to June 30, 2001, ceases upon adoption of the Statement, which the Company is required to adopt no later than our fiscal year beginning October 1, 2002. Management is currently evaluating the impact of adoption on the consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK FACTORS We have market risk exposure from changes in interest rates, foreign currency exchange rates and commodity prices. We use derivative financial instruments for purposes other than trading to mitigate the risk from such exposures. A discussion of our accounting policies for derivative financial instruments is included in Note 1 "Significant Accounting Policies in Notes to our Condensed Consolidated Financial Statements." INTEREST RATE RISK We have bank lines of credit at variable interest rates. The general level of U.S. interest rates, LIBOR, IBOR, and to a lesser extent European Base rates, primarily affects interest expense. We use interest rate swaps to manage such risk. The swaps are designated as cash flow hedges with the fair value recorded in OCI and as a hedge asset or liability as applicable. The swaps settle periodically in arrears with the related amounts for the current settlement period payable to, or receivable from, the counter-parties included in accrued liabilities or accounts receivable and recognized in earnings as an adjustment to interest expense from the underlying debt to which the swap is designated. FOREIGN EXCHANGE RISK We are subject to risk from sales to, purchases from and loans to our subsidiaries as well as sales to, purchases from and bank lines of credit with, third-party customers, suppliers and creditors, respectively, denominated in foreign currencies. Foreign currency sales are made primarily in Pounds Sterling, Canadian Dollars, Euro, German Marks, 20
French Francs, Italian Lira, Spanish Pesetas, Dutch Guilders, Mexican Pesos, Guatemalan Quetzals, Dominican Pesos, Venezuelan Bolivars, Argentine Pesos, Chilean Pesos and Honduran Lempira. Foreign currency purchases are made primarily in Pounds Sterling, German Marks, French Francs, Mexican Pesos, Dominican Pesos, Guatemalan Quetzals and Honduran Lempira. We manage our foreign exchange exposure from forecasted sales, accounts receivable, forecasted purchases, accounts payable, intercompany loans, firm purchase commitments and credit obligations through the use of naturally occurring offsetting positions (borrowing in local currency) and forward foreign exchange contracts. Forward foreign exchange contracts to hedge forecasted transactions are designated as cash flow hedges with the fair value recorded in OCI and as a hedge asset or liability as applicable. Once the forecasted transaction has been recognized as a sale or purchase and a related asset or liability recorded in the balance sheet, the gain or loss on the related derivative hedge contract is re-classified from OCI into earnings as an offset to the change in value of the asset or liability. Forward foreign exchange contracts to hedge firm purchase commitments are designated as fair value hedges with the fair value recorded in earnings and as a hedge asset or liability as applicable. COMMODITY PRICE RISK We are exposed to fluctuation in market prices for purchases of zinc metal-based items used in the manufacturing process. We hedge a portion of this risk through the use of commodity swaps. The swaps are designated as cash flow hedges with the fair value recorded in OCI and as a hedge asset or liability as applicable. The fair value of the swaps is reclassified from OCI into earnings when the hedged forecasted purchase of zinc metal-based items also affects earnings. SENSITIVITY ANALYSIS The analysis below is hypothetical and should not be considered a projection of future risks. Earnings projections are before tax. As of July 1, 2001, the potential change in fair value of outstanding interest rate derivative instruments, assuming a 1% unfavorable shift in the underlying interest rates would be a loss of $0.9 million. The net impact on reported earnings, after also including the reduction in one year's interest expense on the related debt due to the same shift in interest rates, would be a net gain of $1.5 million. As of July 1, 2001, the potential change in fair value of outstanding foreign exchange rate derivative instruments, assuming a 10% unfavorable change in the underlying foreign exchange rates would be a loss of $0.5 million. The net impact on future cash flows, after also including the gain in value on the related accounts receivable payment obligations outstanding at July 1, 2001 due to the same change in exchange rates, would be a net gain of $2.2 million. As of July 1, 2001, the potential change in fair value of outstanding commodity price derivative instruments, assuming a 10% unfavorable change in the underlying commodity prices would be a loss of $1.2 million. The net impact on reported earnings, after also including the reduction in cost of one year's purchases of the related commodities due to the same change in commodity prices, would be immaterial. FORWARD LOOKING STATEMENTS Certain of the information contained in this Form 10-Q, including without limitation statements made under Part I, Item 1, "Financial Statements" and Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part I, Item 3, "Quantitative and Qualitative Disclosures about Market Risk" which are not historical facts, may include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act, as amended. In reviewing such information, you should note that our actual results may differ materially from those set forth in such forward-looking statements. Important factors that could cause our actual results to differ materially from those included in the forward-looking statements made herein include, without limitation, (1) significant changes in consumer demand and buying practices for household batteries, hearing aid batteries or other products we manufacture or sell in North America, Latin America or Europe/ROW; (2) the loss of, or a significant reduction in, sales through a significant retail customer; (3) the successful introduction or expansion of competitive brands into the marketplace, including private label offerings; (4) the introduction of new product features or new battery technologies by a competitor; (5) promotional campaigns and 21
spending by a competitor; (6) difficulties or delays in the integration of operations of acquired companies; (7) our ability to successfully implement manufacturing and distribution cost efficiencies and improvements; (8) delays in manufacturing or distribution due to work stoppages, problems with suppliers, natural causes or other factors; (9) the enactment or imposition of unexpected environmental regulations negatively impacting consumer demand for certain of our battery products or increasing our cost of manufacture or distribution; (10) the costs and effects of unanticipated legal, tax or regulatory proceedings; (11) the effects of competitors' patents or other intellectual property rights; (12) interest rate, exchange rate and raw material price fluctuations; (13) impact of unusual items resulting from evaluation of business strategies, acquisitions and divestitures and organizational structure; (14) changes in accounting standards applicable to our business; and (15) the effects of changes in trade, monetary or fiscal policies and regulations by governments in countries where we do business. Additional factors and assumptions that could generally cause our actual results to differ materially from those included in the forward-looking statements made herein include, without limitation, (1) our ability to develop and introduce new products; (2) the effects of general economic conditions in North America, Europe, Latin America or other countries where we do business, including inflation, labor costs and stock market volatility; (3) the effects of political or economic conditions, unrest or volatility in Latin America and other international markets; (4) the sufficiency of our production and distribution capacity to meet future demand for our products; (5) our ability to keep pace with the product and manufacturing technological standards in our industry; (6) our ability to continue to penetrate and develop new distribution channels for our products; and (7) various other factors, including those discussed herein and those set forth in our most recent Annual Report on Form 10-K and the prospectus supplement for our most recent public offering of common stock. Other factors and assumptions not identified above were also involved in the derivation of the forward-looking statements contained in this Form 10-Q and the failure of such other assumptions to be realized, as well as other factors, may also cause actual results to differ materially from those projected. We assume no obligations to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. PART II. OTHER INFORMATION Item 1: Legal Proceedings There have been no significant changes in the status of Rayovac's legal proceedings since the filing of Rayovac's Annual Report on Form 10-K for its fiscal year ended September 30, 2000 ("2000 Form 10-K") except as follows: On February 9, 2001, the Wisconsin Department of Natural Resources approved our request to proceed under Wisconsin's Voluntary Party Liability Exemption program to investigate and, if necessary, remediate environmental matters at our Wonewoc, Wisconsin, manufacturing facility. Investigative work to date suggests there may be battery materials containing various heavy metals in fill on the property. However, we do not expect this matter to result in material expenditures. On April 11, 2001, Eveready Battery Company, Inc. filed a complaint against us in U.S. District Court for the Northern District of Ohio, Eastern Division, alleging that we have infringed on a patent held by Eveready relating to mercury-free alkaline batteries. Eveready is seeking injunctive relief as well as treble damages and other costs and expenses. We have not been served with the complaint in this matter. We believe we have meritorious defenses to the claims presented in the complaint and, should we ultimately be served, we intend to dispute the allegations and otherwise defend our position. We cannot estimate at this time the effect, if any, that this claim may have on our business or financial condition. 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NUMBER DESCRIPTION 3.1+ Amended and Restated Articles of Incorporation of the Company. 3.2****** Amended and Restated By-laws of the Company, as amended through May 17, 1999. 4.1** Indenture, dated as of October 22, 1996, by and among the Company, ROV Holding, Inc. and Marine Midland Bank, as trustee, relating to the Company's 10 1/4% Senior Subordinated Notes due 2006. 4.2****** First Supplemental Indenture, dated as of February 26, 1999, by and among the Company, ROV Holding, Inc. and HSBC Bank USA (formerly known as Marine Midland Bank) as trustee, relating to the Company's 10 1/4% Senior Subordinated Notes due 2006. 4.3++++ Second Supplemental Indenture, dated as of August 6, 1999, by and among the Company, ROV Holding, Inc. and HSBC Bank USA (formerly known as Marine Midland Bank) as trustee, relating to the Company's 10 1/4% Senior Subordinated Notes due 2006. 4.4******* Third Supplemental Indenture, dated as of June 13, 2001, by and among the Company, ROV Holding, Inc., ROVCAL, Inc. and HSBC Bank USA (formerly known as Marine Midland Bank) as trustee, relating to the Company's 10 1/4% Senior Subordinated Notes due 2006. 4.5** Specimen of the Notes (included as an exhibit to Exhibit 4.1) 4.6**** Amended and Restated Credit Agreement, dated as of December 30, 1997, by and among the Company, the lenders party thereto and Bank of America National Trust and Savings Association ("BofA"), as Administrative Agent. 4.7++++ Second Amended and Restated Credit Agreement, dated as of August 9, 1999, by and among the Company, the lenders party thereto and Bank of America, NA as Administrative Agent. 4.8+++++ The First Amendment dated as of July 28, 2000 to the Second Amended and Restated Credit Agreement, dated as of August 9, 1999, by and among the Company, the lenders party thereto and Bank of America, NA as Administrative Agent. 4.9+++++++ The Second Amendment dated as of December 31, 2000 to the Second Amended and Restated Credit Agreement, dated as of August 9, 1999, by and among the Company, various financial institutions, and Bank of America, N.A. as Administrative Agent. 4.10 The Third Amendment dated as of June 11, 2001, to the Second Amended and Restated Credit Agreement, dated as of August 9, 1999, by and among the Company, various financial institutions, and Bank of America, NA as Administrative Agent. 4.11** The Security Agreement, dated as of September 12, 1996, by and among the Company, ROV Holding, Inc. and BofA. 4.12** The Company Pledge Agreement, dated as of September 12, 1996, by and between the Company and BofA. 4.13*** Shareholders Agreement, dated as of September 12, 1996, by and among the Company and the shareholders of the Company referred to therein. 4.14*** Amendment No. 1 to Rayovac Shareholders Agreement, dated August 1, 1997, by and among the Company and the shareholders of the Company referred to therein. 4.15***** Amendment No. 2 to Rayovac Shareholders Agreement, dated as of January 8, 1999, by and among the Company and the Shareholders of the Company referred to therein. 4.16++++++ Amendment No. 3 to Rayovac Shareholders Agreement dated January 1, 2001, by and among the Company and the shareholders of the Company referred to therein. 23
4.17* Specimen certificate representing the Common Stock. 10.1+++++ Amended and Restated Employment Agreement, dated as of October 1, 2000, by and between the Company and David A. Jones. 10.2+++++ Amended and Restated Employment Agreement, dated as of October 1, 2000, by and between the Company and Kent J. Hussey. 10.3+++++ Employment Agreement, dated as of October 1, 2000, by and between the Company and Randall J. Steward. 10.4+++++ Employment Agreement, dated as of October 1, 2000, by and between the Company and Kenneth V. Biller. 10.5+++++ Employment Agreement, dated as of October 1, 2000, by and between the Company and Stephen P. Shanesy. 10.6+++++ Employment Agreement, dated as of October 1, 2000, by and between the Company and Merrell M. Tomlin. 10.7+++++ Employment Agreement, dated as of October 1, 2000, by and between the Company and Luis A. Cancio. - ---------------- * Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-35181) filed with the Commission. ** Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-17895) filed with the Commission. *** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 29, 1997, filed with the Commission on August 13, 1997. **** Incorporated by reference to the Company's Registration Statement on Form S-3 (Registration No. 333-49281) filed with the Commission. ***** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended January 3, 1999, filed with the Commission on February 17, 1999. ****** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended April 4, 1999, filed with the Commission on May 17, 1999. ******* Incorporated by reference to the Company's Report on Form 8-K filed with the Commission on June 19, 2001. + Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed with the Commission on December 23, 1997. ++++ Incorporated by reference to the Company's Current Report on Form 8-K filed with the Commission on August 24, 1999, as subsequently amended on October 26, 1999. +++++ Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000, filed with the Commission on December 19, 2000. ++++++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2000, filed with the Commission on February 14, 2001. +++++++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001, filed with the Commission on May 14, 2001. (b) Reports on Form 8-K: The Company has filed the following reports on Form 8-K during the three-month period ending July 1, 2001: 1. On June 14, 2001, the Company filed with the Commission a Report on Form 8-K to report issuance of a press release regarding the expiration of its consent solicitation and receipt of consents sufficient to amend the indenture relating to the Company's 10 1/4% Series B Senior Subordinated Notes due 2006. 2. On June 19, 2001, the Company filed with the Commission a Report on Form 8-K to report that a supplemental indenture incorporating the amendments to the indenture referenced in the Company's June 14, 2001, Form 8-K was executed on June 17, 2001, and will become operative when the tendered notes are accepted for payment. 3. On June 20, 2001, the Company filed with the Commission a Report on Form 8-K for the purpose of filing the Purchase Agreement dated June 20, 2001, by and among the Company, certain shareholders 24
identified in the Purchase Agreement ("Selling Shareholders") and Salomon Smith Barney Inc., and certain other underwriters identified in the Purchase Agreement ("Underwriters") as an exhibit to the Company's shelf registration statement on Form S-3 (Registration No. 333-59086). 4. On June 25, 2001, the Company filed with the Commission a Report on Form 8-K to report issuance of a press release announcing the pricing terms for the tender offer for all of its outstanding $65 million principal amount of 10 1/4% Series B Senior Subordinated Notes due 2006. 5. On June 28, 2001, the Company filed with the Commission a Report on Form 8-K to report issuance of a press release announcing the closing of the offer to purchase for cash and consent solicitation with respect to its outstanding $65 million principal amount of 10 1/4% Series B Senior Subordinated Notes due 2006. 25
Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: August 9, 2001 RAYOVAC CORPORATION By: /s/ Randall J. Steward ------------------------------- Randall J. Steward Executive Vice President of Administration and Chief Financial Officer 26
Exhibit 4.10 THIRD AMENDMENT THIS THIRD AMENDMENT dated as of June 11, 2001 (this "AMENDMENT") amends the Second Amended and Restated Credit Agreement dated as of August 9, 1999 (as previously amended, the "CREDIT AGREEMENT") among RAYOVAC CORPORATION (the "COMPANY"), various financial institutions and BANK OF AMERICA, N.A., as Administrative Agent (in such capacity, the "ADMINISTRATIVE AGENT"). Unless otherwise defined herein, capitalized terms used herein have the respective meanings assigned thereto in the Credit Agreement. WHEREAS, the parties hereto desire to amend the Credit Agreement as set forth below, NOW, THEREFORE, for good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties hereto agree as follows: SECTION 1 AMENDMENTS. Effective on (and subject to the occurrence of) the Amendment Effective Date (as defined below), the Credit Agreement shall be amended as set forth below. 1.1 AMENDMENTS TO DEFINITIONS. (a) The first sentence of the definition of "EBITDA" is amended by deleting the words "and Restructuring Charges for such period" and substituting the following therefor: ", Restructuring Charges, any non-cash charges related to the write-off of fees associated with the issuance of the Senior Subordinated Notes and (i) for the Computation Period ending June 30, 2001, up to $15,000,000 of non-cash charges and (ii) for the Computation Period ending September 30, 2001, up to $12,000,000 of non-cash charges." (b) The definition of "Expected Equity Offering" is amended by deleting the amount "$75,000,000" therein and substituting the amount "$60,000,000" therefor. 1.2 AMENDMENTS TO SECTION 2.8(A). Section 2.8(a) shall be amended by (a) deleting the text "(including the Expected Equity Offering and any other public offering, but excluding" in clause (iii) and substituting the following therefor: "(excluding (x) the Expected Equity Offering so long as it is completed prior to December 31, 2001 and (y)"; and (b) deleting the paragraph which begins "All prepayments" immediately following clause (iv) thereof and substituting the following therefor: "(v) On December 31, 2001, in an amount equal to the positive remainder, if any, of (x) the Net Cash Proceeds of the Expected Equity Offering minus (y) the amount paid (including principal and premium, if any, but excluding accrued interest) to purchase or redeem Senior Subordinated Notes after completion of the Expected Equity Offering. All prepayments of Term Loans pursuant to this SUBSECTION 2.8(A) shall be applied to the remaining installments of the Term Loans (x) in inverse order of maturity, in the case of prepayments pursuant to CLAUSES (I) and (II) and (y) PRO RATA, in the case of prepayments pursuant to CLAUSES (III), (IV) and (V).
1.3 ELIMINATION OF SECTION 5.2(D). Section 5.2(d) shall be deleted in its entirety. 1.4 AMENDMENT TO SECTION 8.4(C). Section 8.4(c) shall be amended by deleting the amount "$20,000,000" therein and substituting the amount "$40,000,000" therefor. 1.5 AMENDMENT TO SECTION 8.13. Section 8.13 shall be amended by (x) deleting the word "and" immediately following the text set forth in subsection (c) therein, (y) replacing the period immediately following the text set forth in subsection (d) therein with "; and" and (z) adding the following subsection (e): "(e) prior to December 31, 2001, but only so long as no Event of Default or Unmatured Event of Default has occurred and is continuing at the time of such purchase or redemption or would result therefrom, the Company may apply Net Cash Proceeds of the Expected Equity Offering toward the purchase or redemption of Senior Subordinated Notes." SECTION 2 REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to the Administrative Agent and the Lenders that (a) the representations and warranties made in Section 6 of the Credit Agreement are true and correct on and as of the Amendment Effective Date with the same effect as if made on and as of such date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they were true and correct as of such earlier date); and (b) no Event of Default or Unmatured Event of Default exists or will result from the execution and delivery of this Amendment. SECTION 3 EFFECTIVENESS. The amendments set forth in SECTION 1 above shall become effective, as of the day and year first above written, on the date (the "AMENDMENT EFFECTIVE DATE") on which the Administrative Agent has received (a) counterparts of this Amendment executed by the Company and the Required Lenders (or, in the case of any party from which the Administrative Agent has not received a counterpart hereof, facsimile confirmation of the execution of a counterpart hereof by such party), (b) a Confirmation, substantially in the form of EXHIBIT A, executed by the Company and each Subsidiary (other than any Foreign Subsidiary or Dormant Subsidiary) and (c) for the account of each Lender that has executed and delivered a counterpart hereof to the Administrative Agent by 5:00 p.m. (Eastern time) on June 11, 2001, an amendment fee in an amount equal to 0.05% of such Lender's Commitment on the Amendment Effective Date. SECTION 4 MISCELLANEOUS. 4.1 CONTINUING EFFECTIVENESS, ETC. As herein amended, the Credit Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. After the Amendment Effective Date, all references in the Credit Agreement and each other Loan Document to the "Credit Agreement" or similar terms shall refer to the Credit Agreement as amended hereby. 4.2 COUNTERPARTS. This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original but all such counterparts shall together constitute one and the same Amendment. -2-
4.3 GOVERNING LAW. This Amendment shall be a contract made under and governed by the internal laws of the State of New York. 4.4 SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon the Company, the Lenders and the Administrative Agent and their respective successors and assigns, and shall inure to the benefit of the Company, the Lenders and the Administrative Agent and the successors and assigns of the Lenders and the Administrative Agent. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their duly-authorized officers as of the day and year first above written. RAYOVAC CORPORATION By: _______________________________________ Name: _____________________________________ Title:_____________________________________ BANK OF AMERICA, N.A., as Administrative Agent By: _______________________________________ Name: _____________________________________ Title:_____________________________________ BANK OF AMERICA, N.A., as Issuing Lender, Swingline Lender and a Lender By: _______________________________________ Name: _____________________________________ Title:_____________________________________ BANK LEUMI USA By: _______________________________________ Name: _____________________________________ Title:_____________________________________ -3-
THE BANK OF NEW YORK By: _______________________________________ Name: _____________________________________ Title:_____________________________________ THE BANK OF NOVA SCOTIA By: _______________________________________ Name: _____________________________________ Title:_____________________________________ BANK OF TOKYO-MITSUBISHI TRUST COMPANY By: _______________________________________ Name: _____________________________________ Title:_____________________________________ BNP PARIBAS By: _______________________________________ Name: _____________________________________ Title:_____________________________________ COMERICA BANK By: _______________________________________ Name: _____________________________________ Title:_____________________________________ -4-
DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By: _______________________________________ Name: _____________________________________ Title:_____________________________________ By: _______________________________________ Name: _____________________________________ Title:_____________________________________ BANK ONE, NA (Main Office Chicago) By: _______________________________________ Name: _____________________________________ Title:_____________________________________ FIRSTAR BANK, N.A. By: _______________________________________ Name: _____________________________________ Title:_____________________________________ FLEET NATIONAL BANK By: _______________________________________ Name: _____________________________________ Title:_____________________________________ -5-
HARRIS TRUST AND SAVINGS BANK By: _______________________________________ Name: _____________________________________ Title:_____________________________________ LASALLE BANK NATIONAL ASSOCIATION By: _______________________________________ Name: _____________________________________ Title:_____________________________________ M&I MARSHALL & ILSLEY BANK By: _______________________________________ Name: _____________________________________ Title:_____________________________________ THE MITSUBISHI TRUST AND BANKING CORPORATION By: _______________________________________ Name: _____________________________________ Title:_____________________________________ NATIONAL CITY BANK By: _______________________________________ Name: _____________________________________ Title:_____________________________________ -6-
THE NORTHERN TRUST COMPANY By: _______________________________________ Name: _____________________________________ Title:_____________________________________ THE ROYAL BANK OF SCOTLAND PLC By: _______________________________________ Name: _____________________________________ Title:_____________________________________ ST. FRANCIS BANK, F.S.B. By: _______________________________________ Name: _____________________________________ Title:_____________________________________ SUNTRUST BANK By: _______________________________________ Name: _____________________________________ Title:_____________________________________ U.S. BANK NATIONAL ASSOCIATION By: _______________________________________ Name: _____________________________________ Title:_____________________________________ -7-
EXHIBIT A CONFIRMATION Dated as of June 11, 2001 To: Bank of America, N.A., as Administrative Agent, and the Lenders which are parties to the Credit Agreement referred to below Please refer to (a) the Second Amended and Restated Credit Agreement dated as of August 9, 1999 (as amended, the "CREDIT AGREEMENT") among Rayovac Corporation (the "COMPANY"), various financial institutions (the "LENDERS") and Bank of America, N.A., as Administrative Agent (the "ADMINISTRATIVE AGENT"); (b) the Security Agreement dated as of September 12, 1996 among the Company, ROV Holding, Inc., Rovcal, Inc. and the Administrative Agent; (c) the Trademark Security Agreement dated as of September 12, 1996 executed by the Company in favor of the Administrative Agent; (d) the Patent Security Agreement dated as of September 12, 1996 executed by the Company in favor of the Administrative Agent; (e) the Copyright Security Agreement dated as of September 12, 1996 executed by the Company in favor of the Administrative Agent; (f) the Guaranty dated as of September 12, 1996 executed by ROV Holding, Inc. and Rovcal, Inc. in favor of the Lenders and the Administrative Agent; (g) the Company Pledge Agreement dated as of September 12, 1996 between the Company and the Administrative Agent; (h) the Deed of Charge and Memorandum of Deposit dated September 12, 1996 between ROV Holding, Inc. and the Administrative Agent; (i) the Share Pledge Agreement dated as of November 11, 1996 executed by ROV Holding, Inc. in favor of the Administrative Agent; (j) the Deed of Charge and Memorandum of Deposit dated as of November 11, 1996 between ROV Holding, Inc. and the Administrative Agent; (k) the Deed of Pledge dated as of November 11, 1996 between ROV Holding, Inc. and the Administrative Agent; (l) the Charge Over Shares dated August 9, 1999 between ROV Holding, Inc. and the Administrative Agent; and (m) the Third Amendment dated as of June 11, 2001, amending the Credit Agreement (the "THIRD AMENDMENT"). Each of the documents referred to in items (b) through (l) above is called a "CREDIT DOCUMENT". Capitalized terms used but not defined herein shall have the meanings set forth in the Credit Agreement. Each of the undersigned (a) confirms to the Lenders and the Administrative Agent that, after giving effect to the Third Amendment, each Credit Document to which such undersigned is a party continues in full force and effect and is the legal, valid and binding obligation of such undersigned, enforceable against such undersigned in accordance with its terms; and (b) agrees that each reference in each Credit Document to the "Credit Agreement" or any similar term shall, after the date hereof, be deemed to be a reference to the Credit Agreement as amended by the Third Amendment.
RAYOVAC CORPORATION By: _______________________________________ Name: _____________________________________ Title:_____________________________________ ROV HOLDING, INC. By: _______________________________________ Name: _____________________________________ Title:_____________________________________ ROVCAL, INC. By: _______________________________________ Name: _____________________________________ Title:_____________________________________ Accepted and Agreed as of June __, 2001 BANK OF AMERICA, N.A., as Administrative Agent By: _______________________________________ Name: _____________________________________ Title:_____________________________________ -2-