UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 29, 2002
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 ( )
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )
The number of shares outstanding of the Registrant's common stock, $.01
par value, as of February 7, 2003, was 32,450,184.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 29, 2002 and September 30, 2002
(Unaudited)
(In thousands)
DECEMBER 29, 2002 SEPTEMBER 30, 2002
----------------- ------------------
-ASSETS-
Current assets:
Cash and cash equivalents $ 22,919 $ 9,881
Receivables 216,944 136,610
Inventories 143,006 84,275
Prepaid expenses and other 47,412 28,556
--------- ---------
Total current assets 430,281 259,322
Property, plant and equipment, net 168,681 102,586
Deferred charges and other, net 69,054 51,900
Intangible assets, net 324,151 119,425
--------- ---------
Total assets $ 992,167 $ 533,233
========= =========
-LIABILITIES AND SHAREHOLDERS' EQUITY -
Current liabilities:
Current maturities of long-term debt $ 17,524 $ 13,400
Accounts payable 134,309 76,155
Accrued liabilities 97,620 29,229
--------- ---------
Total current liabilities 249,453 118,784
Long-term debt, net of current maturities 465,447 188,471
Employee benefit obligations, net of current portion 54,734 24,009
Other 44,687 27,176
--------- ---------
Total liabilities 814,321 358,440
Shareholders' equity:
Common stock, $.01 par value, authorized 150,000 shares; issued
61,986 and 61,594 shares, respectively; outstanding 32,450 and
32,058 shares, respectively 620 616
Additional paid-in capital 185,608 180,823
Retained earnings 148,636 149,221
Accumulated other comprehensive loss (17,052) (19,859)
Notes receivable from officers/shareholders (4,205) (4,205)
--------- ---------
313,607 306,596
Less: Treasury stock, at cost, 29,536 shares (130,070) (130,070)
Less: Unearned restricted stock compensation (5,691) (1,733)
--------- ---------
Total shareholders' equity 177,846 174,793
--------- ---------
Total liabilities and shareholders' equity $ 992,167 $ 533,233
========= =========
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS.
2
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three month periods ended December 29, 2002 and December 30, 2001
(Unaudited)
(In thousands)
THREE MONTHS
------------------------------------
2003 2002
---------- ---------
Net sales $ 260,222 $ 161,883
Cost of goods sold 156,963 99,151
Special charges 9,705 --
--------- ---------
Gross profit 93,554 62,732
Selling 48,526 27,407
General and administrative 24,904 28,567
Research and development 3,896 3,218
Special charges 5,685 --
--------- ---------
Total operating expenses 83,011 59,192
Income from operations 10,543 3,540
Interest expense 10,102 4,169
Non-operating expense 3,072 --
Other income, net (1,687) (782)
--------- ---------
(Loss) income before income taxes (944) 153
Income tax benefit (359) (249)
--------- ---------
Net (loss) income $ (585) $ 402
========= =========
BASIC EARNINGS PER SHARE
Weighted average shares
and equivalents outstanding 31,801 31,780
Net (loss) income $ (0.02) $ 0.01
========= =========
DILUTED EARNINGS PER SHARE
Weighted average shares
and equivalents outstanding 31,801 32,412
Net (loss) income $ (0.02) $ 0.01
========= =========
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
RAYOVAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three month period ended December 29, 2002 and December 30, 2001
(Unaudited)
(In thousands)
THREE MONTHS
-------------------------------
2003 2002
----------- --------
Cash flows from operating activities:
Net (loss) income $ (585) $ 402
Non-cash adjustments to net income:
Amortization 523 539
Depreciation 8,286 4,832
Other non-cash adjustments 3,791 (4,852)
Net changes in assets and liabilities 12,211 23,245
-------- --------
Net cash provided by operating activities 24,226 24,166
Cash flows from investing activities:
Purchases of property, plant and equipment (3,052) (3,862)
Proceeds from sale of property, plant and equipment 113 --
Payment for acquisitions, net of cash acquired (245,130) --
-------- --------
Net cash used by investing activities (248,069) (3,862)
Cash flows from financing activities:
Reduction of debt (257,803) (72,656)
Proceeds from debt financing 506,771 60,500
Debt issuance costs (12,635) --
Other (606) (334)
-------- --------
Net cash provided (used) by financing activities 235,727 (12,490)
Effect of exchange rate changes on cash and cash
equivalents 1,154 (384)
-------- --------
Net increase in cash and cash equivalents 13,038 7,430
Cash and cash equivalents, beginning of period 9,881 11,358
-------- --------
Cash and cash equivalents, end of period $ 22,919 $ 18,788
======== ========
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
RAYOVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1 SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: These financial statements have been prepared by
Rayovac Corporation (the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission (the
"SEC") and, in the opinion of the Company, include all adjustments
(which are normal and recurring in nature) necessary to present fairly
the financial position of the Company at December 29, 2002, results of
operations and cash flows for the three month periods ended December
29, 2002, and December 30, 2001. 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, 2002. Certain prior
year amounts have been reclassified to conform with the current year
presentation.
SHIPPING AND HANDLING COSTS: The Company incurred shipping and handling
costs of $12,996 and $6,996 for the three months ended December 29,
2002 and December 30, 2001, respectively, which are included in selling
expense. Shipping and handling costs include costs incurred with
third-party carriers to transport products to customers and salaries
and overhead costs related to activities to prepare the Company's
products for shipment at the Company's distribution facilities.
CONCENTRATION OF CREDIT RISK: Trade receivables potentially subject the
Company to credit risk. The Company extends credit to its customers
based upon an evaluation of the customer's financial condition and
credit history and generally does not require collateral. The Company
monitors its customer's credit and financial conditions based on
changing economic conditions and will make adjustments to credit
policies as required.
The Company has a broad range of customers including many large retail
outlet chains, one of which previously accounted for in excess of 20%
of our sales volume. Due to the impacts of the VARTA acquisition,
see Footnote 9, Acquisitions, this customer represented approximately
3% and 23%, respectively, of receivables as of December 29, 2002 and
September 30, 2002.
After the acquisition of Varta, approximately 59% of the Company's
sales occur outside of North America. These sales and related
receivables are subject to varying degrees of credit, currency,
political and economic risk. The Company monitors these risks and
makes appropriate provisions for collectability based on an
assessment of the risks present.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS: In August 2001, the FASB
issued Statement No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS.
Statement No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company adopted
the Statement on October 1, 2002. Adoption did not have a material
effect on the financial statements of the Company.
In October 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. This statement supersedes
FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting
and reporting provisions of APB Opinion No. 30, REPORTING THE RESULTS
OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A
BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS
AND TRANSACTIONS, for the disposal of a segment of a business. The
Company adopted the Statement on October 1, 2002. Adoption did not have
a material effect on the financial statements of the Company.
In April 2002, the FASB issued Statement No. 145, RESCISSION OF FASB
STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND
TECHNICAL CORRECTIONS. The Statement addresses, among other things, the
income
5
statement treatment of gains and losses related to debt
extinguishments, requiring such expenses to no longer be treated as
extraordinary items, unless the items meet the definition of
extraordinary per APB Opinion No. 30, REPORTING THE RESULTS OF
OPERATIONS--REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A
BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS
AND TRANSACTIONS. The Company adopted this Statement on October 1,
2002. As a result, the write-off of unamortized debt issuance costs of
$3,072 associated with the replacement of our previous credit facility
is classified as non-operating expense in the three-month period ending
December 29, 2002.
In November 2002, the FASB issued Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. This Interpretation
addresses, among other things, the disclosure to be made by a guarantor
in its interim and annual financial statements about its obligations
under guarantees. The Interpretation also requires the recognition of a
liability by a guarantor at the inception of certain guarantees. The
Company has adopted the disclosure requirements of the interpretation,
and will apply the recognition and measurement provisions for all
guarantees entered into or modified after December 31, 2002.
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 month period ended December 29, 2002,
$1,078 of pretax derivative losses from such hedges were recorded as an
adjustment to interest expense. At December 29, 2002, the Company had a
portfolio of interest rate swaps outstanding which effectively fixes
the interest rates on floating rate debt at rates as follows: 4.458%
for a notional principal amount of $70,000 through July 2004, 3.974%
for a notional principal amount of $70,000 from July 2004 through
October 2005, 3.769% for a notional principal amount of $100,000
through August 2004 and 3.799% for a notional principal amount of
$100,000 from August 2004 through November 2005. The derivative net
losses on these contracts recorded in OCI at December 29, 2002 was an
after-tax loss of $4,814.
The Company enters into forward and swap foreign exchange contracts, to
hedge the risk from forecasted settlement in local currencies of
inter-company purchases and sales, trade sales, and trade purchases.
These contracts generally require the Company to exchange foreign
currencies for U.S. dollars, Euros or Pounds Sterling. These contracts
are designated as cash flow hedges with the fair value recorded in OCI
and as a hedge asset or liability, as applicable. Once the forecasted
transaction has been recognized as a purchase or sale and a related
liability or asset recorded in the balance sheet, the gain or loss on
the related derivative hedge contract is reclassified from OCI into
earnings as an offset to the change in value of the liability or asset.
During the three month period ended December 29, 2002, $11 of pretax
derivative losses were recorded as an adjustment to earnings for
forward and swap contracts settled at maturity. At December 29, 2002,
the Company had no foreign exchange derivative contracts outstanding.
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
6
reclassified as an addition to or subtraction from, the carrying value
of the purchased asset. During the three month period ended December
29, 2002, no such foreign exchange derivative activity occurred. At
December 29, 2002, the Company had no such foreign exchange derivative
contracts outstanding.
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 zinc through a specified date. During
the three month period ended December 29, 2002, $218 of pretax
derivative losses were recorded as an adjustment to cost of sales for
swap contracts settled at maturity. At December 29, 2002, the Company
had a series of swap contracts outstanding through December 2003 with a
contract value of $5,913. The derivative net losses on these contracts
recorded in OCI at December 29, 2002 was an after-tax loss of $217.
2 INVENTORIES
Inventories consist of the following:
DECEMBER 29, 2002 SEPTEMBER 30, 2002
----------------- ------------------
Raw material............................... $42,231 $19,893
Work-in-process............................ 22,404 19,004
Finished goods............................. 78,371 45,378
-------- -------
$143,006 $84,275
======== =======
3 ACQUIRED INTANGIBLE ASSETS AND GOODWILL
DECEMBER 29, 2002 SEPTEMBER 30, 2002
----------------- ------------------
GROSS GROSS
CARRYING ACCUMULATED NET CARRYING ACCUMULATED NET
AMOUNT AMORTIZATION INTANGIBLE AMOUNT AMORTIZATION INTANGIBLE
--------- ------------ ---------- -------- ------------ ----------
AMORTIZED INTANGIBLE ASSETS
Non-compete agreement................. $ 700 $ 665 $ 35 $ 700 $ 630 $ 70
Proprietary technology................ 525 316 209 525 308 217
-------- -------- -------- -------- -------- --------
$ 1,225 $ 981 $ 244 $ 1,225 $ 938 $ 287
======== ======== ======== ======== ======== ========
PENSION INTANGIBLES
Under-funded pension.................. $ 2,744 $ -- $ 2,744 $ 3,446 $ -- $ 3,446
======== ======== ======== ======== ======== ========
UNAMORTIZED INTANGIBLE ASSETS
Trade names........................... $240,782 $ 4,875 $235,907 $ 90,000 $ 4,875 $ 85,125
======== ======== ======== ======== ======== ========
NORTH LATIN
GOODWILL AMERICA AMERICA EUROPE/ROW TOTAL
------- ------- ---------- -----
Balance as of October 1, 2002, net............ $1,035 $ 26,884 $2,648 $ 30,567
Goodwill acquired during year................. 653 5,831 46,806 53,290
Effect of translation......................... -- (169) 1,568 1,399
------- -------- ------- -------
Balance as of December 29, 2002, net.......... $ 1,688 $ 32,546 $51,022 $85,256
======= ======== ======= =======
The non-compete agreement is being amortized on a straight-line basis
over 5 years. The proprietary technology assets are being amortized on
a straight-line basis over 15 to 17 years. The Company has deemed that
its trade name intangible assets have indefinite lives because they are
expected to generate cash flows indefinitely. Goodwill and intangible
assets deemed to have indefinite lives are tested for impairment
annually.
The amortization expense for the three months ended December 29, 2002
and December 30, 2001 are as follows:
THREE MONTHS
-----------------------
AMORTIZATION EXPENSE 2003 2002
---- ----
Non-compete and proprietary technology........ $43 $43
=== ===
7
4 OTHER COMPREHENSIVE INCOME
Comprehensive income and the components of other comprehensive income
for the three months ended December 29, 2002 and December 30, 2001
are as follows:
THREE MONTHS
----------------------
2003 2002
---- ----
Net (loss) income............................... $(585) $402
Other comprehensive income:
Foreign currency translation................. 3,373 380
Net unrealized loss on available
for-sale securities.......................... (110) (99)
Reclassification adjustment for losses
included in net (loss) income................ 250 --
Net unrealized (loss) gain on derivative
instruments.................................. (706) 1,297
---- ------
Comprehensive income............................ $2,222 $1,980
====== ======
Net exchange gains or losses resulting from the translation of assets
and liabilities of foreign subsidiaries are accumulated in a separate
section of shareholders' equity. Also included are the effects of
exchange rate changes on intercompany balances of a long-term nature
and transactions designated as hedges of net foreign investments. The
changes in accumulated foreign currency translation for the three
months ended December 29, 2002 was primarily attributable to the impact
of translation of assets and liabilities of our recently acquired
European operations.
5 NET INCOME PER COMMON SHARE
Net income per common share for the three months ended December 29,
2002 and December 30, 2001 is calculated based upon the following
shares:
THREE MONTHS
------------------------
2003 2002
---- ----
Basic............................................... 31,801 31,780
Effect of restricted stock and assumed
conversion of options............................... -- 632
-- ---
Diluted............................................. 31,801 32,412
====== ======
The effect of restricted stock and unexercised stock options
outstanding for the three-month period ending December 29, 2002 were
excluded from the diluted EPS calculation, as their effect was
anti-dilutive.
6 COMMITMENTS AND CONTINGENCIES
In March 1998, the Company entered into an agreement to purchase
certain equipment and to pay annual royalties. In connection with
this 1998 agreement, which supersedes previous agreements dated
December 1991, and March 1994, the Company committed to pay
royalties of $2,000 in 1998 and 1999, $3,000 in 2000 through 2002,
and $500 in each year thereafter, as long as the related equipment
patents are enforceable (until 2022). In December 2002, this
agreement was modified such that royalty payments in 2003 through
2022 will be $250.
8
The Company has provided for the estimated costs associated with
environmental remediation activities at some of its current and
former manufacturing sites. The Company believes that any additional
liability in excess of the amounts provided of $1,764, 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.
During 2002, the Company entered into a long-term lease for a
facility being built in Dixon, Illinois (see Footnote 7, Other). The
Company anticipates that construction will be completed and the
lease payments will be fixed for this facility during the second
fiscal quarter of 2003.
The Company has certain other contingent liabilities with respect to
litigation, claims and contractual agreements arising in the
ordinary course of business. Such litigation includes shareholder
lawsuits. In the opinion of management, it is either not likely or
premature to determine whether such contingent liabilities will have
a material adverse effect on the financial condition, liquidity or
cash flow of the Company. The suit filed against the Company by
Eveready Battery Company has been settled, and the impact of such
settlement is included in results of operations for the three months
ended December 29, 2002.
7 OTHER
During Fiscal 2001, the Company recorded special charges related to:
(i) an organizational restructuring in the U.S, (ii) manufacturing and
distribution cost rationalization initiatives in the Company's
Tegucigalpa, Honduras and Mexico City, Mexico manufacturing facilities
and in the Company's European operations, (iii) the closure of the
Company's Wonewoc, Wisconsin, manufacturing facility, (iv) the
rationalization of uneconomic manufacturing processes at the Company's
Fennimore, Wisconsin, manufacturing facility, and rationalization of
packaging operations and product lines, and (v) costs associated with
the Company's June 2001 secondary offering. The amount recorded
includes $9,100 of employee termination benefits for approximately 570
notified employees, $9,900 of equipment, inventory, and other asset
write-offs, and $2,000 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
Change in estimate..................... 4,400 100 4,500
Expense as incurred.................... 700 1,100 1,800
Cash expenditures...................... (5,800) (1,300) (7,100)
Non-cash charges....................... -- (9,300) (9,300)
------- ------- -------
Balance September 30, 2001............. $4,300 $1,600 $5,900
Change in estimate..................... (1,000) (300) (1,300)
Cash expenditures...................... (3,100) -- (3,100)
Non-cash charges....................... -- (700) (700)
------- ------- -------
Balance September 30, 2002............. $200 $600 $800
Cash expenditures...................... -- (100) (100)
------- ------- -------
Balance December 29, 2002.............. $200 $500 $700
======= ======= =======
9
During Fiscal 2002, the Company recorded special charges related to:
(i) the closure of the Company's Santo Domingo, Dominican Republic
plant, and (ii) manufacturing cost rationalization initiatives in the
Company's Mexico City, Mexico facility. The amount recorded includes
approximately $1,200 of employee termination benefits for approximately
115 notified employees, and approximately $900 of equipment, inventory
and other asset write-offs, and $300 of other expenses. A summary of
the 2002 restructuring activities follows:
2002 RESTRUCTURING SUMMARY
TERMINATION OTHER
BENEFITS COSTS TOTAL
Expense accrued................. $1,200 $1,400 $2,600
Change in estimate.............. -- (400) (400)
Expense as incurred............. -- 200 200
Cash expenditures............... (1,100) (200) (1,300)
Non-cash charges................ -- (1,000) (1,000)
------- ------- -------
Balance September 30, 2002...... $100 $-- $100
Cash expenditures............... (100) -- (100)
------- ------- -------
Balance December 29, 2002....... $-- $-- $--
======= ======= =======
During the three months ended December 29, 2002, the Company recorded
special charges related to: (i) the closure of the Company's Mexico
City, Mexico plant, (ii) the commencement of the closure of operations
at the Company's Madison, Wisconsin packaging facility and Middleton,
Wisconsin distribution and combination of the two operations into a new
leased complex currently being built in Dixon, Illinois, and (iii) a
series of restructuring initiatives impacting the Company's sales,
marketing, operations and administrative functions in Europe, North
America, and Latin America. The amount recorded includes approximately
$6,200 of employee termination benefits for approximately 600 notified
employees, and approximately $7,800 of equipment, inventory and other
asset write-offs, and $1,400 of other expenses. A summary of the 2003
restructuring activities follows:
2003 RESTRUCTURING SUMMARY
TERMINATION OTHER
BENEFITS COSTS TOTAL
Expense accrued..................... $6,200 $9,000 $15,200
Expense as incurred................. -- 200 200
Cash expenditures................... (2,300) (200) (2,500)
Non-cash charges.................... -- (5,600) (5,600)
------ ------ ------
Balance December 29, 2002........... $3,900 $3,400 $7,300
====== ====== ======
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, South America and the
Caribbean; Europe/Rest of World ("Europe/ROW") includes continental
Europe, the United Kingdom, 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
10
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.
Segment information for the three months ended December 29, 2002 and
December 30, 2001 is as follows:
REVENUES FROM EXTERNAL CUSTOMERS THREE MONTHS
----------------------
2003 2002
---- ----
North America................................. $107,145 $122,365
Latin America................................. 34,444 25,989
Europe/ROW.................................... 118,633 13,529
-------- ------
Total segments................................ $260,222 $161,883
======== ========
INTER SEGMENT REVENUES THREE MONTHS
-----------------------
2003 2002
----- ----
North America................................. $7,732 $10,177
Latin America................................. -- 1,777
Europe/ROW.................................... 631 442
------ -------
Total segments................................ $8,363 $12,396
====== =======
SEGMENT PROFIT THREE MONTHS
-----------------------
2003 2002
----- ----
North America................................. $19,705 $7,355
Latin America................................. 3,567 3,642
Europe/ROW.................................... 15,011 1,144
------ -----
Total segments................................ 38,283 12,141
Corporate..................................... 12,350 8,601
Special charges............................... 15,390 --
Interest expense.............................. 10,102 4,169
Non-operating expense......................... 3,072 --
Other income, net............................. (1,687) (782)
------ ----
(Loss) income before income taxes............. $(944) $153
====== ====
SEGMENT ASSETS DECEMBER 29, 2002 DECEMBER 30, 2001
----------------- -----------------
North America........................... $223,655 $249,547
Latin America........................... 207,508 212,265
Europe/ROW.............................. 461,980 30,488
-------- --------
Total segments.......................... $893,143 $492,300
Corporate............................... 99,024 55,927
-------- --------
Total assets at period end.............. $992,167 $548,227
======== ========
11
9 ACQUISITIONS
On October 1, 2002, the Company acquired the consumer battery business
of VARTA AG (VARTA) for approximately $262 million Euro. As a result
of the acquisition, the Company plans to optimize the global
resources of the combined Rayovac and VARTA companies through the
utilization of economies of scale and other initiatives (See 2003
Restructuring Summary within Footnote 7).
The results of VARTA's operations, since the acquisition on October 1,
2002, are included in the condensed consolidated financial statements
for Fiscal 2003. The Company has not yet finalized the purchase price
allocation for the acquisition.
In connection with the acquisition, the Company entered into an Amended
and Restated Credit Agreement ("Third Restated Agreement") which
replaced the previous credit agreement. The Third Restated Agreement
provided for senior bank facilities, including term and revolving
credit facilities in an initial aggregate amount (assuming an exchange
rate of Euro to Dollar of 1 to 1) of approximately $625 million. The
Third Restated Agreement includes a $100 million seven-year revolving
credit facility, a EUR 50 million seven-year revolving facility, a $300
million seven-year amortizing term loan, a EUR 125 million seven-year
amortizing term loan and a EUR 50 million six-year amortizing term
loan. The U.S. Dollar revolving credit facility may be increased, at
the Company's option, by up to $50 million. A non-operating charge of
$3,072 was recorded in the three month period ended December 29, 2002
for the write-off of unamortized debt fees related to the previous debt
agreement.
SUPPLEMENTAL PRO FORMA INFORMATION: The following reflects the
Company's proforma results had the results of the VARTA business been
included in the Fiscal 2002 three months.
THREE MONTHS
------------
2003 2002
---- ----
NET SALES
Reported net sales............................ $260,222 $161,883
Pro forma adjustments......................... -- 110,370
-------- -------
Pro forma net sales........................ $260,222 $272,253
======== ========
NET (LOSS) INCOME
Reported net (loss) income.................... $(585) $402
Pro forma adjustments......................... -- 4,394
-------- ------
Pro forma net (loss) income................ $(585) $4,796
======== ======
BASIC EARNINGS PER SHARE
Reported net (loss) income.................... $(0.02) $0.01
Pro forma adjustments......................... -- 0.14
-------- ------
Pro forma net (loss) income................ $(0.02) $0.15
======== ======
DILUTED EARNINGS PER SHARE
Reported net (loss) income.................... $(0.02) $0.01
Pro forma adjustments......................... -- 0.14
-------- -----
Pro forma net (loss) income................ $(0.02) $0.15
======== =====
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FISCAL QUARTER ENDED DECEMBER 29, 2002 COMPARED TO
FISCAL QUARTER ENDED DECEMBER 30, 2001
Year over year historical comparisons are influenced by our October 1,
2002 acquisition of the consumer battery business of VARTA AG ("VARTA"), which
is included in our current year but not prior year results. See Footnote 9,
Acquisitions, to the Condensed Consolidated Financial Statements for
supplemental pro forma information providing additional year over year
comparisons of the impacts of the VARTA acquisition.
NET SALES. Net sales for the three months ended December 29, 2002 (the
"Fiscal 2003 Quarter") increased $98.3 million, or 60.7%, to $260.2 million from
$161.9 million in the three months ended December 30, 2001 (the "Fiscal 2002
Quarter"). The sales increase is attributable to the VARTA acquisition. Aside
from this impact, both the Latin America and North America segments experienced
declines in net sales versus the Fiscal 2002 Quarter.
OPERATING INCOME. Our income from operations increased $7.0 million to
$10.5 million in the Fiscal 2003 Quarter from $3.5 million the same period last
year. The increase was primarily attributable to increased profitability
associated with the VARTA acquisition and lower general and administrative
expenses, the result of a $16.1 million bad debt reserve in the Fiscal 2002
Quarter, which the Company did not anniversary in Fiscal 2003. In the Fiscal
2003 Quarter, the Company incurred $15.4 million in special charges reflecting a
series of restructuring initiatives announced and implemented during the
quarter.
NET INCOME. Net income for the Fiscal 2003 Quarter decreased $1.0
million to a loss of $0.6 million from income of $0.4 million in the Fiscal 2002
Quarter. During the Fiscal 2003 Quarter, the favorable impacts of the VARTA
acquisition more than offset the increase in interest expense resulting from the
new $625 million credit facility entered into to finance the acquisition. The
Fiscal 2003 Quarter also included special charges related to restructuring of
$9.5 million, after tax, and a non-operating expense of $1.9 million, after tax,
reflecting the write-off of unamortized debt issuance costs associated with the
replacement of our previous credit facility. The Fiscal 2002 Quarter included a
$10.0 million, after tax, bad debt expense related to the bankruptcy filing of a
key customer.
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, South America, and
the Caribbean; Europe/ROW includes continental Europe, the United Kingdom, and
all other countries in which we do business. We evaluate segment profitability
based on income from operations before corporate expense. Corporate expense
includes corporate purchasing expense, general and administrative expense, and
research and development expense.
FISCAL QUARTER
--------------
NORTH AMERICA 2003 2002
---- ----
Revenue from external customers............ $107.2 $122.4
Segment profit............................. 19.7 7.4
Segment profit as a % of net sales......... 18.4% 6.0%
Assets..................................... $223.7 $249.5
Our sales to external customers decreased $15.2 million, or 12.4%, to
$107.2 million in the Fiscal 2003 Quarter from $122.4 million the previous year
due primarily to weakness in alkaline and heavy duty batteries partially offset
by improved sales in lighting products and specialty batteries. Alkaline sales
decreases of $12.3 million were
13
primarily attributable to a $4.0 million decline in sales to a key customer
in bankruptcy, our inability to anniversary $4.0 million in sales to a
discontinued low-margin OEM customer in the prior year, and a cautious
overall retail inventory environment and continued promotional activity.
Heavy duty sales decreases of $4.6 million reflect reduced distribution and
general industry trends. Lighting product sales growth was primarily
attributable to the success of new products, while specialty battery sales
improvement resulted from higher sales of lithium batteries.
Our profitability increased $12.3 million to $19.7 million in the
Fiscal 2003 Quarter from $7.4 million in the Fiscal 2002 Quarter. The increase
in profitability in the Fiscal 2003 Quarter was primarily attributable to a
$16.1 million bad debt expense related to the bankruptcy filing of a key
customer recorded in the Fiscal 2002 Quarter, partially offset by an increase in
operating expenses and a reduction in gross profit due to the sales decrease.
Excluding the impacts of the bad debt expense from the prior year, our
profitability margins decreased 80 basis points to 18.4% from 19.2% in the same
quarter last year.
Our assets decreased $25.8 million, or 10.3%, to $223.7 million in the
Fiscal 2003 Quarter from $249.5 million the previous year. The decrease was
primarily attributable to a $15.0 million decrease in receivables primarily
reflecting the lower sales volume and timing of collections.
FISCAL QUARTER
--------------
LATIN AMERICA 2003 2002
---- ----
Revenue from external customers........ $34.4 $26.0
Segment profit......................... 3.6 3.6
Segment profit as a % of net sales..... 10.5% 13.8%
Assets................................. $207.5 $212.3
Our sales to external customers increased $8.4 million, or 32.3% to
$34.4 million in the Fiscal 2003 Quarter from $26.0 million in the same period
last year. The increase in sales is due to the impact of the VARTA acquisition
within the region, partially offset by continued declines caused by unfavorable
economic conditions, continued curtailment of shipments to certain distributors
and wholesalers who were delinquent in payments, and political uncertainties in
Argentina and Venezuela.
Our profitability was $3.6 million in the Fiscal 2003 Quarter,
unchanged from the Fiscal 2002 Quarter. The favorable profit from the VARTA
acquisition was offset by declines in profit resulting from lower sales
throughout the rest of the region.
Our assets decreased $4.8 million, or 2.3%, to $207.5 million in the
Fiscal 2003 Quarter from $212.3 million the previous year. The acquisition of
the VARTA business in Latin America caused asset increases across all asset
categories, which was offset by a reduction in accounts receivable reflecting
improvements in collections, a decrease in property, plant and equipment
reflecting the closure of the Dominican Republic and Mexico manufacturing
facilities, partially offset by increases in inventory primarily reflecting the
impact of the VARTA acquisition. The closure of the Dominican Republic
manufacturing location occurred in Fiscal 2002 and the closure and subsequent
write-off of the Mexico manufacturing related assets is included in Special
Charges in the Fiscal 2003 Quarter.
FISCAL QUARTER
--------------
EUROPE/ROW 2003 2002
---- ----
Revenue from external customers............ $118.6 $13.5
Segment profit............................. 15.0 1.1
Segment profit as a % of net sales......... 12.6% 8.1%
Assets..................................... $462.0 $30.5
The Europe/ROW segment was the segment most dramatically impacted by
the VARTA acquisition. Increases in sales, segment profitability and assets all
reflect the significance of VARTA within the region.
14
Profitability as a percent of net sales increased from 8.1% in the
Fiscal 2002 Quarter to 12.6% in the Fiscal 2003 Quarter, bringing this segment's
profitability percentage more in line with our North America and Latin America
segments.
Intangible assets of $201.8 million, primarily related to the VARTA
acquisition, now make up a substantial portion of the asset base within the
segment.
CORPORATE EXPENSE. Our corporate expenses increased $3.8 million, or
44.2%, to $12.4 million in the Fiscal 2003 Quarter from $8.6 million in the
Fiscal 2002 Quarter. The increase primarily reflects higher legal expenses
associated with a patent infringement litigation, a $1.5 million charge
associated with the settlement of such litigation (see further discussion in
Part II, Item 1: Legal Proceedings), and a general increase in costs associated
with the integration of the VARTA business. As a percentage of total sales, our
corporate expense was 4.8% and 5.3% in the Fiscal 2003 and Fiscal 2002 Quarters,
respectively.
SPECIAL CHARGES. The Fiscal 2003 Quarter reflects $15.4 million of
special charges related to (i) the closure of the Company's Mexico City, Mexico
plant, (ii) the commencement of the closure of operations at the Company's
Madison, Wisconsin packaging facility and Middleton, Wisconsin distribution
center and combination of the two operations into a new leased complex currently
being built in Dixon, Illinois, and (iii) a series of restructuring initiatives
impacting the Company's sales, marketing, operations and administrative
functions in Europe, North America, and Latin America. The amount recorded
reflects approximately $6.2 million of employee termination benefits for
approximately 600 notified employees, $7.8 million of equipment, inventory, and
other asset write-offs, and $1.4 million of other expenses. See also the 2003
Restructuring Summary within Footnote 7 to the Condensed Consolidated Financial
Statements.
INTEREST EXPENSE. Interest expense increased $5.9 million to $10.1
million in the Fiscal 2003 Quarter. The increase in interest expense is due to
the increase in debt to finance the VARTA acquisition.
NON-OPERATING EXPENSE. Non-operating expenses of $3.1 million in the
Fiscal 2003 Quarter relates to the write-off of unamortized debt fees
associated with the previous credit facility, replaced in conjunction with
the VARTA acquisition.
OTHER INCOME. Other income increased $0.9 million to $1.7 million in
the Fiscal 2003 Quarter. The increase in the Fiscal 2003 Quarter was
attributable to foreign exchange gains reflecting the favorable impacts of
currency valuations, primarily in Europe.
INCOME TAX EXPENSE. Our effective tax rate was 38.0% for the Fiscal
2003 Quarter, up from the 36.0% during the Fiscal 2002 twelve months. The
increase in the effective tax rate from the prior year reflects a larger
percentage of our income being derived from higher taxed foreign
jurisdictions, reflecting the impact of the VARTA acqusition.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
See discussion in Note 1 to the Condensed Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
For the Fiscal 2003 Quarter, operating activities provided $24.2
million in net cash, flat with the previous year. Within operating cash flow,
the Company recognized significantly higher depreciation expense, reflecting
the impacts of the VARTA acquisition. The Company also experienced an
increase in other non-cash adjustments primarily reflecting the impact of the
non-cash restructuring charges and the write-off of the unamortized debt
issuance costs in the Fiscal 2003 Quarter. Operating cash flow from changes
in working capital decreased $11.0 million versus the previous year primarily
reflecting the impact of the VARTA acquisition and the seasonal impacts of
sales.
Net cash used by investing activities increased to $248.1 million
for the Fiscal 2003 Quarter, primarily reflecting the VARTA acquisition.
Capital expenditures in the Fiscal 2003 Quarter were primarily for
improvements to alkaline battery manufacturing and leasehold improvements on
the Dixon, Illinois combined packaging and distribution center which is
currently under construction. Capital expenditures for Fiscal 2003 are
expected to be approximately $28.0 million which will include continued
performance upgrades to our alkaline and zinc air manufacturing and packaging
operations, leasehold improvements for the Dixon, Illinois facility, and
continued investment in technology.
15
During the Fiscal 2003 Quarter we granted approximately 1.1 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
0.4 million shares of restricted stock on October 1, 2002, from the 1997
incentive plan, to certain members of management. These shares will vest on
September 30, 2005 provided the recipient is still employed by the Company.
The total market value of the restricted shares on date of grant totaled
approximately $4.8 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.
We believe our cash flow from operating activities and periodic
borrowings under our credit facilities will be adequate to meet the short-term
and long-term liquidity requirements of our existing business prior to the
expiration of those credit facilities, although no assurance can be given in
this regard. The Company's current credit facilities include a revolving credit
facility of U.S.$100 million, a revolving credit facility of EUR50 million, a
term loan of U.S.$300 million, a term loan of EUR125 million and a term loan of
EUR50 million. As of December 29, 2002, the following amounts were outstanding
under these facilities: $1.5 million and $273.5 million, respectively, of the
U.S. Dollar revolver and term loan and, EUR124.4 million and EUR47.5,
respectively, of the Euro term loans. In addition, approximately $10.7 of the
remaining availability under the U.S. Dollar revolver was utilized for
outstanding letters of credit.
The Third Amended and Restated Credit Agreement ("Third Restated
Agreement"), undertaken to acquire the consumer battery business of VARTA AG,
required the Company to transform the German subsidiary acquired from VARTA AG
from a GmbH legal structure to a KGaA legal structure on or before December 30,
2002. Subsequent to the quarter ended December 29, 2002, the Third Restated
Agreement was amended ("First Amendment") to extend the deadline for
transformation to on or before June 30, 2003.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES. Statement No. 146 nullifies EITF 94-3, LIABILITY RECOGNITION FOR
CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY
(INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). According to the
Statement, commitment to a plan to exit an activity or dispose of long-lived
assets will no longer be enough to record a one-time charge for most
anticipated costs. Instead, companies will record exit or disposal costs when
they are "incurred" and can be measured at fair value, and they will
subsequently adjust the recorded liability for changes in estimated fair
value. Statement No. 146 also revises accounting for specified employee and
contract terminations that are part of restructuring activities. Statement
No. 146 is effective for exit and disposal activities that are initiated
after December 31, 2002. The Company applied the provisions of EITF 94-3 to
the restructuring initiatives announced and committed to during the Fiscal
2003 Quarter. Other than potentially impacting the timing of recognition of
future exit or disposal activities, the Company believes that the adoption of
Statement No. 146 will not have a significant impact on its consolidated
financial statements.
In December 2002, the FASB issued Statement No. 148, ACCOUNTING FOR
STOCK BASED COMPENSATION-TRANSITION AND DISCLOSURE-AN AMENDMENT OF FASB
STATEMENT NO 123. Statement No. 148 permits two additional transition methods
for entities that adopt the fair value based method of accounting for
stock-based employee compensation. The Statement requires new disclosures
about the ramp-up effect of stock-based employee compensation on reported
results. The Statement also requires that those effects be disclosed more
prominently by specifying the form, content, and location of those
disclosures. The transition guidance and annual disclosure provisions of
Statement No. 148 are effective for fiscal years ending after December 15,
2002, with earlier application permitted in certain circumstances. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002.
The Company has not yet decided if it will adopt Statement No. 148 transition
methods, but will adopt the interim disclosure provisions for the quarter
ending March 30, 2003.
In January 2003, the FASB issued Interpretation No. 46,
CONSOLIDATION OF VARIABLE INTEREST ENTITIES. Interpretation No. 46 addresses
consolidation by business enterprises of variable interest entities. The
Interpretation applies immediately for variable interest entities created
after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. For existing variable
interest entities or investments in such, the Interpretation applies in the
first fiscal year or interim period beginning after June 15, 2003. The
Company is currently evaluating the impact of the Interpretation on its
consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
Our Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States
and fairly present the financial position and results of operations of the
Company. We believe certain accounting policies are critical to an
understanding of our financial statements. There have been no changes in our
critical accounting policies since the filing of Rayovac's Annual Report on
Form 10-K for its fiscal year ended September 30, 2002.
16
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, EURIBOR primarily affects interest expense.
We use interest rate swaps to manage such risk. The net amounts to be paid or
received under interest rate swap agreements are accrued as interest rates
change, and are recognized over the life of the swap agreements, as an
adjustment to interest expense from the underlying debt to which the swap is
designated. The related amounts payable to, or receivable from, the contract
counter-parties are included in accrued liabilities or accounts receivable.
FOREIGN EXCHANGE RISK
We are subject to risk from sales and loans to our subsidiaries as well
as sales to, purchases from and bank lines of credit with, third-party
customers, suppliers and creditors, respectively, denominated in foreign
currencies. Foreign currency sales are made primarily in Euro, Pounds Sterling,
Colombian Pesos, Mexican Pesos, Canadian Dollars, Guatemalan Quetzals, Dominican
Pesos, Venezuelan Bolivars, Argentine Pesos, Chilean Pesos and Honduran Lempira.
Foreign currency purchases are made primarily in Euro, Pounds Sterling,
Colombian Pesos, Mexican Pesos, Dominican Pesos, Guatemalan Quetzals and
Honduran Lempira. We manage our foreign exchange exposure from anticipated
sales, accounts receivable, intercompany loans, firm purchase commitments and
credit obligations through the use of naturally occurring offsetting positions
(borrowing in local currency), forward foreign exchange contracts, foreign
exchange rate swaps and foreign exchange options. The related amounts payable
to, or receivable from, the contract counter parties are included in accounts
payable or accounts receivable.
COMMODITY PRICE RISK
We are exposed to fluctuation in market prices for purchases of zinc
used in the manufacturing process. We use commodity swaps, calls and puts to
manage such risk. The maturity of, and the quantities covered by, the contracts
are closely correlated to our anticipated purchases of the commodities. The cost
of calls, and the premiums received from the puts, are amortized over the life
of the contracts and are recorded in cost of goods sold, along with the effects
of the swap, put and call contracts. The related amounts payable to, or
receivable from, the counterparties are included in accounts payable or accounts
receivable.
SENSITIVITY ANALYSIS
The analysis below is hypothetical and should not be considered a
projection of future risks. Earnings projections are before tax.
As of December 29, 2002, 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 $3.5 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 loss of $0.7 million.
As of December 29, 2002, there were no outstanding foreign exchange
rate derivative instruments.
As of December 29, 2002, the potential change in fair value of
outstanding commodity price derivative instruments, assuming a 10% unfavorable
change in the underlying commodity prices would be a loss of $0.5 million. The
net impact on reported earnings, after also including the reduction in cost of
one year's purchases of the related commodities due to the same change in
commodity prices, would be a net gain of $0.9 million.
FORWARD LOOKING STATEMENTS
Certain of the information contained in this Quarterly Report on Form
10-Q is not historical and may include "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements may be identified by such forward-looking language as "expects,"
"anticipates," "intends," "believes," "will," "estimate," "should," "may" or
other similar terms. In reviewing such information, you should note that such
statements are based upon current expectations of future events and projections;
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 contained in this Quarterly Report on Form 10-Q include,
without limitation, (1) competitive promotional activity or spending by
competitors or price reductions by competitors, (2) the introduction of new
product features or technological developments by competitors and/or the
development of new competitors or competitive brands, (3) the loss of, or a
significant reduction in, sales to a
17
significant retail customer, (4) difficulties or delays in the integration of
VARTA's operations, (5) our ability to develop and successfully introduce new
products and protect our intellectual property, (6) our ability to
successfully implement, achieve and sustain manufacturing and distribution
cost efficiencies and improvements, and fully realize anticipated cost
savings, (7) the impact of unusual items resulting from the implementation of
new business strategies, acquisitions and divestitures or current and
proposed restructuring activities, (8) the cost and effect of unanticipated
legal, tax or regulatory proceedings, new laws or regulations (including
environmental regulations) and insurance coverage, (9) changes in accounting
policies applicable to our business, (10) interest rate, exchange rate and
raw material price fluctuations, (11) the effects of general economic
conditions, including inflation, labor costs and stock market volatility, or
changes in trade, monetary or fiscal policies in the countries where we do
business, or (12) the effects of political or economic conditions or unrest
in Latin America and other international markets.
Some of the above-mentioned factors are described in further detail in
the section entitled "Risk Factors" beginning on page S-10 of our Prospectus
Supplement (to Prospectus dated June 20, 2001) filed pursuant to Rule 424(b)(5)
with the Securities and Exchange Commission on June 21, 2001. Other factors and
assumptions not identified above were also involved in the derivation of the
forward-looking statements contained in this Quarterly Report on Form 10-Q. If
such other factors impact our results or if such assumptions are not correct or
do not come to fruition, our actual results may differ materially from those
projected. We assume no obligation to update these forward-looking statements to
reflect actual results or changes in factors or assumptions affecting such
forward-looking statements.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-14(c)
and 15d-14(c) under the Exchange Act) as of an evaluation date within 90 days
prior to the filing date of this Quarterly Report on Form 10-Q. Based on this
evaluation, they have concluded that, as of the evaluation date, our disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to the Company (including our consolidated
subsidiaries) required to be included in our reports filed or submitted under
the Exchange Act.
CHANGES IN INTERNAL CONTROLS. Since the evaluation date referred to
above, there have not been any significant changes in our internal controls or
in other factors that could significantly affect such controls.
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, 2002, except as noted below.
On December 30, 2002, we settled the patent infringement lawsuit filed
against us on April 11, 2001 by Eveready Battery Company, Inc. (EVEREADY BATTERY
COMPANY V. RAYOVAC CORPORATION, Civil Action No. 1:01CV0475; United States
District Court, Northern District of Ohio, Eastern Division). The lawsuit has
now been dismissed.
Regarding the purported class action lawsuits filed against
defendants Rayovac Corporation and several of its current and former
executive officers and directors (ELI FRIEDMAN V. RAYOVAC CORPORATION,
KENNETH V. BILLER, KENT J. HUSSEY, DAVID A. JONES, SCOTT A. SCHOEN, STEPHEN
P. SHANESY, THOMAS R. SHEPHERD, RANDALL J. STEWARD, WARREN C. SMITH, JR., AND
MERRELL TOMLIN, Case No. 02 C 0308 C, United States District Court, Western
District of Wisconsin), (RICHARD SLATTEN V. RAYOVAC CORPORATION, KENNETH V.
BILLER, KENT J. HUSSEY, DAVID A. JONES, SCOTT A. SCHOEN, STEPHEN P. SHANESY,
THOMAS R. SHEPHERD, RANDALL J. STEWARD, WARREN C. SMITH, JR., AND MERRELL
TOMLIN, Case No. 02 C 0325 C, United States District Court, Western District
of Wisconsin) and (DAVID HAYES V. RAYOVAC CORPORATION, KENNETH V. BILLER,
KENT J. HUSSEY, DAVID A. JONES, SCOTT A. SCHOEN, STEPHEN P. SHANESY, THOMAS
R. SHEPHERD, RANDALL J. STEWARD, WARREN C. SMITH, JR., MERRELL TOMLIN, AND
LUIS CANCIO, Case No. 02 C 0308 C, United States District Court, Western
District of Wisconsin) on May 31, 2002, June 11, 2002 and June 28, 2002
respectively and alleging that the defendants violated Sections 11, 12(a)(2)
and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, the
Court ordered on September 23, 2002 that these three actions to be
consolidated into one action. Plaintiffs filed their Consolidated Amended
Class Action Complaint on January 10, 2003 (ELI FRIEDMAN V. RAYOVAC
CORPORATION, THOMAS H. LEE PARTNERS, LP, KENNETH V. BILLER, KENT J. HUSSEY,
DAVID A. JONES, SCOTT A. SCHOEN, STEPHEN P. SHANESY, THOMAS R. SHEPHERD,
RANDALL J. STEWARD, WARREN C. SMITH, JR., AND MERRELL TOMLIN, Case No. 02 C
0308 C, United States District Court, Western District of Wisconsin). This
Consolidated Amended Class Action Complaint generally alleges, as did the
original three complaints, that defendants made various false and misleading
statements which had the alleged effect of artificially inflating the price
of Rayovac stock during the period from April 26, 2001 until September 19,
2001. Plaintiffs allege that statements by Rayovac during this period in
press releases, SEC filings and investor conference calls regarding current
sales and forecasted growth were false and misleading due to alleged failures
to disclose, among other things: (i) alleged improper sales practices in
purported violation of generally accepted accounting principles; (ii) failure
to establish sufficient reserves for doubtful receivables; (iii) declining
demand; and (iv) risks of doing business in Latin America. The time to
respond to the Consolidated Amended Class Action Complaint expires on
February 14, 2003. Rayovac and the individual defendents intend to move to
dismiss the Consolidated Amended Class Action Complaint in its entirety at
that time. Rayovac and the individual defendants believe the claims to be
meritless and intend to vigorously defend themselves in the litigation.
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
2.1+++ Joint Venture Agreement dated July 28, 2002, by and among the
Company, VARTA and ROV German Limited GmbH, as amended.
3.1+ Amended and Restated Articles of Incorporation of the Company.
3.2++++ Amended and Restated By-laws of the Company, as amended through
July 24, 2002.
4.1* Specimen certificate representing the Common Stock.
10.1++++ Amended and Restated Employment Agreement, dated as of October
1, 2002, by and between the Company and David A. Jones.
10.2++++ Amended and Restated Employment Agreement, dated as of October
1, 2002, by and between the Company and Kent J. Hussey.
10.3++++ Amended and Restated Employment Agreement, dated as of October
1, 2002, by and between the Company and Kenneth V. Biller.
10.4++++ Amended and Restated Employment Agreement, dated as of October
1, 2002, by and between the Company and Stephen P. Shanesy.
10.5++++ Amended and Restated Employment Agreement, dated as of October
1, 2002, by and between the Company and Merrell M. Tomlin.
10.6++++ Amended and Restated Employment Agreement, dated as of October
1, 2002, by and between the Company and Luis A. Cancio.
10.7++++ Amended and Restated Employment Agreement, dated as of October
1, 2002, by and between the Company and Dr. Paul G. Cheeseman.
10.8++++ Employment Agreement, dated as of August 19, 2002, by and
between the Company and Randall J. Steward.
10.9++++ Registered Director's Agreement, effective as of October 1,
2002, by and between ROV German Holding GmbH and Remy Burel.
10.10** Technology, License and Service Agreement between Battery
Technologies (International) Limited and the Company, dated
June 1, 1991, as amended April 19, 1993, and December 31, 1995.
10.11** Building Lease between the Company and SPG Partners dated May
14, 1985, as amended June 24, 1986, and June 10, 1987.
10.12**** Amendment, dated December 31, 1998, between the Company and SPG
Partners, to the Building Lease, between the Company and SPG
Partners, dated May 14, 1985.
10.13++++ Build-To-Suit Lease Agreement, dated as of May 2, 2002, by and
among 200 Corporate Drive, L.L.C., as Landlord, the Company, as
Tenant, and Higgins Development Partners, L.L.C., as Developer.
10.14 Real Estate Lease, dated September 1, 2001, by and between
VARTA Geratebatterie GmbH, as Tenant, and Paula
Grundstucksverwaltungsgesellschaft mbH & Co. Vermietungs-KG,
as Landlord, as amended.
10.15 Real Property Leasing Agreement, dated December 21, 2000, by
and between VARTA Geratebatterie GmbH, as Tenant, and ROSATA
Grundstucks-Vermietungsgesellschaft mbH & Co. object
Dischingin KG, as Landlord, as amended.
10.16+++ Third Amended and Restated Credit Agreement, dated October 1,
2002, by and among the Company, VARTA Geratebatterie GmbH, the
lenders party thereto, LaSalle Bank National Association, as
documentation agent, Citicorp North America, Inc., as
syndication agent, and Bank of America, N.A., as administrative
agent.
10.17 Amendment No. 1 to Third Amended and Restated Credit Agreement,
dated October 1, 2002, by and among the Company, VARTA
Geratebatterie GmbH, the lenders party thereto, LaSalle Bank
National Association, as documentation agent, Citicorp North
America, Inc., as syndication agent, and Bank of America, N.A.,
as administrative agent.
10.18*** Rayovac Corporation 1996 Stock Option Plan.
10.19* 1997 Rayovac Incentive Plan.
10.20* Rayovac Profit Sharing and Savings Plan.
10.21 Rayovac Corporation Supplemental Executive Retirement Plan.
19
10.22 Rayovac Corporation Deferred Compensation Plan, as amended.
10.23++ Technical Collaboration, Sale and Supply Agreement, dated as of
March 5, 1998, by and among the Company. Matsushita Battery
Industrial Co., Ltd. and Matsushita Electric Industrial Co.,
Ltd.
21 Subsidiaries of the Company.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
-----------
* 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 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 Annual Report on Form
10-K for the fiscal year ended September 30, 1997, filed with the
Commission on December 23, 1997.
++ Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 28, 1998, filed
with the Commission on May 5, 1998.
+++ Incorporated by reference to the Company's Report on Form 8-K
filed with the Commission on October 16, 2002.
++++ Incorporated by reference to the Company's Report on Form 10-K
filed with the Commission on December 16, 2002.
(b) REPORTS ON FORM 8-K. The Company has filed one report on Form 8-K during the
three-month period ended December 29, 2002. The report on Form 8-K was dated
October 1, 2002, filed on October 16, 2002 and amended on December 16, 2002. The
Form 8-K reported the acquisition of substantially all of the consumer battery
business of VARTA AG ("VARTA") and the amended Form 8-K contained the audited
financial statements of VARTA and certain unaudited pro forma financial
information of the Company.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
DATE: February 12, 2003
RAYOVAC CORPORATION
/s/ David A. Jones
--------------------------------------------
David A. Jones
Chairman of the Board
and Chief Executive Officer
21
CERTIFICATIONS
I, David A. Jones, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rayovac
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 12, 2003
/s/ David A. Jones
-----------------------------------
David A. Jones
Chief Executive Officer
22
I, Randall J. Steward, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rayovac
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 12, 2003
/s/ Randall J. Steward
--------------------------------------
Randall J. Steward
Chief Financial Officer
23