As filed with the Securities and Exchange Commission on January 24, 1997
Registration No. 333-17895
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT No. 1
to
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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RAYOVAC CORPORATION
(Exact Name Of Registrant As Specified In Its Charter)
Wisconsin 3692 22-2423556
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
ROV HOLDING, INC.
(Exact Name Of Registrant As Specified In Its Charter)
Delaware 3692 22-2423555
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
601 Rayovac Drive
Madison,Wisconsin 53711-2497
(608) 275-3340
(Address, including zip code, and telephone number, including area code, of
registrants' principal executive offices)
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JAMES A. BRODERICK, ESQ.
Vice President and General Counsel
Rayovac Corporation
601 Rayovac Drive
Madison, Wisconsin 53711-2497
(608) 275-3340
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
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Copy to:
LOUIS A. GOODMAN, ESQ.
Skadden, Arps, Slate, Meagher & Flom LLP
One Beacon Street
Boston, Massachusetts 02108
(617) 573-4800
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 of the Securities Act
of 1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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RAYOVAC CORPORATION
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
Form S-1 Item No. Location in Prospectus
1. Forepart of the Registration Statement and Facing Page of Registration Statement and
Outside Front Cover Page of Prospectus Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of
Prospectus Prospectus
3. Summary Information, Risk Factors and Ratio Prospectus Summary; Risk Factors; Unaudited
of Earnings to Fixed Charges Pro Forma Condensed Consolidated Financial
Data; Selected Historical Combined
Consolidated Financial Data
4. Use of Proceeds Prospectus Summary; Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Outside Front Cover Page of Prospectus; Plan
of Distribution
9. Description of Securities to be Registered Prospectus Summary; Description of the Notes
10. Interests of Named Experts and Counsel Legal Matters; Experts
11. Information With Respect to the Registrant Prospectus Summary; Risk Factors; The
Recapitalization; Use of Proceeds;
Capitalization; Unaudited Pro Forma
Condensed Consolidated Financial Data;
Selected Historical Combined Consolidated
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business; Management;
Ownership of Capital Stock; Certain
Relationships and Related Transactions;
Description of the Credit Agreement;
Description of the Notes; Consolidated
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities Not Applicable
[red herring on left side of page]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
[end red herring]
SUBJECT TO COMPLETION JANUARY 24, 1997
PROSPECTUS
Offer for all Outstanding
10-1/4% Senior Subordinated Notes due 2006
in Exchange for
10-1/4% Series B Senior Subordinated Notes due 2006
of
RAYOVAC CORPORATION
The Exchange Offer will expire at 5:00 P.M.,
New York City time, on , 1997, unless extended
Rayovac Corporation, a Wisconsin corporation ("Rayovac" or the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange an aggregate principal amount
of up to $100,000,000 of 10-1/4% Series B Senior Subordinated Notes due 2006
of the Company (the "New Notes") for a like principal amount of the issued
and outstanding 10-1/4% Senior Subordinated Notes due 2006 of the Company
(the "Old Notes" and, together with the New Notes, the "Notes") with the
holders thereof. The terms of the New Notes are identical in all material
respects to the Old Notes, except that the terms of the New Notes do not
include certain transfer restrictions and registration rights included in the
terms of the Old Notes.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on
the Old Notes, from October 22, 1996. Accordingly, if the relevant record
date for interest payment occurs after the consummation of the Exchange
Offer, registered holders of New Notes on such record date will receive
interest accruing from the most recent date to which interest has been paid
or, if no interest has been paid, from October 22, 1996. If, however, the
relevant record date for interest payment occurs prior to the consummation of
the Exchange Offer, registered holders of Old Notes on such record date will
receive interest accruing from the most recent date to which interest has
been paid or, if no interest has been paid, from October 22, 1996. Old Notes
accepted for exchange will cease to accrue interest from and after the date
of consummation of the Exchange Offer, except as set forth in the immediately
preceding sentence. Holders of Old Notes whose Old Notes are accepted for
exchange will not receive any payment in respect of interest on such Old
Notes otherwise payable on any interest payment date the record date for
which occurs on or after consummation of the Exchange Offer.
The Old Notes were issued on October 22, 1996 in connection with the
financing of the recapitalization of the Company (the "Recapitalization"),
which resulted in a change in control of the Company. See "The
Recapitalization". The Old Notes are, and the New Notes will be, general
unsecured obligations of the Company, subordinated in right of payment to all
existing and future Senior Debt (as defined herein), including borrowings
under the Credit Agreement (as defined herein). The Old Notes are, and the
New Notes will be, guaranteed by ROV Holding, Inc., a wholly owned subsidiary
of the Company ("ROV Holding"), and may in the future be guaranteed by
certain other subsidiaries of the Company (collectively, the "Guarantors").
See "Description of the Notes-- Subsidiary Guarantees" and "Certain
Covenants--Additional Guarantees." The Guarantees (as defined herein) are
subordinated in right of payment to all existing and future Senior Debt of
the Guarantors, including guarantees under the Credit Agreement. The Old
Notes, the Guarantees and borrowings under the Credit Agreement are, and the
New Notes will be, effectively subordinated to the indebtedness of foreign
subsidiaries of ROV Holding which effectively ranks senior in right of
payment to the Notes and the Guarantees. The Indenture (as defined herein)
permits the Company and its subsidiaries to incur additional indebtedness,
including Senior Debt, subject to certain limitations, and prohibits the
incurrence of any indebtedness that is senior to the Notes and subordinated
to any Senior Debt. As of September 30, 1996, the Company and its
subsidiaries had $128.5 million of Senior Debt and $5.2 million of
indebtedness and capitalized lease obligations of foreign subsidiaries which
rank senior or effectively rank senior, as the case may be, in right of
payment to the Notes.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement,
dated October 17, 1996 (the "Registration Rights Agreement"), among the
Company and the other signatories thereto. Based on interpretations by the
staff of the Securities and Exchange Commission (the "Commission"), New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by holders thereof
(other than any such holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act of 1933, as amended (the
"Securities Act")) without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that such New Notes are
acquired in the ordinary course of such holders' business and such holders
have no arrangement or understanding with any person to participate in the
distribution of such New Notes. If any holder of Old Notes is an affiliate of
the Company, is engaged in or intends to engage in or has any arrangement
with any person to participate in the distribution of the New Notes to be
acquired pursuant to the Exchange Offer, such holder (i) could not rely on
the applicable interpretations of the staff of the Commission and (ii) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Each broker-dealer
that receives New Notes for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in connection with any
resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
New Notes received in exchange for Old Notes where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or
other trading activities. The Company has agreed that, for a period of 180
days after the date of this Prospectus, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale.
See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. Tenders of
Old Notes pursuant to the Exchange Offer may be withdrawn at any time prior
to the Expiration Date (as defined herein). In the event the Company
terminates the Exchange Offer and does not accept for exchange any Old Notes,
the Company will promptly return the Old Notes to the holders thereof. See
"The Exchange Offer."
The Old Notes are eligible for trading in the Private Offerings, Resales
and Trading through Automatic Linkages ("PORTAL") market of the National
Association of Securities Dealers, Inc. Prior to this Exchange Offer, there
has been no public market for the New Notes. If a market for the New Notes
should develop, the New Notes could trade at a discount from their principal
amount. The Company does not currently intend to list the New Notes on any
securities exchange or to seek approval for quotation on any automated
quotation system. There can be no assurance that an active public market for
the New Notes will develop.
See "Risk Factors" beginning on page 11 for a discussion of certain factors
that should be considered in connection with an investment in the Notes
offered hereby.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is , 1997.
[Insert Pictures]
3
ADDITIONAL INFORMATION
The Company filed with the Commission a Registration Statement on Form S-1
(the "Registration Statement") under the Securities Act with respect to the
New Notes being offered by this Prospectus. This Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits
and schedules thereto, to which reference is hereby made. Statements made in
this Prospectus as to the contents of any contract, agreement or other
document filed as an exhibit to the Registration Statement and referred to
herein are not necessarily complete. Reference is made to the exhibit for a
more complete description thereof.
The Registration Statement and the exhibits and schedules thereto may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the
regional offices of the Commission located at 7 World Trade Center, New York,
New York 10048 and at Northwestern Atrium Center, 500 West Madison Street
(Suite 1400), Chicago, Illinois 60661. Copies of such material may also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Additionally, the
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission at (http://www.sec.gov). Upon consummation
of the Exchange Offer, the Company will become subject to the information
requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and in accordance therewith will be required to file
periodic reports and other information with the Commission. Whether or not
the Company is required to be subject to the reporting requirements of the
Exchange Act in the future, the Company and, if the Company is required to
file financial statements for any Guarantor, such Guarantor will be required
under the Indenture, dated as of October 22, 1996 (the "Indenture") by and
among the Company, ROV Holding, Inc. and Marine Midland Bank, as trustee (the
"Trustee"), pursuant to which the Old Notes were, and the New Notes will be,
issued, to continue to file with the Commission for public availability
(unless the Commission will not accept such filings) and to furnish holders
of the New Notes with (i) all quarterly and annual financial information that
would be required to be contained in a filing with the Commission on Forms
10-Q and 10-K, if the Company and/or such Guarantor were required to file
such forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to annual information
only, a report thereon by the Company's certified independent public
accountants, and (ii) all financial information that would be required to be
filed with the Commission on Form 8-K if the Company and/or such Guarantor
were required to file such reports.
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INDUSTRY MARKET DATA
External market information in this Prospectus is provided by the Company,
based on data licensed from A.C. Nielsen. The two primary sources of market
data are Nielsen Scanner Data (obtained from checkout scanners in selected
food stores, drug stores and mass merchandisers) and Nielsen Consumer Panel
Data (obtained from a group of representative households selected by A.C.
Nielsen equipped with in-home scanners). Except as set forth below, specific
market share references are obtained from Nielsen Scanner Data. Specific
hearing aid battery market share references are obtained from Nielsen Scanner
Data, as supplemented by National Family Opinion Purchase Diary Data.
Information regarding the size (in terms of both dollars and unit sales) of
the total U.S. retail battery market is based upon Nielsen Scanner Data, as
supplemented by Nielsen Consumer Panel Data.
Other industry data used throughout this Prospectus has been obtained from
a variety of industry surveys (including surveys forming a part of primary
research studies conducted by the Company) and publications but has not been
independently verified by the Company. The Company believes that information
contained in such surveys and publications has been obtained from reliable
sources, but there can be no assurance as to the accuracy and completeness of
such information.
Unless otherwise indicated, all market share estimates are Company
estimates based on the foregoing, are for the U.S. market and reflect units
sold.
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i
ROV Holding, the only Company subsidiary currently guaranteeing the
Company's obligations under the Notes is a wholly owned subsidiary of the
Company. ROV Holding's guarantee of the New Notes is full and unconditional.
Separate financial statements of ROV Holding are not set forth in this
Prospectus as the Company has determined that they would not be material to
investors.
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The New Notes will be available initially in book-entry form, and the Company
expects that the New Notes sold pursuant hereto will be issued in the form of
a Global Note (as defined herein) which will be deposited with, or on behalf
of, The Depository Trust Company (the "Depositary") and registered in its
name or in the name of Cede & Co., its nominee, except with respect to
institutional "accredited investors" (within the meaning of Rule 501(a)(1),
(2), (3) or (7) under the Securities Act), who will receive New Notes in
certificated form. Beneficial interests in the Global Note will be shown on,
and transfer thereof will be effected through, records maintained by the
Depositary and its participants. After the initial issuance of the Global
Note, New Notes in certificated form will be issued in exchange for the
Global Note only under the limited circumstances set forth in the Indenture.
See "Description of the Notes--Book-Entry, Delivery and Form."
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Upon completion of the Recapitalization, the Company changed its fiscal
year end from June 30 to September 30. For clarity of presentation and
comparison, references herein to fiscal 1994, fiscal 1995 and fiscal 1996 are
to the Company's fiscal years ended June 30, 1994, June 30, 1995 and June 30,
1996, respectively, and references to the "Transition Period ended September
30, 1996" and the "Transition Period" are to the period from July 1, 1996 to
September 30, 1996.
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RAYOVAC, RENEWAL, LOUD'N CLEAR, POWER STATION, PROLINE, WORKHORSE,
ROUGHNECK and SMART PACK are registered trademarks of the Company. LIFEX and
SMART STRIP are trademarks of the Company. All other trademarks or tradenames
referred to in this Prospectus are the property of their respective owners.
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The Company is a Wisconsin corporation with its principal executive
offices at 601 Rayovac Drive, Madison, Wisconsin, 53711-2497. The Company's
telephone number is (608) 275-3340.
ii
[THIS PAGE INTENTIONALLY LEFT BLANK]
SUMMARY
The following summary does not purport to be complete and is qualified in
its entirety by the more detailed information and Combined Consolidated
Financial Statements of the Company, together with the notes thereto, and the
Unaudited Pro Forma Condensed Consolidated Financial Data of the Company,
together with the notes thereto, included elsewhere in this Prospectus.
Except as otherwise set forth herein, references herein to "pro forma"
financial data of the Company are to financial data of the Company which
gives effect to the Recapitalization and the sale of the Old Notes.
The Company
Rayovac Corporation ("Rayovac" or the "Company") is the third largest
domestic manufacturer of general batteries (D, C, AA, AAA and 9-volt sizes).
Within the general battery market, the Company is the leader in the household
rechargeable and heavy duty battery segments. The Company is also the leading
domestic manufacturer of certain specialty batteries, including hearing aid
batteries, lantern batteries and lithium batteries for personal computer
memory back-up. In addition, the Company is a leading marketer of flashlights
and other battery-powered lighting devices. Established in 1906, the Rayovac
brand name is one of the oldest and best recognized names in the battery
industry. The Company attributes the longevity and strength of its brand name
to its high-quality product line and to the success of its marketing and
merchandising initiatives. For fiscal 1996, the Company had net sales, net
income and Adjusted EBITDA (as defined herein) of $399.4 million, $14.3
million and $46.5 million, respectively.
The Company's broad line of products includes (i) general batteries
(including alkaline, heavy duty and household rechargeable batteries), (ii)
specialty batteries (including hearing aid, watch, lantern and personal
computer memory back-up batteries) and (iii) flashlights and other
battery-powered lighting devices. The Company's products are marketed under
the names Rayovac, Renewal, Loud'n Clear, ProLine, Lifex, Power Station,
Workhorse and Roughneck, as well as several private labels.
Since the early 1980s, the Company has implemented a number of important
strategies that have greatly improved its competitive position. In the
general battery market, the Company has become a leader in the mass
merchandise retail channel by positioning its products as a value brand,
offering batteries of substantially equivalent quality and performance at a
discount to those offered by its principal competitors. The Company has also
introduced industry-leading merchandising innovations such as the Smart Pack
and Smart Strip merchandising systems, in which multiple battery packages are
presented together in value-oriented formats. As a result of these programs,
the Company had 27% and 26.6% market shares in the mass merchandise channel
of the general battery market in fiscal 1996 in the Transition Period ended
September 30, 1996, respectively.
The Company has complemented its general battery business with successful
new product introductions and leading market positions in selected
high-margin specialty battery lines. In the domestic hearing aid segment, the
Company has achieved a 50% market share as a result of its products'
technological capabilities, a strong distribution system and a well developed
marketing program. The Company is also the leader in the hearing aid battery
market in the United Kingdom and continental Europe. Further, in 1993, the
Company introduced the Renewal rechargeable battery, the first alkaline
rechargeable battery sold in the United States. Renewal achieved 64% and 63%
market shares in the rechargeable household battery category as of July 1996
and September 1996, respectively, and the Company had domestic sales of
Renewal products of $27.0 million in fiscal 1996.
The U.S. battery industry had aggregate sales in 1995 of $4.1 billion,
including $2.3 billion of retail sales of general batteries. The Company
estimates that retail sales of general batteries have experienced compound
annual unit sales growth of approximately 5.3% since 1986. This growth has
been largely due to (i) the proliferation and popularity of battery-powered
devices (such as remote controls, personal radios and cassette players,
pagers, portable compact disc players, electronic and video games and
battery-powered toys), (ii) the miniaturization of battery-powered devices,
which has resulted in consumption of a larger number of smaller batteries and
(iii) increased purchases of multiple-battery packages for household "pantry"
inventory. These factors have increased the average household usage of
batteries from an estimated 23 batteries per year in 1986 to an estimated 33
batteries per year in 1995. In addition, the hearing aid battery segment, in
which the Company is the market leader, has experienced average annual dollar
sales increases of 10.9% over the last four fiscal years, primarily as a
result of the decreasing size of hearing aids and the increasing age of the
U.S. population. The Company expects growth of this segment to continue in
the United States as well as in Western Europe. See "Industry Market Data."
1
Business Strategy
The Company's objective is to increase sales and profitability by pursuing
the following strategies.
Produce High-Quality Battery Products. In each of its battery product
lines, the Company seeks to manufacture a high-quality product. In the
alkaline segment, the Company manufactures high-performance battery products
of substantially equivalent quality to those offered by its principal
competitors. In some of its specialty product segments, such as hearing aid
batteries, the Company believes its products have advantages over its
competitors' products. The Company focuses its quality improvement efforts on
lengthening service life and enhancing reliability and, in the case of
hearing aid batteries, the Company also focuses on product miniaturization.
Leverage Value Brand Position. The Company has established a position as
the leading value brand in the U.S. general alkaline battery market, by
focusing on the mass merchandise channel. The Company achieved this position
by (i) offering batteries of substantially equivalent quality and performance
to those offered by its principal competitors at a retail price discount,
(ii) emphasizing innovative in-store merchandising programs and (iii)
offering retailers attractive wholesale margins. The mass merchandise segment
has generated significant growth in the U.S. retail battery market over the
last five years and the Company's positioning in this segment should allow it
to continue to take advantage of any future segment growth.
Expand Retail Distribution Channels. The Company plans to expand its
presence in food stores, drug stores, warehouse clubs and other distribution
channels on which the Company historically has not focused significant
marketing and sales efforts. Food stores, drug stores and warehouse clubs
accounted for 1.5 billion general battery units and $1.2 billion in revenues
in the U.S. retail battery market in 1995. Management believes that Rayovac's
value-oriented general battery products and merchandising programs make the
Company an attractive supplier to these channels.
Focus on Niche Markets. The Company has developed leading positions in
several important niche markets. Total net sales of batteries in these
markets (including those for hearing aid, rechargeable, lantern and heavy
duty batteries and for lithium coin cells for personal computer memory
back-up) comprised 47.9% of the Company's fiscal 1996 net sales. The Company
tailors its strategy in each of these market niches to accommodate each
market's characteristics and competitive profile.
Expand Rechargeable Battery Market Segment. The Company intends to expand
its leading share of the rechargeable household battery market through
continued marketing of the economic benefit to consumers of Renewal, the
Company's long-life alkaline rechargeable battery. Although approximately
twice the retail price of a regular alkaline battery, a Renewal battery can
be recharged at least 25 times, providing the approximate aggregate energy of
10 regular alkaline batteries. Consequently, Renewal provides significant
economic benefits to consumers over regular alkaline batteries. In addition,
alkaline rechargeables are superior to nickel cadmium rechargeables because
they are sold fully charged, retain their charge better and are
environmentally safer. Management believes that as the Company educates
consumers about these benefits, the Company will have a substantial
opportunity to expand the rechargeable household battery segment and increase
its market share.
The Recapitalization
Effective as of September 12, 1996, the Company, all of the shareholders
of the Company, Thomas H. Lee Equity Fund III, L.P. (the "Lee Fund") and
other affiliates of Thomas H. Lee Company ("THL Co.") completed a
recapitalization of the Company (the "Recapitalization"), which resulted in a
change in control of the Company, pursuant to which, among other things: (i)
the Company obtained senior financing in an aggregate amount of $170.0
million, of which $131.0 million was borrowed at the closing of the
Recapitalization, including $26.0 million under a revolving credit facility
(the "Revolving Credit Facility"); (ii) the Company obtained $100.0 million
in financing through the issuance of senior subordinated increasing rate
notes of the Company (the "Bridge Notes"); (iii) the Company redeemed a
portion of the shares of common stock, par value $.01 per share, of the
Company (the "Common Stock") held by Thomas F. Pyle, Jr., the former
President and Chief Executive Officer of the Company; (iv) the Lee Fund and
other affiliates of THL Co. purchased for cash shares of Common Stock owned
by shareholders of the Company; and (v) the Company repaid certain of its
outstanding indebtedness, including prepayment fees and penalties. As a
result of the Recapitalization, the Lee Fund and other affiliates of THL Co.,
together with David A. Jones, the Company's new President and Chief
2
Executive Officer, own 80.2% of the outstanding Common Stock, Mr. Pyle owns
9.9% of the outstanding Common Stock and existing management and certain
former employees of the Company own 9.9% of the outstanding Common Stock. See
"The Recapitalization."
During the Transition Period ended September 30, 1996, the Company
recorded charges of $12.3 million directly related to the Recapitalization
and other special charges of $16.1 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The net proceeds received by the Company from the sale of the Old Notes
together with borrowings under the Revolving Credit Facility were used to
repurchase the Bridge Notes plus accrued interest thereon. See "Use of
Proceeds."
The Exchange Offer
The Exchange Offer The Company is offering to exchange up to $100.0 million
aggregate principal amount of its 10-1/4% Series B Senior
Subordinated Notes due 2006 for a like principal amount of
its issued and outstanding 10-1/4% Senior Subordinated Notes
due 2006 that are properly tendered and accepted. The terms
of the New Notes and the Old Notes are identical in all
material respects, except that the terms of the New Notes do
not include certain transfer restrictions and registration
rights relating to the Old Notes described below under "--
Summary Description of the New Notes." See "The Exchange
Offer" for a description of the procedures for tendering Old
Notes. The Exchange Offer is intended to satisfy obligations
of the Company under the Registration Rights Agreement dated
as of October 17, 1996 among the Company, Donaldson Lufkin &
Jenrette Securities Corporation and BA Securities, Inc.
(together, the "Initial Purchasers").
Tenders; The Exchange Offer will expire at 5:00 P.M., New York City
Expiration Date; Time, on [ ], 1997, or such later date and time to which it
Withdrawal is extended (the "Expiration Date"). The tender of Old Notes
pursuant to the Exchange Offer may be withdrawn at any time
prior to the Expiration Date. Any Old Notes not accepted for
exchange for any reason will be returned without expense to
the tendering holder thereof as promptly as practicable
after the expiration or termination of the Exchange Offer.
Federal Income Tax The exchange pursuant to the Exchange Offer will not result
Considerations in any income, gain or loss to holders exchanging Old
Notes for New Notes pursuant thereto or to the Company for
federal income tax purposes. See "Certain Federal Income Tax
Considerations."
Exchange Agent Marine Midland Bank is serving as Exchange Agent in
connection with the Exchange Offer.
3
Consequences of Exchanging Old Notes
Pursuant to the Exchange Offer
Based on interpretations by the staff of the Commission issued to third
parties, holders of Old Notes (other than any holder who is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act) who
exchange their Old Notes for New Notes pursuant to the Exchange Offer may
offer such New Notes for resale, resell such New Notes and otherwise transfer
such New Notes without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided such New Notes are
acquired in the ordinary course of the holders' business and such holders do
not intend, and have no arrangement or understanding with any person, to
participate in a distribution of such New Notes. Each holder, other than a
broker-dealer, must acknowledge that it is not engaged in, and does not
intend to engage in, a distribution of New Notes. If any holder is an
affiliate of the Company, is engaged in or intends to engage in or has any
arrangement or understanding with respect to the distribution of the New
Notes to be acquired pursuant to the Exchange Offer, such holder (i) could
not rely on the applicable interpretations of the staff of the Commission and
(ii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the date on which the Exchange Offer is Consummated
(as defined in the Registration Rights Agreement), it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution." To comply with the securities laws of
certain jurisdictions, if applicable, it may be necessary to qualify for sale
or register the New Notes prior to offering or selling such New Notes. The
Company does not currently intend to take any action to register or qualify
the New Notes for resale in any such jurisdiction.
If a holder of Old Notes does not exchange such Old Notes for New Notes
pursuant to the Exchange Offer, such Old Notes will continue to be subject to
the restrictions on transfer contained in the legend thereon. In general, the
Old Notes may not be offered or sold unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject
to, the Securities Act and applicable state securities laws. The Company does
not currently anticipate that it will register Old Notes under the Securities
Act. See "Risk Factors--Consequences of Failure to Exchange Old Notes."
Summary Description of the New Notes
The terms of the New Notes and the Old Notes are identical in all material
respects, except that the terms of the New Notes do not include certain
transfer restrictions and registration rights relating to the Old Notes.
Securities Offered $100.0 million principal amount of 10-1/4% Series B Senior
Subordinated Notes due 2006.
Use of Proceeds The Company will not receive any proceeds from the Exchange
Offer. The net proceeds to the Company from the sale of the
Old Notes were approximately $97.0 million after deduction
of discounts, commissions and offering expenses. The Company
used such net proceeds, together with borrowings under the
Revolving Credit Facility, to repurchase the Bridge Notes
plus accrued interest thereon. See "The Recapitalization"
and "Use of Proceeds."
Issuer Rayovac Corporation.
4
Maturity Date November 1, 2006.
Interest Payment The New Notes will bear interest at the rate of 10-1/4% per
Dates annum, payable semiannually on May 1 and November 1 of each
year commencing on May 1, 1997.
Optional Except as set forth below, the New Notes are not redeemable
Redemption prior to November 1, 2001. The New Notes may be redeemed at
the option of the Company, in whole or in part, on or after
November 1, 2001 at the redemption prices set forth herein,
plus accrued and unpaid interest, if any, to the date of
redemption. At any time during the first 36 months after the
date of the Indenture (as defined herein), the Company may
redeem up to 35% of the initial principal amount of the New
Notes originally issued with the net proceeds of one or more
public offerings of equity securities of the Company, at a
redemption price equal to 109.25% of the principal amount of
such New Notes, plus accrued and unpaid interest and
Liquidated Damages (as defined herein), if any, to the date
of redemption; provided that at least 65% of the principal
amount of New Notes originally issued remains outstanding
immediately after the occurrence of each such redemption and
that each such redemption occurs within 60 days following
the closing of each such public offering.
Mandatory Except as set forth herein, the Company is not required to
Redemption make mandatory redemption or sinking fund payments with
respect to the New Notes.
Guarantees The New Notes will be guaranteed (the "Guarantees") on an
unsecured senior subordinated basis by ROV Holding, Inc., a
wholly owned subsidiary of the Company that owns the
Company's foreign operating subsidiaries ("ROV Holding"),
and by any other Subsidiary (as defined herein) of the
Company that executes a Guarantee in accordance with the
provisions of the Indenture, and by their respective
successors and assigns (collectively, the "Guarantors").
5
Ranking The New Notes will be general unsecured obligations of the
Company, subordinated in right of payment to all existing
and future Senior Debt (as defined herein), including
borrowings under the Credit Agreement (as defined herein).
In addition, the New Notes will be effectively subordinated
to the indebtedness of foreign subsidiaries of the Company.
The New Notes will rank pari passu with the Old Notes. As of
September 30, 1996, the Company and its subsidiaries had
$128.5 million of Senior Debt and $5.2 million of
indebtedness and capitalized lease obligations of foreign
subsidiaries which would rank senior or effectively rank
senior, as the case may be, in right of payment to the New
Notes. The Indenture permits the incurrence of additional
Senior Debt by the Company, subject to certain limitations,
and prohibits the incurrence by the Company and its
subsidiaries of indebtedness that is subordinate in right of
payment to any Senior Debt and senior in any respect in
right of payment to the New Notes. See "Description of the
Notes--Subordination."
Change of Control Upon a Change of Control (as defined herein), each holder of
New Notes shall have the right to require the Company to
repurchase all or any part of such holder's New Notes at a
purchase price equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of purchase. There
can be no assurance that the Company will have sufficient
funds to repurchase the Notes upon a Change of Control. See
"Description of the Notes--Repurchase at the Option of
Holders."
Certain Covenants The Indenture contains covenants restricting or limiting the
ability of the Company and its subsidiaries to, among other
things, (i) pay dividends or make other restricted payments,
(ii) incur additional indebtedness and issue preferred
stock, (iii) create liens, (iv) incur dividend and other
payment restrictions affecting subsidiaries, (v) enter into
mergers, consolidations or sales of all or substantially all
of the assets of the Company, (vi) make Asset Sales (as
defined herein), (vii) enter into transactions with
affiliates and (viii) issue or sell capital stock of wholly
owned subsidiaries of the Company. See "Description of the
Notes."
6
Amendment, The Indenture provides that the Company, the Guarantors and
Supplement the Trustee may amend or supplement the Indenture and the
and Waiver Notes may be amended or supplemented with the consent of the
holders of at least a majority in principal amount of the
Notes then outstanding for certain limited purposes such as
to cure any ambiguity, defect or inconsistency or to make
any change that would provide additional rights or benefits
to holders. No amendment or waiver may, however, without the
consent of each holder affected, otherwise effect changes in
the terms of the Notes, such as the reduction of the
principal amount of Notes whose holders must consent to an
amendment, supplement or waiver or the reduction of
principal of or a change to the fixed maturity of any Note.
In addition, any amendment to the provisions of the
Indenture relating to subordination would require the
consent of holders of at least 75% in aggregate principal
amount of the Notes then outstanding if such amendment would
adversely affect the rights of holders. See "Description of
the Notes--Amendment, Supplement and Waiver."
Risk Factors
Holders of Old Notes should carefully consider the information set forth
under the caption "Risk Factors" and all other information set forth in this
Prospectus before tendering their Old Notes in the Exchange Offer, although
the risk factors set forth (other than "Risk Factors--Consequences of Failure
to Exchange Old Notes") are generally applicable to the Old Notes as well as
in the New Notes.
7
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following summary historical financial data for the three fiscal years
ended June 30, 1996 and the Transition Period ended September 30, 1996 and
the balance sheet data as of September 30, 1996 are derived from the audited
Combined Consolidated Financial Statements of the Company, together with the
notes thereto, included elsewhere in this Prospectus. The summary historical
financial data for the period July 1, 1995 to September 30, 1995 is derived
from the Unaudited Condensed Combined Consolidated Financial Statements of
the Company, together with the notes thereto, included elsewhere in this
Prospectus. The summary historical financial data of the Company for the two
fiscal years ended June 30, 1993 is derived from audited combined
consolidated financial statements of the Company which are not included
herein.
Transition
Period
Fiscal Year Ended June 30, July 1, 1995 to Ended
----------------------------------------------- September 30, September 30,
1992 1993 1994 1995 1996 1995 1996
--------------- ---------------
(Dollars in millions) (unaudited)
Statement of Operations Data:
Net sales $332.2 $353.4 $386.2 $391.0 $399.4 $100.6 $95.0
Gross profit 140.1 152.0 151.3 153.9 160.0 36.5 35.7
Income (loss) from operations 31.0 31.2 10.9 (1) 31.5 30.3 4.6 (23.7)
Interest expense 14.1 6.0 7.7 8.6 8.4 2.4 4.4
Net income (loss) 5.5 15.0 4.4 16.4 14.3 $ 1.4 ($20.9)(2)
Other Financial Data:
Ratio of earnings to fixed charges (3) 2.1x 3.8x 1.4x 3.0x 2.9x 1.7x -- (3)
Depreciation $ 6.1 $ 7.4 $ 10.3 $ 11.0 $ 11.9 $ 3.2 $3.3
Capital expenditures 15.3 30.3(4) 12.5 16.9 6.6 1.1 1.2
Cash flows from operating activities 23.4 15.8 (18.7) 35.5 17.8 (9.6 ) (1.1)
Cash flows from investing activities (15.3) (30.3) (12.4) (16.8) (6.3) (1.1 ) (0.5)
Cash flows from financing activities (8.6) 13.7 30.8 (18.3) (11.9) 10.5 3.7
EBITDA (5) 37.6 39.3 21.2 41.3 42.2 7.7 (20.4)
Adjusted EBITDA (6) 39.7 41.6 24.0 44.2 46.5 8.5 (19.5)
Pro forma cash interest expense (7) 21.8 21.8 21.8 21.8 21.8 5.3 5.3
Ratio of Adjusted EBITDA to pro forma cash
interest expense 1.8x 1.9x 1.1x 2.0x 2.1x 1.6x - (9)
Ratio of net debt to Adjusted
EBITDA (8) 1.2x 1.7x 4.4x 1.9x 1.7x 11.4x - (9)
As of
September
30,
1996
-----------
(Dollars in
millions)
Balance Sheet Data:
Working capital $ 63.2
Total assets 245.3
Total debt 233.7
Shareholders' deficit (85.7)
- -------------
(1) Income (loss) from operations in fiscal 1994 was impacted by increased
selling expenses due to higher advertising expenses related to the
Renewal Introduction (as defined herein) and non-recurring manufacturing
costs in connection with the Fennimore Expansion (as defined herein). See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Introduction."
(2) Net income (loss) in the Transition Period was impacted by charges
directly related to the Recapitalization and other special charges. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(3) For purposes of computing this ratio, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest
expense, amortization of deferred finance fees and one-third of the rent
expense from operating leases, which management believes is a reasonable
approximation of the interest factor of the
8
rent. Since earnings in the Transition Period ended September 30, 1996
are inadequate to cover fixed charges by $28.2 million, the ratio is not
presented herein.
(4) Fiscal 1993 capital expenditures include $19.7 million in connection with
the Fennimore Expansion. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Introduction."
(5) EBITDA represents income from operations plus depreciation and reflects
an adjustment of income from operations to eliminate the establishment
and subsequent reversal of two reserves ($0.7 million established in 1993
and reversed in 1995, and $0.5 million established in 1992 and reversed
in 1995). The Company believes that EBITDA and related measures are
commonly used by certain investors and analysts to analyze and compare,
and provide useful information regarding, the Company's ability to
service its indebtedness, but holders tendering Old Notes in the Exchange
Offer should consider the following factors in evaluating such measures:
EBITDA and related measures (i) should not be considered in isolation,
(ii) are not measures of performance calculated in accordance with
generally accepted accounting principles ("GAAP"), (iii) should not be
construed as alternatives or substitutes for income from operations, net
income or cash flows from operating activities in analyzing the Company's
operating performance, financial position or cash flows (in each case, as
determined in accordance with GAAP) and (iv) should not be used as
indicators of the Company's operating performance or measures of its
liquidity. Additionally, because all companies do not calculate EBITDA
and related measures in uniform fashion, the calculations presented in
this Prospectus may not be comparable to other similarly titled measures
of other companies. A similar concept to EBITDA, defined as "Consolidated
Cash Flow" in the Indenture and used in the calculation of certain
covenants therein, represents operating income plus depreciation,
amortization, any net loss realized in connection with an Asset Sale and
certain other non-cash charges and certain non-recurring expenses. See
"Description of the Notes--Certain Covenants" and "Description of the
Notes--Certain Definitions." Consolidated Cash Flow would not have been
significantly different from EBITDA in any of the periods presented other
than the Transition Period. The difference in measures for the Transition
Period result primarily from adjustments relating to the
Recapitalization.
Management interprets the general trend of EBITDA, with the exception of
EBITDA for fiscal 1994, as steadily increasing. In fiscal 1994, EBITDA
decreased due to costs incurred in connection with battery redesign, the
start-up of mercury-free alkaline battery production, temporary planned
increases in raw material costs associated with sourcing of raw material
from foreign vendors pursuant to the terms of certain agreements and
increased advertising expense associated with the Renewal Introduction.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operation." In the absence of such costs, EBITDA for fiscal
1994 would have fit within the otherwise prevailing trend.
(6) Adjusted EBITDA is defined as EBITDA adjusted to add back certain
expenses related to (i) the Company's aircraft lease, in excess of the
estimated cost of commercial airline travel, which aircraft lease was
terminated in connection with the Recapitalization, (ii) certain
litigation expense accrued in 1996 for litigation initiated in a prior
period, (iii) compensation expense for the Company's pre-Recapitalization
senior management group, net of expected post-Recapitalization senior
management compensation including the Management Fee (as defined herein)
and the Consulting Fee (as defined herein) and (iv) advertising and
promotional expense associated with the Company's sponsorship of
professional race cars, the contracts for which have been terminated.
Adjusted EBITDA has been calculated as follows:
9
Fiscal Year Ended June 30,
------------------------------------------
Transition
Period
July 1, 1995 Ended
to September 30, September 30,
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------ --------------- ---------------
EBITDA $37.6 $39.3 $21.2 $41.3 $42.2 $ 7.7 ($20.4)
----- ----- ----- ----- ----- ----- ------
Plus:
Aircraft expenses 1.2 1.3 1.6 1.7 1.7 0.4 0.4
Race car expenses 0.8 0.9 1.0 1.0 1.6 0.4 0.5
Senior management expenses 0.1 0.1 0.2 0.2 0.2 -- --
Litigation expense -- -- -- -- 0.8 -- --
----- ----- ----- ----- ----- ----- -----
Adjusted EBITDA $39.7 $41.6 $24.0 $44.2 $46.5 $ 8.5 ($19.5)
===== ===== ===== ===== ===== ===== =====
Management is reviewing a number of categories of expenditures following
the Recapitalization, including advertising and promotional expenditure
levels. Post-Recapitalization expenditure levels have not yet been
determined. Adjusted EBITDA (i) should not be considered in isolation,
(ii) is not a measure of performance calculated in accordance with
generally accepted accounting principles ("GAAP"), (iii) should not be
construed as alternatives or substitutes for income from operations, net
income or cash flows from operating activities in analyzing the Company's
operating performance, financial position or cash flows (in each case, as
determined in accordance with GAAP) and (iv) should not be used as
indicators of the Company's operating performance or measures of its
liquidity.
(7) Pro forma cash interest expense represents pro forma interest expense of
$23.4 million adjusted to exclude amortization of deferred finance costs
of $1.6 million for the fiscal years ended June 30, 1992 through 1996 and
pro forma interest expense of $5.7 million adjusted to exclude
amortization of deferred finance costs of $0.4 million for the period
July 1 to September 30, 1995 and the Transition Period ended September
30, 1996.
(8) For purposes of computing this ratio, net debt represents borrowed money,
including capital lease obligations, less cash and cash equivalents.
(9) Since Adjusted EBITDA is negative, no ratio is presented.
10
RISK FACTORS
Holders of Old Notes should carefully consider the following risk factors,
as well as all other information set forth in this Prospectus, before
tendering their Old Notes in the Exchange Offer, although the risk factors
set forth below (other than "Consequences of Failure to Exchange Old Notes")
are generally applicable to the Old Notes as well as the New Notes.
Consequences of Failure to Exchange Old Notes
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of the Old Notes. In general, the Old Notes may not
be offered or sold unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. Based on interpretations by the staff of the Commission issued to third
parties, New Notes issued pursuant to the Exchange Offer in exchange for Old
Notes may be offered for resale, resold or otherwise transferred by holders
thereof (other than any such holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such New Notes are acquired in the ordinary course of such
holders' business and such holders have no arrangement with any person to
participate in the distribution of such New Notes. Each holder, other than a
broker-dealer, must acknowledge that it is not engaged in, and does not
intend to engage in, a distribution of New Notes. If any holder is an
affiliate of the Company, is engaged in or intends to engage in or has any
arrangement or understanding with respect to the distribution of the New
Notes to be acquired pursuant to the Exchange Offer, such holder (i) could
not rely on the applicable interpretations of the staff of the Commission and
(ii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days from the date on which the Exchange Offer is Consummated
(as defined in the Registration Rights Agreement), it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution." In addition, to comply with the
securities laws of certain jurisdictions, if applicable, it may be necessary
to qualify for sale or to register the New Notes prior to offering or selling
such New Notes. The Company does not currently intend to take any action to
register or qualify the New Notes for resale in any such jurisdiction.
Substantial Leverage; Incurrence of Additional Senior Debt
As of September 30, 1996, the Company had $233.7 million of total
indebtedness. See "Capitalization."
The Company's ability to make principal and interest payments on the New
Notes will be dependent on the Company's future operating performance. The
Company's future operating performance is dependent in part on certain
external factors including prevailing economic conditions and financial,
competitive, regulatory and similar factors that may affect the Company's
business and operations. The Company's ability to make principal and interest
payments on the New Notes may also be dependent on the availability of
borrowings under the Credit Agreement (or any refinancing thereof) or other
borrowings. Although the Company believes that, based on current levels of
operations, its cash flow from operations, together with external sources of
liquidity, will be adequate to make required payments of principal and
interest on its debt (including the New Notes), whether at or prior to
maturity, finance anticipated capital expenditures and fund working capital
requirements, there can be no assurance in this regard. If the Company does
not have sufficient available resources to repay any indebtedness under the
Credit Agreement (or other indebtedness the Company may incur) when it
becomes due and payable, the Company may find it necessary to refinance such
indebtedness, and there can be no assurance that refinancing will be
available, or available on reasonable terms.
Additionally, the Company's high degree of leverage could have a material
adverse effect on the Company's future operating performance, including, but
not limited to, the following: (i) a substantial portion of the Company's
11
cash flow from operations must be dedicated to debt service payments, thereby
reducing the funds available to the Company for other purposes; (ii) the
Company's ability to obtain additional debt financing in the future for
working capital, capital expenditures, acquisitions or general corporate
purposes or other purposes may be impaired; (iii) the Company is
substantially more leveraged than certain of its competitors, which may place
the Company at a competitive disadvantage; (iv) the Company's high degree of
leverage may limit its ability to expand capacity and otherwise meet its
growth objectives; (v) the Company's high degree of leverage may hinder its
ability to adjust rapidly to changing market conditions and could make it
more vulnerable in the event of a downturn in general economic conditions or
its business; and (vi) the Company may not be able to sustain its value
pricing strategy for alkaline batteries with its lower price points and
attractive margins for retailers.
The Indenture and the Credit Agreement permit the incurrence of additional
Senior Debt, subject to certain limitations. The Indenture prohibits the
incurrence by the Company of subordinated debt which is senior in right of
payment to the Notes. The Indenture also prohibits the incurrence by any
Guarantor of subordinated debt which is senior in right of payment to any
Guarantee. See "Description of the Notes."
Subordination
The New Notes will be general unsecured obligations of the Company and
will be subordinate in right of payment to all Senior Debt, including all
indebtedness under the Credit Agreement. As of September 30, 1996, the
Company and its subsidiaries had $128.5 million of Senior Debt and $5.2
million of indebtedness of foreign subsidiaries and capital lease
obligations. The Indenture permits the Company and (under limited
circumstances) its subsidiaries, to incur additional Senior Debt, subject to
certain limitations, and the Company expects from time to time to incur
additional indebtedness, including Senior Debt, subject to such limitations.
By reason of the subordination provisions of the Indenture, in the event of
the insolvency, liquidation, reorganization, dissolution or other winding-up
of the Company, the lenders under the Credit Agreement and other creditors
who are holders of Senior Debt must be paid in full before payment of amounts
due on the New Notes. Accordingly, there may be insufficient assets remaining
after such payments to pay amounts due on the New Notes. The Guarantees are
subordinated to Senior Debt of each Guarantor to the same extent that the New
Notes are subordinated to Senior Debt of the Company, and the ability to
collect under any Guarantees may therefore be similarly limited.
In addition, the Company may not pay principal of, premium, if any, or
interest on, or any other amounts owing in respect of, the New Notes, or
purchase, redeem or otherwise retire the New Notes, or make any deposit
pursuant to defeasance provisions for the New Notes, if Designated Senior
Debt or Significant Senior Debt (as each term is defined in the Indenture) is
not paid when due, unless such default is cured or waived or has ceased to
exist or such Designated Senior Debt or Significant Senior Debt has been
repaid in full. Under certain circumstances, no payments may be made for a
specified period with respect to the principal of, premium, if any, and
interest on, and any other amounts owing in respect of, the New Notes if a
default, other than a payment default, exists with respect to Designated
Senior Debt, including indebtedness under the Credit Agreement, unless such
default is cured, waived or has ceased to exist or such indebtedness has been
repaid in full. See "Description of the Notes-- Subordination." If any Event
of Default occurs and is continuing, the Trustee or the holders of at least
25% in principal amount of the then outstanding New Notes may declare all the
New Notes to be due and payable immediately. However, such a continuing Event
of Default also would permit the acceleration of all outstanding obligations
under the Credit Agreement. In such an event, the subordination provisions of
the Indenture would prohibit any payments to holders of the New Notes unless
and until such obligations (and any other accelerated Senior Debt) have been
repaid in full. See "Description of the Notes--Subordination."
Competition
The industries in which the Company participates are very competitive.
Competition is based upon price, quality, performance, brand name
recognition, product packaging and product innovation, as well as creative
marketing, promotion and distribution strategies. In the U.S. battery
industry, the Company competes primarily with two well established companies,
Duracell International Inc. ("Duracell") and Energizer, Inc., a subsidiary of
Ralston Purina Company (formerly known as Eveready Battery Company) and
producer of Energizer brand batteries ("Energizer"), each of which has
substantially greater financial and other resources and greater overall
market share than the Company. In addition, the Company believes that
Duracell and Energizer may have lower costs of production and higher profit
margins in certain product lines than the Company. On December 31, 1996, The
Gillette
12
Company completed its acquisition of Duracell. The Company cannot predict
what effects, if any, this acquisition will have on Duracell's competitive
position or business strategies or whether there will be any resulting impact
on the Company.
Although foreign battery manufacturers historically have not been
successful in penetrating the U.S. retail market to any significant extent,
they have, from time to time, attempted to establish a significant presence
in the U.S. battery market. There can be no assurance that these attempts
will not be successful in the future or that the Company will be able to
compete effectively with current or prospective participants in the U.S.
battery industry. The battery-powered lighting device industry is also highly
competitive and includes a greater number of competitors than the U.S.
battery industry, some of which have greater capital and other resources than
the Company. See "Business--Competition."
The Company's principal competitors in the U.S. battery industry have
recently introduced an on-the-label battery tester for alkaline batteries
which is located on the battery label and displays the approximate remaining
percentage of the battery's charge. The Company's products do not currently
include any testers. The Company is in the process of evaluating initial
customer reaction to competitors' testers and is attempting to estimate any
potential negative impact on sales if the Company fails to include such a
tester with its products and the significance of the costs associated with
placement of such a tester, including whether such a feature will infringe
any valid U.S. patents. U.S. patents covering various aspects of on-the-label
battery testers are owned or controlled by Duracell, Eastman Kodak Company,
Energizer and Strategic Electronics. These entities are currently involved in
an "interference" proceeding before the United States Patent and Trademark
Office to determine who has the right to patent the various aspects of the
on-the-label battery tester and what the scope of such patents should be.
Other U.S. patents covering various aspects of battery testers also exist. It
appears likely that an attempt by a competitor, such as the Company, to
market any tester covered by the existing patents would result in litigation
by one or more of the current patent holders. The ultimate outcome of any
such litigation would depend upon the outcome of the interference proceeding
and the resolution of any challenges to the validity or enforceability of the
existing patents which the Company might assert in its defense. The earliest
the Company could market such a tester is Spring 1997. There can be no
assurance that competitors' testers will not have a material adverse effect
on the Company's business, financial condition or results of operations, or
that the Company could market a tester without significant litigation risk.
Dependence on Key Customers
Wal-Mart Stores, Inc. ("Wal-Mart"), the Company's largest retailer
customer, accounted for 19.0% of the Company's net sales in fiscal 1996. In
addition, the Company's three largest retailer customers, including Wal-Mart,
together accounted for 28.5% of the Company's net sales in fiscal 1996. The
Company does not have long-term agreements with any of its major customers,
and purchases are generally made through the use of individual purchase
orders, consistent with industry practice. There can be no assurance that
there will not be a significant reduction in purchases by any of the
Company's three largest retailer customers, which could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Business--Marketing and Distribution."
Battery Technology
The battery industry has experienced, and is expected to continue to
experience, regular technological change. There can be no assurance that, as
existing battery products and technologies improve and new, more advanced
products and technologies are introduced, the Company's products will be able
to compete effectively in any of its targeted market segments. The
development and successful introduction of new and enhanced products and
other competing technologies that may outperform the Company's batteries and
technological developments by competitors may have a material adverse effect
on the Company's business, financial condition or results of operations,
particularly in the context of the substantially greater resources of the
Company's two principal competitors in the general battery market, Duracell
and Energizer. See "--Competition." Similarly, in those market segments where
the Company's battery products currently have technological advantages
(including, for example, the hearing aid battery market), there can be no
assurance that the Company's products will maintain such advantages.
The general battery industry historically has sustained unit sales growth
even as battery life has increased with innovation (largely due to expansion
in the use of and the number of applications for batteries); however, there
can be no assurance that continued enhancements of battery performance
(including rechargeable battery performance) will not have an adverse effect
on unit sales.
13
Limited Intellectual Property Protection
The Company relies upon a combination of patent, trademark and trade
secret laws, together with licenses, confidentiality agreements and other
contractual covenants, to establish and protect its technology and other
intellectual property rights. There can be no assurance that the steps taken
by the Company will be adequate to prevent misappropriation of its technology
or other intellectual property or that the Company's competitors will not
independently develop technologies that are substantially equivalent or
superior to the Company's technology. Moreover, although the Company believes
that its current products do not infringe upon the valid proprietary rights
of others, there can be no assurance that third parties will not assert
infringement claims against the Company and that, in the event of an
unfavorable ruling on any such claim, a license or similar agreement will be
available to the Company on reasonable terms. See "--Competition" for issues
associated with the marketing of an on-the-label battery tester.
Certain technology underlying the Company's Renewal line of alkaline
rechargeable batteries is the subject of a non-exclusive license from a third
party and could be made available to the Company's competitors after one
year's prior notice to the Company (which has not been given). The licensing
of such technology to a competitor could have an adverse effect on the
Company's business, financial condition or results of operations. The Company
does not believe, however, that this effect would be material to the Company
because revenues from sales of the Company's rechargeable alkaline batteries
and rechargers account for less than 10% of the Company's total revenues.
The Company does not have any right to the trademark "Rayovac" in Brazil,
where the mark is owned by an independent third-party battery manufacturer.
In addition, the Company has granted exclusive, perpetual, royalty-free
licenses for the use of certain of its technology, patents and trademarks in
a number of countries, including in Latin America. See "Business--Patents,
Licenses and Trademarks."
Environmental Matters
The Company's facilities are subject to a broad range of federal, state,
local and foreign laws and regulations relating to the environment, including
those governing discharges to the air and water, the handling and disposal of
solid and hazardous substances and wastes and the remediation of
contamination associated with releases of hazardous substances at Company
facilities and at off-site disposal locations. Based on information currently
available to Company management, the Company believes that it is
substantially in compliance with applicable environmental regulations at its
facilities, although no assurance can be provided with respect to such
compliance in the future.
Several of the Company's manufacturing facilities have been in operation
for decades and have utilized substances such as cadmium and mercury in the
battery manufacturing process. The Company has not conducted invasive testing
to identify all potential risks, and given the age of the Company's
facilities and the nature of the Company's operations, there can be no
assurance that material liabilities will not arise in the future in
connection with its current or former facilities. In addition, the Company
has been recently notified that its former manganese processing facility in
Covington, Tennessee is being evaluated by the Tennessee Department of
Environment and Conservation ("TDEC") for a determination as to whether the
facility should be added to the National Priorities List as a Superfund site.
Groundwater monitoring at the site conducted pursuant to the post-closure
maintenance of solid waste lagoons on site, and recent groundwater testing
beneath former process areas on site, indicate that there are elevated levels
of certain inorganic contaminants, particularly (but not exclusively)
manganese, in the groundwater underneath the site. The Company cannot predict
the outcome of TDEC's investigation of the site. See "Business--Environmental
Matters."
The Company has been and is subject to several proceedings related to its
disposal of industrial and hazardous waste at off-site disposal locations,
under the federal Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA") or analogous state laws that hold persons who
"arranged for" the disposal or treatment of such substances strictly liable
for the costs incurred in responding to the release or threatened release of
hazardous substances from such sites. Except for the matters specifically
described below, the Company does not believe that any of its pending CERCLA
matters, either individually or in the aggregate, will have a material impact
on the Company's operations, financial condition or liquidity.
The Company recently has been named as a defendant in two lawsuits in
connection with a Superfund site located in Bergen County, New Jersey
(Velsicol Chemical Corporation, et al. v. A.E. Staley Manufacturing Company,
et al., and Morton International, Inc. v. A.E. Staley Manufacturing Company,
et al., United States District
14
Court for the District of New Jersey, filed July 29, 1996). These lawsuits
involve contamination at a former mercury processing facility and nearby
creek (the "Bergen County Site"). The Company is one of approximately 100
defendants named in these lawsuits and is commencing a review to determine
the extent of any potential liability it may have at the Bergen County Site.
Preliminary information from the plaintiffs suggests that they will take the
position that the Company is one of the largest volumetric contributors to
the environmental conditions at the Bergen County Site. The cost to remediate
the Bergen County Site has not been determined and the Company cannot predict
the outcome of these proceedings. There can be no assurance that additional
proceedings relating to off-site disposal locations will not arise in the
future or that such matters will not have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Business--Environmental Matters."
Fraudulent Transfer Considerations
Under relevant federal bankruptcy law or state fraudulent transfer laws,
the New Notes and Guarantees may be subject to avoidance or may be
subordinated to existing or future indebtedness of the Company or the
Guarantors, as applicable (in addition to the Senior Debt to which the New
Notes and Guarantees are expressly subordinated). If a court in a suit by an
unpaid creditor or representative of creditors, such as a trustee in
bankruptcy or the Company as debtor-in-possession, were to find that at the
time the Bridge Notes were issued or after giving effect to the sale of the
Old Notes or the New Notes and the application of the net proceeds therefrom
either (a) the Company received less than a reasonably equivalent value or
fair consideration for the issuance of the Old Notes or the New Notes and
either (i) was insolvent at the time of such issuance or was rendered
insolvent thereby, (ii) was engaged in a business or transaction for which
the assets remaining with the Company constituted unreasonably small capital
or (iii) intended to incur, or believed that it would incur, debts beyond its
ability to pay as such debts matured or (b) the Company issued the Old Notes
or the New Notes with actual intent to hinder, delay or defraud its
creditors, the court could avoid the New Notes and order that all or part of
any payments on the New Notes be returned to the Company or to a fund for the
benefit of its creditors, or subordinate the New Notes to all other
indebtedness of the Company or take other action detrimental to the holders
of the New Notes.
Similarly, if a court in a suit by an unpaid creditor or representative of
creditors of ROV Holding or any other subsidiary of the Company were to find
that at the time ROV Holding issued its guarantee of the Bridge Notes (the
"Bridge Guarantee") or at the time when any subsidiary of the Company,
including without limitation ROV Holding, issued or became liable under a
Guarantee, including without limitation the ROV Holding Guarantee (or when
such subsidiary was required to perform thereunder), any of the conditions
set forth in clauses (a) or (b) above were satisfied with respect to such
subsidiary, the court could avoid ROV Holding's obligations under the Bridge
Guarantee or such subsidiary's obligations under the Guarantee, as
applicable, and direct the repayment of any amounts paid thereunder to such
subsidiary or to a fund for the benefit of its creditors.
The measure of insolvency for purposes of the foregoing varies based upon
the law of the jurisdiction applied. Generally, however, an entity would be
considered insolvent if the sum of its debts (including contingent
liabilities) is greater than all of its property at a fair valuation, or if
the present fair saleable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts
(including contingent liabilities), as they become absolute and matured. In
addition, an entity may be presumed insolvent under some fraudulent transfer
laws if it is not generally paying its debts as they become due. The Company
believes that, based upon forecasts and other financial information, the
Company and ROV Holding were, at the time the indebtedness under the Bridge
Notes and the Bridge Guarantee was incurred, and at the time the Old Notes
and the ROV Holding Guarantee were issued, will be at the time the New Notes
are issued and will continue to be, solvent, that they will have sufficient
capital to carry on their business and are and will continue to be able to
pay their debts as they mature. Accordingly, the Company believes that, in a
bankruptcy case or a lawsuit by creditors of the Company or ROV Holding, none
of the Bridge Notes, the Bridge Guarantee, the Old Notes, the New Notes nor
the ROV Holding Guarantee should be held to have been issued in violation of
applicable federal bankruptcy law or state fraudulent transfer laws. There
can be no assurance, however, as to what standard a court would apply to
determine whether the Company or ROV Holding was "insolvent" as of the date
the indebtedness under the Bridge Notes and the Bridge Guarantee was incurred
or the date the Old Notes, the New Notes or the ROV Holding Guarantee were
issued or that, regardless of the method of valuation, a court would not
determine that the Company or ROV Holding was insolvent on such relevant
dates. Nor can there be any assurance that a court would not determine,
regardless of whether the Company or ROV Holding was insolvent on the date
the indebtedness under the Bridge
15
Notes and the Bridge Guarantee was incurred or the date the Old Notes, the
New Notes or the ROV Holding Guarantee were issued, that the payments
constituted fraudulent transfers on another of the grounds listed above.
Controlling Shareholders
Of the outstanding capital stock of the Company, 80.2% is held by the Lee
Fund and certain other affiliates of THL Co. Consequently, the Lee Fund and
such other affiliates, including the directors of the Company affiliated with
the Lee Fund or THL Co. control the Company and have the power to elect the
board of directors of the Company (the "Board") and to approve any action
requiring shareholder approval, including the adoption of amendments to the
Company's Restated Articles of Incorporation and the approval of mergers or
sales of all or substantially all of the Company's assets. See "Ownership of
Capital Stock." The Company's ability to take certain of these actions is
limited by certain terms of the New Notes. See "Description of the Notes."
Lack of Public Market for the Notes; Volatility; Restrictions on Resale
The Old Notes are eligible for trading in the Private Offerings, Resales
and Trading through Automatic Linkages ("PORTAL") market. The New Notes will
be new securities, and there is no existing trading market for the New Notes.
Accordingly, there can be no assurance regarding the future development of a
trading market for the New Notes or the ability of the holders, or the price
at which such holders may be able, to sell their New Notes. If such a market
were to develop, the New Notes could trade at prices that may be higher or
lower than the exchange tender price of the Old Notes. Prevailing market
prices from time to time will depend on many factors, including then existing
interest rates, the Company's operating results and cash flow and the market
for similar securities. The Initial Purchasers have advised the Company that
they currently intend to make a market in the New Notes. The Initial
Purchasers are not obligated to do so, however, and any market-making with
respect to the New Notes may be discontinued at any time without notice.
Accordingly, even if a trading market for the New Notes does develop, there
can be no assurance as to the liquidity of that market. The Company does not
intend to apply for listing or quotation of the New Notes on any securities
exchange or in the over-the-counter market.
In addition, the liquidity of, and trading markets for, the New Notes may
be adversely affected by declines in the market for high-yield securities
generally. Such a decline may adversely affect liquidity and trading markets
independent of the financial performance of, and prospects for, the Company.
16
THE RECAPITALIZATION
Effective as of September 12, 1996, the Company, all of the shareholders
of the Company, the Lee Fund and other affiliates of THL Co. completed the
Recapitalization which resulted in a change of control of the Company pursuant
to which, among other things: (i) the Company obtained senior financing under
a Credit Agreement dated as of September 12, 1996 by and among the Company,
Bank of America National Trust and Savings Association and DLJ Capital
Funding, Inc. (the "Credit Agreement") in an aggregate amount of $170.0
million, of which $131.0 million was borrowed at the closing of the
Recapitalization, including $26.0 million under the Revolving Credit
Facility; (ii) the Company obtained $100.0 million in financing through the
issuance of the Bridge Notes; (iii) the Company redeemed a portion of the
shares of Common Stock held by Thomas F. Pyle, Jr., the former President and
Chief Executive Officer of the Company; (iv) the Lee Fund and other
affiliates of THL Co. purchased for cash shares of Common Stock owned by
shareholders of the Company (a group consisting of current and former
directors and management of the Company and the Thomas Pyle and Judith Pyle
Charitable Remainder Trust (the "Pyle Trust")); and (v) the Company repaid
certain of its outstanding indebtedness, including prepayment fees and
penalties. Immediately prior to the Recapitalization, Mr. Pyle, together with
the Pyle Trust, owned 89.8% of the outstanding Common Stock. As a result of
the Recapitalization, the Lee Fund and other affiliates of THL Co., together
with David A. Jones, the Company's new President and Chief Executive Officer,
own 80.2% of the outstanding Common Stock, Mr. Pyle owns 9.9% of the
outstanding Common Stock and existing management and certain former employees
of the Company own 9.9% of the outstanding Common Stock. In addition to fees
and expenses paid in connection with the closing of the Recapitalization as
specified below, $3.9 million of additional fees and expenses related to the
Recapitalization were paid subsequent to the closing of the Recapitalization.
The sources and uses of funds in connection with the Recapitalization are
as follows:
Sources of Funds: (Dollars in millions)
Revolving Credit Facility $ 26.0
Term Loan Facility 105.0
Bridge Notes 100.0
Equity from the Lee Fund and other affiliates of THL Co. 72.0
Continuing shareholders' equity investment 18.0
Foreign debt and capital leases 5.5
------
Total sources $326.5
======
Uses of Funds:
Purchases of Common Stock from existing shareholders by:
The Company $127.4
The Lee Fund and other affiliates of THL Co. 72.0
Continuing shareholders' equity investment 18.0
Repay existing Company debt 85.2
Fees and expenses paid at the closing of the
Recapitalization 18.4
Foreign debt and capital leases 5.5
------
Total uses $326.5
======
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the New
Notes offered pursuant to the Exchange Offer. In consideration for issuing
the New Notes as contemplated in this Prospectus, the Company will receive in
exchange Old Notes in like principal amount, the terms of which are identical
in all material respects to the New Notes except for certain transfer
restrictions and registration rights. The Old Notes surrendered in exchange
for New Notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the New Notes will not result in any increase in the
indebtedness of the Company.
The net proceeds to the Company from the sale of the Old Notes were
approximately $97.0 million, after deduction of discounts, commissions and
offering expenses. The Company used such net proceeds, together with $5.4
million in borrowings under the Revolving Credit Facility, to repurchase the
Bridge Notes and pay accrued interest thereon of $1.3 million. The Bridge
Notes are senior subordinated increasing rate notes of the Company due 1997,
the initial interest rate of which is the prime reference rate from time to
time of The Bank of New York, plus 3.5%. The Bridge Notes were used to
finance the Recapitalization in part. See "The Recapitalization."
17
THE EXCHANGE OFFER
Terms of the Exchange Offer, Period for Tendering Old Notes
The Old Notes were sold by the Company on October 22, 1996 to the Initial
Purchasers pursuant to a Purchase Agreement dated October 17, 1996 by and
among the Company, ROV Holding and the Initial Purchasers. Upon the terms and
subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal, the Company will accept for exchange Old
Notes which are properly tendered on or prior to the Expiration Date and not
withdrawn as permitted below. As used herein, the term "Expiration Date"
means 5:00 p.m., New York City time, on [ ], 1997; provided, however,
that if the Company, in its sole discretion, has extended the period of time
for which the Exchange Offer is open, the term "Expiration Date" means the
latest time and date to which the Exchange Offer is extended.
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of the Old Notes was outstanding. This Prospectus, together with the Letter
of Transmittal, is first being sent on or about the date set forth on the
cover page to all holders of Old Notes at the addresses set forth in the
security register with respect to Old Notes maintained by the Trustee. The
Company's obligation to accept Old Notes for exchange pursuant to the
Exchange Offer is subject to certain conditions as set forth under "--Certain
Conditions to the Exchange Offer" below.
The Company expressly reserves the right, at any time or from time to
time, to extend the period of time during which the Exchange Offer is open,
and thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the holders thereof as described below.
During any extension, all Old Notes previously tendered will remain subject
to the Exchange Offer and may be accepted for exchange by the Company. Any
Old Notes not accepted for exchange for any reason will be returned without
expense to the tendering holder thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be $1,000 in principal
amount or any integral multiple thereof.
The Company expressly reserves the right to amend or terminate the
Exchange Offer, and not to accept for exchange any Old Notes not theretofore
accepted for exchange, upon the occurrence prior to the Expiration Date of
any of the conditions of the Exchange Offer specified below under "--Certain
Conditions to the Exchange Offer." The Company will give oral or written
notice of any extension, amendment, non-acceptance or termination to the
holders of the Old Notes as promptly as practicable, such notice in the case
of any extension to be issued by means of a press release or other public
announcement no later than 9:00 a.m. New York City time, on the next business
day after the previously scheduled Expiration Date.
Procedure for Tendering Old Notes
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal. Except as set forth below, a holder who
wishes to tender Old Notes for exchange pursuant to the Exchange Offer must
transmit a properly completed and duly executed Letter of Transmittal,
together with all other documents required by such Letter of Transmittal, to
Marine Midland Bank (the "Exchange Agent") at the address set forth below
under "--Exchange Agent" on or prior to the Expiration Date. In addition, (i)
certificates for such Old Notes must be received by the Exchange Agent along
with the Letter of Transmittal or (ii) a timely confirmation of a book-entry
transfer (a "Book-Entry Confirmation") of such Old Notes, if such procedure
is available, into the Exchange Agent's account at The Depository Trust
Company (the "Book-Entry Transfer Facility") pursuant to the procedure for
book- entry transfer described below, must be received by the Exchange Agent
prior to the Expiration Date or (iii) the holder must comply with the
guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF OLD
NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED IN ALL CASES. SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the
18
Letter of Transmittal or (ii) for the account of an Eligible Institution (as
defined below). In the event that signatures on a Letter of Transmittal or a
notice of withdrawal, as the case may be, are required to be guaranteed, such
guarantees must be by a firm which is an eligible guarantor institution
(bank, stockbroker, national securities exchange, registered securities
association, savings and loan association or credit union with membership in
a signature medallion program) pursuant to Exchange Act Rule 17Ad-15
(collectively, "Eligible Institutions"). If Old Notes are registered in the
name of a person other than the person signing the Letter of Transmittal, the
Old Notes surrendered for exchange must be endorsed by, or be accompanied by
a written instrument or instruments of transfer or exchange, in satisfactory
form as determined by the Company in its sole discretion, duly executed by
the registered holder, with the signature thereon guaranteed by an Eligible
Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined
by the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all
tenders of any particular Old Notes not properly tendered or to not accept
any particular Old Notes if acceptance might, in the judgment of the Company
or its counsel, be unlawful. The Company also reserves the absolute right in
its sole discretion to waive any defects or irregularities or conditions of
the Exchange Offer as to any particular Old Notes either before or after the
Expiration Date (including the right to waive the ineligibility of any holder
who seeks to tender Old Notes in the Exchange Offer). The interpretation of
the terms and conditions of the Exchange Offer as to any particular Old Notes
either before or after the Expiration Date (including the Letter of
Transmittal and the instructions thereto) by the Company shall be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes for exchange must be cured within such
reasonable period of time as the Company shall determine. Neither the
Company, the Exchange Agent nor any other person shall be under any duty to
give notification of any defect or irregularity with respect to any tender of
Old Notes for exchange, nor shall any of them incur any liability for failure
to give such notification.
If the Letter of Transmittal is signed by a person or persons other than
the registered holder or holders of Old Notes, such Old Notes must be
endorsed or accompanied by appropriate powers of attorney, in either case
signed exactly as the name or names of the registered holder or holders that
appear on the Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or other acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by
the Company, proper evidence satisfactory to the Company of their authority
to so act must be submitted with the Letter of Transmittal.
By tendering Old Notes, each holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of New Notes. If any holder of Old Notes is an "affiliate" of
the Company, as defined under Rule 405 of the Securities Act, or is engaged
in or intends to engage in or has any arrangement with any person to
participate in the distribution of the New Notes to be acquired pursuant to
the Exchange Offer, such holder (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
Acceptance of Old Notes for Exchange; Delivery of New Notes
Upon satisfaction or waiver of all the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of
the Old Notes. See "--Certain Conditions to the Exchange Offer" below. For
purposes of the Exchange Offer, the Company shall be deemed to have accepted
properly tendered Old Notes for exchange when, as and if the Company has
given oral or written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on
the Old Notes, from October 22, 1996. Accordingly, if the relevant record
date for interest payment occurs after the consummation of the Exchange
Offer, registered holders of New Notes on such record date will receive
interest accruing from the most
19
recent date to which interest has been paid or, if no interest has been paid,
from October 22, 1996. If, however, the relevant record date for interest
payment occurs prior to the consummation of the Exchange Offer, registered
holders of Old Notes on such record date will receive interest accruing from
the most recent date to which interest has been paid or, if no interest has
been paid, from October 22, 1996. Old Notes accepted for exchange will cease
to accrue interest from and after the date of consummation of the Exchange
Offer, except as set forth in the immediately preceding sentence. Holders of
Old Notes whose Old Notes are accepted for exchange will not receive any
payment in respect of interest on such Old Notes otherwise payable on any
interest payment date the record date for which occurs on or after
consummation of the Exchange Offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of (i) certificates for such Old Notes or a
timely Book-Entry Confirmation of such Old Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility, (ii) a properly completed and
duly executed Letter of Transmittal and (iii) all other required documents.
If any tendered Old Notes are not accepted for any reason set forth in the
terms and conditions of the Exchange Offer or if certificates representing
Old Notes are submitted for a greater principal amount than the holder
desires to exchange, certificates representing such unaccepted or
non-exchanged Old Notes will be returned without expense to the tendering
holder thereof (or, in the case of Old Notes tendered by book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described below, such
non-exchanged Old Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration
or termination of the Exchange Offer.
Book-Entry Transfer
The Exchange Agent will make a request to establish an account with
respect to the Old Notes at the Book-Entry Transfer Facility for purposes of
the Exchange Offer within two business days after the date of this
Prospectus, and any financial institution that is a participant in the
Book-Entry Transfer Facility's systems may make book-entry delivery of Old
Notes by causing the Book-Entry Transfer Facility to transfer such Old Notes
into the Exchange Agent's account at the Book-Entry Transfer Facility in
accordance with such Book-Entry Facility's procedure for transfer. ALTHOUGH
DELIVERY OF OLD NOTES MAY BE EFFECTED THROUGH BOOK-ENTRY TRANSFER AT THE
BOOK-ENTRY TRANSFER FACILITY, THE LETTER OF TRANSMITTAL OR FACSIMILE THEREOF,
WITH ANY REQUIRED SIGNATURE GUARANTEES AND ANY OTHER REQUIRED DOCUMENTS,
MUST, IN ANY CASE, BE TRANSMITTED TO AND RECEIVED BY THE EXCHANGE AGENT AT
THE ADDRESS SET FORTH BELOW UNDER "EXCHANGE AGENT" ON OR PRIOR TO THE
EXPIRATION DATE OR THE GUARANTEED DELIVERY PROCEDURES DESCRIBED BELOW MUST BE
COMPLIED WITH.
Guaranteed Delivery Procedures
If a registered holder of Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot
be completed on a timely basis, a tender may be effected if (i) the tender is
made through an Eligible Institution, (ii) prior to the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly completed
and duly executed Letter of Transmittal (or a facsimile thereof) and Notice
of Guaranteed Delivery, substantially in the form provided by the Company (by
telegram, telex, facsimile transmission, mail or hand delivery), setting
forth the name and address of the holder of Old Notes and the amount of Old
Notes tendered, stating that the tender is being made thereby and
guaranteeing that within five New York Stock Exchange ("NYSE") trading days
after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Old Notes, in proper form for
transfer, or a Book- Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent and (iii) the certificates for
all physically tendered Old Notes, in proper form for transfer, or a
Book-Entry Confirmation, as the case may be, and all other documents required
by the Letter of Transmittal, are received by the Exchange Agent within five
NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
20
Withdrawal Rights
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at the address set forth below under "Exchange
Agent." Any such notice of withdrawal must specify the name of the person
having tendered the Old Notes to be withdrawn, identify the Old Notes to be
withdrawn (including the principal amounts of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which
such Old Notes are registered, if different from that of the withdrawing
holder. If certificates for Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates, the withdrawing holder must also submit the serial numbers of
the particular certificates to be withdrawn and a signed notice of withdrawal
with signatures guaranteed by an Eligible Institution unless such holder is
an Eligible Institution. If Old Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Old Notes and otherwise comply
with the procedures of such facility. All questions as to the validity, form
and eligibility (including time of receipt) of such notices will be
determined by the Company, whose determination shall be final and binding on
all parties. Certificates for any Old Notes so withdrawn will be deemed not
to have been validly tendered for exchange for purposes of the Exchange
Offer. Any Old Notes which have been tendered for exchange but which are not
exchanged for any reason will be returned to the holder thereof without cost
to such holder (or, in the case of Old Notes tendered by book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described above, such Old
Notes will be credited to an account maintained with such Book-Entry Transfer
Facility for the Old Notes) as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Old Notes may be retendered by following one of the procedures described
under "--Procedure for Tendering Old Notes" above at any time on or prior to
the Expiration Date.
Certain Conditions to the Exchange Offer
Notwithstanding any other provision of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue New Notes in
exchange for, any Old Notes and may terminate or amend the Exchange Offer if
at any time prior to the Expiration Date any of the following events shall
occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking
any damages as a result thereof, or (ii) resulting in a material delay in
the ability of the Company to accept for exchange or exchange some or all
of the Old Notes pursuant to the Exchange Offer; or any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of
the transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign or any action shall have been
taken, proposed or threatened, by any government, governmental authority,
agency or court, domestic or foreign, that in the reasonable judgment of
the Company might directly or indirectly result in any of the consequences
referred to in clause (i) or (ii) above or, in the reasonable judgment of
the Company, might result in the holders of New Notes having obligations
with respect to resales and transfers of New Notes which are greater than
those described in the interpretation of the Commission referred to on the
cover page of this Prospectus or would otherwise make it inadvisable to
proceed with the Exchange Offer; or
(b) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market, (ii) any limitation
by any governmental agency or authority which may adversely affect the
ability of the Company to complete the transactions contemplated by the
Exchange Offer, (iii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or any
limitation by any governmental agency or authority which adversely affects
the extension of credit or (iv) a commencement of a war, armed hostilities
or other similar international calamity directly or indirectly involving
the United States or, in the case of any of the foregoing existing at the
time of the commencement of the Exchange Offer, a material acceleration or
worsening thereof; or
21
(c) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company and its subsidiaries, taken as a whole, that, in
the reasonable judgment of the Company, is or may be adverse to the
Company, or the Company shall have become aware of facts that, in the
reasonable judgment of the Company, have or may have adverse significance
with respect to the value of the Old Notes or the New Notes;
which, in the reasonable judgment of the Company, in any case, and regardless
of the circumstances (including any action by the Company) giving rise to any
such condition, makes it inadvisable to proceed with the Exchange Offer
and/or with such acceptance for exchange or with such exchange.
The foregoing conditions are for the sole benefit of the Company and may
be asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any
time and from time to time in its sole discretion. The failure by the Company
at any time to exercise any of the foregoing rights shall not be deemed a
waiver of any such right, and each right shall be deemed an ongoing right
which may be asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes,
if at such time any stop order shall be threatened or in effect with respect
to the Registration Statement of which this Prospectus constitutes a part or
the qualification of the Indenture under the Trust Indenture Act of 1939, as
amended.
Exchange Agent
Marine Midland Bank has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at the address set forth below. Questions and requests for
assistance, requests for additional copies of this Prospectus or of the
Letter of Transmittal and requests for Notices of Guaranteed Delivery should
be directed to the Exchange Agent, addressed as follows:
By Mail or by Hand:
Marine Midland Bank, Exchange Agent
Corporate Trust Operations
140 Broadway--A Level
New York, New York 10005-1180
By Facsimile:
(212) 658-2292
Confirm Facsimile by Telephone:
(212) 658-5931
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
Fees and Expenses
The Company will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
$ .
Transfer Taxes
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer tax in connection therewith, except that Holders who
instruct the Company to register New Notes in the name of, or request that
Old Notes not tendered or not accepted in the Exchange Offer be returned to,
a person other than the registered tendering Holder will be responsible for
the payment of any applicable transfer tax thereon.
22
Consequences of Failure to Exchange Old Notes
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of the Old Notes. In general, the Old Notes may not
be offered or sold unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable state
securities laws. The Company does not currently anticipate that it will
register Old Notes under the Securities Act. Based on interpretations by the
staff of the Commission issued to third parties, New Notes issued pursuant to
the Exchange Offer in exchange for Old Notes may be offered for resale,
resold or otherwise transferred by Holders thereof (other than any Holder
which is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such Holders' business and such Holders
have no arrangement with any person to participate in the distribution of
such New Notes. Each Holder, other than a broker-dealer, must acknowledge
that it is not engaged in, and does not intend to engage in, a distribution
of New Notes. If any Holder is an affiliate of the Company, is engaged in or
intends to engage in or has any arrangement or understanding with respect to
the distribution of the New Notes to be acquired pursuant to the Exchange
Offer, such Holder (i) could not rely on the applicable interpretations of
the staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes must acknowledge that such Old Notes were
acquired by such broker-dealer as a result of market-making activities or
other trading activities and that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution." In addition,
to comply with the securities laws of certain jurisdictions, if applicable,
it may be necessary to qualify for sale or to register the New Notes prior to
offering or selling such New Notes. The Company does not currently intend to
take any action to register or qualify the New Notes for resale in any such
jurisdiction.
23
CAPITALIZATION
The following table sets forth as of September 30, 1996 the actual
capitalization of the Company. This table should be read in conjunction with
the Combined Consolidated Financial Statements of the Company, together with
the notes thereto and the information contained in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere herein.
As of September 30, 1996
--------------------------
(Dollars in millions)
Debt
Revolving Credit Facility (1) $ 23.5
Term Loan Facility (2) 105.0
Bridge Notes (3) 100.0
Capitalized leases and foreign currency borrowings 5.2
------
Total debt 233.7
------
Total shareholders' deficit (4) (85.7)
------
Total capitalization $148.0
======
- -------------
(1) The Revolving Credit Facility represents the outstanding portion under
the $65.0 million facility provided by Bank of America National Trust and
Savings Association and DLJ Capital Funding, Inc. to complete the
Recapitalization. Future borrowings under the Revolving Credit Facility
will be available for general corporate purposes.
(2) For a description of the Term Loan Facility, see "Description of the
Credit Agreement."
(3) The Bridge Notes were repurchased utilizing the net proceeds from the
sale of the Old Notes, together with borrowings under the Revolving
Credit Facility, on October 22, 1996. Old Notes will be exchanged for New
Notes pursuant to the Exchange Offer.
(4) See "Unaudited Pro Forma Condensed Consolidated Balance Sheet Data."
In accounting for the Recapitalization, no fair value adjustments were made
to the book value of the Company's assets (other than the write-off of
deferred financing costs) and no goodwill was recognized.
24
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The unaudited pro forma condensed consolidated financial data presented
below is derived from the Company's Combined Consolidated Financial
Statements included elsewhere in this Prospectus, as adjusted to give effect
to the Recapitalization or the issuance of the Notes, as applicable. The
unaudited pro forma condensed consolidated statement of operations data for
the fiscal year ended June 30, 1996 gives effect to the Recapitalization and
the issuance of the Notes as if they had occurred at the beginning of the
period, and the unaudited pro forma condensed consolidated statement of
operations data for the Transition Period ended September 30, 1996 gives
effect to the issuance of the Notes as if it had occurred at the beginning of
the period. The unaudited pro forma condensed consolidated balance sheet data
gives effect to the issuance of the Notes as if it had occurred on September
30, 1996. The pro forma adjustments are based upon available data and certain
assumptions that the Company believes are reasonable. The unaudited pro forma
condensed consolidated financial data does not purport to represent what the
Company's results of operations or financial position would actually have
been had the Recapitalization or the issuance of the Notes in fact occurred
at such prior times or to project the Company's results of operations or
financial position for or at any future period or date. The unaudited pro
forma condensed consolidated financial data should be read in conjunction
with the Combined Consolidated Financial Statements of the Company, together
with the notes thereto, and the information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
Unaudited Pro Forma Condensed Consolidated Statement of Operations Data
Transition Period Ended
Fiscal Year Ended June 30, 1996 September 30, 1996
------------------------------------- -------------------------------------
Pro Forma Pro Pro Forma Pro
Historical (1) Adjustments Forma Historical (1) Adjustments Forma
(In millions, except per share amounts)
Net sales $399.4 -- $399.4 $ 95.0 -- $ 95.0
Cost of goods sold 239.4 -- 239.4 59.3 -- 59.3
------ ------ ------ ------ ----- ------
Gross profit 160.0 -- 160.0 35.7 -- 35.7
Selling expense 92.6 -- 92.6 20.9 -- 20.9
General and administrative expense 31.7 -- 31.7 8.6 -- 8.6
Research and development expense 5.4 -- 5.4 1.5 -- 1.5
Recapitalization and other special charges -- -- -- 28.4 (2) -- 28.4
Income (loss) from operations 30.3 -- 30.3 (23.7) -- (23.7)
Interest expense 8.4 15.0 (3) 23.4 4.4 1.3 (3) 5.7
Other expense, net 0.6 -- 0.6 0.1 -- 0.1
------ ------ ------ ------ ----- ------
Income (loss) before income taxes and
extraordinary item 21.3 (15.0) 6.3 (28.2) (1.3) (29.5)
Income tax (benefit) expense 7.0 (4.5)(4) 2.5 (8.9) (0.5)(5) (9.4)
------ ------ ------ ------ ----- ------
Income (loss) before extraordinary item $ 14.3 $(10.5) $ 3.8 $(19.3) $(0.8) $(20.1)
====== ====== ====== ====== ===== ======
Net income (loss) per common share
before extraordinary item $ 0.29 $ 0.08 $(0.44) $(0.46)
====== ====== ====== ======
Weighted average shares of common
stock outstanding 49.5 43.8 43.8 43.8
Ratio of earnings to fixed charges (6) 1.2x --
25
Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations
Data
(1) The Company has historically presented its financial statements on a
combined consolidated basis with Rayovac International Corporation, a
domestic international sales corporation (the "DISC"). The DISC was an
entity established by shareholders of the Company prior to the
Recapitalization to capture favorable tax advantages related to sales to
foreign subsidiaries and export customers. The historical columns include
the accounts of the Company and the DISC. The DISC was terminated on
August 16, 1996 in connection with the Recapitalization.
(2) During the Transition Period, the Company recorded charges of $12.3
million directly related to the Recapitalization and other special
charges of $16.1 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(3) The pro forma adjustments to record the incremental interest expense
arising from the Recapitalization or the issuance of the Notes, as
applicable, is computed as follows:
Fiscal Year Transition Period
Ended Ended
June 30, 1996 September 30, 1996
---------------- --------------------
(Dollars in millions)
Interest expense related to new debt:
Revolving Credit Facility $ 2.1 $ 0.5
Term Loan Facility 8.5 2.1
Notes 10.3 2.6
Amortization of deferred financing costs 1.6 0.4
Interest on other debt, not refinanced 0.9 0.1
--- ---
Subtotal 23.4 5.7
Less historical interest expense (8.4) (4.4)
---- ----
Pro forma adjustment $15.0 $ 1.3
===== =====
Interest related to the Revolving Credit Facility is determined based on
an annual average of $26 million of borrowings outstanding. Interest
expense was calculated using the following average rates: (a) Revolving
Credit Facility, 8.0%; (b) Term Loan Facility, 8.0% to 8.8%; and (c)
Notes, 10.3%.
(4) Represents the reduction in income tax expense related to pro forma
income (loss) before income taxes and extraordinary item, which is
computed using an effective income tax rate of 39.0%.
(5) Represents the increase in the income tax benefit related to the pro
forma adjustment for interest, which is computed using an effective
income tax rate of 39.0%.
(6) For purposes of computing this ratio, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest
expense, amortization of deferred finance fees and one-third of the rent
expense from operating leases, which management believes is a reasonable
approximation of the interest factor of the rent. Since earnings for the
Transition Period ended September 30, 1996 are inadequate to cover fixed
charges by $28.2 million, the ratio for that period is not presented
herein.
26
Unaudited Pro Forma Condensed Consolidated Balance Sheet Data
As of September 30, 1996
--------------------------------------------------
Historical Pro Forma Adjustments Pro Forma
Assets (Dollars in millions)
Current assets $155.7 $ -- $155.7
Property, plant and equipment, net 69.4 -- 69.4
Other 20.2 (2.0)(1) 18.2
------- ------- -------
Total assets $245.3 $ (2.0) $243.3
======= ======= =======
Liabilities and Shareholders' Deficit
Current liabilities $ 92.5 $ (0.8)(1) $ 91.7
Long-term debt, net of current maturities:
Revolving Credit Facility 23.5 -- 23.5
Term Loan Facility 101.0 -- 101.0
Bridge Notes 100.0 (100.0)(2) --
Notes -- 100.0 (2) 100.0
Other 0.4 -- 0.4
------- ------- -------
Total 224.9 -- 224.9
Other; noncurrent liabilities 13.6 -- 13.6
------- ------- -------
Total liabilities 331.0 (0.8) 330.2
------- ------- -------
Shareholders' deficit (85.7) (1.2)(1) (86.9)
------- ------- -------
Total liabilities and shareholders' deficit $245.3 $ (2.0) $243.3
======= ======= =======
(1) Represents or reflects the write-off of deferred financing costs of $2.0
related to the Bridge Notes or the related income tax benefit, computed
using an effective income tax rate of 39%.
(2) Represents the repurchase of the Bridge Notes utilizing the net proceeds
from the sale of the Old Notes, together with borrowings under the
Revolving Credit Facility, on October 22, 1996. Old Notes will be
exchanged for New Notes pursuant to the Exchange Offer.
27
SELECTED HISTORICAL COMBINED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected historical combined
consolidated financial data of the Company. The selected historical combined
consolidated financial data for the three fiscal years ended June 30, 1996
and the Transition Period ended September 30, 1996 have been derived from,
and should be read in conjunction with, the audited Combined Consolidated
Financial Statements of the Company, together with the notes thereto,
included elsewhere in this Prospectus. The selected historical combined
consolidated financial data of the Company for the period July 1, 1995 to
September 30, 1995 have been derived from, and should be read in conjunction
with, the Unaudited Condensed Combined Consolidated Financial Statements of
the Company, together with the notes thereto, included elsewhere in this
Prospectus. The selected historical combined consolidated financial data of
the Company for the two fiscal years ended June 30, 1993 have been derived
from the audited combined consolidated financial statements of the Company
which are not included herein. See "Independent Accountants" and the
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
[CLEANUP TABLE] Transition
Fiscal Year Ended June 30, Period
----------------------------------------------- July 1, 1995 to Ended
September 30, September 30,
1992 1993 1994 1995 1996 1995 1996
--------------- ---------------
(Dollars in millions) (Unaudited)
Statement of Operations Data:
Net sales $332.2 $353.4 $386.2 $391.0 $399.4 $100.6 $ 95.0
Cost of goods sold 192.1 201.4 234.9 237.1 239.4 64.1 59.3
------ ------ ------ ------ ------ ------ ------
Gross profit 140.1 152.0 151.3 153.9 160.0 36.5 35.7
Selling expense 72.2 79.8 103.8 84.5 92.6 23.2 20.9
General and administrative expense 31.1 35.4 29.4 32.9 31.7 7.4 8.6
Research and development expense 5.8 5.6 5.7 5.0 5.4 1.3 1.5
Recapitalization and other special
charges -- -- 1.5 -- -- -- 28.4(1)
------ ------ ------ ------ ------ ------ ------
Income (loss) from operations 31.0 31.2 10.9(2) 31.5 30.3 4.6 (23.7)
Interest expense 14.1 6.0 7.7 8.6 8.4 2.4 4.4
Other (income) expense, net (1.0) 1.2 (0.6) 0.3 0.6 0.1 0.1
------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes,
extraordinary item and cumulative
effect of change in accounting 17.9 24.0 3.8 22.6 21.3 2.1 (28.2)
Income tax expense (benefit) 5.8 9.0 (0.6) 6.2 7.0 0.7 (8.9)
------ ------ ------ ------ ------ ------ ------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting 12.1 15.0 4.4 16.4 14.3 1.4 (19.3)
------ ------ ------ ------ ------ ------
Extraordinary item, net
-- -- -- -- -- -- 1.6(3)
Cumulative effect of change in
accounting 6.6(4) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Net income (loss) $ 5.5 $ 15.0 $ 4.4 $16.4 $ 14.3 $ 1.4 ($20.9)
====== ====== ====== ====== ====== ====== ======
Net income (loss) per common
share before extraordinary item
and the cumulative effect of changes
in accounting $ 0.24 $ 0.30 $0.09 $ 0.33 $ 0.29 $ 0.28 ($ 0.44)
====== ====== ====== ====== ====== ====== ======
Other Data:
Depreciation $ 6.1 $ 7.4 $10.3 $11.0 $ 11.9 $ 3.2 $ 3.3
Capital expenditures 15.3 30.3(5) 12.5 16.9 6.6 1.1 1.2
Cash flows from operating activities 23.4 15.8 (18.7) 35.5 17.8 (9.6) (1.1)
Cash flows from investing activities (15.3) (30.3) (12.4) (16.8) (6.3) (1.1) (0.5)
Cash flows from financing activities (8.6) 13.7 30.8 (18.3) (11.9) 10.5 3.7
EBITDA (6) 37.6 39.3 21.2 41.3 42.2 7.7 (20.4)
Adjusted EBITDA (7) 39.7 41.6 24.0 44.2 46.5 8.5 (19.5)
Ratio of earnings to fixed charges (8) 2.1x 3.8x 1.4x 3.0x 2.9x 1.7x --
28
Fiscal Year Ended June 30,
-------------------------------------------------
Transition
Period
July 1, 1995 to Ended
September 30, September 30,
1992 1993 1994 1995 1996 1995 1996
Balance Sheet Data:
Working capital $ 17.2 $ 31.6 $ 63.6 $ 55.9 $ 62.5 $ 68.5 $ 63.2
Total assets 156.0 189.0 222.4 220.6 221.9 241.5 245.3
Long-term debt 37.9 64.1 96.4 76.4 69.7 87.1 224.8
Shareholders' equity (deficit) 25.6 36.7 37.9 53.6 61.7 53.2 (85.7)
- -------------
(1) During the Transition Period, the Company recorded charges of $12.3
million directly related to the Recapitalization and other special
charges of $16.1 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(2) Income from operations in fiscal 1994 was impacted by increased selling
expenses due to higher advertising and promotion expenses related to the
Renewal Introduction and non-recurring manufacturing costs in connection
with the Fennimore Expansion. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Introduction."
(3) The Recapitalization of the Company included repayment of certain
outstanding indebtedness, including prepayment fees and penalties. Such
prepayment fees and penalties of $2.4 million, net of income tax benefit
of $0.8 million, has been recorded as an extraordinary item in the
Combined Consolidated Statement of Operations for the Transition Period
ended September 30, 1996.
(4) In fiscal 1992, the Company recorded a $6.6 million charge for the
cumulative effect of adopting SFAS 109 "Accounting For Income Taxes."
(5) Fiscal 1993 capital expenditures include $19.7 million in connection with
the Fennimore Expansion. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Introduction."
(6) EBITDA represents income from operations plus depreciation and reflects
an adjustment of income from operations to eliminate the establishment
and subsequent reversal of two reserves ($0.7 million established in 1993
and reversed in 1995, and $0.5 million established in 1992 and reversed
in 1995). The Company believes that EBITDA and related measures are
commonly used by certain investors and analysts to analyze and compare,
and provide useful information regarding, the Company's ability to
service its indebtedness, but holders tendering Old Notes in the Exchange
Offer should consider the following factors in evaluating such measures:
EBITDA and related measures (i) should not be considered in isolation,
(ii) are not measures of performance calculated in accordance with
generally accepted accounting principles ("GAAP"), (iii) should not be
construed as alternatives or substitutes for income from operations, net
income or cash flows from operating activities in analyzing the Company's
operating performance, financial position or cash flows (in each case, as
determined in accordance with GAAP) and (iv) should not be used as
indicators of the Company's operating performance or measures of its
liquidity. Additionally, because all companies do not calculate EBITDA
and related measures in uniform fashion, the calculations presented in
this Prospectus may not be comparable to other similarly titled measures
of other companies. A similar concept to EBITDA, defined as "Consolidated
Cash Flow" in the Indenture and used in the calculation of certain
covenants therein, represents operating income plus depreciation,
amortization, any net loss realized in connection with an Asset Sale and
certain other non-cash charges and certain non-recurring expenses. See
"Description of the Notes--Certain Covenants" and "Description of the
Notes--Certain Definitions." Consolidated Cash Flow would not have been
significantly different from EBITDA in any of the periods presented other
than the Transition Period. The difference in measures for the Transition
Period result primarily from adjustments relating to the
Recapitalization.
Management interprets the general trend of EBITDA, with the exception of
EBITDA for fiscal 1994, as steadily increasing. In fiscal 1994, EBITDA
decreased due to costs incurred in connection with battery redesign, the
start-up of mercury-free alkaline battery production, temporary planned
increases in raw material costs associated with sourcing of raw material
from foreign vendors pursuant to the terms of certain agreements and
increased advertising expense associated with the Renewal Introduction.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operation." In the absence of such costs, EBITDA for fiscal
1994 would have fit within the otherwise prevailing trend.
29
(7) Adjusted EBITDA is defined as EBITDA adjusted to add back certain
expenses related to (i) the Company's aircraft lease, in excess of the
estimated cost of commercial airline travel, which aircraft lease was
terminated in connection with the Recapitalization, (ii) certain
litigation expense accrued in 1996 for litigation initiated in a prior
period, (iii) compensation expense for the Company's pre-Recapitalization
senior management group, net of expected post-Recapitalization senior
management compensation including the Management Fee (as defined herein)
and the Consulting Fee (as defined herein) and (iv) advertising and
promotional expense associated with the Company's sponsorship of
professional race cars, the contracts for which have been terminated.
Adjusted EBITDA has been calculated as follows:
Fiscal Year Ended June 30,
------------------------------------------
Transition
Period
July 1, 1995 Ended
to September 30, September 30,
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------ --------------- ---------------
EBITDA $37.6 $39.3 $21.2 $41.3 $42.2 $ 7.7 ($20.4)
----- ----- ----- ----- ----- ----- ------
Plus:
Aircraft expenses 1.2 1.3 1.6 1.7 1.7 0.4 0.4
Race car expenses 0.8 0.9 1.0 1.0 1.6 0.4 0.5
Senior management expenses 0.1 0.1 0.2 0.2 0.2 -- --
Litigation expense -- -- -- -- 0.8 -- --
----- ----- ----- ----- ----- ----- -----
Adjusted EBITDA $39.7 $41.6 $24.0 $44.2 $46.5 $ 8.5 ($19.5)
===== ===== ===== ===== ===== ===== =====
Management is reviewing a number of categories of expenditures following
the Recapitalization, including advertising and promotional expenditure
levels. Post-Recapitalization expenditure levels have not yet been
determined. Adjusted EBITDA (i) should not be considered in isolation,
(ii) is not a measure of performance calculated in accordance with
generally accepted accounting principles ("GAAP"), (iii) should not be
construed as alternatives or substitutes for income from operations, net
income or cash flows from operating activities in analyzing the Company's
operating performance, financial position or cash flows (in each case, as
determined in accordance with GAAP) and (iv) should not be used as
indicators of the Company's operating performance or measures of its
liquidity.
(8) For purposes of computing this ratio, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest
expense, amortization of deferred finance fees and one-third of the rent
expense from operating leases, which management believes is a reasonable
approximation of the interest factor of the rent. Since earnings in the
Transition Period ended September 30, 1996 are inadequate to cover fixed
charges by $28.2 million, the ratio is not presented herein.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Combined
Consolidated Financial Statements, the Unaudited Condensed Combined
Consolidated Financial Data and Unaudited Pro Forma Condensed Consolidated
Financial Data of the Company, together with the notes thereto, included
elsewhere herein.
Introduction
Fiscal Periods. Upon completion of the Recapitalization, the Company
changed its fiscal year end from June 30 to September 30. For clarity of
presentation and comparison, references herein to fiscal 1994, fiscal 1995
and fiscal 1996 are to the Company's fiscal years ended June 30, 1994, June
30, 1995 and June 30, 1996, respectively, and references to the "Transition
Period ended September 30, 1996" and the "Transition Period" are to the
period from July 1, 1996 to September 30, 1996.
The Company is the third largest domestic manufacturer of general
batteries (D, C, AA, AAA and 9-volt sizes). Within the general battery
market, the Company is the leader in the household rechargeable and heavy
duty battery segments. The Company is also the leading domestic manufacturer
of certain specialty batteries, including hearing aid batteries, lantern
batteries and lithium batteries for personal computer memory back-up. In
addition, the Company is a leading marketer of flashlights and other
battery-powered lighting devices.
The Company's operating performance depends on a number of factors, the
most important of which are: (i) general retailing trends, especially in the
mass merchandise segment of the retail market; (ii) the Company's overall
product mix among various specialty and general household batteries and
battery-powered lighting devices, which sell at different price points and
profit margins; (iii) the Company's overall competitive position, which is
affected by both the introduction of new products and promotions by the
Company and its competitors and the Company's relative pricing and battery
performance; and (iv) changes in operating expenses. Set forth below are
specific developments that have impacted the Company's performance in recent
years.
Expansion of Production Facility. The Company has modernized and expanded
its production lines at its Fennimore, Wisconsin facility (the "Fennimore
Expansion"). In connection with the Fennimore Expansion, the Company more
than doubled its aggregate capacity for AA and AAA size alkaline batteries
and replaced its capacity for C and D size alkaline batteries from fiscal
1992 through fiscal 1995 by investing an aggregate of $36.7 million in new
production lines. In addition to increased capacity, this investment resulted
in better performing and higher quality alkaline batteries. Significant
effects of the expansion on the Company's financial results include: $9.5
million of non-recurring manufacturing costs in fiscal 1994 associated with
battery redesign and the start-up of mercury-free alkaline battery
production; and temporary planned increases in raw material costs associated
with sourcing of raw material from foreign vendors pursuant to the terms of
the production line equipment purchase agreements. These incremental costs
decreased in fiscal 1996 as a result of the increased use of lower-cost
domestic raw material sources to replace the foreign vendor sourcing, which
replacement will be substantially completed by the end of fiscal 1997.
Renewal Product Line. In fiscal 1994, the Company introduced the Renewal
rechargeable battery, the first alkaline rechargeable battery sold in the
United States (the "Renewal Introduction"). In connection with the Renewal
Introduction, the Company's advertising and promotional expense increased
significantly to $26.0 million in fiscal 1994. By comparison, the Company
spent $15.7 million in fiscal 1995 and $20.3 million in fiscal 1996 on
Renewal advertising and promotion, with the fiscal 1996 increase largely due
to the Company's new promotional campaign featuring basketball superstar
Michael Jordan. The Renewal Introduction was responsible in significant part
for the increase in working capital from 1993 to 1994. Management believes
that continued improvement in consumer awareness of the benefits of Renewal
over nickel-cadmium rechargeables and disposable alkaline batteries will be
necessary to further expand the rechargeable segment. The Company recently
began discounting the Power Station recharging unit for Renewal batteries to
encourage more consumers to try Renewal products. See "--Recent
Developments."
Management Incentives. The Company's historical financial results reflect
the Company's former policy regarding payment of management bonuses. Under
this policy, members of the Company's management earned cash incentive
bonuses based on the achievement of certain targets based on the Company's
income from operations. In 1994, 1996 and the Transition Period, no such cash
incentive bonuses were paid. In fiscal 1992, 1993 and 1995, the Company paid
bonuses of $2.5 million, $2.9 million and $4.0 million, respectively.
31
Seasonality. The Company's sales are seasonal, with the highest sales
occurring in the fiscal quarter ended December 31, during the Christmas
holiday buying season. During the past four fiscal years, the Company's sales
in the quarter ended December 31 have represented an average of 33% of annual
net sales. As a result of this seasonality, the Company's working capital
requirements and revolving credit borrowings are typically higher in the
first and second fiscal quarters of each year.
Results of Operations
The following table sets forth the percentage relationship of certain
items in the Company's statement of operations to net sales for the periods
presented:
Transition
Period
Fiscal Year Ended June 30, July 1, 1995 to Ended
---------------------------- September 30, September 30,
1994 1995 1996 1995 1996
--------------- ---------------
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 60.8 60.6 59.9 63.7 62.4
------ ------ ------ ------ ------
Gross profit 39.2 39.4 40.1 36.3 37.6
Selling expense 26.9 21.6 23.2 23.1 22.0
General and administrative expense 7.6 8.4 8.0 7.3 9.1
Research and development expense 1.5 1.3 1.4 1.4 1.6
Recapitalization and other special
charges 0.4 -- -- -- 29.9
------ ------ ------ ------ ------
Income (loss) from operations 2.8% 8.1% 7.5% 4.5% (25.0%)
====== ====== ====== ====== ======
Transition Period Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
Net Sales. The Company's total net sales decreased $5.6 million, or 5.6%,
to $95.0 million in the Transition Period from $100.6 million in the three
months ended September 30, 1995 (the "Prior Fiscal Year Period") primarily
due to decreased sales to the food and drug store retail channels and the
Company having made sales to certain retail customers in connection with
promotional orders after the Transition Period which were made during the
Prior Fiscal Year Period in fiscal 1995.
Gross Profit. Gross profit decreased $0.8 million, or 2.2%, to $35.7
million in the Transition Period from $36.5 million in the Prior Fiscal Year
Period, primarily as a result of decreased sales in the Transition Period, as
discussed above.
Selling Expenses. Selling expense decreased $2.3 million, or 9.9% to $20.9
million in the Transition Period from $23.2 million in the Prior Fiscal Year
Period, primarily due to decreased advertising expense in the Transition
Period.
General and Administrative Expense. General and administrative expense
increased $1.2 million, or 16.2% to $8.6 million in the Transition Period
from $7.4 million in the Prior Fiscal Year Period, primarily as a result of
the Company having incurred certain expenditures during the Transition Period
which were incurred subsequent to the Prior Fiscal Year Period in fiscal
1995.
Research and Development Expense. Research and development expense
increased $.1 million, or 7.1%, to $1.5 million in the Transition Period from
$1.4 million in the Prior Fiscal Year Period, primarily as a result of
increased product development efforts.
Recapitalization and Other Special Charges. During the Transition Period
ended September 30, 1996, the Company recorded charges totaling $28.4
million, including non-recurring charges related to the Recapitalization and
other special charges.
Non-recurring charges of $12.3 million related to the Recapitalization:
(i) $5.0 million consisting primarily of $2.2 million in advisory fees
paid to the financial advisor to the Company's selling shareholders and
various legal and consulting fees of $2.8 million; and
32
(ii) $7.3 million of stock option compensation, severance payments and
employment contract settlements for the benefit of certain present and former
officers, directors and management of the Company.
Other special charges of $16.1 million:
(i) $2.7 million of charges related to the exit of certain manufacturing
operations located in the United Kingdom;
(ii) $1.7 million of charges for deferred compensation plan obligations to
officers leaving the Company resulting from the curtailment of the plan;
(iii) $1.5 million of charges reflecting the present value of lease
payments for land which new management has determined will not be used for
any future productive purpose;
(iv) $5.6 million in costs and asset writedowns principally related to
changes in Renewal Power Station pricing strategies adopted by new management
subsequent to the Recapitalization and prior to September 30, 1996; and
(v) $4.6 million of termination benefits and other charges.
Further, subsequent to September 30, 1996, the Company anticipates
additional non-recurring charges of $2.7 million, primarily in connection
with the exit of certain manufacturing operations located in the United
Kingdom and organizational restructuring in the United States. In addition,
the Company anticipates a write off of $2.0 million of unamortized debt
issuance costs related to the Bridge Notes.
Income (loss) from Operations. Income (loss) from operations decreased
$28.3 million to $(23.7) million in the Transition Period from $4.6 million
in the Prior Fiscal Year Period for the reasons discussed above.
Net Income (loss). Net income (loss) for the Transition Period decreased
$22.3 million to $(20.9) from $1.4 million in the Prior Fiscal Year Period,
primarily because of non-recurring charges related to the Recapitalization
and other special charges discussed above. In addition, amortization of
deferred finance charges related to the Bridge Notes and an extraordinary
loss on the early retirement of debt decreased net income in the Transition
Period by $2.6 million, net of income taxes.
Transition Period Ended September 30, 1996 Compared to Fiscal Year Ended June
30, 1996
Results of operations for the Transition Period Ended September 30, 1996
include amounts for a three-month period, while results for the fiscal year
ended June 30, 1996 include amounts for a twelve-month period. Results (in
terms of dollar amounts) for these periods are not directly comparable.
Accordingly, management's discussion and analysis for these periods is
generally based upon a comparison of specified results as a percentage of net
sales.
Net Sales. The Company's total net sales decreased $304.4 million, or
76.2%, to $95.0 million in the Transition Period from $399.4 million in
fiscal 1996 because the Transition Period included only three months of net
sales as compared to twelve months in fiscal 1996. Overall pricing was
relatively constant between the two periods.
Gross Profit. Gross profit decreased $124.3 million, or 77.7%, to $35.7
million in the Transition Period from $160.0 million in fiscal 1996. As a
percentage of net sales, gross profit decreased to 37.6% in the Transition
Period from 40.1% in fiscal 1996, primarily because the products sold during
the Transition Period carried a higher average unit cost than the overall
average unit cost of products sold in fiscal 1996 due to seasonal sales
trends.
Selling Expense. Selling expense decreased $71.7 million, or 77.4%, to
$20.9 million in the Transition Period from $92.6 million in fiscal 1996. As
a percentage of net sales, selling expenses decreased to 22.0% in the
Transition Period from 23.2% in fiscal 1996, primarily as a result of
decreased advertising expense in the Transition Period.
General and Administrative Expense. General and administrative expense
decreased $23.2 million, or 73.0%, to $8.6 million in the Transition Period
from $31.8 million in fiscal 1996. As a percentage of net sales, general and
administrative expense increased to 9.1% in the Transition Period from 8.0%
in fiscal 1996, primarily as a result of the effects of seasonal sales trends
in the Transition Period.
Research and Development Expense. Research and development expense
decreased $3.9 million, or 72.2%, to $1.5 million in the Transition Period
from $5.4 million in fiscal 1996. As a percentage of net sales, research and
development expense increased to 1.6% in the Transition Period from 1.4% in
fiscal 1996, primarily as a result of increased support for ongoing product
development efforts.
33
Recapitalization and Other Special Charges. During the Transition Period
ended September 30, 1996, the Company recorded charges totalling $28.4
million, including non-recurring charges related to the Recapitalization and
other special charges.
Non-recurring charges of $12.3 million related to the Recapitalization:
(i) $5.0 million consisting primarily of $2.2 million in advisory fees
paid to the financial advisor to the Company's selling shareholders and
various legal and consulting fees of $2.8 million; and
(ii) $7.3 million of stock option compensation, severance payments and
employment contract settlements for the benefit of certain present and former
officers, directors and management of the Company.
Other special charges of $16.1 million:
(i) $2.7 million of charges related to the exit of certain manufacturing
operations located in the United Kingdom;
(ii) $1.7 million of charges for deferred compensation plan obligations to
officers leaving the Company resulting from the curtailment of the plan;
(iii) $1.5 million of charges reflecting the present value of lease
payments for land which new management has determined will not be used for
any future productive purpose;
(iv) $5.6 million in costs and asset writedowns principally related to
changes in Renewal Power Station pricing strategies adopted by new management
subsequent to the Recapitalization and prior to September 30, 1996; and
(v) $4.6 million of termination benefits and other charges.
Further, subsequent to September 30, 1996, the Company anticipates
additional non-recurring charges of $2.7 million, primarily in connection
with the exit of certain manufacturing operations located in the United
Kingdom and organizational restructuring in the United States. In addition,
the Company anticipates a write off of $2.0 million of unamortized debt
issuance costs related to the Bridge Notes.
Income (loss) from Operations. Income (loss) from operations decreased
$54.0 million, or 178.2%, to $(23.7) million in the Transition Period from
$30.3 million in fiscal 1996. As a percentage of net sales, income (loss)
from operations decreased to (25.0)% in the Transition Period from 7.5% in
fiscal 1996 for the reasons discussed above.
Net Income (loss). Net income (loss) for the Transition Period decreased
$35.2 million, or 246.2%, to (20.9) from $14.3 million in fiscal 1996. As a
percentage of net sales, net income (loss) decreased to (22.0)% in the
Transition Period from 3.6% in fiscal 1996, primarily because of
non-recurring charges related to the Recapitalization and other special
charges discussed above. In addition, amortization of deferred finance
charges related to the Bridge Notes and an extraordinary loss on the early
retirement of debt decreased net income in the Transition Period by $2.6
million, net of income taxes.
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
Net Sales. The Company's total net sales increased $8.4 million, or 2.1%,
to $399.4 million in fiscal 1996 from $391.0 million in fiscal 1995,
primarily due to higher unit sales of hearing aid batteries, Renewal
rechargeable batteries and alkaline batteries, offset in part by decreases in
unit sales of heavy duty and lantern batteries. Overall pricing was
relatively constant between the two periods. Sales of hearing aid batteries
increased as a result of unit sales growth in the overall hearing aid battery
market as well as increased penetration by the Company's Loud'n Clear line of
hearing aid batteries and the introduction of a new miniature size battery,
used in hearing aids that fit completely in the ear. Unit sales of Renewal
rechargeable alkaline batteries increased as a result of increased consumer
awareness of the benefits of Renewal over nickel-cadmium household
rechargeable batteries and disposable batteries and as replacement sales
increased to retailers who had sold through their high levels of fiscal 1995
Renewal inventory. The Company's unit sales of alkaline batteries increased
as the Company participated to a certain extent in the continued overall
growth in the market for alkaline batteries. Unit sales of heavy duty
batteries decreased due to the continued worldwide migration away from heavy
duty batteries and toward alkaline batteries while unit sales of lantern
batteries also decreased due to an overall decline in the lantern battery
market.
Gross Profit. Gross profit increased $6.1 million, or 4.0%, to $160.0
million in fiscal 1996 from $153.9 million in fiscal 1995. Gross profit
increased as a percentage of net sales to 40.1% in fiscal 1996 from 39.4% in
fiscal 1995.
34
These increases are primarily attributable to increased sales of higher
margin products such as Renewal rechargeable batteries and hearing aid
batteries. In addition, the Company experienced manufacturing cost
improvements, particularly for alkaline battery raw materials related to the
Fennimore Expansion as discussed above.
Selling Expense. Selling expense increased $8.1 million, or 9.6%, to $92.6
million in fiscal 1996 from $84.5 million in fiscal 1995. Selling expense as
a percentage of net sales increased to 23.2% in 1996 from 21.6% in 1995.
These increases are primarily attributable to increased advertising costs to
promote the Renewal product line as discussed above.
General and Administrative Expense. General and administrative expense
decreased $1.2 million, or 3.6%, to $31.7 million in fiscal 1996 from $32.9
million in fiscal 1995. General and administrative expense as a percentage of
net sales decreased from 8.4% in fiscal 1995 to 8.0% in fiscal 1996. These
decreases occurred primarily because the $4.0 million payment of management
incentives in 1995, as discussed above, was not repeated in fiscal 1996.
Research and Development Expense. Research and development expense
increased $0.4 million, or 8.0%, to $5.4 million in fiscal 1996 from $5.0
million in fiscal 1995 as a result of continued support for ongoing product
development efforts.
Income from Operations. Income from operations decreased $1.2 million, or
3.8%, to $30.3 million, or 7.5% of net sales in fiscal 1996, from $31.5
million, or 8.1% of net sales, in fiscal 1995 for the reasons discussed above
and as a result of an increase in depreciation expense, resulting primarily
from the Fennimore Expansion.
Net Income. Net income for fiscal 1996 decreased $2.1 million, or 12.8%,
to $14.3 million from $16.4 million in fiscal 1995, principally as a result
of decreased income from operations and higher effective tax rates, which
increased from 27.6% in 1995 to 32.9% in 1996. The Company's effective income
tax rates in fiscal 1996 and fiscal 1995 were impacted by the income tax
benefits of the DISC, and fiscal 1995 was also impacted by the utilization of
a foreign net operating loss carryforward. The termination of the DISC will
result in higher effective tax rates for the Company in future years.
Fiscal Year Ended June 30, 1995 Compared to Fiscal Year Ended June 30, 1994
Net Sales. The Company's total net sales increased $4.8 million, or 1.2%,
to $391.0 million in fiscal 1995 from $386.2 million in fiscal 1994,
primarily due to higher unit sales of hearing aid batteries and alkaline
batteries, offset in part by decreases in unit sales of Renewal rechargeable
batteries and lighting products. Overall pricing was relatively constant
between the two periods. Sales of hearing aid batteries increased as a result
of unit sales growth in the overall hearing aid battery market and the
success of a national advertising and promotional campaign by the Company
featuring Arnold Palmer. Sales of alkaline batteries increased as a result of
the overall unit increased in the market for alkaline batteries. Decreases in
unit sales of Renewal rechargeable batteries were principally a result of
inventory corrections relating to excess retail inventory accumulated at the
time of Renewal's introduction in fiscal 1994 in anticipation of demand which
materialized later than expected, and consequently delayed replacement sales.
Unit sales of lighting devices decreased due primarily to the successful
introduction in the retail flashlight market of a new flashlight product by a
competitor.
Gross Profit. Gross profit increased $2.6 million, or 1.7%, to $153.9
million in fiscal 1995 from $151.3 million in fiscal 1994. Gross profit
increased as a percentage of net sales to 39.4% in fiscal 1995 from 39.2% in
fiscal 1994. The comparison was favorable primarily because of the one-time
$9.5 million manufacturing costs incurred in 1994 due to the Fennimore
Expansion, as discussed above, the benefit of which was offset in part by a
1995 increase in foreign sourced raw material costs resulting from the
Fennimore Expansion.
Selling Expense. Selling expense decreased $19.3 million, or 18.6%, to
$84.5 million in fiscal 1995 from $103.8 million in fiscal 1994 largely due
to a $10.3 million decline in Renewal advertising and promotional expenses
from fiscal 1994 when $26.0 million in initial advertising and promotional
expenses were incurred in connection with the Renewal Introduction and
reduced promotional expenses in other products. Selling expense decreased as
a percentage of net sales to 21.6% in fiscal 1995 from 26.9% in fiscal 1994.
General and Administrative Expense. General and administrative expense
increased $3.5 million, or 11.9%, to $32.9 million in fiscal 1995 from $29.4
million in fiscal 1994. General and administrative expense as a percentage of
net sales increased from 7.6% in fiscal 1994 to 8.4% in fiscal 1995. This
increase occurred as a result of the payment of $4.0 million in management
incentives in fiscal 1995.
35
Research and Development Expense. Research and development expense
decreased $0.7 million, or 12.3%, to $5.0 million in fiscal 1995 from $5.7
million in fiscal 1994 largely due to the temporary assignment of development
resources and personnel to the Fennimore Expansion, in fiscal 1995, as
discussed above.
Other Special Charges. In fiscal 1994, the Company recorded a charge of
$1.5 million related to a head count reduction in connection with efforts to
reduce cost and improve productivity.
Income from Operations. Income from operations in 1995 increased $20.6
million to $31.5 million, or 8.1% of net sales in fiscal 1995, from $10.9
million, or 2.8% of net sales, in fiscal 1994, for the reasons discussed
above.
Net Income. Net income for fiscal 1995 increased $12.0 million, or 272.7%,
to $16.4 million from $4.4 million in fiscal 1994, largely as a result of
higher operating earnings (as described above), which were partially offset
by increased income tax expense in comparison to a tax benefit in 1994.
Liquidity and Capital Resources
During the Transition Period, cash provided by operations decreased $18.9
million to $(1.1) million from $17.8 million in fiscal 1996 due primarily to
lower net income (as discussed above) and the effect of increases in
inventory to meet seasonal sales requirements. Cash provided by (used in)
operating activities was $17.8 million, $35.5 million and $(18.7) million in
fiscal 1996, 1995 and 1994, respectively. The reduction in cash flow from
operating activities in fiscal 1996 compared to fiscal 1995 and the increase
in cash flow from operating activities in fiscal 1995 compared to fiscal 1994
were primarily due to substantial inventory reductions in 1995 over 1994
levels that were affected by the Renewal Introduction, and the rebuilding of
those inventories in 1996. In addition, cash used in operations in fiscal
1994 was impacted by costs associated with the Renewal Introduction and the
Fennimore Expansion. See "--Introduction."
Capital expenditures during the Transition Period were $1.2 million,
reflecting maintenance level spending. Capital expenditures in fiscal 1996,
1995 and 1994 were $6.6 million, $16.9 million and $12.5 million,
respectively. Capital expenditures in fiscal 1994 and 1995 reflect the
acquisition of equipment used in the Company's improved alkaline production
lines, as discussed above, and were therefore substantially in excess of
maintenance level capital expenditure requirements.
During the Transition Period, net cash provided by financing activities
increased $15.7 million to $3.7 million from $(12.0) million in fiscal 1996
due primarily to the Recapitalization. Net cash used in financing activities
was $12.0 million for fiscal 1996 as compared to $18.3 million in fiscal
1995. The cash was used primarily to reduce the Company's indebtedness.
During fiscal 1994, net cash provided by financing activities was $30.8
million as a result of borrowings under the Company's prior revolving credit
agreement to fund the working capital increases and capital expenditures
discussed above.
Since the Recapitalization, the Company's primary capital requirements
have been, and will continue to be, for debt service, working capital and
capital expenditures. The Company believes that cash flow from operating
activities and periodic borrowings under the Credit Agreement will be
adequate to meet the Company's short-term and long-term liquidity
requirements prior to the maturity of its credit facilities, although no
assurance can be given in this regard. Under the Credit Agreement, the
Revolving Credit Facility provides $65.0 million of revolving credit
availability (of which $26.0 million was borrowed at September 13, 1996, and
$2.3 million was utilized for outstanding letters of credit). See "Risk
Factors--Substantial Leverage; Incurrence of Additional Senior Debt."
The Company estimates that capital expenditures for fiscal 1997 will be up
to $15.0 million, and management is reviewing potential projects to increase
manufacturing efficiencies, fund environmental, occupational safety projects
and general and administrative projects and enhance the Company's
competitiveness and profitability.
The Company has been named as a defendant in two lawsuits in connection
with a Superfund site located in Bergen County, New Jersey (Velsicol Chemical
Corporation, et al. v. A.E. Staley Manufacturing Company, et al., and Morton
International, Inc. v. A.E. Staley Manufacturing Company, et al., United
States District Court for the District of New Jersey, filed July 29, 1996.
The Company is one of almost one hundred defendants named in the above-styled
cases. Both cases involve contamination at a former mercury processing plant.
One case was brought by the current owner and the other case by a former
owner. The complaints in the two cases are identical, with four counts
alleging claims for contribution under the Comprehensive Environmental
Response Compensation and Liability Act of 1980 ("CERCLA"), the New Jersey
Spill Compensation and Control Act ("Spill Act"), the Federal
36
Declaratory Judgment Act, and the common law. The plaintiffs allege that the
Company arranged for the treatment or disposal of hazardous substances at the
site. Consequently, the plaintiffs allege, the Company is liable to them for
contribution towards the costs of investigating and remediating the site.
No ad damnum is specified in either complaint. Indeed, the Remedial
Investigation and Feasibility Study ("RI/ FS") of the site has just begun.
Plaintiff's counsel estimates the cost of the RI/FS to be $4 million. There
is no estimate at this juncture as to the actual cost of remediation. The
Company is one of approximately 75 defendants who allegedly arranged for
treatment or disposal at the site. The remaining defendants are former owners
or operators of the site and adjacent industrial facilities which allegedly
contributed to the contamination. The plaintiff prepared and distributed to
the defendants a "Nexus" memorandum, which described the operation of the
facility and the alleged connection of these defendants to it. According to
that document, the Company was a significant customer of the facility.
However, the Company was not described, as were others, as "one of the
largest" or a "major" customer. At this time, the Company is unable to form a
judgment that the likelihood of an outcome that would have a material impact
on the liquidity of the Company is probable or remote. The cost to remediate
the Bergen County Site has not been determined and the Company cannot predict
the outcome of these proceedings.
BUSINESS
General
The Company is the third largest domestic manufacturer of general
batteries (D, C, AA, AAA and 9-volt sizes). Within the general battery
market, the Company is the leader in the household rechargeable and heavy
duty battery segments. The Company is also the leading domestic manufacturer
of certain specialty batteries, including hearing aid batteries, lantern
batteries and lithium batteries for personal computer memory back-up. In
addition, the Company is a leading marketer of flashlights and other
battery-powered lighting devices. Established in 1906, the Rayovac brand name
is one of the oldest and best recognized names in the battery industry. The
Company attributes the longevity and strength of its brand name to its
high-quality product line and to the success of its marketing and
merchandising initiatives. For the fiscal 1996, the Company had net sales,
net income and Adjusted EBITDA (as defined herein) of $399.4 million, $14.3
million and $46.5 million, respectively.
The Company's broad line of products includes (i) general batteries
(including alkaline, heavy duty and rechargeable household batteries), (ii)
specialty batteries (including hearing aid, watch, lantern and personal
computer memory back-up batteries) and (iii) flashlights and other
battery-powered lighting devices. The Company's products are marketed under
the names Rayovac, Renewal, Loud'n Clear, ProLine, Lifex, Power Station,
Workhorse and Roughneck, as well as several private labels.
Since the early 1980s, the Company has implemented a number of important
strategies that have greatly improved its competitive position. In the
general battery market, the Company has become a leader in the mass
merchandise retail channel by positioning its products as a value brand,
offering batteries of substantially equivalent quality and performance at a
discount to those offered by its principal competitors. The Company has also
introduced industry-leading merchandising innovations such as the Smart Pack
and Smart Strip merchandising systems, in which multiple battery packages are
presented together in value-oriented formats. As a result of these programs,
the Company had 27% and 26.6% market shares in the mass merchandise channel
of the general battery market in fiscal 1996 and in the Transition Period
ended September 30, 1996, respectively.
The Company has complemented its general battery business with successful
new product introductions and leading market positions in selected
high-margin specialty battery lines. In the domestic hearing aid segment, the
Company has achieved a 50% market share as a result of its products'
technological capabilities, a strong distribution system and a well developed
marketing program. The Company is also the leader in the hearing aid battery
market in the United Kingdom and continental Europe. Further, in 1993, the
Company introduced the Renewal rechargeable battery, the first alkaline
rechargeable battery sold in the United States. Renewal achieved 64% and 63%
market shares in the rechargeable household battery category as of July 1996
and September 1996, respectively, and the Company had domestic sales of
Renewal products of $27.0 million in fiscal 1996.
Rayovac markets and sells its products in the United States, Europe,
Canada and the Far East through a wide variety of distribution channels,
including retail, industrial, professional, original equipment manufacturer
("OEM") and government channels. See note 12 to the Combined Consolidated
Financial Statements of the Company included elsewhere herein.
37
Rayovac's principal executive offices are located at 601 Rayovac Drive,
Madison, Wisconsin 53711-2497, and its telephone number is (608) 275-3340.
Business Strategy
The Company's objective is to increase sales and profitability by pursuing
the following strategies.
Produce High-Quality Battery Products. In each of its battery product
lines, the Company seeks to manufacture a high-quality product. In the
alkaline segment, the Company manufactures high-performance battery products
of substantially equivalent quality to those offered by its principal
competitors. In some of its specialty product segments, such as hearing aid
batteries, the Company believes its products have advantages over its
competitors' products. The Company focuses its quality improvement efforts on
lengthening service life and enhancing reliability and, in the case of
hearing aid batteries, the Company also focuses on product miniaturization.
Leverage Value Brand Position. The Company has established a position as
the leading value brand in the U.S. general alkaline battery market, by
focusing on the mass merchandise channel. The Company achieved this position
by (i) offering batteries of substantially equivalent quality and performance
to those offered by its principal competitors at a retail price discount,
(ii) emphasizing innovative in-store merchandising programs and (iii)
offering retailers attractive wholesale margins. The mass merchandise segment
has generated significant growth in the U.S. retail battery market over the
last five years and the Company's positioning in this segment should allow it
to continue to take advantage of any future segment growth.
Expand Retail Distribution Channels. The Company plans to expand its
presence in food stores, drug stores, warehouse clubs and other distribution
channels on which the Company historically has not focused significant
marketing and sales efforts. Food stores, drug stores and warehouse clubs
accounted for 1.5 billion general battery units and $1.2 billion in revenues
in the U.S. retail battery market in 1995. Management believes that Rayovac's
value-oriented general battery products and merchandising programs make the
Company an attractive supplier to these channels.
Focus on Niche Markets. The Company has developed leading positions in
several important niche markets. Total net sales of batteries in these
markets (including those for hearing aid, rechargeable, lantern and heavy
duty batteries and for lithium coin cells for personal computer memory
back-up) comprised 47.9% of the Company's fiscal 1996 net sales. The Company
tailors its strategy in each of these market niches to accommodate each
market's characteristics and competitive profile.
Expand Rechargeable Battery Market Segment. The Company intends to expand
its leading share of the rechargeable household battery market through
continued marketing of the economic benefit to consumers of Renewal, the
Company's long-life alkaline rechargeable battery. Although approximately
twice the retail price of a regular alkaline battery, a Renewal battery can
be recharged at least 25 times, providing the approximate aggregate energy of
10 regular alkaline batteries. Consequently, Renewal provides significant
economic benefits to consumers over regular alkaline batteries. In addition,
alkaline rechargeables are superior to nickel cadmium rechargeables because
they are sold fully charged, retain their charge better and are
environmentally safer. Management believes that as the Company educates
consumers about these benefits, the Company will have a substantial
opportunity to expand the rechargeable household battery segment and increase
its market share.
Battery Industry
The U.S. battery industry had aggregate sales in 1995 of approximately
$4.1 billion as set forth below.
1995 U.S. Battery Industry Sales (Dollars in billions)
Retail:
General $2.3
Specialty:
Hearing aid 0.2
Other specialty 0.9
Industrial, OEM and Government 0.7
---
$4.1
====
38
Retail sales of general batteries represented $2.3 billion of aggregate
U.S. battery industry sales in 1995. As set forth below, this segment has
experienced steady growth, with compound annual unit sales growth since 1986
of 5.3%.
[LINE GRAPH]
RETAIL GENERAL BATTERY MARKET
Total Retail General Batteries
Dollars Units
(Mil) (Mil)
1985 1426 1805
1986 1538 1923
1987 1648 2030
1988 1740 2132
1989 1792 2106
1990 1834 2225
1991 1912 2358
1992 2003 2543
1993 2099 2715
1994 2192 2910
1995 2310 3071
1996 2497 3250
Source: A.C. Nielsen Scanner Data
A.C. Nielsen Consumer Panel Data
[end line chart]
[/LINE CHART]
Growth in retail battery industry sales has been largely due to (i) the
proliferation and popularity of uses of battery- powered devices (such as
remote controls, personal radios and cassette players, pagers, portable
compact disc players, electronic and video games and battery-powered toys),
(ii) the miniaturization of battery-powered devices, which has resulted in
consumption of a larger number of smaller batteries, and (iii) increased
purchases of multiple-battery packages for household "pantry" inventory.
These factors have increased the average household usage of batteries from an
estimated 23 batteries per year in 1986 to an estimated 33 batteries per year
in 1995.
Retail sales of general and specialty batteries represent the largest
portion of the U.S. battery industry, accounting for 82.9% of sales in 1995.
Batteries are popular with many retailers because they enjoy attractive
profit margins on battery products and are able to maximize overall battery
sales by displaying batteries in several locations within each store to
attract impulse purchases.
In line with general retailing trends, increased battery sales through
mass merchandisers and warehouse clubs have driven the overall growth of
retail battery sales. Mass merchandisers were responsible for 54.0% of the
total increase in general battery retail dollar sales between 1991 and 1995
and, together with warehouse clubs, accounted for 45.0% of total retail
battery sales in 1995.
The U.S. battery industry is dominated by three manufacturers, including
the Company, each of which manufactures and markets a wide variety of
batteries. Together, Duracell, Energizer and Rayovac accounted for 90.3% and
89.6% of the U.S. retail general battery market in fiscal 1996 and in the
Transition Period ended September 30, 1996, respectively.
Products
Rayovac develops, manufactures and markets a wide variety of batteries and
battery-powered lighting devices. The Company's broad line of products
includes (i) general batteries (including alkaline, heavy duty and
rechargeable batteries), (ii) specialty batteries (including hearing aid,
watch, lantern and personal computer clock and memory back-up batteries) and
(iii) flashlights and other battery-powered lighting devices. General
batteries (D, C, AA, AAA and 9-volt sizes) are used in devices such as
flashlights, radios, remote controls, personal radios and cassette players,
pagers, portable compact disc players, electronic and video games and
battery-powered toys, as well as a variety of battery-powered industrial
applications.
Of the Company's specialty batteries, button cells are used in smaller
devices (such as hearing aids and watches), lithium coin cells are used in
cameras, calculators, communication equipment, medical instrumentation and
personal computer clocks and memory back-up systems, and lantern batteries
are used almost exclusively in battery-powered lanterns. The Company's
battery-powered lighting devices include flashlights, lanterns and similar
portable products and related bulbs.
39
A description of the Company's battery products including their typical
uses is set forth below.
General Batteries Specialty
Technology: Alkaline Zinc Lithium Silver Zinc Air Zinc
Types/ - Disposable - Heavy Duty -- -- -- Lantern (Zinc
Common Name: - Rechargeable (Zinc Chloride) Chloride and Zinc
- General Carbon)
Purpose (Zinc
Carbon)
Sizes: D, C, AA, AAA, 9-volt(1) for 5 primary sizes 10 primary sizes 5 sizes Standard lantern
both Alkaline and Zinc
Typical Uses: All standard household applications Personal computer Watches Hearing Beam lanterns
including pagers, personal radios and clocks and memory aids Camping lanterns
cassette players, remote controls and back-up
a wide variety of industrial
applications
(1) The Company does not produce 9-volt rechargeable batteries.
Net sales data for the Company's products for fiscal 1995, fiscal 1996 and
the Transition Period are set forth below.
Percentage of
Company Net Sales
Fiscal Year Ended Transition
June 30, Period Ended
------------------ September 30,
Product Type 1995 1996 1996
---------------
General:
Alkaline 42.2% 43.0% 40.6%
Heavy Duty 14.2 12.3 12.6
Rechargeable Batteries and Rechargers 5.5 7.0 5.1
----- ----- -----
Total 61.9 62.3 58.3
Specialty Batteries:
Hearing Aid 12.6 14.7 14.3
Other Specialty Batteries 16.9 13.9 16.3
----- ----- -----
Total 29.5 28.6 30.6
Battery-Powered Lighting Devices/Other 8.6 9.1 11.1
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
General Batteries
Alkaline Batteries. Alkaline batteries are based on technology which
first gained widespread application during the 1980s. Alkaline batteries
provide greater average energy per cell and considerably longer service life
than traditional zinc chloride (heavy duty) or zinc carbon (general purpose)
batteries, the dominant battery types throughout the world until the 1980s.
Alkaline performance superiority has resulted in alkaline batteries steadily
displacing zinc chloride and zinc carbon batteries. In the domestic retail
general battery market, for instance, alkaline batteries represented 86.0%
and 86.3% of total battery unit sales in fiscal 1996 and in the Transition
Period ended September 30, 1996, respectively, despite higher per battery
prices than zinc batteries.
Rayovac produces a full line of alkaline batteries including D, C, AA, AAA
and 9-volt size batteries for both consumers and industrial customers. The
Company's alkaline batteries are sold primarily under the Rayovac name,
although the Company also engages in limited private label manufacture of
alkaline batteries. AA and AAA size batteries are often used with smaller
electronic devices such as remote controls, photography equipment, personal
radios and cassette players, pagers, portable compact disc players and
electronic and video games. AA and AAA
40
size batteries were the Company's best selling alkaline batteries in fiscal
1996. C and D size batteries are generally used in devices such as
flashlights, lanterns, radios, cassette players and battery-powered toys.
The Company regularly tests the performance of its alkaline batteries
against those of its competitors across a number of applications and battery
sizes using American National Standards Institute ("ANSI") testing criteria,
the standardized testing criteria generally used by industry participants to
evaluate battery performance. Although relative performance varies based on
battery size and device tests, the performance of the Company's alkaline
batteries and those of its competitors are substantially equivalent on
average. The Company's performance comparison results are corroborated by
recently published independent test results.
In fiscal 1996 and in the Transition Period ended September 30, 1996, the
Company had 11.2% and 10.9% overall alkaline battery market shares,
respectively, and, within the same period, the Company had 19.9% and 20.1%
alkaline battery market shares, respectively, within the mass merchandise
retail channel.
Heavy Duty Batteries. Heavy duty batteries include zinc chloride
batteries designed for low and medium- drain devices such as lanterns,
flashlights, radios and remote controls. The Company produces a full line of
heavy duty batteries, although AA, C and D size heavy duty batteries together
accounted for 90% of the Company's heavy duty battery sales in fiscal 1996.
The Company also produces zinc carbon ("general purpose") batteries which
accounted for less than 1% of the Company's net sales.
The Company had 44.5% and 44.0% market shares in the heavy duty battery
market in fiscal 1996 and in the Transition Period ended September 30, 1996,
respectively. Generally, the size of the heavy duty battery market has been
decreasing because of increased sales of alkaline batteries for uses
traditionally served by non-alkaline batteries.
Rechargeable Batteries. There are currently two types of rechargeable
household batteries available to consumers. Traditional rechargeable
batteries are based on a technology employing nickel and cadmium. Some states
now impose costly and burdensome collection requirements on retailers of
nickel-cadmium rechargeable batteries due to their cadmium content, and a
nationwide voluntary collection program is now being introduced for these
batteries. Alkaline rechargeable batteries are based on more advanced
alkaline technology. Rayovac is currently the only domestic manufacturer of
alkaline rechargeable batteries.
In 1993, the Company introduced its rechargeable alkaline battery under
the name Renewal. Renewal rechargeable batteries can be reused at least 25
times when recharged in a Power Station, the proprietary recharging unit
designed specifically for Renewal batteries. A Renewal rechargeable battery
can thus provide the aggregate charge of approximately 10 regular alkaline
batteries. The actual and potential benefits of Renewal rechargeable
batteries are significant. Although twice the price of a regular alkaline
battery, a Renewal battery is approximately half the price of a nickel-cadmium
rechargeable battery, and its rechargeable feature gives it significant economic
benefits over regular alkaline batteries with similar performance features.
Moreover, unlike nickel-cadmium rechargeable batteries, which must be charged
before initial use and lose charge at a rate of approximately 1% per day, a
Renewal rechargeable battery comes fully charged before its first use and can
retain 85% of its initial charge for up to five years. Renewal batteries have no
cadmium or mercury added and are, therefore, exempt from legislation relating to
the collection and disposal of such substances. The Company believes that its
Renewal rechargeable battery is the best performing, most environmentally
responsible rechargeable battery for general household use on the market today.
The Company is the market leader in the household rechargeable battery
market segment with market shares of 64.2% and 63.1% in fiscal 1996 and in
the Transition Period ended September 30, 1996, respectively. The Company
believes there is significant opportunity to further expand this market
segment and that the key to the long-term success of the Renewal product line
is to raise awareness and understanding of its benefits over nickel- cadmium
rechargeables and alkaline disposables and to persuade more consumers to use
rechargeable batteries.
Specialty Batteries
Hearing Aid Batteries. The U.S. hearing aid battery industry had
aggregate sales in 1995 of approximately $213 million. The Company estimates
that there are currently 26 million hearing-impaired individuals in the
United States and only 5.5 million hearing aid users. There are several sizes
of hearing aid batteries which are designed for use with various types and
sizes of hearing aids. The trend in the hearing aid industry is toward
miniaturization. As hearing aids have become smaller, hearing aid use has
increased and hearing aid battery consumption has increased significantly, as
smaller batteries generally must be replaced more often than larger
batteries. Consistent
41
with this trend, the Company's hearing aid battery unit sales have increased
from 134.5 million units in fiscal 1992 to 193.4 million units in fiscal
1996, an average annual increase of 9.5%. As the appeal of hearing aids to
potential users broadens with the decreasing size of hearing aids, and as the
age of the U.S. and western European populations increases, the Company
expects the hearing aid battery market to continue to grow.
The Company produces five sizes and two types of zinc air button cells for
use in hearing aids, which are sold under the Loud'n Clear and ProLine brand
names and under several private labels, including Beltone, Miracle Ear and
Siemens. Zinc air is a highly reliable, high energy density, lightweight
battery system with performance superior to that of traditional hearing aid
batteries. The Company had the number one market position in the U.S. hearing
aid battery market in fiscal 1996, with a market share of 50%. This strong
market position is the result of hearing aid battery products with superior
technological capabilities, consistent product performance, a strong
distribution system and an extensive marketing program. The Company is
currently the only manufacturer of the smallest (5A size) hearing aid battery
and is one of only two manufacturers of the next smallest (10A size) hearing
aid battery. The Company's zinc air button cells offer consistently superior
performance, capacity and reliability based on ANSI testing criteria as
applied by the Company.
Other Specialty Batteries. The Company's other specialty battery products
include non-hearing aid button cells, lithium coin cells and lantern
batteries.
The Company produces button and coin cells for watches, cameras,
calculators, communications equipment and medical instrumentation. The
Company's market shares within each of these categories vary.
The Company's Lifex lithium coin cells are high-quality lithium batteries
with certain performance advantages over other lithium battery systems. These
products are used in calculators and personal computer clocks and memory
back-up systems. Lifex lithium coin cells have outstanding shelf life and
excellent performance. The Company believes that the market for lithium
personal computer memory back-up batteries has significant potential to grow
as the personal computer market grows.
The Company also produces a wide range of consumer and industrial lantern
batteries. In fiscal 1996 and in the Transition Period ended September 30,
1996, the Company held 47.2% and 44.9% market shares, respectively, in the
retail lantern battery market, which has experienced declines in recent years
with the increased popularity of alternate technologies to lanterns.
Battery-Powered Lighting Devices/Other
The Company is a leading marketer of battery-powered lighting devices,
including flashlights, lanterns and similar portable products and related
bulbs for the retail and industrial markets. In fiscal 1996 and in the
Transition Period ended September 30, 1996, the Company's products accounted
for 9.9% and 14.2% of aggregate lighting product retail dollar sales in the
mass merchandise retail market segment, respectively. Rayovac has established
its position in this market based on consistent quality products and on
innovative product packaging. The battery- powered lighting device industry
is highly competitive and includes a greater number of competitors than the
U.S. battery industry.
Marketing and Distribution
General
The Company promotes its batteries and lighting devices through a variety of
means, including in-store displays, promotional programs and television
advertising. The Company also sponsors various trade and consumer promotions
intended to foster brand awareness and to maintain multiple, favorable
display positions in retail stores. Generally, the Company tailors its
marketing and distribution strategy to fit its respective products and the
growth and competitive profiles of their respective markets. Rayovac
maintains its own U.S. sales force and utilizes a network of independent
brokers to service participants in selected distribution channels.
General Batteries
Alkaline and Heavy Duty. The Company has positioned its alkaline general
batteries as a value brand, offering batteries of substantially equivalent
quality and performance at a discount to those offered by its principal
competitors. Value pricing is also important to the Company because it spends
significantly less in advertising than its competitors to market its
products. Rather, in addition to pricing, the Company has relied on product
quality,
42
innovative in-store merchandising programs and attractive margins for
retailers to build market share. Rayovac's introduction of Smart Pack
multiple battery packages with user-friendly features such as cardboard
zipper tops and display concepts such as promotional pallet programs and
Smart Strip vending devices have enabled the Company to incrementally
merchandise its products and take full advantage of the impulse nature of
many battery purchases. The Company also works with individual retail channel
participants to develop unique promotions and attempts to provide retailers
with attractive profit margins to encourage retailer brand support.
Rechargeable Batteries. The Company's marketing strategy for its
rechargeable battery product line focuses on generating consumer interest in
Renewal rechargeable batteries. Under this strategy, the Company has made
substantial advertising and marketing investments to establish the Renewal
brand as the industry standard. From fiscal 1994 through fiscal 1996, the
Company spent an aggregate of $62.0 million to promote Renewal battery
products.
As part of its marketing strategy, the Company actively pursues OEM
arrangements and other alliances with major electronic device manufacturers.
To date, the Company has entered into agreements with thirteen such
manufacturers including Phillips Consumer Electronics' Magnavox Division,
Texas Instruments, Case Logic and Gerber Products. In each case, the
particular consumer product is shipped with Renewal batteries and/or a rebate
offer for a Power Station recharging unit. The Company expects to continue to
enter into similar arrangements with other manufacturers of consumer
products.
Specialty Batteries
Hearing Aid Batteries. To market and distribute its hearing aid battery
products, the Company has developed a highly successful national advertising
campaign for its products, which features Arnold Palmer. A binaural wearer
and user of Rayovac hearing aid batteries, Mr. Palmer has been extremely
effective in promoting the use of hearing aids, expanding the market and
communicating the specific product benefits of Rayovac hearing aid batteries.
Additionally, the Company believes that it has developed strong relationships
with hearing aid manufacturers and audiologists, the primary purveyors of
hearing aids. The Company has also established relationships with major
Pacific Rim hearing aid battery distributors to take full advantage of
anticipated global market growth.
Other Specialty Batteries. The Company plans to continue to develop
relationships with manufacturers of communications equipment and other
products in an effort to expand its share of the non-hearing aid button cell
market.
With regard to lithium coin cells, the Company plans to continue to
penetrate further the OEM portable personal computer market, as well as to
broaden its customer base by focusing additional marketing and distribution
efforts on telecommunication and medical equipment manufacturers.
The Company's lantern battery strategy is to focus on profit maximization
and to maintain sales volume.
Lighting Devices/Other
The Company plans to further expand its lighting devices market share by
focusing on non-mass merchandise retail channels such as hardware and home
centers and warehouse clubs, and by using the strategies that have brought
success to the Company in the mass merchandise retail channel.
Manufacturing and Raw Materials
The Company has modernized many of its manufacturing lines and its
manufacturing processes are highly automated and efficient.
During the past five years, Rayovac has spent significant resources on
capital improvements, which have enabled Rayovac to increase the quality and
service life of its alkaline batteries and to increase its manufacturing
capacity. Management believes that Rayovac's manufacturing capacity is
sufficient to meet its anticipated production requirements.
The most significant raw materials used by Rayovac in its manufacture of
batteries are graphite, steel, zinc powder and electrolytic manganese dioxide
powder. There are a number of worldwide sources for all necessary raw
materials, and management believes that Rayovac will continue to have access
to adequate quantities of such materials at competitive prices. The Company
regularly engages in forward purchases and hedging transactions to
effectively manage raw material costs and inventory relative to anticipated
production requirements.
43
Rayovac manufactures batteries in the United States and the United
Kingdom.
Research and Development
The Company's research and development group includes approximately 110
employees. The Company's research and development efforts focus primarily on
performance and cost improvements of existing products and technologies and
in recent years have led to advances in alkaline, heavy duty and lithium
chemistries, as well as zinc air hearing aid batteries and enhancements of
licensed rechargeable alkaline technology. The success of these efforts is
most apparent with hearing aid battery products where the Company is the only
manufacturer of the smallest (5A size) hearing aid battery and is one of only
two manufacturers of the next smallest (10A size) hearing aid battery.
The Company continues to engage in research and development efforts in an
attempt to assure that the Company's products remain technologically
competitive in the future.
Patents, Trademarks and Licenses
The Company's success and ability to compete is dependent in part upon its
technology. The Company relies upon a combination of patent, trademark and
trade secret laws, together with licenses, confidentiality agreements and
other contractual covenants, to establish and protect its technology and
other intellectual property rights.
Rayovac owns or licenses from third parties a considerable number of
patents and patent applications throughout the world, primarily for battery
product improvements, additional features and manufacturing equipment. The
Company also uses a number of trademarks in its business, including
Rayovac(R), Renewal(R), Loud' n Clear(R), ProLine(R), Lifex(tm), Smart
Pack(R), Smart Strip(tm), Workhorse(R) and Roughneck(R). The Company relies
on both registered and common law trademarks in the United States to protect
its trademark rights. The Rayovac(R) mark is also registered in countries
outside the United States, including in Europe and the Far East. The Company
does not have any right to the trademark "Rayovac" in Brazil, where the mark
is owned by an independent third-party battery manufacturer.
The Company has obtained a non-exclusive license to use certain technology
underlying its Renewal rechargeable battery line to manufacture such
batteries in the United States, Puerto Rico and Mexico and to sell and
distribute batteries based on the licensed technology worldwide. This license
terminates with the expiration of the last-expiring patent covering the
licensed technology and, although non-exclusive, the license provides that
the source technology will not be licensed (i) to any new licensee for
manufacturing rights within the United States, Puerto Rico or Mexico or (ii)
to Duracell or Energizer anywhere in the world, pursuant to which the new
licensee may commence manufacture of products employing such licensed
technology before a period of 12 months has expired from the giving of
written notice to the Company of the commencement of a manufacturing right
under such a license. No such notice has been served. In addition, in the
conduct of its business, the Company relies upon other licensed technology in
the manufacture of its products.
Rayovac has granted exclusive, perpetual, royalty-free licenses for the
use of certain of the Company's technology, patents and trademarks (including
the "Rayovac" mark) in connection with zinc carbon and alkaline batteries and
certain lighting devices in many countries outside the United States,
including Latin America.
Competition
The Company believes that the markets for its products are highly
competitive. Duracell and Energizer are the Company's primary battery
industry competitors. Although other competitors often seek to enter this
market, the Company believes that the new market entrants will need
significant financial and other resources to service the U.S. marketplace.
Substantial capital expenditures would be required to establish battery
manufacturing operations. Rayovac and its primary competitors enjoy
significant advantages in having established brand recognition and
distribution channels, which have historically been and will likely continue
to be difficult for new market entrants to overcome.
Competition in the battery industry is based upon price, quality,
performance, brand name recognition, product packaging and design innovation,
as well as creative marketing, promotion and distribution strategies.
In comparison to the U.S. battery market, the international battery market
generally has more competitors, is as highly competitive and has similar
methods of competition.
44
Employees
As of November 15, 1996, the Company had approximately 2,295 employees.
The Company believes its relationship with its employees is good and there
have been no work stoppages involving Company employees since 1981. A
significant number of the Company's factory employees are represented by one
of four labor unions. The Company has recently entered into a collective
bargaining agreement with its Madison, Wisconsin employees which expires in
2000. The Company's other collective bargaining agreements are scheduled to
expire in 1997 and 1998.
Properties and Equipment
The following table sets forth information regarding the Company's eight
manufacturing sites in the United States and the United Kingdom:
Location Product Owned/Leased Square Feet
Fennimore, WI Alkaline batteries and Renewal Owned 176,000
rechargeable batteries
Kinston, NC Battery-powered flashlights and Owned 164,800
lanterns
Madison, WI Heavy duty/general purpose batteries Owned 158,000
Portage, WI Zinc air and silver button cells Owned 62,000
Appleton, WI Lithium coin cells and alkaline Owned 60,600
computer batteries
Wonewoc, WI Battery-powered lanterns and lantern Leased 60,000
batteries
Newton Aycliffe, UK Alkaline and zinc carbon batteries Leased 95,000
Washington, UK Mercuric oxide and zinc air button cells Leased 63,000
Over the last four years the Company has invested in all of its major
battery facilities. During this period, the Company invested $35.0 million in
connection with the Fennimore Expansion. Additional investments in zinc air
battery production have helped to increase output and precision of assembly
as well as to increase the capacity of critical component manufacturing.
Investments in lithium coin cell production have been used to build capacity
for newly developed sizes of lithium coin cells as well as to increase
capacity of the largest volume sizes of such cells.
The Company believes that its facilities, in general, are adequate for its
present and currently foreseeable needs.
Environmental Matters
The Company's facilities are subject to a broad range of federal, state,
local and foreign laws and regulations relating to the environment, including
those governing discharges to the air and water, the handling and disposal of
solid and hazardous substances and wastes, and the remediation of
contamination associated with releases of hazardous substances at Company
facilities and at off-site disposal locations. The Company has a proactive
environmental management program, which program includes the use of periodic
comprehensive environmental audits to detect and correct practices that are
in violation of environmental laws or inconsistent with best management
practices. Based on information currently available to Company management,
the Company believes that it is substantially in compliance with applicable
environmental regulations at its facilities, although no assurance can be
provided with respect to such compliance in the future. There are no pending
proceedings against the Company alleging that the Company is or has been in
violation of environmental laws.
The Company has from time to time been required to address the impact of
historic activities on the environmental condition of its properties,
including without limitation the impact of releases from underground storage
tanks. Several Company facilities have been in operation for many years and
are constructed on fill that includes, among other materials, used batteries
containing various heavy metals. The Company has accepted deed restrictions
on certain of these properties as a means of providing notice to others of
conditions on these properties. Although the Company is currently engaged in
remedial projects at a few of its facilities, the Company does not expect
that such projects will cause it to incur material expenditures. Nonetheless,
the Company has not conducted invasive testing to identify all potential
risks and, given the age of the Company's facilities and the nature of the
45
Company's operations, there can be no assurance that the Company will not
incur material liabilities in the future with respect to its current or
former facilities.
The Company has recently been notified that its former manganese
processing facility in Covington, Tennessee is being evaluated by TDEC for a
determination as to whether the facility should be added to the National
Priorities List as a Superfund site pursuant to CERCLA. Groundwater
monitoring at the site conducted pursuant to the post-closure maintenance of
solid waste lagoons on site, and recent groundwater testing beneath former
process areas on site, indicate that there are elevated levels of certain
inorganic contaminants, particularly (but not exclusively) manganese, in the
groundwater underneath the site. The Company has completed closure of the
aforementioned lagoons and has completed the remediation of a stream that
borders the site. The Company cannot predict the outcome of TDEC's
investigation of the site.
The Company has been and is subject to several proceedings related to its
disposal of industrial and hazardous waste at off-site disposal locations,
under CERCLA or analogous state laws that hold persons who "arranged for" the
disposal or treatment of such substances strictly liable for the costs
incurred in responding to the release or threatened release of hazardous
substances from such sites. Current and former owners and operators of such
sites, and transporters of waste who participated in the selection of such
sites, are also strictly liable for such costs. Liability under CERCLA is
generally "joint and several," so that a responsible party under CERCLA may
be held liable for all of the costs incurred at a particular site. However,
as a practical matter, liability at such sites generally is allocated among
all of the viable responsible parties. Some of the most significant factors
for allocating liabilities to persons that disposed of wastes at Superfund
sites are the relative volume of waste such persons sent to the site and the
toxicity of their waste streams. Except for the matters specifically described
below, the Company does not believe that any of its pending CERCLA matters,
either individually or in the aggregate, will have a material impact on the
Company's operations, financial condition, or liquidity.
The Company has been named as a defendant in two lawsuits in connection
with a Superfund site located in Bergen County, New Jersey (Velsicol Chemical
Corporation, et al, v. A.E. Staley Manufacturing Company, et al., and Morton
International, Inc. v. A.E. Staley Manufacturing Company, et al., United States
District Court for the District of New Jersey, filed July 29, 1996. The Company
is one of almost one hundred defendants named in the above-styled cases. Both
cases involve contamination at a former mercury processing plant. One case was
brought by the current owner and the other case by a former owner. The
complaints in the two cases are identical, with four counts alleging claims for
contribution under the Comprehensive Environmental Response Compensation and
Liability Act of 1980 ("CERCLA"), the New Jersey Spill Compensation and Control
Act ("Spill Act"), the Federal Declaratory Judgment Act, and the common law. The
plaintiffs allege that the Company arranged for the treatment or disposal of
hazardous substances at the site. Consequently, the plaintiffs allege, the
Company is liable to them for contribution towards the costs of investigating
and remediating the site.
No ad damnum is specified in either complaint. Indeed, the Remedial
Investigation and Feasibility Study ("RI/FS") of the site has just begun.
Plaintiff's counsel estimates the cost of the RI/FS to be $4 million. There is
no estimate at this juncture as to the actual cost of remediation. The Company
is one of approximately 75 defendants who allegedly arranged for treatment or
disposal at the site. The remaining defendants are former owners or operators of
the site and adjacent industrial facilities which allegedly contributed to the
contamination. The plaintiff prepared and distributed to the defendants a
"Nexus" memorandum, which described the operation of the facility and the
alleged connection of these defendants to it. According to that document, the
Company was a significant customer of the facility. However, the Company was not
described, as were others, as "one of the largest" or a "major" customer. The
cost to remediate the Bergen County Site has not been determined and the Company
cannot predict the outcome of these proceedings.
There can be no assurances that additional proceedings relating to
off-site disposal locations will not arise in the future or that such
proceedings will not have a material adverse effect on the Company's
business, financial condition or results of operations. See "Risk
Factors--Environmental Matters." As of September 30, 1996, the Company has
reserved $2.1 million for known on-site and off-site environmental
liabilities. The Company believes these reserves are adequate, although there
can be no assurance that this amount will be adequate to cover such matters.
46
Legal Proceedings
In the ordinary course of business, various suits and claims are filed
against the Company. The Company is not party to any legal proceedings which, in
the opinion of management of the Company, will have a material adverse effect on
the Company's business or financial condition. The Company has been named as a
defendant in two lawsuits in connection with a Superfund site located in Bergen
County, New Jersey (Velsicol Chemical Corporation, et al. v. A.E. Staley
Manufacturing Company, et al. and Morton International, Inc. v. A.E. Staley
Manufacturing Company, et al., United States District Court for the District of
New Jersey, filed July 29, 1996). The cost to remediate the site that is the
subject of these lawsuits, and the Company's ultimate share (if any) of the
remedial costs for this site, have not been determined and the Company cannot
predict the outcome of these proceedings. See "Risk Factors--Environmental
Matters;" "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Liquidity and Capital Resources;" and "Business--
Environmental Matters."
47
MANAGEMENT
Directors and Executive Officers
Set forth below is certain information regarding each director and
executive officer of the Company:
Name Age Position and Offices
David A. Jones 47 Chairman of the Board, Chief Executive Officer
and President
Kent J. Hussey 50 Executive Vice President of Finance and
Administration and Chief Financial Officer
Roger F. Warren 55 President/International and Contract Micropower
and Director
Trygve Lonnebotn 59 Executive Vice President of Operations and Director
Merrell M. Tomlin 44 Senior Vice President Sales
James A. Broderick 53 Vice President and General Counsel
Kenneth V. Biller 48 Vice President and General Manager of Lighting
Products & Industrial
Scott A. Schoen 38 Director
Thomas R. Shepherd 66 Director
Warren C. Smith, Jr. 40 Director
Mr. Jones is the Chairman of the Board, Chief Executive Officer and
President of the Company. Between February 1995 and March 1996, Mr. Jones was
Chief Operating Officer, Chief Executive Officer and Chairman of the Board of
Directors of Thermoscan, Inc. From 1989 to 1994, he served as President and
Chief Executive Officer of The Regina Company, a manufacturer of vacuum
cleaners and other floor care equipment. Mr. Jones has over 25 years of
experience working in the consumer durables industry, most recently in
management of operations, manufacturing and marketing.
Mr. Hussey is a director of the Company and has served as Executive Vice
President of Finance and Administration and Chief Financial Officer since
October 1, 1996. Prior to that time and since 1994, Mr. Hussey was Vice
President and Chief Financial Officer of ECC International, a producer of
industrial minerals and specialty chemicals, and from 1991 to 1994 he served
as Vice President and Chief Financial Officer of The Regina Company.
Mr. Warren is a director of the Company and has served as
President/International and Contract Micropower of the Company since 1995.
Since joining the Company in 1985, Mr. Warren has held several positions
including Executive Vice President and General Manager and Senior Vice
President and General Manager/International.
Mr. Lonnebotn is a director of the Company and, since 1985, has served as
Executive Vice President of Operations. He joined Rayovac in 1965.
Mr. Tomlin is the Senior Vice President Sales of the Company. From March
1996 to September 30, 1996, Mr. Tomlin served as Vice President Sales of
Braun of North America/Thermoscan and from August 1995 to March 1996, he
served as Vice President Sales of Thermoscan, Inc. Prior to that time, Mr.
Tomlin was Vice President Sales of various divisions of Casio Electronics.
Mr. Broderick is Vice President and General Counsel for Rayovac and has
held these positions since 1985.
Mr. Biller has been Vice President and General Manager of Lighting
Products & Industrial since 1995. Mr. Biller joined the Company in 1972 and
has held several positions, including Director of Technology/Battery
Products, Madison Plant Manager and Vice President of Manufacturing.
Mr. Schoen is a Managing Director of THL Co., which he joined in 1986. In
addition, Mr. Schoen is a Vice President of Thomas H. Lee Advisors I and
Thomas H. Lee Advisors II. He is also a director of First Alert, Inc., Health
o meter Products, Inc., LaSalle Re Holdings and various private corporations.
Mr. Shepherd is a Managing Director of THL Co. and has been engaged as a
consultant to THL Co. since 1986. In addition, Mr. Shepherd is Executive Vice
President of Thomas H. Lee Advisors I and an officer of various other THL Co.
affiliates. He is also a director of General Nutrition Companies, Inc. and
various private corporations.
48
Mr. Smith is a Managing Director of THL Co. and has been employed by THL
Co. since 1990. In addition, Mr. Smith is Vice President of Thomas H. Lee
Advisors II. He is also a director of Finlay Enterprises, Inc., Finlay Fine
Jewelry Corporation and various private corporations.
Board Committees
The Board has established an Audit Committee and a Compensation Committee.
The members of the Audit Committee and the Compensation Committee are Messrs.
Schoen, Shepherd and Smith.
Executive Compensation
The following table sets forth compensation paid to the former Chief
Executive Officer of the Company and the other four most highly compensated
executive officers of the Company during fiscal 1996 and during the
Transition Period ended September 30, 1996 (the "Named Executive Officers")
for services rendered in all capacities to the Company.
Other
Annual All Other
Compen- Compensation
Name and Principal Position Year Salary ($) Bonus ($) sation ($) ($)
-------------------------------- ----------------------------- ----------- ----------- ---------------
Thomas F. Pyle, Jr., Former
Chairman, President and Chief 1996 $640,500 $25,300
Executive Officer Transition Period 138,800 26,900
David A. Jones, Chairman,
President and Chief Executive
Officer Transition Period 19,700 $179,500
Judith D. Pyle, Former Vice
Chairman and Senior Vice 1996 248,100 6,500
President of Marketing Transition Period 53,800 8,200
Marvin G. Siegert, Former
Executive Vice President of
Finance and Administration and 1996 231,000 11,600
Chief Financial Officer Transition Period 60,100 10,800
Roger F. Warren, Executive
Vice President and 1996 248,100 11,000
General Manager Transition Period 64,500 $486,600 (1)
Trygve Lonnebotn,
Executive Vice President 1996 231,000 9,300
of Operations Transition Period 60,100 377,800 (1)
- -------------
(1) Represents amounts paid by the Company in connection with the
Recapitalization.
Option Grants and Exercises
In connection with the Recapitalization, the Board adopted the Rayovac
Corporation 1996 Stock Option Plan (the "Plan"). Pursuant to the Plan, the
aggregate number of shares of Common Stock as to which options may be granted
equals 3,000,000. The Board has granted an aggregate of 1,464,339 options,
911,577 of which have been granted to David A. Jones in accordance with the
terms of his employment agreement. See "--Employment Agreement."
The following table discloses the grants of stock options during fiscal
1996 to the Named Executive Officers. Other than Mr. Siegert, the Named
Executive Officers did not receive any grant of stock options in fiscal 1996
or in the Transition Period ended September 30, 1996.
49
Option/SAR Grants in Fiscal Year 1996
Potential realizable
value at assumed
annual rates of stock
price appreciation for
Individual Grants option term
----------------------------------------------------------- --------------------------
Number of Percent of Total
Securities Options/SARs Exercise
Underlying Granted to or Base
Options/SARs Employees in Price
Name Granted (#) Fiscal Year ($/Sh) Expiration Date 5% ($) 10% ($)
Marvin G. Siegert 350,000 100% $1.15 1/4/2006 $2,097,756 $3,579,569
Mr. Siegert's options were exercised and the shares of Common Stock
received upon such exercise were sold in connection with the
Recapitalization.
Compensation Committee Interlocks and Insider Participation
During fiscal 1996, the Compensation Committee of the Board was comprised
of Benjamin Garmer, Judith D. Pyle and Marvin G. Siegert. During their fiscal
1996 service on the Compensation Committee, Ms. Pyle was the Vice Chairman
and Senior Vice President of Marketing of the Company and Mr. Seigert was the
Executive Vice President of Finance and Administration and Chief Financial
Officer and Ms. Pyle and Mr. Siegert participated in all compensation
decisions including those relating to their own compensation. Ms. Pyle is the
wife of Thomas F. Pyle, Jr., former Chairman, President and Chief Executive
Officer of the Company and currently a consultant to the Company. See
"Certain Relationships and Related Transactions."
Employment Agreement
Under the employment agreement between David A. Jones and the Company (the
"Jones Employment Agreement"), Mr. Jones is entitled to a salary of $400,000
per annum (which may be increased from time to time at the discretion of the
Board) and an annual bonus based upon the Company achieving certain annual
performance goals established by the Board. The Company has also granted Mr.
Jones options to purchase 911,577 shares of Common Stock at $4.39 per share,
half of which become exercisable at a rate of 20% per year over a five-year
period and the other half of which become exercisable at the end of ten years
with accelerated vesting over each of the next five fiscal years if the
Company achieves certain performance goals. In connection with the
Recapitalization, Mr. Jones individually also purchased 227,895 shares of
Common Stock at approximately $4.39 per share. One-half of the purchase price
was paid in cash and one-half with a promissory note. The Jones Employment
Agreement (other than certain restrictive covenants of Mr. Jones and certain
severance obligations of the Company) may be cancelled by either party by
giving a sixty-day notice or may be cancelled immediately by the Company for
Cause (as defined in the Jones Employment Agreement). The Jones Employment
Agreement took effect September 12, 1996 and expires on September 30, 1999.
Severance Agreements
Each of Kent J. Hussey, Chief Financial Officer of the Company, Roger F.
Warren, Executive Vice President and General Manager of the Company, and
Trygve Lonnebotn, Executive Vice President of Operations of the Company, has
entered into a severance agreement (each, a "Severance Agreement") with the
Company pursuant to which, in the event that his employment is terminated
during the term of the Severance Agreement (a) by the Company without Cause
(as defined in the Severance Agreement) or (b) by reason of death or
Disability (as defined in the Severance Agreement), the Company shall pay him
an amount in cash equal to the sum of (i) his base salary as in effect for
the fiscal year ending immediately prior to the fiscal year in which such
termination occurs and (ii) the annual bonus (if any) earned by him pursuant
to any annual bonus or incentive plan maintained by the Company in respect of
the fiscal year ending immediately prior to the fiscal year in which such
termination occurs, such amount to be paid ratably monthly in arrears over
the remaining term of the Severance Agreement. In the event of such
termination, the Company shall also maintain for the twelve month period
following such termination insurance benefits for such individual and his
dependents similar to those provided immediately prior to such termination.
Under the Severance Agreements, each of Messrs. Hussey, Warren and Lonnebotn
has agreed that for one year following the later of the end of the term of
the Severance Agreement or the date of termination, that
50
he will not engage or have a financial interest in any business which is
involved in the industries in which the Company is engaged. The initial term
of each Severance Agreement is one year with automatic one-year renewals
thereafter, subject to thirty days notice of non-renewal prior to the end of
the then current term.
Director Compensation
Directors who are employees of the Company receive no compensation for
serving on the Board. Non- employee directors of the Company are reimbursed
for their out-of-pocket expenses in attending meetings of the Board. Messrs.
Schoen, Shepherd and Smith receive no fees in their capacities as directors.
See "Certain Relationships and Related Transactions" for a description of
certain other arrangements pursuant to which THL Co., of which they are
managing directors, receives compensation from the Company.
OWNERSHIP OF CAPITAL STOCK
The following table sets forth share ownership information about persons
known to the Company to own beneficially more than 5% of the outstanding
Common Stock, each director of the Company, each Named Executive Officer and
all directors and executive officers of the Company as a group, in each case
as of October 15, 1996.
Shares Beneficially
Owned (2)
------------------------
Name and Address (1) of Beneficial Owner Number Percent
Thomas H. Lee Equity Fund III, L.P. (3) 13,864,135 67.6%
75 State Street, Ste. 2600
Boston, MA 02109
Thomas H. Lee Foreign Fund III, L.P. (3) 858,950 4.2
75 State Street, Ste. 2600
Boston, MA 02109
THL-CCI Limited Partnership (4) 1,457,405 7.1
75 State Street, Ste. 2600
Boston, MA 02109
Thomas F. Pyle, Jr. 2,022,785 9.9
415 Farwell Drive
Madison, WI 53704
David A. Jones (5) 232,025 1.1
Judith D. Pyle 0 0.0
Marvin G. Siegert 205,105 1.0
Kent J. Hussey 0 0.0
Roger F. Warren 569,735 2.8
Trygve Lonnebotn 410,210 2.0
Scott A. Schoen (3) (6) 69,955 *
Thomas R. Shepherd (6) 36,435 *
Warren C. Smith, Jr. (3) (6) 58,305 *
All directors and executive officers of the
Company as a group (10 persons) (3) (6) 1,672,930 8.2%
- -------------
*Less than 1%.
(1) Addresses are given only for beneficial owners of more than 5% of the
outstanding shares of Common Stock.
(2) Unless otherwise noted, the nature of beneficial ownership is sole voting
and/or investment power, except to the extent authority is shared by
spouses under applicable law. Shares of Common Stock not outstanding but
deemed beneficially owned by virtue of the right of a person or group to
acquire them within 60 days are treated as outstanding only for purposes
of determining the number and percent of shares of Common Stock owned by
such person or group, except that 40,000 immediately exercisable options
to purchase Common Stock of an employee of the Company who is not an
executive officer of the Company are included for all purposes.
(3) THL Equity Advisors III Limited Partnership ("Advisors"), the general
partner of Thomas H. Lee Equity Fund III, L.P. and Thomas H. Lee Foreign
Fund III, L.P., THL Equity Trust III ("Equity Trust"), the general
partner of Advisors, Thomas H. Lee, Scott A. Schoen, Warren C. Smith, Jr.
and other managing directors of THL Co., as Trustees of Equity Trust, and
Thomas H. Lee as sole shareholder of Equity Trust, may be deemed to be
51
beneficial owners of the shares of Common Stock held by such Funds. Each
of such persons maintains a principal business address at Suite 2600, 75
State Street, Boston, MA 02109. Each of such persons disclaims beneficial
ownership of all shares.
(4) THL Investment Management Corp., the general partner of THL-CCI Limited
Partnership, and Thomas H. Lee, as director and sole shareholder of THL
Investment Management Corp., may also be deemed to be beneficial owners
of the shares of Common Stock held by THL-CCI Limited Partnership. Each
of such persons maintains a principal business address at Suite 2600, 75
State Street, Boston, MA 02109.
(5) Includes 4,130 shares representing Mr. Jones' proportional interest in
Thomas H. Lee Equity Fund III, L.P.
(6) Includes 69,955 shares, 36,435 shares and 58,305 shares, representing the
proportional interests of Messrs. Schoen, Shepherd and Smith,
respectively, in THL-CCI Limited Partnership; and 13,680 shares which Mr.
Smith may be deemed to beneficially own as a result of Mr. Smith's
children's proportional beneficial interest in THL- CCI Limited
Partnership.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and THL Co. which, together with its affiliates own 80.2% of
the outstanding Common Stock, are parties to a Management Agreement pursuant to
which the Company has engaged THL Co. to provide consulting and management
advisory services for an initial period of five years through September 12,
2001. Under the Management Agreement and in connection with the closing of the
Recapitalization, the Company paid THL Co. and an affiliate an aggregate fee of
$3.25 million (the "THL Transaction Fee"). In consideration of the consulting
and management advisory services, the Company pays THL Co. and its affiliate an
aggregate annual fee of $360,000 plus expenses (the "Management Fee"). The
Company believes that this Management Agreement is on terms no less favorable to
the Company than could have been obtained from an independent third party.
The Company and Thomas F. Pyle, Jr., the former President and Chief
Executive Officer of the Company and the owner of 9.9% of the outstanding Common
Stock, are parties to a Consulting Agreement (the "Consulting Agreement") and a
Confidentiality, Non-Competition, No-Solicitation and No-Hire Agreement (the
"Non-Competition Agreement"). Under the Consulting Agreement, the Company has
engaged Mr. Pyle to provide consulting services for an annual fee of $200,000
plus expenses (the "Consulting Fee") for such period as Mr. Pyle is entitled to
the Consulting Fee. Mr. Pyle is not entitled to the Consulting Fee in the event
that (a) THL Co. or an affiliate of THL Co. no longer receives the Management
Fee or (b) Mr. Pyle (i) is no longer subject to the provisions of the Non-
Competition Agreement or (ii) ceases to retain at least 5% of the outstanding
capital stock of the Company (on a fully diluted basis). In the event that the
Management Fee is reduced or increased, the Consulting Fee shall also be reduced
or increased on a pro rata basis. Under the Non-Competition Agreement, Mr. Pyle
has agreed, among other things, to hold in strict confidence and to not disclose
to any person or use any confidential information or materials received by Mr.
Pyle from the Company. Additionally, Mr. Pyle has agreed not to engage or have a
financial interest in any business which is involved in industries in which the
Company is engaged, for a period of five years.
The Company leases its corporate headquarters facilities and other
properties from partnerships in which Thomas F. Pyle, Jr. is a partner. The
Company has annual minimum rental commitments on its corporate headquarters
facilities of approximately $3.0 million, subject to adjustment based upon
changes in the consumer price index.
The Company and David A. Jones are parties to the Jones Employment
Agreement pursuant to which Mr. Jones agreed to be the Chairman of the Board,
Chief Executive Officer and President of the Company. Mr. Jones also
purchased from the Company 227,895 shares of Common Stock with cash and a
$500,000 promissory note held by the Company with interest payable at a rate
of 7% per annum and principal payable on the earliest of the following to
occur: (a) the fifth anniversary of the note; (b) the date on which (i) Mr.
Jones terminates his employment for any reason other than a Constructive
Termination (as defined in the Jones Employment Agreement) and (ii) he is no
longer a director of the Company; or (c) the date the Company terminates Mr.
Jones' employment for Cause (as defined in the Jones Employment Agreement).
Proceeds from any sale of Mr. Jones' shares must be used to immediately
prepay, in whole or in part, the principal amount of the promissory note
outstanding and any accrued and unpaid interest on the portion prepaid or the
holder of the promissory note may declare the entire principal amount of such
note to be forthwith due and payable. See "Management--Employment Agreement."
52
DESCRIPTION OF THE CREDIT AGREEMENT
Pursuant to the Credit Agreement, BA Securities, Inc., Donaldson, Lufkin &
Jenrette Securities Corporation and certain of its affiliates (collectively,
the "Arrangers"), as Arrangers for a group of financial institutions and
other accredited investors, have agreed to provide senior bank facilities in
an aggregate amount of $170.0 million. The following summary describes
certain provisions of the Credit Agreement.
The Credit Agreement provides for a six-year Tranche A term loan of up to
$55.0 million, a seven-year Tranche B term loan of up to $25.0 million and an
eight-year Tranche C term loan of up to $25.0 million (collectively the "Term
Loan Facility"), and a six-year Revolving Credit Facility of up to $65.0
million under which working capital loans may be made and with a $10.0
million sublimit for letters of credit (the Revolving Credit Facility, and,
together with the Term Loan Facility, referred to collectively as the "Bank
Facilities"). On September 13, 1996 (the "Closing Date"), the Company
borrowed an aggregate amount of $131.0 million comprised of $26.0 million of
Revolving Loans, $55.0 million of Term A Loans, $25.0 million of Term B Loans
and $25.0 million of Term C Loans.
As shown in the table below, quarterly amortization of the Tranche A loans
is in aggregate amounts ranging from $1.0 million to $3.75 million beginning
December 31, 1996. Amortization of the Tranche B loans is in aggregate
quarterly amounts of $0.0625 million during each of the first six years and
$5.875 million during the seventh year beginning December 31, 1996.
Amortization of the Tranche C loans will be in aggregate quarterly amounts of
$0.0625 million during each of the first seven years and $5.8125 million
during the eighth year beginning December 31, 1996. The Revolving Credit
Facility must be reduced for 30 consecutive days each year to no more than
$10.0 million for the fiscal year ending September 30, 1997, $5.0 million for
fiscal year ending September 30, 1998 and is not required to be reduced for
any fiscal year thereafter.
Term Loan Quarterly Amortization
(Dollars in millions)
Year Tranche A Tranche B Tranche C
1 $ 1.0 $ .0625 $ .0625
2 1.5 .0625 .0625
3 2.0 .0625 .0625
4 2.5 .0625 .0625
5 3.0 .0625 .0625
6 3.75 .0625 .0625
7 -- 5.875 .0625
8 -- -- 5.8125
Borrowings under the Credit Agreement bear interest, in each case at the
Company's option, as follows: (i) with respect to the Tranche A loans and the
Revolving Credit Facility, at Bank of America National Trust and Savings
Association's base rate plus 1.50% per annum, or at LIBOR plus 2.50% per
annum; (ii) with respect to the Tranche B loans, at Bank of America National
Trust and Savings Association's base rate plus 2.00% per annum, or at LIBOR
plus 3.00% per annum; and (iii) with respect to the Tranche C loans, at Bank
of America National Trust and Savings Association's base rate plus 2.25% per
annum, or at LIBOR plus 3.25% per annum. Performance- based reductions of the
Tranche A and Revolving Credit Facility interest rates are available. The
Company also incurs standard letter of credit fees to issuing institutions
and other standard commitment fees. The Company obtained interest rate
protection in the form of an interest rate swap for $62.5 million of the Term
Loan Facility on October 7, 1996 .
The indebtedness outstanding under the Credit Agreement has been
guaranteed by ROV Holding and will be secured by all existing and
after-acquired personal property of the Company and its domestic
subsidiaries, including the stock of all domestic subsidiaries of the Company
and any intercompany debt obligations and 65% of the stock of all foreign
subsidiaries (other than dormant subsidiaries) held directly by the Company
or its domestic subsidiaries, and, subject to certain exceptions, all
existing and after-acquired real and intangible property.
The Credit Agreement contains financial and other restrictive covenants
customary and usual for credit facilities of this type, including those
involving maintenance of minimum coverage for fixed charges, a required
minimum level of earnings before income taxes, depreciation and amortization,
a required minimum net worth and a required maximum leverage. Credit
Agreement covenants also restrict the ability of the Company to incur
53
additional indebtedness, create liens, make investments or specified
payments, give guarantees, merge or acquire or sell assets, make capital
expenditures and restrict certain other activities.
"Events of Default" under the Credit Agreement include, among other
things, failure to make payments when due, defaults under certain other
agreements or instruments of indebtedness, noncompliance with covenants,
breaches of representations and warranties, certain bankruptcy or insolvency
events, judgments in excess of specified amounts, pension plan defaults,
impairment of security interests in collateral, invalidity of guarantees and
certain "changes of control" (as defined in the Credit Agreement).
DESCRIPTION OF THE NOTES
General
As used below in this "Description of the Notes" section, references to
the "Notes" refer to the Old Notes and the New Notes, unless the context
otherwise requires.
The Old Notes were issued and the New Notes will be issued pursuant to an
Indenture (the "Indenture") between the Company and Marine Midland Bank, as
trustee (the "Trustee"). The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "Trust Indenture Act"). The Notes are subject to all
such terms, and Holders of Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following discussion is a summary of
the material terms and provisions of the Indenture and is qualified in its
entirety by reference to the Indenture, including the definitions therein of
certain terms used below. Copies of the Indenture and the Registration Rights
Agreement are available as set forth under "--Additional Information." The
definitions of certain terms used in the following summary are set forth below
under "--Certain Definitions."
The Notes are general unsecured obligations of the Company, subordinated
in right of payment to all existing and future Senior Debt, and ranking
senior in right of payment to all future subordinated Indebtedness of the
Company. The Company's payment obligations under the Notes are guaranteed on
a senior subordinated basis by the Guarantors. The Guarantees are
subordinated to the guarantees by the Guarantors of Senior Debt. See "--
Subordination"; "--Subsidiary Guarantees."
The operations of the Company are conducted in part through its
Subsidiaries and, therefore, the Company is dependent in part upon the cash
flow of its Subsidiaries to meet its obligations, including its obligations
under the Notes. The Notes are effectively subordinated to all indebtedness
and other liabilities and commitments (including trade payables and lease
obligations) of the Company's Subsidiaries that are not Guarantors. Any right
of the Company to receive assets of any of its Subsidiaries upon the latter's
liquidation or reorganization (and the consequent right of the Holders of the
Notes to participate in those assets) are effectively subordinated to the
claims of that Subsidiary's creditors, except to the extent that the Company
is itself recognized as a creditor of such Subsidiary, in which case the
claims of the Company would still be subordinate to any security in the
assets of such Subsidiary and any indebtedness of such Subsidiary senior to
that held by the Company.
Principal, Maturity and Interest
The Notes are limited in aggregate principal amount to $100.0 million and
will mature on November 1, 2006. Interest on the Notes will accrue at the
rate of 10-1/4% per annum and will be payable semi-annually in arrears on May
1 and November 1, commencing on May 1, 1997, to Holders of record on the
immediately preceding April 15 and October 15. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium and interest and Liquidated Damages, if any, on the Notes
will be payable at the office or agency of the Company maintained for such
purpose within the City and State of New York or, at the option of the
Company, payment of interest and Liquidated Damages, if any, may be made by
check mailed to the Holders of the Notes at their respective addresses set
forth in the register of Holders of Notes; provided that all payments with
respect to Global Notes and Certificated Securities the Holders of which have
given wire transfer instructions to the Company will be required to be made
by wire transfer of immediately available funds to the accounts specified by
the Holders thereof. Until otherwise designated by the Company, the Company's
office or agency in New York will be the office of the Trustee maintained for
such purpose. The Notes will be issued in denominations of $1,000 and
integral multiples thereof.
54
Subsidiary Guarantees
The Company's payment obligations under the Notes will be jointly and
severally guaranteed by the Guarantors. The Guarantee of each Guarantor will
be subordinated to the prior payment in full of all Senior Debt of such
Guarantor, which on a pro forma basis would have had no Senior Debt
outstanding at June 30, 1996 (except the Guarantee of obligations under the
Credit Agreement), and the amounts for which the Guarantors will be liable
under the guarantees issued from time to time with respect to Senior Debt
(including obligations under the Credit Agreement). The obligations of each
Guarantor under its Guarantee will be limited so as not to constitute a
fraudulent conveyance under applicable law.
Subordination
The payment of principal of, premium, if any, interest and Liquidated
Damages, if any, on the Notes is subordinated in right of payment, as set
forth in the Indenture, to the prior payment in full, in cash, of all
Obligations with respect to Senior Debt, whether outstanding on the date of
the Indenture or thereafter incurred.
Upon any payment or distribution to creditors of the Company or any
Guarantor in a liquidation or dissolution of the Company or any Guarantor or
in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or any Guarantor or its property, an
assignment for the benefit of creditors or any marshalling of the assets and
liabilities of the Company or any Guarantor, the holders of Senior Debt of
the Company or such Guarantor, as applicable, will be entitled to receive
payment in full in cash of all Obligations due in respect of such Senior Debt
(including interest accruing after the commencement of any such proceeding at
the rate specified in the applicable Senior Debt) before the Holders of Notes
will be entitled to receive any payment or distribution with respect to the
Notes or the Guarantees, as applicable, and until all Obligations with
respect to the Senior Debt are paid in full in cash, any payment or
distribution to which the Holders of Notes would be entitled shall be made to
the holders of Senior Debt (except that Holders of Notes may receive
securities under a plan of reorganization that are subordinated at least to
the same extent as the Notes to Senior Debt and any securities issued in
exchange for Senior Debt and payments made from the trust described under
"--Legal Defeasance and Covenant Defeasance").
Neither the Company nor any Guarantor may make any payment or distribution
upon or in respect of the Notes, including, without limitation, by way of
set-off or otherwise, or redeem (or make a deposit in redemption of), defease
or acquire any of the Notes, for cash, property or securities (except in such
subordinated securities in such plan of reorganization) if (i) a default in
the payment of any Obligation of the Company or such Guarantor, as
applicable, with respect to (a) any Designated Senior Debt or (b) any Senior
Debt permitted by clause (xiv) of the second paragraph of the covenant
described under the caption "Incurrence of Indebtedness and Issuance of
Preferred Stock" and any other Senior Debt issued in a single transaction or
a series of related transactions having an aggregate principal amount
outstanding of $5.0 million or more ("Significant Senior Debt"), occurs and
is continuing or (ii) any other default (or any event that, after notice or
passage of time would become an event of default) occurs and is continuing
with respect to any Designated Senior Debt and, in the case of clause (ii),
the Trustee receives notice of such default (a "Payment Blockage Notice")
from the holders (or the agent or representative of such holders) of any
Designated Senior Debt. Payment on the Notes may and shall be resumed (i) in
the case of a payment default, upon the date on which such default is cured
or waived and (ii) in case of a nonpayment default, the earlier of the date
on which such nonpayment default is cured or waived or 179 days after the
date on which the applicable Payment Blockage Notice is received, unless the
maturity of any such Designated Senior Debt or Significant Senior Debt has
been accelerated. No new period of payment blockage may be commenced unless
and until (i) 360 days have elapsed since the effectiveness of the
immediately prior Payment Blockage Notice and (ii) all scheduled payments of
principal, premium, if any, and interest on the Notes that have come due have
been paid in full in cash. No nonpayment default that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the
Trustee shall be, or be made, the basis for a subsequent Payment Blockage
Notice.
The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of Notes may recover less ratably
than creditors of the Company who are holders of Senior Debt. As of June 30,
1996, on a pro forma basis giving effect to the Recapitalization, including
borrowings under the Credit Agreement, and the sale of the Notes, the Company
and its subsidiaries would have had $131.0 million of Senior Debt and $5.2
million of indebtedness and capitalized lease obligations of foreign
subsidiaries which would rank senior or
55
effectively rank senior, as the case may be, in right of payment to the
Notes. The Indenture limits, subject to certain financial tests, the amount
of additional Indebtedness, including Senior Debt, that the Company and its
subsidiaries can incur. See "--Certain Covenants--Incurrence of Indebtedness
and Issuance of Preferred Stock."
Optional Redemption
The Notes are not redeemable at the Company's option prior to November 1,
2001. Thereafter, the Notes will be subject to redemption at the option of
the Company, in whole or in part, upon not less than 30 nor more than 60
days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the applicable redemption date, if redeemed
during the twelve-month period beginning on November 1 of the years indicated
below:
Year Percentage
2001 105.125%
2002 103.417
2003 101.708
2004 and thereafter 100.000%
Notwithstanding the foregoing, at any time during the first 36 months
after the date of the Indenture, the Company may redeem up to 35% of the
initial principal amount of the Notes originally issued with the net proceeds
of one or more public offerings of equity securities of the Company, at a
redemption price equal to 109.250% of the principal amount of such Notes,
plus accrued and unpaid interest and Liquidated Damages, if any, to the date
of redemption; provided that at least 65% of the principal amount of Notes
originally issued remain outstanding immediately after the occurrence of any
such redemption and that such redemption occurs within 60 days following the
closing of each such public offering.
Mandatory Redemption
Except as set forth below under "--Repurchase at the Option of Holders,"
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to
$1,000 in principal amount or an integral multiple thereof) of such Holder's
Notes pursuant to the offer described below (the "Change of Control Offer")
at an offer price in cash equal to 101% of the aggregate principal amount
thereof plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase (the "Change of Control Payment"). Within 30
calendar days following any Change of Control, the Company will mail a notice
to each Holder stating: (i) that the Change of Control Offer is being made
pursuant to the covenant entitled "Change of Control" and that all Notes
tendered will be accepted for payment; (ii) the purchase price and the
purchase date, which will be no earlier than 30 calendar days nor later than
60 calendar days from the date such notice is mailed (the "Change of Control
Payment Date"); (iii) that any Note not tendered will continue to accrue
interest; (iv) that, unless the Company defaults in the payment of the Change
of Control Payment, all Notes accepted for payment pursuant to the Change of
Control Offer will cease to accrue interest after the Change of Control
Payment Date; (v) that Holders electing to have any Notes purchased pursuant
to a Change of Control Offer will be required to surrender the Notes, with
the form entitled "Option of Holder to Elect Purchase" on the reverse of the
Notes completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the third Business Day preceding the Change
of Control Payment Date; (vi) that Holders will be entitled to withdraw their
election if the Paying Agent receives, not later than the close of business
on the second Business Day preceding the Change of Control Payment Date, a
telegram, telex, facsimile transmission or letter setting forth the name of
the Holder, the principal amount of Notes delivered for purchase, and a
statement that such Holder is withdrawing such Holder's election to have such
Notes purchased; and (vii) that Holders whose Notes are being purchased only
in part will be issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered, which unpurchased portion must be equal to
$1,000 in principal amount or an integral
56
multiple thereof. The Company will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in
connection with the repurchase of the Notes in connection with a Change of
Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent
an amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (iii) deliver or cause to be delivered to
the Trustee the Notes so accepted together with an Officers' Certificate
stating the aggregate principal amount of the Notes or portions thereof
required to be purchased by the Company. The Paying Agent will promptly mail
to each Holder of Notes so accepted the Change of Control Payment for such
Notes, and the Trustee will promptly authenticate and mail (or cause to be
transferred by book entry) to each Holder a new Note equal in principal
amount to any unpurchased portion of the Notes surrendered, if any; provided
that each such new Note will be in a principal amount of $1,000 or an
integral multiple thereof. The Indenture provides that, prior to complying
with the provisions of this covenant, but in any event within 90 calendar
days following a Change of Control, the Company shall either repay all
outstanding Senior Debt or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Debt to permit the repurchase of
Notes required by this covenant. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
The Change of Control provisions described above would be applicable
whether or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring, nor does it contain any other similar
"event risk" protections for Holders of the Notes. There can be no assurances
that sufficient funds will be available at the time of any Change of Control to
make any required repurchases. As of , 1997, the Company had
$ million in aggregate indebtedness under the Credit Agreement, the Old
Notes and all Senior Indebtedness.
Although the Change of Control provision may not be waived by the Company,
and may be waived by the Trustee only in accordance with the provisions of
the Indenture unless the Notes are defeased, there can be no assurance that
any particular transaction (including a highly leveraged transaction) cannot
be structured or effected in a manner not constituting a Change of Control.
The Credit Agreement currently prohibits the Company from prepaying or
redeeming any Notes prior to maturity (except that the Company may redeem up to
$35.0 million principal amount of the Notes with the net cash proceeds of an
initial public offering), and also provides that certain change of control
events with respect to the Company would constitute a default thereunder. Any
future credit agreements or other agreements relating to Senior Debt to which
the Company becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when the Company is prohibited
from purchasing Notes, the Company could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a default under
the Credit Agreement. In such circumstances, the subordination provisions in the
Indenture would likely restrict payments to the Holders of Notes. Similarly, the
Company's failure to make any required repurchases of Notes in the event of a
Change of Control would constitute an Event of Default under the Indenture. See
"--Events of Defaults and Remedies."
"Change of Control" means the occurrence of any of the following: (i) (a)
any transaction or series of otherwise unrelated transactions (including a
merger or consolidation) the result of which is that any "person" or "group"
(each within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act),
other than the Principals, becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the
total voting power of all Capital Stock of the Company or a successor entity
normally entitled to vote in the election of directors, managers or trustees, as
applicable, calculated on a fully diluted basis, and (b) as a result of the
consummation of such transaction, any "person" or "group" (each as defined
above) becomes the "beneficial owner" (as defined above), directly or
indirectly, of more of the voting stock of the Company than is at the time
"beneficially owned" (as defined above) by the Principals, or (ii) the first day
on which a majority of the members of the Board of Directors are not Continuing
Directors, or (iii) the sale, lease, transfer, conveyance or other disposition
(other than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and its
Subsidiaries taken as a whole to any "person" (as such term is used in Section
13(d)(3) of the Exchange Act) other than the Principals or their Related
Parties. For purposes of this definition, any transfer of an Equity Interest of
an entity that was formed for the purpose of acquiring voting stock of the
Company shall be deemed
57
to be a transfer of such percentage of such voting stock as corresponds to
the percentage of the equity of such entity that has been so transferred.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors who (i) was a member of such Board of Directors on
the date of the Indenture or (ii) was nominated for election or elected to
such Board of Directors with the approval of a majority of the Continuing
Directors who were members of such Board at the time of such nomination or
election.
"Principals" means Thomas H. Lee Equity Fund III, L.P. and its
co-investors, Thomas H. Lee Foreign Fund III, L.P. and Thomas H. Lee Company,
and any Affiliates of Thomas H. Lee Company.
"Related Party" with respect to any Principal means (i) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (ii) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons
referred to in the immediately preceding clause (i).
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, (i) sell, lease, convey or otherwise
dispose of any assets (including by way of a sale and leaseback) other than
sales of inventory in the ordinary course of business (provided that the
sale, lease, conveyance or other disposition of all or substantially all of
the assets of the Company is governed by the provisions of the Indenture
described under the caption "--Change of Control" and/or the provisions
described under the caption "--Certain Covenants-- Merger, Consolidation or
Sale of Assets" and not by the provisions of this covenant), or (ii) issue or
sell Equity Interests of any of its Restricted Subsidiaries, in the case of
either clause (i) or (ii) above, whether in a single transaction or a series
of related transactions, (a) that have a fair market value in excess of $1.0
million, or (b) for net proceeds in excess of $1.0 million (each of the
foregoing, an "Asset Sale"), unless (x) the Company (or the Restricted
Subsidiary, as the case may be) receives consideration at the time of such
Asset Sale at least equal to the fair market value (evidenced by an Officers'
Certificate delivered to the Trustee, and for Asset Sales having a fair
market value or net proceeds in excess of $5.0 million, evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets sold or otherwise disposed of and (y)
at least 75% of the consideration therefor received by the Company or such
Restricted Subsidiary is in the form of cash or Cash Equivalents; provided,
however, that the amount of (A) any liabilities (as shown on the Company's or
such Restricted Subsidiary's most recent balance sheet or in the notes
thereto) of the Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes
or any Guarantee) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the Company or such
Restricted Subsidiary from further liability and (B) any notes or other
obligations received by the Company or any such Restricted Subsidiary from
such transferee that are immediately converted by the Company or such
Restricted Subsidiary into cash (to the extent of the cash received) or Cash
Equivalents, shall be deemed to be cash for purposes of this provision; and
provided, further, that the 75% limitation referred to in this clause (y)
shall not apply to any Asset Sale in which the cash portion of the
consideration received therefrom, determined in accordance with the foregoing
proviso, is equal to or greater than what the after-tax proceeds would have
been had such Asset Sale complied with the aforementioned 75% limitation.
Notwithstanding the foregoing: (i) a transfer of assets by the Company to a
Wholly Owned Restricted Subsidiary or by a Wholly Owned Restricted Subsidiary
to the Company or to another Wholly Owned Restricted Subsidiary, (ii) an
issuance of Equity Interests (other than Disqualified Stock) by a Wholly
Owned Restricted Subsidiary to the Company or another Wholly Owned Restricted
Subsidiary, (iii) issuances of Equity Interests by the Company pursuant to
warrants outstanding on the date of the Indenture, (iv) a Restricted Payment
that is permitted by the covenant described under the caption "--Certain
Covenants--Restricted Payments," (v) the surrender or waiver of contract
rights or the settlement, release or surrender of contract, tort or other
claims of any kind (other than assignment of such rights or claims for value
outside the ordinary course of business) or (vi) the grant in the ordinary
course of business of any non-exclusive license of patents, trademarks,
registration therefor and other similar intellectual property, is not deemed
to be an Asset Sale. In addition, notwithstanding the foregoing, the Company
and any of its Restricted Subsidiaries may create or assume Liens (or permit
any foreclosure thereon) securing Indebtedness to the extent that such Lien
does not violate the covenant described under the caption "--Certain
Covenants-- Liens".
58
Within 270 days after the receipt of any Net Proceeds from any Asset Sale,
the Company may apply such Net Proceeds from such Asset Sale to permanently
reduce Senior Debt in accordance with the terms of the Credit Agreement, if
applicable, or to the extent not required to be applied thereunder, may, at
its option, apply such Net Proceeds to repayment of Indebtedness of a
Restricted Subsidiary (in the case of Net Proceeds from an Asset Sale
effected by a Restricted Subsidiary) or to an investment in a Restricted
Subsidiary or in another business or capital expenditure or other
long-term/tangible assets, in each case, in the same or a similar line of
business as the Company or any of its Restricted Subsidiaries were engaged in
on the date of the Indenture or in businesses reasonably related thereto.
Pending the final application of any such Net Proceeds, the Company may
temporarily reduce Senior Debt or otherwise invest such Net Proceeds in any
manner that is not prohibited by the Indenture. Any Net Proceeds from an
Asset Sale that are not applied or invested as provided in the first sentence
of this paragraph will be deemed to constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $5.0 million, the Company will be
required to make an offer to all Holders of Notes (an "Asset Sale Offer") to
purchase the maximum principal amount of Notes that may be purchased out of
the Excess Proceeds, at an offer price in cash in an amount equal to 101% of
the principal amount thereof plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase, in accordance with the
procedures set forth in the Indenture. To the extent that the aggregate
amount of Notes tendered pursuant to an Asset Sale Offer is less than the
Excess Proceeds, the Company may use any remaining Excess Proceeds for
general corporate purposes. If the aggregate principal amount of Notes
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes to be purchased on a pro rata basis. Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero.
Selection and Notice
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and
appropriate; provided that no Notes of $1,000 or less shall be redeemed in
part. Notices of redemption shall be mailed by first class mail at least 30
but not more than 60 days before the redemption date to each Holder of Notes
to be redeemed at its registered address. If any Note is to be redeemed in
part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in
the name of the Holder thereof upon cancellation of the original Note. On and
after the redemption date, interest ceases to accrue on Notes or portions of
them called for redemption.
Certain Covenants
Restricted Payments
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any distribution on account of the Company's or any of
its Restricted Subsidiaries' Equity Interests (including, without limitation,
any payment in connection with any merger or consolidation involving the
Company) or to any direct or indirect holders of the Company's Equity
Interests in their capacity as such (other than dividends or distributions
payable in Equity Interests (other than Disqualified Stock) of the Company or
such Restricted Subsidiary or dividends or distributions payable to the
Company or any Wholly Owned Restricted Subsidiary of the Company); (ii)
purchase, redeem or otherwise acquire or retire for value any Equity
Interests of the Company or any Restricted Subsidiary or other Affiliate of
the Company (other than any such Equity Interests owned by the Company or any
Wholly Owned Restricted Subsidiary of the Company that is a Guarantor); (iii)
purchase, redeem, defease or otherwise acquire or retire for value prior to a
scheduled mandatory sinking fund payment date or final maturity date any
Indebtedness that is pari passu with or subordinated to the Notes; or (iv)
make any Restricted Investment (all such payments and other actions set forth
in clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four-quarter period, have been
59
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of the Indenture (including Restricted Payments permitted
by the next succeeding paragraph), is less than (w) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's
most recently ended fiscal quarter for which internal financial statements
are available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, 100% of such
deficit), plus (x) 100% of the aggregate net cash proceeds received by the
Company from the issuance or sale after the date of the Indenture of
Equity Interests of the Company or of debt securities of the Company that
have been converted into such Equity Interests (other than Equity
Interests (or convertible debt securities) sold to a Restricted Subsidiary
of the Company and other than Disqualified Stock or debt securities that
have been converted into Disqualified Stock), plus (y) $2.0 million, plus
(z) to the extent that any Unrestricted Subsidiary is designated to be a
Restricted Subsidiary, the fair market value (as determined in good faith
by the Board of Directors) of the Company's Equity Interests in such
Subsidiary at the time of such designation.
The foregoing provisions do not prohibit: (i) the payment of any dividend
or other distribution within 60 days after the date of declaration thereof,
if at said date of declaration such payment would have complied with the
provisions of the Indenture; (ii) the redemption, repurchase, retirement or
other acquisition of any Equity Interests of the Company in exchange for, or
out of the proceeds of, the substantially concurrent sale (other than to a
Restricted Subsidiary of the Company) of other Equity Interests of the
Company (other than any Disqualified Stock); provided that the amount of any
such net cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c)(x) of the
preceding paragraph; (iii) the defeasance, redemption or repurchase of pari
passu or subordinated Indebtedness with the net proceeds from an incurrence
of Refinancing Indebtedness or the substantially concurrent sale (other than
to a Subsidiary of the Company) of Equity Interests of the Company (other
than Disqualified Stock); provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase, retirement or
other acquisition shall be excluded from clause (c)(x) of the preceding
paragraph; (iv) the purchase, redemption or other acquisition prior to the
stated maturity thereof of Indebtedness that is subordinated to the Notes in
exchange for or out of the net cash proceeds of a substantially concurrent
issue and sale (other than to the Company or any of its Restricted
Subsidiaries) of new Indebtedness; provided that (x) the principal amount of
such new Indebtedness shall not exceed the principal amount of Indebtedness
so refinanced (plus the amount of such reasonable expenses incurred in
connection therewith), (y) such new Indebtedness shall have a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life
to Maturity of the Indebtedness being refinanced, and (z) the new
Indebtedness shall be subordinate in right of payment to the Notes; (v) the
repurchase, redemption or other acquisition or retirement for value of any
Equity Interests of the Company held by any member of the Company's (or any
of its Restricted Subsidiaries') management pursuant to any management equity
subscription agreement or stock option agreement or in connection with the
termination of employment of any employees or management of the Company or
its Subsidiaries; provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not exceed
$2.0 million in the aggregate plus the aggregate cash proceeds received by
the Company after the date of the Indenture from any reissuance of Equity
Interests by the Company to members of management of the Company and its
Restricted Subsidiaries; (vi) Investments received by the Company and its
Restricted Subsidiaries as non-cash consideration from Asset Sales to the
extent permitted by the covenant described under the caption "--Repurchase at
the Option of Holders--Asset Sales;" and (vii) the repurchase of Notes
pursuant to a Change of Control Offer or an Asset Sale Offer; and no Default
or Event of Default shall have occurred and be continuing immediately after
any such transaction.
The Board of Directors may designate a Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash
or Government Securities) in the Subsidiary so designated will be deemed to
be Restricted Payments at the time of such designation and will reduce the
amount available for Restricted Payments under the first paragraph of this
covenant. Such designation will only be permitted if such Restricted Payment
would be permitted at such time and if such Restricted Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary.
60
The amount of all Restricted Payments (other than cash or Government
Securities) shall be the fair market value (evidenced by a resolution of the
Board of Directors set forth in an Officers' Certificate delivered to the
Trustee) on the date of the Restricted Payment of the asset(s) proposed to be
transferred by the Company or such Subsidiary, as the case may be, pursuant
to the Restricted Payment. Not later than the date of making any Restricted
Payment, the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by the covenant described under the
caption "--Restricted Payments" were computed, which calculations may be
based upon the Company's latest available financial statements.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guaranty or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not issue
any Disqualified Stock and will not permit any of its Restricted Subsidiaries
to issue any shares of preferred stock; provided, however, that the Company
may incur Indebtedness or issue shares of Disqualified Stock if the Fixed
Charge Coverage Ratio for the Company's most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date on which such additional Indebtedness is incurred or such
Disqualified Stock is issued would have been at least 2.0 to 1, determined on
a pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of
such four-quarter period.
The foregoing limitations do not apply to: (i) the incurrence by the
Company of Senior Bank Debt; (ii) Guarantees of the Senior Bank Debt
permitted under or required by the Credit Agreement and Guarantees permitted
under or required by the Indenture; (iii) the incurrence by the Company and
its Restricted Subsidiaries of the Existing Indebtedness; (iv) the incurrence
by the Company of Indebtedness represented by the Notes and the Indenture,
and the incurrence by Restricted Subsidiaries of Guarantees required or
permitted to be incurred under the Indenture; (v) the incurrence by the
Company or any of its Restricted Subsidiaries of Capital Lease Obligations
and/or additional Indebtedness constituting purchase money obligations in an
aggregate principal amount not to exceed $5.0 million at any time
outstanding; (vi) the incurrence by the Company of additional Indebtedness
for any corporate purposes in an outstanding principal amount (or accreted
value, as applicable) at no time exceeding $25.0 million (which may, but need
not be, borrowed under the Credit Agreement); (vii) the incurrence by any
Foreign Subsidiary of Indebtedness, which when aggregated with the principal
amount of Indebtedness of all Foreign Subsidiaries then outstanding and
incurred pursuant to this clause (vii) does not exceed $5.0 million (or the
equivalent thereof in any other currency) at any one time outstanding; (viii)
the incurrence by any Restricted Subsidiary of the Company of Acquired Debt
in an aggregate principal amount not to exceed $20.0 million for all
Restricted Subsidiaries (reduced by the amount of Acquired Debt repaid with
the Net Proceeds of Asset Sales of any Restricted Subsidiary subject to such
Acquired Debt) that (a) has not been incurred in connection with, or in
contemplation of such Restricted Subsidiary becoming a Restricted Subsidiary,
or a merger of a Person subject to such Acquired Debt with or into such
Restricted Subsidiary, and (b) is without recourse to the Company or any of
its Restricted Subsidiaries or any of their respective assets (other than the
Restricted Subsidiary subject to such Acquired Debt and its assets), and is
not guaranteed by any such Person; provided that (A) after giving pro forma
effect to the incurrence thereof as if incurred by the Company, the Company
could incur at least $1.00 of Indebtedness under the first paragraph of this
"Incurrence of Indebtedness and Issuance of Preferred Stock" covenant, (B)
any Refinancing Indebtedness with respect thereto may not be incurred by any
Person other than the Restricted Subsidiary that is the obligor on such
Acquired Indebtedness, and (C) such Restricted Subsidiary becomes an
Additional Guarantor upon incurrence of such Acquired Debt in accordance with
the Indenture; (ix) the incurrence by the Company of Indebtedness in
connection with the issuance of notes in payment of the repurchase,
redemption, acquisition or retirement of Equity Interests of the Company or
any Restricted Subsidiary of the Company to the extent permitted by the
covenant described under the caption "--Restricted Payments;" (x) Hedging
Obligations that are incurred for the purpose of fixing or hedging interest
rate risk with respect to any floating rate Indebtedness that is permitted by
the terms of the Credit Agreement or the Indenture to be outstanding; (xi)
Indebtedness arising out of letters of credit, performance bonds, surety
bonds, guarantees resulting from endorsements of negotiable instruments and
bankers' acceptances, incurred in the ordinary course of business; (xii) all
Obligations with respect to the foregoing; (xiii) the incurrence by the
Company and its Restricted Subsidiaries
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of Indebtedness issued in exchange for, or the proceeds of which are used to
repay, redeem, defease, extend, refinance, renew, replace or refund
Indebtedness referred to in clauses (ii) through (xii) above, and this clause
(xiii) (the "Refinancing Indebtedness"); provided that (a) the principal
amount of such Refinancing Indebtedness shall not exceed the principal amount
of Indebtedness so extended, refinanced, renewed, replaced, substituted or
refunded (plus the amount of fees, premiums, consent fees, prepayment
penalties and expenses incurred in connection therewith); (b) in the case of
Refinancing Indebtedness for Indebtedness permitted under clause (iii) or
(viii) of this paragraph, the Refinancing Indebtedness shall have a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life
to Maturity of the Indebtedness being extended, refinanced, renewed, replaced
or refunded or shall mature after the scheduled maturity date of the Notes;
(c) to the extent such Refinancing Indebtedness refinances Indebtedness
subordinate to the Notes, such Refinancing Indebtedness shall be subordinated
in right of payment to the Notes on terms at least as favorable to the
holders of Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced or refunded; and
(d) with respect to Refinancing Indebtedness incurred by a Guarantor, such
Refinancing Indebtedness shall rank no more senior, and shall be at least as
subordinated, in right of payment to the Guarantee of such Guarantor as the
Indebtedness being extended, refinanced, renewed, replaced or refunded; (xiv)
Indebtedness of the Company (A) not to exceed an aggregate principal amount
of $8.0 million outstanding at any time arising as a result of the issuance
of tax-exempt industrial development bonds or similar tax-exempt public
financing, and (B) additional Indebtedness arising out of the issuance of
additional tax-exempt public financing obligations, but only to the extent
that Indebtedness owing under the Credit Agreement is prepaid, concurrently
with the receipt of the net proceeds of such issuance, in an amount at least
equal to the amount of such net proceeds, and term indebtedness or the
availability of revolving credit borrowings under the Credit Agreement is
permanently reduced by the amount of such net proceeds; and (xv) the
incurrence of Indebtedness between (a) the Company and its Restricted
Subsidiaries and (b) the Restricted Subsidiaries; provided that (x) any
subsequent issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than the Company or a Wholly Owned
Restricted Subsidiary and (y) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a Wholly Owned
Restricted Subsidiary shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Restricted Subsidiary,
as the case may be.
Liens
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien on any of their property, assets or revenue now
owned or hereafter acquired by them, or any income or profits therefrom or
assign or convey any right to receive income therefrom, except Permitted
Liens; provided, however, that in addition to creating Permitted Liens on its
properties or assets, the Company may create any Lien upon any of its
properties or assets if the Notes are secured on an equal and ratable basis
with the obligations so secured until such time as such obligation is no
longer secured by a Lien.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction
on the ability of any Restricted Subsidiary to (i)(a) pay dividends or make
any other distributions to the Company or any of its Restricted Subsidiaries
(x) on its Capital Stock or (y) with respect to any other interest or
participation in, or measured by, its profits, or (b) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii)
transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries, except for such encumbrances or restrictions
existing under or by reason of (a) Existing Indebtedness as in effect on the
date of the Indenture, (b) the Credit Agreement and all related Senior Bank
Debt documents as in effect as of the date of the Indenture, and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof; provided that such
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacement or refinancings are no more restrictive with respect
to such dividend and other payment restrictions than those contained in the
Credit Agreement as in effect on the date of the Indenture, (c) the
Indenture, the Guarantee and the Notes, (d) applicable law, (e) any
instrument governing Indebtedness or Capital Stock of a Person acquired by
the Company or any of its Restricted Subsidiaries as in effect at the time of
such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which encumbrance
or restriction is not applicable to any Person, or the properties or assets
of any Person, other than
62
the Person, or the property or assets of the Person, so acquired, provided
that the Consolidated Cash Flow of such Person is not taken into account in
determining whether such acquisition was permitted by the terms of the
Indenture, (f) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices, (g) purchase money obligations or Capital Lease Obligations for
property acquired in the ordinary course of business that impose restrictions
of the nature described in clause (iii) above on the property so acquired,
(h) permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Refinancing Indebtedness are no
more restrictive than those contained in the agreements governing the
Indebtedness being refinanced, (i) customary restrictions imposed on the
transfer of copyrighted or patented materials and customary provisions in
agreements that restrict the assignees of such agreements or any rights
thereunder or (j) restrictions with respect to a Subsidiary of the Company
imposed pursuant to a binding agreement which has been entered into for the
sale or disposition of all or substantially all of the Capital Stock or
assets of such Subsidiary.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving Person), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of
its properties or assets in one or more related transactions, to another
Person unless: (i) the Company is the surviving corporation or the entity or
the Person formed by or surviving any such consolidation or merger (if other
than the Company) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state thereof
or the District of Columbia; (ii) the entity or Person formed by or surviving
any such consolidation or merger (if other than the Company) or the entity or
Person to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the obligations of the Company
under the Notes and the Indenture pursuant to a supplemental indenture in a
form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) the Company or
the entity or Person formed by or surviving any such consolidation or merger
(if other than the Company), or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made (a) will have
Consolidated Net Worth immediately after the transaction equal to or greater
than the Consolidated Net Worth of the Company immediately preceding the
transaction and (b) will, at the time of such transaction and after giving
pro forma effect thereto as if such transaction had occurred at the beginning
of the applicable four-quarter period, be permitted to incur at least $1.00
of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test
set forth in the first paragraph of the covenant described under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock;" provided,
however, that this provision shall not prohibit any merger or consolidation
among the Company and one or more of its Wholly Owned Restricted Subsidiaries
that is a Guarantor. The term "all or substantially all" is not defined in
the Indenture. Accordingly, the term would likely be interpreted by reference
to applicable state law at the time, and the interpretation will be dependent
on the facts and circumstances existing at the time. As a result, under
certain circumstances there could be uncertainty as to whether a particular
transaction is prohibited by the Indenture.
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to or enter into any
other transaction with, or for the benefit of, an Affiliate of the Company
(an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on
terms that are no less favorable to the Company or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable
transaction by the Company or such Restricted Subsidiary with an unrelated
Person and (ii) the Company delivers to the Trustee (a) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $1.0 million, a resolution of the Board
of Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (i) above and that such Affiliate
Transaction has been approved by a majority of the disinterested members of
the Board of Directors and (b) with respect to any Affiliate Transaction
involving aggregate consideration in excess of $5.0 million, an opinion as to
the fairness to the Company or such Restricted Subsidiary of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal
or investment banking firm of national standing; provided that (v) the
Employment Agreement and any employment agreement entered into by the Company
or any of its Restricted Subsidiaries in the ordinary course of business and
consistent with the past practice (other than past practice with respect to
Thomas F. Pyle) of the Company or such Restricted Subsidiary, (w)
transactions between or among the Company and/or its Restricted Subsidiaries,
(x)
63
investment banking and management fees in an aggregate amount no greater than
$360,000 per annum plus reimbursement of expenses to be paid by the Company
to Thomas H. Lee Company, (y) payments to Thomas F. Pyle pursuant to the
Consulting Agreements (whether or not Thomas F. Pyle would be considered an
Affiliate) and (z) transactions permitted by the covenant described under the
caption "--Restricted Payments," in each case, shall not be deemed Affiliate
Transactions; further provided, however, that (A) the provisions of clause
(ii) shall not apply to sales of inventory by the Company or any Restricted
Subsidiary to any Affiliate in the ordinary course of business and (B) the
provisions of clause (ii)(b) shall not apply to loans or advances to the
Company or any Restricted Subsidiary from, or equity investments in the
Company or any Restricted Subsidiary by, any Affiliate to the extent
permitted by the covenant described under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock."
No Senior Subordinated Debt
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinated or junior in right of payment to any Senior Debt of the Company
and senior in any respect in right of payment to the Notes and (ii) the
Company will not permit any Guarantor to incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that is
subordinated or junior in right of payment to its Senior Debt and senior in
any respect in right of payment to its Guarantee.
Limitations on Guarantees of Company Indebtedness by Restricted
Subsidiaries
The Indenture provides that in the event that any Restricted Subsidiary,
directly or indirectly, guarantees any Indebtedness of the Company other than
the Notes (the "Other Indebtedness"), the Company shall cause such Restricted
Subsidiary to deliver to the Trustee a supplemental indenture pursuant to
which such Restricted Subsidiary shall concurrently guarantee the Company's
Obligations under the Indenture and the Notes to the same extent that such
Restricted Subsidiary guaranteed the Company's Obligations under the Other
Indebtedness (including waiver of subrogation, if any), provided that if such
Other Indebtedness is Senior Debt, the Additional Guarantee shall be
subordinated in right of payment to the guarantee of such Other Indebtedness,
as provided by the provisions of the Indenture described under the caption
"--Subordination," and such Additional Guarantee shall be on the same terms
and subject to the same conditions as the initial Guarantee given by ROV
Holding under the Indenture. Each Additional Guarantee shall by its terms
provide that the Additional Guarantor making such Additional Guarantee will
be automatically and unconditionally released and discharged from its
obligations under such Additional Guarantee upon the release or discharge of
the guarantee of the Other Indebtedness that resulted in the creation of such
Additional Guarantee, except a discharge or release by, or as a result of,
any payment under the guarantee of such Other Indebtedness by such Additional
Guarantor.
Additional Guarantees
The Indenture provides that (i) if the Company or any of its Restricted
Subsidiaries shall, after the date of the Indenture, transfer or cause to be
transferred, including by way of any Investment, in one or a series of
transactions (whether or not related), any assets, businesses, divisions,
real property or equipment having an aggregate fair market value (as
determined in good faith by the Board of Directors) in excess of $1.0 million
to any Restricted Subsidiary that is not a Guarantor, (ii) if the Company or
any of its Restricted Subsidiaries shall acquire another Restricted
Subsidiary having total assets with a fair market value (as determined in
good faith by the Board of Directors) in excess of $1.0 million, or (iii) if
any Restricted Subsidiary shall incur Acquired Debt, then the Company shall,
at the time of such transfer, acquisition or incurrence, (i) cause such
transferee, acquired Restricted Subsidiary or Restricted Subsidiary incurring
Acquired Debt (if not then a Guarantor) to execute a Guarantee of the
Obligations of the Company hereunder in the form set forth in the Indenture
and (ii) deliver to the Trustee an Opinion of Counsel, in form reasonably
satisfactory to the Trustee, that such Guarantee is a valid, binding and
enforceable obligation of such transferee, acquired Restricted Subsidiary or
Restricted Subsidiary incurring Acquired Debt, subject to customary
exceptions for bankruptcy and equitable principles. Notwithstanding the
foregoing, the Company or any of its Restricted Subsidiaries may make a
Restricted Investment in any Wholly Owned Restricted Subsidiary of the
Company without compliance with this covenant provided that such Restricted
Investment is permitted by the covenant described under the caption,
"Restricted Payments."
The Indenture provides that no Guarantor may consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person), another
Person (other than the Company) whether or not affiliated with such
64
Guarantor unless: (i) subject to the provisions of the following paragraph,
the Person formed by or surviving any such consolidation or merger (if other
than such Guarantor) assumes all the obligations of such Guarantor pursuant
to a supplemental indenture in form and substance reasonably satisfactory to
the Trustee, under its Guarantee, the Notes and the Indenture; (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists; and (iii) such Guarantor, or any Person formed by or
surviving any such consolidation or merger, (a) would have Consolidated Net
Worth (immediately after giving effect to such transaction), equal to or
greater than the Consolidated Net Worth of such Guarantor immediately
preceding the transaction and (b) would be permitted by virtue of the
Company's pro forma Fixed Charge Coverage Ratio to incur, immediately after
giving effect to such transaction, at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock."
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition,
by way of such a merger, consolidation or otherwise, of all of the capital
stock of such Guarantor) or the Person acquiring the property (in the event
of a sale or other disposition of all of the assets of such Guarantor) will
be released and relieved of any obligations under its Guarantee; provided
that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See "--Repurchase
at the Option of Holders --Asset Sales." In the event the Board of Directors
designates a Guarantor to be an Unrestricted Subsidiary, such Guarantor will
be released and relieved of any obligation under its Guarantee, provided that
such designation is conducted in accordance with the applicable provisions of
the Indenture including, but not limited to, the covenant described under the
caption "--Restricted Payments."
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company and, if the Company is
required to file separate financial statements for any Guarantor, such
Guarantor will furnish to the Trustee and to all Holders (i) all quarterly
and annual financial information that would be required to be contained in a
filing with the Commission on Forms 10-Q and 10-K if the Company and/or any
Guarantor were required to file such forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and, with respect to the annual information only, a report thereon by the
Company's and/or the Guarantor's certified independent accountants and (ii)
all financial information that would be required to be filed with the
Commission on Form 8-K if the Company and/or any Guarantor were required to
file such reports. In addition, whether or not required by the rules and
regulations of the Commission, the Company will file a copy of all such
information with the Commission for public availability (unless the
Commission will not accept such a filing) and promptly make such information
available to all securities analysts and prospective investors upon written
request. In addition, the Company and the Guarantors have agreed that, for so
long as any Notes remain outstanding, they will furnish to the Holders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
Events of Default and Remedies
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages, if any, with respect to, the Notes (whether or not
prohibited by the subordination provisions of the Indenture); (ii) default in
payment when due of the principal of or premium, if any, on the Notes
(whether or not prohibited by the subordination provisions of the Indenture);
(iii) failure by the Company to comply with the provisions described under
the caption "--Repurchase at the Option of Holders--Change of Control;" (iv)
failure by the Company or any Guarantor for 60 days after notice to comply
with any of its other agreements in the Indenture, the Notes or the
Guarantees; (v) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of
its Restricted Subsidiaries) whether such Indebtedness or Guarantee now
exists, or is created after the date of the Indenture, if (a) such default
results in the acceleration of such Indebtedness prior to its express
maturity or shall constitute a default in the payment of such Indebtedness at
final maturity of such Indebtedness, and (b) the principal amount of any such
Indebtedness that has been accelerated or not paid
65
at maturity, when added to the aggregate principal amount of all other
Indebtedness that has been accelerated or not paid at maturity, exceeds $5.0
million; (vi) failure by the Company or any of its Restricted Subsidiaries to
pay final judgments aggregating in excess of $5.0 million, which judgments
are not paid, discharged or stayed for a period of 60 days; (vii) certain
events of bankruptcy or insolvency with respect to the Company or any of its
Restricted Subsidiaries; and (viii) except as permitted by the Indenture, any
Guarantee issued by a Guarantor shall be held in any judicial proceeding to
be unenforceable or invalid or shall cease for any reason to be in full force
and effect or any Guarantor or any Person acting on behalf of any Guarantor
shall deny or disaffirm its obligations under its Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately; provided, however,
that if any Obligation with respect to Designated Senior Debt is outstanding
upon a declaration of acceleration of the Notes, the principal, premium, if
any, interest and Liquidated Damages, if any, on the Notes will not be
payable until the earlier of (i) the day which is five business days after
written notice of acceleration is received by the Bank Agent or any other
agent acting in a similar capacity with regard to any Designated Senior Debt,
or (ii) the date of acceleration of any Designated Senior Debt.
Notwithstanding the foregoing, in the case of an Event of Default arising
from certain events of bankruptcy or insolvency, with respect to the Company
or any Restricted Subsidiary that is a Significant Subsidiary, the principal
of, and premium, if any, and any accrued and unpaid interest and Liquidated
Damages, if any, on all outstanding Notes will become due and payable without
further action or notice. Holders of the Notes may not enforce the Indenture
or the Notes except as provided in the Indenture. In the event of a
declaration of acceleration of the Notes because an Event of Default has
occurred and is continuing as a result of the acceleration of any
Indebtedness described in clause (v) of the preceding paragraph, the
declaration of acceleration of the Notes shall be automatically annulled if
the holders of any Indebtedness described in clause (v) have rescinded the
declaration of acceleration in respect of such Indebtedness within 30 days of
the date of such declaration and if (a) the annulment of the acceleration of
the Notes would not conflict with any judgment or decree of a court of
competent jurisdiction, and (b) all existing Events of Default, except
nonpayment of principal or interest on the Notes that became due solely
because of the acceleration of the Notes, have been cured or waived.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to
the optional redemption provisions of the Indenture, an equivalent premium
shall also become and be immediately due and payable to the extent permitted
by law upon the acceleration of the Notes. If an Event of Default occurs
prior to November 1, 2001 by reason of any willful action (or inaction) taken
(or not taken) by or on behalf of the Company with the intention of avoiding
the prohibition on redemption of the Notes prior to such date, then the
premium specified in the Indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture except a continuing Default or Event of Default in the
payment of the principal of, premium and Liquidated Damages, if any, or
interest on the Notes. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding Notes may direct the Trustee in
its exercise of any trust or power. The Trustee may withhold from Holders of
the Notes notice of any continuing Default or Event of Default (except a
Default or Event of Default relating to the payment of principal or interest)
if it determines that withholding notice is in their interest.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee
a statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Company
or any Guarantor, as such, shall have any liability for any obligations of
the Company or any Guarantor under the Notes, the Guarantees or the Indenture
or for any claim based on, in respect of, or by reason of, such obligations
or their creation. Each Holder of Notes by accepting a Note and the related
Guarantees waives and releases all such liability. The waiver and release
66
are part of the consideration for issuance of the Notes and the Guarantees.
Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such a waiver is
against public policy.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and
interest and Liquidated Damages on such Notes when such payments are due from
the trust referred to below, (ii) the Company's obligations with respect to
the Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an office
or agency for payment and money for security payments held in trust, (iii)
the rights, powers, trusts, duties and immunities of the Trustee, and the
Company's obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. In addition, the Company may, at its option and
at any time, elect to have the obligations of the Company released with
respect to certain covenants that are described in the Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations
shall not constitute a Default or Event of Default with respect to the Notes.
In the event Covenant Defeasance occurs, certain events (not including
non-payment, bankruptcy, receivership and insolvency events) described under
"--Events of Default and Remedies" will no longer constitute an Event of
Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest
and Liquidated Damages on the outstanding Notes on the stated maturity or on
the applicable redemption date, as the case may be, and the Company must
specify whether the Notes are being defeased to maturity or to a particular
redemption date; (ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (a) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (b) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustee confirming that the Holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of
funds to be applied to such deposit) or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 123rd day after the date of deposit; (v) such Legal Defeasance
or Covenant Defeasance will not result in a breach or violation of, or
constitute a default under any material agreement or instrument (other than
the Indenture) to which the Company or any of its Subsidiaries is a party or
by which the Company or any of its Subsidiaries is bound; (vi) the Company
must have delivered to the Trustee an opinion of counsel to the effect that
after the 123rd day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii)
the Company must deliver to the Trustee an Officers' Certificate stating that
the deposit was not made by the Company with the intent of preferring the
Holders of Notes over the other creditors of the Company with the intent of
defeating, hindering, delaying or defrauding creditors of the Company or
others; and (viii) the Company must deliver to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
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Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by
the Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture
provides that the Company, the Guarantors and the Trustee may amend or
supplement the Indenture and the Notes may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount of the Notes
then outstanding (including consents obtained in connection with a tender offer
or exchange offer for Notes), and any existing default or compliance with any
provision of the Indenture or the Notes may be waived with the consent of the
Holders of a majority in principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange offer
for Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any Notes held by a non-consenting Holder) (i) reduce
the principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed
maturity of any Note or alter the provisions with respect to the redemption
of the Notes in a manner adverse to the Holders of the Notes, (iii) reduce
the rate of or change the time for payment of interest on any Note, (iv)
waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the Holders of at least a majority in aggregate
principal amount of the Notes and a waiver of the payment default that
resulted from such acceleration), (v) make any Note payable in money other
than that stated in the Notes, (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of
Notes to receive payments of principal of or premium, if any, or interest on
the Notes, (vii) waive a redemption payment with respect to any Note (other
than a payment required by one of the covenants described under the caption
"--Repurchase at the Option of Holders"), (viii) except pursuant to the
Indenture, release any Guarantor from its obligations under its Guarantee, or
change any Guarantee in any manner that would adversely affect the Holders,
or (ix) make any change in the foregoing amendment and waiver provisions. In
addition, any amendment to the provisions of Article 10 of the Indenture
(which relate to subordination) will require the consent of the Holders of at
least 75% in aggregate principal amount of the Notes then outstanding if such
amendment would adversely affect the rights of Holders.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the
Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes, to
provide for the assumption of the Company's obligations to Holders of Notes
in the case of a merger or consolidation, to make any change that would
provide any additional rights or benefits to the Holders of Notes or that
does not adversely affect the legal rights under the Indenture of any such
Holder, or to comply with requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture Act.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding
Notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent person in the
conduct of his or her own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of
68
its rights or powers under the Indenture at the request of any Holder of
Notes, unless such Holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense.
Additional Information
Anyone who receives this Prospectus may obtain a copy of the Indenture and
the Registration Rights Agreement without charge by writing to Rayovac
Corporation, 601 Rayovac Drive, Madison, Wisconsin 53711- 2497, Attention:
Secretary.
Book-Entry, Delivery and Form
Except as set forth in the next paragraph, the Notes to be resold as set
forth herein will initially be issued in the form of one Global Note (the
"Global Note"). The Global Note will be deposited on the date of the closing
of the sale of the Notes offered hereby (the "Closing Date") with, or on
behalf of, The Depository Trust Company (the "Depositary") and registered in
the name of Cede & Co., as nominee of the Depositary (such nominee being
referred to herein as the "Global Note Holder"), or will remain in the
custody of the Trustee pursuant to the FAST Balance Certificate Agreement
between the Depositary and the Trustee.
In the case of Old Notes that were (i) originally issued to or transferred
to "institutional accredited investors" who are not "qualified institutional
buyers" (as such terms are defined under "Notice to Investors" elsewhere
herein) (the "Non-Global Purchasers") or (ii) issued as described below under
"Certificated Securities," New Notes will be issued in the form of registered
definitive certificates (the "Certificated Securities"). Upon the transfer to
a qualified institutional buyer of Certificated Securities initially issued
to a Non-Global Purchaser, such Certificated Securities may, unless the
Global Note has previously been exchanged for Certificated Securities, be
exchanged for an interest in the Global Note representing the principal
amount of Notes being transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchaser), banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depositary's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants" or the "Depositary's Indirect Participants") that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that, pursuant to procedures established by the
Depositary, (i) upon deposit of the Global Note, the Depositary will credit
the accounts of Participants designated by the Initial Purchaser with
portions of the principal amount of the Global Note and (ii) ownership of the
Notes evidenced by the Global Note will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by the
Depositary (with respect to the interests of the Depositary's Participants),
the Depositary's Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to transfer Notes evidenced by the Global
Note will be limited to such extent.
So long as the Global Note Holder is the registered owner of any Notes,
the Global Note Holder will be considered the sole Holder under the Indenture
of any Notes evidenced by the Global Note. Beneficial owners of Notes
evidenced by the Global Note will not be considered the owners or Holders
thereof under the Indenture for any purpose, including with respect to the
giving of any directions, instructions or approvals to the Trustee
thereunder. Neither the Company nor the Trustee will have any responsibility
or liability for any aspect of the records of the Depositary or for
maintaining, supervising or reviewing any records of the Depositary relating
to the Notes.
Payments in respect of the principal of, premium, if any, interest and
Liquidated Damages, if any, on any Notes registered in the name of the Global
Note Holder on the applicable record date will be payable by the Trustee to
or at the direction of the Global Note Holder in its capacity as the
registered Holder under the Indenture. Under the terms of the Indenture, the
Company and the Trustee may treat the persons in whose names Notes, including
the Global Note, are registered as the owners thereof for the purpose of
receiving such payments. Consequently, neither the Company nor the Trustee
has or will have any responsibility or liability for the payment of such
amounts
69
to beneficial owners of Notes. The Company believes, however, that it is
currently the policy of the Depositary to immediately credit the accounts of
the relevant Participants with such payments, in amounts proportionate to
their respective holdings of beneficial interests in the relevant security as
shown on the records of the Depositary. Payments by the Depositary's
Participants and the Depositary's Indirect Participants to the beneficial
owners of Notes will be governed by standing instructions and customary
practice and will be the responsibility of the Depositary's Participants or
the Depositary's Indirect Participants.
Certificated Securities
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of Certificated Securities. Upon any such
issuance, the Trustee is required to register such Certificated Securities in
the name of, and cause the same to be delivered to, such person or persons
(or the nominee of any thereof). All such certificated Old Notes will
continue to be subject to the legend requirements described thereon. In
addition, if (i) the Company notifies the Trustee in writing that the
Depositary is no longer willing or able to act as a depositary and the
Company is unable to locate a qualified successor within 90 days or (ii) the
Company, at its option, notifies the Trustee in writing that it elects to
cause the issuance of Notes in the form of Certificated Securities under the
Indenture, then, upon surrender by the Global Note Holder of its Global Note,
Notes in such form will be issued to each person that the Global Note Holder
and the Depositary identify as being the beneficial owner of the related
Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
Same-Day Settlement and Payment
The Indenture requires that payments in respect of the Notes represented
by the Global Note (including principal, premium, if any, interest and
Liquidated Damages, if any) be made by wire transfer of immediately available
funds to the accounts specified by the Global Note Holder. With respect to
Certificated Securities, the Company will make all payments of principal,
premium, if any, interest and Liquidated Damages, if any, by wire transfer of
immediately available funds to the accounts specified by the Holders thereof
or, if no such account is specified, by mailing a check to each such Holder's
registered address. Secondary trading in long-term notes and debentures of
corporate issuers is generally settled in clearing-house or next-day funds.
In contrast, the New Notes represented by the Global Note are expected to
trade in the Depositary's Same-Day Funds Settlement System, and any permitted
secondary market trading activity in such Notes will, therefore, be required
by the Depositary to be settled in immediately available funds. The Company
expects that secondary trading in the Certificated Securities will also be
settled in immediately available funds.
Registration Rights; Liquidated Damages
Holders of New Notes are not entitled to any registration rights with
respect to the New Notes. Pursuant to the Registration Rights Agreement,
holders of Old Notes were entitled to certain registration rights. Under the
Registration Rights Agreement, the Company agreed to file with the Commission
the Exchange Offer Registration Statement on the appropriate form under the
Securities Act with respect to the New Notes. Upon the effectiveness of the
Exchange Offer Registration Statement, the Company will offer to the Holders
of Transfer Restricted Securities pursuant to the Exchange Offer who are able
to make certain representations the opportunity to exchange their Transfer
Restricted Securities for New Notes. If (i) the Company is not required to
file the Exchange Offer Registration Statement or permitted to consummate the
Exchange Offer because the Exchange Offer is not permitted by applicable law
or Commission policy or (ii) any Holder of Transfer Restricted Securities
notifies the Company within the specified time period that (a) it is
prohibited by law or Commission policy from participating in the Exchange
Offer or (b) that it may not resell the New Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales or (c) that it is a broker-dealer
and owns Notes acquired directly from the Company or an affiliate of the
Company, the Company will file with the Commission a Shelf Registration
Statement to cover resales of the Notes by the Holders thereof who satisfy
certain conditions relating to the provision of information in connection
with the Shelf Registration Statement. The Company will use its reasonable
best efforts to cause the applicable registration statement to be declared
effective as promptly as possible by the Commission. For purposes
70
of the foregoing, "Transfer Restricted Securities" means each Old Note until
(i) the date on which such Old Note has been exchanged by a person other than
a broker-dealer for a New Note in the Exchange Offer, (ii) following the
exchange by a broker-dealer in the Exchange Offer of an Old Note for a New
Note, the date on which such New Note is sold to a purchaser who receives
from such broker-dealer on or prior to the date of such sale a copy of the
prospectus contained in the Exchange Offer Registration Statement, (iii) the
date on which such Note has been effectively registered under the Securities
Act and disposed of in accordance with the Shelf Registration Statement or
(iv) the date on which such Note is distributed to the public pursuant to
Rule 144 under the Act.
The Registration Rights Agreement provides that (i) the Company will file
an Exchange Offer Registration Statement with the Commission on or prior to
December 21, 1996, (ii) the Company will use its reasonable best efforts to
have the Exchange Offer Registration Statement declared effective by the
Commission on or prior to March 7, 1997, (iii) unless the Exchange Offer
would not be permitted by applicable law or Commission policy, the Company
will commence the Exchange Offer and use its reasonable best efforts to
issue, on or prior to 30 business days after the date on which the Exchange
Offer Registration Statement was declared effective by the Commission, New
Notes in exchange for all Notes tendered prior thereto in the Exchange Offer
and (iv) if obligated to file the Shelf Registration Statement, the Company
will use its reasonable best efforts to file the Shelf Registration Statement
with the Commission on or prior to 60 days after such filing obligation
arises and to cause the Shelf Registration Statement to be declared effective
by the Commission on or prior to April 16, 1997. If (a) the Company fails to
file any of the Registration Statements required by the Registration Rights
Agreement on or before the date specified for such filing, (b) any of such
Registration Statements is not declared effective by the Commission on or
prior to the date specified for such effectiveness (the "Effectiveness Target
Date"), (c) the Company fails to consummate the Exchange Offer within 30
business days of the Effectiveness Target Date with respect to the Exchange
Offer Registration Statement, or (d) the Shelf Registration Statement or the
Exchange Offer Registration Statement is declared effective but thereafter
ceases to be effective or usable in connection with resales of Transfer
Restricted Securities during the periods specified in the Registration Rights
Agreement (each such event referred to in clauses (a) through (d) above, a
"Registration Default"), then the Company will pay Liquidated Damages to each
Holder of Notes, with respect to the first 90-day period immediately
following the occurrence of such Registration Default in an amount equal to
$.05 per week per $1,000 principal amount of Notes held by such Holder. The
amount of the Liquidated Damages will increase by an additional $.05 per week
per $1,000 principal amount of Notes with respect to each subsequent 90-day
period until all Registration Defaults have been cured, up to a maximum
amount of Liquidated Damages of $.50 per week per $1,000 principal amount of
Notes. All accrued Liquidated Damages will be paid by the Company on each
Damages Payment Date to the Global Note Holder by wire transfer of
immediately available funds or by federal funds check and to Holders of
Certificated Securities by wire transfer to the accounts specified by them or
by mailing checks to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Holders of Old Notes will be required to make certain representations to
the Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set
forth in the Registration Rights Agreement in order to have their Notes
included in the Shelf Registration Statement and benefit from the provisions
regarding Liquidated Damages set forth above.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including Indebtedness incurred in connection with, or in contemplation of,
such other Person merging with or into or becoming a Subsidiary of such
specified Person, and (ii) Indebtedness encumbering any asset acquired by
such specified Person.
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"Additional Guarantee" means any guarantee of the Company's obligations
under the Indenture and the Notes issued after the Issue Date as described in
"--Certain Covenants--Limitations on Guarantees of Company Indebtedness by
Restricted Subsidiaries" and "--Certain Covenants--Additional Guarantees."
"Additional Guarantor" means any Subsidiary of the Company that guarantees
the Company's obligations under the Indenture and the Notes issued after the
Issue Date as described in "--Certain Covenants--Limitations on Guarantees of
Company Indebtedness by Restricted Subsidiaries" and "--Certain
Covenants--Additional Guarantees."
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or
otherwise; provided that beneficial ownership of 10% or more of the voting
securities of a Person shall be deemed to be control.
"Bank Agent" means Bank of America National Trust and Savings Association,
in its capacity as administrative agent for the lenders party to the Credit
Agreement, or any successor or successors thereto in such capacity.
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation
that confers on a Person the right to receive a share of the profits and
losses of, or distributions of assets of, the issuing Person (including,
without limitation, membership interests in a limited liability company).
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or guaranteed by a
government that is a member of the Organization for Economic Cooperation and
Development ("OECD Country") or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America or
such OECD Country, as applicable, is pledged in support thereof) having
maturities of not more than three years from the date of acquisition of such
security, (ii) marketable direct obligations issued by any State of the
United States of America or any local government or other political
subdivision thereof rated (at the time of acquisition of such security) at
least AA by Standard & Poor's Ratings Service, a division of the McGraw-Hill
Companies, Inc. ("S&P") or the equivalent thereof by Moody's Investors
Service, Inc. ("Moody's") having maturities of not more than one year from
the date of acquisition of such security, (iii) U.S. dollar denominated time
deposits, certificates of deposit and bankers' acceptances of (a) any
domestic commercial bank of recognized standing having capital and surplus in
excess of $250 million or (b) any bank whose short- term commercial paper
rating (at the time of acquisition of such security) by S&P is at least A-1
or the equivalent thereof, in each case with maturities of not more than six
months from the date of acquisition of such security, (iv) commercial paper
and variable rate notes issued by, or guaranteed by, any industrial or
financial company with a short-term commercial paper rating (at the time of
acquisition of such security) of at least A-1 or the equivalent thereof by
S&P or at least P-1 or the equivalent thereof by Moody's, or guaranteed by
any industrial company with a long-term unsecured debt rating (at the time of
acquisition of such security) of at least AA or the equivalent thereof by
Moody's and in each case maturing within one year after the date of
acquisition of such security and (v) repurchase agreements with any lender
under the Credit Agreement or any primary dealer maturing within one year
from the date of acquisition that are fully collateralized by investment
instruments that would otherwise be Cash Equivalents; provided that the terms
of such repurchase agreements comply with the guidelines set forth in the
Federal Financial Institutions Examination Council Supervisory
Policy--Repurchase Agreements of Depository Institutions With Securities
Dealers and Others, as adopted by the Comptroller of the Currency on October
31, 1985.
72
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus, without
duplication, (i) an amount equal to any extraordinary loss plus any net loss
realized in connection with an Asset Sale (to the extent such losses were
deducted in computing such Consolidated Net Income), (ii) provision for taxes
based on income or profits of such Person and its Restricted Subsidiaries for
such period, to the extent that such provision for taxes was included in
computing such Consolidated Net Income, (iii) consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid
or accrued and whether or not capitalized (including, without limitation,
amortization of original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and other charges incurred in respect
of letters of credit or bankers' acceptance financings and net payments (if
any) pursuant to Hedging Obligations), to the extent that any such expense
was deducted in computing such Consolidated Net Income, (iv) depreciation,
amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period and deferred finance charges) and other non- cash charges of such
Person and its Restricted Subsidiaries for such period (excluding non-cash
charges to the extent that such non-cash charges represent an accrual of or
reserve for cash charges to be incurred in any future period), to the extent
that such depreciation, amortization and other non-cash charges were deducted
in computing such Consolidated Net Income, including without limitation
non-cash charges recorded in the period ended September 30, 1996 for the
write-offs or write-downs of assets related to (A) the rationalization of
manufacturing operations located in the United Kingdom, and (B) adjustments
of Renewal Power Station inventory valuation, and (v) the following
non-recurring expenses related to the recapitalization of the Company
consummated on September 13, 1996 (the "Recapitalization"): (A) up to $2.3
milion of debt prepayment penalties incurred in connection with the
prepayment of the Company's Indebtedness outstanding prior to the
Recapitalization; (B) up to $2.2 million of advisory fees paid to the
financial advisor to the Company's shareholders who sold shares in the
Recapitalization; (C) legal and consulting fees incurred in connection with
the Recapitalization of up to $4.2 million; and (D) up to $7.1 million of
compensation expense paid to present and former officers of the Company with
respect to obligations to such present and former officers arising as a
result of the Recapitalization, in each case to the extent that such expenses
were paid in cash during the period ended September 30, 1996 (or, in the case
of up to $2.0 million of expenses incurred pursuant to clause (D) above,
during the period ended September 30, 1998), and deducted in computing
Consolidated Net Income for such period. Notwithstanding the foregoing, the
provision for taxes on the income or profits of, and the depreciation and
amortization and other non-cash charges of, a Subsidiary of the referent
Person shall be added to Consolidated Net Income to compute Consolidated Cash
Flow only to the extent (and in same proportion) that the Net Income of such
Subsidiary was included in calculating the Consolidated Net Income of such
Person and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Subsidiary without
prior governmental approval (that has not been obtained), and without direct
or indirect restriction pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any period, the aggregate
of the Net Income of such Person and its Restricted Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Restricted Subsidiary that is
accounted for by the equity method of accounting shall be included only to
the extent of the amount of dividends or distributions paid in cash to the
Company or any of its Wholly Owned Restricted Subsidiaries, (ii) the Net
Income of any Restricted Subsidiary that is not a Wholly Owned Restricted
Subsidiary shall only be included to the extent of the amount of dividends or
distribution paid to the Company or any of its Wholly Owned Restricted
Subsidiaries, provided, however, that notwithstanding the foregoing, if at
least 80% of the Equity Interests having ordinary voting power (without
regard to the occurrence of any contingency) for the election of directors or
other governing body of a Restricted Subsidiary is owned by the Company
directly or indirectly through one or more of its Wholly Owned Restricted
Subsidiaries, all of the Net Income of such Restricted Subsidiary shall be
included, (iii) the Net Income of any Restricted Subsidiary acquired directly
or indirectly by the Company in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded, (iv) the
cumulative effect of a change in accounting principles shall be excluded, (v)
the Net Income of any Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been obtained),
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
73
regulation applicable to that Subsidiary or its stockholders and (vi) the Net
Income of any Unrestricted Subsidiary shall be excluded, whether or not
distributed to the Company or one of its Subsidiaries.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Restricted Subsidiaries as of such date plus (ii)
the respective amounts reported on such Person's balance sheet as of such
date with respect to any series of preferred stock (other than Disqualified
Stock) that by its terms is not entitled to the payment of dividends unless
such dividends may be declared and paid only out of net earnings in respect
of the year of such declaration and payment, but only to the extent of any
cash received by such Person upon issuance of such preferred stock, less (a)
all write-ups (other than write-ups resulting from foreign currency
translations and write-ups of tangible assets of a going concern business
made within 12 months after the acquisition of such business) subsequent to
the date of the Indenture in the book value of any asset owned by such Person
or a consolidated Restricted Subsidiary of such Person, and (b) all
investments as of such date in unconsolidated Restricted Subsidiaries and in
Persons that are not Restricted Subsidiaries (except, in each case, Permitted
Investments), and (c) all unamortized debt discount and expense and
unamortized deferred charges as of such date, all of the foregoing determined
in accordance with GAAP.
"Consulting Agreements" means (i) the Consulting Agreement dated September
12, 1996 between the Company and Thomas H. Pyle and (ii) the Confidentiality,
Non-Competition, No Solicitation and No Hire Agreement between the Company
and Thomas H. Pyle, each as in effect on the date of the Indenture and as
amended from time to time in a manner no less favorable, taken as a whole, to
the Company.
"Credit Agreement" means that certain Credit Agreement, dated as of
September 12, 1996, by and among the Company, the lenders party thereto, DLJ
Capital Funding, Inc., as documentation and joint syndication agent, and the
Bank Agent, as amended, supplemented or otherwise modified from time to time.
References to the Credit Agreement shall also include any credit agreement or
agreements entered into by the Company to replace, extend, renew, increase,
refund or refinance all or a portion of the Indebtedness under the Credit
Agreement; provided that the aggregate principal amount of Indebtedness
outstanding or available thereunder will not be increased except to the
extent permitted by the covenant described above under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock."
"Default" means any event or condition that is or with the passage of time
or the giving of notice or both would, unless cured or waived, be an Event of
Default.
"Designated Senior Debt" means (i) so long as Senior Bank Debt is
outstanding, the Senior Bank Debt and (ii) thereafter, any other Senior Debt
permitted under the Indenture the principal amount of which is $25.0 million
or more and which has been designated by the Company as "Designated Senior
Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable, mandatorily or at the option of the holder thereof), or upon
the happening of any event, matures or is mandatorily redeemable, pursuant to
a sinking fund obligation or otherwise, or redeemable at the option of the
Holder thereof, in whole or in part, on or prior to the date on which the
Notes are scheduled to mature.
"Employment Agreement" means the Employment Agreement dated September 12,
1996 between the Company and David A. Jones, as in effect on the date of the
Indenture and as amended from time to time in a manner no less favorable,
taken as a whole, to the Company.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Existing Indebtedness" means (i) Indebtedness of the Company and its
Subsidiaries (other than under the Credit Agreement) in existence on the date
of the Indenture, until such amounts are repaid, and (ii) Indebtedness
incurred after the date of the Indenture pursuant to the following agreements
in aggregate principal amount outstanding not to exceed $7.0 million (or the
equivalent thereof in any foreign currency), as each such agreement is in
effect as of the date of the Indenture and as the same may be amended on
terms, taken as a whole, that are no less favorable to the Company: (a) the
Credit Agreement between Rayovac Europe B.V. and ABN Amro Bank
74
N.V.; (b) the Credit Agreement between Rayovac (UK), Ltd. and NatWest Bank
plc (England); and (c) the Credit Agreement between Rayovac (UK), Ltd. and
NationsBank, N.A.
"Financing Lease" means any lease of property, real or personal, the
obligations of the lessee in respect of which are required in accordance with
GAAP to be capitalized on a balance sheet of the lessee.
"Fixed Charges" means, with respect to any Person for any period, the sum
of (i) the consolidated interest expense of such Person for such period,
whether paid or accrued, to the extent such expense was deducted in computing
Consolidated Net Income (including amortization of original issue discount,
non-cash interest payments and the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred
in respect of letters of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations, but excluding amortization
of deferred financing fees) and (ii) the consolidated interest expense of
such Person and its Subsidiaries that was capitalized during such period, and
(iii) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Subsidiaries or secured by a Lien on
assets of such Person or one of its Subsidiaries (whether or not such
Guarantee is called upon or Lien is enforced) and (iv) the product of (a) all
cash dividend payments (and non-cash dividend payments in the case of a
person that is a Subsidiary) on any series of preferred stock of such Person,
times (b) a fraction, the numerator of which is one and the denominator of
which is one minus the then current combined federal, state and local
statutory tax rate of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such
period to the Fixed Charges of such Person for such period. In the event that
the Company or any of its Subsidiaries incurs, assumes, guarantees or redeems
any Indebtedness (other than revolving credit borrowings) or issues preferred
stock subsequent to the commencement of the period for which the Fixed Charge
Coverage Ratio is being calculated but prior to the date on which the event
for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, Guarantee or
redemption of Indebtedness, or such issuance or redemption of preferred
stock, as if the same had occurred at the beginning of the applicable
four-quarter reference period. In addition, for purposes of making the
computation referred to above, (i) acquisitions that have been made by the
Company or any of its Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on
or prior to the Calculation Date shall be deemed to have occurred on the
first day of the four-quarter reference period and Consolidated Cash Flow for
such reference period shall be calculated without giving effect to clause
(iii) of the proviso set forth in the definition of Consolidated Net Income,
and (ii) the Consolidated Cash Flow attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, shall be excluded, and (iii) the Fixed
Charges attributable to discontinued operations, as determined in accordance
with GAAP, and operations or businesses disposed of prior to the Calculation
Date, shall be excluded, but only to the extent that the obligations giving
rise to such Fixed Charges will not be obligations of the referent Person or
any of its Subsidiaries following the Calculation Date.
"Foreign Subsidiary" means a Restricted Subsidiary not organized or
existing under the laws of the United States, any state or territory thereof,
or the District of Columbia.
"GAAP" means generally accepted accounting principles set forth from time
to time in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the U.S.
accounting profession), which are applicable to the circumstances as of the
date of determination.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which
guarantee or obligations the full faith and credit of the United States of
America is pledged.
"Guarantee" of a Person means any agreement by which such Person assumes,
guarantees, endorses, contingently agrees to purchase or provide funds for
the payment of, or otherwise becomes liable upon, the obligation of any other
Person, or agrees to maintain the net worth or working capital or other
financial condition
75
of any other Person or otherwise assures any creditor of such other Person
against loss, including, without limitation, any comfort letter, operating
agreement or take-or-pay contract and shall include, without limitation, the
contingent liability of such Person in connection with any application for a
letter of credit or letter of guarantee.
"Guarantor" means, collectively, ROV Holding, Inc., a Delaware
corporation, and each Subsidiary of the Company that has executed a Guarantee
in accordance with the covenants described under the captions "--Certain
Covenants--Limitations on Guarantees of Company Indebtedness by Restricted
Subsidiaries" and "--Certain Covenants--Additional Guarantees," and their
successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, without duplication: (i)
all indebtedness of such Person for borrowed money; (ii) all obligations
issued, undertaken or assumed by such Person as the deferred purchase price
of property or services (other than trade payables entered into and accrued
expenses arising in the ordinary course of business on ordinary terms); (iii)
all non-contingent reimbursement or payment obligations with respect to
surety instruments; (iv) all obligations of such Person evidenced by notes,
bonds, debentures or similar instruments; (v) all indebtedness of such Person
created or arising under any conditional sale or other title retention
agreement, or incurred as financing, in either case with respect to property
acquired by such Person (even though the rights and remedies of the seller or
lender under such agreement in the event of default are limited to
repossession or sale of such property); (vi) all Capital Lease Obligations of
such Person; (vii) all indebtedness referred to in clauses (i) through (vi)
above secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien upon or
in property (including accounts and contract rights) owned by such Person,
even though such Person has not assumed or become liable for the payment of
such Indebtedness; (viii) all Hedging Obligations of such Person; and (ix)
all Guarantees of such Person in respect of indebtedness or obligations of
others of the kinds referred to in clauses (i) through (viii) above.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees), advances or capital contributions
(excluding commission, travel and similar advances and loans and other
arrangements, in each case made to officers and employees in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities and all other items that
are or would be classified as investments on a balance sheet prepared in
accordance with GAAP; provided that an acquisition of assets, Equity
Interests or other securities by the Company for consideration consisting of
common equity securities of the Company shall not be deemed to be an
Investment. If the Company or any Restricted Subsidiary of the Company sells
or otherwise disposes of any Equity Interests of any direct or indirect
Restricted Subsidiary of the Company such that, after giving effect to any
such sale or disposition, such Person is no longer a Restricted Subsidiary of
the Company, the Company shall be deemed to have made an Investment on the
date of any such sale or disposition equal to the fair market value of the
Equity Interests of such Restricted Subsidiary not sold or disposed of.
"Joint Venture" means a corporation, partnership, limited liability
company, joint venture or other similar legal arrangement (whether created by
contract or conducted through a separate legal entity) which is not a
Subsidiary of the Company or any of its Restricted Subsidiaries and which is
now or hereafter formed by the Company or any of its Restricted Subsidiaries
with another Person in order to conduct a common venture or enterprise with
such Person.
"Legal Holiday" means a Saturday, a Sunday or a day on which commercial
banks in the City of New York, Chicago or San Francisco or at a place of
payment are authorized or required by law, regulation or executive order to
remain closed. If a payment date is a Legal Holiday at a place of payment,
payment may be made at that place on the next succeeding day that is not a
Legal Holiday, and no interest shall accrue for the intervening period.
"Lien" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge or other security
interest or any preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever, including, without
limitation, any conditional sale or other title retention agreement and any
Financing Lease having substantially the same economic effect as any of the
foregoing (other than any option, call or similar right relating to treasury
shares of the Company to the extent that such option, call or similar right
is granted (i) under any employee stock option plan, employee stock ownership
76
plan or similar plan or arrangement of the Company or its Subsidiaries or
(ii) in connection with the issuance of Indebtedness permitted under the
covenant described under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock").
"Liquidated Damages" means the additional amounts (if any) payable by the
Company in the event of a Registration Default under, and as defined in, the
Registration Rights Agreement.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but
not loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Subsidiaries
or the extinguishment of any Indebtedness of such Person or any of its
Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss),
together with any related provision for taxes on such extraordinary or
nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company
or any of its Restricted Subsidiaries in respect of any Asset Sale, which
amount is equal to the excess, if any, of (i) the cash received by the
Company or such Restricted Subsidiary (including any cash payments received
by way of deferred payment pursuant to, or monetization of, a note or
installment receivable or otherwise, but only as and when received) in
connection with such disposition over (ii) the sum of (a) the amount of any
Indebtedness which is secured by such asset and which is required to be
repaid in connection with the disposition thereof, plus (b) the reasonable
out- of-pocket expenses incurred by the Company or such Restricted
Subsidiary, as the case may be, in connection with such disposition or in
connection with the transfer of such amount from such Restricted Subsidiary
to the Company, plus (c) provisions for taxes, including income taxes,
reasonably estimated to be attributable to the disposition of such asset or
attributable to required prepayments or repayments of Indebtedness with the
proceeds thereof, plus (d) if the Company does not first receive a transfer
of such amount from the relevant Restricted Subsidiary with respect to the
disposition of an asset by such Restricted Subsidiary and such Restricted
Subsidiary intends to make such transfer as soon as practicable, the
out-of-pocket expenses and taxes that the Company reasonably estimates will
be incurred by the Company or such Restricted Subsidiary in connection with
such transfer at the time such transfer is expected to be received by the
Company (including, without limitation, withholding taxes on the remittance
of such amount).
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any
kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), (b) is directly or indirectly liable (as a
guarantor or otherwise), or (c) constitutes the lender, and (ii) no default
with respect to which (including any rights that the holders thereof may have
to take enforcement action against an Unrestricted Subsidiary) would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness of
the Company or any of its Restricted Subsidiaries to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officer" means, with respect to any Person, the Chairman of the Board,
the Chief Executive Officer, the President, the Chief Operating Officer, the
Chief Financial Officer, the Treasurer, any Assistant Treasurer, the
Controller, the Secretary, any Assistant Secretary or any Vice-President of
such Person.
"Officers' Certificate" means a certificate signed on behalf of the
Company by two Officers of the Company, one of whom must be the principal
executive officer, the principal financial officer, the treasurer, or the
principal accounting officer of the Company, that meets the requirements of
the Indenture.
"Opinion of Counsel" means an opinion from legal counsel who is reasonably
acceptable to the Trustee, that meets the requirements of the Indenture. The
counsel may be an employee of or counsel to the Company (or any Guarantor, if
applicable), any Subsidiary of the Company or the Trustee.
"Permitted Investments" means: (i) any Investments in the Company or in a
Wholly Owned Restricted Subsidiary of the Company which, with respect to any
such Wholly Owned Restricted Subsidiary, has a fair market value which does
not exceed $1.0 million in the aggregate, or any Investments in a Wholly
Owned Restricted Subsidiary that (A) is a Guarantor, or (B) is not a
Guarantor, but is a Foreign Subsidiary and the aggregate fair market value of
all Investments
77
made after the date of the Indenture in Foreign Subsidiaries does not exceed
$3.0 million (or the equivalent thereof in one or more foreign currencies);
(ii) any Investments in Cash Equivalents; (iii) Investments by the Company or
any Restricted Subsidiary of the Company in a Person, if as a result of such
Investment (a) such Person becomes a Wholly Owned Restricted Subsidiary of
the Company that is a Guarantor or (b) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Wholly Owned Restricted
Subsidiary of the Company that is a Guarantor; (iv) Investments in accounts
and notes receivable acquired in the ordinary course of business; (v) notes
from employees, officers, directors, and their transferees and Affiliates
issued to the Company representing payment of the exercise price of options
to purchase common stock of the Company; (vi) other Investments made as a
result of the receipt of non-cash consideration from an Asset Sale that was
made pursuant to and in compliance with the covenant described under the
caption "--Repurchase at the Option of Holders--Asset Sales;" (vii)
Investments by the Company and its Subsidiaries in Joint Ventures in the form
of contributions of capital, loans, advances or Guarantees; provided that,
immediately before and after giving effect to such Investment, (a) no Event
of Default shall have occurred and be continuing, and (b) the aggregate fair
market value of all Investments pursuant to this clause (vii) shall not
exceed $2.0 million in the aggregate; (viii) Hedging Obligations permitted by
the terms of the Credit Agreement and the Indenture to be outstanding; and
(ix) other Investments in any Person having an aggregate fair market value
(measured on the date each such Investment was made and without giving effect
to subsequent changes in value) not to exceed $5.0 million at any time
outstanding. For purposes of this definition, the aggregate fair market value
of any Investment shall be measured on the date such Investment is made
without giving effect to subsequent changes in value and shall be valued at
the cash amount thereof, if in cash, the fair market value thereof as
determined by the Board of Directors, if in property, and at the maximum
amount thereof, if in Guarantees.
"Permitted Liens" means
(i) any Lien existing on property of the Company or any Subsidiary on
the date of the Indenture securing Indebtedness outstanding on such date;
(ii) any Lien securing obligations under the Senior Bank Debt and any
Guarantee thereof, which obligations or Guarantee are permitted by the
terms hereof to be incurred and outstanding;
(iii) Liens for taxes, fees, assessments or other governmental charges
which are not delinquent or remain payable without penalty, or which are
being contested in good faith by appropriate proceedings and for which
adequate reserves in accordance with GAAP are being maintained;
(iv) carriers', warehousemen's, mechanics', landlords', materialmen's,
repairmen's or other similar Liens arising in the ordinary course of
business which are not delinquent or which are being contested in good
faith and by appropriate proceedings, which proceedings have the effect of
preventing the forfeiture or sale of the property subject thereto;
(v) Liens (other than any Lien imposed by ERISA) consisting of pledges
or deposits required in the ordinary course of business in connection with
workers' compensation, unemployment insurance and other social security
legislation;
(vi) Liens on property of the Company or any Subsidiary securing (a) the
non-delinquent performance of bids, trade contracts (other than for
borrowed money), leases and statutory obligations, (b) surety bonds
(excluding appeal bonds and bonds posted in connection with court
proceedings or judgments) and (c) other non-delinquent obligations of a
like nature, including pledges or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security legislation, in each case, incurred in
the ordinary course of business;
(vii) Liens consisting of judgment or judicial attachment Liens and
Liens securing contingent obligations on appeal bonds and other bonds
posted in connection with court proceedings or judgments; provided that
the enforcement of such Liens is effectively stayed and all such Liens in
the aggregate at any time outstanding for the Company and its Subsidiaries
do not exceed $3.0 million;
(viii) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount, and which do not in any case
materially detract from the value of the property subject thereto or
interfere with the ordinary conduct of the businesses of the Company and
its Subsidiaries taken as a whole;
78
(ix) purchase money security interests on any property acquired by the
Company or any Subsidiary in the ordinary course of business, securing
Indebtedness incurred or assumed for the purpose of financing all or any
part of the cost of acquiring such property; provided that (a) any such
Lien attaches to such property concurrently with or within 90 days after
the acquisition thereof, (b) such Lien attaches solely to the property so
acquired in such transaction, (c) the principal amount of the Indebtedness
secured thereby does not exceed 100% of the cost of such property and (d)
the principal amount of the Indebtedness secured by all such purchase
money security interests shall not at any time exceed $5.0 million;
(x) Liens securing obligations in respect of Capital Lease Obligations
on assets subject to such leases, provided that such Capital Lease
Obligations are otherwise permitted hereunder;
(xi) Liens arising solely by virtue of any statutory or common law
provision relating to banker's liens, rights of setoff or similar rights
and remedies as to deposit accounts or other funds maintained with a
creditor depository institution; provided that (a) such deposit account is
not a dedicated cash collateral account and is not subject to restrictions
against access by the Company in excess of those set forth by regulations
promulgated by the Federal Reserve Board, and (b) such deposit account is
not intended by the Company or any Subsidiary to provide collateral to the
depository institution;
(xii) Liens in favor of the Company or any Wholly Owned Restricted
Subsidiary that is a Guarantor;
(xiii) Liens on property of a Person existing at the time such Person
becomes a Restricted Subsidiary or such Person is merged into or
consolidated with the Company or any Restricted Subsidiary of the Company;
provided that such Liens were in existence prior to the contemplation of
such merger or consolidation and do not extend to any assets other than
those of the Person merged into or consolidated with the Company;
(xiv) Liens on property existing at the time of acquisition thereof by
the Company or any Restricted Subsidiary of the Company; provided that
such Liens were in existence prior to the contemplation of such
acquisition;
(xv) extensions, renewals and replacements of Liens referred to in
clauses (i) through (xiv) above; provided that any such extension, renewal
or replacement Lien is limited to the property or assets covered by the
Lien extended, renewed or replaced and does not secure any Indebtedness in
addition to that secured immediately prior to such extension, renewal or
replacement;
(xvi) Liens securing Indebtedness permitted by clause (xiv) of the
second paragraph of the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock;"
and
(xvii) Liens securing other Indebtedness of the Company and its
Subsidiaries not expressly permitted by clauses (i) through (xvi) above;
provided that the aggregate amount of the Indebtedness secured by Liens
permitted pursuant to this clause (xvii) does not exceed $3.0 million in
the aggregate.
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock
company, government (or any agency or political subdivision thereof) or other
entity of any kind.
"Restricted Investment" means any Investment other than a Permitted
Investment.
"Restricted Subsidiary" means, with respect to any Person, any Subsidiary
of the referent Person that is not an Unrestricted Subsidiary.
"Senior Bank Debt" means all Obligations outstanding under or in
connection with the Credit Agreement as such agreement may be restated,
further amended, supplemented or otherwise modified or replaced from time to
time hereafter, together with any refunding or replacement of such
Indebtedness, up to an aggregate maximum principal amount outstanding or
available at any time of $170 million plus the aggregate principal amount of
Indebtedness issued under the Credit Agreement pursuant to clause (vi) of the
second paragraph of the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," less
all outstanding Obligations with respect to Existing Indebtedness, less the
aggregate principal amount of Indebtedness issued pursuant to clause (xiv)
(B) of the second paragraph of the covenant described under the caption
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock," less, without duplication, the
79
aggregate amount of all mandatory repayments of principal (which may not be
reborrowed) of and/or mandatory permanent reductions of availability of
Indebtedness under such Senior Bank Debt and any optional prepayments on any
term loans under the Credit Agreement that have been made since the date of
the Indenture (including, without limitation, the aggregate amount of all
such mandatory payments and reductions made pursuant to the covenant
described under the caption "--Repurchase at the Option of Holders--Asset
Sales").
"Senior Debt" means (i) the Senior Bank Debt and (ii) any other
Indebtedness permitted to be incurred by the Company or any Guarantor, as the
case may be, under the terms of the Indenture, unless the instrument under
which such Indebtedness is incurred expressly provides that it is on a parity
with or subordinated in right of payment to the Notes; provided that the
amount of any Guarantee of Senior Bank Debt that constitutes Senior Debt with
respect to any Guarantor shall be determined without regard to any reduction
in the amount of any Guarantee of such Senior Bank Debt necessary to cause
such Guarantee not to be a fraudulent conveyance. Notwithstanding anything to
the contrary in the foregoing, Senior Debt shall not include (a) any
liability for federal, state, local or other taxes owed or owing by the
Company, (b) any Indebtedness of the Company to any of its Subsidiaries or
other Affiliates, (c) any trade payables or (d) any Indebtedness that is
incurred in violation of the Indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of such
Person or a combination thereof.
"Subsidiary Guarantee" means, individually and collectively, the
guarantees given by ROV Holding, Inc. and any Additional Guarantor pursuant
to the terms of the Indenture.
"Unrestricted Subsidiary" means (i) Minera Vidaluz, S.A. de C.V., (ii) Zoe
Phos International, N.V., (iii) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary of the Company than those that might be obtained at the
time from Persons who are not Affiliates of the Company; (c) is a Person with
respect to which neither the Company nor any of its Restricted Subsidiaries
has any direct or indirect obligation (x) to subscribe for additional Equity
Interest or (y) to maintain or preserve such Person's financial condition or
to cause such Person to achieve any specified levels of operating results;
and (d) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its Restricted
Subsidiaries. Any such designation by the Board of Directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described under the caption
"--Certain Covenants--Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the foregoing requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of the Company as of such
date (and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," the
Company shall be in default of such covenant). The Board of Directors of the
Company may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that such designation shall be deemed to be
an incurrence of Indebtedness by a Restricted Subsidiary of the Company of
any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if (i) such Indebtedness is permitted
under the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," and
(ii) no Default or Event of Default would be in existence following such
designation.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the
sum of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity, in respect
thereof, by (b) the number of years (calculated to the nearest one-twelfth)
that will
80
elapse between such date and the making of such payment, by (ii) the then
outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
the Company all of the outstanding Capital Stock or other ownership interests
of which (other than directors' qualifying shares) shall at the time be owned
by the Company or by one or more Wholly Owned Restricted Subsidiaries of the
Company.
81
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of certain U.S. federal income tax
consequences associated with the exchange of the Old Notes for the New Notes
pursuant to the Exchange Offer. The summary is based upon current laws,
regulations, rulings and judicial decisions all of which are subject to
change, possibly with retroactive effect. The discussion below does not
address all aspects of U.S. federal income taxation that may be relevant to
particular holders in the context of their specific investment circumstances
or certain types of holders subject to special treatment under such laws
(e.g., financial institutions, tax-exempt organizations, foreign corporations
and individuals who are not citizens or residents of the U.S.). In addition,
the discussion does not address any aspect of state, local or foreign
taxation.
The exchange of the Old Notes for the New Notes pursuant to the Exchange
Offer will not be treated as an "exchange" for federal income tax purposes
because the New Notes do not differ materially in either kind or extent from
the Old Notes. Rather, the New Notes received by a holder will be treated as
a continuation of the Old Notes in the hands of such holder. As a result,
there generally will be no federal income tax consequences to holders
exchanging the Old Notes for the New Notes pursuant to the Exchange Offer. In
addition, any "market discount" on the Old Notes should carry over to the New
Notes. Holders should consult their tax advisors regarding the application of
the market discount rules to the New Notes received in exchange for the Old
Notes pursuant to the Exchange Offer.
Interest accruing throughout the term of the New Notes at a rate of
10-1/4% per annum will be includable in gross income in accordance with a
holder's regular method of accounting. If Liquidated Damages are paid (in
addition to the accrual of interest at a rate of 10-1/4% per annum) on the
Old Notes as described above under "Description of the Notes--Registration
Rights; Liquidated Damages," such Liquidated Damages payments generally
should be includable in a holder's gross income as ordinary income when such
payment is made.
EACH HOLDER SHOULD CONSULT HIS TAX ADVISOR IN DETERMINING THE FEDERAL,
STATE, LOCAL AND ANY OTHER TAX CONSEQUENCES TO THE PARTICULAR HOLDER OF THE
EXCHANGE OF OLD NOTES FOR NEW NOTES AND THE OWNERSHIP AND DISPOSITION OF THE
OLD NOTES AND THE NEW NOTES.
PLAN OF DISTRIBUTION
Each broker-dealer who holds Old Notes for its own account as a result of
market-making activities or other trading activities, and who receives New
Notes in exchange for such Old Notes pursuant to the Exchange Offer, may be a
statutory underwriter and must deliver a prospectus in connection with any
resale of such New Notes. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired as a result of market-making activities or other trading
activities. The Company has agreed that for a period of 180 days after the
date of this Prospectus, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
such resale. In addition, until [ ], 1997 (180 days after the date of
this Prospectus), all dealers effecting transactions in the New Notes may be
required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any
such resale may be made directly to purchasers or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such New Notes. Any
broker-dealer that resells New Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that is an "underwriter" within the meaning the Securities
Act.
82
For a period of 180 days after the date of this Prospectus, the Company
will promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such
documents in the Letter of Transmittal.
LEGAL MATTERS
The validity of the issuance of the New Notes will be passed upon for the
Company by Whyte Hirschboeck Dudek S.C., Milwaukee, Wisconsin.
EXPERTS
The financial statements and schedules of the Company and Subsidiaries as
of June 30, 1995 and 1996 and as of September 30, 1996 and for each of the
years in the three-year period ended June 30, 1996, and the Transition Period
ended September 30, 1996 included herein and elsewhere in the Registration
Statement have been included herein and in the Registration Statement in
reliance upon the reports of Coopers & Lybrand L.L.P., independent certified
public accountants, appearing elsewhere herein, given upon the authority of
said firm as experts in accounting and auditing.
83
RAYOVAC CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
---------------
Report of Independent Public Accountants F-2
Combined Consolidated Balance Sheets as of June 30, 1995 and 1996 and September 30, 1996 F-3
Combined Consolidated Statements of Operations for the Years Ended June
30, 1994, 1995 and 1996 and the Transition Period Ended September 30, 1996 F-4
Combined Consolidated Statements of Cash Flows for the Years Ended June
30, 1994, 1995 and 1996 and the Transition Period Ended September 30, 1996 F-5
Combined Consolidated Statements of Shareholders' Equity (Deficit) for the
Years Ended June 30, 1994, 1995 and 1996 and the Transition Period Ended September 30, 1996 F-6
Notes to Combined Consolidated Financial Statements F-7
Unaudited Condensed Combined Consolidated Balance Sheet as of September 30, 1995 F-31
Unaudited Condensed Combined Consolidated Statement of Operations for
the period July 1, 1995 through September 30, 1995 F-32
Unaudited Condensed Combined Consolidated Statement of Cash Flows for
the period July 1, 1995 through September 30, 1995 F-33
Notes to Unaudited Condensed Combined Consolidated Financial Statements F-34
ROV Holding, the only Company subsidiary currently guaranteeing the
Company's obligations under the Notes is a wholly owned subsidiary of the
Company. ROV Holding's guarantee of the New Notes is full and unconditional.
Separate financial statements of ROV Holding are not set forth in this
Prospectus as the Company has determined that they would not be material to
investors.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Rayovac Corporation
We have audited the accompanying combined consolidated balance sheets of
Rayovac Corporation and Subsidiaries as of June 30, 1995 and 1996 and
September 30, 1996, and the related combined consolidated statements of
operations, shareholders' equity (deficit), and cash flows for each of the
three years in the period ended June 30, 1996 and the period July 1, 1996 to
September 30, 1996 These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Rayovac Corporation and Subsidiaries as of June 30, 1995 and 1996 and
September 30, 1996, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1996 and the period
July 1, 1996 to September 30, 1996 in conformity with generally accepted
accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
November 22, 1996
F-2
RAYOVAC CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30, June 30, September 30,
1995 1996 1996
------------ ------------ ---------------
Assets
Current assets:
Cash and cash equivalents $ 2,645 $ 2,190 $ 4,255
Receivables:
Trade accounts receivable, net of allowances for
doubtful accounts of $702, $786, and $722,
respectively 50,887 55,830 62,320
Other 1,811 2,322 4,156
Inventories 65,540 66,941 70,121
Deferred income taxes 5,668 5,861 9,958
Prepaid expenses and other 5,651 4,975 4,864
---------- --------- ---------
Total current assets 132,202 138,119 155,674
Property, plant and equipment, net 77,963 73,938 69,397
Deferred charges and other 10,270 9,655 7,413
Debt issuance costs 155 173 12,764
---------- --------- ---------
Total assets $ 220,590 $ 221,885 $ 245,248
========== ========= ==========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term debt $ 11,916 $ 11,631 $ 8,818
Accounts payable 39,171 38,695 46,921
Accrued liabilities:
Wages and benefits 9,372 6,126 5,894
Other 15,861 19,204 15,904
Recapitalization and other special charges -- -- 14,942
---------- --------- ---------
Total current liabilities 76,320 75,656 92,479
Long-term debt, net of current maturities 76,377 69,718 224,845
Employee benefit obligations, net of current portion 10,954 12,141 12,138
Deferred income taxes 2,394 2,584 942
Other 958 162 564
Shareholders' equity (deficit):
Common stock, $ 01 par value, authorized 90,000
shares; issued 50,000 shares; outstanding 50,000,
49,500 and 20,470 shares, respectively 500 500 500
Rayovac International Corporation common stock,
$ 50 par value, authorized 18 shares; issued and
outstanding 10, 10 and 0 shares, respectively 5 5 --
Additional paid-in capital 12,000 12,000 15,970
Foreign currency translation adjustment 1,979 1,650 1,689
Note receivable officer/shareholder -- -- (500)
Retained earnings 39,103 48,002 25,143
---------- --------- ---------
53,587 62,157 42,802
Less treasury stock, at cost, 500 and 29,530 shares,
respectively -- (533) (128,522)
---------- --------- ---------
Total shareholders' equity (deficit) 53,587 61,624 (85,720)
---------- --------- ---------
Total liabilities and shareholders' equity (deficit) $ 220,590 $ 221,885 $ 245,248
========== ========= ==========
The accompanying notes are an integral part of these combined
consolidated financial statements.
F-3
RAYOVAC CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years Ended Transition
June 30, Period Ended
-------------------------------------- September 30,
1994 1995 1996 1996
------------ ------------ ------------ ------------
Net sales $ 386,176 $ 390,988 $ 399,384 $94,981
Cost of goods sold 234,870 237,126 239,343 59,242
--------- --------- --------- --------
Gross profit 151,306 153,862 160,041 35,739
--------- --------- --------- --------
Operating expenses:
Selling 103,846 84,467 92,555 20,897
General and administrative 29,356 32,861 31,767 8,628
Research and development 5,684 5,005 5,442 1,495
Recapitalization charges -- -- -- 12,326
Other special charges 1,522 -- -- 16,065
--------- --------- --------- --------
140,408 122,333 129,764 59,411
--------- --------- --------- --------
Income (loss) from operations 10,898 31,529 30,277 (23,672)
Interest expense 7,725 8,644 8,435 4,430
Other (income) expense, net (601) 230 552 76
--------- --------- --------- --------
Income (loss) before income taxes and
extraordinary item 3,774 22,655 21,290 (28,178)
Income tax expense (benefit) (582) 6,247 7,002 (8,904)
--------- --------- --------- --------
Income (loss) before extraordinary item 4,356 16,408 14,288 (19,274)
Extraordinary item, loss on early
extinguishment of debt, net of income tax
benefit of $777 -- -- -- (1,647)
--------- --------- --------- --------
Net income (loss) $4,356 $16,408 $14,288 (20,921)
========= ========= ========= ========
Net income (loss) per common share:
Income (loss) before extraordinary item $0.09 $0.33 $0.29 $(0.44)
Extraordinary item -- -- -- (0.04)
--------- --------- --------- --------
Net income (loss) $0.09 $0.33 $0.29 $(0.48)
========= ========= ========= ========
Weighted average shares of common stock
outstanding 50,000 50,000 49,500 43,820
========= ========= ========= ========
The accompanying notes are an integral part of these combined
consolidated financial statements.
F-4
RAYOVAC CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended Transition
June 30, Period Ended
----------------------------------- September 30,
1994 1995 1996 1996
----------- ----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ 4,356 $ 16,408 $ 14,288 $ (20,921)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities:
Recapitalization and other special charges -- -- -- 13,449
Extraordinary item, loss on early
extinguishment of debt -- -- -- 2,424
Amortization of debt issuance costs 101 103 53 1,609
Depreciation 10,252 11,024 11,932 3,279
Deferred income taxes (1,086) 346 3 (5,739)
Loss (gain) on disposal of fixed assets 340 110 (108) 1,289
Changes in assets and liabilities:
Accounts receivable (9,211) (2,537) (6,166) (8,940)
Inventories (18,545) 9,004 (1,779) (3,078)
Prepaid expenses and other (489) (990) 1,148 741
Accounts payable and accrued liabilities (4,426) 2,051 (1,526) (185)
Accrued recapitalization and other special
charges -- -- -- 14,942
-------- --------- --------- ---------
Net cash (used in) provided by operating
activities (18,708) 35,519 17,845 (1,130)
-------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (12,464) (16,938) (6,646) (1,248)
Proceeds from sale of property, plant and
equipment 35 139 298 1,281
Notes receivable officer/shareholder -- -- -- (500)
-------- --------- --------- ---------
Net cash used in investing activities (12,429) (16,799) (6,348) (467)
-------- --------- --------- ---------
Cash flows from financing activities:
Reduction of debt (79,844) (106,383) (104,526) (107,090)
Proceeds from debt financing 114,350 85,698 96,252 259,489
Cash overdraft (202) 3,925 2,339 (2,493)
Debt issuance costs -- -- -- (14,373)
Extinguishment of debt -- -- -- (2,424)
Distributions from DISC (3,500) (1,500) (5,187) (1,943)
Acquisition of treasury stock -- -- (533) (127,425)
Payments on capital lease obligation -- -- (295) (84)
-------- --------- --------- ---------
Net cash provided by (used in) financing
activities 30,804 (18,260) (11,950) 3,657
-------- --------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents 57 (345) (2) 5
-------- --------- --------- ---------
Net (decrease) increase in cash and cash
equivalents (276) 115 (455) 2,065
Cash and cash equivalents, beginning of period 2,806 2,530 2,645 2,190
-------- --------- --------- ---------
Cash and cash equivalents, end of period $ 2,530 $ 2,645 $ 2,190 $ 4,255
======== ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 7,692 $ 8,789 $ 7,535 $ 7,977
Cash paid for income taxes $ 4,664 $ 8,821 $ 5,877 $ 419
The accompanying notes are an integral part of these combined
consolidated financial statements.
F-5
RAYOVAC CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
Rayovac International
Corporation
Common Stock Additional -----------------------
---------------------- Paid-in Common Stock (DISC)
Shares Amount Capital Shares Amount
----------- ---------------------- ----------- -----------
Balances July 1, 1993 50,000 $500 $12,000 10 $ 5
Net income -- -- -- -- --
Distributions from DISC -- -- -- -- --
Translation adjustment -- -- -- -- --
Adjustment of additional minimum
pension liability -- -- -- -- --
------- ---- ------- ---- ----
Balances June 30, 1994 50,000 500 12,000 10 5
Net income -- -- -- -- --
Distributions from DISC -- -- -- -- --
Translation adjustment -- -- -- -- --
Adjustment of additional minimum
pension liability -- -- -- -- --
------- ---- ------- ---- ----
Balances June 30, 1995 50,000 500 12,000 10 5
Net income -- -- -- -- --
Distributions from DISC -- -- -- -- --
Translation adjustment -- -- -- -- --
Adjustment of additional minimum
pension liability -- -- -- -- --
Treasury stock acquired (500) -- -- -- --
------- ---- ------- ---- ----
Balances June 30, 1996 49,500 500 12,000 10 5
Net loss -- -- -- -- --
Common stock acquired in
Recapitalization (29,030) -- -- -- --
Exercise of stock options -- -- 3,970 -- --
Increase in cost of existing
treasury stock -- -- -- -- --
Note receivable, officer/
shareholder -- -- -- -- --
Termination of DISC -- -- -- (10) (5)
Translation adjustment -- -- -- -- --
------- ---- ------- ---- ----
Balances September 30, 1996 20,470 $500 $15,970 -- $--
======= ==== ======= ==== ====
Foreign Notes Total
Currency Receivable Shareholders'
Translation Officer/ Retained Treasury Equity
Adjustment Shareholder Earnings Stock (Deficit)
---------- ----------- -------- ----- ---------
Balances July 1, 1993 $1,415 $ -- $ 23,029 $ -- $ 36,949
Net income -- -- 4,356 -- 4,356
Distributions from DISC -- -- (3,500) -- (3,500)
Translation adjustment 140 -- -- -- 140
Adjustment of additional minimum
pension liability -- -- (23) -- (23)
------ ----- -------- --------- ---------
Balances June 30, 1994 1,555 -- 23,862 -- 37,922
Net income -- -- 16,408 -- 16,408
Distributions from DISC -- -- (1,500) -- (1,500)
Translation adjustment 424 -- -- -- 424
Adjustment of additional minimum
pension liability -- -- 333 -- 333
------ ----- -------- --------- ---------
Balances June 30, 1995 1,979 -- 39,103 -- 53,587
Net income -- -- 14,288 -- 14,288
Distributions from DISC -- -- (5,187) -- (5,187)
Translation adjustment (329) -- -- -- (329)
Adjustment of additional minimum
pension liability -- -- (202) -- (202)
Treasury stock acquired -- -- -- (533) (533)
------ ----- -------- --------- ---------
Balances June 30, 1996 1,650 -- 48,002 (533) 61,624
Net loss -- -- (20,921) -- (20,921)
Common stock acquired in
Recapitalization -- -- -- (127,425) (127,425)
Exercise of stock options -- -- -- -- 3,970
Increase in cost of existing
treasury stock -- -- -- (564) (564)
Note receivable, officer/
shareholder -- (500) -- -- (500)
Termination of DISC -- -- (1,938) -- (1,943)
Translation adjustment 39 -- -- -- 39
------ ----- -------- --------- ---------
Balances September 30, 1996 $1,689 $(500) $ 25,143 $(128,522) $ (85,720)
====== ===== ======== ========= =========
The accompanying notes are an integral part of these combined
consolidated financial statements.
F-6
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. RECAPITALIZATION
Rayovac Corporation and its wholly-owned subsidiaries (the "Company")
manufacture and market a variety of battery types including general
(alkaline, rechargeables, heavy duty, lantern and general purpose), button
cell and lithium. The Company also produces a variety of lighting devices
such as flashlights and lanterns. The Company's products are sold primarily
to retailers in the United States, Canada, Europe, and the Far East.
Effective as of September 12, 1996, the Company, all of the shareholders
of the Company, Thomas H. Lee Equity Fund III L.P. (the "Lee Fund") and other
affiliates of Thomas H. Lee Company (THL Co.) completed a recapitalization of
the Company (the "Recapitalization") pursuant to which: (i) the Company
obtained senior financing in an aggregate of $170.0 million, of which $131.0
million was borrowed at the closing of the Recapitalization; (ii) the Company
obtained $100.0 million in financing through the issuance of senior
subordinated increasing rate notes of the Company (the "Bridge Notes"); (iii)
the Company redeemed a portion of the shares of common stock held by the
former President and Chief Executive Officer of the Company; (iv) the Lee
Fund and other affiliates of THL Co. purchased for cash shares of common
stock owned by shareholders of the Company; and, (v) the Company repaid
certain of its outstanding indebtedness, including prepayment fees and
penalties. The prepayment fees and penalties paid have been recorded as an
extraordinary item in the Combined Consolidated Statements of Operations.
Other non-recurring charges of which $12.3 million related to the
Recapitalization were also expensed and included $2.2 million in advisory
fees paid to the financial advisor to the Company's selling shareholders;
various legal and consulting fees of $2.8 million; and $7.3 million of stock
option compensation, severance payments and employment contract settlements
for the benefit of certain present and former officers, directors and
management of the Company. Payment for these costs was or is expected to be
as follows: (i) $8.4 million was paid prior to September 30. 1996; and (ii)
$3.9 million is expected to be paid in fiscal year 1997.
The Company has changed its fiscal year end from June 30 to September 30.
For clarity of presentation herein, the period from July 1, 1996 to September
30, 1996 is referred to as the "Transition Period Ended September 30, 1996"
or "Transition Period".
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies of the
Company:
a. Principles of Combination and Consolidation: The combined consolidated
financial statements include the accounts of Rayovac Corporation and
its wholly-owned subsidiaries and Rayovac International Corporation, a
Domestic International Sales Corporation (DISC) which is owned by the
Company's shareholders. All intercompany transactions have been
eliminated. See also Note 6.
b. Revenue Recognition: The Company recognizes revenue from product sales
upon shipment to the customer.
c. Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
d. Cash Equivalents: The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be
cash equivalents.
e. Concentrations of Credit Risk and Major Customers: The Company's trade
receivables are subject to concentrations of credit risk as three
principal customers accounted for 21%, 26% and 24% of the outstanding
trade receivables as of June 30, 1995 and 1996 and September 30, 1996,
respectively. The Company derived 28%, 27%, 28% and 25% of its net
sales during the years ending June 30, 1994, 1995 and 1996 and the
Transition Period, respectively, from the same three customers.
F-7
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company has one customer that represented over 10% of its net
sales. The Company derived 17%, 16%, 19% and 18% of its net sales from
this customer during the years ending June 30, 1994, 1995 and 1996 and
the Transition Period, respectively.
f. Displays and Fixtures: The costs of displays and fixtures are
capitalized and recorded as a prepaid asset and charged to expense when
shipped to a customer location. Such prepaid assets amount to
approximately $1,300,000, $1,068,000 and $730,000 as of June 30, 1995
and 1996 and September 30, 1996, respectively.
g. Inventories: Inventories are stated at lower of cost (first-in,
first-out (FIFO) method) or market (net realizable value).
h. Property, Plant and Equipment: Property, plant and equipment are
recorded at cost. The Company provides for depreciation over the
estimated useful lives of plant and equipment on the straight-line
basis. Depreciable lives by major classification are as follows:
Building and improvements 20-30 years
Machinery, equipment and other 5-20 years
Maintenance and repairs are charged to operations as incurred and major
renewals and betterments are capitalized. Upon sale or retirement of
depreciable assets, the related cost and accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected
in operations.
i. Debt Issuance Costs: Debt issuance costs are capitalized and amortized
to interest expense over the lives of the debt agreements. Amortization
of debt issuance costs during the Transition Period relates principally
to the Bridge Notes.
j. Accounts Payable: Included in accounts payable at June 30, 1995 and
1996 and September 30, 1996 is approximately $5,466,000, $7,805,000 and
$5,312,000, respectively, of book overdrafts on disbursement accounts
which were replenished prior to the presentation of checks for payment.
k. Income Taxes: Deferred income tax assets and liabilities are determined
based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse.
l. Foreign Currency Translation: Assets and liabilities of the Company's
foreign subsidiaries are translated at the rate of exchange existing at
year-end, with revenues, expenses, and cash flows translated at the
average of the monthly exchange rates. Adjustments resulting from
translation of the financial statements are accumulated as a separate
component of shareholders' equity. Exchange gains (losses) on foreign
currency transactions aggregating $290,000, ($112,000), ($750,000) and
($70,000) for the years ended June 30, 1994, 1995 and 1996, and the
Transition Period, respectively, are included in other expense, net, in
the Combined Consolidated Statements of Operations.
m. Advertising Costs: The Company incurred expenses for advertising of
$34,139,000, $25,014,000, $23,466,000 and $5,191,000 in the years ended
June 30, 1994, 1995 and 1996, and the Transition Period, respectively.
The Company's policy with regard to advertising production costs is to
expense such costs as incurred.
n. Net Income Per Share: Net income (loss) per common share is computed
using the weighted average number of common shares outstanding during
the period.
o. Financial Instruments: From time to time, the Company enters into
derivative financial transactions, specifically interest rate swaps and
other contracts to reduce and manage risks associated with changes in
interest rate, foreign exchange rates and commodity prices. The Company
does not enter into derivative
F-8
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
transactions on a speculative basis. Income and expense related to
interest rate swaps is accrued as interest rates change and is
recognized in income over the life of the agreement. Under commodity
contracts, payments are made or received based upon the differential
between a specified price and the actual price of the commodity. Gains
or losses relating to the commodity contracts are recognized in cost of
sales when the commodities are consumed. Gains or losses related to
foreign exchange qualifying hedges are deferred and recognized in
income when the hedged transaction occurs. Gains or losses related to
foreign exchange contracts that do not qualify as hedges are recognized
in income currently. The carrying value of other financial investments
such as cash and cash equivalents, trade accounts receivable and
accounts payable approximate the fair value due to the relatively short
period to maturity of the instruments.
At September 30, 1996, the Company had commodity hedge contracts
outstanding with a notional value of approximately $2,850,000. The
commodity contracts relate to certain metals used in the manufacturing
process and are short-term in nature. There were no outstanding foreign
exchange contracts or interest rate swaps at September 30, 1996.
p. Environmental Expenditures: Environmental expenditures that relate to
current ongoing operations or to conditions caused by past operations
are expensed. The Company determines its liability on a site by site
basis and records a liability at the time when it is probable and can
be reasonably estimated. The estimated liability is not reduced for
possible recoveries from insurance carriers.
q. Stock Split: In September 1996, the Company's board of directors
declared a five-for-one stock split. A total of 16,376,000 additional
shares were issued in conjunction with the stock split to shareholders
of record. All applicable share and per share amounts herein have been
restated to reflect the stock split retroactively.
3. INVENTORIES
Inventories consist of the following (in thousands):
June 30, June 30, September 30,
1995 1996 1996
--------- --------- ---------------
Raw material $19,815 $17,592 $21,325
Work-in-process 20,832 26,104 19,622
Finished goods 24,893 23,245 29,174
------- ------- -------
$65,540 $66,941 $70,121
======= ======= =======
4 PROPERTY PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
June 30, June 30, September 30,
1995 1996 1996
----------- ----------- ---------------
Land, building and improvements $ 16,472 $ 15,469 $ 16,824
Machinery, equipment and other 114,341 119,619 120,125
Construction in process 4,233 5,339 6,232
-------- --------- ---------
135,046 140,427 143,181
Less accumulated depreciation 57,083 66,489 73,784
-------- --------- ---------
$ 77,963 $ 73,938 $ 69,397
======== ========= =========
F-9
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. DEBT
Debt consists of the following (in thousands):
June 30, June 30, September 30,
1995 1996 1996
--------- ----------- ---------------
Term loan facility $ -- $ -- $105,000
Bridge Notes -- -- 100,000
Revolving credit facility -- -- 23,500
Debt paid September 1996 due to Recapitalization:
Senior Secured Notes due 1997 through 2002 32,429 29,572 --
Subordinated Notes due through 2003 8,180 7,270 --
Revolving credit facility 39,500 39,250 --
Other:
Notes payable in Pounds Sterling to a foreign bank,
due on demand, with interest at bank's base rate
plus 1 87% (7 87% at September 30, 1996) 2,551 1,242 939
Capitalized lease obligation -- 1,330 1,246
Notes and obligations, with a weighted average interest
rate of 8 0% at September 30, 1996 5,633 2,685 2,978
------- ------- --------
88,293 81,349 233,663
Less current maturities 11,916 11,631 8,818
------- ---------- --------
Long-term debt $76,377 $69,718 $224,845
======= ========== ========
On September 12, 1996, the Company executed a new Credit Agreement (the
"Agreement") arranged by BA Securities, Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and certain of its affiliates for a group of financial
institutions and other accredited investors. The Agreement provides for
senior bank facilities, including term and revolving credit facilities in an
aggregate amount of $170.0 million, as described below. Interest on
borrowings is computed, at the Company's option, based on the Bank of America
National Trust and Savings Association's base rate (as defined) ("Base Rate")
or the Interbank Offering Rate ("IBOR").
The term loan facility includes: (i) Tranche A term loan of $55.0 million,
quarterly amortization ranging from $1.0 million to $3.75 million beginning
December 31, 1996 through September 30, 2002, interest at the Base Rate plus
1.5% per annum or at IBOR plus 2.5% per annum (9.75 % at September 30, 1996);
(ii) Tranche B term loan of $25.0 million, quarterly amortization amounts of
$62,500 during each of the first six years and $5.875 million in the seventh
year beginning December 31, 1996 through September 30, 2003, interest at the
Base Rate plus 2.0% per annum, or IBOR plus 3.0% per annum (10.25% at
September 30, 1996); (iii) Tranche C term loan of $25.0 million, quarterly
amortization of $62,500 during each of the first seven years and $5.8125
million during the eighth year beginning December 31, 1996 through September
30, 2004; interest at the Base Rate plus 2.25% per annum or IBOR plus 3.25%
per annum (10.50% at September 30, 1996).
The revolving credit facility provides for aggregate working capital loans
up to $65.0 million through September 30, 2002, reduced by outstanding
letters of credit ($10.0 million limit). Interest on borrowings is at the
Base Rate plus 1.5% per annum or LIBOR plus 2.5% per annum (9.75% at
September 30, 1996). The Company had outstanding letters of credit of
approximately $3.1 million at September 30, 1996.
The Agreement contains financial covenants with respect to borrowings
which include, minimum earnings before interest, income taxes, depreciation,
and amortization, fixed charge coverage and tangible net worth. In addition,
the Agreement restricts capital expenditures and the payment of dividends.
The Company is required to pay a commitment fee of 0.50% per annum on the
average daily unused portion of the revolving credit facility. Borrowings
under the Agreement are collateralized by substantially all the assets of the
Company.
The Bridge Notes bear interest at prime plus 3.5% (11.75% at September 30,
1996). The Bridge Notes were paid in full in October 1996. See also Note 16.
F-10
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. DEBT (Continued)
The aggregate scheduled maturities of debt during subsequent years are as
follows (in thousands):
Year ending September 30,
1997 $ 8,818
1998 6,970
1999 8,886
2000 10,500
2001 12,500
Thereafter 185,989
----------
$233,663
==========
The capital lease obligation is payable in Pounds Sterling in installments
of $390,000 in 1997, $470,000 in 1998 and $386,000 in 1999. For purposes of
the Combined Consolidated Statements of Cash Flows, the assets acquired under
capital lease and the obligation are considered a non-cash transaction.
The carrying values of the debt instruments noted above approximate their
estimated fair values.
6. SHAREHOLDERS' EQUITY (DEFICIT)
During the year ended June 30, 1996, the former principal shareholder of
the Company granted an officer and a director consideration options to
purchase 235,000 shares of common stock owned by the shareholder personally
at exercise prices per share ranging from $3.65 to $5.77 (the book values per
share at the respective dates of grant). These options were exercised in
conjunction with the Recapitalization and resulted in a charge to earnings of
approximately $3,970,000 during the Transition Period and an increase in
additional paid-in capital in the Combined Consolidated Statements of
Shareholders' Equity (Deficit).
Treasury stock acquired during the year ended June 30, 1996 was subject to
an agreement which provided the selling shareholder with additional
compensation for the common stock sold, if a change in control occurred
within a specified period of time. As a result of the Recapitalization, the
selling shareholder was entitled to an additional $564,000, which is
reflected as an increase in treasury stock in the Combined Consolidated
Statements of Shareholders' Equity (Deficit).
Retained earnings includes DISC retained earnings of $3,605,000 and
$1,594,000 at June 30, 1995 and 1996, respectively. In August 1996, the DISC
was terminated and the net assets were distributed to its shareholders.
7. STOCK OPTION PLAN
Effective September 1996, the Company's Board of Directors (the "Board")
approved the Rayovac Corporation Stock Option Plan (the "Plan") which is
intended to afford an incentive to select employees and directors of the
Company to promote the interests of the Company. Under the Plan, stock
options to acquire up to 3.0 million shares of common stock, in the
aggregate, may be granted under either or both a time-vesting or a
performance-vesting formula at an exercise price equal to the market price of
the common stock on the date of grant. The time-vesting options become
exercisable in equal 20% increments over a five year period. The
performance-vesting options become exercisable at the end of ten years with
accelerated vesting over each of the next five years if the Company achieves
certain performance goals.
F-11
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. STOCK OPTION PLAN (Continued)
A summary of the status of the Company's Plan is as follows:
Weighted-Average
Shares Exercise Price
------------ ----------------
Granted 1,464,339 $ 4.39
Exercised -- --
Forfeited -- --
--------- ------
Outstanding, end of period 1,464,339 $ 4.39
========= ======
The stock options outstanding on September 30, 1996 have a
weighted-average remaining contractual life estimated at eight years. The
weighted average fair value of each option issued was $1.92. The risk free
interest rate utilized to determine the fair value of the options was 6.78%.
None of these options are currently exercisable.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plan. Accordingly, no compensation cost has been
recognized in the statement of operations. Had the Company recognized
compensation expense determined based on the fair value at the grant date for
awards under the plans, consistent with the method prescribed by FASB
Statement 123, the Company's net loss and loss per share, on a pro forma
basis, for the Transition Period would have been increased to $21,035,000 and
$0.48 per share, respectively.
8. INCOME TAXES
Pretax earnings (earnings before income taxes and extraordinary item) and
income tax (benefit) expense consists of the following (in thousands):
Years Ended Transition
June 30, Period Ended
--------------------------------- September 30,
1994 1995 1996 1996
-------------------- ----------- ---------------
Pretax earnings:
United States $ 1,031 $16,505 $ 17,154 $(27,713)
Outside the United States 2,743 6,150 4,136 (2,889)
------- ------- -------- --------
Total pretax earnings $ 3,774 $22,655 $ 21,290 $(30,602)
======= ======= ========= ========
Income tax (benefit) expense:
Current:
Federal $ 230 $ 3,923 $ 5,141 $ (3,870)
Foreign 528 797 1,469 (72)
State (254) 1,181 389 --
------- ------- -------- --------
Total current 504 5,901 6,999 (3,942)
------- ------- -------- --------
Deferred:
Federal (1,342) 799 54 (3,270)
Foreign 386 (544) (57) (847)
State (130) 91 6 (1,622)
------- ------- -------- --------
Total deferred (1,086) 346 3 (5,739)
------- ------- -------- --------
$ (582) $ 6,247 $ 7,002 $(9,681)
======= ======= ========= ========
F-12
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. INCOME TAXES (Continued)
The following reconciles the Federal statutory income tax rate with the
Company's effective tax rate:
Years Ended Transition
June 30, Period Ended
----------------------------- September 30,
1994 1995 1996 1996
----------- ------- -------- ---------------
Statutory Federal income tax rate 35.0% 35.0% 35.0% 35.0%
DISC commission income (27.4) (5.9) (5.2) 0.4
Effect of foreign items and rate differentials (5.6) (4.0) 1.0 (1.2)
State income taxes, net (8.5) 3.6 1.1 3.9
Prior year taxes (11.4) -- -- --
Nondeductible recapitalization charges -- -- -- (6.2)
Other 2.5 (1.1) 1.0 (0.3)
------ ---- ---- ----
(15.4)% 27.6% 32.9% 31.6%
====== ==== ==== ====
The components of the net deferred tax asset and types of significant
basis differences were as follows (in thousands):
June 30, June 30, September 30,
1995 1996 1996
----------- ---------- ---------------
Current deferred tax assets:
Recapitalization charges $ -- $ -- $ 3,791
Inventories and receivables 1,894 1,395 1,407
Marketing and promotional accruals 906 1,498 1,252
Employee benefits 1,312 1,554 1,780
Environmental accruals 442 420 752
Other 1,114 994 976
------- ------- -------
Total current deferred tax assets $ 5,668 $ 5,861 $ 9,958
======= ======== ========
Noncurrent deferred tax assets:
Employee benefits $ 2,719 $ 3,053 $ 3,704
State net operating loss carryforwards -- -- 1,249
Package design expense 661 532 523
Promotional expense 216 784 854
Other 1,410 1,516 1,475
------- -------- --------
Total noncurrent deferred tax assets 5,006 5,885 7,805
------- -------- --------
Noncurrent deferred tax liabilities:
Property, plant, and equipment (7,395) (8,430) (8,708)
Other (5) (39) (39)
------- -------- --------
Total noncurrent deferred tax liabilities (7,400) (8,469) (8,747)
------- -------- --------
Net noncurrent deferred tax liabilities $(2,394) $(2,584) $ (942)
======= ========= ========
At September 30, 1996, the Company has operating loss carryforwards for
state income tax purposes of approximately $2.2 million, which expire
generally in years through 2011.
During 1995, the Company used approximately $3,200,000 of foreign net
operating loss carryforwards for which a deferred tax asset had not been
recognized in prior years due to uncertainty regarding future earnings of the
subsidiaries to which the carryforwards related. As a result, the Company
reversed the valuation allowance of $1,240,000 recorded at June 30, 1994 in
1995.
Provision has not been made for United States income taxes on a portion of
the undistributed earnings of the Company's foreign subsidiaries
(approximately $2,563,000, $4,342,000 and $4,216,000 at June 30, 1995 and
1996,
F-13
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. INCOME TAXES (Continued)
and September 30, 1996, respectively), either because any taxes on dividends
would be offset substantially by foreign tax credits or because the Company
intends to reinvest those earnings. Such earnings would become taxable upon
the sale or liquidation of these foreign subsidiaries or upon remittance of
dividends. It is not practicable to estimate the amount of the deferred tax
liability on such earnings.
9. LEASES
Future minimum rental commitments under noncancelable operating leases,
principally pertaining to land, buildings and equipment, are as follows (in
thousands):
Year ending September 30:
1997 $ 7,140
1998 6,088
1999 5,293
2000 4,613
2001 4,311
Thereafter 11,706
---------
$39,151
=========
The above lease commitments include payments under leases for the
corporate headquarters facilities and other properties from partnerships in
which one of the Company's shareholders is a partner. Annual minimum rental
commitments on the headquarters facility of $3,042,000 are subject to an
adjustment based upon changes in the Consumer Price Index. The leases on the
other properties require annual lease payments of $451,000 subject to annual
3% increases. All of the leases expire during the years 2003 through 2021.
Total rental expense was $8,006,000, $8,189,000, $8,213,000 and $1,995,000
for the years ended June 30, 1994, 1995, and 1996 and the Transition Period,
respectively.
10. POSTRETIREMENT PENSION BENEFITS
The Company has various defined benefit pension plans covering
substantially all of its domestic employees. Plans covering salaried
employees provide pension benefits that are based on the employee's average
compensation for the five years which yield the highest average during the 10
consecutive years prior to retirement. Plans covering hourly employees and
union members generally provide benefits of stated amounts for each year of
service.
The Company's policy is to fund pension costs at amounts within the
acceptable ranges established by the Employee Retirement Income Security Act
of 1974.
The Company also has nonqualified deferred compensation agreements with
certain of its employees under which the Company has agreed to pay certain
amounts annually for the first 15 years subsequent to retirement or to a
designated beneficiary upon death. It is management's intent that life
insurance contracts owned by the Company will fund these agreements.
Net periodic pension cost for the aforementioned plans is summarized as
follows (in thousands):
Years Ended Transition
June 30, Period Ended
------------------------------- September 30,
1994 1995 1996 1996
--------- --------- --------- ---------------
Service cost $ 1,576 $ 1,711 $ 1,501 $ 2,149
Interest cost 3,069 3,390 3,513 944
Actual return on plan assets (2,377) (2,054) (7,880) (605)
Net amortization and deferral (181) (708) 4,994 (166)
------- ------- ------- -------
Net periodic pension cost $ 2,087 $ 2,339 $ 2,128 $ 2,322
======== ======= ======== =======
F-14
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. POSTRETIREMENT PENSION BENEFITS (Continued)
The following tables set forth the plans' funded status (in thousands):
June 30, 1995
--------------------------------
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
--------------- ----------------
Actuarial present value of benefit obligations:
Vested benefit obligation $ 19,860 $ 18,844
======== ========
Accumulated benefit obligation $ 20,292 $ 19,636
======== ========
Projected benefit obligation $ 25,209 $ 19,636
Plan assets at fair value, primarily listed stocks, bonds and
cash equivalents 25,358 10,196
-------- --------
Projected benefit obligation (less than) in excess of plan assets (149) 9,440
Unrecognized net loss 684 1,384
Unrecognized net obligation (asset) 589 (5,245)
Additional minimum liability -- 3,866
-------- --------
Pension liability $ 1,124 $ 9,445
======== ========
June 30, 1996
--------------------------------
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
--------------- ----------------
Actuarial present value of benefit obligations:
Vested benefit obligation $ 24,927 $ 19,138
======== =========
Accumulated benefit obligation $ 25,576 $ 19,932
======== =========
Projected benefit obligation $ 31,462 $ 19,932
Plan assets at fair value, primarily listed stocks, bonds and
cash equivalents 32,297 9,349
-------- ---------
Projected benefit obligation (less than) in excess of plan assets (835) 10,583
Unrecognized net loss 2,341 893
Unrecognized net obligation (asset) 211 (4,711)
Additional minimum liability -- 3,823
-------- ---------
Pension liability $ 1,717 $ 10,588
======== =========
F-15
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. POSTRETIREMENT PENSION BENEFITS (Continued)
September 30, 1996
--------------------------------
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
--------------- ----------------
Actuarial present value of benefit obligations:
Vested benefit obligation $ 25,273 $19,495
======== ========
Accumulated benefit obligation $ 25,930 $20,305
======== ========
Projected benefit obligation $ 31,910 $20,305
Plan assets at fair value, primarily listed stocks, bonds
and cash equivalents 32,341 9,364
-------- --------
Projected benefit obligation (less than) in excess of plan assets (431) 10,941
Unrecognized net loss 2,147 832
Unrecognized net obligation (asset) 208 (2,894)
Additional minimum liability -- 2,067
Contribution (86) (756)
-------- --------
Pension liability $ 1,838 $10,190
======== ========
Assumptions used in the aforementioned actuarial valuations were:
Years Ended Transition
June 30, Period Ended
------------------------------- September 30,
1994 1995 1996 1996
--------- --------- --------- -----------------
Discount rate used for funded status calculation 7.5% 8.0% 7.5% 7.5%
Discount rate used for net periodic pension cost
calculations 7.5% 7.5% 8.0% 7.5%
Rate of increase in compensation levels
(salaried plan only) 5.5% 5.5% 5.0% 5.0%
Expected long-term rate of return on assets 9.0% 9.0% 9.0% 9.0%
The Company has recorded an additional minimum pension liability of
$3,866,000, $3,823,000 and $2,067,000 at June 30, 1995 and 1996, and
September 30, 1996, respectively, to recognize the underfunded position of
certain of its benefits plans. An intangible asset of $3,827,000, $3,582,000
and $1,826,000 at June 30, 1995 and 1996, and September 30, 1996,
respectively, equal to the unrecognized prior service cost of these plans,
has also been recorded. The excess of the additional minimum liability over
the unrecognized prior service cost of $39,000 at June 30, 1995 and $241,000
at June 30 and September 30, 1996, has been recorded as a reduction of
shareholders' equity.
The Company sponsors a defined contribution pension plan for its domestic
salaried employees which allows participants to make contributions by salary
reduction pursuant to Section 401(k) of the Internal Revenue Code. The
Company contributes annually 1% of participants' compensation, and may make
additional discretionary contributions. The Company also sponsors defined
contribution pension plans for employees of certain foreign subsidiaries.
Company contributions charged to operations, including discretionary amounts,
for the years ended June 30, 1994, 1995 and 1996, and the Transition Period
were $827,000, $1,273,000, $1,000,000 and $181,000, respectively.
F-16
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care and life insurance benefits to
eligible retired employees. Participants earn retiree health care benefits
after reaching age 45 over the next 10 succeeding years of service and remain
eligible until reaching age 65. The plan is contributory; retiree
contributions have been established as a flat dollar amount with contribution
rates expected to increase at the active medical trend rate. The plan is
unfunded. The Company is amortizing the transition obligation over a 20-year
period.
The following sets forth the plan's funded status reconciled with amounts
reported in the Company's combined consolidated balance sheet (in thousands):
June 30, June 30, September 30,
1995 1996 1996
--------- --------- ---------------
Accumulated postretirement benefit obligation (APBO):
Retirees $ 444 $ 723 $ 687
Fully eligible active participants 489 805 820
Other active participants 495 896 970
------ ------- -------
Total APBO 1,428 2,424 2,477
Unrecognized net loss (287) (1,269) (1,246)
Unrecognized transition obligation (681) (641) (631)
------ ------- -------
Accrued postretirement benefit liability $ 460 $ 514 $ 600
====== ======= =======
Net periodic postretirement benefit cost includes the following components
(in thousands):
Years Ended Transition
June 30, Period Ended
--------------------- September 30,
1994 1995 1996 1996
------ ------ ------ ---------------
Service cost $102 $110 $129 $ 58
Interest 79 85 111 44
Net amortization and deferral 40 40 54 35
---- ---- ---- ----
Net periodic postretirement benefit cost $221 $235 $294 $137
==== ==== ==== ====
A 9.5% annual rate of increase in the per capita costs of covered health
care benefits was assumed for fiscal 1996, gradually decreasing to 5.5% by
fiscal 2025. Increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of June 30, 1995 and 1996, and September 30, 1996 by
$78,000, $144,000 and $147,000 respectively, and increase the aggregate of
the service cost and interest cost components of net periodic postretirement
benefit cost for the year ended June 30, 1994, 1995 and 1996, and the
Transition Period by $16,000, $13,000, $12,000 and $3,000, respectively. A
discount rate of 7.5% was used to determine the accumulated postretirement
benefit obligation.
F-17
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
12. BUSINESS SEGMENT AND INTERNATIONAL OPERATIONS
Information about the Company's operations in different geographic areas
is summarized as follows (in thousands):
Years Ended Transition
June 30, Period Ended
------------------------------------- September 30,
1994 1995 1996 1996
------------ ------------ ------------ ---------------
Net sales to unaffiliated customers:
United States $320,933 $ 315,579 $ 321,866 $ 76,434
Foreign:
Western Europe 51,270 59,560 61,336 14,527
Other 13,973 15,849 16,182 4,020
-------- --------- --------- --------
Total $386,176 $ 390,988 $ 399,384 $ 94,981
======== ========= ========= ========
Transfers between geographic areas:
United States $ 23,393 $ 26,928 $ 27,097 $ 7,431
Foreign:
Western Europe 1,722 1,637 730 422
Other 54 49 -- --
-------- --------- --------- --------
Total $ 25,169 $ 28,614 $ 27,827 $ 7,853
======== ========= ========= ========
Net sales:
United States $344,326 $342,507 $348,963 $ 83,865
Foreign:
Western Europe 52,992 61,197 62,066 14,949
Other 14,027 15,898 16,182 4,020
Eliminations (25,169) (28,614) (27,827) (7,853)
-------- --------- --------- --------
Total $386,176 $390,988 $399,384 $ 94,981
======== ========= ========= ========
Income from operations:
United States $ 7,709 $ 24,335 $ 24,759 $(20,983)
Foreign:
Western Europe 2,851 5,410 5,002 (2,539)
Other 338 1,784 516 (150)
-------- --------- --------- --------
Total $ 10,898 $ 31,529 $ 30,277 $(23,672)
======== ========= ========= ========
Total assets:
United States $199,840 $189,557 $193,198 $215,287
Foreign:
Western Europe 30,174 34,345 33,719 35,065
Other 12,032 16,093 17,532 18,782
Eliminations (19,610) (19,405) (22,564) (23,886)
-------- --------- --------- --------
Total $222,436 $220,590 $221,885 $245,248
======== ========= ========= ========
13. COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements to purchase certain equipment and
to pay annual royalties. In a December 1991 agreement, the Company committed
to pay annual royalties of $1,500,000 for the first five years, beginning in
1993, plus $500,000 for each year thereafter, as long as the related
equipment patents are enforceable (2012). In a March 1994 agreement, the
Company committed to pay annual royalties of $500,000 for five years
beginning in 1995.
F-18
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. COMMITMENTS AND CONTINGENCIES (Continued)
The estimated fair value of these commitments, based on current rates
offered to the Company for debt with the same remaining maturities, is
$8,498,000 at September 30, 1996. Additionally, the Company has committed to
purchase tooling of $1,466,000 related to this equipment at an unspecified
date in the future and purchase manganese ore amounting to $560,000 by March
1998.
The Company has provided for the estimated costs associated with
environmental remediation activities at some of its current and former
manufacturing sites. In addition, the Company, together with other parties,
has been designated a potentially responsible party of various third-party
sites on the United States EPA National Priorities List (Superfund). The
Company provides for the estimated costs of investigation and remediation of
these sites when 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 $2.1 million, 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 result in a loss in excess of amounts recorded of $750,000 at
September 30, 1996.
14. RELATED PARTY TRANSACTIONS
The Company and THL Co. are parties to a Management Agreement pursuant to
which the Company has engaged THL Co. to provide consulting and management
advisory services for an initial period of five years through September 12,
2001. Under the Management Agreement and in connection with the closing of
the Recapitalization, the Company paid THL Co. and an affiliate $3.25
million. In consideration of ongoing consulting and management advisory
services, the Company will pay THL Co. an aggregate annual fee of $360,000
plus expenses.
The Company and 9.9% shareholder of the Company (the principal shareholder
prior to the Recapitalization) are parties to a Consulting Agreement which
includes noncompetition provisions. Terms of the agreement require the
shareholder to provide consulting services for an annual fee of $200,000 plus
expenses. The term of this agreement runs concurrent with the Management
Agreement, subject to certain conditions as defined in the agreement.
The Company has a note receivable from an officer/shareholder in the
amount of $500,000, generally payable in five years, which bears interest at
7%. Since the officer/shareholder utilized the proceeds of the note to
purchase common stock of the Company, the note has been recorded as a
reduction of shareholders' equity.
15. OTHER SPECIAL CHARGES
During the Transition Period, the Company recorded special charges as
follows: (i) $2.7 million of charges related to the exit of certain
manufacturing operations, (ii) $1.7 million of charges to increase net
deferred compensation plan obligations to reflect curtailment of such plans;
(iii) $1.5 million of charges reflecting the present value of lease payments
for land which management has determined will not be used for any future
productive purpose; (iv) $6.9 million in costs and asset write-downs
principally related to changes in product pricing strategies adopted by
management subsequent to the Recapitalization; and (v) $3.3 million of
employee termination benefits and other charges. Payment for these costs was
or is expected to be as follows: $5.0 million was paid prior to September 30,
1996; $8.8 million is expected to be paid in fiscal 1997; and $2.3 million
thereafter.
In 1994, the Company recorded a pre-tax charge of approximately $1.5
million related to a plan to reduce the Company's cost structure and to
improve productivity through an approximate 2.5% reduction in headcount on
worldwide basis. This charge included severance costs, out-placement service,
and other employee benefits, the majority of which was completed during 1995.
F-19
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. SUBSEQUENT EVENTS
Subsequent to September 30, 1996, the Company recorded a pre-tax charge of
approximately $2.7 million related to a reduction of employees. The charge
included severance, out-placement services and other employee benefits.
On October 22, 1996, the Company paid the Bridge Notes described in Note 5
utilizing the proceeds from a private debt offering of Senior Subordinated
Notes (the "Notes"). The Company intends to offer to exchange the Notes for
notes registered with the Securities and Exchange Commission (the "New
Notes"). Upon completion of the Exchange Offer, terms of the New Notes will
be identical in all material respects to terms of the Notes. On or after
November 1, 2001 or in certain circumstances, after a public offering of
equity securities of the Company, the Notes will be redeemable at the option
of the Company, in whole or in part, at prescribed redemption prices plus
accrued and unpaid interest. The terms of the Notes restrict or limit the
ability of the Company and its subsidiaries to, among other things, (i) pay
dividends or make other restricted payments, (ii) incur additional
indebtedness and issue preferred stock, (iii) create liens, (iv) incur
dividend and other payment restrictions affecting subsidiaries, (v) enter
into mergers, consolidations or sales of all or substantially all of the
assets of the Company, (vi) make asset sales, (vii) enter into transactions
with affiliates, and (viii) issue or sell capital stock of wholly owned
subsidiaries of the Company. Payment obligations under the Notes will be
fully and unconditionally guaranteed on a joint and several basis by the
Company's directly and wholly-owned subsidiary, ROV Holding, Inc. (ROV or
Guarantor Subsidiary). The foreign subsidiaries of the Company, which will
not guarantee the payment obligations under the Notes (Nonguarantor
Subsidiaries), are directly and wholly-owned by ROV.
The following condensed combined consolidating financial data illustrates
the composition of the combined consolidated financial statements.
Investments in subsidiaries are accounted for by the Company on an
unconsolidated basis (the Company and the DISC) and the Guarantor Subsidiary
using the equity method for purposes of the consolidating presentation.
Earnings of subsidiaries are therefore reflected in the Company's and
Guarantor Subsidiary's investment accounts and earnings. The principal
elimination entries eliminate investments in subsidiaries and intercompany
balances and transactions. Separate financial statements of the Guarantor
Subsidiary are not presented because management has determined that such
financial statements would not be material to investors.
F-20
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. SUBSEQUENT EVENTS (Continued)
CONDENSED COMBINED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1996
(in thousands)
Parent Guarantor Nonguarantor Combined
and DISC Subsidiary Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,983 $ 57 $ 1,215 $ -- $ 4,255
Receivables:
Trade accounts receivable, net 45,614 -- 16,706 -- 62,320
Other 15,128 162 95 (11,229) 4,156
Inventories 57,615 -- 13,303 (797) 70,121
Deferred income taxes 8,688 1,026 244 -- 9,958
Prepaid expenses and other 3,457 -- 1,407 -- 4,864
--------- --------- --------- --------- ---------
Total current assets 133,485 1,245 32,970 (12,026) 155,674
Property, plant and equipment, net 62,252 -- 7,145 -- 69,397
Deferred charges and other 6,815 -- 598 -- 7,413
Debt issuance costs 12,764 -- -- -- 12,764
Investment in subsidiaries 12,056 12,098 -- (24,154) --
--------- --------- --------- --------- ---------
Total assets $ 227,372 13,343 $ 40,713 $ (36,180) $ 245,248
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term
debt $ 4,500 $ -- $ 4,318 $ -- $ 8,818
Accounts payable 40,830 597 16,505 (11,011) 46,921
Accrued liabilities:
Wages and benefits 4,759 -- 1,135 -- 5,894
Other 12,915 484 2,505 -- 15,904
Recapitalization and other special
charges 11,645 -- 3,297 -- 14,942
--------- --------- --------- --------- ---------
Total current liabilities 74,649 1,081 27,760 (11,011) 92,479
Long-term debt, net of current
maturities 223,990 -- 855 -- 224,845
Employee benefit obligations, net of
current portion 12,138 -- -- -- 12,138
Deferred income taxes 736 206 -- -- 942
Other 564 -- -- -- 564
Shareholders' equity (deficit):
Common stock 500 -- 12,072 (12,072) 500
Additional paid-in capital 15,970 3,525 750 (4,275) 15,970
Foreign currency translation
adjustment 1,689 1,689 1,689 (3,378) 1,689
Note receivable officer/shareholder (500) -- -- -- (500)
Retained earnings 26,158 6,842 (2,413) (5,444) 25,143
--------- --------- --------- --------- ---------
43,817 12,056 12,098 (25,169) 42,802
Less treasury stock (128,522) -- -- -- (128,522)
--------- --------- --------- --------- ---------
Total shareholders' equity (deficit) (84,705) 12,056 12,098 (25,169) (85,720)
--------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity (deficit) $ 227,372 $ 13,3432 $ 40,713 $ (36,180) $ 245,248
========= ========= ========= ========= =========
F-21
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. SUBSEQUENT EVENTS (Continued)
CONDENSED COMBINED CONSOLIDATING STATEMENT OF OPERATIONS
TRANSITION PERIOD ENDED SEPTEMBER 30, 1996
(in thousands)
Parent Guarantor Nonguarantor Combined
and DISC Subsidiary Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net sales $ 83,865 $ -- $ 18,970 $ (7,854) $ 94,981
Cost of goods sold 53,480 -- 13,470 (7,708) 59,242
-------- -------- -------- -------- --------
Gross profit 30,385 -- 5,500 (146) 35,739
-------- -------- -------- -------- --------
Operating expenses:
Selling 17,644 -- 3,253 -- 20,897
General and administrative 6,508 2 2,109 9 8,628
Research and development 1,495 -- -- -- 1,495
Recapitalization charges 12,326 -- -- -- 12,326
Other special charges 12,768 -- 3,297 -- 16,065
-------- -------- -------- -------- --------
50,741 2 8,659 9 59,411
-------- -------- -------- -------- --------
Loss from operations (20,356) (2) (3,159) (155) (23,672)
Interest expense 4,320 -- 110 -- 4,430
Equity in loss of subsidiary 2,508 2,611 -- (5,119) --
Other (income) expense, net (170) (162) 408 -- 76
-------- -------- -------- -------- --------
Loss before income taxes and
extraordinary item (27,014) (2,451) (3,677) 4,964 (28,178)
Income tax (benefit) expense (7,895) 57 (1,066) -- (8,904)
-------- -------- -------- -------- --------
Loss before extraordinary item (19,119) (2,508) (2,611) 4,964 (19,274)
Extraordinary item, loss on early
extinguishment of debt, net of
income tax benefit of $777 (1,647) -- -- -- (1,647)
-------- -------- -------- -------- --------
Net loss $(20,766) $ (2,508) $ (2,611) $ 4,964 $(20,921)
======== ======== ======== ======== ========
F-22
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. SUBSEQUENT EVENTS (Continued)
CONDENSED COMBINED CONSOLIDATING STATEMENT OF CASH FLOWS
TRANSITION PERIOD ENDED SEPTEMBER 30, 1996
(in thousands)
Parent Guarantor Nonguarantor Combined
and DISC Subsidiary Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities $ (2,078) $ 16 $ 932 $ -- $ (1,130)
Cash flows from investing
activities:
Purchases of property, plant
and equipment (912) -- (336) -- (1,248)
Proceeds from sale of property,
plant and equipment 1,281 -- -- -- 1,281
Notes receivable
officer/shareholder (500) -- -- -- (500)
--------- --------- --------- --------- --------
Net cash provided by (used in)
investing activities (131) -- (336) -- (467)
--------- --------- --------- --------- --------
Cash flows from financing
activities:
Reduction of debt (104,138) -- (2,952) -- (107,090)
Proceeds from debt financing 256,500 -- 2,989 -- 259,489
Cash overdraft (2,493) -- -- -- (2,493)
Debt issuance costs (14,373) -- -- -- (14,373)
Extinguishment of debt (2,424) -- -- -- (2,424)
Distributions from DISC (1,943) -- -- -- (1,943)
Acquisition of treasury stock (127,425) -- -- -- (127,425)
Payments on capital lease
obligation -- -- (84) -- (84)
--------- --------- --------- --------- --------
Net cash provided by (used in)
financing activities 3,704 -- (47) -- 3,657
--------- --------- --------- --------- --------
Effect of exchange rate changes on
cash and cash equivalents -- -- 5 -- 5
--------- --------- --------- --------- --------
Net increase (decrease) in cash
and cash equivalents 1,495 16 554 -- 2,065
Cash and cash equivalents, beginning
of period 1,488 41 661 -- 2,190
--------- --------- --------- --------- --------
Cash and cash equivalents, end of
period $ 2,983 $ 57 $ 1,215 $ -- $ 4,255
========= ========= ========= ========= ========
F-23
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. SUBSEQUENT EVENTS (Continued)
CONDENSED COMBINED CONSOLIDATING BALANCE SHEET
JUNE 30, 1996
(in thousands)
Parent Guarantor Nonguarantor Combined
and DISC Subsidiary Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,488 $ 41 $ 661 $ -- $ 2,190
Receivables:
Trade accounts receivable, net 40,138 -- 15,692 -- 55,830
Other 11,434 318 780 (10,210) 2,322
Inventories 54,486 -- 12,951 (496) 66,941
Deferred income taxes 5,439 179 243 -- 5,861
Prepaid expenses and other 3,415 -- 1,560 -- 4,975
--------- --------- --------- --------- ---------
Total current assets 116,400 538 31,887 (10,706) 138,119
Property, plant and equipment, net 66,504 -- 7,434 -- 73,938
Deferred charges and other 9,047 -- 608 -- 9,655
Debt issuance costs 173 -- -- -- 173
Investment in subsidiaries 14,524 14,670 -- (29,194) --
--------- --------- --------- --------- ---------
Total assets $ 206,648 $ 15,208 $ 39,929 $ (39,900) $ 221,885
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term
debt $ 7,350 $ -- $ 4,281 $ -- $ 11,631
Accounts payable 32,906 492 15,145 (9,848) 38,695
Accrued liabilities:
Wages and benefits 5,077 -- 1,049 -- 6,126
Other 15,375 (14) 3,843 -- 19,204
--------- --------- --------- --------- ---------
Total current liabilities 60,708 478 24,318 (9,848) 75,656
Long-term debt, net of current
maturities 68,777 -- 941 -- 69,718
Employee benefit obligations, net of
current portion 12,141 -- -- -- 12,141
Deferred income taxes 2,378 206 -- -- 2,584
Other 162 -- -- -- 162
Shareholders' equity (deficit):
Common stock 500 -- 12,072 (12,072) 500
Rayovac International Corporation
common stock 5 -- -- -- 5
Additional paid-in capital 12,000 3,525 750 (4,275) 12,000
Foreign currency translation
adjustment 1,650 1,650 1,650 (3,300) 1,650
Retained earnings 48,860 9,349 198 (10,405) 48,002
--------- --------- --------- --------- ---------
63,015 14,524 14,670 (30,052) 62,157
Less treasury stock, at cost (533) -- -- -- (533)
--------- --------- --------- --------- ---------
Total shareholders' equity
(deficit) 62,482 14,524 14,670 (30,052) 61,624
--------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity (deficit) $ 206,648 $ 15,208 $ 39,929 $ (39,900) $ 221,885
========= ========= ========= ========= =========
F-24
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. SUBSEQUENT EVENTS (Continued)
CONDENSED COMBINED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996
(in thousands)
Parent Guarantor Nonguarantor Combined
and DISC Subsidiary Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net sales $ 348,964 $ -- $ 78,247 $ (27,827) $ 399,384
Cost of goods sold 213,349 -- 53,846 (27,852) 239,343
--------- --------- --------- --------- ---------
Gross profit 135,615 -- 24,401 25 160,041
--------- --------- --------- --------- ---------
Operating expenses:
Selling 79,385 -- 13,170 -- 92,555
General and administrative 25,967 12 5,775 13 31,767
Research and development 5,442 -- -- -- 5,442
--------- --------- --------- --------- ---------
110,794 12 18,945 13 129,764
--------- --------- --------- --------- ---------
Income (loss) from operations 24,821 (12) 5,456 12 30,277
Interest expense 7,731 -- 704 -- 8,435
Equity in income of subsidiary (2,507) (2,167) -- 4,674 --
Other (income) expense, net (51) (570) 1,173 -- 552
--------- --------- --------- --------- ---------
Income before income taxes 19,648 2,725 3,579 (4,662) 21,290
Income tax expense 5,372 218 1,412 -- 7,002
--------- --------- --------- --------- ---------
Net income $ 14,276 $ 2,507 $ 2,167 $ (4,662) $ 14,288
========= ========= ========= ========= =========
F-25
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. SUBSEQUENT EVENTS (Continued)
CONDENSED COMBINED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1996
(in thousands)
Parent Guarantor Nonguarantor Combined
and DISC Subsidiary Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities $ 14,449 $ (292) $ 3,688 $-- $ 17,845
Cash flows from investing
activities:
Purchases of property, plant
and equipment (6,558) -- (88) -- (6,646)
Proceeds from sale of property,
plant and equipment 298 -- -- -- 298
--------- --------- --------- --- ---------
Net cash provided by (used in)
investing activities (6,260) -- (88) -- (6,348)
--------- --------- --------- --- ---------
Cash flows from financing
activities:
Reduction of debt (97,627) -- (6,899) -- (104,526)
Proceeds from debt financing 93,600 -- 2,652 -- 96,252
Cash overdraft 2,339 -- -- -- 2,339
Distributions from DISC (5,187) -- -- -- (5,187)
Intercompany dividends -- 130 (130) -- --
Acquisition of treasury stock (533) -- -- -- (533)
Payments on capital lease
obligation -- -- (295) -- (295)
--------- --------- --------- --- ---------
Net cash provided by (used in)
financing activities (7,408) 130 (4,672) -- (11,950)
--------- --------- --------- --- ---------
Effect of exchange rate changes on
cash and cash equivalents -- -- (2) -- (2)
--------- --------- --------- --- ---------
Net increase (decrease) in cash
and cash equivalents 781 (162) (1,074) -- (455)
Cash and cash equivalents, beginning
of year 707 203 1,735 -- 2,645
--------- --------- --------- --- ---------
Cash and cash equivalents, end of
year $ 1,488 $ 41 $ 661 $-- $ 2,190
========= ========= ========= === =========
F-26
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. SUBSEQUENT EVENTS (Continued)
CONDENSED COMBINED CONSOLIDATING BALANCE SHEET
JUNE 30, 1995
(in thousands)
Parent Guarantor Nonguarantor Combined
and DISC Subsidiary Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 707 $ 203 $ 1,735 $ -- $ 2,645
Receivables:
Trade accounts receivable, net 37,698 -- 13,189 -- 50,887
Other 8,312 119 254 (6,874) 1,811
Inventories 52,076 -- 14,136 (672) 65,540
Deferred income taxes 5,509 -- 159 -- 5,668
Prepaid expenses and other 3,936 -- 1,715 -- 5,651
-------- -------- -------- -------- --------
Total current assets 108,238 322 31,188 (7,546) 132,202
Property, plant and equipment, net 70,480 -- 7,483 -- 77,963
Deferred charges and other 9,609 -- 661 -- 10,270
Debt issuance costs 155 -- -- -- 155
Investment in subsidiaries 12,346 12,961 -- (25,307) --
-------- -------- -------- -------- --------
Total assets $200,828 $ 13,283 $ 39,332 $(32,853) $220,590
======== ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term
debt $ 3,777 $ -- $ 8,139 $ -- $ 11,916
Accounts payable 33,419 222 12,207 (6,677) 39,171
Accrued liabilities:
Wages and benefits 8,514 -- 858 -- 9,372
Other 11,055 715 4,091 -- 15,861
-------- -------- -------- -------- --------
Total current liabilities 56,765 937 25,295 (6,677) 76,320
Long-term debt, net of current
maturities 76,377 -- -- -- 76,377
Employee benefit obligations, net of
current portion 10,836 -- 118 -- 10,954
Deferred income taxes 2,394 -- -- -- 2,394
Other -- -- 958 -- 958
Shareholders' equity (deficit):
Common stock 500 -- 12,072 (12,072) 500
Rayovac International Corporation
common stock 5 -- -- -- 5
Additional paid-in capital 12,000 3,525 750 (4,275) 12,000
Foreign currency translation
adjustment 1,979 1,979 1,979 (3,958) 1,979
Retained earnings 39,972 6,842 (1,840) (5,871) 39,103
-------- -------- -------- -------- --------
Total shareholders' equity
(deficit) 54,456 12,346 12,961 (26,176) 53,587
-------- -------- -------- -------- --------
Total liabilities and
shareholders' equity (deficit) $200,828 $ 13,283 $ 39,332 $(32,853) $220,590
======== ======== ======== ======== ========
F-27
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. SUBSEQUENT EVENTS (Continued)
CONDENSED COMBINED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1995
(in thousands)
Parent Guarantor Nonguarantor Combined
and DISC Subsidiary Subsidiaries Eliminations Consolidated
------------ ------------- --------------- --------------- ---------------
Net sales $ 342,507 $ -- $ 77,095 $ (28,614) $ 390,988
Cost of goods sold 214,119 -- 51,781 (28,774) 237,126
--------- --------- --------- --------- ---------
Gross profit 128,388 -- 25,314 160 153,862
--------- --------- --------- --------- ---------
Operating expenses:
Selling 71,626 -- 12,841 -- 84,467
General and administrative 27,556 (651) 5,872 84 32,861
Research and development 5,005 -- -- -- 5,005
--------- --------- --------- --------- ---------
104,187 (651) 18,713 84 122,333
--------- --------- --------- --------- ---------
Income from operations 24,201 651 6,601 76 31,529
Interest expense 7,889 -- 755 -- 8,644
Equity in income of subsidiary (5,520) (4,928) -- 10,448 --
Other (income) expense, net (116) (319) 665 -- 230
--------- --------- --------- --------- ---------
Income before income taxes 21,948 5,898 5,181 (10,372) 22,655
Income tax expense 5,616 378 253 -- 6,247
--------- --------- --------- --------- ---------
Net income $ 16,332 $ 5,520 $ 4,928 $ (10,372) $ 16,408
========= ========= ========= ========= =========
F-28
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. SUBSEQUENT EVENTS (Continued)
CONDENSED COMBINED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1995
(in thousands)
Parent Guarantor Nonguarantor Combined
and DISC Subsidiary Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities $ 32,394 $ (3,823) $ 3,737 $ 3,211 $ 35,519
Cash flows from investing activities:
Purchases of property, plant and
equipment (14,288) -- (2,650) -- (16,938)
Proceeds from sale of property, plant
and equipment 139 -- -- -- 139
--------- --------- --------- --------- ---------
Net cash used in investing activities (14,149) -- (2,650) -- (16,799)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Reduction of debt (100,536) -- (5,847) -- (106,383)
Proceeds from debt financing 79,749 -- 5,223 726 85,698
Cash overdraft 3,925 -- -- -- 3,925
Distributions from DISC (1,500) -- -- -- (1,500)
Intercompany dividends -- 3,899 (3,899) -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities (18,362) 3,899 (4,523) 726 (18,260)
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash
and cash equivalents -- -- 3,592 (3,937) (345)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents (117) 76 156 -- 115
--------- --------- --------- --------- ---------
Cash and cash equivalents, beginning
of year 824 127 1,579 -- 2,530
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of year $ 707 $ 203 $ 1,735 $ -- $ 2,645
========= ========= ========= ========= =========
F-29
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. SUBSEQUENT EVENTS (Continued)
CONDENSED COMBINED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1994
(in thousands)
Parent Guarantor Nonguarantor Combined
and DISC Subsidiary Subsidiaries Eliminations Consolidated
------------ ------------- --------------- --------------- ---------------
Net sales $ 344,325 $ -- $ 67,020 $ (25,169) $ 386,176
Cost of goods sold 213,551 -- 46,756 (25,437) 234,870
--------- --------- --------- --------- ---------
Gross profit 130,774 -- 20,264 268 151,306
--------- --------- --------- --------- ---------
Operating expenses:
Selling 92,317 -- 11,529 -- 103,846
General and administrative 24,482 7 4,841 26 29,356
Research and development 5,684 -- -- -- 5,684
Other special charges 1,522 -- -- -- 1,522
--------- --------- --------- --------- ---------
124,005 7 16,370 26 140,408
--------- --------- --------- --------- ---------
Income (loss) from operations 6,769 (7) 3,894 242 10,898
Interest expense 7,072 -- 653 -- 7,725
Equity in income of subsidiary (1,998) (2,251) -- 4,249 --
Other (income) expense, net (1,081) 407 73 -- (601)
--------- --------- --------- --------- ---------
Income before income taxes 2,776 1,837 3,168 (4,007) 3,774
Income tax (benefit) expense (1,338) (161) 917 -- (582)
--------- --------- --------- --------- ---------
Net income $ 4,114 $ 1,998 $ 2,251 $ (4,007) $ 4,356
========= ========= ========= ========= =========
F-30
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. SUBSEQUENT EVENTS (Continued)
CONDENSED COMBINED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1994
(in thousands)
Parent Guarantor Nonguarantor Combined
and DISC Subsidiary Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
operating activities $ (17,709) $ (747) $ (979) $ 727 $ (18,708)
Cash flows from investing activities:
Purchases of property, plant
and equipment (11,475) -- (989) -- (12,464)
Proceeds from sale of property, plant
and equipment 35 -- -- -- 35
--------- --------- --------- --------- ---------
Net cash used in investing activities (11,440) -- (989) -- (12,429)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Reduction of debt (77,751) -- (2,093) -- (79,844)
Proceeds from debt financing 110,775 -- 4,300 (725) 114,350
Cash overdraft (202) -- -- -- (202)
Distributions from DISC (3,500) -- -- -- (3,500)
Intercompany dividends -- 150 (150) -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) financial
activities 29,322 150 2,057 (725) 30,804
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash
and cash equivalents -- -- 59 (2) 57
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 173 (597) 148 -- (276)
Cash and cash equivalents, beginning of
year 651 724 1,431 -- 2,806
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of year $ 824 $ 127 $ 1,579 $ -- $ 2,530
========= ========= ========= ========= =========
F-31
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED BALANCE SHEET (Unaudited)
September 30, 1995
(in thousands, except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 2,431
Receivables:
Trade accounts receivable, net of allowances for doubtful accounts of $433 66,833
Other
1,009
Inventories 73,189
Deferred income taxes 5,757
Prepaid expenses and other 6,208
---------
Total current assets 155,427
Property, plant and equipment, net 75,833
Deferred charges and other 10,289
---------
Total assets $ 241,549
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 11,973
Accounts payable 49,877
Accrued liabilities:
Wages and benefits 6,095
Other
18,962
---------
Total current liabilities 86,907
Long-term debt, net of current maturities 87,127
Employee benefit obligations, net of current portion 11,035
Deferred income taxes 2,339
Other 938
Shareholders' equity:
Common stock, $ 01 par value, authorized 90,000 shares; issued 50,000 shares;
outstanding 49,500 shares 500
Rayovac International Corporation common stock, $ 50 par value, authorized 18 shares;
issued and outstanding 10 shares 5
Additional paid-in capital 12,000
Foreign currency translation adjustment 2,362
Retained earnings 38,869
---------
53,736
Less treasury stock, at cost, 500 shares (533)
---------
Total shareholders' equity 53,203
---------
Total liabilities and shareholders' equity $ 241,549
=========
The accompanying notes are an integral part of these
condensed combined consolidated financial statements.
F-32
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Period July 1, 1995 Through September 30, 1995
(in thousands, except per share amount)
Net sales $100,627
Cost of goods sold 64,116
--------
Gross profit 36,511
--------
Operating expenses:
Selling 23,214
General and administrative 7,386
Research and development 1,361
--------
31,961
--------
Income from operations 4,550
Interest expense 2,413
Other expense, net 29
--------
Income before income taxes 2,108
Income taxes 742
--------
Net income $ 1,366
========
Net income per common share $ 0.28
========
Weighted average shares of common stock outstanding 49,500
========
The accompanying notes are an integral part of these
condensed combined consolidated financial statements.
F-33
RAYOVAC CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Period July 1, 1995 Through September 30, 1995
(in thousands)
Net cash used in operating activities $ (9,627)
--------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,097)
--------
Net cash used in investing activities (1,097)
--------
Cash flows from financing activities:
Reduction of debt (18,424)
Proceeds from debt financing 29,230
Cash overdraft 1,293
Distributions from DISC (1,600)
--------
Net cash provided by financing activities 10,499
--------
Effect of exchange rate changes on cash and cash equivalents 11
--------
Net decrease in cash and cash equivalents (214)
Cash and cash equivalents, beginning of period 2,645
--------
Cash and cash equivalents, end of period $ 2,431
========
The accompanying notes are an integral part of these
condensed combined consolidated financial statements.
F-34
RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The condensed combined consolidated financial
statements for the period July 1, 1995 through September 30, 1995 are
unaudited. These financial statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC") and, in the opinion of the Company, include all
adjustments (all of which are normal and recurring in nature) necessary to
present fairly the financial position, results of operations and cash flows.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations.
These condensed combined consolidated financial statements should be read
in conjunction with the annual audited financial statements and notes
thereto.
2. INVENTORIES
Inventories at September 30, 1995 consist of the following (in thousands):
Raw material $21,400
Work-in-process 24,224
Finished goods 27,565
-------
$73,189
=======
3. COMMON STOCK
In September 1996, the Company's Board of Directors declared a
five-for-one stock split. All applicable share and per share amounts herein
have been restated to reflect the stock split retroactively.
4. COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements to purchase certain equipment and
to pay annual royalties. In a December 1991 agreement, the Company committed
to pay annual royalties of $1,500,000 for the first five years, beginning in
1993, plus $500,000 for each year thereafter, as long as the related
equipment patents are enforceable (2012). In a March 1994 agreement, the
Company committed to pay annual royalties of $500,000 for five years
beginning in 1995. Additionally, the Company has committed to purchase
tooling of $1,745,000 related to this equipment at an unspecified date in the
future.
The Company is involved in various stages of investigation relative to
hazardous waste sites, some of which are on the United States EPA National
Priorities List (Superfund). While it is impossible at this time to determine
with certainty the ultimate outcome of such environmental matters, they are
not expected to materially affect the Company's financial position.
F-35
===============================================================================
No dealer, sales representative, or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Initial Purchasers. This Prospectus does not
constitute an offer to sell or a solicitation of any offer to buy any
securities other than the Notes to which it relates or an offer to, or a
solicitation of, any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create an implication
that there has been no change in the affairs of the Company or that
information contained herein is correct as of any time subsequent to the date
hereof.
-----------------
TABLE OF CONTENTS
Page
Summary 1
Risk Factors 9
The Recapitalization 15
Use of Proceeds 15
Capitalization 22
Unaudited Pro Forma Condensed Consolidated
Financial Data 23
Selected Historical Combined Consolidated
Financial Data 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 31
Business 37
Management 48
Ownership of Capital Stock 51
Certain Relationships and Related
Transactions 52
Description of the Credit Agreement 53
Description of the Notes 54
Certain United States Federal Income Tax
Considerations 82
Plan of Distribution 82
Legal Matters 83
Experts 83
Index to Consolidated Financial Statements F-1
Until , 1997 (90 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
$100,000,000
[Rayovac logo]
Rayovac
Corporation
10-1/4% Series B Senior Subordinated
Notes due 2006
----------
PROSPECTUS
----------
, 1997
================================================================================
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Set forth below is an estimate (except for the Securities and Exchange
Commission Registration Fee) of the fees and expenses all of which are
payable by the Company, other than any underwriting discounts and
commissions, in connection with the registration and sale of the securities
being registered:
Securities and Exchange Commission
Registration Fee $34,500
Legal Fees and Expenses $95,000
Trustee's and Exchange Agent's Fees and
Expenses 3,500
Accounting Fees and Expenses 70,000
Printing Expenses *
Miscellaneous *
-------
Total $ *
=======
- -------------
* To be supplied by amendment.
Item 14. Indemnification of Directors and Officers.
Sections 180.0851 through 180.0859 of Chapter 180 of the Wisconsin
Business Corporation Law, as amended ("BCL"), provide that a corporation
shall indemnify a director or officer to the extent and under the
circumstances set forth therein.
Article VIII of the Company's Restated By-Laws, as amended (the
"By-Laws"), a copy of which is filed herein as Exhibit 3.2, provides for
indemnification of directors and officers of the Company to the fullest
extent permitted or required by the BCL, but not for any action, suit,
arbitration or other proceeding initiated by a director or officer. However,
the By-Laws provide that no indemnification shall be required to be paid by
the Company if (i) a disinterested quorum determines, by majority vote, that
the director or officer requesting indemnification engaged in misconduct
constituting a breach of duty or (ii) a disinterested quorum cannot be
obtained.
The By-Laws also provide that the Company shall pay or reimburse the
reasonable expenses of the director or officer as such expenses are incurred
provided the director or officer furnishes an executed written certificate
affirming his or her good faith belief that he or she has not engaged in
misconduct which constitutes a breach of duty, and an unsecured executed
written agreement to repay any advances made if it is ultimately determined
that he or she is not entitled to be indemnified.
The By-Laws require the Company to indemnify a director or officer of an
affiliate (who is not otherwise serving as a director or officer) against all
liabilities and advance the reasonable expenses incurred by such director or
officer in a proceeding, if such director or officer is a party because he or
she is or was a director or officer of the affiliate. The Company may also
indemnify its employees or agents for liabilities incurred and/or reasonable
expenses pursuant to a majority vote of the Board of Directors.
The Company currently maintains liability insurance for the benefit of its
directors and officers.
Item 15. Recent Sales of Unregistered Securities
1. Credit Agreement Financing
As of September 12, 1996, in connection with the recapitalization of the
Company, the Company entered into a Credit Agreement, a copy of which is
filed herein as Exhibit 4.4, with BA Securities, Inc. and Donaldson, Lufkin &
Jenrette Securities Corporation, as arrangers for a group of financial
institutions and other accredited investors, pursuant to which, among other
things, the Company issued notes representing aggregate loans to the Company
of $170.0 million. These securities were not registered under the Securities
Act of 1933, as amended (the "Securities Act"), in reliance on the exemption
provided by Section 4(2) thereof as an offer and sale of securities which
does not involve a public offering.
II-1
2. Bridge Financing
As of September 12, 1996, in connection with the recapitalization of the
Company, the Company entered into a Securities Purchase Agreement with RC
Funding, Inc. and Bank of America National Trust and Savings Association (the
"Bridge Lenders"), pursuant to which, among other things, the Company issued
and sold to the Bridge Lenders $100 million aggregate principal amount of its
Senior Subordinated Increasing Rate Notes (the "Bridge Notes"). The Bridge
Notes were not registered under the Securities Act of 1933 in reliance on the
exemption provided by Section 4(2) thereof as an offer and sale of securities
which does not involve a public offering.
3. 10-1/4% Senior Subordinated Notes
On October 22 1996, the Company issued and sold $100.0 million aggregate
principal amount of its 10-1/4% Senior Subordinated Notes due 2006 (the
"Notes"). The Notes were not registered under the Securities Act in reliance
on the exemption provided by Section 4(2) thereof as an offer and sale of
securities which does not involve a public offering. The Notes were initially
sold to Donaldson, Lufkin & Jenrette Securities Corporation and BA
Securities, Inc., as initial purchasers, and have been subsequently offered
and sold in the United States only (a) to "Qualified Institutional Buyers"
(as defined in Rule 144A under the Securities Act) and (b) to a limited
number of other institutional "Accredited Investors" (as defined in Rule
501A(1), (2),(3) or (7) under the Securities Act) in reliance on Rule 144A
under the Securities Act. The aggregate discounts, commissions and offering
expenses for the issuance of the Notes were approximately $3.0 million.
Item 16. Exhibits and Financial Statement Schedules
(a) The exhibits listed in the following Exhibit Index are filed as part
of the Registration Statement.
Exhibit
Number Description
- -----------------------------------------------------------------
2.1* Stock Purchase and Redemption Agreement, dated
September 12, 1996, by and among the Company, certain
affiliates of Thomas H. Lee Company, Thomas H. Lee
Equity Fund III, L.P., Thomas H. Lee Foreign Fund
III, L.P., THL-CCI Limited Partnership, David A.
Jones and the then-existing shareholders of the
Company.
3.1* Restated Articles of Incorporation of the Company.
3.2* Restated By-Laws of the Company.
4.1* Indenture, dated as of October 22, 1996, by and among
the Company, ROV Holding, Inc. and Marine Midland
Bank, as trustee relating to the Company's 10-1/4%
Senior Subordinated Notes due 2006.
4.2* Registration Rights Agreement, dated as of October 17,
1996, by and among the Company, Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ") and BA
Securities, Inc.
4.3* Specimen of the Notes (included as an exhibit to
Exhibit 4.1).
4.4* Credit Agreement, dated as of September 12, 1996, by
and among the Company, the lenders party thereto,
Bank of America National Trust and Savings
Association ("BofA") and DLJ Capital Funding, Inc.
(the "Credit Agreement").
4.5* Amendment No. 1 to the Credit Agreement.
4.6* The Security Agreement, dated as of September 12, 1996,
among the Company, ROV Holding, Inc. and BofA.
4.7* The Company Pledge Agreement among the Company and
BofA, dated as of September 12, 1996.
5.1* Opinion of Whyte Hirschboeck Dudek S.C.
10.1* Purchase Agreement, dated October 17, 1996, by and
among the Company, DLJ and BA Securities, Inc.
10.2* Management Agreement, dated as of September 12, 1996,
by and between the Company and Thomas H. Lee Company.
10.3* Consulting Agreement, dated as of September 12, 1996,
by and between the Company and Thomas F. Pyle, Jr.
10.4* Confidentiality, Non-Competition, No-Solicitation and
No-Hire Agreement dated as of September 12, 1996 by
and between the Company and Thomas F. Pyle.
10.5* Employment Agreement, dated as of September 12, 1996,
by and between the Company and David A. Jones,
including the Full Recourse Promissory Note, dated
September 12, 1996 by David A. Jones in favor of the
Company.
II-2
Exhibit
Number Description
- -----------------------------------------------------------------
10.6* Severance Agreement by and between Company and Trygve
Lonnebotn.
10.7* Severance Agreement by and between Company and Kent J.
Hussey.
10.8* Severance Agreement by and between Company and Roger F.
Warren.
10.9* Technology, License and Service Agreement between
Battery Technologies (International) Limited and the
Company, dated June 1, 1991, as amended April 19,
1993 and December 31, 1995.
10.10* Building Lease between the Company and SPG Partners,
dated May 14, 1985, as amended June 24, 1986 and June
10, 1987.
12.1* Statement re. Computation of Ratios.
21.1+ Subsidiaries of the Company.
23.1+ Consent of Coopers & Lybrand L.L.P.
23.2* Consent of Whyte Hirschboeck Dudek S.C. (included in
Exhibit 5.1).
24.1* Power of Attorney, included on page II-5 of the Registration
Statement.
25.1* Statement of Eligibility of Trustee.
27* Financial Data Schedules.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Letter to Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees.
99.4* Form of Letter to Clients.
- ------------------
*Previously filed.
+Filed herewith.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(d) For the purpose of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's annual
report pursuant to section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(e) To deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual report
to security holders that is incorporated by reference in the prospectus
and furnished pursuant to and meeting the requirements of Rule 14a-3 or
Rule 14c-3 under the Securities
II-3
Exchange Act of 1934; and, where interim financial information required to
be presented by Article 3 of Regulation S-X are not set forth in the
prospectus, to deliver, or cause to be delivered to each person to whom
the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such
interim financial information.
(f) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to its Restated Articles of
Incorporation, By-Laws, by agreement or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(g) To file an application for the purpose of determining the
eligibility of the trustee to act under subsection (a) of Section 310 of
the Trust Indenture Act in accordance with the rules and regulations
prescribed by the Commission under Section 305(b)(2) of the Act.
II-4
S
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Madison, Wisconsin on January , 1997.
RAYOVAC CORPORATION
/s/ James A. Broderick
--------------------------------------------
James A. Broderick
Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on January 24, 1997.
Signature Title
----------------------------- -------------------------------------------------------
*
---------------------------- President, Chief Executive Officer and Chairman of the
David A. Jones Board (Principal Executive Officer)
* Executive Vice President of Finance and Administration
---------------------------- and Chief Financial Officer (Principal Financial and
Kent J. Hussey Accounting Officer)
*
----------------------------
Roger F. Warren Director
*
----------------------------
Trygve Lonnebotn Director
*
----------------------------
Scott A. Schoen Director
*
----------------------------
Thomas R. Shepherd Director
*
----------------------------
Warren C. Smith, Jr. Director
*By /s/ James A. Broderick
--------------------------
James A. Broderick
as attorney-in-fact for
each of the persons indicated
II-5
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
Rayovac Corporation
In connection with our audits of the financial statements of Rayovac
Corporation and Subsidiaries as of September 30, 1996 and the Transition
Period July 1, 1996 to September 30, 1996 and as of years ended June 30, 1996
and 1995 and for each of the three years in the period ended June 30, 1996,
which financial statements are included on pages F- through F- of this form
S-1, we have also audited the financial statement schedule listed in Item
16(b) herein.
In our opinion, the financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly,
in all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Milwaukee, Wisconsin
December 11, 1996
RAYOVAC CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Transition Period Ended September 30, 1996
and the years ended June 30, 1994, 1995 and 1996
(in thousands)
Column A Column B Column C Column D Column E
---------------------------------------------- ------------ ------------------------- ---------------
Additions
Balance at Charged to
Beginning Costs and Balance at
Descriptions of Period Expenses Deductions End of Period
---------------------------------------------- ------------ ------------------------- ---------------
Transition Period Ended September 30, 1996:
Allowance for doubtful accounts $786 $147 $211 $722
==== ==== ==== ====
June 30, 1996:
Allowance for doubtful accounts $702 $545 $461 $786
==== ==== ==== ====
June 30, 1995:
Allowance for doubtful accounts $831 $714 $843 $702
==== ==== ==== ====
June 30, 1994:
Allowance for doubtful accounts $829 $404 $402 $831
==== ==== ==== ====
S-2
EXHIBIT 21.1
SUBSIDIARIES
Jurisdiction of incorporation
Subsidiary(1) or organization
----------------------------------------------------------------------------
ROV Holding, Inc.(2) Delaware
Ray-O-Vac Europe BV Holland
Rayovac Far East Limited Hong Kong
Rayovac Canada Inc. Canada
Rayovac Europe Limited United Kingdom
Rayovac (UK) Limited United Kingdom
Wrenford Insurance Company Limited Bermuda
- -------------
(1) Each subsidiary identified below is wholly owned, directly or indirectly,
by ROV Holding, Inc., with the exceptions of ROV Holding, Inc., which is
wholly owned by Rayovac Corporation, and Wrenford Insurance Company
Limited, thirty-three percent of which is owned by Rayovac Corporation and
67% of which is owned by persons not affiliated with Rayovac Corporation.
(2) ROV Holding, Inc. is a Guarantor (as defined in the Prospectus).
[LETTERHEAD OF COOPERS & LYBRAND]
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the inclusion in this registration statement on form S-1,
Amendment No. 1 (File No. 333-17895) of our report dated November 22, 1996, with
respect to the combined consolidated financial statements and financial
statement schedule of Rayovac Corporation and Subsidiaries. We also consent to
the reference to our Firm under the caption "Experts".
/s/ Coopers & Lybrand LLP
Milwaukee, Wisconsin
January 24, 1997
