S-4 1 ds4.htm FORM S-4 FORM S-4
Table of Contents

As filed with the Securities and Exchange Commission on March 29, 2010

Registration No. 333-            

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

SPECTRUM BRANDS HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   3692   27-2166630

(State of other jurisdiction of

incorporation or organization)

  (Primary Standard Industrial Classification Code Number)  

(I.R.S. Employer

Identification No.)

 

 

c/o Russell Hobbs, Inc.

3633 S. Flamingo Road

Miramar, FL 33027

(954) 883-1000

(Address, Including Zip Code, and Telephone Number including Area Code, of Registrant’s Principal Executive Offices)

 

 

Terry L. Polistina

President

Spectrum Brands Holdings, Inc.

c/o Russell Hobbs, Inc.

3633 S. Flamingo Road

Miramar, FL 33027

(954) 883-1000

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

copies to:

 

Mark D. Kaufman

Cynthia M. Krus

Sutherland Asbill & Brennan LLP

1275 Pennsylvania Ave., NW

Washington, DC 20004

Telephone: 202-383-0100

  

Jeffrey D. Marell

Raphael M. Russo

Paul, Weiss, Rifkind,

Wharton & Garrison LLP

1285 Avenue of the Americas

New York, New York 10019-6064

Telephone: 212-373-3000

  

Robert A. Profusek

Andrew M. Levine

Jones Day

222 East 41st Street

New York, NY 10017-6702

Telephone: 212-326-3939

 

 

Approximate Date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement and all conditions of the proposed transaction have been satisfied or waived as described in the Agreement and Plan of Merger, dated as of February 9, 2010 (as amended).

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, 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, 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(d) 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.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   þ  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

 

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer)

   ¨  

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)

   ¨  

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Amount to be
Registered(1)
  Proposed Maximum
Offering Price Per Share
  Proposed Maximum
Aggregate Offering
Price(2)
 

Amount of
Registration

Fee(3)

         
Common Stock, par value $0.01 per share   30,629,213   N/A   $763,279,988   $54,421.86
 
 
(1) Represents the maximum number of shares of the common stock of the Registrant that may be issued to holders of shares of common stock, par value $0.01 per share, of Spectrum Brands, Inc. (the “Spectrum Shares”) upon the completion of the Spectrum merger as described herein.
(2) Estimated solely for the purpose of calculating the registration fee required by Section 6(b) of the Securities Act and calculated pursuant to Rules 457(f)(1) and 457(c) under the Securities Act. The proposed maximum aggregate offering price of the registrant’s common stock was calculated based upon the market value of the Spectrum Shares (the securities to be canceled in the Spectrum merger) in accordance with Rule 457(c) and is equal to the product of (i) $24.92, the average of the high and low prices per Spectrum Share on the New York Stock Exchange on March 23, 2010, multiplied by (ii) 30,629,213, the maximum number of Spectrum Shares that may be canceled and exchanged in the Spectrum merger as of March 23, 2010.
(3) Estimated pursuant to Rule 457(f)(1) solely for the purpose of computing the amount of the registration fee, based on the average of the high and low prices of the Spectrum Shares on March 23, 2010.

 

 

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 the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

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 document shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

 

PRELIMINARY—SUBJECT TO COMPLETION—DATED MARCH 29, 2010

LOGO

MERGER PROPOSED – YOUR VOTE IS VERY IMPORTANT

Dear Stockholder,

On February 9, 2010, upon the unanimous recommendation to the board of directors of a committee consisting solely of independent directors, the board of directors of Spectrum Brands, Inc., a Delaware corporation (“Spectrum”), approved and Spectrum signed a definitive Agreement and Plan of Merger (as amended, the “merger agreement”) with Russell Hobbs, Inc., a Delaware corporation (“Russell Hobbs”), a marketer and distributor of a broad range of branded small household appliances. The combination of Spectrum and Russell Hobbs will create:

 

   

a premier consumer products company with $3 billion in annual revenues with products carried in more than one million retail outlets globally;

 

   

a diverse portfolio of market leading brands, including Rayovac, VARTA, Remington, Hot Shot, Cutter, Repel, Spectracide, Tetra, 8 in 1 Dingo, Black & Decker, George Foreman, Russell Hobbs, LitterMaid and Toastmaster;

 

   

a combined company that will be able to leverage the sales, distribution and administrative infrastructure of Spectrum and Russell Hobbs to realize cost synergies and to pursue revenue growth opportunities; and

 

   

a stronger capital structure with reduced financial risk (transaction is expected to lower leverage ratio, reduce debt cost, extend debt maturity profile and enhance liquidity compared to Spectrum’s existing capital structure).

As part of the proposed transaction, Spectrum and Russell Hobbs will become subsidiaries of Spectrum Brands Holdings, Inc., a newly-created Delaware holding corporation (“SB Holdings”). It is anticipated that SB Holdings will trade on the New York Stock Exchange (the “NYSE”) under the symbol “[            ]”. Upon the consummation of the proposed transaction, (i) Spectrum stockholders will be entitled to receive one share of common stock of SB Holdings in exchange for each share they hold of common stock in Spectrum and (ii) Russell Hobbs stockholders will be entitled to receive shares of SB Holdings in exchange for their shares of Russell Hobbs common stock and preferred stock in accordance with the terms of the merger agreement.

At a special meeting of Spectrum stockholders, Spectrum stockholders will be asked to vote on the adoption of the merger agreement described in this proxy statement/prospectus. Adoption of the merger agreement requires the affirmative votes of the holders of (i) a majority of the outstanding shares of Spectrum common stock entitled to vote (including the shares of Harbinger Capital Partners Master Fund I, Ltd. (“Harbinger Master Fund”), a Cayman Islands exempted company, and two of its affiliates, Harbinger Capital Partners Special Situations Fund, L.P. (“Harbinger Special Situations Fund”) and Global Opportunities Breakaway Ltd. (“Breakaway Fund”) (collectively, the “Harbinger Parties”)) and (ii) a majority of the outstanding shares of Spectrum common stock entitled to vote (excluding the shares of the Harbinger Parties (except any shares of Spectrum common stock acquired by the Harbinger Parties after March 1, 2010)).

The Harbinger Parties currently own approximately 40% of the shares of outstanding Spectrum common stock and 100% of the shares of outstanding Russell Hobbs common and preferred stock. The Harbinger Parties have entered into agreements with Spectrum pursuant to which they have agreed to vote all of their shares of Spectrum common stock acquired prior to the date of the merger agreement in favor of the adoption of the merger agreement and against any “Alternative Proposal” (as defined in the merger agreement) that would impede the mergers, and all of their shares of Spectrum common stock acquired after March 1, 2010 in proportion to the votes of the other stockholders. Following the consummation of the proposed transaction, the Harbinger Parties are expected to own approximately 64% of SB Holdings (assuming that the Harbinger Parties do not acquire additional shares of Spectrum common stock prior to the consummation of the mergers).

On February 8, 2010, the last full trading day before the merger agreement was signed, the closing sales price of Spectrum common stock, which at the time traded on the OTC Bulletin Board and the Pink Sheet Electronic Quotation Service under the symbol “SPEB,” was $29.00 per share. Spectrum common stock has been listed on the NYSE under the symbol “SPB” since March 18, 2010.

Upon the unanimous recommendation to the board of directors of a committee consisting solely of independent directors, Spectrum’s board of directors has determined that the merger agreement and the proposed transaction are advisable and in the best interests of Spectrum stockholders, other than the Harbinger Parties, and recommends that its stockholders vote “FOR” adoption of the merger agreement and “FOR” approval of the proposal to adjourn the Spectrum special meeting, if necessary, to solicit additional proxies if there are not sufficient votes at the time of the Spectrum special meeting to adopt the merger agreement. The proposed transaction is conditioned upon the adoption of the merger agreement by Spectrum stockholders, receipt of applicable regulatory approvals and other conditions described in the attached proxy statement/prospectus.

It is important that your shares are represented at the special meeting, whether or not you plan to attend the meeting. Abstentions and failures to vote will have the same effect as votes “Against” the proposal to adopt the merger agreement. Accordingly, please submit a proxy by telephone or the Internet or complete, date, sign and return promptly your proxy card in the enclosed postage pre-paid envelope. You may attend the special meeting and vote your shares in person if you wish, even though you have previously returned your proxy.

This document concisely describes the special meeting, the proposed transaction, the documents related to the proposed transaction and other related matters that a Spectrum stockholder ought to know before voting on the proposals described herein and should be retained for future reference. Please carefully read this entire document, including the “Risk Factors” section beginning on page 29, for a discussion of the risks relating to the proposed transaction. You also can obtain information about Spectrum from documents that it has filed with the Securities and Exchange Commission. See “Where You Can Find More Information” for instructions on how to obtain such information.

Sincerely,

 

Kent J. Hussey
Chief Executive Officer and Chairman of the Board
Spectrum Brands, Inc.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the common stock of SB Holdings to be issued under this proxy statement/prospectus or determined if this proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

The date of this document is [            ], 2010 and it is first being mailed or otherwise delivered to Spectrum stockholders on or about [            ], 2010.


Table of Contents

LOGO

Spectrum Brands, Inc.

Six Concourse Parkway, Suite 3300

Atlanta, GA 30328

(770-829-6200)

 

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON [                    ], 2010

Dear Stockholder:

You are cordially invited to attend the special meeting of stockholders of Spectrum Brands, Inc., a Delaware corporation (“Spectrum”). The meeting will be held on [                    ], [            ] at [            ], at [            ], for the following purposes:

1. To consider and vote upon the adoption of the Agreement and Plan of Merger, dated as of February 9, 2010, as amended (the “merger agreement”), by and among Spectrum, Russell Hobbs, Inc., Spectrum Brands Holdings, Inc. (“SB Holdings”), Battery Merger Corp., a direct wholly-owned subsidiary of SB Holdings, and Grill Merger Corp., a direct wholly-owned subsidiary of SB Holdings, all Delaware corporations.

2. To consider and vote upon an adjournment of the special meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the special meeting to vote in favor of adoption of the merger agreement.

3. To transact such other business as may properly come before the special meeting and any adjournment or postponement thereof.

Upon the unanimous recommendation to the board of directors of a committee consisting solely of independent directors, Spectrum’s board of directors has determined that the merger agreement and the proposed transaction are advisable and in the best interests of Spectrum stockholders, other than the Harbinger Parties (defined below), and recommends that its stockholders vote “FOR” adoption of the merger agreement and “FOR” approval of the proposal to adjourn the Spectrum special meeting, if necessary, to solicit additional proxies if there are not sufficient votes at the time of the Spectrum special meeting to adopt the merger agreement.

The board of directors of Spectrum has fixed [                    ], 2010 as the record date for the determination of stockholders entitled to notice of, and to vote at, the special meeting and any adjournment or postponement thereof. Only holders of record of shares of Spectrum common stock at the close of business on the record date are entitled to notice of, and to vote at, the special meeting. At the close of business on the record date, Spectrum had [                    ] shares of common stock outstanding and entitled to vote.

You have the option to revoke the proxy at any time prior to the meeting or to vote your shares personally on request if you attend the meeting.

Your vote is important. The affirmative votes of the holders of (i) a majority of the outstanding shares of Spectrum common stock entitled to vote (including the shares of Harbinger Capital Partners Master Fund I, Ltd., a Cayman Islands exempted company, and two of its affiliates, Harbinger Capital Partners Special Situations Fund, L.P. and Global Opportunities Breakaway Ltd. (collectively, the “Harbinger Parties”)) and (ii) a majority of the outstanding shares of Spectrum common stock entitled to vote (excluding the shares of the Harbinger Parties (except any shares of Spectrum common stock acquired by the Harbinger Parties after March 1, 2010)) on the record date for the special meeting are required for adoption of the merger agreement. If a quorum is present, the affirmative vote of the holders of a majority of the votes represented at the meeting and entitled to vote on the matter is required to approve an adjournment of the special meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the special meeting to vote in favor of adoption of the merger agreement.


Table of Contents

Whether or not you expect to attend the special meeting in person, please submit a proxy by telephone or over the Internet as instructed in these materials, or complete, date, sign and return the enclosed proxy card, as promptly as possible in order to ensure we receive your proxy with respect to your shares. Instructions are shown on the proxy card. A return envelope (which is postage pre-paid if mailed in the United States) is enclosed for your convenience.

If you sign, date and mail your proxy card without indicating how you wish to have your shares voted, the shares represented by the proxy will be voted in favor of adoption of the merger agreement (Proposal No. 1) and an adjournment of the special meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the special meeting to vote in favor of adoption of the merger agreement (Proposal No. 2). If you fail to submit a proxy by telephone or over the Internet or return your proxy card, or if your shares are held in “street name” and you do not instruct your broker how to vote your shares, the effect will be as though you cast a vote “Against” the adoption of the merger agreement. If you attend the special meeting and wish to vote in person, you may withdraw your proxy and vote in person prior to the close of voting at the special meeting. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the special meeting, you must obtain a proxy issued in your name from that record holder.

Please do not send any documents representing your ownership of Spectrum common stock at this time.

 

BY ORDER OF THE BOARD OF DIRECTORS,

John T. Wilson, Esq.

Senior Vice President, Secretary and General Counsel

Atlanta, Georgia

[    ], 2010

 


Table of Contents

REFERENCES TO ADDITIONAL INFORMATION

This proxy statement/prospectus incorporates important business and financial information about Spectrum from documents that are not included in or delivered with this document. You may have already been sent some of the documents incorporated by reference, but you can obtain any of them through the Securities and Exchange Commission website at http://www.sec.gov or from Spectrum, excluding all exhibits (unless an exhibit has been specifically incorporated herein by reference), by requesting them in writing or by telephone from Spectrum at the following address:

Spectrum Brands, Inc.

Six Concourse Parkway, Suite 3300

Atlanta, GA 30328

(770) 829-6200

You can also get more information by visiting Spectrum’s website at www.spectrumbrands.com. Website materials are not part of this proxy statement/prospectus.

You will not be charged for any of these documents that you request. If you would like to request documents from Spectrum, please do so by [    ], 2010 to receive them before the special stockholders’ meeting. If you request any incorporated documents, Spectrum will strive to mail them to you by first-class mail, or other equally prompt means, within one business day of receipt of your request.

See “Where You Can Find More Information.”


Table of Contents

TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE PROPOSED TRANSACTION

   1

SUMMARY

   8

SPECTRUM SELECTED HISTORICAL FINANCIAL INFORMATION

   20

RUSSELL HOBBS SELECTED HISTORICAL FINANCIAL INFORMATION

   23

SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

   27

COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE INFORMATION

   28

RISK FACTORS

   29

Risks Related to the Mergers and to an Investment in SB Holdings

   29

Other Risks Currently Faced by Spectrum and Russell Hobbs that SB Holdings Will Face After Consummation of the Mergers

   37

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

   54

THE COMPANIES

   56

Information About SB Holdings

   56

Information About Spectrum

   58

Information About Russell Hobbs

   60

THE SPECIAL MEETING AND PROXY SOLICITATION

   69

Matters Relating to the Special Meeting

   69

Votes Necessary to Adopt the Merger Agreement

   70

Proxies

   70

Changing or Revoking Your Proxy

   71

Voting in Person

   71

Proxy Solicitation

   71

No Appraisal Rights

   71

Other Business

   71

Spectrum Householding Information

   72

Stockholder Account Maintenance

   72

THE PROPOSED TRANSACTION

   73

General Description of the Proposed Transaction

   73

Background of the Proposed Transaction

   73

Recommendation of the Committee and the Spectrum Board of Directors; Reasons for the Transaction

   86

Certain Financial Forecasts

   91

Opinion of the Committee’s Financial Advisor

   95

Spectrum Stockholder Vote Required

   103

Interests of Certain Persons in the Spectrum Merger

   104

Plans for SB Holdings After the Proposed Transaction

   108

 

i


Table of Contents

Ownership of SB Holdings After the Proposed Transaction

   109

Effects on Spectrum if the Proposed Transaction is Not Consummated

   109

Financing the Mergers

   109

Regulatory Approvals Required for the Proposed Transaction

   111

Accounting Treatment

   112

Material Support and Ancillary Agreements in Connection with the Proposed Transaction

   112

New Certificate of Incorporation and New By-laws of SB Holdings; Stockholder Agreement

   118

Federal Securities Laws Consequences

   120

THE MERGER AGREEMENT (PROPOSAL NO. 1)

   121

The Mergers

   121

Merger Consideration

   123

Treatment of Options and Other Awards

   124

Exchange of Shares

   124

Representations and Warranties

   126

Conduct of Business Pending the Mergers

   127

Efforts to Consummate the Mergers and Other Covenants

   129

Conditions to the Mergers

   130

Restrictions on Solicitations of Other Offers

   133

Recommendation Withdrawal/Termination in Connection with a Superior Proposal

   136

Termination of the Merger Agreement

   137

Termination Fees

   139

Indemnification and Insurance

   140

Expenses and Fees

   141

Amendment, Extension and Waiver

   141

ADJOURNMENT OF THE SPECIAL MEETING (PROPOSAL NO. 2)

   142

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

   143

General

   143

Material Tax Consequences of the Spectrum Merger

   143

Information Reporting

   144

RUSSELL HOBBS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   145

Results of Operations

   147

Financial Condition

   156

Recent Accounting Pronouncements Not Yet Adopted

   164

Quantitative and Qualitative Disclosures About Market Risk

   164

 

ii


Table of Contents

Financial Statements and Supplementary Data

   166

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   166

BOARD OF DIRECTORS, BOARD COMMITTEES AND EXECUTIVE OFFICERS OF SB HOLDINGS

   167

Board of Directors of SB Holdings

   167

Committees of the Board of Directors of SB Holdings

   170

Compensation of Directors of SB Holdings

   172

Executive Officers of SB Holdings

   172

ADDITIONAL INFORMATION ABOUT THE COMPANIES

   174

Description of Ongoing Litigation of Russell Hobbs

   174

MARKET PRICE AND DIVIDEND INFORMATION

   176

Market Prices of Spectrum Common Stock

   176

Spectrum Dividend Information

   177

Market Prices for Russell Hobbs Common Stock

   177

PRINCIPAL STOCKHOLDERS

   178

Principal Stockholders of Spectrum Before the Proposed Transaction and of SB Holdings After the Proposed Transaction

   178

Principal Stockholders of Russell Hobbs Before the Proposed Transaction

   182

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

   183

DESCRIPTION OF SB HOLDINGS CAPITAL STOCK

   194

Authorized Capital Stock

   194

SB Holdings Common Stock

   194

SB Holdings Preferred Stock

   194

Registration Rights

   195

Transfer Agent and Registrar for SB Holdings

   195

Stock Exchange Listing of SB Holdings Common Stock

   195

Other Provisions of the Restated Certificate of Incorporation and Amended and Restated Bylaws

   195

Delaware Law Regulating Corporate Takeovers

   197

Limitation of Liabilities and Indemnification

   197

COMPARISON OF STOCKHOLDER RIGHTS

   199

LEGAL MATTERS

   212

EXPERTS

   212

FUTURE STOCKHOLDER PROPOSALS

   212

OTHER MATTERS

   213

WHERE YOU CAN FIND MORE INFORMATION

   213

RUSSELL HOBBS CONSOLIDATED FINANCIAL STATEMENTS

   F-1

 

iii


Table of Contents

LIST OF ANNEXES

Annex A-1

   Agreement and Plan of Merger, dated as of February  9, 2010, by and among Spectrum Brands, Inc., Russell Hobbs, Inc., Spectrum Brands Holdings, Inc., Battery Merger Corp. and Grill Merger Corp.   

Annex A-2

   Amendment to Agreement and Plan of Merger, dated as of March 1, 2010, by and among Spectrum Brands, Inc., Russell Hobbs, Inc., Spectrum Brands Holdings, Inc., Battery Merger Corp. and Grill Merger Corp.   

Annex A-3

   Second Amendment to Agreement and Plan of Merger, dated as of March 26, 2010, by and among Spectrum Brands, Inc., Russell Hobbs, Inc., Spectrum Brands Holdings, Inc., Battery Merger Corp. and Grill Merger Corp.   

Annex B

   Opinion of Barclays Capital Inc.   

 

iv


Table of Contents

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND

THE PROPOSED TRANSACTION

The questions and answers below highlight only selected procedural information from this proxy statement/prospectus. They do not contain all of the information that may be important to you. You should read carefully this entire proxy statement/prospectus to fully understand the Agreement and Plan of Merger and the transactions contemplated thereby and the voting procedures for the special meeting. Unless otherwise indicated in this proxy statement/prospectus or the context otherwise requires, throughout this proxy statement/prospectus we generally refer to Spectrum Brands, Inc. and, where applicable, its consolidated subsidiaries as “Spectrum,” Russell Hobbs, Inc. and, where applicable, its consolidated subsidiaries as “Russell Hobbs,” Spectrum Brands Holdings, Inc., a newly formed holding company, as “SB Holdings,” Battery Merger Corp., a direct wholly-owned subsidiary of SB Holdings, as “Battery Sub,” Grill Merger Corp., a direct wholly-owned subsidiary of SB Holdings, as “Grill Sub,” Harbinger Capital Partners Master Fund I, Ltd. and two of its affiliates as the “Harbinger Parties” and the Agreement and Plan of Merger, dated as of February 9, 2010, by and among Spectrum, Russell Hobbs, SB Holdings, Battery Sub and Grill Sub, as amended, as the “merger agreement”.

 

Q: What are the mergers?

 

A: On February 9, 2010, Spectrum entered into the merger agreement with Russell Hobbs, SB Holdings, Battery Sub and Grill Sub. Under the merger agreement, (i) Battery Sub will merge with and into Spectrum, with Spectrum as the surviving corporation (the “Spectrum merger”), and (ii) Grill Sub will merge with and into Russell Hobbs, with Russell Hobbs as the surviving corporation (the “Russell Hobbs merger,” which, together with the Spectrum merger, are referred to herein as the “mergers”). Battery Sub and Grill Sub are both direct wholly-owned subsidiaries of SB Holdings. Upon the consummation of the mergers, (i) stockholders of Spectrum will be entitled to receive in the Spectrum merger one share of the common stock of SB Holdings (“SB Holdings common stock”) in exchange for each share they hold of Spectrum common stock (the “Spectrum common stock”) and (ii) Russell Hobbs stockholders will be entitled to receive shares of SB Holdings in exchange for their shares of Russell Hobbs common stock and preferred stock (the “Russell Hobbs Stock”) in accordance with the terms of the merger agreement and based on a $675 million enterprise value of Russell Hobbs, subject to various adjustments set forth in the merger agreement, and a $31.50 per share valuation of Spectrum common stock. Furthermore, as part of the transaction, the Harbinger Parties have agreed to convert their existing approximately $158 million principal amount of Russell Hobbs’ term debt into SB Holdings common stock at a price of $31.50 per share, which is included in the $675 million enterprise value of Russell Hobbs. As a result of the mergers, the stockholders of Spectrum (other than the Harbinger Parties) are expected to own approximately 36% of SB Holdings, and the Harbinger Parties are expected to own approximately 64% of SB Holdings (assuming that the Harbinger Parties do not acquire additional shares of Spectrum common stock prior to the consummation of the mergers). For more details regarding the mergers, see “The Proposed Transaction” and “The Merger Agreement (Proposal No. 1).” Copies of the merger agreement and the two amendments to the merger agreement are attached as Annex A-1, Annex A-2 and Annex A-3, respectively.

 

Q: Why am I receiving these materials?

 

A: We sent you this proxy statement/prospectus and the enclosed proxy card because you have been identified as a stockholder of record of Spectrum and the board of directors of Spectrum is soliciting your proxy to vote at a special meeting of stockholders. You may submit a proxy by telephone or over the Internet as further described in these materials or you may complete, date, sign and return the enclosed proxy card. We strongly encourage stockholders to submit a proxy by telephone or over the Internet. You are also invited to attend the special meeting in person, although you do not need to attend the special meeting to have your shares voted at the special meeting. We intend to mail this proxy statement/prospectus and accompanying proxy card on or about [                    ], 2010 to all stockholders of record entitled to vote at the special meeting.

 

1


Table of Contents
Q: What is the prior relationship among the Harbinger Parties, Spectrum and Russell Hobbs?

 

A: The Harbinger Parties currently own approximately 40% of the outstanding Spectrum common stock and 100% of the outstanding Russell Hobbs Stock. For additional information, see the sections entitled “The Proposed Transaction—Background of the Proposed Transaction,” “The Proposed Transaction—Interests of Certain Persons in the Spectrum Merger” and “Principal Stockholders.”

 

Q: How will the combined company be managed following the mergers?

 

A: Immediately following the mergers, the board of directors of SB Holdings will be divided into three classes and will be comprised of ten individuals. Initially, six directors will be designated by Russell Hobbs, three will be designated by Spectrum and one will be the Chief Executive Officer of SB Holdings. The Chief Executive Officer of Spectrum will be the initial Chief Executive Officer of SB Holdings. In addition to the Chief Executive Officer, Spectrum’s current management team will be the initial management team of SB Holdings. The Chief Executive Officer of Russell Hobbs will be added to Spectrum’s management team to lead a fourth reporting segment made up of the existing Russell Hobbs’ portfolio of home appliance brands.

 

Q: What are the conditions to closing the mergers?

 

A: Consummation of the mergers is subject to certain conditions, including, among others, closing of a new financing, adoption of the merger agreement by Spectrum’s stockholders, customary regulatory approvals, no material adverse change in Spectrum or Russell Hobbs and other customary closing conditions. For more information, see the section entitled “The Merger Agreement (Proposal No. 1)—Conditions to the Mergers.”

 

Q: What are the material federal income tax consequences of the mergers?

 

A: The obligation of Spectrum to consummate the Spectrum merger is conditioned on the receipt by Spectrum of an opinion of Sutherland Asbill & Brennan LLP, counsel to Spectrum, dated the date of the effective time of the Spectrum merger, to the effect that for U.S. federal income purposes the Spectrum merger will constitute a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code and/or the mergers, taken together, will constitute exchanges described in Section 351 of the Internal Revenue Code. Tax matters are very complicated. Accordingly, we encourage you to consult your own tax advisor for a full understanding of the tax consequences of the mergers to you, including the applicability and effect of federal, state, local and foreign income and other tax laws. For more information, see the section entitled “Material U.S. Federal Income Tax Consequences.”

 

Q: When do you expect the transaction to be consummated?

 

A: We anticipate that the consummation of the mergers will occur by the end of the third or fourth quarter of Spectrum’s fiscal year 2010 if the requisite stockholder votes are obtained, assuming the other conditions to consummation of the mergers are satisfied or waived. However, it is possible that the transaction will not be consummated during that timeframe. For more information, see “The Merger Agreement (Proposal No. 1)—Conditions to the Mergers.”

 

Q: Am I entitled to appraisal rights?

 

A: Spectrum stockholders are not entitled to appraisal rights under the General Corporation Law of the State of Delaware in connection with the mergers.

 

Q: Who may vote at the special meeting?

 

A: Only Spectrum stockholders of record at the close of business on [                    ], 2010 will be entitled to vote at the special meeting. On the record date, there were [                    ] shares of Spectrum common stock outstanding and entitled to vote.

 

2


Table of Contents
Q: How many votes do Spectrum stockholders have?

 

A: Each holder of Spectrum common stock will be entitled to one vote for each share held on all matters to be voted upon at the special meeting. The holders of record of Spectrum common stock will vote on all matters to be voted upon at the special meeting.

As of the record date, directors and executive officers of Spectrum as a group beneficially owned and were entitled to vote approximately [            ] shares of Spectrum common stock, representing approximately [            ] of the votes entitled to be cast at the special meeting. All of the directors and executive officers of Spectrum who are entitled to vote at the special meeting have indicated that they intend to vote their shares of Spectrum common stock in favor of all of the proposals to be presented at the special meeting.

As of the record date, the Harbinger Parties beneficially owned and were entitled to vote approximately 40% of Spectrum common stock entitled to vote at the special meeting. In addition, on March 1, 2010, Spectrum and the Harbinger Parties entered into a Letter Agreement (described in this proxy statement/prospectus) to permit the Harbinger Parties to purchase up to 100,000 shares of Spectrum common stock per week, up to an aggregate maximum of two million shares, in order to provide additional liquidity to Spectrum’s stockholders. Pursuant to the terms of a support agreement dated February 9, 2010 and the Letter Agreement, the Harbinger Parties have generally agreed to vote their shares of Spectrum common stock acquired before the date of the merger agreement in favor of the adoption of the merger agreement and against any “Alternative Proposal” (as defined in the merger agreement) that would impede the mergers and all of their shares of Spectrum common stock acquired after March 1, 2010 proportionately with the votes of the holders of Spectrum common stock (other than the Harbinger Parties), except under the circumstances described in this proxy statement/prospectus, with respect to the merger agreement and the proposed transaction.

 

Q: What stockholder approvals are required for Spectrum?

 

A: Proposal No. 1: The affirmative votes of the holders of (i) a majority of the outstanding shares of Spectrum common stock entitled to vote (including the shares of the Harbinger Parties) and (ii) a majority of the outstanding shares of Spectrum common stock entitled to vote (excluding the shares of the Harbinger Parties (except any shares of Spectrum common stock acquired by the Harbinger Parties after March 1, 2010)) are required to adopt the merger agreement.

Proposal No. 2: If a quorum is present, the affirmative vote of the holders of a majority of Spectrum common stock represented at the meeting and entitled to vote on the matter is required to approve an adjournment of the special meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the special meeting to vote in favor of adopting the merger agreement.

All other actions considered at the meeting may be taken upon the favorable vote of the holders of a majority of the votes present in person or represented by proxy at the meeting and entitled to vote on the matter.

Unless otherwise indicated, the discussions relating to the procedures for voting stock are applicable to holders of Spectrum common stock, present in person (or by remote communication) or represented by proxy and entitled to vote at the special meeting.

 

Q: What constitutes a quorum?

 

A: A quorum of at least a majority of the voting power of all outstanding shares of common stock of Spectrum represented by proxy or in person entitled to vote at the special meeting is necessary to hold a valid special meeting. On the record date, there were an aggregate of [                    ] shares of Spectrum common stock outstanding. Thus, [                    ] shares of Spectrum common stock must be represented by proxy or present in person at the special meeting to have a quorum. The inspector of elections will determine whether or not a quorum is present.

 

3


Table of Contents

Your shares will be counted towards the quorum only if you are present in person at the special meeting or submit a valid proxy in accordance with the procedures set forth in “How do I vote?” below. Abstentions will also be counted towards the quorum requirement, but broker non-votes will not be counted towards the quorum requirement. If there is no quorum, a majority of the shares present in person or by proxy at the special meeting may vote to adjourn the special meeting to another date.

 

Q: What if I return a proxy card but do not make specific choices?

 

A: If Spectrum receives a signed and dated proxy card and the proxy card does not specify how your shares are to be voted, your shares will be voted “For” the adoption of the merger agreement and “For” the approval of the proposal to adjourn the special meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes to adopt the merger agreement. If any other matter is properly presented at the special meeting, your proxy (i.e., one of the individuals named on your proxy card) will vote your shares using his or her best judgment.

 

Q: What effect do abstentions and broker non-votes have on the outcome of the proposals?

 

A: An abstention has the same effect as a vote “Against” each of the proposals.

A “broker non-vote” occurs when a broker or bank cannot vote for a proposal because the broker or bank did not receive instructions from the beneficial owner on how to vote and does not have discretionary authority to vote on the beneficial owner’s behalf in the absence of instructions. Broker non-votes are not counted as present for the purpose of determining the existence of a quorum, and also have the same effect as a vote “Against” the proposal to adopt the merger agreement. Broker non-votes will have no effect on the proposal to adjourn the meeting to permit further solicitation of proxies.

 

Q: How does Spectrum’s board of directors recommend that I vote?

 

A: Spectrum’s board of directors (acting upon the unanimous recommendation of a committee of independent directors to Spectrum’s board of directors) recommends that Spectrum stockholders vote:

FOR Proposal No. 1 to adopt the merger agreement, and

FOR Proposal No. 2 to approve a proposal to adjourn the special meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes to adopt the merger agreement.

 

Q: When and where is the special meeting?

 

A: The special meeting will take place on [                    ], 2010 at [            ], at [            ].

 

Q: Why is my vote important?

 

A: If you do not submit your proxy by telephone or over the Internet, return your proxy card or vote in person at the special meeting, it will be more difficult for Spectrum to obtain the necessary quorum to hold the special meeting. In addition, the adoption of the merger agreement requires the affirmative votes of (i) a majority of the outstanding shares of Spectrum common stock entitled to vote (including the shares of the Harbinger Parties) and (ii) a majority of the outstanding shares of Spectrum common stock entitled to vote (excluding the shares of the Harbinger Parties (except any shares of Spectrum common stock acquired by the Harbinger Parties after March 1, 2010)). As a result, your failure to vote will have the same effect as a vote “Against” the adoption of the merger agreement.

 

Q: What do I need to do now?

 

A: After you carefully read this proxy statement/prospectus, submit your proxy by telephone or over the Internet or mail your signed proxy card in the enclosed return envelope, as soon as possible, but in any event no later than 11:59 p.m. Eastern Time on [                    ], 2010, so that your shares may be represented at the special meeting. In order to assure that your shares are voted, please submit your proxy as instructed on your proxy card even if you currently plan to attend the special meeting in person.

 

4


Table of Contents
Q: How do I vote?

 

A: You may vote “For,” “Against” or “Abstain” from voting on either proposal. Votes will be counted by the inspector of elections appointed for the special meeting. The procedures for voting are as follows:

Submitting a Proxy Prior to the Special Meeting

Whether or not you plan to attend the special meeting, we urge you to submit a proxy prior to the special meeting to ensure that your shares are voted. The deadline for submitting a proxy prior to the special meeting is 11:59 p.m. Eastern Time on [                    ], 2010. We strongly encourage you to submit a proxy by telephone or over the Internet prior to the special meeting, as further described below. Submitting a proxy by telephone or over the Internet will assist in ensuring that your vote is timely recorded and in reducing the costs related to the return of paper proxies.

 

   

If you have elected to receive your special meeting materials over the Internet, please submit a proxy over the Internet by following the instructions indicated in the email communication that you receive.

 

   

If you have not yet elected to receive your special meeting materials over the Internet, you may submit a proxy by telephone or over the Internet by following the instructions included on your proxy card. We strongly encourage you to submit a proxy by telephone or over the Internet. Alternatively, you may submit a proxy by promptly returning your completed, signed and dated proxy card in the envelope provided (which is postage pre-paid if mailed in the United States).

 

   

Please submit a proxy to vote in only one of the above ways. If you submit a proxy to vote in more than one way, the proxy received later in time will revoke your earlier proxy and be the only proxy by which your shares are voted.

 

   

Giving your proxy means that you authorize us to vote your shares at the special meeting in the manner you direct. If you sign the proxy card but do not make specific choices, your proxy will vote your shares as recommended by Spectrum’s board of directors as described above.

 

   

If any other matter is presented, your proxy will vote in accordance with his or her best judgment. At the time this Proxy Statement went to press, we knew of no matters which needed to be acted on at the special meeting, other than those discussed in this proxy statement/prospectus.

Voting During the Special Meeting

 

   

If you hold shares directly in your name, you may vote during the special meeting in person prior to the close of voting.

 

   

If your shares are held in “street name” through a bank, broker or other nominee, in order to vote during the special meeting you must request and obtain a new, valid proxy card from such nominee prior to the meeting (please contact them for further information). Once you have obtained and properly completed this new proxy card, you may vote in person prior to the close of voting.

 

Q: Do I hold my shares of record or in street name?

 

A.

If on the record date, your shares were registered directly in your name with Spectrum’s transfer agent, BNY Mellon Shareowner Services, then you are a stockholder of record. As a stockholder of record, you may vote in person at the meeting or vote by proxy. If on the record date your shares were held in an account at a brokerage firm, bank, dealer or similar organization, then you are the beneficial owner of shares held in “street name” and these proxy materials are being forwarded to you by that organization. The organization holding your account is considered the stockholder of record for purposes of voting at the special meeting.

 

5


Table of Contents
 

As a beneficial owner, you have the right to direct your broker or other agent on how to vote the shares in your account. You are also invited to attend the special meeting. However, because you are not the stockholder of record, you may not vote your shares in person at the meeting unless you request and obtain a valid proxy from your broker or other agent.

 

Q: If my Spectrum shares are held in street name by my broker, will my broker vote my Spectrum shares for me?

 

A: Brokers cannot vote your Spectrum shares on Proposal No. 1 to adopt the merger agreement. Therefore, it is important that you follow the directions provided by your broker about how to instruct your broker to vote your shares. If you do not provide instructions to your broker about how to vote your shares on this proposal, your shares will be treated as “broker non-votes” with respect to this proposal, which will have the same effect as a vote “Against” the proposal to adopt the merger agreement.

 

Q: How are votes counted?

 

A: The inspector of elections for the special meeting will tabulate the votes.

 

Q: How can I find out the voting results?

 

A: Preliminary and final voting results will be publicly announced as promptly as practicable. Preliminary voting results may be announced at the special meeting.

 

Q: May I change my vote after I have submitted my proxy?

 

A: Yes. You may revoke your proxy at any time before the close of voting at the special meeting. You may revoke your proxy in any of the following ways:

Prior to the special meeting, you may:

 

   

submit another properly completed proxy card with a later date by following the return instructions on the proxy card;

 

   

submit another proxy by telephone or over the Internet after you have already provided an earlier proxy (please refer to “How do I vote?” above for instructions on how to do so); or

 

   

send a written notice that you are revoking your proxy to our Corporate Secretary at our principal offices at Six Concourse Parkway, Suite 3300, Atlanta, GA 30328.

During the special meeting, you may vote in person prior to the close of voting. Simply attending the special meeting will not, by itself, revoke your proxy.

If you have instructed a broker, bank or other nominee to vote your shares, you must follow directions from such nominee to change those instructions.

 

Q: Who is paying for this proxy solicitation?

 

A: Spectrum will pay for the entire cost of soliciting proxies. In addition to the Spectrum proxy materials, Spectrum’s directors, officers, other employees and any other solicitors that Spectrum may retain may also solicit proxies personally, by telephone or by other means of communication. Directors and employees will not be paid any additional compensation for soliciting proxies. Spectrum will provide copies of its solicitation materials to banks, brokerage houses, fiduciaries and custodians that hold beneficially owned shares of Spectrum common stock for distribution to such beneficial owners. Spectrum has retained Georgeson, Inc. to aid in Spectrum’s proxy solicitation process. Spectrum estimates that its proxy solicitor fees will be approximately $[            ]. Spectrum may also reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners.

 

6


Table of Contents
Q: Should I send any documents representing my ownership of Spectrum common stock now?

 

A: No. After the proposed transaction is consummated, SB Holdings will send Spectrum stockholders written instructions for exchanging their Spectrum common stock for SB Holdings common stock. Please follow the instructions when you receive them.

 

Q: What does it mean if I receive more than one proxy card or more than one email instructing me to vote?

 

A: If you receive more than one proxy card or more than one email instructing you to vote, your shares are registered in more than one name or are registered in different accounts. Please complete, date, sign and return each proxy card, and respond to each email, to ensure that all of your shares are voted.

 

Q: What does it mean if multiple members of my household are stockholders but we only received one set of proxy materials?

 

A: If you hold shares in “street name,” in accordance with a notice sent to certain brokers, banks or other nominees, we are sending only one proxy statement/prospectus to an address unless we received contrary instructions from any stockholder at that address. This practice, known as “householding,” is designed to reduce Spectrum’s printing and postage costs. If you hold shares in your name rather than in street name and you would like to receive only one proxy statement/prospectus for your household, please contact BNY Mellon Shareowner Services, Spectrum’s transfer agent, at (800) 777-3694, or access your account on the Internet at www.bnymellon.com/shareowner.

However, if any stockholder residing in your household wishes to receive a separate proxy statement/prospectus for future special meetings, they may call Spectrum’s Investor Relations department at (770) 829-6200 or write to Investor Relations at investorrelations@spectrumbrands.com or Six Concourse Parkway, Suite 3300, Atlanta, GA 30328. For more information see “The Special Meeting and Proxy Solicitation—Spectrum Householding Information.”

 

Q: Whom can I contact with any additional questions?

 

A: If you have questions about the special meeting or would like additional copies of this proxy statement/prospectus, you should contact:

Spectrum Brands, Inc.

Six Concourse Parkway, Suite 3300

Atlanta, GA 30328

Attention: Investor Relations

Phone Number: (770) 829-6200

E-mail: investorrelations@spectrumbrands.com

 

7


Table of Contents

SUMMARY

This summary highlights some of the information contained elsewhere in this proxy statement/prospectus. It is not complete and may not contain all of the information that you may want to consider. We urge you to read carefully this entire proxy statement/prospectus, including “Risk Factors” beginning on page 29, and the other documents we refer you to for a more complete understanding of the proposed transaction and subsequent combination. See “Where You Can Find More Information.” Certain items in this summary include a page reference directing you to a more complete description of that item. Unless otherwise indicated in this proxy statement/prospectus or the context otherwise requires, throughout this proxy statement/prospectus we generally refer to Spectrum Brands, Inc. and, where applicable, its consolidated subsidiaries as “Spectrum,” Russell Hobbs, Inc. and, where applicable, its consolidated subsidiaries as “Russell Hobbs,” Spectrum Brands Holdings, Inc., a newly formed holding company, as “SB Holdings,” Battery Merger Corp., a direct wholly-owned subsidiary of SB Holdings, as “Battery Sub,” Grill Merger Corp., a direct wholly-owned subsidiary of SB Holdings, as “Grill Sub,” Harbinger Capital Partners Master Fund I, Ltd. (“Harbinger Master Fund”), a Cayman Islands exempted company, and two of its affiliates, Harbinger Capital Partners Special Situations Fund, L.P. (“Harbinger Special Situations Fund”) and Global Opportunities Breakaway Ltd. (“Breakaway Fund”) as the “Harbinger Parties” and the Agreement and Plan of Merger, dated as of February 9, 2010, by and among Spectrum, Russell Hobbs, SB Holdings, Battery Sub and Grill Sub, as amended, as the “merger agreement”.

The Companies (see page 56)

Spectrum Brands, Inc.

Six Concourse Parkway, Suite 3300

Atlanta, GA 30328

Telephone: (770) 829-6200

Spectrum, a Delaware corporation based in Atlanta, Georgia is a global branded consumer products company with leading market positions in six major product categories: consumer batteries, pet supplies, electric shaving and grooming, electric personal care, portable lighting and home and garden control products. Spectrum is a leading worldwide manufacturer and marketer of alkaline, zinc carbon and hearing aid batteries, as well as aquariums and aquatic health supplies and a leading worldwide designer and marketer of rechargeable batteries, battery-powered lighting products, electric shavers and accessories, grooming products and hair care appliances. Spectrum’s operations also include the manufacturing and marketing of specialty pet supplies. Spectrum is also a leading North American manufacturer and marketer of herbicides, insecticides and repellents.

Spectrum sells its products in approximately 120 countries through a variety of trade channels, including retailers, wholesalers and distributors, hearing aid professionals, industrial distributors and original equipment manufacturers. Spectrum enjoys strong name recognition in our markets under the Rayovac, VARTA and Remington brands, each of which has been in existence for more than 80 years, and under the Spectracide, Cutter, Tetra, 8-in-1 and various other brands. Spectrum has manufacturing and product development facilities located in the United States, Europe, China and Latin America. Substantially all of Spectrum’s rechargeable batteries and chargers, shaving and grooming products, personal care products and portable lighting products are manufactured by third party suppliers that are primarily located in Asia.

On February 3, 2009, Spectrum and thirteen of its United States subsidiaries (collectively, the “Debtors”) filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Western District of Texas. On August 28, 2009, the Debtors’ joint plan of reorganization (the “Plan”) became effective and the Debtors emerged from Chapter 11 of the Bankruptcy Code. Pursuant to the Plan, Spectrum’s capital structure was realigned. Spectrum’s outstanding equity securities were cancelled with no distribution to holders of Spectrum’s then existing equity. Spectrum issued new common stock and 12% Senior Subordinated Toggle Notes due 2019 (“PIK Notes”) to holders of allowed claims in respect of Spectrum’s then outstanding public senior subordinated notes. The supplemental and sub-supplemental

 

 

8


Table of Contents

participants in the Debtors’ debtor-in-possession credit facility also received the new common stock. Spectrum common stock has been listed on the New York Stock Exchange (“NYSE”) under the symbol “SPB” since March 18, 2010.

Russell Hobbs, Inc.

3633 S. Flamingo Road

Miramar, FL 33027

Telephone: (954) 883-1000

In December 2007, two longstanding companies in the small household appliance business, Salton, Inc. (“Salton”) and Applica Incorporated (“Applica”), combined their businesses through a merger, as a result of which Applica became a wholly-owned subsidiary of Salton. In December 2009, the combined company (formerly known as Salton, Inc.) changed its name to Russell Hobbs, Inc.

Russell Hobbs, a Delaware corporation based in Miramar, Florida, markets and distributes a broad range of branded small household appliances, pet and pest products, water products and personal care products. Russell Hobbs has a broad portfolio of well recognized brand names, including Black & Decker, George Foreman, Russell Hobbs, Farberware, Toastmaster, Juiceman, Breadman and LitterMaid. Russell Hobbs’ customers include mass merchandisers, specialty retailers and appliance distributors primarily in North America, South America, Europe and Australia.

Spectrum Brands Holdings, Inc.

c/o Russell Hobbs, Inc.

3633 S. Flamingo Road

Miramar, FL 33027

Telephone: (954) 883-1000

SB Holdings is a Delaware corporation and a newly formed holding company. SB Holdings was formed solely to effect the proposed transaction and has not conducted any business, other than in connection with the merger agreement and related ancillary agreements to which SB Holdings is a party. Pursuant to the merger agreement, Spectrum and Russell Hobbs will survive as wholly owned subsidiaries of SB Holdings. It is anticipated that SB Holdings will trade on the NYSE under the symbol “[            ]”.

Battery Merger Corp.

c/o Russell Hobbs, Inc.

3633 S. Flamingo Road

Miramar, FL 33027

Telephone: (954) 883-1000

Battery Sub is a newly formed Delaware corporation and a direct wholly owned subsidiary of SB Holdings, which was formed solely to effect the proposed transaction and has not conducted and will not conduct any business during any period of its existence. Pursuant to the merger agreement, Battery Sub will merge with and into Spectrum with Spectrum continuing as the surviving corporation and a wholly owned subsidiary of SB Holdings.

 

 

9


Table of Contents

Grill Merger Corp.

c/o Russell Hobbs, Inc.

3633 S. Flamingo Road

Miramar, FL 33027

Telephone: (954) 883-1000

Grill Sub is a newly formed Delaware corporation and a direct wholly owned subsidiary of SB Holdings formed solely to effect the proposed transaction and has not conducted and will not conduct any business during any period of its existence. Pursuant to the merger agreement, Grill Sub will merge with and into Russell Hobbs with Russell Hobbs continuing as the surviving corporation and a wholly owned subsidiary of SB Holdings.

The Merger Agreement (Proposal No. 1) (see page 121)

The merger agreement is attached as Annex A-1 to this proxy statement/prospectus and is incorporated by reference herein in its entirety. The first amendment to the merger agreement, dated as of March 1, 2010, is attached as Annex A-2 to this proxy statement/prospectus and is incorporated by reference herein in its entirety. The second amendment to the merger agreement, dated as of March 26, 2010, is attached as Annex A-3 to this proxy statement/prospectus and is incorporated by reference herein in its entirety. Spectrum encourages its stockholders to read the merger agreement and the two amendments thereto carefully and in their entirety, as the merger agreement is the principal legal document governing the mergers.

The Proposed Transaction (see page 73)

On February 9, 2010, Spectrum entered into the merger agreement with Russell Hobbs, SB Holdings, Battery Sub and Grill Sub. Under the merger agreement, (i) Battery Sub will merge with and into Spectrum, with Spectrum as the surviving corporation (the “Spectrum merger”), and (ii) Grill Sub will merge with and into Russell Hobbs, with Russell Hobbs as the surviving corporation (the “Russell Hobbs merger,” which together with the Spectrum merger are referred to herein as the “mergers”). Battery Sub and Grill Sub are both direct wholly-owned subsidiaries of SB Holdings. As a result of the mergers, Spectrum and Russell Hobbs will become subsidiaries of SB Holdings. Spectrum’s board of directors (the “Spectrum Board”) approved the merger agreement based on the unanimous recommendation to the Spectrum Board of a committee of independent directors (the “Committee”).

Upon the consummation of the mergers, (i) stockholders of Spectrum will be entitled to receive in the Spectrum merger one share (the “Spectrum Exchange Ratio”) of the common stock of SB Holdings (“SB Holdings common stock”) in exchange for each share they hold of Spectrum common stock (the “Spectrum common stock”) and (ii) Russell Hobbs stockholders will be entitled to receive shares of SB Holdings in exchange for their shares of common stock and preferred stock of Russell Hobbs (together, the “Russell Hobbs Stock”) in accordance with the terms of the merger agreement and based on a $675 million enterprise value of Russell Hobbs, subject to various adjustments set forth in the merger agreement, and a $31.50 per share valuation of Spectrum common stock. Furthermore, as part of the proposed transaction, the Harbinger Parties have agreed to convert their existing approximately $158 million aggregate principal amount of Russell Hobbs’ term debt into SB Holdings common stock at a price of $31.50 per share, which is included in the $675 million enterprise value of Russell Hobbs. The Harbinger Parties currently own approximately 40% of the outstanding shares of Spectrum common stock and 100% of the Russell Hobbs Stock. As a result of the mergers, the stockholders of Spectrum (other than the Harbinger Parties) are expected to own approximately 36% of SB Holdings, and the Harbinger Parties are expected to own approximately 64% of SB Holdings (assuming that the Harbinger Parties do not acquire additional shares of Spectrum common stock prior to the consummation of the mergers).

 

 

10


Table of Contents

The combination of Spectrum and Russell Hobbs, if consummated, will create a new global consumer products company with an estimated $3 billion in annual revenues, a strong balance sheet and a diverse portfolio of market-leading brands, including Remington, Rayovac, VARTA, Hot Shot, Cutter, Repel, Spectracide, Black & Decker, George Foreman, Russell Hobbs, LitterMaid, Toastmaster, Tetra, 8 in 1 and Dingo.

If the proposed transaction is consummated, SB Holdings, operating under the “Spectrum Brands” name, will continue to be managed by Spectrum’s senior management team, with the addition of Terry L. Polistina, current Chief Executive Officer of Russell Hobbs, to lead a fourth reporting segment made up of the existing Russell Hobbs’ portfolio of small household appliance brands. Spectrum’s current reporting segments, Global Batteries and Personal Care, Global Pet Supplies and Home and Garden, will remain autonomous and will continue to operate under their current management structures. Including Russell Hobbs’ $800 million in annual revenues, SB Holdings is expected to be approximately $3 billion in annual revenues with $430 million to $440 million of adjusted EBITDA in fiscal 2010. Anticipated synergies of $25 million to $30 million are expected to be realized within 36 months following the consummation of the mergers.

Financing the Proposed Transaction (see page 109)

Commitments for $1.8 billion in financing have been obtained from three financial institutions to be provided through a combination of new term loans, new senior notes and a new $300 million ABL revolving facility. Proceeds from the financing will be used to refinance substantially all of existing Spectrum and Russell Hobbs debt and to pay transaction fees and expenses.

The proposed transaction is expected to improve Spectrum’s leverage ratio, calculated as total debt less cash divided by adjusted EBITDA. Spectrum’s leverage ratio was 4.7x for the quarter ended January 3, 2010. The leverage ratio declines to 4.0x pro forma for the transaction. The leverage ratio is projected to decline to 3.8x for fiscal 2010. Compared to Spectrum’s existing capital structure, the new capital structure will provide longer maturities and additional liquidity for the combined company.

What Stockholders Will Be Entitled To Receive (see page 73)

Upon the consummation of the mergers, (i) stockholders of Spectrum will be entitled to receive in the Spectrum merger one share of SB Holdings common stock in exchange for each share they hold of Spectrum common stock and (ii) Russell Hobbs stockholders will be entitled to receive shares of SB Holdings in exchange for their shares of Russell Hobbs Stock in accordance with the terms of the merger agreement and based on a $675 million enterprise value of Russell Hobbs, subject to various adjustments set forth in the merger agreement, and a $31.50 per share valuation of Spectrum common stock.

Ownership of SB Holdings After the Proposed Transaction (see page 109)

After consummation of the mergers, the stockholders of Spectrum (other than the Harbinger Parties) are expected to own approximately 36% of SB Holdings and the Harbinger Parties are expected to own approximately 64% of SB Holdings (assuming that the Harbinger Parties do not acquire additional shares of Spectrum common stock prior to the consummation of the mergers). Specifically, the Russell Hobbs Stock will convert into SB Holdings common stock in accordance with the terms of the merger agreement and is based on a $675 million enterprise value of Russell Hobbs, subject to various adjustments set forth in the merger agreement, and a $31.50 per share valuation of Spectrum common stock. Furthermore, as part of the proposed transaction, the Harbinger Parties have agreed to convert their existing approximately $158 million aggregate principal amount of Russell Hobbs’ term debt into SB Holdings common stock at a price of $31.50 per share, which is included in the $675 million enterprise value of Russell Hobbs.

 

 

11


Table of Contents

Directors and Executive Officers of SB Holdings After the Proposed Transaction (see page 167)

Immediately following the mergers, the board of directors of SB Holdings will be divided into three classes and will be comprised of ten individuals. Initially, six directors will be designated by Russell Hobbs, three will be designated by Spectrum and one will be the Chief Executive Officer of SB Holdings. The Chief Executive Officer of Spectrum will be the initial Chief Executive Officer of SB Holdings. In addition to the Chief Executive Officer, Spectrum’s current management team will be the initial management team of SB Holdings. The Chief Executive Officer of Russell Hobbs will be added to Spectrum’s management team to lead a fourth reporting segment made up of the existing Russell Hobbs’ portfolio of home appliance brands.

Recommendation to Spectrum’s Stockholders (see page 73)

The Spectrum Board (consistent with the recommendation of the Committee to the Spectrum Board) believes the merger agreement and the proposed transaction are advisable and in the best interests of Spectrum’s stockholders (other than the Harbinger Parties) and recommends that you vote FOR the proposal to adopt the merger agreement. The Spectrum Board (consistent with the recommendation of the Committee to the Spectrum Board) also recommends that you vote FOR the proposal to adjourn the special meeting, if necessary, to permit further solicitation of proxies on the proposal to adopt the merger agreement. When you consider the Spectrum Board’s recommendation, you should be aware that Spectrum’s directors may have interests in the transaction that may be different from, or in addition to, your interests. These interests are described in “The Proposed Transaction—Interests of Certain Persons in the Spectrum Merger.”

Spectrum’s Reasons for the Proposed Transaction (see page 86)

In evaluating the proposed transaction, the Committee consulted its legal and financial advisors and, in making its recommendation, the Committee considered a number of factors, including those factors described under “The Proposed Transaction—Background of the Proposed Transaction—Recommendation of the Committee and the Spectrum Board of Directors; Reasons for the Transaction.” In the course of reaching its decision, the Spectrum Board considered, among other factors, the unanimous recommendation of the Committee. See “The Proposed Transaction—Background of the Proposed Transaction—Recommendation of the Committee and the Spectrum Board of Directors; Reasons for the Proposed Transaction—The Spectrum Board of Directors.”

Opinion of the Committee’s Financial Advisor (see page 95)

In connection with the transaction, the Committee received the written opinion, dated February 8, 2010, of its financial advisor, Barclays Capital Inc. (“Barclays Capital”), as to the fairness, from a financial point of view and as of the date of such opinion, to holders of Spectrum common stock (other than the Harbinger Parties and their respective affiliates) of the Spectrum Exchange Ratio. The full text of Barclays Capital’s written opinion is attached as Annex B to this proxy statement/prospectus and is incorporated herein by reference. Barclays Capital’s written opinion sets forth, among other things, the assumptions made, procedures followed, factors considered and limitations on the review undertaken by Barclays Capital in rendering its opinion. Barclays Capital’s opinion is addressed to the Committee (solely in its capacity as such) and relates only to the fairness, from a financial point of view, of the Spectrum Exchange Ratio. Barclays Capital’s opinion does not in any manner address Spectrum’s underlying business decision to proceed with or effect the proposed transaction, the likelihood of consummation of the proposed transaction or the terms of any related financing and does not constitute a recommendation to any stockholder as to how such stockholder should vote or act with respect to the proposed transaction.

Risks Relating to the Proposed Transaction (page 29)

You should understand that the following important factors, in addition to those discussed in “Risk Factors” below and elsewhere in this proxy statement/prospectus, and in the documents which are incorporated by

 

 

12


Table of Contents

reference in this proxy statement/prospectus, could affect the future results of Russell Hobbs and Spectrum, and of SB Holdings after the consummation of the proposed transaction, and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements:

 

   

the failure of Spectrum stockholders to adopt the merger agreement;

 

   

the risk that the businesses will not be integrated successfully;

 

   

the risk that synergies will not be realized;

 

   

the risk that required consents will not be obtained;

 

   

the risk that SB Holdings following this transaction will not realize its financing strategy;

 

   

litigation with respect to either company or the mergers; and

 

   

disruption from the mergers making it more difficult to maintain certain strategic relationships.

Spectrum Stockholder Vote Required (see page 103)

Adoption of the merger agreement requires an affirmative votes of the holders of (i) a majority of the outstanding shares of Spectrum common stock entitled to vote (including the shares of the Harbinger Parties) and (ii) a majority of the outstanding shares of Spectrum common stock entitled to vote (excluding the shares of the Harbinger Parties (except any shares of Spectrum common stock acquired by the Harbinger Parties after March 1, 2010)). Approval of the proposal to adjourn the special meeting, if necessary, to permit further solicitation of proxies if adoption of the merger agreement is not obtained at the special meeting, requires the affirmative vote of the holders of a majority of the shares represented at the special meeting and entitled to vote on the matter.

Treatment of Spectrum Restricted Stock (see page 124)

Prior to and contingent upon the consummation of the mergers, the Spectrum Board (or the appropriate committee thereof) will take any actions necessary to cause each share of restricted stock with respect to Spectrum common stock to be converted into a share of restricted stock with respect to SB Holdings common stock at the exchange ratio for the conversion of Spectrum common stock, as may be adjusted, without change in the vesting schedule and other terms and conditions of the restricted stock. At the effective time of the mergers, the Spectrum 2009 Incentive Plan will be assumed by SB Holdings.

Conditions to the Consummation of the Mergers (see page 130)

Consummation of the mergers is subject to certain conditions, including, among others, closing of the new financing, adoption of the merger agreement by the affirmative votes of the holders of (i) a majority of the outstanding shares of Spectrum common stock entitled to vote (including the shares of the Harbinger Parties) and (ii) a majority of the outstanding shares of Spectrum common stock entitled to vote (excluding the shares of the Harbinger Parties (except any shares of Spectrum common stock acquired by the Harbinger Parties after March 1, 2010)), customary regulatory approvals, no material adverse change in Spectrum or Russell Hobbs and other customary closing conditions.

Termination of the Merger Agreement (see page 137)

The merger agreement may be terminated due to any of the following:

 

   

by mutual written consent of Spectrum and Russell Hobbs;

 

   

by Russell Hobbs if there is a change in the recommendation by the Spectrum Board;

 

   

by Spectrum if the Spectrum Board decides to accept a Superior Proposal as described below;

 

 

13


Table of Contents
   

by either party:

 

   

if the proposed transaction is not consummated before the close of business on August 12, 2010;

 

   

if the proposed transaction is enjoined or otherwise prohibited by law;

 

   

if Spectrum’s stockholders do not adopt the merger agreement; or

 

   

if there is a material breach (as defined in the merger agreement) by either party.

The Spectrum Board (consistent with the recommendation of the Committee to the Spectrum Board) may withdraw or change its recommendation to the Spectrum stockholders with respect to the Spectrum merger if the Spectrum Board determines that to do otherwise would be inconsistent with its fiduciary duties because of the existence of an Intervening Event (as defined in the merger agreement) or a Superior Proposal. In addition, subject to certain procedural requirements (including the ability of Russell Hobbs to revise its offer) and payment of the termination fee and expense reimbursement discussed below, Spectrum may terminate the merger agreement and enter into an agreement with a third party which makes a Superior Proposal.

Termination Fees and Expenses (see page 139)

In connection with the termination of the merger agreement under specified circumstances generally related to a change in the recommendation by the Spectrum Board or a termination in connection with a Superior Proposal, Spectrum may be required to pay Russell Hobbs a termination fee of $1 million (or $10 million in specified circumstances) and reimburse Russell Hobbs for certain expenses related to the merger agreement up to an aggregate amount of $10 million (or in some cases expense reimbursement will not be subject to this $10 million limit). In connection with the termination of the merger agreement due to the failure to obtain the debt financing, Russell Hobbs may be required to pay Spectrum a reverse termination fee of $1 million and reimburse Spectrum Brands for certain expenses related to the merger agreement up to an aggregate amount of $10 million.

Prior to any termination of the merger agreement, the only remedy that either party may pursue is specific performance. Following termination, the parties’ sole remedy will be the termination fees described above (if payable), except in the case of a willful and material breach, in which case the aggregate amount of damages of either party may not exceed $50 million. Money damages payable by the Harbinger Parties and their affiliates under the merger agreement and the other transaction documents following a termination of the merger agreement are limited to $50 million in the aggregate.

Regulatory Matters (see page 111)

Consummation of the mergers is subject to prior receipt of those approvals and consents required to be obtained from applicable governmental and regulatory authorities, including under the Hart-Scott-Rodino Act (“HSR Act”) and by the applicable governmental authorities of Canada, Germany and Spain (except those the failure of which to be made or obtained does not have and would not reasonably be likely to have, individually or in the aggregate, an RH Material Adverse Effect and/or a Battery Material Adverse Effect (as each is defined in the merger agreement)). Spectrum, Russell Hobbs and SB Holdings have agreed to cooperate and use all reasonable best efforts to obtain, or cause their applicable affiliates to obtain, all permits, consents, approvals and authorizations from any governmental or regulatory authority necessary to consummate the mergers as promptly as practicable.

Although Spectrum has submitted the required notices to the applicable antitrust regulatory authorities in the United States, Canada, Germany and Spain, and the antitrust regulatory authorities of Canada and Germany have each issued a ruling in favor of the mergers, there can be no assurance that the remaining regulatory approvals will be obtained, that such approvals will be received on a timely basis or that such approvals will not impose conditions or requirements that, individually or in the aggregate, would or could reasonably be expected to have a material adverse effect on the financial condition, results of operations, assets or business of SB Holdings following consummation of the mergers.

 

 

14


Table of Contents

Except for the competition law approvals described above, Spectrum, Russell Hobbs and SB Holdings are not aware of any governmental approvals or compliance with applicable laws and regulations that are required for the mergers to become effective other than filings with the NYSE regarding the listing of SB Holdings’ shares and filings with the Securities and Exchange Commission (“SEC”) regarding this proxy statement/prospectus. Spectrum, Russell Hobbs and SB Holdings intend to seek any other approvals required to consummate the mergers. There can be no assurance, however, that any such approvals will be obtained.

No Appraisal Rights (see page 71)

Spectrum stockholders are not entitled to appraisal rights under the General Corporation Law of the State of Delaware (“DGCL”) in connection with the mergers.

Material U.S. Federal Income Tax Consequences (see page 143)

The obligation of Spectrum to consummate the Spectrum merger is conditioned on the receipt by Spectrum of an opinion of Sutherland Asbill & Brennan LLP, counsel to Spectrum, dated the date of the effective time of the Spectrum merger, to the effect that for U.S. federal income tax purposes the Spectrum merger will constitute a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code and/or the mergers, taken together, will constitute exchanges described in Section 351 of the Internal Revenue Code.

Interests of Certain Persons in the Spectrum Merger (see page 104)

When Spectrum stockholders consider the Spectrum Board’s recommendation that they vote in favor of the adoption of the merger agreement, Spectrum stockholders should be aware that Spectrum executive officers and directors may have interests in the Spectrum merger that may be different from, or in addition to, their interests.

As of March 26, 2010, Spectrum directors and named executive officers have been granted restricted stock which represents approximately 2% of the outstanding shares of Spectrum common stock. They will be entitled to receive the same consideration for their shares of Spectrum common stock in the Spectrum merger as the other holders of Spectrum common stock. The named executive officers hold restricted stock, which vests 75% on October 1, 2010, and 25% on October 1, 2011, and the directors hold restricted stock which vests 100% on October 1, 2010, if the executive officer is employed by (or the director is serving as a director of) Spectrum on such date. If the executive officer terminates employment (or the director ceases to serve as a director) before such date under certain circumstances, vesting of the restricted stock may be accelerated or may continue as if such executive officer remained employed by Spectrum.

Spectrum has entered into employment agreements with certain of its executive officers. Under these employment agreements, Spectrum’s executive officers would have been entitled to significant payments in connection with their termination of employment or a change in control of Spectrum. However, in connection with the mergers, such executive officers have waived the right to assert that the Spectrum merger is a change in control and have waived the right to receive any compensation or benefits due solely as a result of the Spectrum merger, to the extent such benefits were triggered, pursuant to signed Change in Control Waivers and Releases, each effective as of February 8, 2010. For the avoidance of doubt, the named executive officers have not waived their contractual rights, if any, under their employment agreements to receive compensation or benefits if their employment is terminated without regard to whether a change in control has occurred.

There are 26.4 million outstanding Russell Hobbs Restricted Stock Units (“RSU”) which will vest on the earlier to occur of (i) a change in control of Russell Hobbs (as defined below), (ii) the first anniversary of a “significant corporate event” (as defined below), or (iii) the termination of the RSU holder’s employment with Russell Hobbs without “cause” or by the employee for “good reason” after the occurrence of a significant corporate event. Under the merger agreement, the Russell Hobbs equity awards will be converted based on the

 

 

15


Table of Contents

RH Common Exchange Ratio (as defined in the merger agreement) into comparable equity awards with respect to SB Holdings common stock at the effective time of the mergers.

On February 8, 2010, Spectrum entered into an amendment to the employment agreement of David R. Lumley, Spectrum’s Co-Chief Operating Officer and President of its Global Batteries and Personal Care and Home and Garden segments. This amendment provides that, in the event that Spectrum’s current Chief Executive Officer, Kent J. Hussey, no longer serves as the sole Chief Executive Officer, Mr. Lumley would succeed Mr. Hussey as the sole Chief Executive Officer of Spectrum and the sole Chief Executive Officer of the business group of which Spectrum is a part. In connection with such position, SB Holdings and Mr. Lumley will enter into a new employment agreement providing for compensation and benefits commensurate with such position, which terms shall not be less favorable than the compensation and benefits currently in effect for Mr. Lumley.

In addition, the merger agreement requires SB Holdings to (x) either maintain Spectrum’s and Russell Hobbs’ current directors’ and officers’ liability insurance policies for a period of six years from the effective time of the mergers or (y) obtain substitute policies or purchase a “tail” policy with a claims period of at least six years from the effective time of the mergers, in each case that provides coverage for events occurring on or before the effective time of mergers. The terms of the insurance policies will be no less favorable than Spectrum’s and Russell Hobbs’ respective existing policies, unless the annual premiums of the policies would exceed 300% of the current policies’ premiums as of the date of the merger agreement, in which case the coverage will be the greatest amount of coverage available for a premium amount not exceeding 300% of such current premiums.

The Harbinger Parties currently own approximately 40% of the outstanding Spectrum common stock and own 100% of the outstanding Russell Hobbs Stock. The Harbinger Parties may have interests that differ from those of the other Spectrum stockholders due to their 100% ownership of Russell Hobbs. As a result of the mergers, the Harbinger Parties will reduce their ownership of Russell Hobbs from 100% direct ownership to approximately 64% indirect ownership, and they will increase their ownership of Spectrum from approximately 40% direct ownership to approximately 64% indirect ownership (assuming that the Harbinger Parties do not acquire additional shares of Spectrum common stock prior to the consummation of the mergers).

Material Support and Ancillary Agreements in Connection with the Proposed Transaction (see page 112)

Stockholder Agreement

In connection with the proposed transaction, the Harbinger Parties and SB Holdings entered into a stockholder agreement, dated February 9, 2010 (the “Stockholder Agreement”), which will be effective as of the effective time of the mergers, to provide for certain protective provisions in favor of minority stockholders, including selection of three independent directors by a special nominating committee, preemptive rights for certain eligible stockholders, limitations on transactions with affiliates of significant stockholders, limitations on going private transactions and tag along rights.

Support Agreements

Harbinger Support Agreement and Letter Agreement

On February 9, 2010, Spectrum entered into a support agreement with the Harbinger Parties (the “Harbinger Support Agreement”). Under the Harbinger Support Agreement, the Harbinger Parties agree to vote their shares of Spectrum common stock acquired before the date of the merger agreement in favor of the mergers and against any Alternative Proposal that would impede the mergers.

 

 

16


Table of Contents

In the event that the merger agreement is terminated by Spectrum in connection with a Superior Proposal, which requires the approval of the Spectrum stockholders to be effective and which involves all or substantially all of Spectrum’s assets or stock before its stockholders adopt the merger agreement, the Harbinger Parties have agreed to vote sufficient shares of their Spectrum common stock acquired before the date of the merger agreement to cause such Superior Proposal to be approved, if such Superior Proposal values the Spectrum common stock at no less than $34.65 per share and assuming at least two-thirds of the Spectrum common stock not held by the Harbinger Parties or their affiliates (except Letter Agreement Shares (defined below)) are voted in favor of, or tendered in connection with, such Superior Proposal.

On March 1, 2010, Spectrum and the Harbinger Parties entered into a letter agreement (the “Letter Agreement”) amending the Harbinger Support Agreement to permit the Harbinger Parties to purchase up to 100,000 shares of Spectrum common stock per week prior to the consummation of the mergers, up to an aggregate maximum of two million shares, in order to provide additional liquidity to Spectrum’s stockholders. The Harbinger Support Agreement otherwise would in general have prohibited the Harbinger Parties from acquiring additional shares of Spectrum common stock until the termination of the merger agreement.

Pursuant to the terms of the Letter Agreement, the Harbinger Parties have generally agreed to vote any such newly acquired shares of Spectrum common stock proportionately with the votes of the holders of Spectrum common stock (other than the Harbinger Parties and the Avenue Parties (defined below)) with respect to the merger agreement and the mergers, except that the Harbinger Parties will vote any shares purchased from Avenue International Master, L.P. and certain of its affiliates that own Spectrum common stock (the “Avenue Parties”) in accordance with the Avenue Parties’ voting obligations under the support agreement, dated as of February 9, 2010, by and among Spectrum and the Avenue Parties (the “Avenue Support Agreement”). If the Avenue Support Agreement is terminated or suspended, any shares purchased by the Harbinger Parties from the Avenue Parties will be voted proportionately with the votes of the holders of Spectrum common stock (other than the Harbinger Parties and the Avenue Parties). The Harbinger Parties have also agreed to vote their shares of Spectrum common stock acquired after March 1, 2010 pursuant to the Letter Agreement proportionately with the votes of the other holders of Spectrum common stock with respect to a Superior Proposal (regardless of the price offered for Spectrum common stock under such Superior Proposal).

Avenue Support Agreement

On February 9, 2010, Spectrum entered into the Avenue Support Agreement. Under the Avenue Support Agreement, the Avenue Parties agree to vote their shares of Spectrum common stock in favor of the mergers and against any Alternative Proposal that would impede the mergers. The obligation of the Avenue Parties to so support the mergers will terminate on the first to occur of (i) the consummation of the mergers, (ii) the date on which the merger agreement is terminated, (iii) 15 business days following the date on which the Spectrum Board changes its recommendation of the mergers or the Committee recommends to the Spectrum Board that it change such recommendation, and (iv) August 12, 2010.

Ancillary Agreements

Harbinger Limited Guarantee and Indemnification Agreement

Harbinger Master Fund has agreed, among other things and subject to the terms and conditions set forth therein, to guarantee the obligations of Russell Hobbs to pay (i) a reverse termination fee to Spectrum under the merger agreement and (ii) monetary damages awarded to Spectrum in connection with any willful and material breach by Russell Hobbs of the merger agreement. The maximum amount payable by Harbinger Master Fund under such guarantee is $50 million less any amounts paid by Russell Hobbs or the Harbinger Parties, or any of

 

 

17


Table of Contents

their respective affiliates as damages under any documents related to the proposed transaction. Harbinger Master Fund has also agreed to indemnify Russell Hobbs, SB Holdings and their subsidiaries for out-of-pocket costs and expenses above $3 million in the aggregate that become payable after the consummation of the mergers and that relate to the litigation arising out of the Applica transaction.

Registration Rights Agreement

In connection with the merger agreement, the Harbinger Parties, the Avenue Parties and SB Holdings entered into a registration rights agreement, dated as of February 9, 2010 (the “Registration Rights Agreement”), pursuant to which, after the consummation of the mergers, the Harbinger Parties and the Avenue Parties will, among other things and subject to the terms and conditions set forth therein, have certain demand and so-called “piggy back” registration rights with respect to their shares of SB Holdings common stock.

Under the Registration Rights Agreement, after the consummation of the mergers, any of the Harbinger Parties and the Avenue Parties may demand that SB Holdings register all or a portion of such Harbinger Party’s or Avenue Party’s SB Holdings common stock for sale under the Securities Act of 1933, as amended (the “Securities Act”), so long as the anticipated aggregate offering amount of the securities to be offered to the public (based on the average of the daily closing price of the securities for the 30 immediately preceding trading days) is (i) at least $30 million if registration is to be effected pursuant to a registration statement on Form S-1 or a similar “long-form” registration or (ii) at least $5 million if registration is to be effected pursuant to a registration statement on Form S-3 or a similar “short-form” registration.

Amendment of Certain Provisions of PIK Notes

The merger agreement required Spectrum to commence a consent solicitation to seek the consent of the holders of the PIK Notes to modify certain provisions of the indenture governing the PIK Notes, dated August 31, 2009 (the “PIK Notes Indenture”) such that the mergers will not constitute a “change of control” under the PIK Notes Indenture and to provide more accommodative debt incurrence covenants under the combined business of Spectrum and Russell Hobbs. The Spectrum Consent Solicitation (as defined below) was initiated on March 1, 2010 and expired at 5:00 p.m. New York City time on March 9, 2010. Spectrum has obtained the requisite consents of holders representing a majority in aggregate principal amount of the PIK Notes outstanding (excluding PIK Notes owned by affiliates of Spectrum) necessary to amend the PIK Notes Indenture and the amendment has been executed and delivered by the parties thereto.

First Amendment to Merger Agreement

The parties to the merger agreement entered into an amendment to the merger agreement, dated as of March 1, 2010, (the “first amendment”), which extended the “go-shop” period under the merger agreement by 15 days to April 9, 2010. In addition, as discussed below, because the parties to the merger agreement agreed to permit the Harbinger Parties to purchase additional shares of Spectrum common stock prior to the consummation of the mergers, the first amendment also changed the stockholder approval requirement so that the merger agreement and the proposed transaction must be approved by the affirmative votes of the holders of (i) a majority of the outstanding shares of Spectrum common stock entitled to vote (including the shares of the Harbinger Parties) and (ii) a majority of the outstanding shares of Spectrum common stock entitled to vote (excluding the shares of the Harbinger Parties (other than any shares of Spectrum common stock acquired by the Harbinger Parties after March 1, 2010)). The purpose of this change is to ensure that any shares acquired by the Harbinger Parties pursuant to the Letter Agreement are counted for purposes of obtaining the adoption of the merger agreement by a majority of the outstanding shares of Spectrum common stock entitled to vote other than shares held by the Harbinger Parties as of the date of the merger agreement.

 

 

18


Table of Contents

Second Amendment to Merger Agreement

The parties to the merger agreement entered into a second amendment to the merger agreement dated as of March 26, 2010 (the “second amendment”). The second amendment was executed to incorporate several technical revisions to the SB Holdings certificate of incorporation and bylaws to be effective at the closing of the mergers. In addition, the second amendment clarified that Spectrum stockholder approval is required only for the adoption of the merger agreement and not any other aspects of the proposed transaction.

Comparison of SB Holdings and Spectrum Stockholder Rights (see page 199)

The rights of Spectrum stockholders are currently governed by the DGCL and Spectrum’s certificate of incorporation and bylaws. Upon consummation of the mergers, Spectrum stockholders and Russell Hobbs stockholders that receive SB Holdings common stock pursuant to the mergers will become stockholders of SB Holdings, and their rights will be governed by the DGCL and SB Holdings’ restated certificate of incorporation and amended and restated bylaws.

 

 

19


Table of Contents

SPECTRUM SELECTED HISTORICAL FINANCIAL INFORMATION

The following table sets forth selected historical consolidated financial information of Spectrum for the periods presented. The selected financial information, as of September 30, 2009, 2008, 2007, 2006 and 2005 and for each of the five fiscal years then ended has been derived from Spectrum’s audited consolidated financial statements. The selected financial information, as of January 3, 2010 and for the quarterly period then ended, has been derived from Spectrum’ unaudited condensed consolidated financial statements which include, in the opinion of Spectrum’s management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the results of operations and financial position of Spectrum for the period and date presented.

On November 5, 2008, the Spectrum Board committed to the shutdown of the growing products portion of Spectrum’s Home and Garden Business, which includes the manufacturing and marketing of fertilizers, enriched soils, mulch and grass seed, following an evaluation of the historical lack of profitability and the projected input costs and significant working capital demands for the growing product portion of the Home and Garden Business during fiscal 2009. During the second quarter of fiscal 2009, Spectrum completed the shutdown of the growing products portion of the Home and Garden Business and, accordingly, began reporting the results of operations of the growing products portion of the Home and Garden Business as discontinued operations. As of October 1, 2005, Spectrum began reporting the results of operations of Nu-Gro Pro and Tech as discontinued operations. Spectrum also began reporting the results of operations of the Canadian division of the Home and Garden Business as discontinued operations as of October 1, 2006, which business was sold on November 1, 2007. Therefore, the presentation of all historical continuing operations has been changed to exclude the growing products portion of the Home and Garden Business, the Nu-Gro Pro and Tech and the Canadian division of the Home and Garden Business but to include the remaining control products portion of the Home and Garden Business.

The financial information indicated may not be indicative of future performance. This financial information and other data should be read in conjunction with the respective audited and unaudited consolidated financial statements of Spectrum, including the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” incorporated in this proxy statement/prospectus by reference. See “The Companies—Information About Spectrum” This information should also be read in conjunction with the unaudited pro forma condensed combined financial statements.

 

 

20


Table of Contents
    Successor Company     Predecessor Company  
    The
Quarterly
Period
Ended
January 3,
2010
    The
Period
From
August 31,
2009
through
September 30,
2009
    The
Period
From
October 1,
2008
through
August 30,

2009
    Fiscal Year Ended September 30,  
        2008     2007     2006     2005  
          (In millions, except per share data)  

Statement of Operations Data:

             

Net sales

  $ 591.9      $ 219.9      $ 2,010.6      $ 2,426.6      $ 2,332.7      $ 2,228.5      $ 2,077.5   

Gross profit

    184.5        64.4        751.8        920.1        876.7        871.2        821.9   

Operating income (loss) (1)

    18.8        0.1        156.8        (684.6 )     (251.8 )     (289.1 )     202.6   

(Loss) income from continuing operations before income taxes

    (35.0     (20.0 )     1,227.8        (914.8 )     (507.2 )     (460.9 )     69.2   

(Loss) income from discontinued operations, net of tax (2)

    (2.7     0.4        (86.8 )     (26.2 )     (33.7 )     (2.5 )     2.3   

Net (loss) income (3)(4)(5)(6)

    (60.2     (70.8 )     1,013.9        (931.5 )     (596.7 )     (434.0 )     46.8   

Restructuring and related charges—cost of goods sold (7)

  $ 1.7      $ 0.2      $ 13.2      $ 16.5      $ 31.3      $ 21.1      $ 10.5   

Restructuring and related charges—operating expenses (7)

    4.8        1.6        30.9        22.8        66.7        33.6        15.8   

Other expense (income), net (8)

    0.6        (0.8 )     3.3        1.2        (0.3 )     (4.1 )     (0.7 )

Interest expense

  $ 49.5      $ 17.0      $ 172.9      $ 229.0      $ 255.8      $ 175.9      $ 134.1   

Per Share Data:

             

Net (loss) income per common share:

             

Basic

  $ (2.01   $ (2.36 )   $ 19.76      $ (18.29 )   $ (11.72 )   $ (8.77 )   $ 1.07   

Diluted

  $ (2.01   $ (2.36 )     19.76        (18.29 )     (11.72 )     (8.77 )     1.03   

Average shares outstanding:

             

Basic

    30.0        30.0        51.3        50.9        50.9        49.5        43.7   

Diluted (9)

    30.0        30.0        51.3        50.9        50.9        49.5        45.6   

Cash Flow and Related Data:

             

Net cash provided (used) by operating activities

  $ (31.4   $ 75.0      $ 1.6      $ (10.2 )   $ (32.6 )   $ 44.5      $ 216.6   

Capital expenditures (10)

    (4.9     2.7        8.1        18.9        23.2        55.6        60.5   

Depreciation and amortization (excluding amortization of debt issuance costs) (10)

    25.0        8.6        58.5        85.0        77.4        82.6        68.5   

Statement of Financial Position Data (at period end):

             

Cash and cash equivalents

  $ 62.7      $ 97.8        $ 104.8      $ 69.9      $ 28.4      $ 29.9   

Working capital (11)

    294.3        323.7          371.5        370.2        397.2        490.6   

Total assets

    2,908.1        3,020.7          2,247.5        3,211.4        3,549.3        4,022.1   

Total long-term debt, net of current maturities

    1,524.7        1,530.0          2,474.8        2,416.9        2,234.5        2,268.0   

Total debt

    1,584.2        1,583.5          2,523.4        2,460.4        2,277.2        2,307.3   

Total shareholders’ equity (deficit)

    600.4        660.9          (1,027.2 )     (103.8 )     452.2        842.7   

 

(1)

During fiscal 2009, 2008, 2007 and 2006, pursuant to the Financial Accounting Standards Board Codification Topic 350: “Intangibles-Goodwill and Other,” formerly the Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets, Spectrum conducted its annual impairment testing of goodwill and indefinite-lived intangible assets. As a result of these analyses Spectrum recorded non-cash pretax impairment charges of approximately $34 million, $861 million, $362 million and $433 million in the eleven month period ended August 30, 2009, fiscal 2008, fiscal 2007 and fiscal 2006, respectively. See the “Critical Accounting Policies—Valuation of Assets and Asset Impairment section of

 

 

21


Table of Contents
 

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” incorporated in this proxy statement/prospectus by reference as well as Note 3(i), Significant Accounting Policies—Intangible Assets, of Notes to Consolidated Financial Statements incorporated in this proxy statement/prospectus by reference for further details on these impairment charges.

 

(2) Fiscal 2007 loss from discontinued operations, net of tax, includes a non-cash pretax impairment charge of approximately $45 million to reduce the carrying value of certain assets, principally consisting of goodwill and intangible assets, relating to Spectrum’s Canadian Division of the Home and Garden Business in order to reflect the estimated fair value of this business. Fiscal 2008 loss from discontinued operations, net of tax, includes a non-cash pretax impairment charge of approximately $8 million to reduce the carrying value of intangible assets relating to Spectrum’s growing products portion of the Home and Garden Business in order to reflect the estimated fair value of this business. See Note 6, Assets Held for Sale, and Note 10, Discontinued Operations, of Notes to Consolidated Financial Statements incorporated in this proxy statement/prospectus by reference for information relating to these impairment charges.

 

(3) Included in the one month period for the Successor Company is a non-cash tax charge of $58 million related to the residual U.S. and foreign taxes on approximately $166 million of actual and deemed distributions of foreign earnings. The eleven month period ended August 30, 2009 income tax expense includes a non-cash adjustment of approximately $52 million which reduced the valuation allowance against certain deferred tax assets.

The eleven month Predecessor Company includes a non-cash charge of $104 million related to the tax effects of the fresh-start adjustments. In addition, Predecessor Company includes the tax effect on the gain on the cancellation of debt from the extinguishment of the senior subordinated notes as well as the modification of the senior term credit facility resulting in approximately $124 million reduction in the U.S. net deferred tax asset exclusive of indefinite lived intangibles. Due to the Company’s full valuation allowance position as of August 30, 2009 on the U.S. net deferred tax asset exclusive of indefinite lived intangibles, the tax effect of the gain on the cancellation of debt and the modification of the senior secured credit facility is offset by a corresponding adjustment to the valuation allowance of $124 million. The tax effect of the fresh-start adjustments, the gain on the cancellation of debt and the modification of the senior secured credit facility, net of corresponding adjustments to the valuation allowance, are netted against reorganization items.

 

(4) Fiscal 2008 income tax benefit of $9.5 million includes a non-cash charge of approximately $222.0 million which increased the valuation allowance against certain net deferred tax assets.

 

(5) Fiscal 2007 income tax expense of $55.8 million includes a non-cash charge of approximately $180.1 million which increased the valuation allowance against certain net deferred tax assets.

 

(6) Fiscal 2006 income tax benefit of $29.4 million includes a non-cash charge of approximately $29.3 million which increased the valuation allowance against certain net deferred tax assets.

 

(7) See Note 15, Restructuring and Related Charges, of Notes to Consolidated Financial Statements incorporated in this proxy statement/prospectus by reference for further discussion.

 

(8) Fiscal 2006 includes a $7.9 million net gain on the sale of our Bridgeport, CT manufacturing facility, acquired as part of the Remington Products Company, L.L.C. acquisition and subsequently closed in fiscal 2004, and our Madison, WI packaging facility, which was closed in Spectrum’s fiscal 2003.

 

(9) Each of the one month period ended September 30, 2009, the eleven month period ended August 30, 2009, fiscal 2008, 2007 and 2006 does not assume the exercise of common stock equivalents as the impact would be antidilutive.

 

(10) Amounts reflect the results of continuing operations only.

 

(11) Working capital is defined as current assets less current liabilities.

 

 

22


Table of Contents

RUSSELL HOBBS SELECTED HISTORICAL FINANCIAL INFORMATION

Merger of Salton and Applica. In December 2007, two longstanding companies in the small household appliance business, Salton and Applica, combined their businesses through a merger of SFP Merger Sub, Inc., a Delaware corporation and a wholly owned direct subsidiary of Salton, with and into APN Holding Company, Inc., the parent of Applica Incorporated. As a result of the merger, Applica became a wholly-owned subsidiary of Salton. In December 2009, the combined company (formerly known as Salton, Inc.) changed its name to Russell Hobbs, Inc.

Statement of Financial Accounting Standard (“SFAS”) No. 141 “Business Combinations” requires the use of the purchase method of accounting for business combinations. In applying the purchase method, it is necessary to identify both the accounting acquiree and the accounting acquiror. In a business combination effected through an exchange of equity interests, such as the merger of Applica and Salton, the entity that issues the interests (Salton in this case) is normally the acquiring entity. However, in identifying the acquiring entity in a combination effected through an exchange of equity interests, all pertinent facts and circumstances must be considered, including the following:

 

   

the relative voting interests in the combined entity after the combination: in this case, stockholders of Applica received approximately 92% of the equity ownership and associated voting rights in the combined entity upon completion of the merger and related transactions; and

 

   

the composition of the governing body of the combined entity: in this case, the merger agreement provided that the composition of the board of directors of the surviving company would be determined by Applica.

While Salton, Inc. was the legal acquiror and surviving registrant in the merger, Applica was deemed to be the accounting acquiror based on the facts and circumstances outlined above. Accordingly, for accounting and financial statement purposes, the merger was treated as a reverse acquisition of Salton by Applica under the purchase method of accounting.

Harbinger Master Fund’s and Harbinger Special Situations Fund’s Acquisition of Applica. In January 2007 (prior to the merger of Applica and Salton), Applica was acquired by Harbinger Master Fund and Harbinger Special Situations Fund. For purposes of financial reporting, the acquisition was deemed to have occurred on January 1, 2007. References to “Successor” in the financial statements contained herein refer to reporting dates on or after January 1, 2007 and references to “Predecessor” in the financial statements refer to reporting dates through December 31, 2006. This is to indicate two different bases of accounting presented: (1) the period prior to the acquisition (January 1, 2006 through December 31, 2006, labeled “Predecessor”) and (2) the period after the acquisition, including, the acquisition date (January 1, 2007 – June 30, 2008, labeled “Successor”).

The following table sets forth selected historical consolidated financial information of Russell Hobbs for the periods presented. The selected financial information as of June 30, 2009, June 30, 2008, June 30, 2007, December 31, 2006, December 31, 2005 and December 31, 2004 and for each of the five fiscal years then ended, has been derived from Russell Hobbs’ audited consolidated financial statements. The selected financial data as of December 31, 2009, December 31, 2008, and June 30, 2006, and for each of the periods then ended, has been derived from Russell Hobbs’ unaudited condensed consolidated financial statements which include, in the opinion of Russell Hobbs’ management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the results of operations and financial position of Russell Hobbs for the periods and dates presented.

The results of operations for an interim period are not necessarily indicative of results for the full year or any other interim period. This financial information and other data should be read in conjunction with the respective audited and unaudited consolidated financial statements of Russell Hobbs, including the notes thereto, and “Russell Hobbs Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this proxy statement/prospectus. This information should also be read in conjunction with the unaudited pro forma condensed consolidated financial statements.

 

 

23


Table of Contents
    Successor Company     Predecessor Company  
    Six Months Ended
December 31,
    Year Ended
June 30,
    Six Months Ended
June 30,
    Year Ended
December 31,
 
    2009     2008     2009     2008     2007     2006     2006     2005     2004  
    (Dollars in thousands, except per share data)  

Statement of Operations:

                 

Net sales

  $ 459,776      $ 476,774      $ 796,660      $ 660,897      $ 207,001      $ 188,286      $ 466,880      $ 496,868      $ 640,170   

Income (loss) from continuing operations before income taxes

  $ 27,133      $ (11,570   $ (24,833   $ (14,168   $ (332   $ (15,105   $ (17,251   $ (49,135   $ (80,783

Income tax expense

  $ 8,872      $ 4,916      $ 14,042      $ 13,440      $ 1,685      $ 1,516      $ 3,087      $ 2,805      $ 59,451   

Income (loss) from discontinued operations, net of taxes

  $ (6,715   $ (13,194   $ (19,442   $ (14,926   $ 408      $ (2,313   $ (3,333   $ 2,671      $ 7,280   

Net earnings (loss)

  $ 6,111 (6)    $ (29,680 )(7)    $ (58,317 )(1)    $ (42,534 )(2)    $ (1,609   $ (18,934 )(8)    $ (23,671 )(3)    $ (49,269 )(4)    $ (132,954 )(5) 

Balance Sheet:

                 

Working capital

  $ 167,551      $ 271,506        173,907      $ 229,033      $ 108,392      $ 87,907      $ 90,512      $ 104,722      $ 116,390   

Current ratio

    1.9        2.3        2.1        2.1        2.1        1.7        1.5        1.7        1.6   

Property, plant and equipment, net

  $ 18,535      $ 23,934      $ 20,876      $ 24,090      $ 13,453      $ 17,722      $ 15,441      $ 19,715      $ 38,327   

Total assets

  $ 740,689      $ 914,572      $ 737,846      $ 865,088      $ 344,318      $ 240,492      $ 284,418      $ 297,282      $ 375,937   

Long-term debt and other long term liabilities

  $ 242,145      $ 549,427      $ 480,016      $ 460,447        —        $ 76,133      $ 76,041      $ 76,225      $ 62,012   

Stockholders’ equity

  $ 115,159      $ 153,027      $ 99,679        200,120      $ 242,579      $ 43,089      $ 41,303      $ 63,151      $ 110,970   

Per Share Data:

                 

Earnings (loss) per common share from continuing operations—basic and diluted

  $ 0.017      $ (0.023 )     $ (0.05   $ (0.04   $ (0.00   $ (0.02   $ (0.03   $ (0.07   $ (0.11

Earnings (loss) per common from share from discontinued operations—basic and diluted

  $ (0.009   $ (0.018   $ (0.03   $ (0.02   $ 0.00      $ (0.00   $ (0.00   $ 0.00      $ 0.01   

Earnings (loss) per common—basic and diluted

  $ 0.008 (6)    $ (0.041 )(7)    $ (0.08 )(1)    $ (0.06 )(2)    $ (0.00   $ (0.02 )(8)    $ (0.03 )(3)    $ (0.06 )(4)    $ (0.10 )(5) 

Cash dividends paid

    —          —          —          —          —          —          —          —          —     

Book value at year end

  $ 0.16      $ 0.21      $ 0.14      $ 0.27      $ 0.33      $ 1.77      $ 0.06      $ 0.09      $ 0.15   

Return on average equity

    5.7     (16.8 )%      (38.9 )%      (19.2 )%      (1.1 )%      (35.6 )%      (45.3 )%      (56.6 )%      (76.3 )% 

 

(1) During the year ended June 30, 2009, Russell Hobbs recorded:

 

   

$6.6 million in legal expenses related to its pursuit of patent infringement matters on certain patents related to the LitterMaid automatic cat litter box;

 

   

$3.1 million in acquisition-related expenses of which approximately $2.1 million were for the proposed acquisition of all the outstanding shares of Island Sky Australia Limited and other potential acquisition targets in the Water Products segment (none of which were consummated) and approximately $1.0 million in acquisition-related expenses in its Household Products segment related to the cancellation of stock options as part of the purchase by Harbinger of the remaining public shares of Russell Hobbs in December 2008;

 

   

$1.1 million in severance expenses primarily related to a reduction in force in December 2008 in its North American and European operations and the transfer of its operations at its distribution facilities in North America to a third-party provider in June 2009; and

 

   

$1.0 million in integration and transition-related costs primarily related to the integration and transition of the North American operations of Salton and Applica. The integration of the North American operations was substantially completed by June 2008.

 

(2) During the year ended June 30, 2008, Russell Hobbs recorded:

 

   

$17.9 million in integration and transition-related costs primarily related to the integration and transition of the North American operations of Salton and Applica;

 

   

$5.1 million in legal expenses related to Russell Hobbs’ pursuit of patent infringement matters on certain patents related to the LitterMaid automatic cat litter box; and

 

   

$4.1 million, net of $3.0 million in reimbursement, in connection with a proposed acquisition of a global pet supply business that ultimately was not consummated.

 

(3) During the year ended December 31, 2006, Russell Hobbs recorded:

 

   

$6.0 million in termination fees in connection with the termination of the proposed merger with NACCO Industries, Inc. and HB-PS Holding Company, Inc.;

 

 

24


Table of Contents
   

$3.1 million net impact for the product recall of Black & Decker branded TCM 800 and TCM 805 thermal coffeemakers reported in the first quarter of 2006;

 

   

$2.4 million attributable to price adjustments and write down of inventory related to a discontinued product;

 

   

the sale of inventory that included capitalized losses of $2.9 million related to the closure of a manufacturing facility in Mexico;

 

   

$1.8 million of fees and expenses related to the proposed merger with NACCO Industries, Inc. and HB-PS Holding Company, Inc.; and

 

   

$1.9 million in consulting fees related to the engagement of a consulting firm.

 

(4) During the year ended December 31, 2005, Russell Hobbs recorded:

 

   

inventory write-downs of $12.8 million related to adjustment to net realizable value of certain discontinued products;

 

   

raw materials inventory write off of $3.3 million, write down of property, plant and equipment of $1.1 million, accelerated depreciation of $3.2 million and severance charges of $4.9 million related to the downsizing and closure of its Mexican manufacturing operations;

 

   

inefficiencies and unabsorbed overhead of $6.2 million associated with the downsizing and ultimate closure in October 2005 of its Mexican manufacturing operations;

 

   

$1.2 million of fees and expenses related to certain strategic initiatives;

 

   

$0.7 million in bad debt expense related to a contract manufacturing project at its Mexican manufacturing operations;

 

   

higher product warranty returns and related expenses of $5.2 million, primarily in the first half of 2005; and

 

   

additional tax expense of $1.9 million related to the closure of its Mexican manufacturing operations.

 

(5) During the year ended December 31, 2004, Russell Hobbs recorded:

 

   

an impairment charge of $62.8 million as the result of its annual fair value assessment as of June 30, 2004 of goodwill;

 

   

income tax expense of $57.8 million related to an increase in valuation allowances against net deferred tax assets;

 

   

restructuring charges of $9.2 million, primarily in connection with the downsizing of its Mexican manufacturing operations;

 

   

termination benefits of $9.2 million related to resignation of its former Chairman of its board of directors and the termination of certain other employment and consulting agreements and relationships; and

 

   

a net gain on the sales of a subsidiary, a division and certain property of $3.9 million.

 

(6) During the six months ended December 31, 2009, Russell Hobbs recorded:

 

   

$1.1 million in legal expenses related to Russell Hobbs’ pursuit of patent infringement matters on certain patents related to the LitterMaid automatic cat litter box;

 

   

$0.4 million in severance expenses primarily related to a reduction in force in December 2008 in its North American and European operations and the transfer of its operations at its distribution facilities in North America to a third-party provider in June 2009; and

 

   

$0.3 million in integration and transition-related costs primarily related to the integration and transition of the North American operations of Salton and Applica.

 

(7) During the six months ended December 31, 2008, Russell Hobbs recorded:

 

   

$4.7 million in legal expenses related to Russell Hobbs’ pursuit of patent infringement matters on certain patents related to the LitterMaid automatic cat litter box;

 

   

$1.6 million in acquisition-related expenses consisting primarily of $1.0 million recorded in Russell Hobbs’ Household Products segment relating to the cancellation of stock options as part of Russell Hobbs’ going-private transaction and the resulting purchase by Harbinger of the remaining public shares of Russell Hobbs in December 2008 and approximately $0.6 million in acquisition-related expenses for potential acquisitions of businesses in the Water Products segment, none of which were consummated. Finally, Russell Hobbs had reversals of approximately $0.3 million of acquisition-related accruals relating to potential acquisition within the Household Products segment;

 

   

$1.0 million in integration and transition-related costs primarily related to the integration and transition of the North American operations of Salton and Applica. The integration of the North American operations was substantially completed by June 2008; and

 

   

$0.9 million in severance expenses in the year ended June 30, 2009 primarily related to a reduction in force in December 2008 in its North American and European operations and the transfer of its operations at its distribution facilities in North America to a third-party provider in June 2009.

 

 

25


Table of Contents
(8) During six months ended June 30, 2006, Russell Hobbs recorded:

 

   

$3.7 million for the product recall of Black & Decker branded TCM 800 and TCM 805 thermal coffeemakers;

 

   

the sale of inventory that included capitalized losses of $2.7 million related to the closure of a manufacturing facility in Mexico;

 

   

$0.4 million of fees and expenses related to the proposed merger with NACCO Industries, Inc. and HB-PS Holding Company, Inc.; and

 

   

$1.7 million in consulting fees related to the engagement of a consulting firm.

 

 

26


Table of Contents

SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following selected unaudited pro forma condensed combined statement of financial position, as of January 3, 2010, reflects the merger and related transactions as if they had occurred on January 3, 2010 for Spectrum and Russell Hobbs as a consolidated entity. The unaudited pro forma statements of operations for the six month period ended January 3, 2010 and the fiscal year ended September 30, 2009 reflects the merger and related transactions as if they had occurred on October 1, 2008. In the opinion of management, all adjustments necessary to reflect the effect of these transactions have been made. The mergers will be accounted for under the acquisition method of accounting as provided by Accounting Standards Codification (“ASC”) 805-10 (previously SFAS No. 141(R), Business Combinations).

The unaudited pro forma condensed combined financial information should be read together with the respective historical audited and unaudited consolidated financial statements and financial statement notes of Spectrum and Russell Hobbs in this proxy statement/prospectus and the documents incorporated by reference herein. The unaudited pro forma condensed combined financial information is presented for comparative purposes only and does not necessarily indicate what the future operating results or financial position of SB Holdings will be following consummation of the mergers. The unaudited pro forma condensed combined financial information does not include adjustments to reflect any cost savings or other operational efficiencies that may be realized as a result of the mergers or any future merger related restructuring or integration expenses.

 

(In millions, except share and per share numbers)

   As of and for the
Six Months Ended
January 3,

2010
    As of and for the
Fiscal Year Ended
September 30,
2009
 

Income Statement

    

Net sales

   $ 1,641.1      $ 3,027.2   

Cost of goods sold and restructuring and related charges

     1,103.7        1,991.5   
                

Gross profit

     537.4        1,035.7   

Operating expenses

     456.6        858.6   

Interest expense

     88.6        171.5   

Other expenses

     2.8        7.1   
                

Loss from continuing operations before reorganization items and income taxes

     (10.6     (1.5

Reorganization items, net

     (1,219.0     (1,138.8

Income tax expense

     73.3        87.8   
                

Income from continuing operations

   $ 1,135.1      $ 1,049.5   
                

Earnings from continuing operations per share:

    

Basic

   $ 22.23      $ 20.55   
                

Diluted

   $ 22.23      $ 20.55   
                

Number of shares:

    

Basic

     51,061,213        51,061,213   
                

Diluted

     51,061,213        51,061,213   
                

Balance Sheet

    

Total assets

   $ 3,819.3     
          

Total shareholders’ equity

   $ 1,031.9     
          

Net book value per share outstanding

   $ 20.21     
          

 

 

27


Table of Contents

COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE INFORMATION

The following selected unaudited pro forma per share information for the six month period ended January 3, 2010 and for the year ended September 30, 2009 reflects the mergers and related transactions as if they had occurred on October 1, 2008. The unaudited pro forma combined net asset value per common share outstanding reflects the mergers and related transactions as if they had occurred on January 3, 2010.

Such unaudited pro forma combined per share information is based on the historical financial statements of Spectrum and Russell Hobbs and on available information and certain assumptions and adjustments as discussed in the section entitled “Unaudited Pro Forma Condensed Combined Financial Statements” of this proxy statement/prospectus. This unaudited pro forma combined per share information is provided for illustrative purposes only and is not necessarily indicative of what the operating results or financial position of Spectrum or Russell Hobbs would have been had the mergers and related transactions been completed at the beginning of the periods or on the dates indicated, nor are they necessarily indicative of any future operating results or financial position. The following should be read in connection with the section entitled “Unaudited Pro Forma Condensed Combined Financial Statements” and other information included in or incorporated by reference into this proxy statement/prospectus.

Spectrum

 

     Successor
Company
    Predecessor
Company
     Six Months Ended
January 3,

2010
   The period
from Aug. 31,
2009
to Sept. 30,
2009
    The period
from Oct. 1,
2008
to Aug. 30,
2009

Historical Per Common Share Data:

       

Basic net (loss) income per share

   $ 36.59    $ (2.36   $ 19.76
                     

Diluted net (loss) income per share

   $ 36.59    $ (2.36   $ 19.76
                     

Book value per share as of the period end

   $ 19.60    $ 22.03     
                 

Russell Hobbs

 

     Six Months Ended
December 31,
2009
   Fiscal Year Ended
June 30,
2009
 

Historical Per Common Share Data:

     

Basic net income (loss) per share

   $ 0.02    $ (0.05
               

Diluted net income (loss) per share

   $ 0.02    $ (0.05
               

Book value per share as of the period end

   $ 0.16    $ 0.14   
               

Pro Forma Combined Company

 

     Six Months Ended
January 3,
2010
   Fiscal Year Ended
September 30,
2009

Unaudited Pro Forma Combined Per Common Share Data:

     

Basic net income per share

   $ 22.23    $ 20.55
             

Diluted net income per share

   $ 22.23    $ 20.55
             

Book value per share as of the period end

   $ 20.21   
         

 

 

28


Table of Contents

RISK FACTORS

In addition to the other information included and incorporated by reference in this proxy statement/prospectus, including the matters addressed in the “Cautionary Statement Regarding Forward-Looking Statements,” you should carefully consider the following risks before deciding how to cast your vote. In addition, you should read and consider the risks associated with the businesses of Spectrum and Russell Hobbs. You should also read and consider the other information in this proxy statement/prospectus and the other documents incorporated by reference in this proxy statement/prospectus. Please see “Where You Can Find More Information.” Additional risks and uncertainties not presently known to Spectrum and Russell Hobbs or that are not currently believed to be important also may adversely affect the transaction and SB Holdings following the mergers.

Risks Related to the Mergers and to an Investment in SB Holdings

Significant costs are expected to be incurred in connection with the consummation of the mergers and integration of Spectrum and Russell Hobbs into a single business, including legal, accounting, financial advisory and other costs.

If the mergers are consummated, Spectrum and Russell Hobbs expect to incur significant costs in connection with integrating their operations, products and personnel. These costs may include costs for:

 

   

employee redeployment, relocation or severance;

 

   

integration of information systems;

 

   

combination of research and development teams and processes; and

 

   

reorganization or closures of facilities.

In addition, Spectrum and Russell Hobbs expect to incur a number of non-recurring costs associated with combining the operations of the two companies, which cannot be estimated accurately at this time. Spectrum and Russell Hobbs will also incur transaction fees and other costs related to the mergers, anticipated to be approximately $94 million. This amount is a preliminary estimate and subject to change. Additional unanticipated costs may be incurred in the integration of the businesses of Spectrum and Russell Hobbs. Although Spectrum and Russell Hobbs expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction and transaction-related costs over time, this net benefit may not be achieved in the near term, or at all. There can be no assurance that Spectrum and Russell Hobbs will be successful in these integration efforts.

The debt of Spectrum and Russell Hobbs incurred in connection with the mergers may limit their financial and operating flexibility.

In order to refinance Spectrum’s existing senior debt and a portion of Russell Hobbs’ existing senior debt, as well as to pay transaction expenses in connection with the mergers, Spectrum and Russell Hobbs expect to finance substantially all of such amounts through the incurrence of approximately $1.80 billion of new indebtedness (from which $1.532 billion in proceeds is anticipated to be received at closing), including:

 

   

senior secured notes in a principal amount of up to $750 million;

 

   

a senior secured asset-based revolving facility of up to $300 million (the “New Revolving Facility”);

 

   

a senior secured term facility of up to $750 million (the “New Term Facility”); and

 

   

if the companies are unable to issue the senior secured notes prior to the consummation of the mergers, a senior secured bridge facility of up to $750 million (the “Bridge Loan Facility”).

 

29


Table of Contents

The New Revolving Facility, the New Term Facility and the Bridge Loan Facility are collectively referred to as the “New Facilities.” The New Facilities are expected to contain financial covenants relating to maximum leverage and minimum fixed charge coverage. Other covenants contained in the New Facilities are expected to restrict, among other things, asset dispositions, mergers and acquisitions, dividends, stock repurchases and redemptions, other restricted payments, indebtedness and preferred stock, loans and investments, liens and affiliate transactions. Spectrum anticipates that the New Facilities will contain customary events of default. These covenants will, among other things, limit the ability of the respective restricted entities to fund future working capital and capital expenditures, engage in future acquisitions or development activities, or otherwise realize the value of their assets and opportunities fully because of the need to dedicate a portion of cash flow from operations to payments on debt. In addition, such covenants could limit the flexibility of the respective restricted entities in planning for, or reacting to, changes in the industries in which they operate.

SB Holdings may not realize the anticipated benefits of the mergers.

The mergers involve the integration of two companies that have previously operated independently. The integration of Spectrum and Russell Hobbs is expected to result in financial and operational benefits, including increased revenues, cost savings and other financial and operational benefits. There can be no assurance, however, regarding when or the extent to which SB Holdings will be able to realize these increased revenues, cost savings or other benefits. This integration may also be difficult, unpredictable, and subject to delay because of possible company culture conflicts and different opinions on technical decisions and product roadmaps. The companies must integrate or, in some cases, replace, numerous systems, including those involving management information, purchasing, accounting and finance, sales, billing, employee benefits, payroll and regulatory compliance, many of which are dissimilar. In some instances, Spectrum and Russell Hobbs serve the same customers, and some of these customers may decide that it is desirable to have additional or different suppliers. Difficulties associated with integrating Spectrum and Russell Hobbs could have a material adverse effect on Russell Hobbs, Spectrum and/or SB Holdings and the market price of SB Holdings common stock.

Results after the mergers may materially differ from the pro forma information presented in this proxy statement/prospectus.

Results after the mergers may be materially different from those shown in the pro forma information that only show a combination of historical results for Spectrum and Russell Hobbs. The merger, integration, restructuring and transaction costs related to the mergers could be higher or lower than currently estimated depending on how difficult it will be to integrate Spectrum and Russell Hobbs.

Integrating Spectrum and Russell Hobbs may divert management’s attention away from their operations.

Successful integration of Spectrum’s and Russell Hobbs’ operations, products and personnel may place a significant burden on the management and internal resources of Spectrum and Russell Hobbs. The diversion of management attention and any difficulties encountered in the transition and integration process could harm the businesses, financial conditions and operating results of Spectrum, Russell Hobbs and the combined company, as the case may be.

As a result of the mergers, Spectrum and Russell Hobbs may not be able to retain key personnel or recruit additional qualified personnel, which could materially affect the companies’ respective businesses and require Spectrum and Russell Hobbs to incur substantial costs to recruit replacements for lost personnel.

Each of Spectrum and Russell Hobbs is highly dependent on the continuing efforts of its senior management team and other key personnel. As a result of the mergers, current and prospective Spectrum and Russell Hobbs employees could experience uncertainty about their future roles. This uncertainty may adversely affect the ability of Spectrum, Russell Hobbs or SB Holdings, as the case may be, to attract and retain key management, sales, marketing and technical personnel. Any failure to attract and retain key personnel could have a material adverse

 

30


Table of Contents

effect on the business of Spectrum, Russell Hobbs or SB Holdings after consummation of the mergers. In addition, Spectrum and Russell Hobbs currently do not maintain “key person” insurance covering any member of its management teams.

General customer uncertainty related to the mergers could harm Spectrum, Russell Hobbs and SB Holdings.

Spectrum’s or Russell Hobbs’ customers may, in response to the announcement or consummation of the proposed mergers, delay or defer purchasing decisions. If Spectrum’s or Russell Hobbs’ customers delay or defer purchasing decisions, the revenues of Spectrum and Russell Hobbs, respectively, and the revenues of SB Holdings, could materially decline or any anticipated increases in revenue could be lower than expected.

While the mergers are pending, Spectrum and Russell Hobbs will be subject to business uncertainties and contractual restrictions that could adversely affect their businesses.

Uncertainty about the effect of the mergers on customers and suppliers may have an adverse effect on Spectrum and Russell Hobbs and, consequently, on SB Holdings. These uncertainties could cause customers, suppliers and others who deal with Spectrum and Russell Hobbs to seek to change existing business relationships with Spectrum and Russell Hobbs. In addition, the merger agreement restricts Spectrum and Russell Hobbs, without the other party’s consent and subject to certain exceptions, from making certain acquisitions and taking other specified actions until the mergers occur or the merger agreement terminates. These restrictions may prevent Spectrum and Russell Hobbs from pursuing otherwise attractive business opportunities and making other changes to their respective businesses that may arise prior to consummation of the mergers or termination of the merger agreement.

Spectrum and Russell Hobbs may not be able to obtain the regulatory approvals required to consummate the mergers unless they agree to material restrictions or conditions.

Consummation of the mergers is subject to prior receipt of those approvals and consents required to be obtained from applicable governmental and regulatory authorities, including under the HSR Act and by the applicable governmental authorities of Canada, Germany and Spain (except those the failure of which to be made or obtained does not have and would not reasonably be likely to have, individually or in the aggregate, an RH Material Adverse Effect and/or a Battery Material Adverse Effect (as each is defined in the merger agreement)). Spectrum, Russell Hobbs and SB Holdings have agreed to cooperate and use all reasonable best efforts to obtain, or cause their applicable affiliates to obtain, all permits, consents, approvals and authorizations from any governmental or regulatory authority necessary to consummate the mergers as promptly as practicable. Complying with requests from such governmental agencies, including requests for additional information and documents, could delay consummation of the transaction. In connection with granting these consents and authorizations, governmental authorities may require divestitures of Russell Hobbs or Spectrum assets or seek to impose conditions on SB Holdings’ operations after consummation of the mergers. Such divestitures or conditions may jeopardize or delay consummation of the mergers or may reduce the anticipated benefits of the transaction. Under the terms of the merger agreement, although Spectrum and Russell Hobbs are required to use reasonable best efforts to obtain all necessary governmental approvals, they are not required to agree to any divestitures or conditions in connection with such efforts.

Officers and directors of Spectrum may have certain interests in the Spectrum merger that may be different from, or in addition to, interests of other Spectrum stockholders.

Spectrum officers and directors may have certain interests in the Spectrum merger that may be different from, or in addition to, interests of other Spectrum stockholders. Spectrum stockholders should be aware of these interests when considering the Spectrum Board recommendation to adopt the merger agreement. See “The Proposed Transaction—Interests of Certain Persons in the Spectrum Merger” for additional information.

 

31


Table of Contents

The Harbinger Parties will exercise significant influence over SB Holdings and their interests in SB Holdings’ business may be different from the interests of Spectrum stockholders.

Upon consummation of the mergers and related transactions, the Harbinger Parties will beneficially own approximately 64% of the outstanding common stock of SB Holdings (assuming that the Harbinger Parties do not acquire additional shares of Spectrum common stock prior to the consummation of the mergers). The Harbinger Parties will thus generally have the ability to influence the outcome of any corporate action of SB Holdings which requires stockholder approval, including, but not limited to, the election of directors, approval of merger transactions involving SB Holdings and the sale of all or substantially all of SB Holdings’ assets. In addition, SB Holdings is a party to the Stockholder Agreement pursuant to which the Harbinger Parties will have the right to designate for nomination for election six of SB Holdings’ ten board members subject to the terms and conditions described therein.

This influence and actual control may have the effect of discouraging offers to acquire SB Holdings because any such consummation would likely require the consent of the Harbinger Parties. The Harbinger Parties may also delay or prevent a change in control of SB Holdings. In addition, the significant concentration of stock ownership may adversely affect the value of SB Holdings common stock due to a resulting lack of liquidity of SB Holdings common stock or a perception among investors that conflicts of interest may exist or arise.

If the Harbinger Parties sell substantial amounts of SB Holdings common stock in the public market, or investors perceive that these sales could occur, the market price of SB Holdings common stock could be adversely affected. In connection with the execution of the merger agreement, SB Holdings entered into the Registration Rights Agreement with the Harbinger Parties and certain other existing stockholders of Spectrum who collectively own or control approximately 62% of Spectrum’s outstanding common stock as of March 25, 2010. If requested properly under the terms of the Registration Rights Agreement, these stockholders have the right to require SB Holdings to register all or some of such shares for sale under the Securities Act in certain circumstances and also have the right to include those shares in a registration initiated by SB Holdings. If SB Holdings is required to include the shares of SB Holdings common stock held by these stockholders pursuant to these registration rights in a registration initiated by SB Holdings, sales made by such stockholders may adversely affect the price of SB Holdings common stock and SB Holdings’ ability to raise needed capital. In addition, if these stockholders exercise their demand registration rights and cause a large number of shares to be registered and sold in the public market or demand that SB Holdings register their shares on a shelf registration statement, such sales or shelf registration may have an adverse effect on the market price of SB Holdings common stock.

The interests of the Harbinger Parties, which have investments in other companies, may from time to time diverge from the interests of other SB Holdings stockholders, particularly with regard to new investment opportunities. The Harbinger Parties are not restricted from investing in other businesses involving or related to the marketing or distribution of household products, pet and pest products and personal care products. The Harbinger Parties may also engage in other businesses that compete or may in the future compete with SB Holdings.

The value of the shares of SB Holdings common stock received upon the consummation of the mergers may be less than the value of the shares of Spectrum common stock as of the date of this proxy statement/prospectus or the date of the special meeting.

The consideration that holders of Spectrum common stock will be entitled to receive in the Spectrum merger is fixed and will not be adjusted in the event of any changes in the price of Spectrum common stock prior to the mergers. There may be a significant amount of time between the date when the stockholders of Spectrum vote on the merger agreement at the special meeting of Spectrum’s stockholders and the date when the mergers are consummated. The price per share of Spectrum common stock may vary significantly between the date of this proxy statement/prospectus, the date of the special meeting and the date of the consummation of the mergers.

 

32


Table of Contents

These variations may be caused by, among other things, changes in the businesses, operations, results or prospects of Spectrum, market expectations of the likelihood that the mergers will be consummated and the timing of consummation, the prospects of post-merger operations, the effect of any conditions or restrictions imposed on or proposed with respect to SB Holdings by regulatory agencies and authorities, general market and economic conditions and other factors. In addition, it is impossible to predict accurately the market price of the SB Holdings common stock to be received by Spectrum stockholders after the consummation of the mergers. Accordingly, the price of Spectrum common stock on the date of this proxy statement/prospectus and on the date of the special meeting may not be indicative of its price immediately prior to consummation of the mergers and the price of SB Holdings common stock after the mergers are consummated.

The trading price of shares of SB Holdings common stock after the consummation of the mergers may be affected by factors different from those affecting the price of shares of Spectrum common stock before the mergers.

Upon the consummation of the mergers, holders of Spectrum common stock will be entitled to become holders of SB Holdings common stock. The results of operations of Spectrum, as well as the trading price of SB Holdings common stock, after the mergers may be affected by factors different from those currently affecting Spectrum’s results of operations and the trading price of Spectrum common stock. For a discussion of the businesses of Spectrum and Russell Hobbs and of certain factors to consider in connection with those businesses, see “The Companies—Information About Spectrum” and “The Companies—Information About Russell Hobbs.”

There has been no prior public market for SB Holdings common stock.

Before this offering, no public market existed for the SB Holdings common stock. It is anticipated that the SB Holdings common stock will be listed on the NYSE. However, an active public market for the SB Holdings common stock may not develop or be sustained after the consummation of the mergers, which could affect the ability to sell, or depress the market price of, the SB Holdings common stock. We cannot predict the extent to which a trading market will develop or how liquid that market might become.

The stock price of SB Holdings common stock may be volatile.

The stock price of SB Holdings common stock may be volatile and subject to wide fluctuations. In addition, the trading volume of SB Holdings common stock may fluctuate and cause significant price variations to occur. Some of the factors that could cause fluctuations in the stock price or trading volume of the SB Holdings common stock include:

 

   

general market and economic conditions, including market conditions in the human capital and risk and financial management consulting industries;

 

   

actual or expected variations in quarterly operating results;

 

   

differences between actual operating results and those expected by investors and analysts;

 

   

changes in recommendations by securities analysts;

 

   

operations and stock performance of competitors;

 

   

accounting charges, including charges relating to the impairment of goodwill;

 

   

significant acquisitions or strategic alliances by SB Holdings or by competitors;

 

   

sales of the SB Holdings common stock, including sales by SB Holdings’ directors and officers or significant investors;

 

   

recruitment or departure of key personnel;

 

   

loss of key clients; and

 

   

changes in reserves for professional liability claims.

 

33


Table of Contents

We cannot assure you that the price of SB Holdings common stock will not fluctuate or decline significantly in the future. In addition, the stock market in general can experience considerable price and volume fluctuations that may be unrelated to SB Holdings’ performance.

Spectrum and Russell Hobbs face risks related to the current economic environment.

The current economic environment and related turmoil in the global financial system has had and may continue to have an impact on the business and financial condition of Spectrum and/or Russell Hobbs. Global economic conditions have significantly impacted economic markets within certain sectors, with financial industries and retail business being particularly impacted. The ability of Spectrum and/or Russell Hobbs to generate revenue depends significantly on discretionary consumer spending. It is difficult to predict new general economic conditions that could impact consumer and customer demand for products of Spectrum and/or Russell Hobbs or their respective ability to manage normal commercial relationships with their customers, suppliers and creditors. The recent continuation of a number of negative economic factors, including constraints on the supply of credit to households, uncertainty and weakness in the labor market and general consumer fears of a continuing economic downturn could have a negative impact on discretionary consumer spending. If the economy continues to deteriorate or fails to improve, Spectrum’s and Russell Hobbs’ respective businesses could be negatively impacted, including as a result of reduced demand for their products or supplier or customer disruptions. Any weakness in discretionary consumer spending could have a material adverse effect on the revenues, results of operations and financial condition of Spectrum and/or Russell Hobbs. In addition, the ability of Spectrum and/or Russell Hobbs to access the capital markets may be restricted at a time when Spectrum and/or Russell Hobbs, as the case may be, would like or need to do so, which could have an impact on its flexibility to react to changing economic and business conditions.

Spectrum and Russell Hobbs participate in very competitive markets and they may not be able to compete successfully, causing them to lose market share and sales.

The markets in which Spectrum participates are very competitive. In the consumer battery market, Spectrum’s primary competitors are Duracell (a brand of Procter & Gamble), Energizer and Panasonic (a brand of Matsushita). In the electric shaving and grooming and electric personal care product markets, Spectrum’s primary competitors are Braun (a brand of Procter & Gamble), Norelco (a brand of Philips), and Vidal Sassoon and Revlon (brands of Helen of Troy). In the pet supplies market, Spectrum’s primary competitors are Mars, Hartz and Central Garden & Pet. In the Home and Garden Business, Spectrum’s principal national competitors are The Scotts Company, Central Garden & Pet and S.C. Johnson. In each of Spectrum’s markets, it also faces competition from numerous other companies.

Russell Hobbs competes with established companies, a number of which have substantially greater facilities, personnel, financial and other resources than it has. The key competitors of Russell Hobbs in this market in the United States and Canada include Jarden Corporation, DeLonghi America, Euro-Pro Operating LLC, Metro Thebe, Inc., d/b/a HWI Breville, NACCO Industries, Inc. (Hamilton Beach) and SEB S.A. In addition, Russell Hobbs competes with its retail customers, who use their own private label brands, and with distributors and foreign manufacturers of unbranded products. Some competitors may be willing to reduce prices and accept lower profit margins to compete with Russell Hobbs. As a result of this competition, Russell Hobbs could lose market share and sales, or be forced to reduce its prices to meet competition. Significant new competitors or increased competition from existing competitors may adversely affect Russell Hobbs’ business, financial condition and results of operations.

 

34


Table of Contents

Spectrum and Russell Hobbs and their respective competitors compete for consumer acceptance and limited shelf space based upon brand name recognition, perceived product quality, price, performance, product features and enhancements, product packaging and design innovation, as well as creative marketing, promotion and distribution strategies, and new product introductions. Spectrum’s and Russell Hobbs’ ability to compete in these consumer product markets may be adversely affected by a number of factors, including, but not limited to, the following:

 

   

Spectrum and Russell Hobbs compete against many well-established companies that may have substantially greater financial and other resources, including personnel and research and development, and greater overall market share than that of Spectrum and Russell Hobbs.

 

   

In some key product lines, Spectrum’s and Russell Hobbs’ competitors may have lower production costs and higher profit margins than that of Spectrum and Russell Hobbs, which may enable them to compete more aggressively in offering retail discounts, rebates and other promotional incentives.

 

   

Product improvements or effective advertising campaigns by competitors may weaken consumer demand for Spectrum’s and Russell Hobbs’ products.

 

   

Consumer purchasing behavior may shift to distribution channels where Spectrum and Russell Hobbs do not have a strong presence.

 

   

Consumer preferences may change to lower margin products or products other than those Spectrum and Russell Hobbs market.

If Spectrum’s or Russell Hobbs’ product offerings are unable to compete successfully, Spectrum’s or Russell Hobbs’ sales, results of operations and financial condition could be materially and adversely affected.

Sales of certain of Spectrum’s and Russell Hobbs’ products are seasonal and may cause their quarterly operating results and working capital requirements to fluctuate.

Sales of Spectrum’s battery and electric shaving and grooming and personal care products are seasonal. A large percentage of sales for these products generally occur during Spectrum’s first fiscal quarter that ends on or about December 31, due to the impact of the December holiday season. Sales of Spectrum’s lawn and garden and household insect control products that are offered through the Home and Garden Business are also seasonal. A large percentage of Spectrum’s sales of these products occur during the spring and summer, typically Spectrum’s second and third fiscal quarters. As a result of this seasonality, Spectrum’s inventory and working capital needs relating to these products fluctuate significantly during the year. In addition, orders from retailers are often made late in the period preceding the applicable peak season, making forecasting of production schedules and inventory purchases difficult. If Spectrum is unable to accurately forecast and prepare for customer orders or its working capital needs, or there is a general downturn in business or economic conditions during these periods, Spectrum’s business, financial condition and results of operations could be materially and adversely affected.

The market for small household appliances is highly seasonal in nature, and Russell Hobbs often recognizes a substantial portion of its sales in the last half of the calendar year. As a result of this seasonality, Russell Hobbs’ inventory and working capital needs relating to these products fluctuate significantly during the year. In addition, orders from retailers are often made late in the period preceding the applicable peak season, making forecasting of production schedules and inventory purchases difficult. If Russell Hobbs is unable to accurately forecast and prepare for customer orders or its working capital needs, or there is a general downturn in business or economic conditions during these periods, its businesses, financial condition and results of operations could be materially and adversely affected.

Spectrum and Russell Hobbs are subject to significant international business risks that could hurt their businesses and cause their results of operations to fluctuate.

A significant amount of Spectrum’s and Russell Hobbs’ revenues are from customers outside of the United States. Each company’s pursuit of international growth opportunities may require significant investments for an

 

35


Table of Contents

extended period before returns on these investments, if any, are realized. International operations are subject to risks including, among others:

 

   

currency fluctuations;

 

   

changes in the economic conditions or consumer preferences or demand for Spectrum’s and/or Russell Hobbs’ products in these markets;

 

   

the risk that because Spectrum’s and/or Russell Hobbs’ brand names may not be locally recognized, each company must spend significant amounts of time and money to build brand identities without certainty that it will be successful;

 

   

labor unrest;

 

   

political and economic instability, as a result of terrorist attacks, natural disasters or otherwise;

 

   

lack of developed infrastructure;

 

   

longer payment cycles and greater difficulty in collecting accounts;

 

   

restrictions on transfers of funds;

 

   

import and export duties and quotas, as well as general transportation costs;

 

   

changes in domestic and international customs and tariffs;

 

   

changes in foreign labor laws and regulations affecting the ability to hire and retain employees;

 

   

inadequate protection of intellectual property in foreign countries;

 

   

unexpected changes in regulatory environments;

 

   

difficulty in complying with a variety of foreign laws;

 

   

difficulty in obtaining distribution and support; and

 

   

potentially adverse tax consequences.

The foregoing factors may have a material adverse effect on each company’s ability to increase or maintain its respective supply of products, financial condition or results of operations.

SB Holdings will have various mechanisms in place that could prevent a change in control that a stockholder might favor.

The Stockholder Agreement and the New Certificate of Incorporation and New Bylaws (each as defined below) contain the following mechanisms, which restrict SB Holdings’ ability to engage in a transaction that would result in a “change in control” of SB Holdings:

 

   

Under the New Certificate of Incorporation, stockholders owning 5% or more of SB Holdings’ outstanding common stock or capital stock into which any shares of common stock may be converted (“voting securities”) generally have the right to purchase their respective pro rata share of newly-issued SB Holdings securities.

 

   

Significant Stockholders are prohibited from initiating or engaging in going private transactions, subject to certain exceptions set forth in the New Certificate of Incorporation.

 

   

Subject to certain exceptions set forth in the Stockholder Agreement, the Harbinger Parties, as a Significant Stockholder, are prohibited from effecting any transfer of equity securities of SB Holdings to any person that would result in such person and its affiliates owning 40% or more of the outstanding voting securities of SB Holdings unless such person agrees in writing to be bound by the terms of the Stockholder Agreement to the same extent as the Harbinger Parties would be bound thereunder prior to giving effect to such transfer.

 

36


Table of Contents

In addition, because the Harbinger Parties will hold a majority of the SB Holdings common stock following  consummation of the mergers, a change in control will not be possible without the support of the Harbinger Parties.

Other Risks Currently Faced by Spectrum and Russell Hobbs that SB Holdings Will Face After Consummation of the Mergers

Spectrum and Russell Hobbs are, and will continue to be, and SB Holdings after consummation of the mergers will be, subject to the risks described in (i) “Risks Related to Spectrum,” (ii) “Risks Related to Spectrum Generally” and (iii) “Risks Related to Russell Hobbs.”

Risks Related To Spectrum Prior to the Consummation of the Mergers

Because Spectrum’s consolidated financial statements are required to reflect fresh-start reporting adjustments to be made upon emergence from bankruptcy, financial information in Spectrum’s financial statements prepared after August 30, 2009 will not be comparable to Spectrum’s financial information from prior periods.

All conditions required for the adoption of fresh-start reporting were met upon emergence from Chapter 11 of the Bankruptcy Code on August 28, 2009 (the “Effective Date”). However, in light of the proximity of that date to Spectrum’s accounting period close immediately following the Effective Date, which was August 30, 2009, Spectrum elected to adopt a convenience date of August 30, 2009 for recording fresh-start reporting. Spectrum adopted fresh-start reporting in accordance with the ASC Topic 852: “Reorganizations” (previously American Institute of Certified Public Accountants Statement of Position No. 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code”) pursuant to which Spectrum’s reorganization value, which is intended to reflect the fair value of the entity before considering liabilities and approximate the amount a willing buyer would pay for the assets of the entity immediately after the Reorganization, were allocated to the fair value of assets in conformity with Statement of Financial Accounting Standards No. 141, Business Combinations, using the purchase method of accounting for business combinations. Spectrum stated liabilities, other than deferred taxes, at a present value of amounts expected to be paid. The amount remaining after allocation of the reorganization value to the fair value of identified tangible and intangible assets was reflected as goodwill, which is subject to periodic evaluation for impairment. In addition, under fresh-start reporting the accumulated deficit was eliminated. Thus, Spectrum’s future statements of financial position and results of operations will not be comparable in many respects to statements of financial position and consolidated statements of operations data for periods prior to the adoption of fresh-start reporting. The lack of comparable historical information may discourage investors from purchasing Spectrum’s securities. Additionally, the financial information included in this proxy statement/prospectus may not be indicative of future financial information.

Spectrum’s substantial indebtedness could adversely affect its business, financial condition and results of operations and prevent Spectrum from fulfilling its obligations under the terms of its indebtedness.

Spectrum has, and Spectrum expects to continue to have, a significant amount of indebtedness. As of January 3, 2010, Spectrum had total indebtedness under its senior subordinated notes, senior credit facilities and other senior debt of approximately $1.7 billion. Although the combined company’s percentage of indebtedness relative to total value will be less than that of Spectrum currently, Spectrum’s indebtedness will not be reduced in connection with the consummation of the mergers.

Spectrum’s substantial indebtedness has had and could continue to have material adverse consequences for Spectrum’s business, including:

 

   

requiring Spectrum to dedicate a large portion of its cash flow to pay principal and interest on its indebtedness, which will reduce the availability of Spectrum’s cash flow to fund working capital, capital expenditures, research and development expenditures and other business activities;

 

   

increasing Spectrum’s vulnerability to general adverse economic and industry conditions;

 

37


Table of Contents
   

limiting Spectrum’s flexibility in planning for, or reacting to, changes in its business and the industry in which it operates;

 

   

restricting Spectrum from making strategic acquisitions, dispositions or exploiting business opportunities;

 

   

placing Spectrum at a competitive disadvantage compared to its competitors that have less debt; and

 

   

limiting Spectrum’s ability to borrow additional funds (even when necessary to maintain adequate liquidity) or dispose of assets.

In addition, a substantial portion of Spectrum’s debt bears, and is expected to bear, interest at variable rates. If market interest rates increase, the interest rate on Spectrum’s variable-rate debt will increase and will create higher debt service requirements, which would adversely affect Spectrum’s cash flow and could adversely impact Spectrum’s results of operations. While Spectrum may enter into agreements limiting its exposure to higher debt service requirements, any such agreements may not offer complete protection from this risk.

The terms of Spectrum’s existing indebtedness impose and the New Facilities are expected to impose restrictions on Spectrum that may affect its ability to successfully operate its business.

The PIK Notes Indenture contains and the New Facilities are expected to contain covenants that, among other things, limit Spectrum’s ability to:

 

   

incur additional indebtedness;

 

   

borrow money or sell preferred stock;

 

   

create liens;

 

   

pay dividends on or redeem or repurchase stock;

 

   

make certain types of investments;

 

   

issue or sell stock in Spectrum’s subsidiaries;

 

   

restrict dividends or other payments from Spectrum’s subsidiaries;

 

   

issue guarantees of debt;

 

   

transfer or sell assets and utilize proceeds of any such sales;

 

   

enter into agreements that restrict Spectrum’s restricted subsidiaries from paying dividends, making loans or otherwise transferring assets to Spectrum or to any of Spectrum’s other restricted subsidiaries;

 

   

enter into or engage in transactions with affiliates; and

 

   

merge, consolidate or sell all or substantially all of Spectrum’s assets.

In addition, the New Facilities are expected to require Spectrum to meet a number of financial ratios and tests. Noncompliance with these covenants could materially and adversely affect Spectrum’s ability to finance its operations or capital needs and to engage in other business activities that may be in Spectrum’s best interest and may also restrict Spectrum’s ability to expand or pursue Spectrum’s business strategies. Spectrum may not be able to comply with all of its covenants and obligations in all of its debt instruments.

The market price of Spectrum common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond Spectrum’s control.

Factors that may influence the price of the Spectrum common stock include, without limitation, the following:

 

   

loss of any of Spectrum’s key customers or suppliers;

 

38


Table of Contents
   

additions or departures of key personnel;

 

   

sales of the common stock;

 

   

Spectrum’s ability to execute its business plan;

 

   

operating results that fall below expectations;

 

   

additional issuances of the common stock;

 

   

low volume of sales due to concentrated ownership of the common stock;

 

   

intellectual property disputes;

 

   

industry developments;

 

   

economic and other external factors; and

 

   

period-to-period fluctuations in Spectrum’s financial results.

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of the common stock. You should also be aware that price volatility might be worse if the trading volume of shares of the common stock is low. Also, speculation regarding the likelihood of the consummation of the mergers could increase the volatility of the price of Spectrum common stock.

Additional issuances of Spectrum common stock may result in dilution to its existing stockholders.

As of March 26, 2010, Spectrum has issued 629,213 shares of common stock under its 2009 equity incentive plan and is authorized to issue up to a total of 3,333,333 shares of its common stock, or options exercisable for shares of common stock. In addition, the Spectrum Board has the authority to issue additional shares of capital stock to provide additional financing or for other purposes in the future. The issuance of any such shares or exercise of any such options may result in a reduction of the book value or market price of the outstanding shares of common stock. If Spectrum does issue any such additional shares or any such options are exercised, such issuance or exercise also will cause a reduction in the proportionate ownership and voting power of all other stockholders. As a result of such dilution, the proportionate ownership interest and voting power of a holder of shares of common stock could be decreased. Under Spectrum’s certificate of incorporation, holders of 5% or more of the outstanding voting securities have certain rights to purchase their pro rata share of certain future issuances of securities. The merger agreement prohibits Spectrum from issuing any shares of its capital stock prior to the termination of the merger agreement.

Spectrum has historically not paid dividends on its public common stock, and, therefore, any return on investment may be limited to the value of the common stock.

Spectrum has not declared or paid dividends on its common stock since the stock commenced public trading in 1997, and Spectrum does not anticipate paying dividends in the foreseeable future. The payment of dividends on outstanding common stock will depend on earnings, financial condition and other business and economic factors affecting Spectrum at such time as the Spectrum Board may consider relevant, including the ability to do so under its credit and other debt agreements. If Spectrum does not pay dividends, returns on an investment in its common stock will only occur if the stock price appreciates.

Risks Related To Spectrum Generally

Adverse weather conditions during Spectrum’s peak selling season for its home and garden control products could have a material adverse effect on Spectrum’s home and garden business.

Weather conditions in the U.S. have a significant impact on the timing and volume of sales of certain of Spectrum’s lawn and garden and household insecticide and repellent products. Periods of dry, hot weather can

 

39


Table of Contents

decrease insecticide sales, while periods of cold and wet weather can slow sales of herbicides. In addition, an abnormally cold spring throughout the U.S. could adversely affect insecticide sales and therefore have a material adverse effect on Spectrum’s Home and Garden Business.

Spectrum’s products utilize certain key raw materials; any increase in the price of these raw materials could have a material and adverse effect on Spectrum’s business, financial condition and profits.

The principal raw materials used to produce Spectrum’s products—including zinc powder, electrolytic manganese dioxide powder and steel—are sourced either on a global or regional basis, and the prices of those raw materials are susceptible to price fluctuations due to supply and demand trends, energy costs, transportation costs, government regulations, duties and tariffs, changes in currency exchange rates, price controls, general economic conditions and other unforeseen circumstances. In particular, during 2007 and 2008 Spectrum experienced extraordinary price increases for raw materials, particularly as a result of strong demand from China. Spectrum regularly engages in forward purchase and hedging derivative transactions in an attempt to effectively manage and stabilize some of the raw material costs it expects to incur over the next 12 to 24 months; however, Spectrum’s hedging positions may not be effective or may not anticipate beneficial trends in a particular raw material market or as a result of changes in Spectrum’s business may no longer be useful for Spectrum. In addition, for certain of the principal raw materials Spectrum uses to produce its products, such as electrolytic manganese dioxide powder, there are no available effective hedging markets. If these efforts are not effective or expose Spectrum to above average costs for an extended period of time and Spectrum is unable to pass its raw materials costs on to its customers, Spectrum’s future profitability may be materially and adversely affected. Further, with respect to transportation costs, certain modes of delivery are subject to fuel surcharges which are determined based upon the current cost of diesel fuel in relation to pre-established agreed upon costs. Spectrum may be unable to pass these fuel surcharges on to its customers, which may have an adverse effect on Spectrum’s profitability and results of operations.

In addition, Spectrum has exclusivity arrangements and minimum purchase requirements with certain of its suppliers for the Home and Garden Business, which increase Spectrum’s dependence upon and exposure to those suppliers. Some of those agreements include caps on the price Spectrum pays for its supplies and in certain instances, these caps have allowed Spectrum to purchase materials at below market prices. When Spectrum attempts to renew those contracts, the other parties to the contracts may not be willing to include or may limit the effect of those caps and could even attempt to impose above market prices in an effort to make up for any below market prices paid by Spectrum prior to the renewal of the agreement. Any failure to timely obtain suitable supplies at competitive prices could materially adversely affect Spectrum’s business, financial condition and results of operations.

Spectrum may not be able to fully utilize its United States net operating loss carryforwards.

As of January 3, 2010, Spectrum has U.S. federal and state net operating loss carryforwards of approximately $682 and $732 million, respectively. These net operating loss carryforwards expire through years ending in 2030. As of January 3, 2010, Spectrum’s management determined that it continues to be more likely than not that the net U.S. deferred tax asset, excluding certain indefinite lived intangibles, would not be realized in the future and as such recorded a full valuation allowance to offset the net U.S. deferred tax asset, including Spectrum’s net operating loss carryforwards. In addition, Spectrum has had changes of ownership, as defined under Internal Revenue Code Section 382, that continue to subject a significant amount of Spectrum’s U.S. net operating losses and other tax attributes to certain limitations. Spectrum estimates that approximately $149 million of its federal and $311 million of its state net operating losses will expire unused due to the Internal Revenue Code Section 382 limitation. If Spectrum is unable to fully utilize its net operating losses other than those restricted under Internal Revenue Code Section 382, as discussed above, to offset taxable income generated in the future, Spectrum’s results of operations could be materially and negatively impacted.

 

40


Table of Contents

Consolidation of retailers and Spectrum’s dependence on a small number of key customers for a significant percentage of its sales may negatively affect Spectrum’s business, financial condition and results of operations.

As a result of consolidation of national mass merchandisers, a significant percentage of Spectrum’s sales are attributable to a very limited group of retailer customers. Because of the importance of these key customers, demands for price reductions or promotions by such customers, reductions in their purchases, changes in their financial condition or loss of their accounts could have a material adverse effect on Spectrum’s business, financial condition and results of operations. In addition, as a result of the desire of retailers to more closely manage inventory levels, there is a growing trend among them to purchase Spectrum’s products on a “just-in-time” basis. This requires Spectrum to shorten its lead-time for production in certain cases and more closely anticipate their demand, which could in the future require Spectrum to carry additional inventories, increase Spectrum’s working capital and related financing requirements or result in excess inventory becoming unusable or obsolete. Furthermore, Spectrum primarily sells branded products and a move by one or more of its large customers to sell significant quantities of private label products, which Spectrum does not produce on their behalf and which directly compete with Spectrum’s products, could have a material adverse effect on Spectrum’s business, financial condition and results of operations.

As a result of Spectrum’s international operations, it faces a number of risks related to exchange rates and foreign currencies.

Spectrum’s international sales and certain of Spectrum’s expenses are transacted in foreign currencies. During the fiscal year ended September 30, 2009, approximately 43% of Spectrum’s net sales and 45% of Spectrum’s operating expenses were denominated in foreign currencies. Spectrum expects that the amount of Spectrum’s revenues and expenses transacted in foreign currencies will increase as Spectrum’s Latin American, European and Asian operations grow and, as a result, Spectrum’s exposure to risks associated with foreign currencies could increase accordingly. Significant changes in the value of the U.S. dollar in relation to foreign currencies could have a material effect on Spectrum’s business, financial condition and results of operations. Changes in currency exchange rates may also affect Spectrum’s sales to, purchases from and loans to Spectrum’s subsidiaries as well as sales to, purchases from and bank lines of credit with Spectrum’s customers, suppliers and creditors that are denominated in foreign currencies.

Spectrum sources many products from, and sells many products in, China and other Asian countries. To the extent the Chinese Renminbi (“RMB”) or other currencies appreciate with respect to the U.S. dollar, Spectrum may experience fluctuations in its results of operations. Since 2005, the RMB has no longer been pegged to the U.S. dollar at a constant exchange rate and instead fluctuates versus a basket of currencies. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate within a flexible peg range against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future Chinese authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

The RMB appreciated approximately 7% versus the U.S. dollar in 2008 and remained substantially unchanged in 2009. The RMB currency fluctuation in 2009 and 2008 has not generated material cost increases for products sourced from China, however, further significant appreciation of the RMB or other currencies in countries where Spectrum sources or sells products could adversely impact Spectrum’s profitability. Very limited hedging transactions are available in China to reduce exposure to exchange rate fluctuations. While Spectrum may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and Spectrum may not be able to successfully hedge its exposure to currency fluctuations. Further, Spectrum may not be successful in implementing customer pricing or other actions in an effort to mitigate the impact of currency fluctuations and, thus, Spectrum’s results of operations may be adversely impacted.

In addition, the Venezuelan government has imposed foreign exchange and price controls on the local currency. These foreign exchange controls increase Spectrum’s costs to, and also limit its ability to, convert local

 

41


Table of Contents

currency into U.S. dollars and transfer funds out of Venezuela, and may have an adverse effect on Spectrum’s Venezuelan customers. Further, given Venezuela’s designation as a highly inflationary economy and the devaluation of the official rate, Spectrum’s revenue, operating profit, and net income may be negatively impacted in the future.

Spectrum’s international operations may expose it to risks related to compliance with the laws and regulations of foreign countries.

Spectrum is subject to three EU Directives that may have a material impact on its business: Restriction of the Use of Hazardous Substances in Electrical and Electronic Equipment, Waste of Electrical and Electronic Equipment and the Directive on Batteries and Accumulators and Waste Batteries, discussed below. Restriction of the Use of Hazardous Substances in Electrical and Electronic Equipment requires Spectrum to eliminate specified hazardous materials from products Spectrum sells in EU member states. Waste of Electrical and Electronic Equipment requires Spectrum to collect and treat, dispose of or recycle certain products it manufactures or imports into the EU at Spectrum’s own expense. The Directive on Batteries and Accumulators and Waste Batteries bans heavy metals in batteries by establishing maximum quantities of heavy metals in batteries and mandates waste management of these batteries, including collection, recycling and disposal systems, with the costs imposed upon producers and importers such as Spectrum. Complying or failing to comply with the EU directives may harm Spectrum’s business. For example:

 

   

Although contractually assured with Spectrum’s suppliers, Spectrum may be unable to procure appropriate Restriction of the Use of Hazardous Substances in Electrical and Electronic Equipment compliant material in sufficient quantity and quality and/or be able to incorporate it into Spectrum’s product procurement processes without compromising quality and/or harming Spectrum’s cost structure.

 

   

Spectrum may face excess and obsolete inventory risk related to non-compliant inventory that Spectrum may continue to hold in fiscal 2010 for which there is reduced demand and Spectrum may need to write down the carrying value of such inventories.

 

   

Spectrum may be unable to sell certain existing inventories of its batteries in Europe.

Many of the developing countries in which Spectrum operates do not have significant governmental regulation relating to environmental safety, occupational safety, employment practices or other business matters routinely regulated in the U.S. or may not rigorously enforce such regulation. As these countries and their economies develop, it is possible that new regulations or increased enforcement of existing regulations may increase the expense of doing business in these countries. In addition, social legislation in many countries in which Spectrum operates may result in significantly higher expenses associated with labor costs, terminating employees or distributors and closing manufacturing facilities. Increases in Spectrum’s costs as a result of increased regulation, legislation or enforcement could materially and adversely affect Spectrum’s business, results of operations and financial condition.

Spectrum may not be able to adequately establish and protect its intellectual property rights.

To establish and protect Spectrum’s intellectual property rights, Spectrum relies upon a combination of national, foreign and multi-national patent, trademark and trade secret laws, together with licenses, confidentiality agreements and other contractual arrangements. The measures Spectrum takes to protect its intellectual property rights may prove inadequate to prevent third parties from misappropriating Spectrum’s intellectual property. Spectrum may need to resort to litigation to enforce or defend its intellectual property rights. If a competitor or collaborator files a patent application claiming technology also invented by Spectrum, or a trademark application claiming a trademark, service mark or trade dress also used by Spectrum, in order to protect its rights, Spectrum may have to participate in expensive and time consuming interference proceedings before the United States Patent and Trademark Office or a similar foreign agency. In addition, Spectrum’s intellectual property rights may be challenged by third parties. Even if Spectrum’s intellectual property rights are not directly challenged, disputes among third parties could lead to the weakening or invalidation of Spectrum’s

 

42


Table of Contents

intellectual property rights. Furthermore, competitors may independently develop technologies that are substantially equivalent or superior to Spectrum’s technology. Obtaining, protecting and defending intellectual property rights can be time consuming and expensive, and may require Spectrum to incur substantial costs, including the diversion of management and technical personnel.

Moreover, the laws of certain foreign countries in which Spectrum operates or may operate in the future do not protect, and the governments of certain foreign countries do not enforce, intellectual property rights to the same extent as do the laws and government of the U.S., which may negate Spectrum’s competitive or technological advantages in such markets. Also, some of the technology underlying Spectrum’s products is the subject of nonexclusive licenses from third parties. As a result, this technology could be made available to Spectrum’s competitors at any time. If Spectrum is unable to establish and then adequately protect its intellectual property rights, then Spectrum’s business, financial condition and results of operations could be materially and adversely affected.

Claims by third parties that Spectrum is infringing on their intellectual property could adversely affect Spectrum’s business.

From time to time in the past Spectrum has been subject to claims that Spectrum is infringing upon the intellectual property of others. Spectrum currently is the subject of claims that it is infringing upon the intellectual property of others, and it is possible that third parties will assert infringement claims against Spectrum in the future. An adverse finding against Spectrum in these or similar trademark or other intellectual property litigations may have a material adverse effect on Spectrum’s business, financial condition and results of operations. Any such claims, with or without merit, could be time consuming and expensive, and may require Spectrum to incur substantial costs, including the diversion of management and technical personnel, cause product delays or require Spectrum to enter into licensing or other agreements in order to secure continued access to necessary or desirable intellectual property. If Spectrum is deemed to be infringing a third party’s intellectual property and is unable to continue using that intellectual property as it had been, Spectrum’s business and results of operations could be harmed if it is unable to successfully develop non-infringing alternative intellectual property on a timely basis or license non-infringing alternatives or substitutes, if any exist, on commercially reasonable terms. In addition, an unfavorable ruling in intellectual property litigation could subject Spectrum to significant liability, as well as require Spectrum to cease developing, manufacturing or selling the affected products or using the affected processes or trademarks. Any significant restriction on Spectrum’s proprietary or licensed intellectual property that impedes its ability to develop and commercialize its products could have a material adverse effect on Spectrum’s business, financial condition and results of operations.

Spectrum’s dependence on a few suppliers and one of its U.S. facilities for certain of its products makes Spectrum vulnerable to a disruption in the supply of its products.

Although Spectrum has long-standing relationships with many of its suppliers, Spectrum does not have long-term contracts with them. An adverse change in any of the following could have a material adverse effect on Spectrum’s business, financial condition and results of operations:

 

   

Spectrum’s relationships with its suppliers;

 

   

the terms and conditions upon which Spectrum purchases products from its suppliers;

 

   

the financial condition of Spectrum’s suppliers;

 

   

the ability to import outsourced products; or

 

   

Spectrum’s suppliers’ ability to manufacture and deliver outsourced products on a timely basis.

If Spectrum’s relationship with one of its key suppliers is adversely affected, Spectrum may not be able to quickly or effectively replace such supplier and may not be able to retrieve tooling, molds or other specialized production equipment or processes used by such supplier in the manufacture of Spectrum’s products. In addition,

 

43


Table of Contents

Spectrum manufactures the majority of its foil cutting systems for its shaving product lines, using specially designed machines and proprietary cutting technology, at its Portage, Wisconsin facility. Damage to this facility, or prolonged interruption in the operations of this facility for repairs, as a result of labor difficulties or for other reasons, would have a material adverse effect on Spectrum’s ability to manufacture and sell its foil shaving products which would in turn harm Spectrum’s business, financial condition and results of operations.

Class action and derivative action lawsuits and other investigations, regardless of their merits, could have an adverse effect on Spectrum’s business, financial condition and results of operations.

Spectrum and certain of its officers and directors have been named in the past, and may be named in the future, as defendants of class action and derivative action lawsuits. In the past, Spectrum has also received requests for information from government authorities. Regardless of their subject matter or merits, class action lawsuits and other government investigations may result in significant cost to Spectrum, which may not be covered by insurance, may divert the attention of management or may otherwise have an adverse effect on Spectrum’s business, financial condition and results of operations.

Spectrum may be exposed to significant product liability claims which its insurance may not cover and which could harm its reputation.

In the ordinary course of Spectrum’s business, Spectrum may be named as a defendant in lawsuits involving product liability claims. In any such proceeding, plaintiffs may seek to recover large and sometimes unspecified amounts of damages and the matters may remain unresolved for several years. Any such matters could have a material adverse effect on Spectrum’s business, results of operations and financial condition if Spectrum is unable to successfully defend against or settle these matters or if Spectrum’s insurance coverage is insufficient to satisfy any judgments against it or settlements relating to these matters. Although Spectrum has product liability insurance coverage and an excess umbrella policy, Spectrum’s insurance policies may not provide coverage for certain, or any, claims against it or may not be sufficient to cover all possible liabilities. Moreover, any adverse publicity arising from claims made against Spectrum, even if the claims were not successful, could adversely affect the reputation and sales of its products.

Spectrum may incur material capital and other costs due to environmental liabilities.

Because of the nature of Spectrum’s operations, Spectrum’s facilities are subject to a broad range of federal, state, local, foreign and multi-national laws and regulations relating to the environment. These include laws and regulations that govern:

 

   

discharges to the air, water and land;

 

   

the handling and disposal of solid and hazardous substances and wastes; and

 

   

remediation of contamination associated with release of hazardous substances at Spectrum’s facilities and at off-site disposal locations.

Risk of environmental liability is inherent in Spectrum’s business. As a result, material environmental costs may arise in the future. In particular, Spectrum may incur capital and other costs to comply with increasingly stringent environmental laws and enforcement policies, such as the EU directives: Restriction of the Use of Hazardous Substances in Electrical and Electronic Equipment, Waste of Electrical and Electronic Equipment and the Directive on Batteries and Accumulators and Waste Batteries, discussed above. Although Spectrum believes that it is substantially in compliance with applicable environmental regulations at its facilities, Spectrum may not be in compliance with such regulations in the future, which could have a material adverse effect on Spectrum’s business, financial condition and results of operations.

From time to time, Spectrum has been required to address the effect of historic activities on the environmental condition of Spectrum’s properties or former properties. Spectrum has not conducted invasive

 

44


Table of Contents

testing at all of its facilities to identify all potential environmental liability risks. Given the age of Spectrum’s facilities and the nature of Spectrum’s operations, material liabilities may arise in the future in connection with Spectrum’s current or former facilities. If previously unknown contamination of property underlying or in the vicinity of Spectrum’s manufacturing facilities is discovered, Spectrum could be required to incur material unforeseen expenses. If this occurs, it may have a material adverse effect on Spectrum’s business, financial condition and results of operations. Spectrum is currently engaged in investigative or remedial projects at a few of its facilities and any liabilities arising from such investigative or remedial projects at such facilities may be material.

Spectrum is also subject to proceedings related to its disposal of industrial and hazardous material at off-site disposal locations or similar disposals made by other parties for which Spectrum is responsible as a result of its relationship with such other parties. These proceedings are under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) or similar state laws that hold persons who “arranged for” the disposal or treatment of such substances strictly liable for costs incurred in responding to the release or threatened release of hazardous substances from such sites, regardless of fault or the lawfulness of the original disposal. Liability under CERCLA is typically joint and several, meaning that a liable party may be responsible for all of the costs incurred in investigating and remediating contamination at a site. As a practical matter, liability at CERCLA sites is shared by all of the viable responsible parties. Spectrum occasionally is identified by federal or state governmental agencies as being a potentially responsible party for response actions contemplated at an off-site facility. At the existing sites where Spectrum has been notified of its status as a potentially responsible party, it is either premature to determine if Spectrum’s potential liability, if any, will be material or Spectrum does not believe that its liability, if any, will be material. Spectrum may be named as a potentially responsible party under CERCLA or similar state laws in the future for other sites not currently known to it, and the costs and liabilities associated with these sites may be material.

Compliance with various public health, consumer protection and other regulations applicable to Spectrum’s products and facilities could increase Spectrum’s cost of doing business and expose it to additional requirements with which it may be unable to comply.

Certain of Spectrum’s products sold through, and facilities operated under, each of Spectrum’s business segments are regulated by the U.S. Environmental Protection Agency, the U.S. Food and Drug Administration or other federal consumer protection and product safety agencies and are subject to the regulations such agencies enforce, as well as by similar state, foreign and multinational agencies and regulations. For example, in the U.S., all products containing pesticides must be registered with the U.S. Environmental Protection Agency and, in many cases, similar state and foreign agencies before they can be manufactured or sold. Spectrum’s inability to obtain, or the cancellation of, any registration could have an adverse effect on Spectrum’s business, financial condition and results of operations. The severity of the effect would depend on which products were involved, whether another product could be substituted and whether Spectrum’s competitors were similarly affected. Spectrum attempts to anticipate regulatory developments and maintain registrations of, and access to, substitute chemicals and other ingredients, but Spectrum may not always be able to avoid or minimize these risks.

The Food Quality Protection Act (“FQPA”) established a standard for food-use pesticides, which is that a reasonable certainty of no harm will result from the cumulative effect of pesticide exposures. Under the FQPA, the U.S. Environmental Protection Agency is evaluating the cumulative effects from dietary and non-dietary exposures to pesticides. The pesticides in certain of Spectrum’s products that are sold through the Home and Garden Business continue to be evaluated by the U.S. Environmental Protection Agency as part of this program. It is possible that the U.S. Environmental Protection Agency or a third party active ingredient registrant may decide that a pesticide Spectrum uses in its products will be limited or made unavailable to Spectrum. Spectrum cannot predict the outcome or the severity of the effect of the U.S. Environmental Protection Agency’s continuing evaluations of active ingredients used in its products.

In addition, the use of certain pesticide and fertilizer products that are sold through Spectrum’s global pet supplies business and through the Home and Garden Business may, among other things, be regulated by various

 

45


Table of Contents

local, state, federal and foreign environmental and public health agencies. These regulations may require that only certified or professional users apply the product, that users post notices on properties where products have been or will be applied or that certain ingredients may not be used. Compliance with such public health regulations could increase Spectrum’s cost of doing business and expose it to additional requirements with which Spectrum may be unable to comply.

Spectrum faces risks related to its sales of products obtained from third-party suppliers.

Spectrum sells a number of products that are manufactured by third party suppliers over which Spectrum has no direct control. While Spectrum has implemented processes and procedures to try to ensure that the suppliers it uses are complying with all applicable food and health regulations, there can be no assurances that such suppliers in all instances will comply with such processes and procedures or otherwise with applicable food and health regulations. Noncompliance could result in Spectrum’s marketing and distribution of contaminated or defective products which could subject Spectrum to liabilities and could result in the imposition by governmental authorities of procedures or penalties that could restrict or eliminate Spectrum’s ability to purchase products from non-compliant suppliers. Any or all of these effects could adversely affect Spectrum’s business, financial condition and results of operations.

Public perceptions that some of the products Spectrum produces and markets are not safe could adversely affect Spectrum.

Spectrum manufactures and markets a number of complex chemical products bearing its brands relating to the Home and Garden Business, such as herbicides and pesticides. On occasion, customers and some current or former employees have alleged that some products failed to perform up to expectations or have caused damage or injury to individuals or property.

Public perception that any of Spectrum’s products are not safe, whether justified or not, could impair Spectrum’s reputation, damage its brand names and have a material adverse effect on its business, financial condition and results of operations.

If Spectrum is unable to negotiate satisfactory terms to continue existing or enter into additional collective bargaining agreements, Spectrum may experience an increased risk of labor disruptions and Spectrum’s results of operations and financial condition may suffer.

Approximately 20% of Spectrum’s total labor force is employed under collective bargaining agreements. Three of these agreements, which cover approximately 68% of the labor force under collective bargaining agreements, or approximately 14% of Spectrum’s total labor force, are scheduled to expire during Spectrum’s fiscal year ending September 30, 2010. While Spectrum currently expects to negotiate continuations to the terms of these agreements, there can be no assurances that Spectrum will be able to obtain terms that are satisfactory to it or otherwise to reach agreement at all with the applicable parties. In addition, in the course of Spectrum’s business, it may also become subject to additional collective bargaining agreements. These agreements may be on terms that are less favorable than those under Spectrum’s current collective bargaining agreements. Increased exposure to collective bargaining agreements, whether on terms more or less favorable than existing collective bargaining agreements, could adversely affect the operation of Spectrum’s business, including through increased labor expenses. While Spectrum intends to comply with all collective bargaining agreements to which it is subject, there can be no assurances that it will be able to do so and any noncompliance could subject Spectrum to disruptions in its operations and materially and adversely affect its results of operations and financial condition.

Significant changes in actual investment return on pension assets, discount rates and other factors could affect Spectrum’s results of operations, equity and pension contributions in future periods.

Spectrum’s results of operations may be positively or negatively affected by the amount of income or expense Spectrum records for its defined benefit pension plans. U.S. generally accepted accounting principles (“GAAP”) requires that Spectrum calculate income or expense for the plans using actuarial valuations. These

 

46


Table of Contents

valuations reflect assumptions about financial market and other economic conditions, which may change based on changes in key economic indicators. The most significant year-end assumptions Spectrum used to estimate pension income or expense are the discount rate and the expected long-term rate of return on plan assets. In addition, Spectrum is required to make an annual measurement of plan assets and liabilities, which may result in a significant change to equity. Although pension expense and pension funding contributions are not directly related, key economic factors that affect pension expense would also likely affect the amount of cash Spectrum would contribute to pension plans as required under the Employee Retirement Income Security Act.

Risks Related to Russell Hobbs

The failure of Russell Hobbs’ business strategy could seriously hurt its financial condition and results of operations.

As part of its business strategy, Russell Hobbs plans to:

 

   

maximize utility of its brand assets;

 

   

leverage innovation and strategic marketing to drive profitability;

 

   

create long-term cost and quality advantages for its customers; and

 

   

continue to optimize its supply chain.

Russell Hobbs’ strategic objectives may not be realized or, if realized, may not result in increased revenue, profitability or market presence. Executing its strategy may also place a strain on its suppliers, information technology systems and other resources. To manage growth effectively, Russell Hobbs must maintain a high level of quality, properly manage its third-party suppliers, continue to enhance its operational, financial and management systems and expand, train and manage its employee base. Russell Hobbs may not be able to effectively manage its growth in any one or more of these areas, which could cause its financial condition and results or operations to suffer.

The small household appliance industry is consolidating, which could reduce Russell Hobbs’ ability to successfully secure product placements at key customers and limit its ability to sustain a cost competitive position in the industry.

Over the past several years, the small household appliance industry has undergone substantial consolidation, and further consolidation is likely. As a result of this consolidation, the small household appliance industry could primarily consist of a limited number of large distributors. To the extent that Russell Hobbs does not continue to be a major participant in the small household appliance industry, its ability to compete effectively with these larger distributors could be negatively impacted. As a result, this condition could reduce its ability to successfully secure product placements at key customers and limit its ability to sustain a cost competitive position in the industry.

Russell Hobbs’ future success requires it to develop new and innovative products on a consistent basis in order to increase revenues and it may not be able to do so.

Russell Hobbs believes that its future success is heavily dependent upon its ability to continue to make innovations in its existing products and to develop and market new products, which generally carry higher margins. Russell Hobbs may not be successful in the introduction, marketing and manufacture of any new products or product innovations and Russell Hobbs may not be able to develop and introduce in a timely manner innovations to its existing products that satisfy customer needs or achieve market acceptance.

 

47


Table of Contents

Russell Hobbs may not be able to realize expected benefits and synergies from future acquisitions of businesses or product lines.

Russell Hobbs may acquire partial or full ownership in businesses or may acquire rights to market and distribute particular products or lines of products. The acquisition of a business or of the rights to market specific products or use specific product names may involve a financial commitment by Russell Hobbs, either in the form of cash or equity consideration. In the case of a new license, such commitments are usually in the form of prepaid royalties and future minimum royalty payments. There is no guarantee that Russell Hobbs will acquire businesses or product distribution rights that will contribute positively to its earnings. Anticipated synergies may not materialize, cost savings may be less than expected, sales of products may not meet expectations, and acquired businesses may carry unexpected liabilities.

Long lead times, potential material price increases and customer demands may cause Russell Hobbs to purchase more inventory than necessary, which may lead to increased obsolescence and adversely affect its results of operations.

Due to (i) manufacturing lead times, (ii) a strong concentration of its sales occurring during the last half of the calendar year and (iii) the potential for material price increases, Russell Hobbs may purchase products and thereby increase inventories based on anticipated sales and forecasts provided by its customers and its sales personnel. Russell Hobbs cannot provide assurance that its customers will order these inventories as anticipated. Changes in customer inventory management strategies could also make inventory management more difficult for Russell Hobbs. If retailers significantly change their inventory management strategies, Russell Hobbs may encounter difficulties in filling customer orders or in liquidating excess inventories, or may find that customers are cancelling orders or returning products. Distribution difficulties may have an adverse effect on Russell Hobbs’ business by increasing the amount of inventory and the cost of warehousing inventory.

If Russell Hobbs were to lose one or more of its major customers, or suffer a major reduction of orders from them, its financial results would suffer.

The success of Russell Hobbs depends on its sales to its significant customers. Although Russell Hobbs has long-established relationships with many of its customers, it does not have long-term agreements with them and purchases are generally made through the use of individual purchase orders. A significant reduction in purchases by any of these major customers or a general economic downturn in retail sales could have a material adverse effect on its business, financial condition and results of operations. In addition, failure to obtain anticipated orders or delays or cancellations of orders or significant pressure to reduce prices from key customers could have a material adverse effect on Russell Hobbs.

Large sophisticated customers may take actions that adversely affect the gross profit and result of operations of Russell Hobbs.

In recent years, Russell Hobbs has observed a consumer trend toward mass merchandisers, which include super centers and club stores. This trend has resulted in the increased size and influence of these mass merchandisers. As these mass merchandisers grow larger and become more sophisticated, they may demand lower pricing, special packaging, or impose other requirements on product suppliers. These business demands may relate to inventory practices, logistics, or other aspects of the customer–supplier relationship. If Russell Hobbs does not effectively respond to the demands of these mass merchandisers, they could decrease their purchases from Russell Hobbs. A reduction in the demand of its products by these mass merchandisers and the costs of complying with customer business demands could have a material adverse effect on its business, financial condition and operating results.

The bankruptcy or financial difficulty of any major customer or fluctuations in the financial condition of the retail industry in general could adversely affect the results of operations of Russell Hobbs.

Russell Hobbs sells its products to distributors and retailers, including mass merchandisers, department stores and wholesale clubs. The financial difficulties of its customers or the loss of, or a substantial decrease in,

 

48


Table of Contents

the volume of purchases by a major customer could have a material adverse effect on Russell Hobbs. Additionally, a significant deterioration in the financial condition of the retail industry in general could have a material adverse effect on its sales and profitability.

Russell Hobbs depends on third party suppliers for the manufacturing of substantially all of its products and if Russell Hobbs fails to develop and maintain relationships with a sufficient number of qualified suppliers, its ability to timely and efficiently source products that meet its standards for quality could be adversely affected.

Russell Hobbs currently buys products and supplies from suppliers located primarily in Asia. Russell Hobbs’ ability to continue to identify and develop relationships with qualified suppliers who can satisfy its standards for quality and its need to access products in a timely and efficient manner is a significant challenge. Russell Hobbs’ ability to access products also can be adversely affected by political instability, the financial instability of suppliers, suppliers’ noncompliance with applicable laws, trade restrictions, tariffs, currency exchange rates, transport capacity and cost and other factors beyond its control. Any inability of its suppliers to timely deliver products or any unanticipated changes in its suppliers could be disruptive and costly to Russell Hobbs. Russell Hobbs’ ability to select reliable suppliers who provide timely deliveries of quality products will impact its success in meeting customer demand. Any significant failure to obtain products on a timely basis at an affordable cost or any significant delays or interruptions of supply could disrupt customer relationships and have a material adverse effect on its business and results of operations.

Russell Hobbs purchases a large number of products from three suppliers. Production-related risks with these suppliers could jeopardize its ability to realize anticipated sales and profits until alternative supply arrangements are secured.

Tsann Kuen (China) Enterprises Co., Ltd. accounted for 15% and 24% of Russell Hobbs’ total purchases for the years ended June 30, 2009 and 2008, respectively. Elec-Tech International (H.K.) Company, Ltd. and its affiliates accounted for 10% and 23% of its total purchases for the years ended June 30, 2009 and 2008, respectively. Guangdong Xinbao Electrical Appliances Holding Co., Ltd. accounted for 16% and 12% of its total purchases for the years ended June 30, 2009 and 2008, respectively. In order for Russell Hobbs to realize sales and operating profits at anticipated levels, these suppliers must deliver high quality products in a timely manner. In addition, Russell Hobbs does not have long term contracts with two of these suppliers.

Although these suppliers are expected to remain significant suppliers for Russell Hobbs, there can be no assurance that such suppliers will be able to continue to so deliver good quality products at a commercially reasonable price. Any inability of such suppliers to do so may have a material adverse effect on Russell Hobbs’ business or results of operations.

In addition, Tsann Kuen (China) Enterprises Co., Ltd. owns certain patent rights with respect to a portion of the products currently sold under the George Foreman brand. If Tsann Kuen prohibits Russell Hobbs from using such intellectual property rights, Russell Hobbs would have to change certain features of the effected products. This could result in increased costs and an interruption of product supply, which could have a material adverse effect on its business and results of operations.

Any reduction in trade credit from Russell Hobbs’ suppliers could seriously harm its operations and financial condition.

Russell Hobbs depends on the continuing willingness of its suppliers to extend credit to it to finance its inventory purchases. If suppliers experience financial constraints or if they become concerned about Russell Hobbs’ ability to generate liquidity and service its debt, they may delay shipments to Russell Hobbs or require payment in advance. Any such actions by its suppliers could materially harm Russell Hobbs’ ability to continue its business.

 

49


Table of Contents

Russell Hobbs’ ability to obtain products may be adversely impacted by changes in worldwide supply of or demand for raw materials.

Russell Hobbs’ products are predominantly made from petroleum-based plastic materials, steel, aluminum, copper and corrugated paper (for packaging). Russell Hobbs’ suppliers contract separately for the purchase of such raw materials. Russell Hobbs can provide no assurance that its sources of supply will not be interrupted should its suppliers not be able to obtain these materials due to changes in worldwide supply of or demand for raw materials or other events that interrupt material flow.

Russell Hobbs’ margins may be adversely impacted by increases in raw material prices.

The cost of Russell Hobbs’ products may be impacted by global increases in the price of petroleum-based plastic materials, steel, aluminum, copper and corrugated materials (for packaging). Although Russell Hobbs may increase the prices of certain of its goods to its customers, it cannot assure you that it will be able to pass all of these cost increases on to its customers. As a result, its margins may be adversely impacted by such cost increases.

Significant fluctuations in the exchange rate between the U.S. dollar and the currencies in which Russell Hobbs’ costs are denominated may reduce its sales or profits.

While Russell Hobbs reports financial results in U.S. dollars, a portion of its costs, such as payroll, rent and indirect operational costs, are denominated in other currencies, such as Australian dollars, British pounds, Canadian dollars and Mexican pesos. In addition, while a portion of its revenues are collected in foreign currencies, a significant portion of the related cost of goods sold is denominated in U.S. dollars. Changes in the relation of these and other currencies to the U.S. dollar will affect Russell Hobbs’ cost of goods sold and operating margins and could result in exchange losses. The impact of future exchange rate fluctuations on its results of operations cannot be accurately predicted.

The costs of the products purchased by Russell Hobbs could increase as a result of fluctuations in the Chinese currency.

In 1994, China pegged the RMB at an exchange rate of 8.28 to the U.S. dollar. However, certain U.S. groups argued that the peg made China’s exports to the U.S. cheaper, and U.S. exports to China more expensive, thus greatly contributing to China’s trade surplus with the U.S. Since 2005, the RMB has no longer been pegged to the U.S. dollar at a constant exchange rate and instead fluctuates versus a basket of currencies. Immediately, the new renminbi rate revalued the currency by 2.1% to 8.11 to the dollar. As of March 25, 2010, the RMB exchange rate was 6.83 to the U.S. dollar. Because a substantial number of its products are imported from China, the floating currency could result in significant fluctuations in Russell Hobbs’ product costs. If the RMB increases in value against the U.S. dollar, Chinese exports to Russell Hobbs will become more expensive, and its costs will increase. If Russell Hobbs is unable to pass on the cost increases to customers, its gross profit would decline. An increase in product prices might lead to a decrease in demand for its products.

A deterioration in trade relations with China could lead to a substantial increase in tariffs imposed on goods of Chinese origin, which potentially could reduce demand for and sales of Russell Hobbs’ products.

Most of Russell Hobbs’ products are imported from China. China gained Permanent Normal Trade Relations (“PNTR”) with the United States when it acceded to the World Trade Organization (“WTO”), effective January 2002. The United States imposes the lowest applicable tariffs on exports from PNTR countries to the United States. In order to maintain its WTO membership, China has agreed to several requirements, including the elimination of caps on foreign ownership of Chinese companies, lowering tariffs and publicizing its laws. China may not meet these requirements, it may not remain a member of the WTO, and its PNTR trading status may not be maintained. If China’s WTO membership is withdrawn or if PNTR status for goods produced in China were removed, there could be a substantial increase in tariffs imposed on goods of Chinese origin entering the United States which could hurt Russell Hobbs’ sales and gross margin.

 

50


Table of Contents

Compliance with governmental regulations could significantly increase Russell Hobbs’ operating costs or prevent it from selling its products.

Most federal, state and local authorities require certification by Underwriters Laboratory, Inc. (“UL”), an independent, not-for-profit corporation engaged in the testing of products for compliance with certain public safety standards, or other safety regulation certification prior to marketing electrical appliances. Foreign jurisdictions also have regulatory authorities overseeing the safety of consumer products. Russell Hobbs’ products may not meet the specifications required by these authorities. A determination that Russell Hobbs is not in compliance with these rules and regulations could result in the imposition of fines or an award of damages to private litigants.

Product recalls or lawsuits relating to defective products could adversely impact Russell Hobbs’ results of operations.

As a distributor of consumer products in the United States, Russell Hobbs is subject to the Consumer Products Safety Act, which empowers the U.S. Consumer Products Safety Commission to exclude from the market products that are found to be unsafe or hazardous. Under certain circumstances, the U.S. Consumer Products Safety Commission could require Russell Hobbs to repair, replace or refund the purchase price of one or more of its products, or it may voluntarily do so. For example, in August 2009, Russell Hobbs, in cooperation with the Consumer Products Safety Commission, voluntarily recalled approximately 9,800 units of a thermal coffeemaker sold under the Black & Decker brand.

Any additional repurchases or recalls of its products could be costly to Russell Hobbs and could damage its reputation or the value of its brands. If Russell Hobbs were required to remove, or it voluntarily removes, its products from the market, its reputation or brands could be tarnished and it might have large quantities of finished products that could not be sold. Furthermore, failure to timely notify the U.S. Consumer Product Safety Commission of a potential safety hazard can result in significant fines being assessed against Russell Hobbs. Additionally, laws regulating certain consumer products exist in some states, as well as in other countries in which Russell Hobbs sells its products, and more restrictive laws and regulations may be adopted in the future.

Russell Hobbs also faces exposure to product liability claims if one of its products is alleged to have caused property damage, bodily injury or other adverse effects. Russell Hobbs is self-insured to specified levels of those claims and maintains product liability insurance for claims above the self-insured levels. Russell Hobbs may not be able to maintain such insurance on acceptable terms, if at all, in the future. In addition, product liability claims may exceed the amount of insurance coverage. Additionally, Russell Hobbs does not maintain product recall insurance. Russell Hobbs’ results of operations are also susceptible to adverse publicity regarding the quality and safety of its products. In particular, product recalls or product liability claims challenging the safety of its products may result in a decline in sales for a particular product. This could be true even if the claims themselves are ultimately settled for immaterial amounts. This type of adverse publicity could occur and product liability claims could be made in the future.

Russell Hobbs is subject to environmental laws and regulations that could impose significant liabilities, costs and obligations.

Russell Hobbs is subject to various federal, state and local laws and regulations relating to the environment and human health and safety, including requirements governing the management and disposal of hazardous substances and the sale and use of pest control products. Any failure to comply with these laws or regulations, or the terms of applicable environmental permits, could result in Russell Hobbs incurring substantial costs, including fines, penalties and other civil and criminal sanctions or the prohibition of sales of its pest control products. Environmental requirements, and the enforcement thereof, change frequently, have tended to become more stringent over time and could require Russell Hobbs to incur significant expenses. Under certain environmental laws, Russell Hobbs could be responsible for the costs relating to contamination at its or its predecessors’ current or former owned or operated properties or third-party waste disposal sites. Prior to 2003,

 

51


Table of Contents

subsidiaries of Russell Hobbs manufactured certain of their products at facilities in the United States and Europe. Russell Hobbs is investigating, monitoring or remediating contamination at certain of these manufacturing sites. Costs and liabilities relating to environmental matters could have a material adverse effect on Russell Hobbs’ business, financial condition and results of operations.

The infringement or loss of Russell Hobbs’ proprietary rights could harm its business.

Russell Hobbs regards its trademarks, patents and similar intellectual property as important to its success. Russell Hobbs relies on copyright and trademark laws in the United States and other jurisdictions to protect its proprietary rights. Russell Hobbs seeks to register its trademarks and patents in the United States and elsewhere. These registrations could be challenged by others or invalidated through administrative process or litigation. The costs associated with protecting intellectual property rights, including litigation costs, may be material. For example, Russell Hobbs has spent several million dollars on protecting its patented automatic litterbox business over the last few years. If any of these rights were infringed or invalidated, Russell Hobbs’ business, financial condition and results of operations could be materially adversely affected.

Russell Hobbs licenses various trademarks, trade names and patents from third parties for use on its products. These licenses generally place marketing obligations on Russell Hobbs and require it to pay fees and royalties based on net sales or profits. Typically, each license may be terminated if Russell Hobbs fails to satisfy minimum sales obligations or if it breaches the license. The termination of these licensing arrangements could adversely affect its business, financial condition and results of operations.

Russell Hobbs may be subject to litigation and infringement claims, which could cause it to incur significant expenses or prevent it from selling its products.

Russell Hobbs cannot assure that others will not claim its products are infringing their intellectual property rights or that it does not in fact infringe those intellectual property rights. If someone claimed that its products infringed their intellectual property rights, any resulting litigation could be costly and time consuming and would divert the attention of management and key personnel from other business issues. Russell Hobbs also may be subject to significant damages or an injunction against use of its products. A claim of patent or other intellectual property infringement against Russell Hobbs could harm its financial condition and results of operations.

In 2006, NACCO Industries, Inc. and HB-PS Holding Company, Inc. filed a civil complaint in the Delaware Court of Chancery against, among other parties, Applica and the Harbinger Parties. Although Russell Hobbs is not specifically named in the complaint, Applica is a predecessor to Russell Hobbs, and in addition, certain of the allegations in the complaint relate to, among other things, the acquisition of Salton by the Harbinger Parties. The Plaintiffs seek damages for alleged claims relating to the termination of plaintiffs’ merger agreement with Applica and for alleged claims relating to the Harbinger Parties’ acquisition of Applica. In 2009, the Court granted in part and denied in part the defendants’ motion to dismiss, and the parties are currently engaged in discovery. Trial is scheduled for December 13 through December 17, 2010. Due to the uncertain nature of litigation, Russell Hobbs cannot predict the outcome of this matter. However, litigation is very costly and the costs associated with prosecuting and defending this matter could have a material adverse effect on Russell Hobbs’ financial condition and profitability.

If Russell Hobbs is unable to renew the Black & Decker trademark license agreement, its business could suffer.

Russell Hobbs licenses the Black & Decker brand for use in marketing certain small household appliances in North America, South America (excluding Brazil) and the Caribbean. Sales of Black & Decker branded products represent a significant portion of its total revenue. The sale of such products represented approximately 53% and 67% of its total consolidated revenue in the 2009 fiscal year and 2008 fiscal year, respectively. In December 2007, The Black & Decker Corporation extended the license agreement through December 2012, with an

 

52


Table of Contents

automatic extension through December 2014 if certain milestones are met regarding sales volume and product return. Russell Hobbs’ failure to renew the license agreement with The Black & Decker Corporation or to enter into a new agreement on acceptable terms would have a material adverse effect on its financial condition, liquidity and results of operations.

Russell Hobbs’ net operating loss carryforwards are limited as a result of prior mergers and are dependent upon it achieving profitable results.

As a consequence of the merger between Salton and Applica, as well as earlier business combinations and issuances of common stock consummated by both companies, use of the tax benefits of each company’s loss carryforwards is subject to limitations imposed by Section 382 of the Internal Revenue Code. The determination of the limitations is complex and requires significant judgment and analysis of past transactions. Russell Hobbs has completed an analysis to determine what portion of these carryforwards are restricted or eliminated by that provision and, pursuant to such analysis, a significant portion of these carryforwards will not be available to offset future taxable income, if any. In addition, use of its net operating loss and credit carryforwards is dependent upon Russell Hobbs achieving profitable results in the future.

If Russell Hobbs’ goodwill, indefinite-lived intangible assets or other long-term assets become impaired, it will be required to record additional impairment charges, which may be significant.

A significant portion of Russell Hobbs’ long-term assets continues to consist of goodwill and other indefinite-lived intangible assets recorded as a result of past acquisitions. Russell Hobbs does not amortize goodwill and indefinite-lived intangible assets, but rather reviews them for impairment on a periodic basis or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Russell Hobbs considers whether circumstances or conditions exist which suggest that the carrying value of its goodwill and other long-lived assets might be impaired. If such circumstances or conditions exist, further steps are required in order to determine whether the carrying value of each of the individual assets exceeds its fair market value. If analysis indicates that an individual asset’s carrying value does exceed its fair market value, the next step is to record a loss equal to the excess of the individual asset’s carrying value over its fair value.

The steps required by GAAP entail significant amounts of judgment and subjectivity. Events and changes in circumstances that may indicate that there is impairment and which may indicate that interim impairment testing is necessary include, but are not limited to, strategic decisions to exit a business or dispose of an asset made in response to changes in economic, political and competitive conditions, the impact of the economic environment on the customer base and on broad market conditions that drive valuation considerations by market participants, Russell Hobbs’ internal expectations with regard to future revenue growth and the assumptions it makes when performing its impairment reviews, a significant decrease in the market price of its assets, a significant adverse change in the extent or manner in which its assets are used, a significant adverse change in legal factors or the business climate that could affect its assets, an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset, and significant changes in the cash flows associated with an asset. As a result of such circumstances, Russell Hobbs may be required to record a significant charge to earnings in its financial statements during the period in which any impairment of its goodwill, indefinite-lived intangible assets or other long-term assets is determined. Any such impairment charges could have a material adverse effect on Russell Hobbs’ business, financial condition and operating results.

 

53


Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Spectrum and Russell Hobbs have made forward-looking statements in this document, and in documents that are incorporated by reference in this document, that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of each company’s management. Generally, forward-looking statements include information concerning possible or assumed future actions, events or results of operations of Spectrum, Russell Hobbs and/or SB Holdings. Forward-looking statements specifically include, without limitation, the information in this document regarding: projections; efficiencies/cost avoidance; cost savings; income and margins; earnings per share; growth; economies of scale; combined operations; the economy; future economic performance; conditions to, and the timetable for, completing the transaction; future acquisitions and dispositions; litigation; potential and contingent liabilities; management’s plans; business portfolios; taxes; and merger and integration-related expenses.

Forward-looking statements may be preceded by, followed by or include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates” or similar expressions. Spectrum, Russell Hobbs and SB Holdings claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.

Actual results may differ materially as a result of (i) Spectrum’s and Russell Hobbs’ ability to manage and otherwise comply with its covenants with respect to its significant outstanding indebtedness, (ii) Spectrum’s and Russell Hobbs’ ability to identify, develop and retain key employees, (iii) risks that changes and developments in external competitive market factors, such as introduction of new product features or technological developments, development of new competitors or competitive brands or competitive promotional activity or spending, (iv) changes in consumer demand for the various types of products Spectrum and Russell Hobbs offer, (v) unfavorable developments in the global credit markets, (vi) the impact of overall economic conditions on consumer spending, (vii) fluctuations in commodities prices, the costs or availability of raw materials or terms and conditions available from suppliers, (viii) changes in the general economic conditions in countries and regions where Spectrum and Russell Hobbs do business, such as stock market prices, interest rates, currency exchange rates, inflation and consumer spending, (ix) Spectrum’s and Russell Hobbs’ ability to successfully implement manufacturing, distribution and other cost efficiencies and to continue to benefit from its cost-cutting initiatives, and (x) unfavorable weather conditions and various other risks and uncertainties, including those discussed herein and those set forth in Spectrum’s securities filings, including the most recently filed Annual Report on Form 10-K or Quarterly Reports on Form 10-Q. Spectrum and Russell Hobbs also caution the reader that their estimates of trends, market share, retail consumption of their products and reasons for changes in such consumption are based solely on limited data available to Spectrum and Russell Hobbs and their respective management’s reasonable assumptions about market conditions, and consequently may be inaccurate, or may not reflect significant segments of the retail market.

Forward-looking statements are not guarantees of performance. You should understand that the following important factors, in addition to those discussed in “Risk Factors” above and elsewhere in this document, and in the documents which are incorporated by reference in this document, could affect the future results of Spectrum and Russell Hobbs, and of SB Holdings after the consummation of the mergers, and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements:

 

   

the failure of Spectrum stockholders to adopt the merger agreement;

 

   

the risk that the businesses will not be integrated successfully;

 

   

the risk that synergies will not be realized;

 

   

the risk that required consents will not be obtained;

 

   

the risk that SB Holdings following this transaction will not realize on its financing strategy;

 

   

litigation in respect of either company or the mergers; and

 

   

disruption from the mergers making it more difficult to maintain certain strategic relationships.

 

54


Table of Contents

Spectrum, Russell Hobbs and SB Holdings also caution the reader that undue reliance should not be placed on any forward-looking statements, which speak only as of the date of this document. None of Spectrum, Russell Hobbs or SB Holdings undertakes any duty or responsibility to update any of these forward-looking statements to reflect events or circumstances after the date of this document or to reflect actual outcomes.

Additional factors that may affect future results and conditions are described in Spectrum’s filings with the SEC, which are available at the SEC’s website at www.sec.gov or at Spectrum’s website at www.spectrumbrands.com.

 

55


Table of Contents

THE COMPANIES

Information About SB Holdings

Spectrum Brands Holdings, Inc.

c/o Russell Hobbs, Inc.

3633 Flamingo Road

Miramar, FL 33027

Telephone: (954) 883-1000

SB Holdings is a Delaware corporation and a newly formed holding company. SB Holdings was formed solely to effect the mergers and has not conducted any business, other than in connection with the merger agreement and related ancillary agreements to which SB Holdings is a party. Pursuant to the merger agreement, Spectrum and Russell Hobbs will survive as wholly owned subsidiaries of SB Holdings. It is anticipated that SB Holdings will trade on the NYSE under the symbol “[            ]”.

Commitments for $1.8 billion in financing have been obtained from three financial institutions to be provided through a combination of new term loans, new senior notes and a new $300 million ABL revolving facility. Proceeds from the financing will be used to refinance substantially all of existing Spectrum and Russell Hobbs debt and to pay transaction fees and expenses.

The proposed transaction is expected to improve Spectrum’s leverage ratio, calculated as total debt less cash divided by adjusted EBITDA. Spectrum’s leverage ratio was 4.7x for the quarter ended January 3, 2010. The leverage ratio declines to 4.0x pro forma for the transaction. The leverage ratio is projected to decline to 3.8x for fiscal 2010. Compared to Spectrum’s existing capital structure, the new capital structure will provide longer maturities and additional liquidity for the combined company.

Consummation of the mergers, which is currently anticipated to occur by the end of the third or fourth quarter of Spectrum’s fiscal year 2010, is subject to certain conditions, including, among others, closing of the new financing, adoption of the merger agreement by Spectrum’s stockholders, required regulatory approvals, and other customary closing conditions.

The combination of Spectrum and Russell Hobbs, if consummated, will create a new global consumer products company with an estimated $3 billion in annual revenues, a strong balance sheet, and a diverse portfolio of market-leading brands, including Remington, Rayovac, VARTA, Hot Shot, Cutter, Repel, Spectracide, Black & Decker, George Foreman, Russell Hobbs, LitterMaid, Toastmaster, Tetra, 8 in 1 and Dingo.

 

56


Table of Contents

Set forth below is an organizational chart indicating the proposed corporate structure of the combined entities under SB Holdings.

LOGO

If the proposed transaction is consummated, SB Holdings, operating under the “Spectrum Brands” name, will continue to be managed by Spectrum’s senior management team, with the addition of Terry L. Polistina, current Chief Executive Officer of Russell Hobbs, to lead a fourth reporting segment made up of the existing Russell Hobbs’ portfolio of small household appliance brands. Spectrum’s current reporting segments, Global Batteries and Personal Care, Global Pet Supplies and Home and Garden, will remain autonomous and will continue to operate under their current management structures. Including Russell Hobbs’ $800 million in annual revenues, SB Holdings is expected to be approximately $3 billion in annual revenues with $430 million to $440 million of adjusted EBITDA in fiscal 2010. Anticipated synergies of $25 million to $30 million are expected to be realized within 36 months following the consummation of the mergers.

 

57


Table of Contents

Information About Spectrum

Spectrum Brands, Inc.

Six Concourse Parkway, Suite 3300

Atlanta, GA 30328

Telephone: (770) 829-6200

Spectrum, a Delaware corporation based in Atlanta, Georgia, is a global branded consumer products company with leading market positions in six major product categories: consumer batteries, pet supplies, electric shaving and grooming, electric personal care, portable lighting and home and garden control products. Spectrum is a leading worldwide manufacturer and marketer of alkaline, zinc carbon and hearing aid batteries, as well as aquariums and aquatic health supplies and a leading worldwide designer and marketer of rechargeable batteries, battery-powered lighting products, electric shavers and accessories, grooming products and hair care appliances. Spectrum’s operations also include the manufacturing and marketing of specialty pet supplies. Spectrum is also a leading North American manufacturer and marketer of herbicides, insecticides and repellents.

Spectrum sells its products in approximately 120 countries through a variety of trade channels, including retailers, wholesalers and distributors, hearing aid professionals, industrial distributors and original equipment manufacturers. Spectrum enjoys strong name recognition in its markets under the Rayovac, VARTA and Remington brands, each of which has been in existence for more than 80 years, and under the Spectracide, Cutter, Tetra, 8-in-1 and various other brands. Spectrum has manufacturing and product development facilities located in the United States, Europe, China and Latin America. Substantially all of Spectrum’s rechargeable batteries and chargers, shaving and grooming products, personal care products and portable lighting products are manufactured by third party suppliers, primarily located in Asia.

On February 3, 2009, the Debtors filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Western District of Texas. On August 28, 2009, the Debtors’ Plan became effective and the Debtors emerged from Chapter 11 of the Bankruptcy Code. Pursuant to the Plan, Spectrum’s capital structure was realigned. Spectrum’s outstanding equity securities were cancelled with no distribution to holders of Spectrum’s then existing equity. Spectrum issued new common stock and PIK Notes to holders of allowed claims in respect of Spectrum’s then outstanding public senior subordinated notes. The supplemental and sub-supplemental participants in the Debtors’ debtor-in-possession credit facility also received the new common stock. Spectrum common stock has been listed on the NYSE under the symbol “SPB” since March 18, 2010.

Spectrum may “incorporate by reference” certain information into this proxy statement/prospectus. This means that Spectrum can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is deemed to be part of this document, except for any information superseded by information in this document. This proxy statement/prospectus incorporates by reference the documents set forth below that Spectrum has previously filed with the SEC. These documents contain important information about Spectrum’s companies and their financial performance. There have not been any material changes in Spectrum’s affairs since the Form 10-Q for the fiscal quarter ended January 3, 2010 was filed with the SEC on February 10, 2010.

 

   

Annual Report on Form 10-K for the fiscal year ended September 30, 2009 filed with the SEC on December 29, 2009;

 

   

Amended Annual Report on Form 10-K/A for the fiscal year ended September 30, 2009 filed with the SEC on March 29, 2010;

 

   

Quarterly Report on Form 10-Q for the quarterly period ended January 3, 2010 filed with the SEC on February 10, 2010; and

 

   

Current Reports on Form 8-K filed with the SEC on October 5, 2009, October 13, 2009, October 28, 2009, December 30, 2009, January 6, 2010, January 7, 2010, February 9, 2010, February 10, 2010, February 12, 2010, February 26, 2010, March 1, 2010, March 2, 2010, March 15, 2010, March 16, 2010, March 18, 2010 and March 29, 2010.

 

58


Table of Contents

In addition, all reports and other documents that Spectrum subsequently files pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), after the date of this proxy statement/prospectus and prior to the termination of the offering of securities hereunder will be deemed to be incorporated by reference into this proxy statement/prospectus and to be part of this proxy statement/prospectus from the date of the filing of such reports and documents. Any statement contained herein or in a document incorporated or deemed to be incorporated herein by reference will be deemed to be modified or superseded for the purposes of this proxy statement/prospectus to the extent that a statement contained in any subsequently filed document which is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this proxy statement/prospectus.

Russell Hobbs has supplied all information contained in this proxy statement/prospectus relating to Russell Hobbs, SB Holdings has supplied all information contained in this proxy statement/prospectus relating to SB Holdings and Spectrum has supplied all information contained or incorporated by reference in this proxy statement/prospectus relating to Spectrum.

This proxy statement/prospectus incorporates important business and financial information about Spectrum from documents that are not included in or delivered with this document. You may have already been sent some of the documents incorporated by reference, but you can obtain any of them through the Securities and Exchange Commission website at http://www.sec.gov or from Spectrum, excluding all exhibits (unless an exhibit has been specifically incorporated herein by reference), by requesting them in writing or by telephone from Spectrum at the following address:

Spectrum Brands, Inc.

Six Concourse Parkway, Suite 3300

Atlanta, GA 30328

(770) 829-6200

You can also get more information by visiting Spectrum’s website at www.spectrumbrands.com. Website materials are not part of this proxy statement/prospectus.

You will not be charged for any of these documents that you request. If you would like to request documents from Spectrum, please do so by [    ], 2010 to receive them before the special stockholders’ meeting. If you request any incorporated documents, Spectrum will strive to mail them to you by first-class mail, or other equally prompt means, within one business day of receipt of your request.

See “Where You Can Find More Information.”

 

59


Table of Contents

Information About Russell Hobbs

Russell Hobbs, Inc.

3633 S. Flamingo Road

Miramar, FL 33027

Telephone: (954) 883-1000

Description of Business

Overview

In December 2007, two longstanding companies in the small household appliance business, Salton and Applica combined their businesses through a merger, as a result of which Applica became a wholly-owned subsidiary of Salton. In December 2009, the combined company (formerly known as Salton, Inc.) changed its name to Russell Hobbs, Inc.

Russell Hobbs, based in Miramar, Florida, markets and distributes a broad range of branded small household appliances, pet and pest products, water products and personal care products. Russell Hobbs has a broad portfolio of well recognized brand names, including Black & Decker, George Foreman, Russell Hobbs, Farberware, Toastmaster, Juiceman, Breadman and LitterMaid. Russell Hobbs’ customers include mass merchandisers, specialty retailers and appliance distributors primarily in North America, South America, Europe and Australia.

Russell Hobbs manages its operations through two business segments: Household Products and Water Products. For information regarding the Water Products segment, see “Water Products Segment” below.

Information Regarding Financial Data

SFAS No. 141 “Business Combinations” requires the use of the purchase method of accounting for business combinations. In applying the purchase method, it is necessary to identify both the accounting acquiree and the accounting acquirer. In a business combination effected through an exchange of equity interests, such as the merger of Salton and Applica, the entity that issues the interests (Salton in this case) is normally the acquiring entity. However, in identifying the acquiring entity in a combination effected through an exchange of equity interests, all pertinent facts and circumstances must be considered, including the relative voting interests in the combined entity after the combination and the composition of the governing body of the combined entity. While Salton was the legal acquirer and surviving registrant in the merger, Applica was deemed to be the accounting acquirer. Accordingly, the information presented in this section for the year ended June 30, 2008 represents Applica’s operations for the periods presented and only includes Salton’s operations from the consummation of the merger, which was December 28, 2007.

Competitive Strengths

Russell Hobbs believes that its business model provides an attractive value proposition to its customers and that it is distinguished by the following strengths:

Strong Portfolio of Highly Recognizable, Market Leading Brands. Russell Hobbs’ brands are some of the most recognized in the small appliances industry. It has a strong portfolio of flagship brands including Black & Decker, George Foreman, Russell Hobbs, Toastmaster, Farberware and LitterMaid. Russell Hobbs has a significant market presence with a diverse product offering spanning several key categories. Its products have significant market share across their respective U.S. small kitchen and household appliance product categories. George Foreman is the U.S. market leader in indoor grills and Black & Decker has the top U.S. market share in more categories than any other brand in the household appliance business.

 

60


Table of Contents

Long-term Established Relationships with Key Retailers and Suppliers. Russell Hobbs has deep and long standing relationships with its customers. For example, it has been a supplier to Wal-Mart Stores, Inc. and Target Corporation, its top two customers, for over 15 years. It continues to strengthen its relationships with these customers by integrating its supply chain processes with their inventory management systems and by having dedicated offices and personnel near their headquarters. Internationally, Russell Hobbs has relationships of over 15 years with customers such as Canadian Tire Corporation, one of Canada’s most-shopped general merchandise retailers, and Argos Limited, a large multi-channel retailer located in the UK.

Additionally, Russell Hobbs has long standing relationships with its key suppliers around the world. Due to the strength of its relationships with its suppliers, Russell Hobbs has been able to optimize its supply chain in partnership with its core suppliers.

Significant Global Reach. Russell Hobbs is an international business with a global footprint throughout North America, Europe, Latin America and Australia. Its customer base includes both large multi-national retailers as well as retailers focused in a specific country or region. For the fiscal years ended June 30, 2009 and 2008, approximately 47.7% and 47.3% of its sales were outside the United States, respectively.

Proven and Experienced Management Team. Russell Hobbs’ senior management team has substantial experience in the consumer products industry, with specific expertise in the small appliance sector. Russell Hobbs’ senior management team is led by:

 

   

Terry L. Polistina, its Chief Executive Officer and President,

 

   

Ivan R. Habibe, its Vice President and Chief Financial Officer,

 

   

Evanghela Hidalgo, its President and General Manager of the Americas Division,

 

   

Martin Burns, its President and General Manager of the European Division, and

 

   

Chris Dickins, President and General Manager of the Australia/New Zealand Division.

Russell Hobbs’ management team has delivered strong operating results through disciplined execution and cost control. This team has successfully managed the integration of large companies, along with associated substantial cost reduction initiatives.

Business Strategy

Russell Hobbs has combined top brand names such as Black & Decker, George Foreman, Russell Hobbs, Toastmaster and LitterMaid with a reputation for durability and innovation. It is striving to become the preeminent provider of quality portable household appliances on a global basis across all price points and all distribution channels. Russell Hobbs’ business strategy includes the following:

Maximize Utility of Its Brand Assets. Russell Hobbs has a stable of world-class brands positioned in distinctive consumer segments. It plans to continue to strengthen its best performing brands, such as Black & Decker, George Foreman, Russell Hobbs, Toastmaster and LitterMaid, while also investing to improve under-utilized brands such as Juiceman and Breadman. Russell Hobbs’ product strategies and marketing plans are tailored to the unique needs of its consumers. Russell Hobbs is building a fully integrated communication strategy that allows for consistent communication of its brand equity across all consumer touch points including: industrial design, package graphics, in-store advertising, web design and national advertising.

Leverage Innovation and Strategic Marketing to Drive Profitability. Russell Hobbs drives revenues through innovation within its product categories using new marketing platforms to enhance its existing products. Russell Hobbs intends to develop new categories and grow its existing categories through distinctive product innovation, new product introductions and continued brand development. Its continued focus on product quality,

 

61


Table of Contents

design, performance characteristics and speed-to-market is designed to maximize product success. Russell Hobbs’ development teams work closely with retailers and suppliers to identify consumer needs and preferences to generate new product ideas in and outside of its current product categories. New products allow Russell Hobbs to generate higher margins based on their uniqueness and desirability in the marketplace.

Create Long-Term Cost and Quality Advantages for Its Customers. Russell Hobbs maintains a value chain for its customers that strives to meet their cost and quality objectives. It is accomplishing this by strengthening its relationships with suppliers in Asia who can deliver quality products on a timely basis at a reasonable cost. These relationships allow Russell Hobbs to fully capitalize on its strengths of providing a foundation for new product development, delivering quality products consistent with the reputation of its brands and delivering products at costs that are competitive in its industry.

Continue to Optimize Its Supply Chain. Russell Hobbs continues to improve its global supply chain, reducing the need for large working capital investment. This effort continues to improve the definition of product velocities, as well as Russell Hobbs’ ability to estimate procurement, manufacturing and logistical lead times and to plan order placement accordingly. Russell Hobbs continues to improve its integration with its preferred suppliers through software connections and more effective collaborative communication.

Household Products

The following table sets forth the approximate amounts and percentages of Russell Hobbs’ consolidated net sales of household products by product category during the periods indicated:

 

     Fiscal Year ended June 30,  
     2009     2008 (1)  
     (Dollars in thousands)  
     Net Sales    %     Net Sales    %  

Kitchen Products

   $ 627,648    78      $ 499,796    75   

Home Products

     124,724    16        118,866    18   

Pet Products

     21,804    3        24,978    4   

Personal Care Products

     14,473    2        9,791    2   

Pest Control Products

     7,980    1        7,466    1   
                          

Total Household Products

   $ 796,629    100   $ 660,897    100

 

(1) Pursuant to the requirements of SFAS No. 141, the information presented above for the year ended June 30, 2008 represents the sales of Applica for the periods presented and only includes the sales of Salton from the consummation of the merger of Applica and Salton, which was December 28, 2007.

The kitchen products group includes cooking, beverage and food preparation products and constitutes Russell Hobbs’ largest product category. Russell Hobbs provides customers with a broad product line in the small kitchen appliances market, primarily at mid- to high-tier price points. Russell Hobbs’ products in this category include grills, sandwich makers, kettles, toaster ovens, toasters, blenders, juicers, can openers, coffee grinders, coffee makers, electric knives, skillets, deep fryers, food choppers, food processors, hand mixers, rice cookers and steamers. Significant brands for this category include Black & Decker, George Foreman, Russell Hobbs, Toastmaster, Farberware, Juiceman and Breadman.

The home products group includes garment care products, such as hand-held irons, vacuum cleaners, air purifiers and heaters. Significant brands for this category include Black & Decker and Russell Hobbs. Vacuum cleaners are distributed under the Black & Decker brand in Latin America and under the Russell Hobbs brand in Europe and Australia.

The pet products group includes the LitterMaid Classic patented self-cleaning cat litter box and the LitterMaid Elite litter box, which contains innovative, consumer-driven features such as a sleep timer and a

 

62


Table of Contents

built-in ionic air cleaner. The LitterMaid product line also delivers a recurring revenue stream from consumable accessories, including privacy tents, litter carpets, crystal litter cartridges, charcoal filters, corn-based litter and replaceable waste receptacles.

The personal care products group offers a broad range of personal care products including hand-held dryers, curling irons, straightening irons, brush irons, airbrushes and hair setters. Significant brands for this category include Russell Hobbs, Carmen, Andrew Collinge, Orva and Llongueras.

The pest control products group includes pest control and repelling devices that use ultra-sonic or sub-sonic sound waves to control insects and rodents, primarily in homes. The core of the business is the ultrasonic direct plug-in pest repellers marketed under the Black & Decker brand name.

Product Development

Russell Hobbs’ product development process is designed to better serve consumer needs and maximize its available resources. The process is focused on quality, design, appropriate performance characteristics and speed-to-market. Russell Hobbs has product development teams dedicated to creating innovative products in its core categories. The product development process also helps Russell Hobbs manage the improvement of quality, performance and cost of existing products.

Russell Hobbs also works closely with both retailers and suppliers to identify consumer needs and preferences and to generate new product ideas. Russell Hobbs evaluates new ideas and seeks to develop and acquire new products and improve existing products to satisfy marketplace requirements and changing consumer preferences. Russell Hobbs designs the style, features and functionality of its products to meet customer requirements for quality, performance, product mix and pricing.

Brands

Russell Hobbs’ portfolio contains many time-honored traditional brands, as well as recently established names, within the world wide housewares industry. Russell Hobbs believes this brand portfolio contains many brands with strong consumer recognition throughout the world, including:

 

Black & Decker    Farberware    Juiceman    Russell Hobbs
Breadman    George Foreman    LitterMaid    Toastmaster

In addition, Russell Hobbs owns certain other brands, such as Salton, Windmere, Orva, Haden and Tower, and sub-brands, including Gizmo, SmartBrew, Digital Advantage, Toast R Oven and Quick N’ Easy. Russell Hobbs licenses the Spacemaker brand for under the cabinet kitchen appliances. Russell Hobbs continues to develop new brands and sub-brands for product differentiation at the retail level.

Russell Hobbs licenses the Black & Decker brand for use in marketing small household appliances in North America, Latin America (excluding Brazil) and the Caribbean. The major portion of its revenue is generated through the sale of Black & Decker branded products, which represented approximately 53% of its total consolidated revenue for the fiscal year ended June 30, 2009 and 67% for the fiscal year ended June 30, 2008.

As part of the merger of Applica and Salton, over the last two years, Russell Hobbs has eliminated approximately 80 underperforming brands and reduced its SKUs (stock keeping units) by more than 1,000.

Russell Hobbs continues to seek to enhance its brand portfolio through licensing agreements and strategic alliances.

 

63


Table of Contents

Suppliers

All of Russell Hobbs’ finished products are acquired from third party suppliers, primarily in Asia. Russell Hobbs purchases a significant amount of its finished products from a limited number of suppliers. Its top two suppliers accounted for approximately 31% of total purchases for the fiscal year ended June 30, 2009 and 47% for the fiscal year ended June 30, 2008. Russell Hobbs maintains supply contracts with terms of one to three years with certain of its third party suppliers, which include standard terms for production, delivery, quality and indemnification for product liability claims. Specific production amounts are ordered by separate purchase orders.

Intellectual Property

Russell Hobbs markets and distributes products with features for which it has filed or obtained licenses for trademarks, patents and design registrations in the United States and in several foreign countries. Its right to these patents and trademarks is a significant part of its business and Russell Hobbs’ ability to create demand for its products is dependent to a large extent on its ability to capitalize on them. Russell Hobbs owns the following significant brand names:

 

George Foreman    Juiceman    Russell Hobbs
Breadman    LitterMaid    Toastmaster

Russell Hobbs licenses the Black & Decker brand in North America, Latin America (excluding Brazil) and the Caribbean for four core categories of household appliances: beverage products, food preparation products, garment care products and cooking products. In December 2007, Russell Hobbs and The Black & Decker Corporation extended the trademark license agreement for a third time through December 2012, with an automatic extension through December 2014 if certain milestones are met regarding sales volume and product return. Under the agreement as extended, Russell Hobbs agreed to pay The Black & Decker Corporation royalties based on a percentage of sales, with minimum annual royalty payments as follows:

 

   

Calendar year 2010: $14,500,000

 

   

Calendar year 2011: $15,000,000

 

   

Calendar year 2012: $15,000,000

The agreement also requires Russell Hobbs to comply with maximum annual return rates for products.

If The Black & Decker Corporation does not agree to renew the license agreement, Russell Hobbs has 18 months to transition out of the brand name. No minimum royalty payments will be due during such transition period. The Black & Decker Corporation has agreed not to compete in the four core product categories for a period of five years after the termination of the license agreement. Upon request, The Black & Decker Corporation may elect to extend the license to use the Black & Decker brand to certain additional product categories. The Black & Decker Corporation has approved several extensions of the license to additional categories and geographies.

Russell Hobbs licenses the Farberware brand from the Farberware Licensing Company in the United States, Canada and Mexico for several types of household appliances, including beverage products, food preparation products, garment care products and cooking products. The term of the license is through June 2010 and can be renewed for additional periods upon the mutual agreement of both parties. Farberware represented approximately 1.0% of Russell Hobbs’ total consolidated revenue for the fiscal year ended June 30, 2009 and approximately 0.8% for the fiscal year ended June 30, 2008. Under the agreement, Russell Hobbs agreed to pay Farberware Licensing Company royalties based on a percentage of sales, with minimum annual royalty payments. The minimum annual royalty payment for fiscal year 2010 is $1.5 million. Russell Hobbs is currently in discussions regarding an extension of the Farberware license.

 

64


Table of Contents

Russell Hobbs owns the LitterMaid trademark for self-cleaning litter boxes and has extended the trademark for accessories such as litter, a litterbox privacy tent and waste receptacles. Russell Hobbs owns two patents and has exclusive licenses to three other patents covering the LitterMaid litter box, which requires it to pay royalties based on a percentage of sales. Sales of LitterMaid branded products represented approximately 2.7% of Russell Hobbs’ total consolidated revenue for the fiscal year ended June 30, 2009 and approximately 3.7% for the fiscal year ended June 30, 2008. The license agreements are for the life of the applicable patents and do not require minimum royalty payments. The patents have been issued in the United States and a number of foreign countries.

In 2007, pursuant to Russell Hobbs’ request, the U.S. International Trade Commission (“ITC”) initiated a Section 337 investigation into the exclusion of certain products from entry into the United States that infringe a patent protecting some of its LitterMaid branded litter box products. Russell Hobbs is the exclusive licensee of the patent with the right to enforce the same. In December 2008, an ITC administrative law judge ruled in Russell Hobbs’ favor, which ruling was affirmed by the ITC in April 2009. The ITC issued a limited exclusion order and a cease and desist order preventing importation and resale of infringing products (although such order is not currently being enforced by the U.S. Customs Department). The ruling is currently on appeal.

One ITC respondent has filed a reexamination request with the United States Patent & Trademark Office (“USPTO”) stating a substantial new question of patentability exists regarding the patent. Subsequently, the USPTO initiated a reexamination proceeding, which is currently pending.

Russell Hobbs also has related suits pending in the U.S. District Court for the Eastern District of Texas seeking monetary damages and other remedies. There, Russell Hobbs is pursuing infringement claims based on other patents in addition to the patent brought before the ITC. Such suits are currently stayed pending the outcome of the appeals of the ITC ruling.

Russell Hobbs maintains various other licensing and contractual relationships to market and distribute products under specific names and designs. These licensing arrangements generally require certain license fees and royalties and may contain minimum sales requirements.

Customers

Russell Hobbs markets its household appliances primarily through mass merchandisers, but also distributes to home improvement warehouses, specialty retailers, catalogers, warehouse clubs, drug and grocery stores, department stores, television shopping channels, pet supply retailers, and independent distributors, as well as through e-commerce websites. Its top two customers are Wal-Mart Stores, Inc. and Target Corporation. Wal-Mart Stores, Inc. accounted for approximately 24% of consolidated net sales for the fiscal year ended June 30, 2009 and 24% for the fiscal year ended June 30, 2008. Target Corporation accounted for approximately 10% of consolidated net sales for the fiscal year ended June 30, 2009 and 11% for the fiscal year ended June 30, 2008.

Sales, Marketing and Distribution

Russell Hobbs’ products are sold principally by an internal sales staff located in North America, Latin America, Europe, Australia and New Zealand. Russell Hobbs also uses independent sales representatives, primarily in Central America and the Caribbean. In addition to directing its marketing efforts toward retailers, Russell Hobbs sells certain of its products directly to consumers through infomercials and its Internet websites. For information on revenues attributable to the countries in which Russell Hobbs does business, see Note 11 to Russell Hobbs’ Consolidated Financial Statements for the fiscal years ended June 30, 2009 and 2008.

Russell Hobbs uses media advertising, cooperative advertising and other promotional materials to promote its products and develop brand awareness. Russell Hobbs enhances the equity of key brands through design, promotion and product functionality based on consumer feedback. Russell Hobbs provides promotional support for its products with the aid of various media, including television and print advertising, cooperative advertising

 

65


Table of Contents

with retailers and in-store displays and product demonstrations. Russell Hobbs believes that these promotional activities are important to strengthening its brand name recognition. The level of promotional effort targeted toward sales velocity and brand building is determined by the profitability of the category, the strategic importance of the brand and retailer plans.

Russell Hobbs distributes most of its products to retailers, including mass merchandisers, department stores, home improvement stores, warehouse clubs, drug chains, catalog stores and discount and variety stores.

Russell Hobbs’ policy is to maintain its inventory at levels reasonably necessary to service the rapid delivery requirements of its customers. Because of manufacturing lead times and seasonal sales, Russell Hobbs may increase inventories based on anticipated sales and forecasts provided by its customers and its sales personnel.

Backlog

Russell Hobbs’ backlog consists of commitments to order and orders for its products, which are typically subject to change and cancellation until shipment. Customer order patterns vary from year to year, largely because of annual differences in consumer acceptances of product lines, product availability, marketing strategies, inventory levels of retailers and overall economic conditions. As a result, comparisons of backlog between periods are not necessarily indicative of sales for that period. Accordingly, Russell Hobbs does not believe that the amount of backlog orders is a significant predictor of its business.

Seasonality

Russell Hobbs’ business is seasonal, with operating results varying from quarter to quarter. It historically has experienced higher revenues in the second half of the calendar year, primarily due to increased demand by customers in late summer for “back-to-school” sales and in the fall for the holiday season. The majority of Russell Hobbs’ sales occur from July through December.

Competition

The sale of small household appliances is characterized by intense competition. Competition is based on price and quality, as well as access to retail shelf space, product design, brand names, new product introductions, marketing support and distribution strategies. Russell Hobbs competes with various domestic, foreign and international marketers and distributors, some of which have substantially greater financial and other resources than Russell Hobbs. Russell Hobbs believes that its future success will depend upon its ability to develop and distribute reliable products that incorporate developments in technology and to satisfy consumer preferences with respect to style and design. It will also depend on Russell Hobbs’ ability to market a broad offering of products in each category at competitive prices.

Primary competitive brands in the household appliance market include Hamilton Beach, Procter Silex, Sunbeam, Mr. Coffee, Oster, General Electric, Rowenta, DeLonghi, Kitchen Aid, Cuisinart, Krups, Braun, Rival, Europro, Kenwood, Philips, Morphy Richards, Breville and Tefal. The key competitors of Russell Hobbs in this market in the United States and Canada include Jarden Corporation, DeLonghi America, Euro-Pro Operating LLC, Metro Thebe, Inc., d/b/a HWI Breville, NACCO Industries, Inc. (Hamilton Beach) and SEB S.A. In addition, Russell Hobbs competes with retailers who use their own private label brands for household appliances (for example, General Electric branded products at Wal-Mart Stores, Inc.). Primary competitive brands in the pet and pest market include Cat Genie, Petsafe, Sunbeam and Lentek. The key competitors of Russell Hobbs in the pest market in the United States and Canada include Jarden Corporation, Lentek and Good Life LLC. The key competitors of Russell Hobbs in the pet market in the United States and Canada include Radio Systems Corporation and OurPet’s Company.

 

66


Table of Contents

Regulation

As a marketer and distributor of consumer products in the United States, Russell Hobbs is subject to the Consumer Products Safety Act, which empowers the Consumer Products Safety Commission to exclude from the market products that are found to be unsafe or hazardous. Under certain circumstances, the Consumer Products Safety Commission could require Russell Hobbs to repurchase or recall one or more of its products. In August 2009, Russell Hobbs, in cooperation with the Consumer Products Safety Commission, voluntarily recalled approximately 9,800 units of a thermal coffee maker sold under the Black & Decker brand.

Throughout the world, most federal, state, provincial and local authorities require safety regulation certification prior to marketing electrical appliances in those jurisdictions. Within the United States, Underwriters Laboratory, Inc. (“UL”) is the most widely recognized certification body for electrical appliances. UL is an independent, not-for-profit corporation engaged in the testing of products for compliance with certain public safety standards. Russell Hobbs also uses the ETL SEMKO division of Intertek for certification and testing of compliance with UL standards, as well as other national and industry-specific standards. Russell Hobbs endeavors to have its products designed to meet the certification requirements of, and to be certified in, each of the jurisdictions in which they are sold.

Laws regulating certain consumer products also exist in some U.S. cities and states, as well as in other countries in which Russell Hobbs sells its products. Russell Hobbs believes that it is in substantial compliance with all of the laws and regulations applicable to it and its products.

Certain of the products sold by Russell Hobbs in the United States are also subject to the Fair Packaging and Labeling Act. Russell Hobbs believes that in addition to complying with the Fair Packaging and Labeling Act, it complies with the applicable rules and regulations of the Federal Trade Commission and other federal and state agencies with respect to the content of advertising and other trade practices.

Russell Hobbs’ pest control products are subject to various regulations, including regulations promulgated by the U.S. Environmental Protection Agency, as well as laws and regulations of the states and applicable state agencies. Compliance with such environmental regulations is not expected to have a material effect upon capital expenditures, earnings or Russell Hobbs’ competitive position in the pest product market.

Water Products Segment

In 2007, Russell Hobbs launched a new water products initiative, beginning with a water pitcher filtration system sold under the Clear2O brand. In May 2009, Russell Hobbs introduced its Clear2Go branded sports filtration bottle. The sales of Clear2O and Clear2Go branded products are made to mass merchandisers and specialty retailers primarily in North America.

In June 2008, Russell Hobbs entered into a license agreement with Island Sky Corporation for a patented air-to-water product. In August 2008, Russell Hobbs purchased 16,342,940 common shares of Island Sky Australia Limited, the parent company of Island Sky Corporation, for approximately $3.5 million. In December 2009, Russell Hobbs purchased an additional 2,887,968 common shares of Island Sky Australia Limited, previously owned by Harbinger, for approximately $274,000. At December 31, 2009, Russell Hobbs owed approximately 17% of Island Sky’s outstanding common shares. Russell Hobbs’ President and Chief Executive Officer currently serves as a non-executive director of Island Sky Australia Limited. The air-to-water business of the Water Products Segment is in its beginning stages and is focused on the commercial markets in India and certain other countries in the Far East.

In December 2009, Russell Hobbs determined to divest the operations of its water filtration business sold under the Clear2O and Clear2Go brands and put the assets and business up for sale. Russell Hobbs decided to sell this division primarily because it does not strategically complement its appliance business, has incurred

 

67


Table of Contents

significant operating losses since its launch in 2007 and has not been successful in gaining any significant market share.

Prior to the merger, Russell Hobbs intends to distribute its Water Products Segment to its sole stockholders, the Harbinger Parties, as a dividend.

Employees

As of March 1, 2010, Russell Hobbs had approximately 265 full-time employees in North America, approximately 190 full-time employees in Europe, approximately 75 full-time employees in South America and the Caribbean and approximately 45 full-time employees located in Australia and New Zealand. From time to time, Russell Hobbs also uses the services of seasonal employees.

None of Russell Hobbs’ employees are covered by a collective bargaining agreement. Russell Hobbs believes that it has satisfactory working relations with its employees.

As part of the merger of Applica and Salton, over the last two years, Russell Hobbs has reduced its headcount from more than 1,400 employees to less than 600 employees.

Properties

The following table sets forth Russell Hobbs’ principal operating facilities, all of which are used by the Household Products Segment:

 

Location

  

Description

   Area (Square feet)

Redlands, California

   Warehouse    983,986 Leased

Little Rock, Arkansas

   Warehouse and distribution    562,000 Leased

Wolverhampton, England

   Warehouse    312,000 Owned

Manchester, England

   Sales and administrative office and warehouse    170,756 Owned

Wolverhampton, England

   Warehouse    136,750 Leased

Miramar, Florida

   Headquarters, general administration offices    110,000 Leased

Russell Hobbs leases additional warehouse and office space in the United States, Canada, Europe, Latin America, Australia and New Zealand pursuant to long and short-term contracts. Russell Hobbs also contracts with third party distribution providers that provide full service warehousing and shipping services. Russell Hobbs has such arrangements in North America, South America, Asia, Europe, Australia and New Zealand. Service contracts are typically short-term in nature, with fixed pricing, and provide for specific performance requirements related to customer service.

Russell Hobbs believes its current facilities are adequate to meet its needs in the foreseeable future. If necessary, Russell Hobbs may, from time to time, downsize current facilities or lease additional facilities for warehousing or other activities.

 

68


Table of Contents

THE SPECIAL MEETING AND PROXY SOLICITATION

The Spectrum Board is using this document to solicit proxies from the holders of Spectrum common stock for use at the special meeting of Spectrum’s stockholders. Spectrum is first mailing this proxy statement/prospectus and accompanying form of proxy to Spectrum stockholders on or about [            ].

Matters Relating to the Special Meeting

 

Time and Place:

                    , 2010

[        ], Eastern Time

[address]

[address]

[city], [state]

 

Purpose of Special Meeting Is to Vote on the Following Items:

1. To adopt the merger agreement, as described in “The Merger Agreement (Proposal No. 1).”

2. To approve a proposal to adjourn the special meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting to adopt the merger agreement.

3. To transact such other business as may properly come before the meeting, and any adjournment or postponement thereof.

 

Record Date:

The record date for shares entitled to vote is [                    ], 2010.

 

Outstanding Shares Held on Record Date:

On the record date, there were an aggregate of [            ] shares of common stock outstanding and entitled to vote.

 

Shares Entitled to Vote:

Shares entitled to vote at the special meeting are Spectrum common stock. Each share of Spectrum common stock is entitled to one vote.

 

Quorum Requirement:

A quorum of stockholders (at least a majority of the outstanding shares of Spectrum common stock represented by proxy or in person at the special meeting) is necessary to hold a valid special meeting. On the record date, there were an aggregate of [            ] shares of Spectrum common stock outstanding. Thus, [            ] shares must be represented by proxy or present in person at the special meeting to have a quorum. The inspector of elections will determine whether or not a quorum is present.

Abstentions count towards the quorum requirement. Broker non-votes will not count towards a quorum. If there is no quorum, a majority of the shares present in person or by proxy at the special meeting may vote to adjourn the special meeting to another date.

 

Shares Beneficially Owned by Spectrum Directors and Executive Officers as of the Record Date:

Spectrum directors and executive officers beneficially owned [            ] shares of Spectrum common stock on the record date,

 

69


Table of Contents
 

including shares subject to restricted stock awards. These shares represent in total approximately [    ]% of the total voting power of Spectrum’s voting securities. Spectrum’s directors and executive officers intend to vote all of Spectrum common stock beneficially owned by them “for” the adoption of the merger agreement.

Votes Necessary to Adopt the Merger Agreement

 

Item

  

Vote Necessary

Proposal to Adopt the Merger Agreement

   Adoption of the merger agreement requires the affirmative votes of the holders of (i) a majority of the outstanding shares of Spectrum common stock entitled to vote (including the shares of the Harbinger Parties) and (ii) a majority of the outstanding shares of Spectrum common stock entitled to vote (excluding the shares of the Harbinger Parties (except any shares of Spectrum common stock acquired by the Harbinger Parties after March 1, 2010)). Abstentions and broker non-votes have the same effect as a vote against adoption of the merger agreement.

Proposal to Adjourn Special Meeting

   If a quorum is present, approval of the proposal to adjourn the special meeting, if necessary, to permit further solicitation of proxies requires the affirmative vote of the holders of a majority of the shares represented at the special meeting and entitled to vote on the matter.

Proxies

Submitting Your Proxy. You may vote in person by ballot at the special meeting or by submitting a proxy. Please submit your proxy even if you plan to attend the special meeting. If you attend the special meeting in person, you may cancel any proxy previously given and vote by ballot.

Voting instructions are included on your proxy card. If you properly give your proxy and submit it to Spectrum by 11:59 p.m. Eastern Time on [                    ], 2010, one of the individuals named as your proxy will vote your shares as you have directed. You may direct your shares to be voted “For” or “Against” the proposals or abstain from voting.

How to Submit a Proxy

 

By telephone:

   You may submit your proxy by telephone by following the instructions included on your proxy card. Telephone proxy submission will be accessible until 11:59 p.m. Eastern Time on [            ]. If you submit your proxy by telephone, you do not need to return your proxy card.

By Internet:

   You may also choose to submit your proxy on the Internet. The website for Internet proxy submission should be listed on your proxy card. Internet proxy submission will be accessible until 11:59 p.m. Eastern Time on [            ]. If you submit your proxy on the Internet, you do not need to return your proxy card.

By mail:

   To submit your proxy by mail, simply complete, date and sign your proxy and return it in the return envelope provided. Postage will be pre-paid if mailed in the United States.

 

70


Table of Contents

If you submit your proxy but do not make specific choices with respect to the proposals, your proxy will follow the Spectrum Board’s recommendations and vote your shares:

 

   

“For” the adoption of the merger agreement; and

 

   

“For” the proposal to adjourn the special meeting, if necessary, to permit further solicitation of proxies on the proposal to adopt the merger agreement.

Changing or Revoking Your Proxy

You can revoke your proxy at any time before the close of voting at the special meeting. You may revoke your proxy in any of the following ways:

 

   

Prior to the special meeting, you may:

 

   

submit another properly completed proxy card with a later date by following the return instructions on the proxy card;

 

   

submit another proxy by telephone or over the Internet after you have already provided an earlier proxy (see “The Special Meeting and Proxy Solicitation—Proxies—How to Submit a Proxy” above for instructions on how to do so); or

 

   

send a written notice that you are revoking your proxy to the Corporate Secretary at Spectrum’s principal offices at Six Concourse Parkway, Suite 3300, Atlanta, GA 30328.

 

   

During the special meeting, you may vote in person prior to the close of voting. Simply attending the special meeting will not, by itself, revoke your proxy.

Voting in Person

If you are a stockholder of record and you wish to vote in person at the special meeting, a ballot will be provided at the special meeting. However, if your shares are held in the name of your bank, broker, custodian or other record holder, you must obtain a proxy, executed in your favor, from the holder of record to be able to vote at the meeting.

Proxy Solicitation

Spectrum will pay its own costs of soliciting proxies. In addition to the Spectrum’s proxy materials, Spectrum’s directors, officers, other employees and any other solicitors that Spectrum may retain may also solicit proxies personally, by telephone or by other means of communication. Directors and employees will not be paid any additional compensation for soliciting proxies. Spectrum will provide copies of its solicitation materials to banks, brokerage houses, fiduciaries and custodians that hold beneficially owned shares of Spectrum common stock for distribution to such beneficial owners. Spectrum has retained Georgeson, Inc. to aid in Spectrum’s proxy solicitation process. Spectrum estimates that its proxy solicitor fees will be approximately $[            ].

Do not send in any stock certificates with your proxy cards. If the merger agreement is adopted, the exchange agent will mail transmittal forms with instructions for the surrender of stock certificates for Spectrum common stock to former Spectrum stockholders as soon as practicable after the completion of the Spectrum merger.

No Appraisal Rights

Spectrum stockholders are not entitled to appraisal rights under the DGCL in connection with the mergers.

Other Business

Spectrum is not currently aware of any other business to be acted upon at the special meeting. If, however, other matters are properly brought before the special meeting, or any adjourned meeting or postponement, your proxies include discretionary authority on the part of the individuals appointed to vote your shares or act on those matters according to their best judgment.

 

71


Table of Contents

Spectrum Householding Information

The SEC has adopted rules that permit companies and intermediaries (e.g., brokers) to satisfy the delivery requirements for proxy statements and annual reports with respect to two or more stockholders sharing the same address by delivering a single proxy statement/prospectus and annual report addressed to those stockholders. This process, which is commonly referred to as “householding,” potentially means extra convenience for stockholders and cost savings for companies.

This year, a number of brokers with account holders who are our stockholders will be “householding” our proxy materials. A single proxy statement/prospectus will be delivered to multiple stockholders sharing an address unless contrary instructions have been received from the affected stockholders. Once you have received notice from your broker that they will be “householding” communications to your address, “householding” will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in “householding” and would prefer to receive a separate proxy statement/prospectus, please notify your broker, direct your written request to Spectrum Brands, Inc., Investor Relations, Six Concourse Parkway, Suite 3300, Atlanta, GA 30328, or investorrelations@spectrumbrands.com or contact Investor Relations at (770) 829-6200. Stockholders who currently receive multiple copies of the proxy statement/prospectus at their address and would like to request “householding” of their communications should contact their broker.

Stockholder Account Maintenance

Spectrum’s transfer agent is BNY Mellon Shareowner Services. All communications concerning accounts of stockholders of record, including address changes, name changes, inquiries as to requirements to transfer shares of common stock, and similar issues, should be made by calling the transfer agent’s toll-free number, (800) 777-3694. In addition, you can access your account through the transfer agent’s website. To access your account on the Internet, visit www.bnymellon.com/shareowner.

 

72


Table of Contents

THE PROPOSED TRANSACTION

General Description of the Proposed Transaction

On February 9, 2010, Spectrum entered into the merger agreement with Russell Hobbs, SB Holdings, Battery Sub and Grill Sub. Under the merger agreement, (i) Battery Sub will merge with and into Spectrum, with Spectrum as the surviving corporation (referred to herein as the Spectrum merger), and (ii) Grill Sub will merge with and into Russell Hobbs, with Russell Hobbs as the surviving corporation (referred to herein as the Russell Hobbs merger, which, together with the Spectrum merger, are referred to herein as the mergers). Battery Sub and Grill Sub are both direct wholly-owned subsidiaries of SB Holdings. The Spectrum Board adopted the merger agreement based on the unanimous recommendation of the Committee to the Spectrum Board.

Upon the consummation of the mergers, (i) stockholders of Spectrum will be entitled to receive in the Spectrum merger one share of SB Holdings common stock in exchange for each share they hold of Spectrum common stock and (ii) Russell Hobbs stockholders will be entitled to receive shares of SB Holdings in exchange for their shares of Russell Hobbs Stock in accordance with the terms of the merger agreement and based on a $675 million enterprise value of Russell Hobbs, subject to various adjustments set forth in the merger agreement, and a $31.50 per share valuation of Spectrum common stock. Furthermore, as part of the proposed transaction, the Harbinger Parties have agreed to convert their existing approximately $158 million aggregate principal amount of Russell Hobbs’ term debt into SB Holdings common stock at a price of $31.50 per share, which is included in the $675 million enterprise value of Russell Hobbs. As a result of the mergers, Spectrum and Russell Hobbs will become subsidiaries of SB Holdings. The Harbinger Parties currently own 100% of the outstanding shares of Russell Hobbs Stock and approximately 40% of the outstanding shares of Spectrum common stock. As a result of the mergers, the stockholders of Spectrum (other than the Harbinger Parties) are expected to own approximately 36% of SB Holdings, and the Harbinger Parties are expected to own approximately 64% of SB Holdings (assuming that the Harbinger Parties do not acquire additional shares of Spectrum common stock prior to the consummation of the mergers).

The merger agreement is attached as Annex A-1 to this proxy statement/prospectus and is incorporated by reference herein in its entirety. The first amendment to the merger agreement, dated as of March 1, 2010, is attached as Annex A-2 to this proxy statement/prospectus and is incorporated by reference herein in its entirety. The second amendment to the merger agreement, dated as of March 26, 2010, is attached as Annex A-3 to this proxy statement/prospectus and is incorporated by reference herein in its entirety. Spectrum encourages its stockholders to read the merger agreement and the two amendments thereto carefully and in their entirety, as the merger agreement is the principal legal document governing the mergers.

At the special meeting, holders of Spectrum common stock will be asked to vote upon a proposal to adopt the merger agreement and a proposal to adjourn the special meeting, if necessary, to permit further solicitation of proxies in the event there are not sufficient votes at the time of the special meeting to adopt the merger agreement.

The Spectrum Board is using this document to solicit proxies from the holders of Spectrum common stock for use at the special meeting. The mergers will not be consummated unless Spectrum’s stockholders adopt the merger agreement.

Background of the Proposed Transaction

Spectrum Reorganization

Spectrum commenced Chapter 11 reorganization proceedings in February 2009 by filing a plan of reorganization supported by, among others, the Harbinger Parties, the Avenue Parties and D.E. Shaw Laminar Portfolios, L.L.C. (“Shaw”), who together owned approximately 70% of Spectrum’s $1.05 billion aggregate principal amount of then-outstanding senior subordinated notes. The effective date of Spectrum’s bankruptcy

 

73


Table of Contents

Plan was August 28, 2009. Under the Plan, (1) all of Spectrum’s previously existing equity securities were cancelled, (2) reorganized Spectrum issued 30.0 million shares of common stock and $218 million aggregate principal amount of PIK Notes to holders of allowed claims and pre-petition notes and debtor-in-possession facility participants, including the Harbinger Parties, the Avenue Parties and Shaw, and (3) Spectrum’s $1.34 billion pre-petition term credit facility was amended. Following the reorganization, the Harbinger Parties, the Avenue Parties and Shaw became holders of 39%, 22% and 14%, respectively, of reorganized Spectrum’s outstanding common stock and PIK Notes in principal amount, as of September 21, 2009, of $92.0 million, $39.0 million and $24.8 million, respectively. In addition, Spectrum also obtained a $242 million asset-based exit loan facility that matures in 2011. The term debt facility matures in 2012.

Formation of the Committee

On October 23, 2009, representatives of Spectrum met with a representative of the Harbinger Parties and the representatives of an unaffiliated special purpose acquisition vehicle, commonly known as a “SPAC,” at their request. The Harbinger Parties and the SPAC explained that they were considering proposing a possible transaction in which Spectrum and Russell Hobbs (then known as Salton) would merge into the SPAC and Spectrum’s existing indebtedness would be refinanced. They also explained that, because the SPAC’s organizational documents required a SPAC stockholder vote in connection with any acquisition by mid-January 2010, definitive documents providing for a transaction would need to be executed by mid-November. The initial discussions did not include a specific proposed allocation of value among the respective stockholders of Russell Hobbs, the SPAC and Spectrum.

On October 25, 2009, the Spectrum Board, other than Terry L. Polistina, the chief executive officer of Russell Hobbs, met to discuss the proposal and formed the Committee, composed of Marc S. Kirschner, Norman S. Matthews and Hugh R. Rovit, to consider the possible transaction. None of the members of the Committee is employed by or otherwise affiliated with the Harbinger Parties, the SPAC or any of their respective affiliated entities, including Russell Hobbs.

The Committee met later that day and invited a representative of the Jones Day law firm to join the call. The representative of Jones Day explained such firm’s experience and expertise in this context and confirmed that the firm had not represented Spectrum, the Harbinger Parties or the SPAC and was otherwise free of any conflicting relationships. Following discussion, the Committee determined to retain Jones Day as legal counsel. At the Committee’s request, the representative of Jones Day reviewed the legal duties of the Committee members in connection with the possible transaction and the process typically employed in these circumstances. The Committee instructed the Jones Day representative to contact Spectrum’s legal counsel to finalize formal resolutions memorializing its formation and authority and, in light of the tight timeline contemplated by the possible transaction, to determine the specific actions that would have to be taken.

The Spectrum Board confirmed the appointment of the Committee on November 6, 2009. The Committee was authorized to review the possible transaction and any alternative transaction and evaluate and, if applicable, negotiate and make recommendations to the Spectrum Board in connection with the possible transaction or any alternative, and to continue to exist until the Committee decided to discontinue its existence. No limitations were placed on the Committee’s authority. Following a review of compensation for service in similar circumstances, the Spectrum Board approved a flat fee of $50,000 for each Committee member’s service (plus reimbursement of expenses), the receipt of which was not dependent in any respect on the outcome of the process. On March 23, 2010, Spectrum’s compensation committee approved the payment of an additional flat fee of $30,000 to each member of the Committee as compensation for the significant amount of work performed by the members of the Committee over and above that expected at the time the initial fee was approved.

Consideration of the Possible SPAC Transaction

During the period from October 26 through November 17, 2009, the Committee met 15 times to consider a possible transaction involving Russell Hobbs and the SPAC and also to discuss potential alternatives to the

 

74


Table of Contents

possible transaction, including maintaining the status quo or pursuing a partial refinancing or recapitalization of Spectrum (recognizing that a capital markets alternative would likely involve substantial dilution to existing stockholders and could not reasonably be completed until Spring 2010). On November 2, 2009, representatives of the Harbinger Parties and the SPAC proposed financial terms for a transaction, including that Spectrum common stock would be valued at a 5% discount to market prices and Russell Hobbs would be assigned a total enterprise value of $725 million. The initial proposal involving the SPAC went through a series of iterations and revisions during this period, and the Committee continually weighed a variety of factors that supported the proposed transaction, including (1) the potential de-leveraging of Spectrum contemplated by the proposed transaction, (2) access to additional capital, (3) enhanced liquidity and capital resources, (4) better credit metrics after giving effect to the transaction, (5) the Committee’s sense, based in part on advice from Jones Day, that appropriate procedural protections to assure approval of the transaction on a non-coercive basis and governance mechanics to provide reasonable minority protections post-closing could each be negotiated, and (6) the substantial synergies which could be expected to be realized in a transaction (preliminarily estimated by Spectrum’s management to be in the range of $25 to $30 million per year). The Committee also weighed a variety of factors that did not support a possible transaction, including (1) potential dilution to existing Spectrum stockholders given the SPAC’s indication that any transaction it proposed would value Spectrum stock at a discount to market, (2) challenging timing considerations due to the SPAC’s stockholder approval requirements, (3) management’s then-current focus on implementing its business plan for the fourth calendar quarter of 2009 and the need to complete Spectrum’s “fresh start” financial statements by the December 29th due date for Spectrum’s filing of its annual report on Form 10-K for its 2009 fiscal year, (4) what appeared to be a full valuation assigned to Russell Hobbs, relative to Spectrum’s valuation, in light of the fact that Russell Hobbs did not have a long track record of successful operations, forecasted substantial increases in adjusted EBITDA for the fourth calendar quarter of 2009 and continuing improvements in subsequent periods and was engaged in mature and highly competitive lines of business, and (5) that the Harbinger Parties would acquire a majority of Spectrum’s common stock in the proposed transaction. (See “The Proposed Transaction—Background of the Proposed Transaction—Recommendation of the Committee and the Spectrum Board of Directors; Reasons for the Transaction” for a complete discussion of the reasons for and against the transaction.)

In addition, during this period, the Committee engaged Barclays Capital as its financial advisor and The Parthenon Group as its industry consultant to assist the Committee in its review. The Committee’s and Spectrum’s advisors performed due diligence on Russell Hobbs, its subsidiaries and their respective businesses, including a financial due diligence review of Russell Hobbs by representatives of PricewaterhouseCoopers (“PWC”), the accounting firm engaged by Spectrum, which included due diligence meetings with management of Russell Hobbs at its Miramar, Florida operational headquarters that were also attended by Barclays Capital.

Jones Day advised the Committee from the outset that it believed that any transaction of the type proposed by the Harbinger Parties and the SPAC should require approval by holders of a majority of Spectrum’s common stock not held by the Harbinger Parties. Accordingly, during the period referred to above, Spectrum entered into a nondisclosure agreement with an affiliate of the Avenue Parties so that the Committee could solicit the preliminary views of the Avenue Parties regarding a possible transaction. Representatives of the Avenue Parties informed the Committee that they believed that the combination of Russell Hobbs with Spectrum could be attractive, assuming that it could be done at an appropriate exchange ratio.

On November 17, 2009, the Committee’s and the Harbinger Parties’ respective advisors met. Based on the various factors described above, including the Committee’s concern with including the SPAC in a possible transaction due to the tight timetable, potential equity dilution resulting from the SPAC’s participation and the parties’ differing points of view regarding the relative valuations of Russell Hobbs and Spectrum and the impact of potential synergies on the valuations, the Committee’s representatives proposed, on behalf of the Committee, alternative transaction terms, which are described in the chart below and which included an earn-out structure in which a portion of the purchase price payable in respect of Russell Hobbs would be paid at closing with additional consideration payable following the achievement of an adjusted EBITDA target for calendar year 2010 in light of Spectrum management’s uncertainty as to the ability of Russell Hobbs to achieve its forecasts.

 

75


Table of Contents

On November 18, 2009, the Committee’s advisors were informed that the SPAC had determined not to further pursue the proposed transaction. In a subsequent discussion, the Committee’s advisors were informed that the Harbinger Parties were considering an alternative structure to combine Spectrum and Russell Hobbs that did not involve the SPAC.

The following chart depicts the principal financial terms of the proposal provided by the Harbinger Parties and the SPAC on November 2, 2009 and the Committee’s November 17, 2009 counterproposal ($ in millions, except per share amounts).

 

     SPAC November 2, 2009
Proposal
   Committee November 17, 2009
Counterproposal

Implied Spectrum price per share

   $21.99    $23.15

Spectrum closing price on prior day

   $23.15    $22.50

Premium to market

   None    2.9%

Discount to market

   5%    None

Russell Hobbs valuation

   $725    $500

Earn-out?

   No    Potential for another $150
based on Russell Hobbs CY
2010 adjusted EBITDA

Consideration of the Proposed Transaction Involving the Harbinger-Controlled Company

The Spectrum Board held a previously scheduled conference call on November 19, 2009 to review Spectrum’s October results. On that call, members of the Committee explained the process undertaken by the Committee and the status of discussions, including the SPAC’s recent withdrawal from discussions. Also on that call, Spectrum’s management discussed generally improving conditions in the capital markets, including the possibility that Spectrum could access the capital markets to refinance its debt maturing in 2011 and 2012 and potentially obtain additional capital. In this regard, while management was optimistic that Spectrum would perform well in its 2010 fiscal year, management did not expect that Spectrum’s 2010 free cash flow would permit it to significantly reduce debt during that period and Spectrum would therefore remain capital constrained unless its Chapter 11 debt were refinanced. The Spectrum Board encouraged management to actively explore capital markets alternatives to de-lever Spectrum’s balance sheet, extend its debt maturing in 2011 and 2012 and obtain additional capital resources.

 

76


Table of Contents

During the period from November 19, 2009 to December 24, 2009, the Harbinger Parties made several proposals providing for a transaction involving Spectrum, Russell Hobbs and a non-operating company controlled by the Harbinger Parties, the primary assets of which consisted of $145 million of cash and short-term investments that could be used to de-lever the combined company. The following chart depicts the principal financial terms of these proposals, as well as the terms of a counterproposal focused on the valuation of Russell Hobbs which representatives of the Committee made for discussion purposes on November 29th ($ in millions, except per share amounts).

 

    

November 19,
2009 Proposal

  

November 29, 2009
Committee
Counterproposal

  

December 21,
2009 Proposal

  

December 24, 2009

             

Alternative 1

   Alternative 2
Implied Spectrum price per share    $23.92    Not specified    $26.77    $26.75    $26.75

Spectrum closing price on prior day

   $22.25    $22.00    $21.75    $21.95    $21.95

Premium to market

   7.5%    Premium indicated but not specified    23.1%    21.9%    21.9%

Russell Hobbs valuation

   $700    $550    $700    $700    $700

Earn-out?

   Based only on Russell Hobbs CY 2010 adjusted EBITDA    Based on Russell Hobbs and Spectrum CY 2010 adjusted EBITDA    Based only on Russell Hobbs CY 2010 adjusted EBITDA    Based on Russell Hobbs and Spectrum CY 2010 adjusted EBITDA    Based only
on Russell
Hobbs CY
2010 adjusted
EBITDA
Aggregate equitization of Harbinger Party-owned debt/ preferred securities)    $453 at $23.92/share    $453 (price
not specified)
   $453 at $26.77/share    $453 at $26.75/ share    $453 at
$26.75/share
Harbinger Party majority control?    Yes    Yes    Yes    Yes    No

During the period from November 19 through November 30, 2009, the Committee met five times to discuss the possible transaction. During this period, the Harbinger Parties made several proposals providing for a possible transaction and the Committee continually considered several factors regarding the proposed transaction. (See “The Proposed Transaction—Background of the Proposed Transaction—Recommendation of the Committee and the Spectrum Board of Directors; Reasons for the Transaction” for a complete discussion of the reasons for and against the transaction.) In considering the various proposals of the Harbinger Parties during this period, the Committee and its advisors also discussed the possibility of including an earn-out structure that would also take Spectrum’s 2010 performance, in addition to Russell Hobbs’ 2010 performance, into consideration so that the value attributable to Spectrum in the transaction could be increased in the event that Spectrum’s 2010 results exceeded its forecast. In connection with the Committee’s deliberations, Jones Day reviewed on several occasions potential governance protections, including board representation for the non-Harbinger Party stockholders proportionate to stock ownership, that could be included in any proposed transaction, as well as potential procedural protections, such as including (1) a non-waivable requirement for the approval of the transaction by a majority of the Spectrum common stock not held by the Harbinger Parties and (2) a go-shop process in order to determine whether other superior proposals for Spectrum were available. Jones Day informed the Committee that it believed that a post-signing go-shop process would likely be superior to a pre-signing market-check because a go-shop process would be conducted under procedures worked out with the Harbinger Parties, including possibly terms under which the Harbinger Parties would be obligated to support an alternative proposal determined to be superior by the Committee that was supported by the non-Harbinger Party stockholders, whereas prospective bidders would have no assurance of cooperation by the Harbinger Parties in a pre-signing market check. Jones Day proposed these procedural protective post-closing governance provisions to Paul, Weiss, Rifkind, Wharton & Garrison LLP (“Paul Weiss”), Russell Hobbs’ legal advisor, on November 25, 2009.

 

77


Table of Contents

On November 29, 2009, Barclays Capital, at the direction of the Committee, delivered a counterproposal to the Harbinger Parties, the principal financial terms of which are summarized in the table above.

On November 30, 2009, representatives of the Harbinger Parties informed the Committee’s representatives that the Harbinger Parties had decided to stop working on the possible transaction. No specific reason was assigned to the decision, but it was the sense of the Committee’s advisors that the substantial difference in the parties’ relative valuations of Russell Hobbs was a major factor. The Committee met that day and determined that it should not at that time solicit any alternative proposals from or make further inquiries of the Harbinger Parties.

On December 9, 2009, the Committee’s advisors were informed by representatives of the Harbinger Parties that the Harbinger Parties wished to restart discussions involving a possible transaction in which Russell Hobbs and Spectrum would be valued on a relative basis similar to that outlined on behalf of the Committee on November 29, 2009 with an additional investment in cash by the Harbinger Parties at a price per Spectrum share equal to the price implied by the relative valuations, a portion of which could be made available to repurchase stock at that value.

During the period from December 11 through December 24, 2009, the Committee’s advisors engaged in several discussions with advisors to the Harbinger Parties and Russell Hobbs, the Harbinger Parties’ initial proposal regarding a transaction involving the company controlled by the Harbinger Parties went through a series of iterations and revisions and the Committee continually weighed a variety of factors regarding the proposed transaction as reflected in the revised proposals. (See “The Proposed Transaction—Background of the Proposed Transaction—Recommendation of the Committee and the Spectrum Board of Directors; Reasons for the Transaction” for a complete discussion of the reasons for and against the transaction.) Proposals made by the Harbinger Parties on December 21, 2009 and December 24, 2009 are summarized in the table above.

The Committee met on December 27, 2009. Representatives of Jones Day and Barclays Capital were present, as was Mr. Hussey at the invitation of the Committee. The Committee discussed the two alternatives proposed by the Harbinger Parties on December 24, 2009 and summarized on the chart above, and also received an update from Mr. Hussey regarding the expected performance of Spectrum in the fourth calendar quarter of 2009. The Committee again discussed other alternatives available to Spectrum, including potential capital markets transactions. The Committee instructed its advisors to convey to the Harbinger Parties’ advisors that, if an earn-out structure were pursued, the Committee would prefer to consider a transaction in which Spectrum’s 2010 performance was also taken into consideration. The Committee also observed that, as the Harbinger Parties had proposed when they initiated the current discussions, depending on the overall terms of any transaction, it might be desirable for the Harbinger Parties to provide equity financing to permit some portion of Spectrum stockholders who chose not to participate as stockholders in the combined company an option to cash out at least a portion of their stock. In this regard, the Committee recognized that any such liquidity feature would require additional analysis in that, among other things, it would reduce Spectrum’s liquidity and increase its leverage post-closing and that, given Spectrum’s financial position and capital markets considerations generally, it was not reasonable to expect that a substantial amount of cash would be available for this purpose.

Following the December 27, 2009 meeting, several discussions were held among the Committee’s and the Harbinger Parties’ respective legal and financial advisors. In those discussions, the advisors discussed whether to include the company controlled by the Harbinger Parties in the potential transaction and the Committee’s advisors conveyed the Committee’s perspective regarding the matters discussed in its meeting earlier that day. The Harbinger Parties’ advisors informed the Committee’s advisors that they believed that there could be no assurance that Spectrum could successfully de-lever through capital markets transactions and that the discounts inherent in any capital markets transaction would be very dilutive to existing stockholders.

On December 30, 2009, Spectrum announced its fiscal 2009 results. Spectrum reported net sales of $589.4 million and $2,230.5 million for the fourth quarter and full fiscal year 2009, respectively, and consolidated

 

78


Table of Contents

adjusted EBITDA of $91.4 million and $309.9 million for the fourth quarter and full fiscal year 2009, respectively.

Consideration of the Proposed Transaction Involving Only Spectrum and Russell Hobbs

During the period from January 4, 2010 to February 2, 2010, the Harbinger Parties made several proposals providing for a possible transaction involving only Spectrum and Russell Hobbs. The following chart depicts the principal financial terms of these proposals ($ in millions, except per share amounts).

 

    

January 4,

2010

  

January 28,
2010

  

February 2, 2010

          

Alternative 1

  

Alternative 2

Implied Spectrum price per share

   $26.75    $31.50    $31.50    $31.50

Spectrum closing price on prior day

   $22.50    $29.00    $29.00    $29.00

Premium to market

   18.9%    8.6%    8.6%    8.6%

Russell Hobbs valuation

   $700    $675    $650    $675

Earn-out?

   Based on Russell Hobbs and Spectrum CY 2010 adjusted EBITDA    No earnout    No earnout    No earnout
Equitization of Harbinger Party-owned debt/preferred securities    $453 at $26.75/share    $207 at $31.50/share    $365, at $31.50/share (but term loan converted at $27.00/share)    $365 at $31.50/share

As indicated above, on January 4, 2010, representatives of the Harbinger Parties delivered a revised proposal, which contemplated that the relative valuations of Russell Hobbs and Spectrum would be as set forth in the first alternative of the Harbinger Parties’ December 24th proposal ($700 million for Russell Hobbs with an earn-out adjustment, representing a 0.75x EBITDA multiple premium for Spectrum based on the two companies’ expected 2010 calendar year performances). In addition, the preferred stock of Russell Hobbs owned by the Harbinger Parties, the Russell Hobbs term loan held by the Harbinger Parties and the PIK Notes held by the Harbinger Parties would be converted into common stock of the combined company at a price of $26.75 per share, and $124 million would be invested in the combined company by the Harbinger Parties to lower the combined company’s leverage, with a portion potentially available to permit Spectrum stockholders who wished to do so to sell a portion of their stock for cash at $26.75 per share. In addition, the proposal contemplated that no go-shop process would be permitted, the approval by a majority of the Spectrum common stock, other than those owned by the Harbinger Parties, would be required and the Harbinger Parties would have the power to elect a majority of the combined company’s board of directors.

On January 6, 2010, Spectrum held an investor call to discuss its 2009 fiscal year results. During the call, management indicated that it expected to be able to report at least 7% top line sales growth for the fiscal first quarter of 2010 (the quarter ended December 31, 2009) compared to the same quarter in fiscal 2009 and that management believed adjusted EBITDA for that quarter would be significantly above the prior year, which provided management confidence that Spectrum’s full fiscal year 2010 results would exceed its previously forecasted results (adjusted EBITDA of $332 million).

The Committee met later that day. Representatives of Jones Day and Barclays Capital were present, as was Mr. Hussey at the invitation of the Committee. The Committee and its advisors discussed the latest proposal from

 

79


Table of Contents

the Harbinger Parties. Mr. Hussey informed the Committee that it was the general consensus of management that there was strategic sense to the acquisition of the Russell Hobbs business, and the proposed transaction provided Spectrum with a potentially attractive opportunity to de-lever Spectrum’s balance sheet and obtain additional liquidity, provided that a transaction could be negotiated on otherwise acceptable terms. The Committee determined that it would be advisable to engage in further discussions regarding the relative valuation of the Russell Hobbs business, but also that management should continue to pursue a possible capital markets alternative to de-lever Spectrum and provide it with enhanced financial resources in light of the generally favorable market conditions and the fact that there was no assurance that any deal with the Harbinger Parties would be available. The Committee also determined that if discussions were to proceed, Spectrum should require a process for determining whether a superior transaction was reasonably available. The Committee again weighed the relative merits of a pre-signing market check or post-signing go-shop process and, based in part on advice from its legal and financial advisors, determined that a post-signing go-shop process appeared to be preferable because it could be conducted under agreed procedures, including procedures in which the Harbinger Parties would be required to support a superior proposal, whereas in a pre-signing market check potential bidders presumably would not be interested in seriously evaluating alternatives without the cooperation or support of the Harbinger Parties, itself a potential bidder and a 39.4% stockholder. The Committee also observed the importance of understanding plans for the integration process, the liquidity and financial resources of the combined company and the roles of management, particularly David Lumley, Co-Chief Operating Officer and President—Global Batteries and Personal Care and Home and Garden, who the Committee perceived as a strong candidate to replace Mr. Hussey as Chief Executive Officer upon Mr. Hussey’s retirement.

On January 7 and 12, 2010, the Committee’s legal and financial advisors met with representatives of the Harbinger Parties and Paul Weiss to discuss issues relating to the proposed transaction and the Committee’s reaction to the Harbinger Parties’ January 4th proposal. Mr. Lumley attended the January 12th meeting at the invitation of the Committee and indicated that, while management believed that an earn-out structure was feasible, it would be very difficult to implement and would necessarily adversely affect, or at least delay, the ability to realize synergy gains from the possible transaction.

Also on January 12, 2010, Mr. Lumley and Mr. Kirschner met separately with a representative of the Harbinger Parties to discuss the integration of the two businesses, as well as to understand the Harbinger Parties’ views as to the management of the combined company if a transaction were to be pursued. The representative of the Harbinger Parties conveyed the firm’s intention that, should Mr. Hussey cease to be Chief Executive Officer of the combined company, Mr. Lumley would be a candidate to serve as his successor.

The Committee next met on January 18, 2010. Representatives of Jones Day and Barclays Capital were present, as was Mr. Hussey at the invitation of the Committee. The Committee and its advisors discussed the January 12th meeting, as well as Spectrum’s recent trading prices. Spectrum’s stock price had increased by approximately 27.2% since January 6, 2010, the date of Spectrum’s investor call, closing at $29.25 per share on January 15, 2010. The Committee and its advisors again discussed Spectrum’s potential ability to access the equity and debt markets, as well as the timing considerations and potential outcomes associated with such an approach. It was the consensus of the Committee that its advisors should engage in further discussions with the Harbinger Parties’ advisors to gain a better understanding of the Harbinger Parties’ view of Spectrum’s valuation in light of the recent increase in its trading price, and also continue to consider possible capital markets alternatives.

On January 20, 2010, Paul Weiss informed Jones Day that the Harbinger Parties would be willing to permit Spectrum to run a go-shop process following the announcement of the proposed transaction in order to determine whether third parties might be willing to provide higher value to Spectrum’s stockholders than the consideration contemplated by the Harbinger Parties’ proposal. In addition, Paul Weiss indicated that the Harbinger Parties proposed that Spectrum’s and Russell Hobbs’ relative valuations would be fixed prior to the announcement of the possible transaction rather than adjusted based on their respective calendar year 2010 performances given the difficulties associated with measuring the relative performances in a meaningful way without negatively

 

80


Table of Contents

impacting potential synergies. The Harbinger Parties and the Committee recognized that it would be advisable for the Committee to seek Avenue Capital’s views regarding the potential transaction.

Also on January 20, 2010, representatives of Paul Weiss, Sutherland Asbill & Brennan, LLP (“Sutherland”), counsel to Spectrum, and Jones Day began to exchange and negotiate draft transaction documents relating to the possible transaction. In addition, members of the Committee and the Spectrum Board management interviewed three investment banks (including Barclays Capital) and discussed with those firms the ability of Spectrum to access the capital markets to refinance its debt maturity in 2012 and to receive additional capital.

The Committee met on January 22, 2010. Representatives of Jones Day and Barclays Capital were present. The Committee and its advisors reviewed the recent discussions among the advisors, including the revisions to the proposal received from the Harbinger Parties’ advisors on January 20, 2010. The Committee and its advisors noted that the implied value of Spectrum common stock in the current proposal of $26.75 per share remained lower than the then-current trading price of Spectrum common stock. It was the consensus of the Committee that it would be advisable to continue to pursue discussions with the Harbinger Parties and their advisors to determine whether the other remaining issues could be resolved. However, the Committee instructed its advisors to inform the Harbinger Parties that a transaction that valued the Spectrum common stock below its trading price would not be acceptable. It was also the consensus of the Committee that Spectrum should continue to consider a potential recapitalization through the capital markets.

On January 25, 2010, members of the Committee and representatives of Jones Day and Avenue Capital met to discuss the Harbinger Parties’ proposal. The Committee had requested these discussions in light of the fact that the Harbinger Parties and the Committee believed it would be advantageous to determine the view of Avenue Capital, and possibly Shaw, on support of the possible transaction. In the meeting, the representatives of Avenue Capital indicated that Avenue Capital generally supported the transaction assuming that the implied valuation of Spectrum was increased from $26.75 per share to an acceptable level, management conducted appropriate due diligence on the Russell Hobbs business and its prospects, appropriate minority stockholder and governance protections were included and an acceptable indemnity arrangement was developed to protect the combined company against exposure arising out of litigation related to the Applica transaction in 2007. The representatives of Avenue Capital also indicated that Avenue Capital generally did not support a substantial capital markets transaction involving the sale of equity capital in light of the substantial dilution of existing stockholders that it would likely involve. The Harbinger Parties and the Committee did not initiate discussions with Shaw prior to the announcement of the transaction.

The Committee and its advisors discussed the input received from Avenue Capital at a meeting the following day, and the Committee determined that the Committee’s and Spectrum’s respective advisors should continue to engage in discussions regarding a possible transaction, but that it was essential that (1) any proposal be based on a higher valuation for Spectrum and (2) due diligence regarding Russell Hobbs and its future prospects be completed before the Committee could consider a definitive proposal, particularly in light of the Harbinger Parties’ proposed removal of the earn-out feature.

The Spectrum Board had a regularly scheduled meeting on January 27, 2010. At the meeting, in addition to unrelated business, members of the Committee updated the board generally as to the status of discussions with the Harbinger Parties and management updated the board as to its consideration of capital markets alternatives.

Discussions among the parties’ representatives continued over the next few days in which the Committee’s advisors informed the Harbinger Parties’ advisors that it was the consensus of the Committee that the Harbinger Parties had to substantially increase the implied valuation of Spectrum in any transaction and that the Harbinger Parties would have to agree to support an alternative transaction if obtained in the go-shop process that had a value substantially in excess of the value of the Harbinger Parties’ proposal.

On January 28, 2010, the Harbinger Parties enhanced their proposal by lowering the valuation of Russell Hobbs to $675 million from $700 million and increasing Spectrum’s valuation so that it would have an implied

 

81


Table of Contents

value of $31.50 per share, representing a 1.0x valuation multiple premium to Russell Hobbs (based on expected adjusted EBITDA in calendar year 2010), and a premium of 8.6% to the closing price of the Spectrum common stock on January 27, 2010. In addition, the proposal contemplated that the Russell Hobbs term loan held by the Harbinger Parties and the PIK Notes held by the Harbinger Parties would not be converted into common stock of the combined company, but that Harbinger Capital would instead provide equity capital to the combined company in the aggregate amount of $200 million, valued at $27.00 per share, to be used to lower the combined company’s leverage. No cash would be available to permit Spectrum stockholders to exchange stock for cash in the proposed transaction.

The Committee met on January 29, 2010. Representatives of Jones Day and Barclays Capital were present, as was Mr. Hussey at the invitation of the Committee. Mr. Hussey reviewed management’s current forecast for Spectrum’s 2010 fiscal year, which was in the range of $335 to $345 million of adjusted EBITDA. While management believed there was some upside potential to its forecast, there also was downside risk due to continuing uncertainty as to consumer spending and general economic conditions as well as increased competition in certain of Spectrum’s product lines. The Committee discussed the Harbinger Parties’ revised proposal and noted that the implied per share price for Spectrum’s common stock in the proposal represented a 36.4% premium to the trading price when discussions of a possible transaction involving Russell Hobbs began in October 2009. The Committee also observed that Spectrum’s full fiscal year 2010 midpoint forecast of $340 million of adjusted EBITDA was essentially the same as Spectrum’s forecast of $332 million of adjusted EBITDA published in connection with Spectrum’s Chapter 11 bankruptcy plan. As a result, there did not appear to be a substantial benefit to insisting on a pricing mechanism that adjusted based on Spectrum’s 2010 actual results, which was consistent with the Harbinger Parties’ January 20th modification of its proposal. However, the Committee noted that fixing the value of Russell Hobbs would require a reasonable level of assurance that its forecast was achievable, as well as analysis of the possible transaction on more conservative assumptions relating to Russell Hobbs’ 2010 adjusted EBITDA. The Committee instructed management to complete the Russell Hobbs due diligence as promptly as reasonably practicable and report back to it.

On January 31, 2010, representatives of Jones Day and Barclays Capital met with representatives of Avenue Capital and Akin Gump Strauss Hauer & Feld LLP (“Akin Gump”), Avenue Capital’s counsel. During that meeting, the representatives of Avenue Capital indicated that they believed that Avenue Capital would likely support the Harbinger Parties’ most recently proposed terms, except that Avenue Capital believed that the Harbinger Parties’ investment in the combined company (whether through debt conversion or direct capital infusion) should be valued at the $31.50 implied Spectrum valuation (not the $27.00 price the Harbinger Parties had proposed) and that any transaction had to include appropriate governance provisions to appropriately protect non-Harbinger stockholders, as well as an acceptable indemnity from Harbinger Master Fund relating to the litigation arising in connection with the 2007 Applica transaction.

The Committee met later that day. Representatives of Jones Day, Barclays Capital and management were present at the invitation of the Committee. Representatives of management indicated that Russell Hobbs’ fourth quarter financial results had been reviewed by PWC and Spectrum management. The representatives of management indicated that the business performance of Russell Hobbs in the fourth calendar quarter and in 2009 generally was consistent with the key assumptions included in Russell Hobbs’ 2009 budget. While Russell Hobbs’ fourth quarter revenues were $20 million lower than forecasted, it nonetheless achieved its forecasted adjusted EBITDA due to conservative cost assumptions in its budget. In this regard, management informed the Committee that it did not believe that Russell Hobbs had deferred expenses or taken other steps artificially to meet its forecasted adjusted EBITDA target. Management also informed the Committee that it believed that Russell Hobbs’ 2010 adjusted EBITDA forecast of $104 million was not certain but appeared to be reasonably achievable even if the revenue targets were not met due to the conservative cost assumptions contained in Russell Hobbs’ management’s forecast. In this regard, management reminded the Committee that Russell Hobbs had missed its revenue forecast for the fourth quarter of 2010 by about $20 million, yet was able to meet its adjusted EBITDA forecast as described above. It was the consensus of the Committee that, while proceeding without an earn-out structure necessarily presented some risk, the risk was not unreasonable, particularly in light of the

 

82


Table of Contents

enhanced valuation of Spectrum to $31.50 per share. However, the Committee instructed its advisors to inform the Harbinger Parties that the contemplated equity investment by the Harbinger Parties in the combined company should be at $31.50 per share, not $27.00 per share as proposed by the Harbinger Parties, and that it would be preferable for such investment to include equitization of the PIK Notes held by the Harbinger Parties given their high coupon rate. It was the sense of the Committee that its advisors should analyze the possible transaction both on the assumption that Russell Hobbs achieved its forecasted $104 million 2010 adjusted EBITDA, and on a more conservative assumption that its forecasted 2010 adjusted EBITDA was $97 million. See “The Proposed Transaction—Certain Financial Forecasts” and “The Proposed Transaction—Opinion of the Committee’s Financial Advisor.”

On February 1, 2010, the Committee’s advisors informed representatives of the Harbinger Parties as to the Committee’s preference for a transaction in which approximately $125 million of equity capital was invested in Spectrum by the Harbinger Parties and the $88 million of PIK Notes owned by the Harbinger Parties would be converted into Spectrum common stock, in each case at $31.50 per share, rather than a transaction in which $200 million was invested at a lower per share price. The representatives of the Committee also emphasized that the Committee needed a better understanding of the debt financing necessary to refinance Spectrum’s outstanding indebtedness.

On February 2, 2010, the representatives of the Harbinger Parties proposed that the Committee could choose one of two alternative proposed structures. In the first structure, Russell Hobbs would be valued at $650 million and the Russell Hobbs term loan would convert into common stock at $27.00, a discount to the per share price that would be implied in the proposed transaction of $31.50. In the second structure, Russell Hobbs would be valued at $675 million and the same term loan would be converted at an implied per share price of $31.50. The PIK Notes held by the Harbinger parties would not be converted into equity in either alternative.

The Committee met later in the day on February 2, 2010. Representatives of Jones Day, Barclays Capital and management, including Mr. Hussey, were present at the invitation of the Committee. A representative of Barclays Capital informed the Committee that the terms of the financing being provided by Credit Suisse to the Harbinger Parties had not yet been resolved. The Committee and its advisors discussed the two alternatives, as well as Avenue Capital’s preference (indicated earlier that day in discussions with its and the Committee’s advisors) for the second alternative. Barclays Capital indicated that the two alternatives were substantially equal in terms of their potential impact on the pro forma ownership of Spectrum’s stockholders (other than the Harbinger Parties). During the meeting, Mr. Hussey informed the Committee that management continued to be comfortable with Russell Hobbs adjusted EBITDA projections for 2010 and believed that the $25 million to $30 million estimated synergies previously discussed by the parties were reasonable. He also indicated that management was generally supportive of the current terms and preferred a transaction in which the Harbinger Parties’ capital contribution was valued at $31.50 per share. It was the consensus of the Committee that the proposal in which Russell Hobbs was valued at $675 million and the term debt was converted into common stock of the combined company at $31.50 per shares was preferable, but that the Committee would not support a transaction unless the terms of the debt financing were resolved in an acceptable manner, a satisfactory indemnity for the litigation arising out of the Applica transaction was provided by Harbinger Master Fund and an adequate post-closing governance structure was developed.

Between February 3 and 8, 2010, the Committee’s and Spectrum’s advisors continued to have discussions with the Harbinger Parties’ and Avenue Capital’s advisors regarding the unresolved issues and to negotiate and finalize the definitive transaction documents should the Committee ultimately determine to recommend the proposed transaction. During this period, Credit Suisse AG, Credit Suisse Securities (USA) LLC, Bank of America, N.A., Bank of America Bridge LLC, Banc of America Securities LLC, Deutsche Bank Trust Company Americas, Deutsche Bank AG Cayman Islands Branch and Deutsche Bank Securities Inc. agreed with the Harbinger Parties to the terms of a commitment to finance the transaction, the terms of which are described in “The Proposed Transaction—Financing the Mergers.” In addition, Harbinger Master Fund agreed to the terms of

 

83


Table of Contents

an indemnity agreement relating to litigation arising from the Applica transaction, and the parties agreed upon the corporate governance provisions that would be applicable to the combined company.

The Committee met on February 5, 2010 to receive an update as to the status of the discussions and the financing commitments, and again on February 8, 2010 to consider whether to recommend the proposed transaction to the Spectrum Board. Representatives of Jones Day, Barclays Capital, management and Sutherland were present at the February 8th meeting. Drafts of the transaction documents, including the merger agreement, and other materials prepared by the Committee’s and Spectrum’s advisors were distributed to the members of the Committee in advance of the meeting. Jones Day reviewed the Committee’s fiduciary duties in this context, as well as the history of the discussions that had taken place in connection with the transaction, including the various proposals that had been received by the Committee. Management summarized its due diligence reviews of Russell Hobbs’ business, financial position and prospects, the strategic rationale for the possible transaction and integration plans. Management also reviewed Spectrum’s stand-alone forecast for 2010. Spectrum’s counsel reviewed the legal due diligence performed in respect of Russell Hobbs, including the indemnity arrangement negotiated with the Harbinger Parties in respect of the litigation resulting from the Applica transaction in 2007. Management concluded its presentation by informing the Committee that management believed that the transaction was in the best interests of Spectrum and its stockholders.

The Committee and its advisors then discussed the recent developments with respect to the negotiations and the possible resolution of the terms of the merger agreement and the related transaction documents, including the support agreements pursuant to which the Harbinger Parties and the Avenue Parties would agree to vote in favor of the proposed transaction. Jones Day reviewed the material terms of the draft merger agreement and related documents. Jones Day reviewed with the Committee key issues that had been presented over the course of the discussions with the various parties, including the financial terms of the various proposals and alternatives to the proposed transaction. The Committee also considered and weighed various key elements of the possible transaction and prior proposals, including the go-shop process and Spectrum’s ability to pursue a possible superior proposal, the terms of the proposed financing, the proposed post-closing corporate governance provisions and other matters.

Barclays Capital reviewed with the Committee its financial analysis of the 1.0 exchange ratio in the Spectrum merger, as more fully described in “The Proposed Transaction—Opinion of the Committee’s Financial Advisor.” Barclays Capital then delivered to the Committee an oral opinion, which was confirmed by delivery of a written opinion dated February 8, 2010, to the effect that, as of that date and based on and subject to the matters reviewed with the Committee and the factors and assumptions set forth in such opinion, the 1.0 exchange ratio in the Spectrum merger was fair, from a financial point of view, to the holders of Spectrum common stock, other than the Harbinger Parties and their respective affiliates. An extensive and wide-ranging discussion followed, after which the Committee unanimously determined that the transactions contemplated by the merger agreement and the related agreements were advisable and fair to and in the best interests of Spectrum’s stockholders, other than the Harbinger Parties and their respective affiliates, and recommended that the merger agreement be approved by the Spectrum Board and that the board recommend its adoption to the stockholders of Spectrum.

Following the Committee meeting, the Spectrum Board met to consider the proposed transaction. Representatives of management, Sutherland, Richards Layton & Finger, Spectrum’s Delaware counsel, Barclays Capital and Jones Day attended the meeting. (Mr. Polistina received notice of the meeting and declined to participate in light of his position as Chief Executive Officer of Russell Hobbs). Drafts of the transaction documents, including the merger agreement, and other materials prepared by the Committee’s and Spectrum’s advisors were distributed to the members of the board in advance of the meeting. A representative of Richards Layton & Finger reviewed the directors’ fiduciary duties in these circumstances, after which representatives of management described the due diligence reviews undertaken, the history of the discussions and the terms of the proposed transaction. A representative of Jones Day reviewed the process and analyses undertaken by the Committee and the go-shop and fiduciary provisions in the transaction documents as well as the stockholder support agreements. At the request of the Committee, Barclays Capital informed the board that it had reviewed

 

84


Table of Contents

with the Committee its financial analysis and delivered an opinion to the Committee with respect to the 1.0 exchange ratio, as described above. The Committee reported to the board its recommendation as described above. The Spectrum Board, based in part on the recommendation of the Committee:

 

   

determined that the merger agreement and the related documents, and the transactions contemplated thereby, were fair to, and in the best interests of, Spectrum and all of its stockholders other than the Harbinger Parties and their respective affiliates;

 

   

declared it to be advisable for Spectrum to enter into the merger agreement and each of the related documents and to consummate the transactions contemplated thereby;

 

   

approved the merger agreement and the related documents and the consummation of the transactions contemplated thereby; and

 

   

recommended that the stockholders of Spectrum vote in favor of the adoption of the merger agreement.

Following the Committee and board meetings, representatives of Paul Weiss, Jones Day, Sutherland and Akin Gump finalized the transaction documents. On February 9, 2010, the financing commitment letter was executed by Credit Suisse AG, Credit Suisse Securities (USA) LLC, Bank of America, N.A., Bank of America Bridge LLC, Banc of America Securities LLC, Deutsche Bank Trust Company Americas, Deutsche Bank AG Cayman Islands Branch and Deutsche Bank Securities Inc. and accepted by Russell Hobbs. See “The Proposed Transaction—Financing the Mergers.”

Early in the morning of February 9, 2010, the parties executed the transaction documents. Thereafter, Spectrum published its financial results for the first quarter of fiscal 2010, which included management’s guidance that adjusted EBITDA was expected to be in the range of $335 million to $345 million for the full fiscal year 2010, and Russell Hobbs and Spectrum issued a joint press release announcing the execution of the merger agreement.

Go-Shop Process

After the merger agreement was signed, Barclays Capital prepared, with the input of the Committee, a list of potential acquirors. Materials based on publicly available information regarding Spectrum and its businesses also were prepared for distribution to potential acquirors. Spectrum’s legal advisors prepared a form of confidentiality agreement based on the confidentiality agreement that Spectrum had entered into with an affiliate of the Harbinger Parties, consistent with the requirements of the merger agreement. Early in the 60-day go-shop period following the execution of the merger agreement, Barclays Capital, on behalf of Spectrum, contacted over 60 potential acquirors regarding their possible interest in pursuing an alternative transaction with Spectrum. Of the parties contacted, 23 signed confidentiality agreements and were granted access to an electronic data room containing information regarding Spectrum and its business. As of the date of this document, none of these parties has submitted a proposal to pursue an alternative transaction with Spectrum. During the 60-day go-shop period, the Committee met on [      ] occasions with representatives of Barclays Capital and Jones Day to review this process.

Under the merger agreement, Spectrum is permitted to engage in discussions with and provide information to third parties which submit written proposals for alternative transactions on or prior to April 9, 2010, subject to the requirements set forth in “The Merger Agreement—Restrictions on Solicitations of Other Offers—Spectrum Solicitation.” Spectrum’s ability to pursue such discussions and provide such information to parties which do not submit proposals by that date is subject to restrictions described in “The Merger Agreement—Restrictions on Solicitations of Other Offers—Spectrum Solicitation.”

Amendments to Merger Agreement and Harbinger Support Agreement

On February 17, 2010, a representative of Paul Weiss contacted a representative of Jones Day to discuss the possibility of the Harbinger Parties purchasing Spectrum common stock. The transaction documents prohibited

 

85


Table of Contents

the Harbinger Parties and their affiliates from buying additional Spectrum common stock prior to the termination of the merger agreement.

Between February 17, 2010 and February 26, 2010, representatives of Jones Day, Sutherland and Paul Weiss engaged in discussions regarding the Harbinger Parties’ request. In those discussions, the representatives of Jones Day informed the representatives of Paul Weiss that, while the potential additional liquidity for stockholders who wanted to sell their stock prior to the completion of the transaction could be desirable, it was important that any Spectrum common stock so acquired generally be voted on a consistent basis with the way such stock otherwise would have been voted had the Harbinger Parties not purchased such stock, whether such vote related to the transactions contemplated by the merger agreement or a potentially superior proposal. In addition, based in part on discussions that the Committee’s advisors previously had with representatives of Shaw following the announcement of the transaction in which Shaw suggested that it would prefer that the go-shop period be extended to provide Spectrum with additional time to solicit alternative proposals, the Committee’s and Spectrum’s advisors requested that, in connection with the Committee’s consideration of the proposed waiver to permit stock purchases by the Harbinger Parties, Russell Hobbs agree to extend the go-shop period provided for in the merger agreement by 15 days until April 9, 2010.

In light of, among other things, Russell Hobbs’ willingness to extend the go-shop period by 15 days, the potential additional liquidity being provided to stockholders who choose to sell their stock prior to the completion of the transaction and the Harbinger Parties’ agreement to vote any acquired stock in a manner designed so as not to affect the required stockholder votes under the merger agreement or in respect of a superior proposal, on March 1, 2010, the Committee authorized Spectrum to enter into a letter agreement and an amendment to the merger agreement and recommended that the Spectrum Board approve the letter agreement and the amendment to the merger agreement. The Spectrum Board subsequently approved these amendments.

On March 26, 2010, Spectrum and the Harbinger Parties agreed to further amend the merger agreement to clarify the specific matters that are required to be approved by Spectrum’s stockholders under the merger agreement and to amend and replace the constituent documents of SB Holdings that are exhibits to the merger agreement in order to reflect certain technical revisions to, among other things, the stockholder proposal process and previously agreed to governance provisions. The amendment was authorized by the Committee, which also recommended that the Spectrum Board approve the amendment. The Spectrum Board subsequently approved the amendment.

Recommendation of the Committee and the Spectrum Board of Directors; Reasons for the Transaction

The Committee

The Harbinger Parties are collectively the largest stockholder of Spectrum and also own all of the outstanding voting securities of Russell Hobbs. Accordingly, the Spectrum Board established the Committee to review the transactions proposed by the Harbinger Parties and any alternative thereto, and to evaluate, negotiate and make recommendations to the Spectrum Board in connection with the proposed transaction and any alternative. The Committee, with the advice and assistance of independent legal and financial advisors, evaluated and negotiated the transaction, including the terms and conditions of the merger agreement and the related agreements, with the Harbinger Parties. Following the negotiations, the Committee unanimously determined that the transactions contemplated by the merger agreement were advisable and fair to and in the best interests of Spectrum’s stockholders, other than the Harbinger Parties and their affiliates, and recommended that the merger agreement be approved by the Spectrum Board and that the board recommend its adoption to the stockholders of Spectrum.

In the course of reaching its determination and making the recommendation described above, the Committee considered a number of factors and a substantial amount of information, including at 32 committee meetings and

 

86


Table of Contents

substantial additional discussions in between such meetings. The principal factors and benefits that the Committee believes support its conclusion are set forth below:

 

   

Valuation of Spectrum. Spectrum’s common stock was valued at $31.50 per share in the transaction. This amount represents:

 

   

a premium of 36.4% over the $23.10 closing price of Spectrum’s common stock on October 23, 2009, the last trading day prior to date on which representatives of the Harbinger Parties and the SPAC informed management of Spectrum of their desire to pursue a possible transaction;

 

   

a premium of 31.7% over the $23.92 implied price per share contemplated by the Harbinger Parties’ proposal on November 19, 2009;

 

   

a premium of 17.8% over the $26.75 implied price per share contemplated by the Harbinger Parties’ proposal on January 4, 2010; and

 

   

a premium of 8.6% over the $29.00 closing price of Spectrum’s common stock on February 8, 2010, the last trading day prior to announcement of the execution of the merger agreement.

The Committee is aware that, subsequent to the announcement of the transaction, the market price for Spectrum common stock has been below the $31.50 per share valuation implied in the transaction and has traded in a range from $22.95 per share to $28.00 per share. Accordingly, the fact that Spectrum was valued at $31.50 per share in fixing the exchange ratio between Russell Hobbs and Spectrum stockholders and that the Harbinger Parties have agreed to invest in Spectrum common stock at $31.50 per share does not guarantee that Spectrum stockholders will be able to realize that amount for their stock.

 

   

Enhanced Financial Resources and Flexibility. Despite a generally positive outlook for its business, Spectrum did not expect to be able to significantly de-lever in the near and intermediate terms from free cash flow from operations. As a result, the Committee considered the extension of the maturity of the almost $1.4 billion of Spectrum debt from 2012 to 2014 and beyond, and that the combined company is expected to be significantly less leveraged than Spectrum is currently (due in part to the fact that Russell Hobbs will be acquired on a substantially unleveraged basis and has $104 million of forecasted 2010 adjusted EBITDA), with enhanced liquidity and significant financial resources and flexibility to support long-term growth. In particular, giving effect to the transaction and refinancing, the combined company’s leverage ratio, calculated as total debt less cash divided by adjusted EBITDA, is projected to decline to 3.8x for fiscal 2010 from 4.7x for Spectrum’s quarter ended January 3, 2010.

 

   

Synergies. The Committee also considered, based on synergy estimates of management, that potential synergies are estimated to generate $25-30 million of improved profitability annually by the end of the 36-month anniversary of the transaction.

 

   

Alternatives. The Committee determined that the transaction and the merger consideration would result in greater value to Spectrum stockholders than any of the other strategic alternatives considered by the Committee, including the continued execution of Spectrum’s strategic plan on a stand-alone basis. Among other things, the Committee determined that the Harbinger Parties’ substantial equity ownership in Spectrum made it difficult, absent an organized mechanism such as the go-shop process provided for in the merger agreement, to seek a superior transactional alternative. The Committee also considered capital markets alternatives that could be available to Spectrum. While it was the sense of the Committee that a de-leveraging capital markets transaction could be attractive, there could be no assurance that such a transaction would be available in light of the continuing uncertainty of the capital markets after the 2008-2009 financial crisis and the substantial discounts inherent in any capital markets transaction with respect to the per share price at which common stock could be issued. In addition, both the Harbinger Parties and Avenue Capital informed the Committee that they did not favor a substantial capital markets transaction in which Spectrum was de-leveraged through the sale of common stock due to the dilution inherent in such a transaction, and the Committee believed, based on discussions with investment banking firms interviewed as capital markets alternatives were being

 

87


Table of Contents
 

considered, that it could be difficult to raise substantial additional equity capital through a rights offering to existing stockholders and that a rights offering would not enhance, and could in fact diminish, liquidity for Spectrum’s common stock.

 

   

Opinion of the Committee’s Financial Advisor. The Committee considered Barclays Capital’s opinion and financial analysis, dated February 8, 2010, as to the fairness, from a financial point of view and as of that date, to the holders of Spectrum common stock, other than the Harbinger Parties and their respective affiliates, of the 1.0 exchange ratio in the Spectrum merger, as more fully described below under the caption “The Proposed Transaction—Opinion of the Committee’s Financial Advisor.”

 

   

Trading Liquidity. The Committee considered that, by listing the newly issued shares of the combined company’s common stock on a national exchange, the liquidity of the common stock could be enhanced, although the Committee was aware that the non-Harbinger Party stockholders would own less of the combined company on a percentage basis than they now own of Spectrum.

 

   

Agreement Terms. The Committee considered the following provisions of the merger agreement and the related transaction agreements:

 

   

the requirement that a majority of the non-Harbinger Party stockholders approve the merger for it to be adopted by stockholders;

 

   

the merger agreement’s inclusion of provisions that provide the Committee with a post-signing go-shop period during which the Committee has the right to actively solicit additional interest in a transaction involving Spectrum and the ability to respond to unsolicited proposals prior to the stockholder vote, subject in each case to specified conditions as more fully described under “The Merger Agreement—Restrictions on Solicitations of Other Offers”;

 

   

the fact that the Harbinger Parties will in certain circumstances be obligated to vote certain of their common stock in favor of an alternative transaction if the merger agreement is terminated, as described in “The Proposed Transaction—Material Support and Ancillary Agreements in Connection with the Proposed Transaction—The Harbinger Support Agreement”;

 

   

the fact that the Harbinger Parties and the Avenue Parties have entered into support agreements to vote their stock in favor of the transaction, as described in “The Proposed Transaction—Material Support and Ancillary Agreements in Connection with the Proposed Transaction”;

 

   

the fact that the Avenue Parties are not obligated to vote their common stock in favor of the transaction involving the Harbinger Parties if the merger agreement is terminated or if the Spectrum Board changes its recommendation in favor of the transaction, as described in “The Proposed Transaction—Material Support and Ancillary Agreements in Connection with the Proposed Transaction—The Avenue Support Agreement”;

 

   

the provisions of the limited guarantee by Harbinger Master Fund of up to $50 million, as described in “The Proposed Transaction—Material Support and Ancillary Agreements in Connection with the Proposed Transaction—the Limited Guarantee”;

 

   

the protections in favor of minority stockholders following the transaction under the terms of the combined company’s certificate of incorporation and bylaws and the stockholder agreement to which the combined company is a party, including the selection of independent directors by a special nominating committee, preemptive rights for certain eligible stockholders, limitations on transactions with affiliates of significant stockholders, limitations on going private transactions and tag-along rights, as described in “The Proposed Transaction—Certificate of Incorporation and Bylaws of SB/RH Holdings; Stockholder Agreement”; and

 

   

the indemnification provided by Harbinger Master Fund regarding litigation relating to the Applica transaction in 2007, as described in “The Proposed Transaction—Material Support and Ancillary Agreements in Connection with the Proposed Transaction—Harbinger Indemnification Agreement.”

 

88


Table of Contents

The Committee also considered a variety of risks and other potentially negative factors concerning the merger agreement and the transactions contemplated thereby. These factors included:

 

   

Harbinger Parties’ Ownership. The Harbinger Parties own approximately 40% of Spectrum’s outstanding common stock, and this could negatively impact the interest of third parties in making alternative proposals that would be more favorable for Spectrum than the transactions contemplated by the merger agreement. In addition, following the transaction, the Harbinger Parties are expected to own 64% of the common stock of the combined company (assuming that the Harbinger Parties do not purchase any additional shares of Spectrum common stock prior to the consummation of the transaction). Although the combined company’s organizational documents and stockholder agreement will provide for a variety of protections for minority stockholders of the combined company, the Harbinger Parties have the right to elect a majority of the members of the combined company’s board of directors. In addition, while the combined company’s common stock is expected to be listed on the New York Stock Exchange, it is likely that the Harbinger Parties’ control position will result in the combined company being exempt from certain New York Stock Exchange board and committee independence requirements.

 

   

Conditions to the Transaction; Financing. The fact that, while Spectrum expects the transaction to be consummated, there can be no assurance that all conditions to the parties’ obligations to consummate the transaction, including the receipt of debt financing and any necessary regulatory consents and approvals, will be satisfied such that the mergers will be consummated. Particularly with respect to the debt financing condition, the Committee considered the unprecedented volatility in the financial markets since the 2008-2009 financial crisis and the resulting unpredictability with respect to the availability of financing.

 

   

Timing of the Transaction. In part because of the capital constraints under which Spectrum operated, but also because of the mature and highly competitive nature of its businesses, Spectrum’s management had informed the Committee that it would not have independently pursued the acquisition of Russell Hobbs at the time that the Harbinger Parties and the SPAC first approached Spectrum regarding a possible transaction.

 

   

Other. The possibility that the transaction might not be completed in a timely manner or at all, as well certain other risks relating to the transaction described in “Risk Factors.”

The Committee believes that sufficient safeguards were and are present to ensure the procedural fairness of the transaction and to permit the Committee to represent effectively the interests of Spectrum stockholders, other than the Harbinger Parties. These procedural safeguards include the following:

 

   

Arms’ Length Negotiations. The Committee engaged in arms’ length negotiations, with the assistance of independent legal and financial advisors, with representatives of the Harbinger Parties regarding the merger consideration and the other terms of the transaction and the merger agreement, which the Committee believes resulted in the transaction’s terms being more beneficial to Spectrum’s stockholders, other than the Harbinger Parties and their affiliates, than those originally proposed by the Harbinger Parties.

 

   

Committee Authority. The Committee had the exclusive authority to negotiate the terms of the transaction on behalf of Spectrum, had no obligation to recommend the approval of the transaction and had the power to reject the proposed the transaction on behalf of Spectrum.

 

   

Required Vote. The merger agreement requires, as a non-waivable condition to the consummation of the transaction, that the Spectrum merger be approved by the affirmative vote of a majority of the Spectrum common stock entitled to vote, other than any Spectrum common stock beneficially owned by the Harbinger Parties.

 

   

Go-Shop Process. The merger agreement includes provisions that provide the Committee with a post-signing go-shop period during which the Committee has the right to actively solicit additional interest

 

89


Table of Contents
 

in a transaction involving Spectrum and, after such go-shop period, the Committee would be permitted to continue any then on-going discussions with third parties which qualify under the terms of the merger agreement, and also provides that, following the go-shop period, the Committee may respond to unsolicited proposals prior to the stockholder vote, subject in each case to specified conditions as more fully described under “The Merger Agreement—Restrictions on Solicitations of Other Offers.”

 

   

Advisors. The Committee received the advice and assistance of Jones Day, as legal advisor, and Barclays Capital, as financial advisor, which the Committee determined had no relationships that would compromise their independence.

 

   

Interests of the Committee. The Committee is comprised of three independent Spectrum directors who are not affiliated with the Harbinger Parties or any of their affiliates and are not employees of Spectrum or any of its affiliates. Other than the receipt of Spectrum board and committee fees and reimbursement of expenses, which are not contingent upon the consummation of the transaction or the Committee’s recommendation of the transaction, and their indemnification and liability insurance rights under the merger agreement, members of the Committee do not have an interest in the transaction different from that of Spectrum stockholders generally, other than the Harbinger Parties. While the merger agreement provides that the members of the Committee will comprise the independent non-Harbinger Party designated directors of the combined company following the completion of the transaction, the Committee was not aware prior to acting on the proposed transaction that the Harbinger Parties had recommended that they so serve.

 

   

Recommendation Changes and Termination. Under the terms of the merger agreement, the Spectrum Board, acting through or consistent with the recommendation of the Committee, may withdraw, modify or qualify its recommendation, or terminate the merger agreement, in certain circumstances as more fully described under “The Merger Agreement—Recommendation Withdrawal/Termination in Connection with a Superior Proposal.” In that event, the Avenue Parties are free to vote their Spectrum common stock in their discretion.

In light of the procedural safeguards described above, the Committee did not consider it necessary to retain an unaffiliated representative to act solely on behalf of Spectrum’s unaffiliated stockholders for purposes of negotiating the terms of the merger agreement or preparing a report concerning the fairness of the merger agreement or the transactions contemplated thereby.

This discussion of the information and factors considered by the Committee in reaching its conclusions and recommendation includes all of the material factors considered by the Committee, but is not intended to be exhaustive. In view of the wide variety of factors the Committee considered in evaluating the merger agreement and the transactions contemplated thereby and the complexity of these matters, the Committee did not find it practicable, and did not attempt, to quantify, rank or otherwise assign relative weight to such factors. In addition, different members of the Committee may have given different weight to different factors.

The Spectrum Board of Directors

The Spectrum Board met on February 8, 2010 to consider the merger agreement and the transactions contemplated thereby. On the basis of the Committee’s recommendations and the other factors described below, the board, among other things, (1) determined that the merger agreement and the related documents, and the transactions contemplated thereby, including the mergers, are advisable and fair to, and in the best interests of Spectrum and all of its stockholders, other than the Harbinger Parties, (2) declared it to be advisable for Spectrum to enter into the merger agreement and each of the related documents and to consummate the transactions contemplated thereby, including the mergers, (3) approved the merger agreement and the related documents and the consummation of the transactions contemplated thereby, including the mergers, and all other actions contemplated thereby, and (4) recommended that the stockholders of Spectrum vote in favor of the adoption of the merger agreement. See “—Consideration of the Proposed Transaction Involving Only Spectrum and Russell Hobbs.”

 

90


Table of Contents

In determining that the merger agreement and the Spectrum merger are advisable and fair to, and in the best interests of Spectrum and its stockholders, other than the Harbinger Parties, the Spectrum Board considered:

 

   

the unanimous determination and recommendation of the Committee; and

 

   

the factors considered by the Committee as described in “—Recommendation of the Committee and the Spectrum Board of Directors; Reasons for the Transaction—The Committee,” including the positive factors and potential benefits of the merger agreement and the mergers, the risks and potentially negative factors relating to the merger agreement and the mergers and the factors relating to procedural safeguards.

The foregoing discussion of the information and factors considered by the Spectrum Board includes all of the material factors considered by the Spectrum Board, but is not intended to be exhaustive. In view of the wide variety of factors considered by the Spectrum Board in evaluating the the merger agreement and the transactions contemplated hereby and the complexity of these matters, the directors did not find it practicable, and did not attempt, to quantify, rank or otherwise assign relative weight to such factors. In addition, different members of the board may have given different weight to different factors.

In connection with the consummation of the mergers, Mr. Hussey, the management member of the Spectrum Board, may receive benefits and compensation that may differ from the merger consideration Spectrum stockholders would receive. See “The Proposed Transaction—Interests of Certain Persons in the Spectrum Merger.”

Based in part on the recommendation of the Committee, the Spectrum Board, by the unanimous vote of the independent directors, recommends that Spectrum’s stockholders vote “FOR” the approval of the proposal to adopt the merger agreement.

Certain Financial Forecasts

Spectrum Forecast

As is typical in chapter 11 reorganizations, Spectrum included a forecast of its results of operations for its 2009 fiscal year and subsequent periods in the disclosure statement prepared in connection with its emergence from reorganization proceedings. The forecast, which was prepared in the Summer of 2009, projected fiscal 2009 revenue of $2,263 million and fiscal 2009 EBITDA (as adjusted for reorganization expenses and other nonrecurring items) of $313 million, and fiscal 2010 revenue and adjusted EBITDA of $2,263 million and $332 million, respectively. The forecast assumed that revenue would increase by 4% each year thereafter during the five-year forecast period and that Spectrum’s adjusted EBITDA margin would increase to 15% in fiscal 2010 and remain constant during the period.

Since Spectrum’s emergence from chapter 11 reorganization proceedings, Spectrum did not as a matter of course make public updated financial forecasts as to future financial performance, and Spectrum is cautious about making financial forecasts for extended periods due to the unpredictability of general business conditions, consumer sentiment, costs and other factors that affect future financial performance. However, Spectrum updated its financial forecast for fiscal year 2010 after the completion of fiscal year 2009 based upon its 2010 business plan and a bottoms-up review of its business and prospects, and created a new five-year forecast based on its updated 2010 forecast, extended out for the next four years based on Spectrum management’s estimate of Spectrum’s performance for fiscal year 2010 and reflecting a revenue forecast of a 3.0% annual growth rate from fiscal year 2010 to 2011, and a 4% annual growth rate from fiscal year 2011 through 2014. The updated forecast also reflected an adjusted EBITDA margin of 15% for each of fiscal years 2011 through 2014. The updated forecast of revenue and adjusted EBITDA assumed that Spectrum would continue its business generally as then conducted and that Spectrum would not take any extraordinary actions, such as dispositions of assets or properties or refinancing of indebtedness. The updated forecast also did not take into account any of the transactions contemplated by the merger agreement. The financial advisors of the Harbinger Parties and Russell

 

91


Table of Contents

Hobbs were informed of Spectrum management’s updated forecast during the course of the negotiations, but that information was not furnished to the Harbinger Parties’ or Russell Hobbs’ personnel until late January 2010 in connection with discussions of the terms of a possible transaction.

Spectrum management’s updated financial forecast is summarized below:

 

     Fiscal Year Ending September 30,
     2010E    2011E    2012E    2013E    2014E
     (in millions)

Revenue

   $ 2,335    $ 2,405    $ 2,501    $ 2,601    $ 2,705

Adjusted EBITDA

     340      361      375      390      406

The principal adjustments to EBITDA in Spectrum management’s updated forecast for fiscal year 2010 are a non-cash charge related to the revaluation of Spectrum’s inventory in connection with its adoption of “fresh-start” reporting, restructuring and related charges and expenses incurred in connection with its chapter 11 reorganization. No adjustments to EBITDA were assumed for subsequent periods.

Spectrum’s updated forecast was not prepared with a view toward public disclosure, nor was it prepared with a view toward compliance with published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information or GAAP. In addition, Spectrum’s 2009 and updated forecasts were not prepared with the assistance of, or reviewed, compiled or examined by, Spectrum’s independent registered public accounting firm, any other independent accountants or compiled or prepared with the assistance of Barclays Capital, the Committee or the Spectrum Board. The summary of Spectrum’s forecasts is not being included in this document to influence your decision whether to vote for or against the adoption of the merger agreement, but because the updated forecast was provided by Spectrum management to the Committee and the Spectrum Board in connection with their evaluation of a possible transaction between Spectrum and Russell Hobbs. The updated forecast also was provided to the Committee’s financial advisor in connection with its financial analysis. The inclusion of Spectrum’s forecasts in this document is not an admission or representation by Spectrum, the Committee, the Spectrum Board or their respective advisors that Spectrum’s forecasts are viewed by any of them as material information.

Spectrum’s forecasts were based on numerous variables and assumptions that are inherently uncertain, many of which are beyond the control of Spectrum. Important factors that may affect actual results and cause the updated forecast to not be achieved include, but are not limited to, risks and uncertainties relating to Spectrum’s business (including its ability to achieve strategic goals, objectives and targets over the applicable periods), industry performance, the regulatory environment, general business and economic conditions and other factors described under “Cautionary Statement Regarding Forward-Looking Statements.” Spectrum’s forecasts also reflect assumptions as to certain business decisions that are subject to change. Furthermore, because Spectrum’s forecasts cover multiple years, such information by its nature becomes less predictive with each successive year. Actual results may differ from those contained in Spectrum’s updated forecast and those differences could be material. Accordingly, there can be no assurance that the updated forecast will be realized or that Spectrum’s future financial results will not materially vary from the updated forecast.

The inclusion of Spectrum’s forecasts in this document should not be regarded as an indication that Spectrum or its affiliates or representatives considered the forecasts to be predictive of actual future events, and the forecasts should not be relied upon as such. None of Spectrum, its affiliates or representatives undertakes any obligation to update or otherwise revise or reconcile the updated forecast to reflect circumstances existing after the time that the updated forecast was generated or to reflect the occurrence of future events, including any of the transactions contemplated by the merger agreement, even in the event that any or all of the assumptions underlying the updated forecast are shown to be in error. Spectrum does not intend to make publicly available any update or other revision to the updated forecast. None of Spectrum, its affiliates or representatives has made

 

92


Table of Contents

or makes any representation to any stockholder or other person regarding Spectrum’s ultimate performance compared to the information contained in the updated forecast or that forecasted results will be achieved, including in the merger agreement. The updated forecast should not be compared to actual financial results disclosed in Spectrum’s periodic reports filed with the SEC or elsewhere.

Russell Hobbs Forecast

Russell Hobbs furnished its financial forecast to Spectrum in connection with the discussions of the possible transaction. Russell Hobbs’ forecast included projections of revenue and adjusted EBITDA for calendar year 2010 through 2013. The forecast did not take into account any of the transactions contemplated by the merger agreement, including transaction costs, costs to achieve synergies or severance costs. The adjustments to EBITDA in Russell Hobbs’ forecast included elimination of costs and expenses related to Russell Hobbs’ LitterMaid patent litigation and NACCO Industries litigation and the elimination of costs and expenses related to discontinued operations. Russell Hobbs’ forecast assumed that Russell Hobbs would continue its business generally as then conducted and that Russell Hobbs would not take any extraordinary actions, such as dispositions of assets or properties or refinancing of indebtedness.

 

     Calendar Year Ending December 31,
     2010E    2011E    2012E    2013E
     (in millions)

Revenue

   $ 859    $ 898    $ 926    $ 951

Adjusted EBITDA

     104      116      122      126

Spectrum management conducted a due diligence review of Russell Hobbs’ forecast, focused initially on the forecast of revenue and adjusted EBITDA for 2010. Spectrum’s management concluded that the $104 million of adjusted EBITDA for 2010 forecasted by Russell Hobbs’ management was reasonably achievable, but Spectrum management’s view was that revenue growth assumptions in Russell Hobbs’ forecast were aggressive, albeit not unreasonable. Accordingly, Spectrum management revised Russell Hobbs management’s forecast downward, primarily by reducing the revenue growth rate to 3% over the forecast period, compared to 8.3% for 2010, 6.1% for 2011 and approximately 3% per year thereafter, and extended the forecast to a fifth year using the same assumptions applied to the prior years in the forecast period. Russell Hobbs’ revised forecast, as so adjusted, is summarized below.

 

     Calendar Year Ending December 31,
     2010E    2011E    2012E    2013E    2014E
     (in millions)

Revenue

   $ 821    $ 846    $ 871    $ 897    $ 924

Adjusted EBITDA

     97      108      116      118      122

The Committee and the Spectrum Board considered both Russell Hobbs’ management forecast and Spectrum management’s adjusted forecast for Russell Hobbs in considering the proposed transaction, and Barclays Capital utilized both forecasts in its financial analysis. See “The Proposed Transaction—Opinion of the Committee’s Financial Advisor.”

The Russell Hobbs forecast and the adjusted forecast were not prepared with a view toward public disclosure, nor were they prepared with a view toward compliance with published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information or generally accepted accounting principles. In addition, the Russell Hobbs forecast and the adjusted forecast were not prepared with the assistance of, or reviewed, compiled or examined by, Russell Hobbs’ or Spectrum’s independent registered public accounting firm or any other independent accountants or compiled or prepared with the assistance of Barclays Capital, the Committee or the Spectrum Board. The summary of the Russell Hobbs forecast and the adjusted forecast is not being included in this document to influence your decision whether to vote for or against the adoption of the merger agreement, but

 

93


Table of Contents

because the Russell Hobbs forecast and the adjusted forecast were provided by Russell Hobbs to Spectrum, and considered in connection with the evaluation by the Committee and the Spectrum Board of a possible transaction between Spectrum and Russell Hobbs. The inclusion of the Russell Hobbs forecast and the adjusted forecast in this document is not an admission or representation by Russell Hobbs, Spectrum, the Committee or the Spectrum Board or their respective advisors that the Russell Hobbs forecast and the adjusted forecast are viewed by any of them as material information.

The Russell Hobbs forecast and the adjusted forecast were based on numerous variables and assumptions that are inherently uncertain, many of which are beyond the control of Russell Hobbs. Important factors that may affect actual results and cause these forecasts to not be achieved include, but are not limited to, risks and uncertainties relating to Russell Hobbs’ business (including its ability to achieve strategic goals, objectives and targets over the applicable periods), industry performance, the regulatory environment, general business and economic conditions and other factors described under “Cautionary Statement Regarding Forward-Looking Statements.” The Russell Hobbs forecast and the adjusted forecast also reflect assumptions as to certain business decisions that are subject to change. Furthermore, because the Russell Hobbs forecast and the adjusted forecast cover multiple years, such information by its nature becomes less predictive with each successive year. Actual results may differ from those contained in the Russell Hobbs forecast and the adjusted forecast and those differences could be material. Accordingly, there can be no assurance that the Russell Hobbs forecast and the adjusted forecast will be realized or that Russell Hobbs’ future financial results will not materially vary from the Russell Hobbs forecast and the adjusted forecast.

The inclusion of the Russell Hobbs forecast and the adjusted forecast in this document should not be regarded as an indication that Russell Hobbs or Spectrum or their respective affiliates or representatives considered the forecasts to be predictive of actual future events, and the Russell Hobbs forecast and the adjusted forecast should not be relied upon as such. None of Russell Hobbs, Spectrum, their respective affiliates or representatives undertakes any obligation to update or otherwise revise or reconcile the Russell Hobbs forecast or the adjusted forecast to reflect circumstances existing after the time that such forecasts were generated or to reflect the occurrence of future events, including any of the transactions contemplated by the merger agreement, even in the event that any or all of the assumptions underlying such forecasts are shown to be in error. Neither Russell Hobbs nor Spectrum intends to make publicly available any update or other revision to the Russell Hobbs forecast or the adjusted forecast. None of Russell Hobbs, Spectrum, their respective affiliates or representatives has made or makes any representation to any stockholder or other person regarding Russell Hobbs’ ultimate performance compared to the information contained in the Russell Hobbs forecast and the adjusted forecast or that forecasted results will be achieved, including in the merger agreement. The Russell Hobbs forecast and the adjusted forecast should not be compared to actual financial results disclosed in Spectrum’s periodic reports filed with the SEC or elsewhere.

Combined Company Forecast

As part of the financing process for the merger, Spectrum and Russell Hobbs prepared a forecast relating to the combined company for the fiscal years ending September 2010 through 2013 which forecast was provided solely to the rating agencies and not to the Committee, the Spectrum Board or their respective advisors in connection with their review of the transaction. The combined company forecast takes into account the transactions contemplated by the merger agreement and includes synergies, but does not include related expenses to achieve such synergies, which expenses are currently estimated to be approximately $17 million in 2011 and approximately $6 million in 2012.

The combined company forecast reflected a year-over-year increase in revenue of 3% to 4% from fiscal year 2010 to 2013. The combined company forecast also reflected an adjusted EBITDA margin of 14% to 15% for each of 2010 through 2013. Spectrum and Russell Hobbs are unable to present a quantitative reconciliation of forecasted adjusted EBITDA to the most directly comparable forward-looking GAAP financial measure without unreasonable effort because the items used to calculate adjusted EBITDA are difficult to estimate and dependent on future events.

 

94


Table of Contents

The forecast for the combined company is summarized below:

 

     Fiscal Year Ending September 30,
     2010E    2011E    2012E    2013E
     (in millions)

Revenue

   $ 3,153    $ 3,259    $ 3,382    $ 3,505

Adjusted EBITDA

   $ 431    $ 457    $ 484      514

The combined company forecast was based on numerous variables and assumptions that are inherently uncertain, many of which will be beyond the control of the combined company. Important factors that may affect actual results and cause the combined company forecast to not be achieved include, but are not limited to, risks and uncertainties relating to the combined company’s business (including its ability to achieve strategic goals, objectives and targets over the applicable periods), industry performance, the regulatory environment, general business and economic conditions and other factors described under “Cautionary Statement Regarding Forward-Looking Statements.” The combined company forecast also reflects assumptions as to certain business decisions that are subject to change. Furthermore, because the combined company forecast covers multiple years, such information by its nature becomes less predictive with each successive year. Actual results may differ from those contained in the combined company forecast and those differences could be material. Accordingly, there can be no assurance that the combined company forecast will be realized or that the combined company’s future financial results will not materially vary from the combined company forecast.

The inclusion of the combined company forecast in this document should not be regarded as an indication that the combined company, Spectrum, Russell Hobbs or their respective affiliates or representatives consider the forecast to be predictive of actual future events, and the combined company forecast should not be relied upon as such. None of the combined company, Spectrum, Russell Hobbs nor their respective affiliates or representatives undertakes any obligation to update or otherwise revise or reconcile the combined company forecast to reflect circumstances existing after the time that the combined company forecast was generated or to reflect the occurrence of future events, including any of the transactions contemplated by the merger agreement, even in the event that any or all of the assumptions underlying the combined company forecast are shown to be in error. None of the combined company, Spectrum or Russell Hobbs intends to make publicly available any update or other revision to the combined company forecast. None of the combined company, Spectrum, Russell Hobbs or any of their respective affiliates or representatives has made or makes any representation to any stockholder or other person regarding the combined company’s ultimate performance compared to the information contained in the combined company forecast or that forecasted results will be achieved, including in the merger agreement.

Opinion of the Committee’s Financial Advisor

The Committee engaged Barclays Capital to act as its financial advisor in connection with the proposed transaction. At the February 8, 2010 meeting of the Committee held to evaluate the proposed transaction, Barclays Capital rendered to the Committee an oral opinion, which was confirmed by delivery of a written opinion dated February 8, 2010, to the effect that, as of that date and based on and subject to the qualifications, limitations and assumptions stated in its opinion, the Spectrum Exchange Ratio was fair, from a financial point of view, to holders of Spectrum common stock (other than the Harbinger Parties and their respective affiliates).

The full text of Barclays Capital’s written opinion, dated February 8, 2010, is attached as Annex B to this proxy statement/prospectus. Barclays Capital’s written opinion sets forth, among other things, the assumptions made, procedures followed, factors considered and limitations on the review undertaken by Barclays Capital in rendering its opinion. The following summary of Barclays Capital’s opinion is qualified in its entirety by reference to the full text of the opinion. Barclays Capital’s opinion, the issuance of which was approved by Barclays Capital’s fairness opinion committee, is addressed to the Committee (solely in its capacity as such) and relates only to the fairness, from a financial point of view, of the Spectrum Exchange Ratio. Barclays Capital’s opinion does not in any manner address Spectrum’s

 

95


Table of Contents

underlying business decision to proceed with or effect the proposed transaction, the likelihood of consummation of the proposed transaction or the terms of any related financing and does not constitute a recommendation to any stockholder as to how such stockholder should vote or act with respect to the proposed transaction.

In arriving at its opinion, Barclays Capital, among other things:

 

   

reviewed a draft, dated February 8, 2010, of the merger agreement and certain related documents and the specific financial terms of the proposed transaction;

 

   

reviewed and analyzed publicly available information concerning Spectrum that Barclays Capital believed to be relevant to its analysis, including Spectrum’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009;

 

   

reviewed and analyzed financial and operating information with respect to Spectrum’s business, operations and prospects furnished to Barclays Capital by Spectrum, including financial projections of Spectrum prepared by Spectrum’s management;

 

   

reviewed and analyzed financial and operating information with respect to Russell Hobbs’ business, operations and prospects furnished to Barclays Capital by Russell Hobbs and Spectrum, including financial projections of Russell Hobbs prepared by Russell Hobbs’ and Spectrum’s respective managements;

 

   

reviewed and analyzed potential cost savings, operating synergies and other strategic benefits estimated by Spectrum’s and Russell Hobbs’ managements to result from the proposed transaction;

 

   

reviewed and analyzed a trading history of Spectrum common stock from September 2, 2009 to February 5, 2010 and a comparison of that trading history with those of other companies that Barclays Capital deemed relevant;

 

   

reviewed and analyzed a comparison of certain financial data of Spectrum and Russell Hobbs with each other and with those of other companies that Barclays Capital deemed relevant;

 

   

reviewed and analyzed a comparison of the financial terms of the proposed transaction with the financial terms of certain other transactions that Barclays Capital deemed relevant;

 

   

reviewed and analyzed the relative contributions of Spectrum and Russell Hobbs to the financial performance of the combined company on a pro forma basis;

 

   

reviewed and analyzed the potential pro forma financial impact of the proposed transaction on the future financial performance of the combined company, including the expected synergies estimated by Spectrum’s and Russell Hobbs’ managements to result from the proposed transaction;

 

   

had discussions with Spectrum’s and Russell Hobbs’ managements concerning Spectrum’s and Russell Hobbs’ respective businesses, operations, assets, liabilities, financial condition and prospects; and

 

   

undertook such other studies, analyses and investigations as Barclays Capital deemed appropriate.

In arriving at its opinion, Barclays Capital assumed and relied upon the accuracy and completeness of the financial and other information used by Barclays Capital without any independent verification of such information and further relied upon the assurances of Spectrum’s and Russell Hobbs’ managements that they were not aware of any facts or circumstances that would make such information inaccurate or misleading. With respect to the financial projections of Spectrum and Russell Hobbs, including the expected synergies estimated by Spectrum’s and Russell Hobbs’ managements to result from the proposed transaction, upon the advice of Spectrum and Russell Hobbs, Barclays Capital assumed that such projections were reasonably prepared on a basis reflecting the best currently available estimates and judgments of Spectrum’s and Russell Hobbs’ managements as to the future financial performance of Spectrum and Russell Hobbs, as the case may be, and the other matters covered thereby. For purposes of its analysis, Barclays Capital also considered certain projections

 

96


Table of Contents

relating to Russell Hobbs prepared by Spectrum’s management reflecting more conservative assumptions and estimates as to the future financial performance of Russell Hobbs. With respect to the expected synergies estimated by Spectrum’s and Russell Hobbs’ managements to result from the proposed transaction, upon the advice of Spectrum and Russell Hobbs, Barclays Capital assumed that the amount and timing of such expected synergies were reasonable and, for purposes of the analyses in which the expected synergies were utilized, that such expected synergies would be realized substantially in accordance with such estimates. Barclays Capital assumed no responsibility for and expressed no view as to any projections or estimates reviewed by it or the assumptions on which they were based. In addition, Barclays Capital relied upon, without any independent verification, the assessments of Spectrum’s and Russell Hobbs’ managements as to the ability to integrate Spectrum’s and Russell Hobbs’ businesses and to retain certain material licenses relating to Spectrum’s and Russell Hobbs’ businesses and assumed, upon the advice of Spectrum and Russell Hobbs, that there would be no developments with respect to any such matters that would have an adverse effect on Spectrum, Russell Hobbs or the contemplated benefits of the proposed transaction in any respect material to Barclays Capital’s analyses or opinion.

In arriving at its opinion, Barclays Capital did not conduct a physical inspection of the properties and facilities of Spectrum, Russell Hobbs or any other entity and did not make or obtain any evaluations or appraisals of the assets or liabilities, contingent or otherwise, of Spectrum, Russell Hobbs or any other entity. The Committee did not authorize Barclays Capital to solicit, and Barclays Capital did not solicit, any indications of interest from any third party with respect to the purchase of all or a part of Spectrum’s business; however, Barclays Capital was requested to solicit third party indications of interest in the possible acquisition of Spectrum for a specified period after the date of the merger agreement as permitted under its provisions. Barclays Capital’s opinion necessarily was based upon market, economic and other conditions as they existed on, and could be evaluated as of, the date of its opinion. The credit, financial and stock markets have been experiencing unusual volatility and Barclays Capital expressed no opinion or view as to any potential effects of such volatility on Spectrum, Russell Hobbs or any other entity or on the proposed transaction or any related financing. Barclays Capital assumed no responsibility for updating or revising its opinion based on events or circumstances that may occur after the date of its opinion. Barclays Capital expressed no opinion as to the prices at which shares of Spectrum common stock would trade following the announcement of the proposed transaction or shares of SB Holdings common stock would trade following consummation of the proposed transaction. Barclays Capital’s opinion should not be viewed as providing any assurance that the market value of the shares of SB Holdings common stock to be held by holders of Spectrum common stock after consummation of the proposed transaction will be in excess of the market value of Spectrum common stock owned by such holders at any time prior to the announcement or consummation of the proposed transaction.

Barclays Capital assumed that the executed merger agreement and related documents would conform in all material respects to the last drafts of such documents reviewed by Barclays Capital, including with respect to the terms of any financing. In addition, Barclays Capital assumed the accuracy of the representations and warranties contained in the merger agreement and all related agreements. Barclays Capital also assumed, upon Spectrum’s advice, that all material governmental, regulatory and third party approvals, consents and releases for the proposed transaction and related transactions would be obtained within the constraints contemplated by the merger agreement and related documents and that the proposed transaction and related transactions, including any related financing, would be consummated in accordance with their respective terms without waiver, modification or amendment of any material term, condition or agreement. Barclays Capital did not express an opinion as to any terms or other aspects of the proposed transaction (other than the Spectrum Exchange Ratio to the extent expressly specified in its opinion) or any related transactions, including, without limitation, the Russell Hobbs merger, the terms of any guarantees, indemnities or other arrangements with respect to outstanding litigation or otherwise or any other transactions, agreements or arrangements entered into in connection with, or otherwise contemplated by, the proposed transaction or any related transactions. Barclays Capital also did not express any opinion as to any tax or other consequences that might result from the proposed transaction or any related transactions, nor did its opinion address any legal, tax, regulatory or accounting matters, as to which Barclays Capital understood that Spectrum had obtained such advice as it deemed necessary from qualified

 

97


Table of Contents

professionals. In addition, Barclays Capital expressed no opinion on, and its opinion did not in any manner address, the fairness of the amount or the nature of any compensation to any officers, directors or employees of any parties to the proposed transaction, or any class of such persons, relative to the Spectrum Exchange Ratio or otherwise.

In connection with rendering its opinion, Barclays Capital performed certain financial, comparative and other analyses as summarized below. This summary is not a complete description of Barclays Capital’s opinion or the financial analyses performed and factors considered by it in connection with its opinion. In arriving at its opinion, Barclays Capital did not ascribe a specific range of values to Spectrum or Russell Hobbs but rather made its determination as to the fairness, from a financial point of view, of the Spectrum Exchange Ratio on the basis of various financial and comparative analyses taken as a whole. The preparation of a fairness opinion is a complex process and involves various determinations as to the most appropriate and relevant methods of financial and comparative analyses and the application of those methods to the particular circumstances. Therefore, a fairness opinion is not readily susceptible to summary description.

In arriving at its opinion, Barclays Capital did not attribute any particular weight to any single analysis or factor considered by it but rather made qualitative judgments as to the significance and relevance of each analysis and factor relative to all other analyses and factors performed and considered by it and in the context of the circumstances of the particular transaction. Accordingly, Barclays Capital believes that the analyses must be considered as a whole, as considering any portion of such analyses and factors, without considering all analyses and factors as a whole, could create a misleading or incomplete view of the process underlying its opinion.

The following is a summary of the material financial analyses reviewed with the Committee in connection with Barclays Capital’s opinion, dated February 8, 2010. Certain financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses, the tables must be read together with the text of each summary, as the tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of such financial analyses. In performing these analyses, Barclays Capital considered industry performance, general business and economic conditions and other matters existing as of the date of its opinion, many of which are beyond the control of Spectrum, Russell Hobbs or any other parties to the proposed transaction. None of Spectrum, Russell Hobbs, Barclays Capital or any other person assumes responsibility if future results are different from those discussed, whether or not any such difference is material. Any estimates contained in these analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth below. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or necessarily reflect the prices at which businesses or securities may actually be sold or acquired. Accordingly, the assumptions and estimates used in, and the results derived from, Barclays Capital’s analyses are inherently subject to substantial uncertainty.

In connection with the “Selected Company Analyses,” “Selected Transactions Analyses” and “Discounted Cash Flow Analyses” described below, Barclays Capital calculated equity ownership percentage ranges for Spectrum’s stockholders in the pro forma company implied by the respective standalone reference ranges derived for Spectrum and Russell Hobbs from each analysis, as adjusted for net debt (calculated as the sum of short- and long-term debt and accrued restructuring charges, less cash and cash equivalents). The high-end of the implied equity ownership percentage range was based on the high-end of the standalone implied equity reference range derived for Spectrum and the low-end of the standalone implied equity reference range derived for Russell Hobbs. The low-end of the implied equity ownership percentage range was based on the low-end of the standalone implied equity reference range derived for Spectrum and the high-end of the standalone implied equity reference range derived for Russell Hobbs. The implied exchange ratio reference ranges were then calculated assuming Russell Hobbs’ stockholders receive 21 million shares of SB Holdings common stock and

 

98


Table of Contents

Spectrum’s stockholders receive that number of shares of SB Holdings common stock that would result in Spectrum’s stockholders having an overall equity ownership percentage in the pro forma company equal to the implied equity ownership percentages derived by the respective analyses. In connection with its analyses described below, Barclays Capital utilized, with respect to Spectrum, financial projections prepared by Spectrum’s management and, with respect to Russell Hobbs, two sets of financial projections, one prepared by Russell Hobbs’ management and one prepared by Spectrum’s management.

Selected Company Analyses

In order to assess how the public market values shares of publicly traded companies in the consumer products industry, which is the industry in which Spectrum and Russell Hobbs generally operate, Barclays Capital performed separate selected company analyses of Spectrum and Russell Hobbs. Barclays Capital reviewed and compared specific financial and operating data relating to Spectrum and Russell Hobbs with the following nine selected publicly-held consumer product companies and, with respect to the selected company analysis for Russell Hobbs, Barclays Capital also included Spectrum:

 

   

Central Garden & Pet Company

 

   

Energizer Holdings, Inc.

 

   

SEB S.A.

 

   

Helen of Troy Limited

 

   

Jarden Corporation

 

   

Newell Rubbermaid Inc.

 

   

Prestige Brands Holdings, Inc.

 

   

The Scotts Miracle-Gro Company

 

   

Société BIC S.A.

Barclays Capital calculated, among other things, the ratio of each of the above-listed company’s enterprise value to its calendar year 2010 estimated earnings before interest, taxes, depreciation and amortization (“EBITDA”). Enterprise value generally was obtained by adding short- and long-term debt to the sum of the market value of common equity, calculated using a fully diluted share count assuming the treasury stock method, and the book value of any minority interest, and subtracting cash and cash equivalents. All of these calculations were performed based on publicly available financial data and closing stock prices as of February 5, 2010, the last trading date prior to the delivery of Barclays Capital’s opinion. Barclays Capital selected the companies listed above because, among other things, such companies operate in the consumer products industry and, as a result, their respective businesses and operating profiles are generally similar to those of Spectrum and Russell Hobbs; provided, however, no selected company is identical to Spectrum or Russell Hobbs. Accordingly, Barclays Capital believes that purely quantitative analyses are not, in isolation, determinative and that qualitative judgments concerning differences in the business, financial and operating characteristics and prospects of Spectrum, Russell Hobbs and the selected companies that could affect public trading values also are relevant. With respect to Spectrum, Barclays Capital calculated an implied reference range by applying a range of multiples of calendar year 2010 estimated EBITDA derived from the selected companies to corresponding data of Spectrum based on internal estimates prepared by Spectrum’s management. With respect to Russell Hobbs, Barclays Capital calculated an implied reference range by applying a range of multiples of calendar year 2010 estimated EBITDA derived from Spectrum and the selected companies to corresponding data of Russell Hobbs based on internal estimates relating to Russell Hobbs prepared by Spectrum’s and Russell Hobbs’ respective managements. These implied reference ranges indicated the following implied exchange ratio reference range, as compared to the Spectrum Exchange Ratio:

 

Implied Exchange Ratio Reference Range

  

Spectrum Exchange Ratio

0.707x – 1.260x

   1.0x

 

99


Table of Contents

Selected Transactions Analyses

In order to assess how consumer products companies have been valued in merger and acquisition transactions, Barclays Capital performed separate selected transactions analyses of Spectrum and Russell Hobbs. Barclays Capital reviewed and compared the purchase prices and financial multiples paid in selected transactions described below. The reasons for and the circumstances surrounding each of the transactions considered were diverse and there are inherent differences in the business, operations, financial conditions and prospects of Spectrum and Russell Hobbs and the companies included in such transactions. Accordingly, Barclays Capital believes that purely quantitative analyses are not, in isolation, determinative and that qualitative judgments concerning differences in the characteristics of the selected transactions and the proposed transaction that could affect the acquisition values of the selected target companies, Spectrum and Russell Hobbs also are relevant. Barclays Capital calculated transaction values in the selected transactions as the ratio of the target company’s enterprise value, based on the consideration payable in the selected transaction, to its latest 12 months EBITDA based on publicly available information at the time of announcement of the relevant transaction.

Spectrum. Given the diverse nature of Spectrum’s business, Barclays Capital performed a sum-of-the-parts analysis of Spectrum, including its global battery and personal care business, pet supplies business and home and garden business. Barclays Capital reviewed the following 17 selected transactions, seven of which involve companies with operations in the global battery and personal care industries, six of which involve companies with operations in the pet supplies industry and four of which involve companies with operations in the home and garden industry:

 

Selected Battery and Personal Care Transactions

Acquirer

  

Target

•   Holmes Products Corp.

  

•   The Rival Company

•   Jarden Corporation

  

•   American Household, Inc.

•   Libbey Inc.

  

•   Anchor Hocking glassware operations of Newell Rubbermaid Inc.

•   Spectrum

  

•   Remington Products Company, L.L.C.

•   Spectrum

  

•   VARTA AG

•   Sunbeam Corporation

  

•   Signature Brands USA, Inc.

•   Techtronic Industries Company Limited

  

•   Royal Appliance Mfg. Co.

Selected Pet Supplies Transactions

Acquirer

  

Target

•   Central Garden & Pet Company

  

•   Farnam Companies, Inc.

•   Del Monte Foods Company

  

•   Meow Mix Holdings, Inc.

•   Del Monte Foods Company

  

•   Milk-Bone business of Kraft Foods Global, Inc.

•   Salton, Inc.

  

•   United Pet Group business of Spectrum

•   Spectrum

  

•   Tetra Holding GmbH

•   United Industries Corporation

  

•   United Pet Group, Inc.

Selected Home and Garden Transactions

Acquirer

  

Target

•   Castle Harlan Partners IV, L.P.

  

•   Ames True Temper, Inc.

•   Jarden Corporation

  

•   The Holmes Group, Inc.

•   Jarden Corporation

  

•   Lehigh Consumer Products Corporation

•   Spectrum

  

•   United Industries Corporation

Barclays Capital calculated an overall implied reference range for Spectrum by applying multiples of latest 12 months EBITDA derived from the selected battery and personal care transactions, pet supplies transactions and home and garden transactions to Spectrum’s latest 12 months EBITDA (as of January 3, 2010) attributable to

 

100


Table of Contents

its global battery and personal care business, pet supplies business and home and garden business, respectively, and taking into account Spectrum’s general corporate expenses. Financial data of Spectrum was based on internal estimates prepared by Spectrum’s management.

Russell Hobbs. With respect to Russell Hobbs, Barclays Capital reviewed the following 10 selected transactions involving consumer products companies, referred to as the Russell Hobbs selected transactions:

 

Acquirer

  

Target

•    Castle Harlan Partners IV, L.P.

  

•    Ames True Temper, Inc.

•    Harbinger Capital Partners

  

•    Applica Incorporated

•    Holmes Products Corp.

  

•    The Rival Company

•    Jarden Corporation

  

•    The Holmes Group, Inc.

•    Jarden Corporation

  

•    American Household, Inc.

•    Jarden Corporation

  

•    Lehigh Consumer Products Corporation

•    Libbey Inc.

  

•    Anchor Hocking glassware operations of Newell Rubbermaid Inc.

•    Spectrum

  

•    Remington Products Company, L.L.C.

•    Sunbeam Corporation

  

•    Signature Brands USA, Inc.

•    Techtronic Industries Company Limited

  

•    Royal Appliance Mfg. Co.

Barclays Capital calculated an implied reference range for Russell Hobbs by applying a range of selected multiples of latest 12 months EBITDA derived from the Russell Hobbs selected transactions to Russell Hobbs’ latest 12 months EBITDA (as of December 31, 2009) based on internal estimates relating to Russell Hobbs prepared by Spectrum’s and Russell Hobbs’ respective managements. These implied reference ranges indicated the following implied exchange ratio reference range, as compared to the Spectrum Exchange Ratio:

 

Implied Exchange Ratio Reference Range

  

Spectrum Exchange Ratio

0.719x – 1.415x

   1.0x

Discounted Cash Flow Analyses

In order to assess the “present value” of estimated future cash flows of Spectrum and Russell Hobbs, Barclays Capital performed separate discounted cash flow analyses of Spectrum and Russell Hobbs (both before and after taking into account expected synergies estimated by Spectrum’s and Russell Hobbs’ respective managements to result from the proposed transaction). “Present value” refers to the current value of future cash flows and is obtained by discounting those future cash flows by a discount rate that takes into account macroeconomic assumptions and estimates of risk, the opportunity cost of capital, expected returns and other appropriate factors.

To calculate implied reference ranges for each of Spectrum and Russell Hobbs using the discounted cash flow method, Barclays Capital added (1) each of Spectrum’s and Russell Hobbs’ projected after-tax unlevered free cash flows for fiscal years 2010 through 2014 based on, in the case of Spectrum, internal estimates prepared by Spectrum’s management and, in the case of Russell Hobbs, internal estimates prepared by Spectrum’s and Russell Hobbs’ respective managements (before and after taking into account expected synergies) to (2) the residual or terminal value of each of Spectrum and Russell Hobbs at the end of the forecast period, and discounted such amounts to present value using a range of selected discount rates. The after-tax unlevered free cash flows were calculated by taking the tax-affected earnings before interest and tax expense, adding back non-cash depreciation and amortization, subtracting capital expenditures and adjusting for changes in working capital. The terminal value of each of Spectrum and Russell Hobbs was estimated by applying a selected range of perpetual growth rates of 2.25% to 2.75% to each company’s respective fiscal year 2014 projected unlevered free cash flows. Barclays Capital selected ranges of discount rates of 11.0% to 12.0% for Spectrum and 12.0% to 13.0% for Russell Hobbs based on, among other factors, a weighted average cost of capital calculation. These

 

101


Table of Contents

implied reference ranges for Spectrum and Russell Hobbs (both before and after taking into account expected synergies) indicated the following implied exchange ratio reference ranges, as compared to the Spectrum Exchange Ratio:

 

Implied Exchange Ratio Reference Ranges

   Spectrum Exchange Ratio

Excluding Synergies

   Including Synergies     

0.608x – 1.167x

   0.501x – 0.932x    1.0x

Contribution Analysis

Barclays Capital reviewed the relative financial contributions of Spectrum and Russell Hobbs to the financial performance of the combined company on a pro forma basis. Barclays Capital reviewed latest 12 months and fiscal years 2010 and 2011 estimated net sales and EBITDA (as adjusted for certain one-time nonrecurring items) based on internal estimates prepared by Spectrum’s management with respect to Spectrum’s financial data and internal estimates prepared by Spectrum’s and Russell Hobbs’ respective managements with respect to Russell Hobbs’ financial data. Barclays Capital calculated the following overall aggregate equity ownership percentages of Spectrum stockholders (other than the Harbinger Parties) in the combined company based on such relative contributions, and then compared such percentages to the aggregate pro forma equity ownership percentages of such Spectrum stockholders in the combined company upon consummation of the proposed transaction based on the Spectrum Exchange Ratio:

 

Equity Contribution Percentage Reference Range

for Spectrum Non-Affiliated Stockholders

 

Aggregate Pro Forma Equity Ownership by Spectrum

Non-Affiliated Stockholders Based on Spectrum Exchange Ratio

29.9% - 34.9%

  36%

Pro Forma Financial Analysis

Barclays Capital reviewed the potential pro forma financial effects of the proposed transaction on the combined company’s fiscal year 2011 estimated earnings per share (“EPS”) relative to Spectrum’s fiscal year 2011 estimated EPS on a standalone basis, based on internal estimates prepared by Spectrum’s management with respect to Spectrum’s financial data and internal estimates prepared by Spectrum’s and Russell Hobbs’ respective managements with respect to Russell Hobbs’ financial data. Barclays Capital also considered expected synergies estimated by Spectrum’s and Russell Hobbs’ respective managements to result from the proposed transaction, utilizing both the expected synergies estimated to be realized in fiscal year 2011 and the expected run-rate synergies estimated to be realized over time. Based on the Spectrum Exchange Ratio, this analysis indicated that the combined company’s fiscal year 2011 estimated EPS could be accretive relative to Spectrum’s fiscal year 2011 estimated EPS on a standalone basis, both before and after taking into account expected synergies. The actual results achieved by the combined company may vary from forecasted results and the variations may be material.

Other Factors. With respect to Spectrum, Barclays Capital also considered, for informational purposes, certain other factors, including:

 

   

Historical Trading Prices. To illustrate the trend in historical trading prices of Spectrum common stock, Barclays Capital considered historical data with regard to the trading prices of Spectrum common stock for the period from September 2, 2009 to February 5, 2010 and compared such data with the relative stock price performances during the same period of the selected companies listed under the caption “Selected Company Analysis” above. Barclays Capital noted that during such period, the closing price of Spectrum common stock ranged from $21.00 per share to $29.70 per share; and

 

   

Leveraged Buyout Analysis. To illustrate a range of theoretical purchase prices that might be achieved in a leveraged buyout transaction with a financial buyer, Barclays Capital considered a leveraged buyout analysis of Spectrum assuming, among other things, a debt capital structure consistent with the

 

102


Table of Contents
 

proposed transaction, current market conditions, that such financial buyer would attempt to realize a return on its investment in Spectrum’s fiscal year 2013 or 2015, projected EBITDA terminal value multiples of 7.25x to 7.75x and a required internal rate of return of approximately 20% to 25%. Based upon these assumptions and internal estimates prepared by Spectrum’s management, this analysis indicated an illustrative implied per share equity value reference range for Spectrum of approximately $20.75 to $27.25.

Miscellaneous

The terms of the proposed transaction were determined through negotiations among Spectrum, Russell Hobbs and the Harbinger Parties, and the decision to enter into the merger agreement was solely that of the Spectrum Board, after receiving the recommendation of the Committee, and was approved by the Spectrum Board. Barclays Capital’s opinion was only one of many factors considered by the Committee in its evaluation of the proposed transaction and should not be viewed as determinative of the views of the Committee, the Spectrum Board or management or any other party with respect to the proposed transaction or the consideration payable in the proposed transaction. Barclays Capital did not recommend any specific form of consideration to the Committee or that any specific form of consideration constituted the only appropriate consideration for the proposed transaction.

Barclays Capital is an internationally recognized investment banking firm and, as part of its investment banking activities, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, investments for passive and control purposes, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. The Committee selected Barclays Capital as its financial advisor in connection with the proposed transaction because of Barclays Capital’s qualifications, reputation and experience in the valuation of businesses and securities in connection with mergers and acquisitions generally.

As compensation for its services in connection with the proposed transaction, Spectrum has agreed to pay Barclays Capital an aggregate fee currently estimated to be $6.6 million, a portion of which was paid or payable upon its engagement and in connection with its opinion and $2.5 million of which is contingent upon the consummation of the proposed transaction. In the event Spectrum enters into a definitive agreement in connection with a superior proposal received by Spectrum during the go-shop process described in the merger agreement, Barclays Capital will be entitled to receive a substantial fee contingent upon consummation of such other transaction based on the consideration payable in connection with such other transaction. In addition, Spectrum has agreed to reimburse Barclays Capital for expenses and to indemnify Barclays Capital and related parties for certain liabilities that may arise out of Barclays Capital’s engagement. Barclays Capital has performed limited investment banking services for Spectrum and certain of its affiliates during the past two years prior to the date of its opinion, and may perform investment banking services in the future, and has received and may receive, customary fees for such services.

Barclays Capital and its affiliates engage in a wide range of businesses from investment and commercial banking, lending, asset management and other financial and non-financial services. In the ordinary course of business, Barclays Capital and its affiliates may actively trade and effect transactions in the equity, debt and/or other securities (and any derivatives thereof) and financial instruments (including loans and other obligations) of Spectrum, Russell Hobbs and certain of their respective affiliates for their own account and for the accounts of their customers and, accordingly, may at any time hold long or short positions and investments in such securities and financial instruments.

Spectrum Stockholder Vote Required

Adoption of the merger agreement requires the affirmative votes of the holders of (i) a majority of the outstanding shares of Spectrum common stock entitled to vote (including the shares of the Harbinger Parties) and

 

103


Table of Contents

(ii) a majority of the outstanding shares of Spectrum common stock entitled to vote (excluding the shares of the Harbinger Parties (except any shares of Spectrum common stock acquired by the Harbinger Parties after March 1, 2010)). Approval of the proposal to adjourn the special meeting, if necessary, to permit further solicitation of proxies if adoption of the merger agreement is not obtained at the special meeting, requires the affirmative vote of the holders of a majority of the shares represented at the special meeting and entitled to vote.

The Harbinger Parties have agreed, under the circumstances described below, to vote their shares of Spectrum common stock acquired prior to the date of the merger agreement: (i) in favor of the adoption of the merger agreement; (ii) against any action or proposal that would reasonably be expected to result in a material breach by Spectrum or Russell Hobbs of any covenant, warranty or representation contained in the merger agreement; and (iii) except with the written consent of Spectrum, against (x) any Alternative Proposal with respect to Spectrum or Russell Hobbs that would impede the mergers or (y) any other action or proposal involving Spectrum or Russell Hobbs that would reasonably be expected to prevent or materially impede, interfere with or delay the mergers. In the event that the merger agreement is terminated by Spectrum in connection with a Superior Proposal, the Harbinger Parties have agreed to vote certain of their shares in favor of such Superior Proposal, as described in “The Proposed Transaction—Material Support and Ancillary Agreements in Connection with the Proposed Transaction—The Harbinger Support Agreement.”

The Harbinger Parties have agreed to vote those shares of Spectrum common stock acquired by the Harbinger Parties after March 1, 2010 proportionally with the votes of the other holders of Spectrum common stock with respect to the adoption of the merger agreement, except that the Harbinger Parties will vote shares of Spectrum common stock that they purchased from the Avenue Parties in accordance with the Avenue Support Agreement. If the Avenue Support Agreement has been terminated or suspended, the Harbinger Parties will vote shares of Spectrum common stock that they purchased from the Avenue Parties after March 1, 2010 proportionally with the other holders of Spectrum common stock (other than the Harbinger Parties and the Avenue Parties) with respect to the adoption of the merger agreement.

The Avenue Parties have also agreed to vote their shares of Spectrum common stock at any meeting of the Spectrum stockholders: (i) in favor of the adoption of the merger agreement; (ii) against any action or proposal that would reasonably be expected to result in a material breach by Spectrum of any covenant, warranty or representation contained in the merger agreement; and (iii) except with the written consent of Spectrum, against (x) any Alternative Proposal with respect to Spectrum that would impede the mergers or (y) any other action or proposal involving Spectrum that would reasonably be expected to prevent or materially impede, interfere with or delay the Spectrum merger.

Spectrum’s directors and officers have not entered into any voting agreements. However, Spectrum’s directors and executive officers intend to vote all of the Spectrum common stock beneficially owned by them “for” the adoption of the merger agreement.

Interests of Certain Persons in the Spectrum Merger

In considering the recommendation of the Spectrum Board with respect to adopting the merger agreement, Spectrum stockholders should be aware that certain Spectrum and Russell Hobbs directors, executive officers and stockholders have interests in the Spectrum merger that are different from, or in addition to, the interests of the Spectrum stockholders. These interests create a potential conflict of interest. The Spectrum Board was aware of these potential conflicts of interest during its deliberations on the merits of the mergers and in making its decision to adopt the merger agreement.

 

104