Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 4, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

Commission File Number 001-13615

 

 

Spectrum Brands, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   22-2423556

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

601 Rayovac Drive

Madison, Wisconsin

  53711
(Address of principal executive offices)   (Zip Code)

(608) 275-3340

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report.)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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. (Check one):

 

Large accelerated filer  ¨

     Accelerated filer  ¨

Non-accelerated filer  ¨

     Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

 

 


Table of Contents

SPECTRUM BRANDS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTER ENDED July 4, 2010

INDEX

 

          Page

Part I—Financial Information

  
Item 1.   

Financial Statements

   3
  

Condensed Consolidated Statements of Financial Position (Unaudited) as of July 4, 2010 and September  30, 2009

   3
  

Condensed Consolidated Statements of Operations (Unaudited) for the three and nine month periods ended July 4, 2010 and June 28, 2009

   4
  

Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine month periods ended July 4, 2010 and June 28, 2009

   5
  

Notes to Condensed Consolidated Financial Statements (Unaudited)

   6
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   52
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

   71
Item 4.   

Controls and Procedures

   72

Part II—Other Information

  
Item 1.   

Legal Proceedings

   73
Item 1A.   

Risk Factors

   74
Item 5.   

Other Information

   90
Item 6.   

Exhibits

   90

Signatures

   91

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SPECTRUM BRANDS, INC.

Condensed Consolidated Statements of Financial Position

July 4, 2010 and September 30, 2009

(Unaudited)

(Amounts in thousands, except per share figures)

 

     Successor Company  
     July 4, 2010     September 30, 2009  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 115,941      $ 97,800   

Receivables:

    

Trade accounts receivable, net of allowances of $8,825 and $1,011, respectively

     378,694        274,483   

Other

     43,497        24,968   

Inventories

     514,415        341,505   

Deferred income taxes

     27,953        28,137   

Assets held for sale

     12,238        11,870   

Prepaid expenses and other

     47,354        39,973   
                

Total current assets

     1,140,092        818,736   

Property, plant and equipment, net

     189,333        212,361   

Deferred charges and other

     33,271        34,934   

Goodwill

     590,926        483,348   

Intangible assets, net

     1,754,439        1,461,945   

Debt issuance costs

     59,390        9,422   
                

Total assets

   $ 3,767,451      $ 3,020,746   
                
LIABILITIES AND SHAREHOLDERS’ DEFICIT     

Current liabilities:

    

Current maturities of long-term debt

   $ 46,261      $ 53,578   

Accounts payable

     257,898        186,235   

Accrued liabilities:

    

Wages and benefits

     79,281        88,443   

Income taxes payable

     35,287        21,950   

Restructuring and related charges

     22,099        26,104   

Accrued interest

     8,086        8,678   

Other

     124,639        110,080   
                

Total current liabilities

     573,551        495,068   

Long-term debt, net of current maturities

     1,734,746        1,529,957   

Employee benefit obligations, net of current portion

     66,045        55,855   

Deferred income taxes

     269,112        227,498   

Other

     57,010        51,489   
                

Total liabilities

     2,700,464        2,359,867   

Commitments and contingencies

    

Shareholders’ equity:

    

Common stock, $.01 par value, authorized 150,000 shares; issued 30,000 shares, outstanding shares, at September 30, 2009

     —          300   

Additional paid-in capital

     —          724,796   

Other capital

     1,310,453        —     

Accumulated deficit

     (236,373     (70,785

Accumulated other comprehensive (loss) income

     (7,093     6,568   
                

Total shareholders’ equity

     1,066,987        660,879   
                

Total liabilities and shareholders’ equity

   $ 3,767,451      $ 3,020,746   
                

See accompanying notes which are an integral part of these condensed consolidated financial statements

(Unaudited).

 

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SPECTRUM BRANDS, INC.

Condensed Consolidated Statements of Operations

For the three and nine month periods ended July 4, 2010 and June 28, 2009

(Unaudited)

(Amounts in thousands, except per share figures)

 

     Successor
Company
          Predecessor
Company
    Successor
Company
          Predecessor
Company
 
     THREE MONTHS ENDED     NINE MONTHS ENDED  
         2010                   2009         2010           2009  

Net sales

   $ 653,486           $ 589,361      $ 1,778,012           $ 1,641,126   

Cost of goods sold

     398,727             358,661        1,125,571             1,022,914   

Restructuring and related charges

     1,890             403        5,530             13,210   
                                          

Gross profit

     252,869             230,297        646,911             605,002   

Selling

     112,380             95,039        327,832             301,220   

General and administrative

     53,619             42,375        139,763             116,822   

Research and development

     7,078             6,313        21,346             17,638   

Acquisition and integration related charges

     17,002             —          22,472             —     

Restructuring and related charges

     2,954             2,829        11,132             27,190   
                                          

Total operating expenses

     193,033             146,556        522,545             462,870   
                                          

Operating income

     59,836             83,741        124,366             142,132   

Interest expense

     132,238             48,649        230,130             148,559   

Other expense (income), net

     1,443             (841     8,427             3,546   
                                          

(Loss) income from continuing operations before reorganization items and income taxes

     (73,845          35,933        (114,191          (9,973

Reorganization items expense, net

     —               62,521        3,646             83,832   
                                          

Loss from continuing operations before income taxes

     (73,845          (26,588     (117,837          (93,805

Income tax expense

     12,460             7,893        45,016             31,842   
                                          

Loss from continuing operations

     (86,305          (34,481     (162,853          (125,647

Loss from discontinued operations, net of tax

     —               (2,040     (2,735          (83,980
                                          

Net loss

   $ (86,305        $ (36,521   $ (165,588        $ (209,627
                                          

See accompanying notes which are an integral part of these condensed consolidated financial statements

(Unaudited).

 

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SPECTRUM BRANDS, INC.

Condensed Consolidated Statements of Cash Flows

For the nine month periods ended July 4, 2010 and June 28, 2009

(Unaudited)

(Amounts in thousands)

 

     Successor
Company
          Predecessor
Company
 
     NINE MONTHS ENDED  
     2010           2009  

Cash flows from operating activities:

         

Net loss

   $ (165,588        $ (209,627

Loss from discontinued operations

     (2,735          (83,980
                     

Loss from continuing operations

     (162,853          (125,647

Adjustments to reconcile net loss to net cash used by operating activities:

         

Depreciation

     39,488             29,859   

Amortization of intangibles

     31,744             15,560   

Amortization of unearned restricted stock compensation

     12,259             2,047   

Amortization of debt issuance costs

     6,657             11,523   

Administrative related reorganization items

     3,646             83,832   

Payments for administrative related reorganization items

     (47,173          —     

Payments of acquisition related expenses for Russell Hobbs

     (22,452          —     

Non-cash increase to cost of goods sold due to inventory valuations

     34,865             —     

Non-cash interest expense on 12% Notes

     20,317             —     

Non-cash debt accretion

     17,358             —     

Write off of unamortized discount on retired debt

     59,162             —     

Write off of debt issuance costs

     6,551             2,358   

Other non-cash adjustments

     45,146             40,920   

Net changes in assets and liabilities, net of discontinued operations

     (88,442          (88,220
                     

Net cash used by operating activities of continuing operations

     (43,727          (27,768

Net cash used by operating activities of discontinued operations

     (9,812          (15,596
                     

Net cash used by operating activities

     (53,539          (43,364
 

Cash flows from investing activities:

         

Purchases of property, plant and equipment

     (17,392          (5,606

Acquisition of Russell Hobbs, net of cash acquired

     (2,577          —     

Proceeds from sale of equipment

     260             374   
                     

Net cash used by investing activities of continuing operations

     (19,709          (5,232

Net cash used by investing activities of discontinued operations

     —               (860
                     

Net cash used by investing activities

     (19,709          (6,092
 

Cash flows from financing activities:

         

Proceeds from new Senior Credit Facilities, excluding new ABL Revolving Credit Facility, net of discount

     1,474,755             —     

Payment of extinguished senior credit facilities, excluding old ABL revolving credit facility

     (1,278,760          —     

Debt issuance costs

     (55,135          (8,250

Proceeds from other debt financing

     29,849             155,262   

Reduction of debt

     (8,366          (241,027

New ABL Revolving Credit Facility, net

     22,000             —     

Extinguished old ABL revolving credit facility, net

     (33,225          —     

Debtor in possession revolving credit facility, net

     —               60,013   

(Payments of) proceeds from extinguished supplemental loan

     (45,000          45,000   

Refund of debt issuance costs

     204             —     

Treasury stock purchases for SB Holdings

     (2,207          (61
                     

Net cash provided by financing activities

     104,115             10,937   

Effect of exchange rate changes on cash and cash equivalents

     (7,086          (1,841

Effect of exchange rate changes on cash and cash equivalents due to Venezuela hyperinflation

     (5,640          —     
                     

Net decrease in cash and cash equivalents

     18,141             (40,360

Cash and cash equivalents, beginning of period

     97,800             104,773   
                     

Cash and cash equivalents, end of period

   $ 115,941           $ 64,413   
                     

See accompanying notes which are an integral part of these condensed consolidated financial statements

(Unaudited).

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Amounts in thousands, except per share figures)

1    DESCRIPTION OF BUSINESS

Spectrum Brands, Inc., a Delaware corporation (“Spectrum Brands” or the “Company”), is a global branded consumer products company. Spectrum Brands Holdings, Inc. (“SB Holdings”) was created in connection with the combination of Spectrum Brands and Russell Hobbs, Inc. (“Russell Hobbs”), a small appliance brand company, to form a new combined company (the “Merger”). The Merger was consummated on June 16, 2010. As a result of the Merger, both Spectrum Brands and Russell Hobbs are wholly-owned subsidiaries of SB Holdings and Russell Hobbs is a wholly-owned subsidiary of Spectrum Brands. SB Holdings trades on the New York Stock Exchange under the symbol “SPB.”

In connection with the Merger, Spectrum Brands refinanced its existing senior debt and a portion of Russell Hobbs’ existing senior debt through a combination of a new $750,000 United States (“U.S.”) Dollar Term Loan due June 16, 2016, new 9.5% Senior Secured Notes maturing June 15, 2018 and a new $300,000 ABL revolving facility due June 16, 2014. (See also Note 7, Debt, for a more complete discussion of the Company’s outstanding debt.)

On February 3, 2009, Spectrum Brands, at the time a Wisconsin corporation, and each of its wholly owned U.S. subsidiaries (collectively, the “Debtors”) filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”), in the U.S. Bankruptcy Court for the Western District of Texas (the “Bankruptcy Court”). On August 28, 2009 (the “Effective Date”), the Debtors emerged from Chapter 11 of the Bankruptcy Code. As of the Effective Date and pursuant to the Debtors’ confirmed plan of reorganization, Spectrum Brands converted from a Wisconsin corporation to a Delaware corporation.

Unless the context indicates otherwise, the term “Company” is used to refer to Spectrum Brands and its subsidiaries prior to and after the Merger. The term “Predecessor Company” refers only to the Company prior to the Effective Date and the term “Successor Company” refers to the Company subsequent to the Effective Date. The Company’s fiscal year ends September 30. References herein to Fiscal 2010 and Fiscal 2009 refer to the fiscal years ended September 30, 2010 and 2009, respectively.

Prior to and including August 30, 2009, all operations of the business resulted from the operations of the Predecessor Company. In accordance with ASC Topic 852: “Reorganizations,” (“ASC 852”) the Company determined that all conditions required for the adoption of fresh-start reporting were met upon emergence from Chapter 11 of the Bankruptcy Code on the Effective Date. However in light of the proximity of that date to the Company’s August accounting period close, which was August 30, 2009, the Company elected to adopt a convenience date of August 30, 2009, (the “Fresh-Start Adoption Date”) for recording fresh-start reporting. The Company analyzed the transactions that occurred during the two-day period from August 29, 2009, the day after the Effective Date, and August 30, 2009, the Fresh-Start Adoption Date, and concluded that such transactions represented less than one-percent of the total net sales during Fiscal 2009. As a result, the Company determined that August 30, 2009 would be an appropriate Fresh-Start Adoption Date to coincide with the Company’s normal financial period close for the month of August 2009. As a result, the fair value of the Predecessor Company’s assets and liabilities became the new basis for the Successor Company’s Consolidated Statement of Financial Position as of the Fresh-Start Adoption Date, and all operations beginning August 31, 2009 are related to the Successor Company. Financial information of the Company’s financial statements prepared for the Predecessor Company will not be comparable to financial information for the Successor Company. The Company is a global branded consumer products company with positions in seven major product categories: consumer batteries; small appliances; pet supplies; electric shaving and grooming; electric personal care; portable lighting; and home and garden control.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

The Company manages its business in four reportable segments: (i) Global Batteries & Personal Care, which consists of the Company’s worldwide battery, shaving and grooming, personal care and portable lighting business (“Global Batteries & Personal Care”); (ii) Global Pet Supplies, which consists of the Company’s worldwide pet supplies business (“Global Pet Supplies”); (iii) Home and Garden Business, which consists of the Company’s lawn and garden and insect control businesses (the “Home and Garden Business”); and (iv) Small Appliances, which resulted from the acquisition of Russell Hobbs and consists of small electrical appliances primarily in the kitchen and home product categories (“Small Appliances”).

The Company’s operations include the worldwide manufacturing and marketing of alkaline, zinc carbon and hearing aid batteries, as well as aquariums and aquatic health supplies and the designing and marketing of rechargeable batteries, battery-powered lighting products, electric shavers and accessories, grooming products and hair care appliances. The Company’s operations also include the manufacturing and marketing of specialty pet supplies. The Company also manufactures and markets herbicides, insecticides and repellents in North America. With the addition of Russell Hobbs the Company designs, markets and distributes a broad range of branded small appliances and personal care products. The Company’s operations utilize manufacturing and product development facilities located in the U.S., Europe, Asia and Latin America.

The Company 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 and enjoys 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 Tetra, 8in1, Spectracide, Cutter, Black & Decker, George Foreman, Russell Hobbs, Farberware and various other brands.

2    VOLUNTARY REORGANIZATION UNDER CHAPTER 11

On February 3, 2009, the Predecessor Company announced that it had reached agreements with certain noteholders, representing, in the aggregate, approximately 70% of the face value of the Company’s then outstanding senior subordinated notes, to pursue a refinancing that, if implemented as proposed, would significantly reduce the Predecessor Company’s outstanding debt. On the same day, the Debtors filed voluntary petitions under Chapter 11 of the Bankruptcy Code, in the Bankruptcy Court (the “Bankruptcy Filing”) and filed with the Bankruptcy Court a proposed plan of reorganization (the “Proposed Plan”) that detailed the Debtors’ proposed terms for the refinancing. The Chapter 11 cases were jointly administered by the Bankruptcy Court as Case No. 09-50455 (the “Bankruptcy Cases”).

The Bankruptcy Court entered a written order (the “Confirmation Order”) on July 15, 2009 confirming the Proposed Plan (as so confirmed, the “Plan”).

Plan Effective Date

On the Effective Date the Plan became effective, and the Debtors emerged from Chapter 11 of the Bankruptcy Code. Pursuant to and by operation of the Plan, on the Effective Date, all of Predecessor Company’s existing equity securities, including the existing common stock and stock options, were extinguished and deemed cancelled. Spectrum Brands filed a certificate of incorporation authorizing new shares of common stock. Pursuant to and in accordance with the Plan, on the Effective Date, Successor Company issued a total of 27,030 shares of common stock and $218,076 of 12% Senior Subordinated Toggle Notes due 2019 (the “12% Notes”) to holders of allowed claims with respect to Predecessor Company’s 8   1/2% Senior Subordinated Notes due 2013 (the “8 1 /2 Notes”), 7 3/ 8% Senior Subordinated Notes due 2015 (the “7 3/8 Notes”) and Variable Rate Toggle

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

Senior Subordinated Notes due 2013 (the “Variable Rate Notes”) (collectively, the “Senior Subordinated Notes”). (See also Note 7, Debt, for a more complete discussion of the 12% Notes.) Also on the Effective Date, Successor Company issued a total of 2,970 shares of common stock to supplemental and sub-supplemental debtor-in-possession facility participants in respect of the equity fee earned under the Debtors’ debtor-in-possession credit facility.

Reorganization Items

In accordance with ASC 825, reorganization items are presented separately in the accompanying Condensed Consolidated Statements of Operations (Unaudited) and represent expenses, income, gains and losses that the Company has identified as directly relating to the Bankruptcy Cases. Reorganization items expense, net for the three month period ended June 28, 2009 and the nine month periods ended July 4, 2010 and June 28, 2009 are summarized as follows:

 

     Predecessor
Company
   Successor
Company
   Predecessor
Company
     Three Months
Ended
   Nine Months Ended
     2009    2010    2009

Legal and professional fees

   $ 56,881    $ 3,536    $ 67,144

Deferred financing costs

     —        —        10,668

Provision for rejected leases

     5,640      110      6,020
                    

Reorganization items expense, net

   $ 62,521    $ 3,646    $ 83,832
                    

3    SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: These condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include all adjustments (which are normal and recurring in nature) necessary to present fairly the financial position of the Company at July 4, 2010 and September 30, 2009, and the results of operations for the three and nine month periods ended July 4, 2010 and June 28, 2009 and the cash flows for the nine month periods ended July 4, 2010 and June 28, 2009. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such SEC rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K and any amendments thereto for the fiscal year ended September 30, 2009. Certain prior period amounts have been reclassified to conform to the current period presentation.

Significant Accounting Policies and Practices: The condensed consolidated financial statements include the condensed consolidated financial statements of Spectrum Brands and its subsidiaries and are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). All intercompany transactions have been eliminated.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

Discontinued Operations: On November 11, 2008, the Predecessor Company board of directors (the “Predecessor Board”) approved the shutdown of the growing products portion of the Home and Garden Business, which included the manufacturing and marketing of fertilizers, enriched soils, mulch and grass seed. The decision to shutdown the growing products portion of the Home and Garden Business was made only after the Predecessor Company was unable to successfully sell this business, in whole or in part. The growing products portion of the Home and Garden Business qualified as a component of an entity, in accordance with U.S. GAAP, of the Home and Garden Business, as operations and cash flows of the growing products portion were clearly distinguished both operationally and for financial reporting purposes from the rest of the Home and Garden Business. The operations and cash flows of the growing products portion of the Home and Garden Business were eliminated from ongoing operations during the second quarter of Fiscal 2009. The Company did not have significant involvement in the operations of the growing products portion of the Home and Garden Business subsequent to the second quarter of Fiscal 2009.

The presentation herein of the results of continuing operations exclude the growing products portion of the Home and Garden Business for all periods presented. The following amounts have been segregated from continuing operations and are reflected as discontinued operations for the three month period ended June 28, 2009 and the nine month periods ended July 4, 2010 and June 28, 2009, respectively:

 

     Predecessor
Company
    Successor
Company
    Predecessor
Company
 
     Three Months
Ended
    Nine Months Ended  
     2009     2010     2009  

Net sales

   $ —        $ —        $ 31,306   
                        

Loss from discontinued operations before income taxes

   $ (3,092   $ (2,512   $ (89,064

Provision for income tax (benefit) expense

     (1,052     223        (5,084
                        

Loss from discontinued operations, net of tax

   $ (2,040   $ (2,735   $ (83,980
                        

Assets Held for Sale: At July 4, 2010 and September 30, 2009, the Company had $12,238 and $11,870, respectively, included in Assets held for sale in its Condensed Consolidated Statements of Financial Position (Unaudited) consisting of certain assets primarily related to a former manufacturing facility in Ningbo, China.

Intangible Assets: Intangible assets are recorded at cost or at fair value if acquired in a purchase business combination. Customer lists and proprietary technology intangibles are amortized, using the straight-line method, over their estimated useful lives of approximately 4 to 20 years. Excess of cost over fair value of net assets acquired (goodwill) and trade name intangibles are not amortized. Goodwill is tested for impairment at least annually, at the reporting unit level with such groupings being consistent with the Company’s reportable segments. If an impairment is indicated, a write-down to fair value (normally measured by discounting estimated future cash flows) is recorded. Trade name intangibles are tested for impairment at least annually by comparing the fair value with the carrying value. Any excess of carrying value over fair value is recognized as an impairment loss in income from operations. The Company’s annual impairment testing is completed at its August financial period end.

ASC Topic 350: “Intangibles-Goodwill and Other,” (“ASC 350”) requires that goodwill and indefinite-lived intangible assets be tested for impairment annually, or more often if an event or circumstance indicates that an impairment loss may have been incurred. Management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as unexpected adverse business

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

conditions, economic factors, unanticipated technological change or competitive activities, loss of key personnel, and acts by governments and courts may signal that an asset has become impaired. The fair values of the Company’s goodwill and indefinite-lived intangible assets were not tested for impairment during the three and nine month period ended July 4, 2010 and June 28, 2009, respectively, as no event or circumstance arose which indicated that an impairment loss may have been incurred.

Shipping and Handling Costs: The Successor Company incurred shipping and handling costs of $40,204 and $111,615 for the three and nine month periods ended July 4, 2010. The Predecessor Company incurred shipping and handling costs of $35,975 and $112,314 for the three and nine month periods ended June 28, 2009. These costs are included in Selling expenses in the accompanying Condensed Consolidated Statements of Operations (Unaudited). Shipping and handling costs include costs incurred with third-party carriers to transport products to customers as well as salaries and overhead costs related to activities to prepare the Company’s products for shipment from its distribution facilities.

Concentrations of Credit Risk: Trade receivables subject the Company to credit risk. Trade accounts receivable are carried at net realizable value. The Company extends credit to its customers based upon an evaluation of the customer’s financial condition and credit history, and generally does not require collateral. The Company monitors its customers’ credit and financial condition based on changing economic conditions and makes adjustments to credit policies as required. Provision for losses on uncollectible trade receivables are determined principally on the basis of past collection experience applied to ongoing evaluations of the Company’s receivables and evaluations of the risks of nonpayment for a given customer.

The Company has a broad range of customers including many large retail outlet chains, one of which accounts for a significant percentage of its sales volume. This customer represented approximately 24% and 22% of the Successor Company’s Net sales during the three and nine month periods ended July 4, 2010, respectively. This customer represented approximately 25% and 23% of the Predecessor Company’s Net sales during the three and nine month periods ended June 28, 2009, respectively. This customer also represented approximately 19% and 14% of the Successor Company’s Trade accounts receivable, net at July 4, 2010 and September 30, 2009, respectively.

Approximately 37% and 43% of the Successor Company’s Net sales during the three and nine month periods ended July 4, 2010, respectively, and 37% and 42% of the Predecessor Company’s Net sales during the three and nine month periods ended June 28, 2009, respectively, occurred outside the United States. These sales and related receivables are subject to varying degrees of credit, currency, political and economic risk. The Company monitors these risks and makes appropriate provisions for collectibility based on an assessment of the risks present.

Stock-Based Compensation: In 1996, the Predecessor Board approved the Rayovac Corporation 1996 Stock Option Plan (“1996 Plan”). Under the 1996 Plan, stock options to acquire up to 2,318 shares of common stock, in the aggregate, could be granted to select employees and non-employee directors of the Predecessor Company under either or both a time-vesting or a performance-vesting formula at an exercise price equal to the market price of the common stock on the date of grant. The 1996 Plan expired on September 12, 2006.

In 1997, the Predecessor Board adopted the 1997 Rayovac Incentive Plan (“1997 Plan”). Under the 1997 Plan, the Predecessor Company could grant to employees and non-employee director’s stock options, stock appreciation rights (“SARs”), restricted stock, and other stock-based awards, as well as cash-based annual and long-term incentive awards. Accelerated vesting would have occurred in the event of a change in control, as defined in the 1997 Plan. Up to 5,000 shares of common stock could have been issued under the 1997 Plan. The 1997 Plan expired on August 31, 2007.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

In 2004, the Predecessor Board adopted the 2004 Rayovac Incentive Plan (“2004 Plan”). The 2004 Plan supplemented the 1997 Plan. Under the 2004 Plan, the Predecessor Company could grant to employees and non-employee directors stock options, SARs, restricted stock, and other stock-based awards, as well as cash-based annual and long-term incentive awards. Accelerated vesting would occur in the event of a change in control, as defined in the 2004 Plan. Up to 3,500 shares of common stock, net of forfeitures and cancellations, could have been issued under the 2004 Plan. The 2004 Plan would have expired on July 31, 2014.

Upon the Effective Date, however, by operation of the Plan all the existing common stock of the Predecessor Company was extinguished and deemed cancelled and, in connection with the cancellation of the Predecessor’s common stock, any and all equity awards granted under, and understandings with respect to participation in, the 2004 Plan in effect prior to the Effective Date became null and void as of the Effective Date.

In September 2009, the Successor Company’s board of directors (the “Board”) adopted the 2009 Spectrum Brands Inc. Incentive Plan (the “2009 Plan”). In conjunction with the Merger the 2009 Plan was assumed by SB Holdings. Up to 3,333 shares of common stock, net of forfeitures and cancellations, may be issued under the 2009 Plan.

In conjunction with the Merger, SB Holdings adopted the Spectrum Brands Holdings, Inc. 2007 Omnibus Equity Award Plan (formerly known as the Russell Hobbs, Inc. 2007 Omnibus Equity Award Plan, as amended on June 24, 2008) (the “RH Plan”). Up to 600 shares of common stock, net of forfeitures and cancellations, may be issued under the RH Plan.

The Company granted approximately 310 shares of restricted stock during the three month period ended July 4, 2010. Of these grants, approximately 271 restricted stock units were granted in conjunction with the consummation of the merger with Russell Hobbs and are time-based and vest over a one year period. The remaining 39 shares are restricted stock grants that are time-based and vest over a three year period. The Company also granted 629 shares of restricted stock grants during the three month period ended January 3, 2010. Of these grants, 18 shares are time-based and vest after a one year period and 611 shares are time-based and vest over a two year period. All vesting dates are subject to the recipient’s continued employment with the Company, except as otherwise permitted by the Board or in certain cases if the employee is terminated without cause. The total market value of the restricted shares on the date of grant was approximately $23,299.

The Predecessor Company granted approximately 229 shares of restricted stock during the three and nine month period ended June 28, 2009. All shares granted were purely performance based and would have vested only upon achievement of certain performance goals which consisted of reportable segment and consolidated company earnings before interest, taxes, depreciation and amortization and cash flow components, each as defined by the Company for purposes of such awards. All vesting dates were subject to the recipient’s continued employment with the Company, except as otherwise permitted by the Predecessor Board. The total market value of the restricted shares on the date of grant was approximately $150. Upon the Effective Date, by operation of the Plan, the restricted stock granted by the Predecessor Company was extinguished and deemed cancelled.

In connection with the adoption of ASC Topic 718: “Compensation-Stock Compensation,” (“ASC 718”), the Company is required to recognize expense related to the fair value of its employee stock awards. Total stock compensation expense associated with restricted stock awards recognized by the Successor Company during the three and nine month periods ended July 4, 2010 was $5,881 or $3,822, net of taxes and $12,259, or $7,968, net of taxes, respectively. Total stock compensation expense associated with restricted stock awards recognized by the Predecessor Company during the three and nine month periods ended June 28, 2009 was $883 or $548, net of taxes and $2,047, or $1,269, net of taxes, respectively.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

The fair value of restricted stock is determined based on the market price of the Company’s shares on the grant date. A summary of the status of the Successor Company’s non-vested restricted stock at July 4, 2010 is as follows:

 

Restricted Stock

   Shares     Weighted
Average
Grant Date
Fair Value
   Fair Value  

Restricted stock at September 30, 2009

   —        $ —      $ —     

Granted

   939        24.82      23,299   

Vested

   (234     23.40      (5,463
                 

Restricted stock at July 4, 2010

   705      $ 25.30    $ 17,836   
                 

Derivative Financial Instruments: In accordance with ASC Topic 815: “Derivatives and Hedging,” (“ASC 815”) the Company has provided enhanced disclosures about (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under ASC 815; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.

Derivative financial instruments are used by the Company principally in the management of its interest rate, foreign currency and raw material price exposures. The Company does not hold or issue derivative financial instruments for trading purposes. When hedge accounting is elected at inception, the Company formally designates the financial instrument as a hedge of a specific underlying exposure if such criteria are met, and documents both the risk management objectives and strategies for undertaking the hedge. The Company formally assesses, both at the inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in the forecasted cash flows of the related underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the forecasted cash flows of the underlying exposures being hedged. Any ineffective portion of a financial instrument’s change in fair value is immediately recognized in earnings. For derivatives that are not designated as cash flow hedges, or do not qualify for hedge accounting treatment, the change in the fair value is also immediately recognized in earnings.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

The Successor Company’s fair value of outstanding derivative contracts recorded as assets in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) were as follows:

 

Asset Derivatives

        July 4,
2010
   September 30,
2009

Derivatives designated as hedging instruments under
ASC 815:

        

Commodity contracts

   Receivables—Other    $ —      $ 2,861

Commodity contracts

   Deferred charges and other      —        554

Foreign exchange contracts

   Receivables—Other      5,732      295

Foreign exchange contracts

   Deferred charges and other      344      —  
                

Total asset derivatives designated as hedging instruments under ASC 815

      $ 6,076    $ 3,710
                

Derivatives not designated as hedging instruments under ASC 815:

        

Commodity contracts

   Receivables—Other      8      —  

Foreign exchange contracts

   Receivables—Other      79      75
                

Total asset derivatives

      $ 6,163    $ 3,785
                

The Successor Company’s fair value of outstanding derivative contracts recorded as liabilities in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) were as follows:

 

Liability Derivatives

        July 4,
2010
   September 30,
2009

Derivatives designated as hedging instruments under
ASC 815:

        

Interest rate contracts

   Accounts payable    $ 3,645    $ —  

Interest rate contracts

   Accrued interest      912      —  

Interest rate contracts

   Other long term liabilities      2,567      —  

Commodity contracts

   Accounts payable      1,332      —  

Commodity contracts

   Other long term liabilities      586      —  

Foreign exchange contracts

   Accounts payable      883      —  

Foreign exchange contracts

   Other long term liabilities      66      1,036
                

Total liability derivatives designated as hedging instruments under ASC 815

      $ 9,991    $ 1,036
                

Derivatives not designated as hedging instruments under ASC 815:

        

Foreign exchange contracts

   Accounts payable      9,736      131
                

Total liability derivatives

      $ 19,727    $ 1,167
                

Cash Flow Hedges

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

Gains and losses on the derivative, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.

The following table summarizes the pretax impact of derivative instruments designated as cash flow hedges on the accompanying Condensed Consolidated Statements of Operations (Unaudited) for the three month period ended July 4, 2010 (Successor Company):

 

Derivatives in ASC 815 Cash Flow

Hedging Relationships

  Amount of
Gain (Loss)
Recognized in
AOCI on
Derivatives
(Effective  Portion)
    Location of
Gain (Loss)
Reclassified from
AOCI into
Income
(Effective Portion)
  Amount of
Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)
    Location of
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
  Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 

Commodity contracts

  $ (4,647   Cost of
goods sold
  $ 155      Cost of
goods sold
  $ (73

Interest rate contracts

    (998   Interest
expense
    (587   Interest
expense
    (5,845 )(1) 

Foreign exchange contracts

    (864   Net sales     (216   Net sales     —     

Foreign exchange contracts

    5,820      Cost of
goods sold
    1,601      Cost of
goods sold
    —     
                           

Total

  $ (689     $ 953        $ (5,918
                           

 

(1)

Includes $(4,305) reclassified from AOCI associated with the refinancing of the senior credit facility. (See also Note 7, Debt, for a more complete discussion of the Company’s refinancing of its senior credit facility.)

The following table summarizes the pretax impact of derivative instruments designated as cash flow hedges on the accompanying Condensed Consolidated Statements of Operations (Unaudited) for the nine month period ended July 4, 2010 (Successor Company):

 

Derivatives in ASC 815 Cash Flow

Hedging Relationships

  Amount of
Gain (Loss)
Recognized in
AOCI on
Derivatives
(Effective  Portion)
    Location of
Gain (Loss)
Reclassified from
AOCI into
Income
(Effective Portion)
  Amount of
Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)
    Location of
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
  Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 

Commodity contracts

  $ (2,201   Cost of
goods sold
  $ 1,106      Cost of
goods sold
  $ 68   

Interest rate contracts

    (12,644   Interest
expense
    (3,565   Interest
expense
    (5,845 )(1) 

Foreign exchange contracts

    (1,214   Net sales     (402   Net sales     —     

Foreign exchange contracts

    7,865      Cost of
goods sold
    1,382      Cost of
goods sold
    —     
                           

Total

  $ (8,194     $ (1,479     $ (5,777
                           

 

(1)

Includes $(4,305) reclassified from AOCI associated with the refinancing of the senior credit facility. (See also Note 7, Debt, for a more complete discussion of the Company’s refinancing of its senior credit facility.)

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

The following table summarizes the pretax impact of derivative instruments designated as cash flow hedges on the accompanying Condensed Consolidated Statements of Operations (Unaudited) for the three month period ended June 28, 2009 (Predecessor Company):

 

Derivatives in ASC 815 Cash Flow

Hedging Relationships

  Amount of
Gain (Loss)
Recognized in
AOCI on
Derivatives
(Effective Portion)
    Location of
Gain (Loss)
Reclassified from
AOCI into
Income
(Effective Portion)
  Amount of
Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)
    Location of
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
  Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 

Commodity contracts

  $ 1,930      Cost of
goods sold
  $ (2,934   Cost of
goods sold
  $ 197   

Interest rate contracts

    (777   Interest
expense
    (1,274   Interest
expense
    (7,369

Foreign exchange contracts

    139      Net sales     302      Net sales     —     

Foreign exchange contracts

    584      Cost of
goods sold
    2,343      Cost of
goods sold
    —     
                           

Total

  $ 1,876        $ (1,563     $ (7,172
                           

The following table summarizes the pretax impact of derivative instruments designated as cash flow hedges on the accompanying Condensed Consolidated Statements of Operations (Unaudited) for the nine month period ended June 28, 2009 (Predecessor Company):

 

Derivatives in ASC 815 Cash Flow
Hedging Relationships

  Amount of
Gain (Loss)
Recognized in
AOCI on
Derivatives
(Effective Portion)
    Location of
Gain (Loss)
Reclassified from
AOCI into
Income
(Effective Portion)
  Amount of
Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)
    Location of
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
  Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 

Commodity contracts

  $ (5,987   Cost of
goods sold
  $ (9,969   Cost of
goods sold
  $ 739   

Interest rate contracts

    (8,130   Interest
expense
    (2,096   Interest
expense
    (11,847

Foreign exchange contracts

    1,219      Net sales     321      Net sales     —     

Foreign exchange contracts

    9,313      Cost of
goods sold
    7,968      Cost of
goods sold
    —     

Commodity contracts

    (1,313   Discontinued
operations
    (2,116   Discontinued
operations
    (12,803
                           

Total

  $ (4,898     $ (5,892     $ (23,911
                           

 

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Table of Contents

SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

Derivative Contracts

For derivative instruments that are used to economically hedge the fair value of the Company’s third party and intercompany foreign exchange payments and commodity purchases, the gain (loss) is recognized in earnings in the period of change associated with the derivative contract. During the three month period ended July 4, 2010 (Successor Company) and the three month period ended June 28, 2009 (Predecessor Company), the Company recognized the following respective gains (losses) on derivative contracts:

 

Derivatives Not Designated as

Hedging Instruments Under ASC 815

   Amount of Gain (Loss)
Recognized in
Income on Derivatives
   

Location of Gain (Loss)

Recognized in

Income on Derivatives

   Successor
Company
          Predecessor
Company
   
   2010           2009    

Commodity contracts

   $ (53        $ —        Cost of goods sold

Interest rate contracts(A)

     —               (3,841   Interest expense

Foreign exchange contracts

     (9,538          (2,483   Other expense, net
                       

Total

   $ (9,591        $ (6,324  
                       

 

(A)

Amount represents ineffective portion of certain future payments related to an interest rate contract that was de-designated as a cash flow hedge during the pendency of the Bankruptcy Cases.

During the nine month period ended July 4, 2010 (Successor Company) and the nine month period ended June 28, 2009 (Predecessor Company), the Company recognized the following respective gains (losses) on derivative contracts:

 

Derivatives Not Designated as

Hedging Instruments Under ASC 815

   Amount of Gain (Loss)
Recognized in
Income on Derivatives
   

Location of Gain (Loss)

Recognized in

Income on Derivatives

   Successor
Company
          Predecessor
Company
   
   2010           2009    

Commodity contracts

   $ 99           $ —        Cost of goods sold

Interest rate contracts(A)

     —               (6,191   Interest expense

Foreign exchange contracts

     (11,827          3,975      Other expense, net
                       

Total

   $ (11,728        $ (2,216  
                       

 

(A)

Amount represents ineffective portion of certain future payments related to an interest rate contract that was de-designated as a cash flow hedge during the pendency of the Bankruptcy Cases.

Credit Risk

The Company is exposed to the default risk of the counterparties with which the Company transacts. The Company monitors counterparty credit risk on an individual basis by periodically assessing each such counterparty’s credit rating exposure. The maximum loss due to credit risk is not significant as the fair value of the gross asset derivatives, which are primarily concentrated with a domestic financial institution counterparty, are offset by gross liability derivative positions held by the Company that are subject to a master netting agreement. The Company considers these exposures when measuring its credit reserves on its derivatives. Additionally, the Company does not require collateral or other security to support financial instruments subject to credit risk.

 

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Table of Contents

SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

The Company’s standard contracts do not contain credit risk related contingent features whereby the Company would be required to post additional cash collateral as a result of a credit event. However, as a result of the Company’s current credit profile, the Company is typically required to post collateral in the normal course of business to offset its liability positions. At July 4, 2010 and September 30, 2009, the Successor Company had posted cash collateral of $7,097 and $1,943, respectively, related to such liability positions. In addition, at July 4, 2010 and September 30, 2009, the Successor Company had posted standby letters of credit of $5,000 and $0, respectively, related to such liability positions. The cash collateral is included in Current Assets—Receivables—Other within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited).

Derivative Financial Instruments

Cash Flow Hedges

The Company uses interest rate swaps to manage its interest rate risk. The swaps are designated as cash flow hedges with the changes in fair value recorded in AOCI and as a derivative hedge asset or liability, as applicable. The swaps settle periodically in arrears with the related amounts for the current settlement period payable to, or receivable from, the counter-parties included in accrued liabilities or receivables, respectively, and recognized in earnings as an adjustment to interest expense from the underlying debt to which the swap is designated. At July 4, 2010, the Successor Company had a portfolio of U.S. dollar-denominated interest rate swaps outstanding which effectively fixes the interest on floating rate debt, exclusive of lender spreads as follows: 2.25% for a notional principal amount of $300,000 through December 2011 and 2.29% for a notional principal amount of $300,000 through January 2012 (the “U.S. dollar swaps”). During both the three and nine month periods ended July 4, 2010, in connection with the refinancing of its senior credit facilities, the Company terminated a portfolio of Euro-denominated interest rate swaps at a cash loss of $3,499 which was recognized as an adjustment to interest expense for ineffectiveness. The Successor Company had no interest rate swap financial instruments at September 30, 2009. The derivative net loss on these contracts recorded in AOCI by the Successor Company at July 4, 2010 was $2,960, net of tax benefit of $1,814. At July 4, 2010, the portion of derivative net losses estimated to be reclassified from AOCI into earnings by the Successor Company over the next 12 months is 1,369, net of tax.

In connection with the Company’s merger with Russell Hobbs and the refinancing of the Company’s existing senior credit facilities associated with the closing of the Merger, the Company assessed the prospective effectiveness of its interest rate cash flow hedges during the three month period ended July 4, 2010. As a result, during the three and nine month periods ended July 4, 2010, the Company recorded a loss of $2,346 from ineffectiveness as an adjustment to interest expense as the Company was unable to confirm that all forecasted interest rate swaps transactions were probable of occurring. Upon the refinancing of the existing senior credit facility associated with the closing of the Merger, the Company re-designated the U.S. dollar swaps as cash flow hedges of certain scheduled interest rate payments on the new $750,000 U.S. Dollar Term Loan expiring June 16, 2016. At, July 4, 2010, the Company believes that all forecasted interest rate swap transactions designated as cash flow hedges are probable of occurring.

The Company periodically enters into forward foreign exchange contracts to hedge the risk from forecasted foreign denominated third party and intercompany sales or payments. These obligations generally require the Company to exchange foreign currencies for U.S. Dollars, Euros, Pounds Sterling, Australian Dollars, Brazilian Reals, Canadian Dollars or Japanese Yen. These foreign exchange contracts are cash flow hedges of fluctuating foreign exchange related to sales or product or raw material purchases. Until the sale or purchase is recognized, the fair value of the related hedge is recorded in AOCI and as a derivative hedge asset or liability, as applicable.

 

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Table of Contents

SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

At the time the sale or purchase is recognized, the fair value of the related hedge is reclassified as an adjustment to Net sales or purchase price variance in Cost of goods sold.

At July 4, 2010 the Successor Company had a series of foreign exchange derivative contracts outstanding through September 2011 with a contract notional value of $104,650. At September 30, 2009 the Successor Company had a series of foreign exchange derivative contracts outstanding through September 2010 with a contract notional value of $92,963. The derivative net gain on these contracts recorded in AOCI by the Successor Company at July 4, 2010 was $3,662, net of tax expense of $1,464. The derivative net loss on these contracts recorded in AOCI by the Successor Company at September 30, 2009 was $378, net of tax benefit of $167. At July 4, 2010, the portion of derivative net gains estimated to be reclassified from AOCI into earnings by the Successor Company over the next 12 months is $3,466, net of tax.

The Company is exposed to risk from fluctuating prices for raw materials, specifically zinc used in its manufacturing processes. The Company hedges a portion of the risk associated with these materials through the use of commodity swaps. The hedge contracts are designated as cash flow hedges with the fair value changes recorded in AOCI and as a hedge asset or liability, as applicable. The unrecognized changes in fair value of the hedge contracts are reclassified from AOCI into earnings when the hedged purchase of raw materials also affects earnings. The swaps effectively fix the floating price on a specified quantity of raw materials through a specified date. At July 4, 2010 the Successor Company had a series of such swap contracts outstanding through September 2012 for 16 tons with a contract notional value of $32,175. At September 30, 2009 the Successor Company had a series of such swap contracts outstanding through September 2011 for 8 tons with a contract notional value of $11,830. The derivative net loss on these contracts recorded in AOCI by the Successor Company at July 4, 2010 was $1,814, net of tax benefit of $963. The derivative net gain on these contracts recorded in AOCI by the Successor Company at September 30, 2009 was $347, net of tax expense of $183. At July 4, 2010, the portion of derivative net losses estimated to be reclassified from AOCI into earnings by the Successor Company over the next 12 months is $1,442, net of tax.

The Company was also exposed to fluctuating prices of raw materials, specifically urea and di-ammonium phosphates (“DAP”), used in its manufacturing processes in the growing products portion of the Home and Garden Business. The Successor Company did not have any contracts outstanding and did not record any activity for these raw materials during the three and nine month periods ended July 4, 2010 as the Company completed the shutdown of the growing products portion of the Home and Garden Business during the second quarter of Fiscal 2009. See Note 3, Significant Accounting Policies—Discontinued Operations, for further information on the shutdown of the growing products portion of the Home and Garden Business.

Derivative Contracts

The Predecessor Company periodically enters into forward and swap foreign exchange contracts to economically hedge the risk from third party and intercompany payments resulting from existing obligations. These obligations generally require the Company to exchange foreign currencies for U.S. Dollars, Euros or Australian Dollars. These foreign exchange contracts are fair value hedges of a related liability or asset recorded in the accompanying Condensed Consolidated Statement of Financial Position (Unaudited). The gain or loss on the derivative hedge contracts is recorded in earnings as an offset to the change in value of the related liability or asset at each period end. At July 4, 2010 and September 30, 2009 the Successor Company had $347,031 and $37,478, respectively, of such foreign exchange derivative notional value contracts outstanding.

The Company is indirectly exposed to economic risk from fluctuating prices for underlying raw materials, including nickel, through its purchases of processed parts used in its manufacturing processes. Periodically the

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

Company economically hedges a portion of the risk associated with these parts through swap agreements with the supplier of the parts. The swap agreements are designated as fair value hedges. The swaps effectively fix the floating price on a specified quantity of underlying raw materials through the life of the purchase contract with the supplier. The unrealized change in fair value of the hedge contracts is recorded in earnings and as a hedge asset or liability, as applicable. The unrealized gains or losses are reversed from earnings as the hedged purchases of processed parts also effects earnings. At July 4, 2010 and September 30, 2009 the Successor Company had $105 and $0, respectively, of such commodity derivative notional value contracts outstanding.

Fair Value of Financial Instruments: The Company measures certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the Company uses a three-level hierarchy which prioritizes fair value measurements based on the types of inputs used for the various valuation techniques.

The valuation techniques required by ASC Topic 820: “Fair Value Measurements and Disclosures,” are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the Company. These two types of inputs create the following fair value hierarchy:

 

Level 1

   Unadjusted quoted prices for identical instruments in active markets.

Level 2

   Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3

   Significant inputs to the valuation model are unobservable.

The Company maintains policies and procedures to value instruments using the best and most relevant data available. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls must be determined based on the lowest level input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. In addition, the Company has risk management teams that review valuation, including independent price validation for certain instruments. Further, in other instances, the Company retains independent pricing vendors to assist in valuing certain instruments.

The Company’s derivatives are valued using internal models that are based on market observable inputs including interest rate curves and both forward and spot prices for currencies and commodities.

The Successor Company’s net derivative portfolio at July 4, 2010 contains Level 2 instruments and represents commodity and foreign exchange contracts.

 

     Level 1    Level 2     Level 3    Total  

Liabilities:

          

Interest rate contracts

   $ —      $ (7,124   $ —      $ (7,124

Commodity contracts, net

     —        (1,910   $ —        (1,910

Foreign exchange contracts, net

     —        (4,530   $ —        (4,530
                              

Total Liabilities

   $ —      $ (13,564   $ —      $ (13,564
                              

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

The Successor Company’s net derivative portfolio at September 30, 2009 contains Level 2 instruments and represents, commodity and foreign exchange contracts.

 

     Level 1    Level 2     Level 3    Total  

Assets:

          

Commodity contracts

   $ —      $ 3,415      $ —      $ 3,415   
                              

Total Assets

   $ —      $ 3,415      $ —      $ 3,415   
                              

Liabilities:

          

Foreign exchange contracts, net

   $ —      $ (797   $ —      $ (797
                              

Total Liabilities

   $ —      $ (797   $ —      $ (797
                              

The carrying values of cash and cash equivalents, accounts and notes receivable, accounts payable and short-term debt approximate fair value. The fair values of long-term debt and derivative financial instruments are generally based on quoted or observed market prices.

The carrying amounts and fair values of the Successor Company’s financial instruments are summarized as follows ((liability)/asset):

 

     July 4, 2010     September 30, 2009  
     Carrying
Amount
    Fair Value     Carrying
Amount
    Fair Value  

Total debt

   $ (1,781,007   $ (1,843,897   $ (1,583,535   $ (1,592,987

Interest rate swap agreements

     (7,124     (7,124     —          —     

Commodity swap and option agreements

     (1,910     (1,910     3,415        3,415   

Foreign exchange forward agreements

     (4,530     (4,530     (797     (797

See Note 3, Significant Accounting Policies—Derivative Financial Instruments and Note 7, Debt, for further details of the Company’s financial instruments.

Subsequent Events: During Fiscal 2009, the Company adopted ASC 855, “Subsequent Events,” (“ASC 855”). ASC 855 establishes general standards of accounting and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The adoption of ASC 855 requires the Company to evaluate all subsequent events that occur after the balance sheet date through the date and time the Company’s financial statements are issued. The Company has evaluated subsequent events through August 18, 2010, which is the date these financial statements were issued.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

4    OTHER COMPREHENSIVE LOSS

Comprehensive loss and the components of other comprehensive loss, net of tax, for the three and nine month periods ended July 4, 2010 and June 28, 2009 are as follows:

 

     Successor
Company
          Predecessor
Company
    Successor
Company
          Predecessor
Company
 
     Three Months Ended     Nine Months Ended  
     2010           2009     2010           2009  

Net loss

   $ (86,305        $ (36,521   $ (165,588        $ (209,627

Other comprehensive (loss) income:

                  

Foreign currency translation

     (2,870          19,495        (9,306          (8,790

Valuation allowance adjustments

     668             3,611        (2,453          4,168   

Pension liability adjustments

     —               —          (52          —     

Net unrealized gain (loss) on derivative instruments

     1,548             6,841        (1,850          9,450   
                                          

Net change to derive comprehensive loss for the period

     (654          29,947        (13,661          4,828   
                                          

Comprehensive loss

   $ (86,959        $ (6,574   $ (179,249        $ (204,799
                                          

Net exchange gains or losses resulting from the translation of assets and liabilities of foreign subsidiaries are accumulated in the AOCI section of Shareholders’ equity. Also included are the effects of exchange rate changes on intercompany balances of a long-term nature and transactions designated as hedges of net foreign investments.

The changes in accumulated foreign currency translation for the three and nine month periods ended July 4, 2010 and June 28, 2009 were primarily attributable to the impact of translation of the net assets of the Company’s European operations, primarily denominated in Euros and Pounds Sterling.

5    INVENTORIES

Inventories for the Successor Company, which are stated at the lower of cost or market, consist of the following:

 

     July 4,
2010
   September  30,
2009

Raw materials

   $ 72,175    $ 64,314

Work-in-process

     29,473      27,364

Finished goods

     412,767      249,827
             
   $ 514,415    $ 341,505
             

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

6    GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets for the Successor Company consist of the following:

 

    Global Batteries  &
Personal Care
    Home and
Garden
    Global  Pet
Supplies
    Small
Appliances
    Total  

Goodwill:

         

Balance at September 30, 2009

  $ 152,293      $ 170,807      $ 160,248      $ —        $ 483,348   

Additions due to Russell Hobbs combination

    —          —          —          120,079        120,079   

Effect of translation

    (6,932     —          (6,821     1,252        (12,501
                                       

Balance at July 4, 2010

  $ 145,361      $ 170,807      $ 153,427      $ 121,331      $ 590,926   
                                       

Intangible Assets:

         

Trade names Not Subject to Amortization

         

Balance at September 30, 2009

  $ 401,983      $ 76,000      $ 212,253      $ —        $ 690,236   

Additions due to Russell Hobbs combination

    —          —          —          170,930        170,930   

Effect of translation

    (8,331     —          (14,866     3,528        (19,669
                                       

Balance at July 4, 2010

  $ 393,652      $ 76,000      $ 197,387      $ 174,458      $ 841,497   
                                       

Intangible Assets Subject to Amortization

         

Balance at September 30, 2009, net

  $ 354,433      $ 172,271      $ 245,005      $ —        $ 771,709   

Additions due to Russell Hobbs combination

    —          —          —          192,397        192,397   

Amortization during period

    (13,349     (6,563     (11,180     (652     (31,744

Effect of translation

    (10,965     —          (8,751     296        (19,420
                                       

Balance at July 4, 2010, net

  $ 330,119      $ 165,708      $ 225,074      $ 192,041      $ 912,942   
                                       

Total Intangible Assets, net, at July 4, 2010

  $ 723,771      $ 241,708      $ 422,461      $ 366,499      $ 1,754,439   
                                       

Intangible assets subject to amortization include proprietary technology, customer relationships and certain trade names. The carrying value of technology assets was $62,443, net of accumulated amortization of $4,655 at July 4, 2010 and $62,985, net of accumulated amortization of $515 at September 30, 2009. The carrying value of these trade names was $149,078, net of accumulated amortization of $613, at July 4, 2010 and $490, net of accumulated amortization of $10, at September 30, 2009. Remaining intangible assets subject to amortization include customer relationship intangibles. The carrying value of customer relationships was $701,421, net of accumulated amortization of $26,476, at July 4, 2010 and $708,234, net of accumulated amortization of $2,988, at September 30, 2009. The useful life of the Company’s intangible assets subject to amortization are 8 years for technology assets related to the Global Pet Supplies segment, 9 to 11 years for technology assets related to the Small Appliances segment, 17 years for technology assets associated with the Global Batteries & Personal Care segment, 20 years for customer relationships of Global Batteries & Personal Care, Home and Garden and Global Pet Supplies, 15 years for Small Appliances customer relationships, 12 years for a trade name within the Small Appliances segment and 4 years for a trade name within the Home and Garden segment.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

Amortization expense for the three and nine month periods ended July 4, 2010 and June 28, 2009 is as follows:

 

     Successor
Company
        Predecessor
Company
   Successor
Company
        Predecessor
Company
     Three Months Ended    Nine Months Ended
     2010         2009    2010         2009

Proprietary technology amortization

   $ 1,563        $ 944    $ 4,655        $ 2,813

Customer relationships amortization

     8,767          4,081      26,476          12,163

Trade names amortization

     549          221      613          583
                                   
   $ 10,879        $ 5,246    $ 31,744        $ 15,559
                                   

The Company estimates annual amortization expense for the next five fiscal years will approximate $55,000 per year.

7    DEBT

Debt of the Company consists of the following:

 

     July 4, 2010     September 30, 2009  
     Amount     Rate     Amount     Rate  

Term Loan, U.S. Dollar, expiring June 16, 2016

     750,000      8.1     —        —     

9.5% Secured Subordinated Notes, due June 15, 2018

     750,000      9.5     —        —     

Term Loan B, U.S. Dollar, expiring June 30, 2012

     —        —          973,125      8.1

Term Loan, Euro, expiring June 30, 2012

     —        —          371,874      8.6

12% Senior Subordinated Notes, due August 28, 2019

     231,161      12.0     218,076      12.0

ABL Revolving Credit Facility, expiring June 16, 2014

     22,000      6.0     —        —     

ABL Revolving Credit Facility, expiring March 31, 2012

     —        —          33,225      6.6

Supplemental Loan, expiring March 31, 2012

     —        —          45,000      17.7

Other notes and obligations

     44,380      8.3     5,919      6.2

Capitalized lease obligations

     10,969      5.1     12,924      4.9
                    
     1,808,510          1,660,143     

Original issuance discounts on debt

     (27,355       —       

Adjustments resulting from fresh-start reporting valuation

     (148       (76,608  

Less current maturities

     46,261          53,578     
                    

Long-term debt, net of current maturities

   $ 1,734,746        $ 1,529,957     
                    

In connection with the combination of Spectrum Brands and Russell Hobbs, Spectrum Brands (i) entered into a new senior secured term loan pursuant to a new senior credit agreement (the “Senior Credit Agreement”) consisting of a $750,000 U.S. Dollar Term Loan due June 16, 2016 (the “Term Loan”), (ii) issued $750,000 in aggregate principal amount of 9.5% Senior Secured Notes maturing June 15, 2018 (the “9.5% Notes”) and (iii) entered into a $300,000 U.S. Dollar asset based revolving loan facility due June 16, 2014 (the “ABL Revolving Credit Facility” and together with the Senior Credit Agreement, the “Senior Credit Facilities” and the Senior Credit Facilities together with the 9.5% Notes, the “Senior Secured Facilities”). The proceeds from the Senior Secured Facilities were used to repay Spectrum Brands’ then-existing senior term credit facility (the “Prior Term Facility”) and Spectrum Brands’ then-existing asset based revolving loan facility, to pay fees and expenses in connection with the refinancing and for general corporate purposes.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

The 9.5% Notes and 12% Notes were issued by Spectrum Brands. SB/RH Holdings, LLC, a wholly-owned subsidiary of SB Holdings, and the wholly owned domestic subsidiaries of Spectrum Brands are the guarantors under the 9.5% Notes. The wholly owned domestic subsidiaries of Spectrum Brands are the guarantors under the 12% Notes. SB Holdings is not an issuer or guarantor of the 9.5% Notes or the 12% Notes. SB Holdings is also not a borrower or guarantor under the Company’s Term Loan or the ABL Revolving Credit Facility. Spectrum Brands is the borrower under the Term Loan and its wholly owned domestic subsidiaries along with SB/RH Holdings, LLC are the guarantors under that facility. Spectrum Brands and its wholly owned domestic subsidiaries are the borrowers under the ABL Revolving Credit Facility and SB/RH Holdings, LLC is a guarantor of that facility.

Senior Term Credit Facility

The Term Loan has a maturity date of June 16, 2016. Subject to certain mandatory prepayment events, the Term Loan is subject to repayment according to a scheduled amortization, with the final payment of all amounts outstanding, plus accrued and unpaid interest, due at maturity. Among other things, the Term Loan provides for a minimum Eurodollar interest rate floor of 1.5% and interest spreads over market rates of 6.5%.

The Senior Credit Agreement contains financial covenants with respect to debt, including, but not limited to, a maximum leverage ratio and a minimum interest coverage ratio, which covenants, pursuant to their terms, become more restrictive over time. In addition, the Senior Credit Agreement contains customary restrictive covenants, including, but not limited to, restrictions on the Company’s ability to incur additional indebtedness, create liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets. Pursuant to a guarantee and collateral agreement, the Company and its domestic subsidiaries have guaranteed their respective obligations under the Senior Credit Agreement and related loan documents and have pledged substantially all of their respective assets to secure such obligations. The Senior Credit Agreement also provides for customary events of default, including payment defaults and cross-defaults on other material indebtedness.

The Term Loan was issued at a 2.00% discount and was recorded net of the $15,000 amount incurred. The discount will be amortized as an adjustment to the carrying value of principal with a corresponding charge to interest expense over the remaining life of the Senior Credit Agreement. During both the three and nine month periods ended July 4, 2010, the Company recorded $25,968 of fees in connection with the Senior Credit Agreement. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statement of Financial Position (Unaudited) as of July 4, 2010 and will be amortized as an adjustment to interest expense over the remaining life of the Senior Credit Agreement.

At July 4, 2010, the aggregate amount outstanding under the Term Loan totaled $750,000.

At September 30, 2009, the aggregate amount outstanding under the Prior Term Facility totaled a U.S. Dollar equivalent of $1,391,459, consisting of principal amounts of $973,125 under the U.S. Dollar Term B Loan, €254,970 under the Euro Facility (USD $371,874 at September 30, 2009) as well as letters of credit outstanding under the L/C Facility totaling $46,460.

At July 4, 2010, the Company was in compliance with all covenants under the Senior Credit Agreement.

9.5% Notes

At July 4, 2010, Company had outstanding principal of $750,000 under the 9.5% Notes maturing June 15, 2018.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

The Company may redeem all or a part of the 9.5% Notes, upon not less than 30 or more than 60 days notice at specified redemption prices. Further, the indenture governing the 9.5% Notes (the “2018 Indenture”) requires the Company to make an offer, in cash, to repurchase all or a portion of the applicable outstanding notes for a specified redemption price, including a redemption premium, upon the occurrence of a change of control of the Company, as defined in such indenture.

The 2018 Indenture contains customary covenants that limit, among other things, the incurrence of additional indebtedness, payment of dividends on or redemption or repurchase of equity interests, the making of certain investments, expansion into unrelated businesses, creation of liens on assets, merger or consolidation with another company, transfer or sale of all or substantially all assets, and transactions with affiliates.

In addition, the 2018 Indenture provides for customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to make payments on or acceleration of certain other indebtedness, and certain events of bankruptcy and insolvency. Events of default under the 2018 Indenture arising from certain events of bankruptcy or insolvency will automatically cause the acceleration of the amounts due under the 9.5% Notes. If any other event of default under the 2018 Indenture occurs and is continuing, the trustee for the 2018 Indenture or the registered holders of at least 25% in the then aggregate outstanding principal amount of the 9.5% Notes may declare the acceleration of the amounts due under those notes.

At July 4, 2010, the Company was in compliance with all covenants under the 2018 Indenture. The Company, however, is subject to certain limitations as a result of the Company’s Fixed Charge Coverage Ratio under the 2018 Indenture being below 2:1. Until the test is satisfied, the Company and certain of its subsidiaries are limited in their ability to make significant acquisitions or incur significant additional senior credit facility debt beyond the Senior Credit Facilities. The Successor Company does not expect its inability to satisfy the Fixed Charge Coverage Ratio test to impair its ability to provide adequate liquidity to meet the short-term and long-term liquidity requirements of its existing businesses, although no assurance can be given in this regard.

The 9.5% Notes were issued at a 1.37% discount and were recorded net of the $10,245 amount incurred. The discount will be amortized as an adjustment to the carrying value of principal with a corresponding charge to interest expense over the remaining life of the 9.5% Notes. During both the three and nine month periods ended July 4, 2010, the Company recorded $20,810 of fees in connection with the issuance of the 9.5% Notes. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statement of Financial Position (Unaudited) as of July 4, 2010 and will be amortized as an adjustment to interest expense over the remaining life of the 9.5% Notes.

12% Notes

On August 28, 2009, in connection with emergence from the voluntary reorganization under Chapter 11 and pursuant to the Plan, the Company issued $218,076 in aggregate principal amount of 12% Notes maturing August 28, 2019. Semiannually, at its option, the Company may elect to pay interest on the 12% Notes in cash or as payment in kind, or “PIK”. PIK interest would be added to principal upon the relevant semi-annual interest payment date. Under the Prior Term Facility, the Company agreed to make interest payments on the 12% Notes through PIK for the first three semi-annual interest payment periods. As a result of the refinancing of the Prior Term Facility the Company is no longer required to make interest payments as payment in kind after the semi-annual interest payment date of August 28, 2010. During both the three and nine month periods ended July 4, 2010, the Company reclassified $13,085 of accrued interest from Other long term liabilities to principal in

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

connection with the PIK provision of the 12% Notes. At July 4, 2010, the Company had $9,632 of accrued interest included in Other long term liabilities in the accompanying Condensed Consolidated Statement of Financial Position (Unaudited) that will be reclassified to principal upon the next semi-annual interest payment date of August 28, 2010.

The Company may redeem all or a part of the 12% Notes, upon not less than 30 or more than 60 days notice, beginning August 28, 2012 at specified redemption prices. Further, the indenture governing the 12% Notes require the Company to make an offer, in cash, to repurchase all or a portion of the applicable outstanding notes for a specified redemption price, including a redemption premium, upon the occurrence of a change of control of the Company, as defined in such indenture.

At July 4, 2010 and September 30, 2009, the Company had outstanding principal of $231,161 and $218,076, respectively, under the 12% Notes.

The indenture governing the 12% Notes (the “2019 Indenture”), contains customary covenants that limit, among other things, the incurrence of additional indebtedness, payment of dividends on or redemption or repurchase of equity interests, the making of certain investments, expansion into unrelated businesses, creation of liens on assets, merger or consolidation with another company, transfer or sale of all or substantially all assets, and transactions with affiliates.

In addition, the 2019 Indenture provides for customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to make payments on or acceleration of certain other indebtedness, and certain events of bankruptcy and insolvency. Events of default under the indenture arising from certain events of bankruptcy or insolvency will automatically cause the acceleration of the amounts due under the 12% Notes. If any other event of default under the 2019 Indenture occurs and is continuing, the trustee for the indenture or the registered holders of at least 25% in the then aggregate outstanding principal amount of the 12% Notes may declare the acceleration of the amounts due under those notes.

At July 4, 2010, the Company was in compliance with all covenants under the 12% Notes. The Company, however, is subject to certain limitations as a result of the Company’s Fixed Charge Coverage Ratio under the 2019 Indenture being below 2:1. Until the test is satisfied, Spectrum Brands and certain of its subsidiaries are limited in their ability to make significant acquisitions or incur significant additional senior credit facility debt beyond the Senior Credit Facilities. The Company does not expect its inability to satisfy the Fixed Charge Coverage Ratio test to impair its ability to provide adequate liquidity to meet the short-term and long-term liquidity requirements of its existing businesses, although no assurance can be given in this regard.

In connection with the Merger, the Company obtained the consent of the note holders to certain amendments to the 2019 Indenture (the “Supplemental Indenture”). The Supplemental Indenture became effective upon the closing of the Merger. Among other things, the Supplemental Indenture amended the definition of change in control to exclude the Harbinger Capital Partners Master Fund I, Ltd. (“Harbinger Master Fund”) and Harbinger Capital Partners Special Situations Fund, L.P. (“Harbinger Special Fund”) and, together with Harbinger Master Fund, the “HCP Funds”) and Global Opportunities Breakaway Ltd. (together with the HCP Funds, the “Harbinger Parties”) and increased the Company’s ability to incur indebtedness up to $1,850,000.

During the nine month period ended July 4, 2010, the Company recorded $2,950 of fees in connection with the consent. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

Statement of Financial Position (Unaudited) as of July 4, 2010 and will be amortized as an adjustment to interest expense over the remaining life of the 12% Notes effective with the closing of the Merger.

ABL Revolving Credit Facility

The ABL Revolving Credit Facility is governed by a credit agreement (the “ABL Credit Agreement”) with Bank of America as administrative agent (the “Agent”). The ABL Revolving Credit Facility consists of revolving loans (the “Revolving Loans”), with a portion available for letters of credit and a portion available as swing line loans, in each case subject to the terms and limits described therein.

The Revolving Loans may be drawn, repaid and reborrowed without premium or penalty. The proceeds of borrowings under the ABL Revolving Credit Facility are to be used for costs, expenses and fees in connection with the ABL Revolving Credit Facility, for working capital requirements of the Company and its subsidiaries’, restructuring costs, and other general corporate purposes.

The ABL Revolving Credit Facility carries an interest rate, at the Company’s option, which is subject to change based on availability under the facility, of either: (a) the base rate plus currently 2.75% per annum or (b) the reserve-adjusted LIBOR rate (the “Eurodollar Rate”) plus currently 3.75% per annum. No amortization will be required with respect to the ABL Revolving Credit Facility. The ABL Revolving Credit Facility will mature on June 16, 2014.

The ABL Credit Agreement contains various representations and warranties and covenants, including, without limitation, enhanced collateral reporting, and a maximum fixed charge coverage ratio. The ABL Credit Agreement also provides for customary events of default, including payment defaults and cross-defaults on other material indebtedness.

At July 4, 2010, the Company was in compliance with all covenants under the ABL Credit Agreement.

During both the three and nine month periods ended July 4, 2010, the Company recorded $9,759 of fees in connection with the ABL Revolving Credit Facility. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statement of Financial Position (Unaudited) as of July 4, 2010 and will be amortized as an adjustment to interest expense over the remaining life of the ABL Revolving Credit Facility.

As a result of borrowings and payments under the ABL Revolving Credit Facility at July 4, 2010, the Company had aggregate borrowing availability of approximately $208,108, net of lender reserves of $28,972.

At July 4, 2010, the Company had an aggregate amount outstanding under the ABL Revolving Credit Facility of $62,920 which includes loans outstanding of $22,000 and letters of credit of $40,920.

At September 30, 2009, the Company had an aggregate amount outstanding under its then-existing asset based revolving loan facility of $84,225 which included a supplemental loan of $45,000 and $6,000 in outstanding letters of credit.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

8    EMPLOYEE BENEFIT PLANS

Pension Benefits

The Company has various defined benefit pension plans covering some of its employees in the U.S. and certain employees in other countries, primarily the United Kingdom and Germany. Plans generally provide benefits of stated amounts for each year of service. The Company funds its U.S. pension plans at a level to maintain, within established guidelines, the IRS-defined 96 percent current liability funded status. At January 1, 2010, the date of the most recent calculation, all U.S. funded defined benefit pension plans reflected a current liability funded status equal to or greater than 96 percent. Additionally, in compliance with the Company’s funding policy, annual contributions to non-U.S. defined benefit plans are equal to the actuarial recommendations or statutory requirements in the respective countries.

The Company also sponsors or participates in a number of other non-U.S. pension arrangements, including various retirement and termination benefit plans, some of which are covered by local law or coordinated with government-sponsored plans, which are not significant in the aggregate and therefore are not included in the information presented below.

The Company also has various nonqualified deferred compensation agreements with certain of its employees. Under certain of these agreements, the Company has agreed to pay certain amounts annually for the first 15 years subsequent to retirement or to a designated beneficiary upon death. It is management’s intent that life insurance contracts owned by the Company will fund these agreements. Under the remaining agreements, the Company has agreed to pay such deferred amounts in up to 15 annual installments beginning on a date specified by the employee, subsequent to retirement or disability, or to a designated beneficiary upon death.

Other Benefits

Under the Rayovac postretirement plan the Company provides certain health care and life insurance benefits to eligible retired employees. Participants earn retiree health care benefits after reaching age 45 over the next 10 succeeding years of service and remain eligible until reaching age 65. The plan is contributory; retiree contributions have been established as a flat dollar amount with contribution rates expected to increase at the active medical trend rate. The plan is unfunded. The Company is amortizing the transition obligation over a 20-year period.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

The Company’s results of operations for the three and nine month periods ended July 4, 2010 and June 28, 2009 reflect the following pension and deferred compensation benefit costs:

 

     Successor
Company
          Predecessor
Company
    Successor
Company
          Predecessor
Company
 
     Three Months Ended     Nine Months Ended  

Components of net periodic pension benefit and deferred
compensation benefit cost

   2010           2009     2010           2009  

Service cost

   $ 725           $ 601      $ 2,174           $ 1,803   

Interest cost

     1,932             1,727        5,558             5,179   

Expected return on assets

     (1,382          (1,147     (3,926          (3,442

Amortization of prior service cost

     1             55        4             165   

Recognized net actuarial loss

     22             39        25             118   

Employee contributions

     (88          (29     (265          (86
                                          

Net periodic benefit cost

   $ 1,210           $ 1,246      $ 3,570           $ 3,737   
                                          
              
     Successor
Company
          Predecessor
Company
    Successor
Company
          Predecessor
Company
 
     Three Months Ended     Nine Months Ended  

Pension and deferred compensation contributions

   2010           2009     2010           2009  

Contributions made during period

   $ 1,711           $ 2,475      $ 3,714           $ 3,724   

The Company sponsors a defined contribution pension plan for its domestic salaried employees, which allows participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code. Prior to April 1, 2009 the Company contributed annually from 3% to 6% of participants’ compensation based on age or service, and had the ability to make additional discretionary contributions. The Company suspended all contributions to its U.S. subsidiaries defined contribution pension plans effective April 1, 2009 through December 31, 2009. Effective January 1, 2010 the Company reinstated its annual contribution as described above. The Company also sponsors defined contribution pension plans for employees of certain foreign subsidiaries. Successor Company contributions charged to operations, including discretionary amounts, for the three and nine month periods ended July 4, 2010 were $933 and $2,408, respectively. Predecessor Company contributions charged to operations, including discretionary amounts, for the three and nine month periods ended June 28, 2009 were $134 and $2,583, respectively.

9    INCOME TAXES

The Company files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions and is subject to ongoing examination by the various taxing authorities. The Company’s major taxing jurisdictions are the U.S., U.K., and Germany. In the U.S. federal tax filings for years prior to and including Spectrum Brands fiscal year ended September 30, 2006 are closed. However, the federal net operating loss carryforward from Spectrum Brands fiscal year ended September 30, 2006 is subject to Internal Revenue Service (“IRS”) examination until the year that such net operating loss carryforward is utilized and that year is closed for audit. Spectrum Brands fiscal years ended September 30, 2007, 2008, and 2009 remain open to examination by the IRS. Filings in various U.S. state and local jurisdictions are also subject to audit and to date no significant audit matters have arisen.

In the U.S. federal tax filings for years prior to and including Russell Hobbs fiscal year ended June 30, 2008 are closed. However, the federal net operating loss carryforward from Russell Hobbs fiscal year ended June 30,

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

2008 is subject to Internal Revenue Service (“IRS”) examination until the year that such net operating loss carryforward is utilized and that year is closed for audit. Russell Hobbs fiscal year ended June 30, 2009 remains open to examination by the IRS. Filings in various U.S. state and local jurisdictions are also subject to audit and to date no significant audit matters have arisen.

During Fiscal 2010, certain of the Company’s German legal entities are undergoing audits for the fiscal years ended 2003 through 2006. The Company cannot predict the ultimate outcome of the examinations; however, it is reasonably possible that during the next 12 months some portion of previously unrecognized tax benefits could be recognized.

10    SEGMENT RESULTS

The Company manages its business in four vertically integrated, product-focused reporting segments; (i) Global Batteries & Personal Care; (ii) Global Pet Supplies; (iii) the Home and Garden Business; and (iv) Small Appliances.

On June 16, 2010, the Company completed the Merger with Russell Hobbs. The results of Russell Hobbs operations since June 16, 2010 are in included in the Company’s Condensed Consolidated Statement of Operations (Unaudited). The financial results are reported as a separate business segment, Small Appliances.

Global strategic initiatives and financial objectives for each reportable segment are determined at the corporate level. Each reportable segment is responsible for implementing defined strategic initiatives and achieving certain financial objectives and has a general manager responsible for the sales and marketing initiatives and financial results for product lines within that segment.

Net sales and Cost of goods sold to other business segments have been eliminated. The gross contribution of intersegment sales is included in the segment selling the product to the external customer. Segment net sales are based upon the segment from which the product is shipped.

The operating segment profits do not include restructuring and related charges, acquisition and integration related charges, interest expense, interest income, impairment charges and income tax expense. Corporate expenses include primarily general and administrative expenses associated with corporate overhead and global long-term incentive compensation plans. All depreciation and amortization included in income from operations is related to operating segments or corporate expense. Costs are identified to operating segments or corporate expense according to the function of each cost center.

All capital expenditures are related to operating segments. Variable allocations of assets are not made for segment reporting.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

Segment information for the three and nine month periods ended July 4, 2010 and June 28, 2009 is as follows:

 

     Successor
Company
          Predecessor
Company
    Successor
Company
          Predecessor
Company
 
     Three Months Ended     Nine Months Ended  
     2010           2009     2010           2009  

Net sales from external customers

                  

Global Batteries & Personal Care

   $ 318,931           $ 296,759      $ 1,055,867           $ 973,594   

Global Pet Supplies

     135,216             144,594        420,388             419,085   

Home and Garden Business

     163,584             148,008        266,002             248,447   

Small Appliances

     35,755             —          35,755             —     
                                          

Total segments

   $ 653,486           $ 589,361      $ 1,778,012           $ 1,641,126   
                                          
              
     Successor
Company
          Predecessor
Company
    Successor
Company
          Predecessor
Company
 
     Three Months Ended     Nine Months Ended  
     2010           2009     2010           2009  

Segment profit (loss)

                  

Global Batteries & Personal Care

   $ 31,874           $ 37,316      $ 111,570           $ 124,406   

Global Pet Supplies

     17,229             19,221        37,325             45,799   

Home and Garden Business

     40,058             38,645        41,446             36,870   

Small Appliances

     2,137             —          2,137             —     
                                          

Total segments

     91,298             95,182        192,478             207,075   

Corporate expense

     9,616             8,209        28,978             24,543   

Acquisition and integration related charges

     17,002             —          22,472             —     

Restructuring and related charges

     4,844             3,232        16,662             40,400   

Interest expense

     132,238             48,649        230,130             148,559   

Other expense, net

     1,443             (841     8,427             3,546   
                                          

Income (loss) from continuing operations before reorganization items and income taxes

   $ (73,845        $ 35,933      $ (114,191        $ (9,973
                                          

 

     Successor Company
     July 4,
2010
   September 30,
2009

Segment total assets

     

Global Batteries & Personal Care

   $ 1,538,227    $ 1,630,139

Global Pet Supplies

     809,963      866,901

Home and Garden

     533,153      505,586

Small Appliances

     820,691      —  
             

Total segments

     3,702,034      3,002,626

Corporate

     65,417      18,120
             

Total assets at period end

   $ 3,767,451    $ 3,020,746
             

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

The Global Batteries & Personal Care segment does business in Venezuela through a Venezuelan subsidiary. At January 4, 2010, the beginning of the Company’s second quarter of Fiscal 2010, the Company determined that Venezuela meets the definition of a highly inflationary economy under GAAP. As a result, beginning January 4, 2010, the U.S. dollar is the functional currency for the Company’s Venezuelan subsidiary. Accordingly, going forward, currency remeasurement adjustments for this subsidiary’s financial statements and other transactional foreign exchange gains and losses are reflected in earnings. Through January 3, 2010, prior to being designated as highly inflationary, translation adjustments related to our Venezuelan subsidiary were reflected in Shareholders’ equity as a component of other comprehensive income.

In addition, on January 8, 2010, the Venezuelan government announced its intention to devalue its currency, the Bolivar fuerte, relative to the U.S. dollar. The official exchange rate for imported goods classified as essential, such as food and medicine, changed from 2.15 to 2.6 to the U.S. dollar, while payments for other non-essential goods moved to an exchange rate of 4.3 to the U.S. dollar. Some of the Company’s imported products fall into the essential classification and qualify for the 2.6 rate; however, the Company’s overall results in Venezuela will be reflected at the 4.3 rate expected to be applicable to dividend repatriations. As a result, the Company remeasured the local statement of financial position of its Venezuela entity during the second quarter of Fiscal 2010 to reflect the impact of the devaluation. There is also an ongoing impact related to measuring the Company’s Venezuelan statement of operations at the new exchange rate of 4.3 to the U.S. dollar.

The designation of the Company’s Venezuela entity as a highly inflationary economy and the devaluation of the Bolivar fuerte resulted in a $150 and $1,306 reduction to the Company’s operating income during the three and nine months ended July 4, 2010, respectively. The Company also reported a foreign exchange loss in Other expense (income), net, of $5,823 for the nine month period ended July 4, 2010.

11    ACQUISITION AND INTEGRATION RELATED CHARGES

Acquisition and integration related charges reflected in Operating expenses include, but are not limited to transaction costs such as banking, legal and accounting professional fees directly related to the acquisition, termination and related costs for transitional and certain other employees, integration related professional fees and other post business combination related expenses associated with the Merger of Russell Hobbs.

The following table summarizes acquisition and integration related charges incurred by the Company for the three and nine month periods ended July 4, 2010:

 

     Three Months
Ended
   Nine Months
Ended

Legal and professional fees

   $ 15,512    $ 20,982

Integration costs

     103      103

Employee termination charges

     1,387      1,387
             

Total Acquisition and integration related charges

   $ 17,002    $ 22,472
             

12    RESTRUCTURING AND RELATED CHARGES

The Company reports restructuring and related charges associated with manufacturing and related initiatives in Cost of goods sold. Restructuring and related charges reflected in Cost of goods sold include, but are not limited to, termination, compensation and related costs associated with manufacturing employees, asset impairments relating to manufacturing initiatives, and other costs directly related to the restructuring or integration initiatives implemented.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

The Company reports restructuring and related charges relating to administrative functions in Operating expenses, such as initiatives impacting sales, marketing, distribution, or other non-manufacturing related functions. Restructuring and related charges reflected in Operating expenses include, but are not limited to, termination and related costs, any asset impairments relating to the functional areas described above, and other costs directly related to the initiatives implemented as well as consultation, legal and accounting fees related to the evaluation of the Predecessor Company’s capital structure incurred prior to the Bankruptcy filing.

The following table summarizes restructuring and related charges incurred by segment for the three and nine month periods ended July 4, 2010 and June 28, 2009:

 

     Successor
Company
          Predecessor
Company
    Successor
Company
          Predecessor
Company
     Three Months Ended     Nine Months Ended
     2010           2009     2010           2009

Cost of goods sold:

                  

Global Batteries & Personal Care

   $ 1,185           $ 171      $ 2,638           $ 12,447

Global Pet Supplies

     705             232        2,854             763

Home and Garden Business

     —               —          38             —  
                                        

Total restructuring and related charges in cost of goods sold

     1,890             403        5,530             13,210
   

Operating expenses:

                  

Global Batteries & Personal Care

     51             797        (155          8,106

Global Pet Supplies

     222             (20     724             3,939

Home and Garden Business

     (220          1,168        7,805             2,949

Corporate

     2,901             884        2,758             12,196
                                        

Total restructuring and related charges in operating expenses

     2,954             2,829        11,132             27,190
                                        

Total restructuring and related charges

   $ 4,844           $ 3,232      $ 16,662           $ 40,400
                                        

2009 Restructuring Initiatives

The Predecessor Company implemented a series of initiatives within the Global Batteries & Personal Care segment, the Global Pet Supplies segment and the Home and Garden Business segment to reduce operating costs as well as evaluate the Company’s opportunities to improve its capital structure (the “Global Cost Reduction Initiatives”). These initiatives include headcount reductions within each of the Company’s segments and the exit of certain facilities in the U.S. related to the Global Pet Supplies and Home and Garden Business segments. These initiatives also included consultation, legal and accounting fees related to the evaluation of the Predecessor Company’s capital structure. The Successor Company recorded $2,553 and $13,942 of pretax restructuring and related charges during the three and nine month periods ended July 4, 2010, respectively, and the Predecessor Company recorded $2,423 and $12,515 of pretax restructuring and related charges during both the three and nine month periods ended June 28, 2009 related to the Global Cost Reduction Initiatives. Costs associated with these initiatives, which are expected to be incurred through March 31, 2014, are projected at approximately $55,000.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

Global Cost Reduction Initiatives Summary

The following table summarizes the remaining accrual balance associated with the 2009 initiatives and the activity during the nine month period ended July 4, 2010:

 

     Termination
and
Compensation
Benefits
    Other
Costs
    Total  

Accrual balance at September 30, 2009

   $ 4,180      $ 84      $ 4,264   

Provisions

     2,938        4,885        7,823   

Cash expenditures

     (2,861     (848     (3,709

Non-cash items

     (131     (56     (187
                        

Accrual balance at July 4, 2010

   $ 4,126      $ 4,065      $ 8,191   
                        

Expensed as incurred(A)

   $ 1,302      $ 4,817      $ 6,119   

 

(A)

Consists of amounts not impacting the accrual for restructuring and related charges.

The following table summarizes the expenses as incurred during the nine month period ended July 4, 2010, the cumulative amount incurred to date and the total future costs expected to be incurred associated with the Global Cost Reduction Initiatives by operating segment:

 

     Global
Batteries and
Personal Care
   Global Pet
Supplies
   Home and
Garden
   Corporate    Total

Restructuring and related charges during the nine month period ended July 4, 2010

   $ 1,913    $ 3,578    $ 8,451    $ —      $ 13,942

Restructuring and related charges since initiative inception

   $ 6,515    $ 7,034    $ 13,203    $ 7,591    $ 34,343

Total remaining restructuring and related charges expected

   $ —      $ 20,300    $ 200    $ —      $ 20,500

2008 Restructuring Initiatives

The Company implemented an initiative within the Global Batteries & Personal Care segment in China to reduce operating costs and rationalize the Company’s manufacturing structure. These initiatives include the plan to exit the Company’s Ningbo, China battery manufacturing facility (the “Ningbo Exit Plan”). The Successor Company recorded $193 and $1,526 of pretax restructuring and related charges during the three and nine month periods ended July 4, 2010, respectively, and the Predecessor Company recorded $193 and $12,455 of pretax restructuring and related charges during the three and nine month periods ended June 28, 2009, respectively, in connection with the Ningbo Exit Plan. The Company has recorded pretax restructuring and related charges of $28,481 since the inception of the Ningbo Exit Plan, which are substantially complete.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

Ningbo Exit Plan Summary

The following table summarizes the remaining accrual balance associated with the 2008 initiatives and the activity during the nine month period ended July 4, 2010:

 

     Other
Costs
 

Accrual balance at September 30, 2009

   $ 308   

Provisions

     446   

Cash expenditures

     (237

Non-cash items

     (10
        

Accrual balance at July 4, 2010

   $ 507   
        

Expensed as incurred(A)

   $ 1,080   

 

(A)

Consists of amounts not impacting the accrual for restructuring and related charges.

2007 Restructuring Initiatives

The Company has implemented a series of initiatives within the Global Batteries & Personal Care segment in Latin America to reduce operating costs (the “Latin American Initiatives”). These initiatives, which are substantially complete, include the reduction of certain manufacturing operations in Brazil and the restructuring of management, sales, marketing and support functions. The Successor Company recorded no pretax restructuring and related charges during the three month period ended July 4, 2010 and $79 of pretax restructuring and related charges during the nine month period ended July 4, 2010. The Predecessor Company recorded $(32) and $54 of pretax restructuring and related charges during the three and nine month periods ended June 28, 2009, respectively, in connection with the Latin American Initiatives. The Company has recorded pretax restructuring and related charges of $11,526 since the inception of the Latin American Initiatives, which are substantially complete.

The following table summarizes the remaining accrual balance associated with the Latin American Initiatives and the activity during the nine month period ended July 4, 2010:

Latin American Initiatives Summary

 

     Other
Costs
 

Accrual balance at September 30, 2009

   $ 331   

Non-cash items

     (331
        

Accrual balance at July 4, 2010

   $ —     
        

Expensed as incurred(A)

   $ 79   

 

(A)

Consists of amounts not impacting the accrual for restructuring and related charges.

In Fiscal 2007, the Company began managing its business in three vertically integrated, product-focused reporting segments; Global Batteries & Personal Care, Global Pet Supplies and the Home and Garden Business. As part of this realignment, the Company’s Global Operations organization, previously included in corporate expense, consisting of research and development, manufacturing management, global purchasing, quality

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

operations and inbound supply chain, is now included in each of the operating segments. In connection with these changes the Company undertook a number of cost reduction initiatives, primarily headcount reductions, at the corporate and operating segment levels (the “Global Realignment Initiatives”). The Successor Company recorded $2,098 and $1,115 of pretax restructuring and related charges during the three and nine month periods ended July 4, 2010, respectively, and the Predecessor Company recorded $1,448 and $12,499 of pretax restructuring and related charges during the three and nine month periods ended June 28, 2009, respectively, in connection with the Global Realignment Initiatives. Costs associated with these initiatives, which are expected to be incurred through June 30, 2011, relate primarily to severance and are projected at approximately $86,300, the majority of which are cash costs.

The following table summarizes the remaining accrual balance associated with the Global Realignment Initiatives and the activity during the nine month period ended July 4, 2010:

Global Realignment Initiatives Summary

 

     Termination
and
Compensation
Benefits
    Other
Costs
    Total  

Accrual balance at September 30, 2009

   $ 14,581      $ 3,678      $ 18,259   

Provisions

     (31     (1,101     (1,132

Cash expenditures

     (5,612     (76     (5,688

Non-cash items

     (496     454        (42
                        

Accrual balance at July 4, 2010

   $ 8,442      $ 2,955      $ 11,397   
                        

Expensed as incurred(A)

   $ 2,616      $ (369   $ 2,247   

 

(A)

Consists of amounts not impacting the accrual for restructuring and related charges.

The following table summarizes the expenses as incurred during the nine month period ended July 4, 2010, the cumulative amount incurred to date and the total future costs expected to be incurred associated with the Global Realignment Initiatives by operating segment:

 

     Global
Batteries and
Personal Care
    Home and
Garden
    Corporate    Total

Restructuring and related charges during the nine month period ended July 4, 2010

   $ (1,034   $ (795   $ 2,944    $ 1,115

Restructuring and related charges since initiative inception

   $ 46,606      $ 6,763      $ 32,718    $ 86,087

Total remaining restructuring and related charges expected

   $ —        $ —        $ 220    $ 220

2006 Restructuring Initiatives

The Company implemented a series of initiatives within the Global Batteries & Personal Care segment in Europe to reduce operating costs and rationalize the Company’s manufacturing structure (the “European Initiatives”). These initiatives, which are substantially complete, include the relocation of certain operations at the Ellwangen, Germany packaging center to the Dischingen, Germany battery plant and restructuring its sales, marketing and support functions. The Successor Company recorded no pretax restructuring and related charges during the three and nine month periods ended July 4, 2010 and the Predecessor Company also recorded no

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

pretax restructuring and related charges during the three and nine month periods ended June 28, 2009 in connection with the European Initiatives. The Company has recorded pretax restructuring and related charges of $27,057 since the inception of the European Initiatives.

The following table summarizes the remaining accrual balance associated with the 2006 initiatives and the activity during the nine month period ended July 4, 2010:

European Initiatives Summary

 

     Termination
and
Compensation
Benefits
    Other
Costs
    Total  

Accrual balance at September 30, 2009

   $ 2,623      $ 319      $ 2,942   

Cash expenditures

     (450     (151     (601

Non-cash items

     (353     16        (337
                        

Accrual balance at July 4, 2010

   $ 1,820      $ 184      $ 2,004   
                        

13    COMMITMENTS AND CONTINGENCIES

The Company has provided for the estimated costs associated with environmental remediation activities at some of its current and former manufacturing sites. The Company believes that any additional liability in excess of the amounts provided of approximately $9,626, which may result from resolution of these matters, will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

In December 2009, San Francisco Technology, Inc. filed an action in the Federal District Court for the Northern District of California against the Company, as well as a number of unaffiliated defendants, claiming that each of the defendants had falsely marked patents on certain of its products in violation of Article 35, Section 292 of the U.S. Code and seeking to have civil fines imposed on each of the defendants for such claimed violations. This matter is currently stayed pending resolution of a similar case in which the Company is not a party. The Company is reviewing the claims but is unable to estimate any possible losses at this time.

In May 2010, Herengrucht Group, LLC filed an action in the U.S. District Court for the Southern District of California against the Company claiming that the Company had falsely marked patents on certain of its products in violation of Article 35, Section 292 of the U.S. Code and seeking to have civil fines imposed on each of the defendants for such claimed violations. The Company is reviewing the claims but is unable to estimate any possible losses at this time.

A subsidiary of the Company is a defendant in NACCO Industries, Inc. et al. v. Applica Incorporated et al., Case No. C.A. 2541-VCL, which was filed in the Court of Chancery of the State of Delaware in November 2006.

The original complaint in this action alleged a claim for, among other things, breach of contract against Applica and a number of tort claims against certain entities affiliated with the Harbinger Master Fund and Harbinger Special Fund and, together with Harbinger Master Fund, the HCP Funds. The claims against Applica related to the alleged breach of the merger agreement between Applica and NACCO Industries, Inc. (“NACCO”) and one of its affiliates, which agreement was terminated following Applica’s receipt of a superior merger offer from the HCP Funds. On October 22, 2007, the plaintiffs filed an amended complaint asserting claims against

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

Applica for, among other things, breach of contract and breach of the implied covenant of good faith relating to the termination of the NACCO merger agreement and asserting various tort claims against Applica and the HCP Funds. The original complaint was filed in conjunction with a motion preliminarily to enjoin the HCP Funds’ acquisition of Applica. On December 1, 2006, plaintiffs withdrew their motion for a preliminary injunction. In light of the consummation of Applica’s merger with affiliates of the HCP Funds in January 2007 (Applica is currently a subsidiary of Russell Hobbs), the Company believes that any claim for specific performance is moot. Applica filed a motion to dismiss the amended complaint in December 2007. Rather than respond to the motion to dismiss the amended complaint, NACCO filed a motion for leave to file a second amended complaint, which was granted in May 2008. Applica moved to dismiss the second amended complaint, which motion was granted in part and denied in part in December 2009.

The trial is currently scheduled for February 2011. The Company may be unable to resolve the disputes successfully or without incurring significant costs and expenses. As a result, Russell Hobbs and Harbinger Master Fund have entered into an indemnification agreement, dated as of February 9, 2010, by which Harbinger Master Fund has agreed, effective upon the consummation of the Merger, to indemnify Russell Hobbs, its subsidiaries and any entity that owns all of the outstanding voting stock of Russell Hobbs against any out-of-pocket losses, costs, expenses, judgments, penalties, fines and other damages in excess of $3,000 incurred with respect to this litigation and any future litigation or legal action against the indemnified parties arising out of or relating to the matters which form the basis of this litigation.

Applica Consumer Products, Inc., a subsidiary of the Company, is a defendant in three asbestos lawsuits in which the plaintiffs have alleged injury as the result of exposure to asbestos in hair dryers distributed by that subsidiary over 20 years ago. Although Applica never manufactured such products, asbestos was used in certain hair dryers distributed by it prior to 1979. Russell Hobbs, another subsidiary, is a defendant in one asbestos lawsuit in which the plaintiff has alleged injury as the result of exposure to asbestos in toasters and/or toaster ovens. There are numerous defendants named in these lawsuits, many of whom, unlike Russell Hobbs or Applica, actually manufactured asbestos containing products. The Company believes that these actions are without merit, but may be unable to resolve the disputes successfully without incurring significant expenses. At this time, the Company does not believe it has coverage under its insurance policies for the asbestos lawsuits.

The Company is a defendant in various other matters of litigation generally arising out of the ordinary course of business.

The Company does not believe that any other matters or proceedings presently pending will have a material adverse effect on its results of operations, financial condition, liquidity or cash flows.

14    ACQUISITION

On June 16, 2010, the Company merged with Russell Hobbs. Headquartered in Miramar, Florida, Russell Hobbs is a designer, marketer and distributor of a broad range of branded small household appliances. Russell Hobbs markets and distributes small kitchen and home appliances, pet and pest products and personal care products. Russell Hobbs has a broad portfolio of recognized brand names, including Black & Decker, George Foreman, Russell Hobbs, Toastmaster, LitterMaid, Farberware, Breadman and Juiceman. Russell Hobbs’ customers include mass merchandisers, specialty retailers and appliance distributors primarily in North America, South America, Europe and Australia.

The results of Russell Hobbs operations since June 16, 2010 are included in the Company’s Condensed Consolidated Statements of Operations (Unaudited). The financial results of Russell Hobbs are reported as a

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

separate business segment, Small Appliances. Russell Hobbs contributed $35,755 in Net sales, and recorded Operating income of $647 for the period from June 16, 2010 through the period ended July 4, 2010, which includes $1,490 of Acquisition and integration related charges.

In accordance with ASC Topic 805, “Business Combinations” (“ASC 805”), the Company accounted for the Merger by applying the acquisition method of accounting. The acquisition method of accounting requires that the consideration transferred in a business combination be measured at fair value as of the closing date of the acquisition. After consummation of the Merger, the stockholders of Spectrum Brands, inclusive of Harbinger, own approximately 60% of SB Holdings and the stockholders of Russell Hobbs own approximately 40% of SB Holdings. Inasmuch as Russell Hobbs is a private company and its common stock was not publicly traded, the closing market price of the Spectrum Brands common stock at June 15, 2010 was used to calculate the purchase price. The total purchase price of Russell Hobbs was approximately $597,579 determined as follows:

 

Spectrum Brands closing price per share on June 15, 2010

   $ 28.15

Purchase price—Russell Hobbs allocation—20,704 shares(1 )(2)

   $ 575,203

Cash payment to payoff Russell Hobbs’ north american credit facility

     22,376
      

Total purchase price of Russell Hobbs

   $ 597,579
      

 

( 1 )

Number of shares calculated based upon conversion formula, as defined in the Merger Agreement, using balances as of June 16, 2010.

( 2 )

The fair value of 271 shares of unvested restricted stock units as they relate to post combination services will be recorded as operating expense over the remaining service period and were assumed to have no fair value for the purchase price.

Preliminary Purchase Price Allocation

The total purchase price for Russell Hobbs was allocated to the preliminary net tangible and intangible assets based upon their preliminary fair values at June 16, 2010 as set forth below. The excess of the purchase price over the preliminary net tangible assets and intangible assets was recorded as goodwill. The preliminary allocation of the purchase price was based upon a preliminary valuation and the estimates and assumptions that are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair values of certain tangible assets and liabilities acquired, certain legal matters, amounts for income taxes including deferred tax accounts, amounts for uncertain tax positions, and net operating loss carryforwards inclusive of associated limitations, the determination of identifiable intangible assets and the final allocation of goodwill. The Company

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

expects to continue to obtain information to assist it in determining the fair values of the net assets acquired at the acquisition date during the measurement period. The preliminary purchase price allocation for Russell Hobbs is as follows:

 

Current assets

   $ 307,809

Property, plant and equipment

     15,150

Intangible assets

     363,327

Goodwill

     120,079

Other assets

     15,752
      

Total assets acquired

   $ 822,117

Current liabilities

     142,046

Total debt

     18,970

Long-term liabilities

     63,522
      

Total liabilities assumed

   $ 224,538
      

Net assets acquired

   $ 597,579
      

Preliminary Pre-Acquisition Contingencies Assumed

The Company has evaluated and continues to evaluate pre-acquisition contingencies relating to Russell Hobbs that existed as of the acquisition date. Based on the evaluation to date, the Company has preliminarily determined that certain pre-acquisition contingencies are probable in nature and estimable as of the acquisition date. Accordingly, the Company has preliminarily recorded its best estimates for these contingencies as part of the preliminary purchase price allocation for Russell Hobbs. The Company continues to gather information relating to all pre-acquisition contingencies that it has assumed from Russell Hobbs. Any changes to the pre-acquisition contingency amounts recorded during the measurement period will be included in the purchase price allocation. Subsequent to the end of the measurement period any adjustments to pre-acquisition contingency amounts will be reflected in the Company’s results of operations.

Certain estimated values are not yet finalized and are subject to change, which could be significant. The Company will finalize the amounts recognized as it obtains the information necessary to complete its analysis during the measurement period. The following items are provisional and subject to change:

 

   

tangible assets and liabilities acquired;

 

   

amounts for legal contingencies, pending the finalization of the Company’s examination and evaluation of the portfolio of filed cases;

 

   

amounts for income taxes including deferred tax accounts, amounts for uncertain tax positions, and net operating loss carryforwards inclusive of associated limitations; and

 

   

the determination of identifiable intangible assets and the final allocation of Goodwill.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

ASC 805 requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Accordingly, the Company performed a preliminary valuation of the assets and liabilities of Russell Hobbs at June 16, 2010. Significant adjustments as a result of that preliminary valuation are summarized as followed:

 

   

Inventories—An adjustment of $1,721 was recorded to adjust inventory to fair value. Finished goods were valued at estimated selling prices less the sum of costs of disposal and a reasonable profit allowance for the selling effort.

 

   

Deferred tax, liabilities net—An adjustment of $43,086 was recorded to adjust deferred taxes for the preliminary fair value allocations.

 

   

Property, plant and equipment, net—An adjustment of $(455) was recorded to adjust the net book value of property, plant and equipment to fair value giving consideration to their highest and best use. Key assumptions used in the valuation of the Company’s property, plant and equipment were based on the cost approach.

 

   

Certain indefinite-lived intangible assets were valued using a relief from royalty methodology. Customer relationships and certain definite-lived intangible assets were valued using a multi-period excess earnings method. Certain intangible assets are subject to sensitive business factors of which only a portion are within control of the Company’s management. The total fair value of indefinite and definite lived intangibles was $363,327 as of June 16, 2010. A summary of the significant key inputs were as follows:

 

   

The Company valued customer relationships using the income approach, specifically the multi-period excess earnings method. In determining the fair value of the customer relationship, the multi-period excess earnings approach values the intangible asset at the present value of the incremental after-tax cash flows attributable only to the customer relationship after deducting contributory asset charges. The incremental after-tax cash flows attributable to the subject intangible asset are then discounted to their present value. Only expected sales from current customers were used which included an expected growth rate of 3%. The Company assumed a customer retention rate of approximately 93% which was supported by historical retention rates. Income taxes were estimated at 36% and amounts were discounted using a rate of 15.5%. The customer relationships were valued at $38,000 under this approach.

 

   

The Company valued trade names and trademarks using the income approach, specifically the relief from royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the trade name was not owned. Royalty rates were selected based on consideration of several factors, including prior transactions of Russell Hobbs related trademarks and trade names, other similar trademark licensing and transaction agreements and the relative profitability and perceived contribution of the trademarks and trade names. Royalty rates used in the determination of the fair values of trade names and trademarks ranged from 2.0% to 5.5% of expected net sales related to the respective trade names and trademarks. The Company anticipates using the majority of the trade names and trademarks for an indefinite period as demonstrated by the sustained use of each subjected trademark. In estimating the fair value of the trademarks and trade names, nets sales were estimated to grow at a rate of 1%-12% annually with a terminal year growth rate of 3%. Income taxes were estimated at a range of 30%—38% and amounts were discounted using rates between 15.5%-16.5%. Trade name and trademarks were valued at $170,930 under this approach.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

   

The Company valued a trade name license agreement using the income approach, specifically the multi-period excess earnings method. In determining the fair value of the trade name license agreement, the multi-period excess earnings approach values the intangible asset at the present value of the incremental after-tax cash flows attributable only to the trade name license agreement after deducting contributory asset charges. The incremental after-tax cash flows attributable to the subject intangible asset are then discounted to their present value. In estimating the fair value of the trade name license agreement net sales were estimated to grow at a rate of 1% annually. The Company assumed a twelve year useful life of the trade name license agreement. Income taxes were estimated at 37% and amounts were discounted using a rate of 15.5%. The trade name license agreement was valued at $149,200 under this approach.

 

   

The Company valued technology using the income approach, specifically the relief from royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the technology was not owned. Royalty rates were selected based on consideration of several factors including prior transactions of Russell Hobbs related licensing agreements and the importance of the technology and profit levels, among other considerations. Royalty rates used in the determination of the fair values of technologies were 2% of expected net sales related to the respective technology. The Company anticipates using these technologies through the legal life of the underlying patent and therefore the expected life of these technologies was equal to the remaining legal life of the underlying patents ranging from 9 to 11 years. In estimating the fair value of the technologies, nets sales were estimated to grow at a rate of 3%-12% annually. Income taxes were estimated at 37% and amounts were discounted using the rate of 15.5%. The technology assets were valued at $4,100 under this approach.

Supplemental Pro Forma Information

The following reflects the Company’s pro forma results had the results of Russell Hobbs been included for all periods beginning after September 30, 2008.

 

     Three Months Ended     Nine Months Ended  
     2010           2009     2010           2009  

Net sales:

                  

Reported Net sales

   $ 653,486           $ 589,361      $ 1,778,012           $ 1,641,126   

Russell Hobbs adjustment

     137,540             167,059        543,952             570,242   
                                          

Pro forma Net sales

   $ 791,026           $ 756,420      $ 2,321,964           $ 2,211,368   
                                          

Loss from continuing operations:

                  

Reported Loss from continuing operations

   $ (86,305        $ (34,481   $ (162,853        $ (125,647

Russell Hobbs adjustment

     (20,547          (8,466     (5,504          (31,308
                                          

Pro forma Loss from continuing operations

   $ (106,852        $ (42,947   $ (168,357        $ (156,955
                                          

15    NEW ACCOUNTING PRONOUNCEMENTS

Employers’ Disclosures About Postretirement Benefit Plan Assets

In December 2008, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance on employers’ disclosures about assets of a defined benefit pension or other postretirement plan. It requires employers to disclose information about fair value measurements of plan assets. The objectives of the disclosures

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Amounts in thousands, except per share figures)

 

are to provide an understanding of: (a) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies, (b) the major categories of plan assets, (c) the inputs and valuation techniques used to measure the fair value of plan assets, (d) the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and (e) significant concentrations of risk within plan assets. The disclosures required are effective for the Company’s annual financial statements for the period that began after December 15, 2009. The adoption of this guidance is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

Accounting for Transfers of Financial Assets

In June 2009, the FASB issued new accounting guidance to improve the information provided in financial statements concerning transfers of financial assets, including the effects of transfers on financial position, financial performance and cash flows, and any continuing involvement of the transferor with the transferred financial assets. The provisions are effective for the Company’s financial statements for the fiscal year beginning October 1, 2010. The Company is in the process of evaluating the impact that the guidance may have on its financial statements and related disclosures.

Variable Interest Entities

In June 2009, the FASB issued new accounting guidance requiring an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. It also requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The provisions are effective for the Company’s financial statements for the fiscal year beginning October 1, 2010. The Company is in the process of evaluating the impact that the guidance may have on its financial statements and related disclosures.

16    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

On the Effective Date, pursuant to the Plan, Spectrum Brands , with its domestic subsidiaries as guarantors, issued the 12% Notes under the 2019 Indenture for the benefit of holders of allowed claims with respect to the Predecessor Company’s then-existing senior subordinated notes. See Note 2, Voluntary Reorganization Under Chapter 11, for further details of the Bankruptcy Cases and In connection with the combination with Russell Hobbs, Spectrum Brands, with its domestic subsidiaries and SB/RH Holdings, LLC as guarantors, issued the 9.5% Notes under the 2018 Indenture. (See Note 7, Debt, for further information on the 12% Notes and the 2019 Indenture and the 9.5% Notes under the 2018 Indenture.)

The following condensed consolidating financial statements illustrate the components of the condensed consolidated financial statements of the Successor Company and the Predecessor Company. Investments in subsidiaries are accounted for using the equity method for purposes of illustrating the consolidating presentation. Earnings of subsidiaries are therefore reflected in the Company’s and Guarantor Subsidiaries’ investment accounts and earnings. The elimination entries presented herein eliminate investments in subsidiaries and intercompany balances and transactions. Separate condensed consolidated financial statements of the Guarantor Subsidiaries are not presented because management has determined that such financial statements would not be material to investors.

 

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SPECTRUM BRANDS, INC. AND SUBSIDIARIES

Successor Company

Condensed Consolidating Statement of Financial Position

July 4, 2010

(Unaudited)

(Amounts in thousands)

 

    Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total
 
ASSETS          

Current assets:

         

Cash and cash equivalents

  $ 2,666      $ 2,840      $ 110,436      $ (1   $ 115,941   

Receivables, net

    527,640        1,515,730        372,234        (1,993,413     422,191   

Inventories

    93,783        207,849        216,825        (4,042     514,415   

Deferred income taxes

    9,620        8,513        9,392        428        27,953   

Assets held for sale

    —          359       11,879        —          12,238   

Prepaid expenses and other

    13,419        9,753        24,182        —          47,354   
                                       

Total current assets

    647,128        1,745,044        744,948        (1,997,028     1,140,092   

Property, plant and equipment, net

    53,815        43,745        91,773        —          189,333   

Long term intercompany receivables

    264,828        250,081        (601,829     86,920        —     

Deferred charges and other

    9,844        2,341        21,088        (2     33,271   

Goodwill

    67,722        365,900        157,304        —          590,926   

Intangible assets, net

    538,461        779,740        436,238        —          1,754,439   

Debt issuance costs

    54,911        4,478       —          1       59,390   

Investments in subsidiaries

    5,102,120        3,824,804        3,570,511        (12,497,435     —     
                                       

Total assets

  $ 6,738,829      $ 7,016,133      $ 4,420,033      $ (14,407,544   $ 3,767,451   
                                       

LIABILITIES AND

SHAREHOLDERS’ EQUITY

         

Current liabilities:

         

Current maturities of long-term debt

  $ 242,453      $ 1,266      $ 35,488      $ (232,946   $ 46,261   

Accounts payable

    670,173        1,289,130        191,197        (1,892,602     257,898   

Accrued liabilities

    55,789        71,782        141,820        1       269,392   
                                       

Total current liabilities

    968,415        1,362,178        368,505        (2,125,547     573,551   

Long-term debt, net of current maturities

    1,719,503        361,398        101,482        (447,637     1,734,746   

Employee benefit obligations, net of current portion

    10,971        4,604        50,470        —          66,045   

Deferred income taxes

    40,181        185,838        43,093        —          269,112   

Other

    24,250        (5     31,679        1,086        57,010   
                                       

Total liabilities

    2,763,320        1,914,013        595,229        (2,572,098     2,700,464   

Shareholders’ equity:

         

Other capital

    1,310,454        2,968,354        4,073,304        (7,041,659     1,310,453   

(Accumulated deficit) retained earnings

    (751,774     (535,097     (256,379     1,306,877        (236,373

Excess of FMV over NBV for intergroup mergers

    4        4        4        (12     —     

Accumulated other comprehensive income (loss)

    3,416,825        2,668,859        7,875        (6,100,652     (7,093
                                       

Total shareholders’ equity

    3,975,509        5,102,120        3,824,804        (11,835,446     1,066,987   
                                       

Total liabilities and shareholders’ equity

  $ 6,738,829      $ 7,016,133      $ 4,420,033      $ (14,407,544   $ 3,767,451   
                                       

 

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SPECTRUM BRANDS, INC. AND SUBSIDIARIES

Successor Company

Condensed Consolidating Statement of Financial Position

September 30, 2009

(Unaudited)

(Amounts in thousands)

 

    Parent   Guarantor
Subsidiaries
  Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total
 
ASSETS          

Current assets:

         

Cash and cash equivalents

  $ 1,450   $ 3,364   $ 92,986      $ —        $ 97,800   

Receivables, net

    472,616     559,802     111,618        (844,585     299,451   

Inventories

    84,267     116,291     143,701        (2,754     341,505   

Deferred income taxes

    16,407     9,149     2,153        428        28,137   

Assets held for sale

    —       321     11,549        —          11,870   

Prepaid expenses and other

    15,530     6,062     18,381        —          39,973   
                                   

Total current assets

    590,270     694,989     380,388        (846,911     818,736   

Property, plant and equipment, net

    59,229     42,888     110,244        —          212,361   

Long term intercompany receivables

    379,000     488,077     (861,730     (5,347     —     

Deferred charges and other

    7,462     2,463     25,009        —          34,934   

Goodwill

    67,722     277,691     137,935        —          483,348   

Intangible assets, net

    546,480     530,807     384,846        (188     1,461,945   

Debt issuance costs

    9,422     —       —          —          9,422   

Investments in subsidiaries

    4,196,025     3,359,913     3,440,646        (10,996,584     —     
                                   

Total assets

  $ 5,855,610   $ 5,396,828   $ 3,617,338      $ (11,849,030   $ 3,020,746   
                                   

LIABILITIES AND

SHAREHOLDERS’ EQUITY

         

Current liabilities:

         

Current maturities of long-term debt

  $ 248,787   $ 11   $ 4,382      $ (199,602   $ 53,578   

Accounts payable

    510,608     577,291     136,787        (1,038,451     186,235   

Accrued liabilities

    111,803     37,441     106,011        —          255,255   
                                   

Total current liabilities

    871,198     614,743     247,180        (1,238,053     495,068   

Long-term debt, net of current maturities

    1,518,790     402,980     (106,686     (285,127     1,529,957   

Employee benefit obligations, net of current portion

    11,667     953     43,235        —          55,855   

Deferred income taxes

    12,506     179,049     35,943        —          227,498   

Other

    11,892     3,078     37,754        (1,235     51,489   
                                   

Total liabilities

    2,426,053     1,200,803     257,426        (1,524,415     2,359,867   

Shareholders’ equity:

         

Common stock

    300     451     613,335        (613,786     300   

Additional paid-in capital

    724,679     2,166,066     3,300,215        (5,466,164     724,796   

Retained earnings (accumulated deficit)

    54,073     101,822     (630,365     403,685        (70,785

Accumulated other comprehensive income (loss)

    2,650,505     1,927,686     (1,649     (4,569,974     6,568   
                                   
    3,429,557     4,196,025     3,281,536        (10,246,239     660,879   

Less treasury stock, at cost

    —       —       78,376        (78,376     —     
                                   

Total shareholders’ equity

    3,429,557     4,196,025     3,359,912        (10,324,615     660,879   
                                   

Total liabilities and shareholders’ equity

  $ 5,855,610   $ 5,396,828   $ 3,617,338      $ (11,849,030   $ 3,020,746   
                                   

 

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Table of Contents

SPECTRUM BRANDS, INC. AND SUBSIDIARIES

Successor Company

Condensed Consolidating Statement of Operations

Three Month Period Ended July 4, 2010

(Unaudited)

(Amounts in thousands)

 

    Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Net sales

  $ 96,769      $ 331,447      $ 260,225      $ (34,955   $ 653,486   

Cost of goods sold

    54,786        225,214        153,049        (34,322     398,727   

Restructuring and related charges

    67        705        1,118        —          1,890   
                                       

Gross profit

    41,916        105,528        106,058        (633     252,869   

Operating expenses:

         

Selling

    16,441        38,836        57,126        (23     112,380   

General and administrative

    (27,058     59,078        21,599        —          53,619   

Research and development

    4,089        2,108        881        —          7,078   

Acquisition and Integration related charges

    15,479        1,490        33        —          17,002   

Restructuring and related charges

    2,935        (148     167        —          2,954   
                                       
    11,886        101,364        79,806        (23     193,033   

Operating (loss) income

    30,030        4,164        26,252        (610     59,836   

Interest expense

    132,804        (5,898     5,309        23        132,238   

Other (income) expense, net

    (22,210     5,494        (427     18,586        1,443   
                                       

(Loss) income before income taxes

    (80,564     4,568        21,370        (19,219     (73,845

Income tax expense (benefit)

    9,997        (3,264     5,582        145        12,460   
                                       

Net (loss) income

  $ (90,561   $ 7,832      $ 15,788      $ (19,364   $ (86,305
                                       

 

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Table of Contents

SPECTRUM BRANDS, INC. AND SUBSIDIARIES

Predecessor Company

Condensed Consolidating Statement of Operations

Three Month Period Ended June 28, 2009

(Unaudited)

(Amounts in thousands)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Net sales

   $ 86,941      $ 308,661      $ 193,759      $ —        $ 589,361   

Cost of goods sold

     46,078        210,806        101,777        —          358,661   

Restructuring and related charges

     9,258        232        (9,087     —          403   
                                        

Gross profit

     31,605        97,623        101,069        —          230,297   

Operating expenses:

        

Selling

     12,614        33,539        48,886        —          95,039   

General and administrative

     17,871        10,157        14,347        —          42,375   

Research and development

     4,153        1,340        820        —          6,313   

Restructuring and related charges

     1,060        1,142        627        —          2,829   
                                        
     35,698        46,178        64,680        —          146,556   

Operating (loss) income

     (4,093     51,445        36,389        —          83,741   

Interest expense

     36,589        6,435        5,625        —          48,649   

Other (income) expense, net

     (42,805     (39,292     (420     81,676        (841
                                        

Income from continuing operations before reorganization items, net and income taxes

     2,123        84,302        31,184        (81,676     35,933   

Reorganization items, net

     56,880        5,641        —          —          62,521   
                                        

(Loss) income from continuing operations before income taxes

     (54,757     78,661        31,184        (81,676     (26,588

Income tax (benefit) expense

     (17,177     19,143        5,927        —          7,893   
                                        

(Loss) income from continuing operations

     (37,580     59,518        25,257        (81,676     (34,481

Loss from discontinuing operations, net of tax

     1,015        (3,055     —          —          (2,040
                                        

Net (loss) income

   $ (36,565   $ 56,463      $ 25,257      $ (81,676   $ (36,521
                                        

 

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Table of Contents

SPECTRUM BRANDS, INC. AND SUBSIDIARIES

Successor Company

Condensed Consolidating Statement of Operations

Nine Month Period Ended July 4, 2010

(Unaudited)

(Amounts in thousands)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Net sales

   $ 293,539      $ 766,766      $ 814,995      $ (97,288   $ 1,778,012   

Cost of goods sold

     171,877        561,388        487,755        (95,449     1,125,571   

Restructuring and related charges

     3,390        2,892        (752     —          5,530   
                               &nb