UNITED STATES DISTRICT COURT FOR THE WESTERN...
Transcript of UNITED STATES DISTRICT COURT FOR THE WESTERN...
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UNITED STATES DISTRICT COURTFOR THE WESTERN DISTRICT OF WISCONSIN
ELI FRIEDMAN, Individually and on behalf of allOthers Similarly Situated,
Plaintiff,
vs.
RAYOVAC CORPORATION, THOMAS H. LEEPARTNERS, LP, KENNETH V. BILLER, KENTJ. HUSSEY, DAVID A. JONES, SCOTT A.SCHOEN, STEPHEN P. SHANESY, THOMAS R.SHEPHERD, RANDALL J. STEWARD,WARREN C. SMITH, JR. and MERRELL M.TOMLIN,
Defendants
))))))))))))))))
CASE NO. 02-C-0308-CJudge Barbara B. Crabb
JURY TRIAL DEMANDED
CONSOLIDATED AMENDED CLASS ACTION COMPLAINT
The Court-appointed lead plaintiffs, Eli Friedman, Lawrence M. Cox, Carol A. LoGalbo and
Harold C. Eck, (collectively “Lead Plaintiffs”), individually and on behalf of all other persons
similarly situated, by and through their undersigned attorneys, allege the following based upon
personal knowledge with respect to their own acts, and as to all other matters, based upon an
investigation made by their attorneys that included, but was not limited to: (i) interviews of persons
with knowledge, including former employees of Rayovac Corporation (“Rayovac” or the
“Company”); and (ii) reviewing and analyzing information and financial data obtained from
numerous public and proprietary sources, including, inter alia, Securities and Exchange Commission
(“SEC”) filings, publicly available annual reports, press releases, published interviews, news articles
1 This secondary public offering (“Secondary Offering”) was announced on May 31, 2001and was completed in June 2001.
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and other media reports, and reports of securities analysts. Lead Plaintiffs believe that additional
substantial evidentiary support will exist for the allegations set forth below after a reasonable
opportunity for discovery.
NATURE OF THE ACTION/SUMMARY OF ALLEGATIONS
1. This is a federal securities class action brought on behalf of a class (the “Class”)
consisting of purchasers of the securities of Rayovac between April 26, 2001 and September 19,
2001, inclusive (the “Class Period”), seeking to pursue remedies under the Securities Act of 1933
(the “1933 Act”) and the Securities Exchange Act of 1934 (the “1934 Act”).
2. Rayovac is one of the world’s leading battery and lighting device companies. At the
beginning of the Class Period, Rayovac was a company silently suffering from numerous business
difficulties and, in response, Defendants embarked on a scheme to conceal Rayovac’s difficulties
for the purpose of artificially inflating and maintaining the price of Rayovac common stock, and
thereby facilitating the secondary public offering1 of 7.5 million shares of Rayovac’s common stock,
of which 3.5 million shares were offered by the Company and 4 million shares were offered by
certain shareholders, including Thomas H. Lee Partners, LP (“THL”) and the Individual Defendants,
as defined in ¶18 below.
3. To allay investor concerns regarding Rayovac’s business position and to artificially
inflate and maintain Rayovac’s share price, Defendants began at the outset of the Class Period to
make a series of false and misleading statements, detailed herein, regarding Rayovac and its business
prospects. Stressing the Company’s potential for growth, Defendants proceeded to make substantial
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and repeated assurances regarding Rayovac’s fiscal 2001 financial performance, including, without
limitation, Defendants’ statements that “the market data suggests that the battery category is
returning to its historic annual growth rate of six to seven percent in recent years” and that “the
market continues to rebound and is quickly returning to its strong historical growth trends.”
Despite the problems detailed below facing Rayovac, Defendant Jones stated that “[w]e plan to
continue our growth in Latin America by continuing our geographic expansion, increasing
alkaline penetration, introducing lighting and specialty products and continuing to offer a full
range of battery solutions” and “[t]he Rayovac brand continues to build momentum in the
marketplace as our sales outpaced both our competition as well as the industry as a whole . .
. . Despite a weakened economy and slower than anticipated overall battery category growth,
Rayovac continues to gain unit share as more and more consumers recognize the value of our
brand.” Defendants even predicted that “sales growth over the second half of ‘01 should be
about 8 - 9% range and we feel actually pretty comfortable with that number” and that “[w]e
think during the 3rd and 4th quarter and going forward that a good assumption for modeling
would be high single digit sales, so we feel good with those numbers.”
4. However, the reality of Rayovac’s situation differed sharply from the encouraging
picture painted by Defendants. Battery sales, both in the U.S. and the Latin American markets, were
slowing (i) as a result of the elimination of Y2K blackout concerns, and (ii) in light of the general
worldwide economic slowdown, retailers were reducing the size of their overall inventories,
including batteries. As alleged in detail below, throughout the Class Period, Defendants provided
inflated sales, profits, and earnings guidance that they knew (or recklessly disregarded) could not
be achieved by the Company, and also made false and misleading statements, failed to disclose, and
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concealed adverse information concerning: (i) the declining demand for Rayovac’s products; (ii) the
fact that in order to stimulate demand and create an impression that Rayovac was performing
according to analyst expectations, Rayovac had extended generous credit terms to customers to
induce them to purchase additional products, thereby stuffing the distributor and retail channels
which Rayovac knew would negatively impact demand for Rayovac's products in the future; (iii)
that Rayovac, in violation of Generally Accepted Accounting Principles ("GAAP"), was pulling
forward sales to make quarterly targets; (iv) that Rayovac, in violation of GAAP, was shipping
product to intermediary warehouses and booking such shipments as sales even though the product
would not be delivered to the customer until the following quarter or later; (v) that Rayovac's
expansion in Latin America was the result of aggressive sales practices whereby the Company
extended generous payment terms and induced customers to take additional unneeded inventory; and
(vi) that Rayovac, in violation of GAAP, was carrying tens of millions of dollars of receivables
from customers who were in financial distress when it was probable that those receivables were
uncollectible without providing for an appropriate allowance for bad debts recognizing the
likelihood of those losses due to such uncollectible receivables. Defendants publicly reiterated
unattainable earnings guidance and false and misleading statements and/or omissions throughout
the Class Period, which caused the price of the Company’s common stock to be artificially inflated
at all times during the Class Period.
5. Defendants’ scheme worked enormously well – for them. The price of Rayovac’s
common stock remained steady throughout the Class Period, thereby allowing Rayovac to close the
Secondary Offering of 7.5 million shares of Rayovac’s common stock at $19.50 per share, 3.5
million of which were being offered by the Company itself and the remainder by individual
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shareholders including THL and the Individual Defendants. This Secondary Offering allowed THL
and the individual shareholders, including the Individual Defendants, to sell $74,300,00 worth of
Rayovac common stock, and allowed the Company to retire $65 million worth of debt at the expense
of those purchasing the new shares of common stock.
6. Then, on September 20, 2001 – just 3 months after the Secondary Offering – Rayovac
issued a press release announcing that the Company’s fiscal fourth quarter results would be
negatively impacted by a purported slowdown in battery sales in its U.S. and Latin American
markets. Contrary to Defendants’ repeated Class Period representations that Rayovac would have
sales growth over the second half of ‘01 in the 8 - 9% range, Rayovac’s earnings for the quarter
would be flat to down slightly from the same period for the previous year.
7. Following this press release, the market reacted negatively, with shares of Rayovac’s
common stock falling more that 23% to a low of $12.74 per share on almost eight times the normal
trading volume, and 35% below the $19.50 per share Secondary Offering price at which Defendants
sold shares to the investing public a mere three months previously.
JURISDICTION AND VENUE
8. This Court has jurisdiction over the subject matter of this action pursuant to
Section 27 of the 1934 Act (15 U.S.C. § 78aa), Section 22 of the 1933 Act (15 U.S.C. § 77v), and
28 U.S.C. § 1331.
9. Lead Plaintiffs bring this action pursuant to Section 10 of the 1934 Act, as amended
(15 U.S.C. §§ 78j(b) and 78t(a)), and Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5),
Section 20(a) of the 1934 Action, and pursuant to Sections 11 (15 U.S.C. § 77k), 12(a)(2) (15 U.S.C.
§ 77l) and 15 (15 U.S.C. § 77o) of the 1933 Act.
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10. Venue is proper in this District pursuant to Section 22 of the 1933 Act, Section 27
of the 1934 Act and 28 U.S.C. §§ 1391(b) and (c), because (i) Rayovac maintains manufacturing
facilities and its principal place of business in this District, (ii) Defendants’ conduct business in this
District, and (iii) many of the wrongful acts alleged herein took place or originated in this District.
11. In connection with the acts and conduct alleged in this Complaint, Defendants,
directly or indirectly, used the means and instrumentalities of interstate commerce, including the
mails and telephonic communications and the facilities of the national securities markets.
PARTIES
Lead Plaintiffs
12. Lead Plaintiffs Eli Friedman, Lawrence M. Cox, Carol A. LoGalbo, and Harold C.
Eck purchased Rayovac common stock at artificially inflated prices during the Class Period, as set
forth in their certifications previously filed with this Court on July 30, 2002 in connection with their
motion for appointment as lead plaintiffs, and were damaged thereby.
13. The Court appointed the Lead Plaintiffs pursuant to an Order dated September 23,
2002.
14. During the Class Period, Lead Plaintiffs purchased shares of the Company’s common
stock on the open market, without knowledge of the falsity of the Company’s reported financial
results, as specified below, or that the price of the Company’s common stock was artificially
inflated. During the Class Period, Lead Plaintiffs and members of the proposed class directly or
indirectly relied upon Defendants’ public reports, press releases, filings with the SEC and other
public statements, as more fully described below, and the fact that the Company’s common stock
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was fairly priced and/or upon the integrity of the market for its shares. As a result, Lead Plaintiffs
have been damaged by Defendants’ wrongful conduct as specified herein.
Defendants
15. Defendant Rayovac is a corporation organized under the laws of Wisconsin with its
principal executive offices located 601 Rayovac Drive in Madison, Wisconsin. Rayovac describes
itself as the "leading value brand and the third largest domestic manufacturer of general batteries.
[Rayovac is] also the leading worldwide manufacturer of hearing aid batteries and the leading U.S.
manufacturer of rechargeable household batteries and certain other specialty batteries. In addition,
[Rayovac is] a leading manufacturer and marketer of heavy duty batteries and battery-powered
lighting products. [Rayovac is] also the leading manufacturer and marketer of zinc carbon-
household batteries in Latin America."
16. During the Class Period, Rayovac’s shares were listed and actively traded on the New
York Stock Exchange, an efficient market, under the symbol “ROV.”
17. Upon information and belief, Defendant Thomas H. Lee Partners, LP and its
subsidiaries and affiliates (“THL”) is a private leveraged buyout firm, with its principal offices
located in Boston, Massachusetts. As revealed in the Company’s SEC filings, THL and its affiliates,
together with David A. Jones, chairman of the Board and CEO of Rayovac, owned 80.2% of the
outstanding shares of Rayovac following a recapitalization that was effective September 12, 1996.
During the Class Period, THL owned approximately 26% of the outstanding shares of Rayovac.
THL, through its substantial holdings in the Company, at all relevant times, had the ability to control
the Company.
2 Shepherd was also a member of the Company’s Audit Committee during the ClassPeriod. The Company, in Appendix A to its Proxy Statement, identifies the Audit Committee’sresponsibilities as including: (1) monitoring the integrity of the financial reporting process and systems ofinternal controls regarding finance, accounting and legal compliance; (2) monitoring the independenceand performance of the independent auditor and internal auditing department; and (3) providing anavenue of communication among the independent auditors, management, the internal auditing departmentand the Board of Directors. Moreover, the June 29, 2001 Proxy Statement makes clear that the membersof the Audit Committee reviewed and discussed year-end and quarterly financial statements withmanagement.
3 Shepherd did not receive directors’ fees due to his position with THL. Shepherd, alongwith Shoen and Smith, constituted the entire Compensation Committee for THL, and were responsible forthe decision to replace Coopers Lybrand with KPMG as the Company’s auditors in 1997.
4 THL owned approximately 26% of Rayovac's issued and outstanding common stock atthe end of the class period and owned approximately 41.5% of Rayovac's issued and outstanding commonstock immediately before the Secondary Offering. In addition, THL received management fees andexpenses of $473,000 during the year ended September 30, 2001.
5 Schoen did not receive directors’ fees due to his position with THL. Schoen, along withShepherd and Smith, constituted the entire Compensation Committee for THL, and were responsible forthe decision to replace Coopers Lybrand with KPMG as the Company’s auditors in 1997.
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18. The individual defendants (the “Individual Defendants”), at all times relevant to this
action, served the Company in the capacities listed below and received substantial compensation
thereby:
Name Position at Rayovac
David A. Jones (“Jones") Chairman of the Board and ChiefExecutive Officer (“CEO”)
Kent J. Hussey (“Hussey”) President and Chief Financial Officer(“CFO”) and Director
Thomas R. Shepherd (“Shepherd”)2 3 Director and Special Partner of THL4
Scott A. Schoen ("Schoen")5 Director of Rayovac and Managing Partnerof THL
6 Smith did not receive directors’ fees due to his position with THL. Smith, along withShepherd and Shoen, constituted the entire Compensation Committee for THL, and were responsible forthe decision to replace Coopers Lybrand with KPMG as the company’s auditors in 1997.
7 Steward resigned on November 8, 2001, effective January 1, 2002, and rejoined Rayovacon August 21, 2002.
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Warren C. Smith, Jr. ("Smith’)6 Director of Rayovac and Managing Partnerof THL
Stephen P. Shanesy ("Shanesy") Executive Vice President of Global BrandManagement
Merrell M. Tomlin ("Tomlin") Executive Vice President of Sales
Randall J. Steward ("Steward") 7 Executive Vice President ofAdministration and Chief Financial Officer
Kenneth V. Biller ("Biller") Executive Vice President of Operations
19. It is appropriate to treat THL and the Individual Defendants as a group for pleading
purposes and to presume that the false or misleading information conveyed in the Company’s public
statements in press releases as alleged herein, is the collective action of this narrowly defined group
of Defendants. THL and each of the Individual Defendants, by virtue of the executive and
managerial positions with, and/or directorship of, the Company, directly participated in the daily
management of the Company, were directly involved in the day-to-day operations of the Company
at the highest levels, and were privy to confidential proprietary information concerning the Company
and its business and operations. Because of the Individual Defendants’ positions with the Company,
and THL’s controlling interest, these Defendants had access to the adverse undisclosed information
about its business, operations, financial statements, business practices, finances and present and
future business prospects via access to internal corporate documents (including the Company’s
operating plans, budgets and forecasts and reports of actual operations compared thereto),
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conversations and connections with other corporate officers and employees, attendance at
management and Board of Directors meetings and committees thereof and via reports and other
information provided to them in connection therewith. Moreover, THL and the Individual
Defendants were involved or participated in drafting, producing, reviewing and/or disseminating the
false and misleading statements alleged herein.
20. The statements made by the Individual Defendants and THL, as outlined below, were
materially false and misleading when made. The true financial and operating condition of the
Company, which was known or recklessly disregarded by THL and the Individual Defendants,
remained concealed from the investing public throughout the Class Period. THL and the Individual
Defendants, who were under a duty to disclose those facts, instead misrepresented or concealed them
during the relevant period herein. THL and the Individual Defendants, as officers and/or directors
and controlling persons of a publicly-held company, had a duty to promptly disseminate accurate
and truthful information with respect to the Company's operations, finances, financial conditions,
and present and future business prospects, to correct any previously issued statement from any
source that had become untrue, and to disclose any trends that would materially affect earnings and
the present and future operating results of Rayovac, so that the market price of the Company's
publicly traded securities would be based upon truthful and accurate information. THL and the
Individual Defendants’ misrepresentations and omissions during the Class Period violated these
requirements and obligations.
21. During the Class Period, THL and the Individual Defendants were privy to
confidential and proprietary information concerning Rayovac, its operations, finances, financial
condition, and present and future business prospects. Because of their possession of such
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information, THL and the Individual Defendants knew or recklessly disregarded the fact that the
adverse facts specified herein had not been disclosed to and were being concealed from the public.
22. THL and the Individual Defendants are each liable as a direct participant with respect
to the wrongs complained of herein. In addition, THL and the Individual Defendants, by reason of
their stock ownership and status as officers, managers and/or directors of Rayovac were "controlling
persons" within the meaning of Section 20(a) of the 1934 Act and had the power and influence to
cause Rayovac to engage in the unlawful conduct complained of herein. Because of their positions
of control, THL and the Individual Defendants were able to and did, directly or indirectly, control
the conduct of Rayovac’s business, the information contained in its filings with the SEC, and public
statements about its business and financial results. Furthermore, THL and the Individual Defendants
were provided with or had access to copies of the statements and documents alleged herein to be
false and misleading prior to, and/or shortly after their issuance, and had the ability and opportunity
to prevent their issuance or to cause them to be corrected.
23. Each of the Defendants knew or recklessly ignored that the misleading statements
and omissions complained of herein would adversely affect the integrity of the market for the
Company’s stock and would cause the price of those securities to become artificially inflated or
distorted. Each of the Defendants acted knowingly or in such a manner as to constitute a fraud and
deceit upon Lead Plaintiffs and the other members of the Class.
24. Critically, THL and the Individual Defendants reaped considerable profits from their
sale of Company stock during the Class Period, as reflected in the following table:
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DEFENDANT SHARES SOLD APPROX. PROCEEDS
Jones 437,037 $ 8,100,000
Hussey 100,000 1,850,000
Shepherd 7,498 139,000
Shoen 14, 894 276,000
Shanesy 75,185 1,400,000
Tomlin 68,700 1,300,000
Steward 10,000 180,000
Biller 85,930 1,600,000
THL 3,317,184 61,500,000
Rayovac 3,500,000 68,250,000
25. Defendants are liable, jointly and severally, as direct participants in and
co-conspirators of, the wrongs complained of herein. Each of the Defendants is liable as a
participant in a fraudulent scheme and course of business that operated as a fraud or deceit on
purchasers of Rayovac common stock by disseminating materially false and misleading statements
and/or concealing material adverse facts. The scheme: (i) deceived the investing public regarding
Rayovac’s business, operations, management and the intrinsic value of Rayovac common stock; (ii)
allowed Defendants to successfully complete the Secondary Offering of shares of the Company’s
common stock in which the Company received proceeds in excess of $65 million, and THL and the
Individual Defendants received proceeds in excess of $74 million; and (iii) caused Lead Plaintiffs
and other members of the Class to purchase Rayovac securities at artificially inflated prices.
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LEAD PLAINTIFFS' CLASS ACTION ALLEGATIONS
26. Lead Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil
Procedure 23(a) and 23(b)(3) on behalf of a Class, consisting of all those who purchased the
securities of Rayovac between April 26, 2001 and September 19, 2001, inclusive (the "Class
Period") and who were damaged thereby. Excluded from the Class are Defendants herein, members
of the immediate family of each of the Defendants, any person, firm, trust, corporation, officer,
director or other individual or entity in which any Defendant has a controlling interest or which is
related to or affiliated with any of the Defendants, and the legal representatives, agents, affiliates,
heirs, successors-in-interest or assigns of any such excluded party.
27. Because Rayovac has millions of shares of common stock outstanding, and because
the Company’s common stock was actively traded, the members of the Class are so numerous that
joinder of all members is impracticable. While the exact number of Class members is unknown to
Lead Plaintiffs at this time and can only be ascertained through appropriate discovery, Lead
Plaintiffs believe that there are hundreds or thousands of members in the proposed Class. Record
owners and other members of the Class may be identified from records maintained by Rayovac or
its transfer agent and may be notified of the pendency of this action by mail, using the form of notice
similar to that customarily used in securities class actions.
28. Lead Plaintiffs' claims are typical of the claims of the members of the Class, because
Lead Plaintiffs and all of the Class members sustained damages arising out of Defendants' wrongful
conduct complained of herein.
29. Lead Plaintiffs will fairly and adequately protect the interests of the Class members
and have retained counsel who are experienced and competent in class action and securities
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litigation. Lead Plaintiffs have no interests that are contrary to or in conflict with the members of
the Class that Lead Plaintiffs seek to represent.
30. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy, since joinder of all members is impracticable. Furthermore, as the
damages suffered by individual members of the Class may be relatively small, the expense and
burden of individual litigation make it impossible for the members of the Class individually to
redress the wrongs done to them. There will be no difficulty in the management of this action as a
class action.
31. Questions of law or fact common to the members of the Class predominate over any
questions that may affect only individual members, in that Defendants have acted on grounds
generally applicable to the entire Class. Among the questions of law and fact common to the Class
are:
a. whether the federal securities laws were violated by Defendants' acts as
alleged herein;
b. whether the Company's publicly disseminated releases and statements during
the Class Period, omitted and/or misrepresented material facts and whether Defendants breached any
duty to convey material facts or to correct material facts previously disseminated;
c. whether Defendants participated in and pursued the fraudulent scheme or
course of business complained of;
d. whether Defendants acted willfully, with knowledge or recklessly, in omitting
and/or misrepresenting material facts;
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e. whether the Prospectus and Registration Statement issued by Defendants to
the investing public in connection with the Secondary Offering omitted and/or misrepresented
material facts about Rayovac and its business;
f. whether the market prices of Rayovac common stock during the Class Period
were artificially inflated due to the material nondisclosures and/or misrepresentations complained
of herein; and
g. whether the members of the Class have sustained damages and, if so, what
is the appropriate measure of damages.
SUBSTANTIVE ALLEGATIONS
Factual Background
32. Defendant Rayovac describes itself as the "leading value brand and the third largest
domestic manufacturer of general batteries. [Rayovac is] also the leading worldwide manufacturer
of hearing aid batteries and the leading U.S. manufacturer of rechargeable household batteries and
certain other specialty batteries. In addition, [Rayovac is] a leading manufacturer and marketer of
heavy duty batteries and battery-powered lighting products. [Rayovac is] also the leading
manufacturer and marketer of zinc carbon-household batteries in Latin America."
33. Rayovac was nearly bankrupt when Thomas F. Pyle acquired the Company in 1986
and turned it into a profitable company. In September of 1996, Thomas F. Pyle sold approximately
80% of Rayovac to THL, a Boston buyout firm. Analysts believed THL would “make a killing”
taking Rayovac public, as it had done on numerous other acquisitions. Indeed, in 1997, THL took
the stock public, selling 6.7 million Rayovac shares at $14 each, while retaining a large stake in the
Company. As detailed hereafter, Rayovac and THL, on three separate occasions, took steps to make
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a secondary offering after Rayovac went public in 1997. In May 1998, Rayovac made a secondary
offering, whereby THL and its affiliates sold 5.5 million shares, and certain Rayovac officers and
employees sold 1.0 million shares. In December 1998, it appears Rayovac took steps for another
secondary offering which may not have been completed. However, THL did not abandon its plans
to reap financial benefits from Rayovac stock. A third offering, the Secondary Offering at issue in
this action, was completed in June 2001, selling 7.5 million shares, 3.5 million shares offered by the
Company and the remaining 4 million offered by THL and the Individual Defendants.
34. From the time THL acquired Rayovac in September of 1996, through its fourth fiscal
quarter 2000 (year end date September 30, 2000 -- Rayovac’s fiscal year runs from October 1 to
September 30), Rayovac reported four straight years of sales growth, from $417.9 million to $675.3
million. Then on December 19, 2000, Rayovac announced that the first quarter results (for the
period ending December 31, 2000) would be lower than previously anticipated, as a result of lower
than expected sales. The Company stated that it would not be able to meet the abnormally high sales
volumes of 2000, which it stated were driven by the impact of Y2K buying of both batteries and
lighting products, as well as an unusually active storm season in 1999. The Company also stated
that sales were hurt by end of the year cautiousness by retailers reluctant to carry a normal inventory.
35. On January 25, 2001, while announcing that its first quarter fiscal 2001 (ending
December 31, 2000) sales and earnings were down for the first time since 1996 when THL acquired
Rayovac, Jones, who is identified by a former employee as a key Rayovac employee who was given
direction by THL, stated:
As we stated in December, we fully expected that last year’s Y2K buying bingewould result in tough year-over-year comparisons for Rayovac as well as the batteryand lighting industry. However, we remain confident that beginning in our secondfiscal quarter, Rayovac will return to its history of strong growth, which generated
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four straight years of record sales and earnings. . . . Our recent introduction ofexciting new industry-leading rechargeable products is one of the ways we areworking to ensure that Rayovac will continue to provide the powerful batterysolutions consumers need. [Emphasis added.]
Class Period False Statements and Omissions
36. Throughout the Class Period, Defendants engaged in an ongoing scheme to inflate
the price of Rayovac shares by making a series of materially false and misleading statements about
the Company’s business, performance and prospects. Moreover, as discussed below, the
Registration Statement and Prospectus Rayovac issued in connection with the Secondary Offering
was materially misleading and omitted material facts required to be stated therein or necessary to
make the statements therein not misleading.
37. Rayovac’s ability to meet increased sales predictions was of paramount importance
to Defendants and the success of the Secondary Offering. However, Rayovac knew that demand for
its products had declined and that it needed to substantially increase its allowance for uncollectible
receivables, in large part due to the business difficulties suffered by Kmart. Thus, to ensure a
successful Secondary Offering, Defendants embarked on a scheme to artificially inflate the price of
Rayovac’s common stock. In order to create the appearance of earnings growth and ensure the
success of the Secondary Offering, Rayovac engaged in improper fraudulent revenue and expense
recognition activities that were deceitful and in violation of the securities laws. These improper
activities included channel stuffing, pulling forward sales, booking sham sales, failing to recognize
an appropriate amount of bad debt expense, and other violations of GAAP.
8 The term “channel stuffing” refers to the sales practice of selling substantially moreproduct than the customer can reasonably use. As one former Rayovac sales employee described thepractice, “you are jamming product down the throat of your current customer . . . they have no place tomove this product.”
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Rayovac’s Materially False Second Fiscal Quarter 2001 Results
38. The Class Period begins on April 26, 2001. On that date, Rayovac issued a press
release announcing its financial results for the second fiscal quarter of 2001 (the period ending
March 31, 2001). The Company reported that revenue for the second fiscal quarter 2001 rose 4%
to $145.2 million, compared to $140.1 million for the same quarter in the previous year.
39. In the press release, defendant Jones commented positively on the results, stating in
pertinent part, as follows:
As anticipated, Rayovac achieved strong growth during the second quarter. Twelvepercent year over year growth in general battery sales and 14 percent year over yeargrowth in alkaline sales during the period attest to Rayovac's position as one of theleaders in the battery marketplace . . . . Importantly, the market data suggests that thebattery category is returning to its historic annual growth rate of six to seven percentin recent years. [Emphasis added.]
40. Then on April 26, 2001, Rayovac released its earnings results for the second fiscal
quarter 2001 (period ending March 31, 2001), reporting that sales had risen 4% over the same
quarter the previous year.
41. Unbeknownst to the public and not disclosed in the April 26th earnings release was
the fact that Rayovac was actually experiencing a decline in demand for its products not due to Y2K
factors or retailers’ reluctance to carry normal levels of inventory, but due to the Company’s
systematic and continual “channel stuffing,”8 including to Wal-Mart, Target and troubled Kmart,
to create sixteen consecutive quarters of growth in sales and net income when comparing quarter
against prior year quarter. Nor did the press release disclose that because of this activity, Rayovac
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would not be able to maintain the same growth rate of past quarters. Further, and also relevant to
an investor’s opinion of a stock’s value but left undisclosed, was the fact that the Company was
carrying tens of millions of dollars of receivables from customers who were in financial distress and
would not likely be able to pay in full, which should have required Rayovac to significantly increase
its allowance for doubtful accounts by incurring a significant reduction to net income by increasing
its expense related to uncollectible receivables (but the Company did not do so until after the Class
Period).
42. Following the Company’s earnings announcement, Defendants held a conference call
with analysts and investors to discuss the Company’s earnings announcement. Defendants Jones
and Steward participated in the conference call. During the conference call, Defendant Jones
represented that the battery market was rebounding, stating in pertinent part, as follows:
As we’ve communicated previously, the market continues to rebound and is quicklyreturning to its strong historical growth trends. [Emphasis added.]
Further, during the conference call, Defendant Jones highlighted the Company’s performance in
Latin America stating, in pertinent part, as follows:
Momentum continues in this key geographic area with many more new initiativescurrently underway.
*****
Around the world, retailers are experiencing strong battery category growth as aresult of adding Rayovac high performance value array and products to theirassortments. Our strategy is not only working, but also gaining significantmomentum in all important geographic regions. And we expect more major winsto come our way in the near future. After all, why wouldn’t every retailer carryRayovac, the fastest growing battery company in the world? Overall, we are veryencouraged that industry growth trends are returning in virtually all importantsegments of the battery industry and Rayovac continues to outperform the marketin all key segments.
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During the conference call, Defendant Jones also provided detailed earnings guidance stating in
pertinent part as follows:
Rayovac’s long term top line sales growth should be in the 8-9% range,outperforming the overall industry growth rates of 6-7%. Gross margins andoperating margins should continue to improve 50-100 basis points annually in thefuture. We confirm our previous fiscal year ending 9/30/01 guidance from $1.30 to$1.32 cents earnings per share. Our guidance for calendar year ‘01 would be in arange of $1.36 to $1.38 EPS. Our preliminary guidance for fiscal year ‘02 is in arange of $1.50 to $1.55 earnings per share in line with our previously communicatedlong term EPS growth rate target of 15 - 18 %.
43. During the conference call, Defendants also held a question/answer session. In
response to questions concerning Rayovac's sales growth, Defendant Jones confirmed that the
Company would experience 8-9% growth in the second half of fiscal 2001, stating in pertinent part
as follows:
Question: Do you think [sales growth] is going to be in-line with the 8 - 9 %target or are we still ramping up towards that?
Jones: Well we believe that sales growth over the second half of ‘01 shouldbe about that 8 - 9 % range and we feel actually pretty comfortablewith that number.
*****Question: Just to zero in again on this third quarter, you think that in the third
quarter your sales can be up 8-9 % as well?
Jones: We think during the 3rd and 4th quarter and going forward that agood assumption for modeling would be high single digits sales, sowe feel good with those numbers.
In response to questions about how inventory positions held by retailers may affect shipments,
Defendant Jones responded:
So, we think our inventory position is very good, we are not over inventoriedanywhere, having said that we are cautious and with the economic slowdown that hasoccurred over the last six months retailers have pulled their horns in and they wantto make sure that they plan their business appropriately, not just in batteries but in
21
all categories you know we’re seeing cautious retailers but I can only talk aboutinventory at retail is in extremely good shape and we think we have no excess outthere. [Emphasis added.]
44. Defendants knew these statements were false when made and intended that analysts
would repeat the misrepresentations made by Defendants in the April 26, 2001 press release and
during the April 26, 2001 conference call. For example, on April 26, 2001, H.H. Murren, an analyst
at Merrill Lynch, issued a positive report on Rayovac common stock, stating, in pertinent part, as
follows:
We expect ROV to continue to deliver solid results in F2001 due to increaseddistribution and market share gains. We expect the battery category overall to returnto more normalized levels of group (up 6-8%) in C2001 post the Y2K comp. Wereiterate our Accumulate rating and believe the shares are exceptionally inexpensivetrading at 12.4X our C2001E of $1.44.
* * * * *
We expect ROV’s sales to be up mid/high single digits in F2Q01 (March) due to anexpected improvement in the general battery category, new product launches, andincreased distribution and market share gains.
45. Again, these statements made to analysts, with the understanding and expectation that
they would be broadcast to the investing market, were false and misleading because they did not
disclose that Rayovac was actually experiencing a decline in demand for its products due to the
Company’s systematic and continual channel stuffing, the adverse impact Defendants knew this
activity would have on sales growth going forward, or the Company’s failure to properly account
for uncollectible receivables.
46. On or about May 14, 2001, Rayovac filed a Form 10-Q with the SEC for the period
ending March 31, 2001, which confirmed the previously-announced financial results. This 10-Q,
signed by Defendant Steward, was false and misleading for the reasons set forth in ¶¶ 41 and 45.
22
47. Contrary to these public statements, Defendants knew that demand for Rayovac’s
products was declining and that sales growth could not be maintained. Indeed, the Company was
threatening and intimidating sales personnel to meet unrealistic sales projections by any means or
method. For example, the following methods were employed to pull sales from the future into a
current reporting period in violation of GAAP for revenue recognition under Accounting Research
Bulletin 43, Chapter 1A; Accounting Principles Board Opinion No. 10; Financial Accounting
Standard Board Statement No. 48; and Staff Accounting Bulletin No. 101:
a. According to a former Rayovac sales representative, Rayovac loaded
customers with inventory, thereby necessarily resulting in the subsequent sales revenue decline from
those customers. Rayovac instituted a variety of dating and promotion incentives to convince
customers to take the product. There were quarter-end deals every quarter. One incentive Rayovac
utilized was to extend payment terms. Rayovac’s normal terms were 30 days. However, at quarter-
end, Rayovac would give additional terms of 60 days, and in some cases up to 90 days.
b. According to the same former employee, another form of incentive was
generous advertising credits. Rayovac would sell $100,000 worth of merchandise and in the contract
Rayovac would give the customer back 10% for advertising. Unless the customer was required to
validate that the money was spent for advertising, these payments should have been deducted from
revenues. These advertising accounts were monies that customers would, essentially, put back into
their own pockets and decreased Rayovac's profit margins, earnings and sales revenues.
c. As another former employee stated, "Let's say -- we were giving them 10%
(advertising credit) plus an additional 20% (advertising credit) if they would buy in a large volume
of product. It was a nasty cycle because customers would wait for the good deals at quarter end.
9 In addition to the companies identified in the Complaint, counsel for LeadPlaintiffs is in possession of the identities of additional organizations that were channel stuffedby Defendants. However, in an attempt to protect the identity of witnesses providing theinformation who fear retaliation, the specific identity of such organizations has not beenprovided.
23
Some quarters Rayovac gave 25%. Rayovac would give away what they had to give away to get
the sale. It got to the point where Rayovac would do about 60% of the business in the last 2 or 3
weeks of the quarter."
d. Another former employee confirmed that there was frequent talk in the
Company about whether Rayovac would make its quarterly projections, but the common refrain was
“you know they always work miracles in the last ten or twelve working days . . . We never knew
where it came from, but you know, who are we to say it wasn’t right.”
e. Yet another former employee confirmed the tense atmosphere at month-end
and quarter-end: “There was always a drive to get orders up at the end of the month.”
f. Another former employee, a former district sales manager, substantiated that
Rayovac used different techniques to make the sales projections for the quarters. This former
employee referred to a process called “dating,” which is to push back the date of when the customer
must pay the invoice for a shipment. Rayovac would routinely offer “90 days dating” to get sales
at the end of the quarter. In addition, Rayovac would discount prices to increase shipments that went
out the door in time for the quarter-end and year-end.
g. At quarter-end, Rayovac would “stuff” distributors9 with product, knowing
full well that there was no way of moving the product out for the distributor. "For example, a
company that does $100,000 worth of business a year, buys $50,000 worth of product in a quarter
because of a discounted price and dating. Well, you are not going to see another order from them
24
for another six months . . . Rayovac gave them dating, price reductions, in order to entice them to
buy a $50,000 order, to prop up numbers for that quarter, essentially you have to back out $50,000
or a portion of that business from the next quarter, which usually never happened."
h. According to a former district sales manager, "the dating and price
discounting were part of everyday business . . . there were no adjustments made for the following
quarter to pull that business out of the forecasts for the following quarter, knowing full well that we
may have brought in, a half a million dollars of business . . . Rayovac used the term 'incremental
orders' to denote that the customer was buying more than normal or needed."
i. According to a former Rayovac employee, Rayovac also induced distributors
or wholesalers (who then re-sell the product to smaller retail stores), to buy Rayovac products in
excess of their projected needs. Indeed, distributors were offered incentives, such as 25%, if they
would buy a certain amount of product.
j. According to a former salesperson, the type of deals that would be cut
included giving 10 or 15% discounts to customers and extended credit terms of 60 days, and
sometimes 90 days, if the customer would purchase "pallet quantities of batteries where that type
of inventory would take someone out 6 months."
k. A former employee also recounted instances of “double shipments” where
the customer’s order would be counted and shipped twice so it would count as a shipping number
and the return would not be booked until the following quarter. Rayovac did not provide for a
proper allowance for sales returns according to its accounting policies footnote.
l. Another former employee commented that there was severe pressure on
employees to "make the quarter." "MTQ [make the quarter] was all over the Company intranet.
25
They had a file set up for MTQ. The sales people were under tremendous pressure, all the time, in
fact they still are under the pressure to make the quarter. It's a cultural way of life at Rayovac."
m. A former employee who traveled for Rayovac visited the Hong Kong office
and saw numerous boxes of batteries. When he asked why there were all these batteries in the
office, an employee stationed in Hong Kong stated: "We were told by Roger Warren to take two
containers of batteries to help make the quarter." Roger Warren was the senior International Sales
person.
n. A former employee stated that certain industrial customers – companies
involved with highway barricades that all are illuminated by battery operated warning lights -- were
regularly pushed to take more inventory. These companies include Poco Sales, PSI Protection
Services, Bob's Barricades and Grainger.
48. Defendants also inflated sales forecasts. According to a former salesperson, at the
direct instruction of Tomlin and Jones, management, including regional sales managers exerted
extreme pressure on sales people to generate unrealistic sales forecasts. Management would take
the sales forecasts and “jack it up -- it could be 20-30%.” With regard to projections being altered,
another employee stated:
Oh, God! Absolutely! There was a forecasting system that came out in 2000. It wasthe most god-awful complicated thing you ever saw. Every time you sent in aforecast they would f*** with it. They’d massage it. They’d come back and say,“that number’s not good enough.” Well, okay, you would give them the number thatthey wanted which was always in increase. It could be 10, 15, 20% more. You knewyou couldn’t make it. People just made up the sh**. Then, 3 or 4 or 5 days beforethe end of the quarter, when top management knew they weren’t going to make thisnumber, that’s when they would go out and make the really big deals. They wouldgo out to the Kmarts, the Walmarts, the Targets. That’s how they pumped thenumber.
26
Management would presume that certain customers would double the amount of business from the
prior quarter, even after Rayovac had recently shipped a far greater amount of product than the
customer had any current need for. One former employee referred to the process as "snow balling."
Another former employee confirmed this occurred: “When we told them what the realistic number
was, then they would always make us add more to it, knowing full well that we’re not going to reach
it.”
49. Defendants knew or had to have known that these overly aggressive and improper
sales activities would have a negative effect on future sales. According to two former sales people,
the channel stuffing (which “went all the way up to Merrill Tomlin’s level”), the practice of pushing
inventory into the hands of distributors or centralized warehouses in advance of customer orders by
the use of extended credit terms and deep discounts and unusual incentives, got progressively
aggressive over time. Even at the sales force level it was recognized that it was only a question of
time until the pyramid collapsed. As former sales people explained:
a. "I don't think anybody had any long term vision about how to get us out of thatdownward spiral -- it was just, what did you do today and what are you going to dotomorrow. You just did what you had to do to make your number today."
b. "I mean you are jamming product down the throat of your current customers . . . theyhave no place to move this product. Essentially what you are doing is pre-selling thenext quarter. That's all fine and dandy, because you put those numbers in the quarterto pump those numbers up, but as a sales person, you hear what the forecast was forRayovac as a whole, you kind of sit back, and go how and the hell are they going todo that. Let's do it now and worry about that later. This is what steamed a lot ofsales managers because all of a sudden, growth that we may have seen from a client,we are not going to see because we just saturated them with a half of year ofproduct."
c. “Inevitable, about the last week or 10 days of a quarter, your sales manager wouldcall you up and say – stop traveling, stop spending expense money, hit the phonesand it was basically dialing for dollars.”
27
50. According to former sales people, management, including Tomlin and Jones, at the
Company not only knew about the improper sales activities but were actively involved in pressuring
employees to engage in these practices just to make the quarter's forecast. According to one former
salesperson, Defendant Jones would attend sales meetings and threaten that the numbers had to be
met, meaning that their jobs were on the line. According to another former salesperson, the sales
people brought the deals to the managers who reported directly to Defendant Tomlin for approval.
"The sales reps were doing what they were told to do -- it's not like we were out there trying to make
our bonuses and line our pockets -- we were threatened with our jobs." It was fully understood by
the sales force that Defendant Tomlin, senior vice president of North American Sales, not only
authorized but dictated these practices, including the dating and price discounting.
51. Thus, for the reasons set forth above, the statements made in connection with
Rayovac’s second quarter earnings release were materially false and misleading when made.
Rayovac Misleadingly Touts Distribution Relationships
52. During the Class Period Defendants repeatedly emphasized the Company’s expanded
retail distribution and its traditional focus on mass merchandisers, such as Wal-Mart, which alone
accounted for 17 percent of Rayovac’s sales. For example:
a. During the conference call with analysts on April 26, 2001, Defendant Jones
stated in pertinent part:
Now Rayovac experienced significant distribution wins during the quarter. In NorthAmerica we began shipping to 800 Toys R Us stores during the quarter.Additionally we just received confirmation that our alkaline products will also beplaced in all Kids R Us stores. We also secured an entire [inaudible] Rayovaclighting products in Target Stores. This important distribution win should providethe momentum to propel our Rayovac lighting products business, the number one inmass sometime later this year. Additionally, we began shipping lighting productschain wide to Home Depot during the quarter. We also experienced distribution
10 The audio for the conference call downloadable from the Company's website is at timesinaudible.
28
wins at [inaudible] with alkaline and lights [inaudible] with the alkaline expansionprogram to K-mart when we began shipping heavy duty and photo batteries duringthe period. Other notable new distribution included signing [inaudible] and supplycontracts with UPS as well as Proctor & Gamble to supply all batteries for their[inaudible] watch later this year. This quarter reflects a continued momentum in ourNorth America distribution expansion strategy. The [inaudible] that you should hearabout later this year. In Latin America notable new distribution lands includedHasbro, [inaudible], Omega in Mexico in Venezuela, [inaudible] the number onefood chain. As well as Casino stores. In Chile we are at the number one food chainoperating expansion in Argentina. And in Peru Visa a large distributor [inaudible]sixteen thousand smaller stores. Since the [inaudible] eighteen months ago, we haveincreased the number of major accounts that carry Rayovac in the Latin Americaregion some 489 to 1,314 accounts, a 169% increase in distribution. Momentumcontinues in this tedious area with many more entities currently on the way. Europeexperienced a most significant distribution land during the quarter. Rayovac has justsigned a contract which supplied branded alkaline and heavy duty batteries in allKing Fisher stores. The King Fisher stores is one of five largest retail organizationsin the world. Subsidiaries include Woolworths in England, B&Q in England. B&Qis the world's number two home center chain; Castarama with stores in France, Italy,Germany, Belgium and Poland; Reno Depot located in Canada; Melvin's in Poland;[inaudible] in France. But in France. Comet Stores of England, as well as severalother operations in Belgium, China, Taiwan and Turkey. This multi year dealrepresents the largest distribution opportunity in Europe for Rayovac and were nearlydouble our current distribution on the continent.10 [Emphasis added.]
b. On May 21, 2001, Rayovac issued a press release announcing that it had been
selected by The Home Depot as a major-branded battery supplier. According to the press release,
Rayovac was to begin shipping its batteries to The Home Depot by the summer. Defendant Jones
commented on this announcement stating, in pertinent part, as follows:
Rayovac looks forward to teaming up with The Home Depot as we develop powerfulsolutions to grow their battery business. Being selected as a battery supplier for TheHome Depot is a great honor and further legitimizes Rayovac's position as a majorglobal battery company . . . . Rayovac's innovative packaging concepts, coupled withour consumer-appealing marketing strategy of delivering high quality products at avalue price, were key factors in The Home Depot selection.
29
In response to this announcement, later that same day, shares of Rayovac’s common stock jumped
$2.43 per share, or 11%, to close at a Class Period high of $24.50.
c. In both 10-Qs filed during the Class Period, Defendants attributed the growth
in sales in large part to distribution gains. In the 10-Q filed for the quarter ending March 31, 2001,
Defendants stated,
Alkaline sales increases of $6.1 million, or 11.4%, were primarily attributable todistribution gains and strong sales in the mass merchandiser and OEM tradechannels. [Emphasis added.]
In the 10-Q filed for the quarter ending June 30, 2001, Defendants stated,
The increase was driven by growth in alkaline battery sales attributable to newdistribution, produce line expansion, promotional timing, and growth in the OEMtrade channel. [Emphasis added.]
Furthermore, Defendants also emphasized the importance of the expansion of distribution
relationships in the Prospectus filed in connection with the Secondary Offering during the Class
Period.
53. However, not disclosed to the investing public -- thereby rendering Defendants’
statements materially false and misleading -- were: (i) the manipulation of sales by Defendants
described in ¶ 47; and (ii) all the problems that Rayovac was having with its distribution channel --
problems that should have been disclosed and accounted for in a timely fashion. At the same time
Defendants were touting the distribution relationships, several of Rayovac’s biggest customers were
suffering financially and Rayovac had substantial uncollected and uncollectible accounts
receivables. Those customers included, but are not limited to:
30
a. Kmart, which constituted an estimated 10 percent of the Company’s U.S.
sales, and approximately 10 percent of receivables at June of 2001, had been suffering publicly for
well over a year and ultimately filed for bankruptcy on January 22, 2002.
b. Ames Department Stores, Inc., the nation’s largest regional, full-line discount
retailer, filed for bankruptcy on August 20, 2001.
c. Phar-Mor, Inc., a retail drug store chain, filed for bankruptcy on September
24, 2001.
54. According to a former Rayovac employee, "The Kmart thing, that really [angered]
a lot of people [],” because the Kmart receivables had been outstanding well over 6 or 7 months.
When Kmart’s business was deteriorating, Rayovac was so desperate for cash that it put the pressure
on its sales force to contact customers and attempt to collect any and all outstanding receivables that
they could.
55. Indeed, the receivable issue was so acute that in 2001, according to a former Rayovac
employee, “Tomlin sent a memo saying, unless you clean up any pricing discrepancies, what they
call debits, you're not going to get a bonus check." The Company, however, failed to write down
these uncollectible receivables in a timely manner as required by GAAP (Financial Accounting
Standard Board Opinion No. 5).
56. Ultimately, after the end of the Class Period, Rayovac did take a $2.7 million bad
debt write-off for uncollectible accounts receivables related to Ames Department Stores, Phar-Mor
and Western International, and increased its bad debt reserves to $16.1 million related to its accounts
receivable exposure for Kmart. The $16.1 million charge against earnings was postponed until the
quarter ended December 31, 2001. Kmart’s credit risk had not been evaluated as required by GAAP,
31
even though Kmart’s problems had been made public as early as July 25, 2000, when Kmart first
announced “strategic actions to enhance financial performance,” which included at least 66 store
closings and significant inventory reductions, along with its anticipation that its earnings would be
below expectations. From July 25, 2000 forward through the end of the Class Period, Rayovac
should have drastically limited shipments to Kmart and/or heavily reserved outstanding invoices to
Kmart.
The False & Misleading Secondary Offering Registration Statement and Prospectus
57. On May 31, 2001, Rayovac issued a press release announcing that it had filed a
registration statement with the SEC for the Secondary Offering of 7.5 million shares of Rayovac’s
common stock that was to be completed in June 2001. According to the press release, 3.5 million
shares were being offered by the Company itself, with the balance, 4 million shares, being offered
by certain selling shareholders, including THL and the Individual Defendants and other selling
shareholders.
58. In June 2001, Rayovac filed the final registration statement (“Registration
Statement”), which incorporated a prospectus (the “Prospectus”), and commenced the Secondary
Offering. The Registration Statement was signed by, among others, Defendants Jones, Hussey,
Steward, Schoen, Shepherd and Smith. The Registration Statement incorporated by reference the
following documents: Annual Report on Form 10-K for the fiscal year ended September 30, 2000
filed with the SEC on December 19, 2000; Quarterly Report on Form 10-Q for the quarter ended
December 31, 2000 filed with the SEC on February 14, 2001; Quarterly Report on Form 10-Q for
the quarter ended April 1, 2001 filed with the SEC on May 14, 2001; Current Report on Form 8-K
filed with the SEC on June 14, 2002; Current Report on Form 8-K filed with the SEC on June 19,
11 As discussed throughout this Complaint, Defendants’ statements which the Prospectusincorporated by reference were materially false and misleading, thus rendering the Prospectus materiallyfalse and misleading.
32
2001; and the description of the Company’s common stock contained in the Company’s registration
statement on Form 8-A filed with the SEC on November 17, 1997, including any amendments or
reports filed for the purpose of updating the descriptions.11
59. On or about June 21, 2001, the Prospectus, which forms part of the Registration
Statement, became effective and Rayovac sold shares of common stock. The Prospectus stated:
We estimate that our net proceeds from this offering will be approximately $64.5million. We intend to use our net proceeds from this offering, together withborrowings under our credit facilities, to repurchase our outstanding 10 1/4% SeriesB Senior Subordinated Notes due November 2006. We will not receive any of theproceeds from the sale of shares by selling shareholders.
In fact, approximately $2.0 million of expenses paid by Rayovac, presumably on behalf of the
selling shareholders, was deferred and expensed in a restructuring charge in the Fourth Quarter of
the Fiscal Year 2001.
60. Pursuant to the Registration Statement and Prospectus, Rayovac, THL and the
Individual Defendants sold 7.5 million shares at $19.50 per share. In the Secondary Offering,
Rayovac generated $65,012,500 in proceeds, and THL and the Individual Defendants and other
selling shareholders collectively received $74,300,000 in proceeds.
61. As described herein, the Prospectus was materially false and misleading and/or
lacked reasonable basis in that it represented that demand for Rayovac’s products was great, that
demand would continue to increase, and that Rayovac was well-positioned within the battery
industry to take advantage of growth opportunities. In this regard, the Prospectus states:
The success of our business strategy is evidenced by our consistent improvement inoperating results over the past five years. From the twelve months ended September
33
30, 1996 through the twelve months ended April 1, 2001, we have grown net salesand adjusted income from operations from $417.9 million to $675.3 million and$27.0 million to $83.3 million, respectively. This growth represents an 11.3% and28.4% compound annual growth rate in net sales and adjusted income fromoperations, respectively. In addition, adjusted income from operations margins haveimproved by 580 basis points, from 6.5% for the twelve months ended September 30,1996 to 12.3% for the twelve months ended April 1, 2001.
* * * * *
We have developed strategies to increase our sales, profits and market share.
* * * * *
The growth in retail sales of general batteries in the U.S. is largely due to (1) thepopularity and proliferation of battery-powered devices, such as toys, personal digitalassistants, digital cameras, camcorders, pocket televisions, remote controls, personalradios, pagers, portable compact disc players and electronic and video games, (2) theminiaturization of battery-powered devices, which has resulted in consumption of alarger number of smaller batteries and (3) increased purchases of multiple-batterypackages for household "pantry" inventory. These factors have increased the averagehousehold usage of batteries from an estimated 23 batteries per year in 1986 to anestimated 44 batteries per year in 2000.
62. The Prospectus was materially false and misleading because it failed to disclose how
Rayovac achieved the touted sales and earnings growth and how those tactics would necessarily
negatively impact the Company’s future sales growth and potential.
63. The Prospectus was also materially false and misleading and/or lacked reasonable
basis in that it represented that demand for Rayovac’s products in Latin America was great, that
demand would continue to increase in Latin America, and that Rayovac was well-positioned within
the battery industry in Latin America to take advantage of growth opportunities. In this regard, the
Prospectus states:
Increase Our Presence in Latin America and Europe. We have a strong presence inLatin America and have made sizable distribution gains in the region over the last18 months, adding over 800 major retail accounts that represent more than 4,100
34
stores. We plan to continue our growth in Latin America by continuing ourgeographic expansion, increasing alkaline penetration, introducing lighting andspecialty products and continuing to offer a full range of battery solutions. [Emphasisadded.]
However, the Prospectus does not disclose that Rayovac was using the same destructive and
deceitful sales practices, i.e., channel stuffing, in Latin America to “book” sales that it was using in
North America. Thus, Defendants failed to disclose the very real risk that growth could not and
would not continue in Latin America but that the market would actually shrink. In fact, while
Rayovac was touting the potential of its Latin American business in 2001, according to a former
field salesperson, it was obvious in 2000 that Rayovac was seeing a decline in its Latin American
business, citing antiquated and inefficient manufacturing facilities for the region, poor product
quality, and channel stuffing as the reasons behind the problems facing Rayovac in the Latin
American market. The Prospectus also failed to disclose one other risk, the additional high cost of
selling in Latin America due to continued currency devaluation.
64. As described herein, the Prospectus was materially false and misleading and/or
lacked reasonable basis in that it represented that Rayovac was expanding its distribution channels,
while failing to disclose that some of its largest current distribution customers were experiencing
severe financial difficulty and carrying large accounts receivable balances with Rayovac. The
Prospectus was also materially false and misleading because it failed to mention that the cost of
promotions to large retailers and mass merchandisers was and would be significantly higher than
the sales promotions to smaller retail outlets. In this regard the Prospectus states:
Expand Retail Distribution. We believe that our value brand positioning andinnovative merchandising programs make us an attractive supplier to all tradechannels. Accordingly, we have expanded our traditional focus on mass
35
merchandisers to include other retail channels, including hardware/home centers,warehouse clubs and food, drug and convenience stores. The mass merchandiserchannel, where we have our strongest presence, with 34% U.S. market share, is thefastest-growing channel for the general battery category and provides opportunitiesfor continued growth for us through incremental market share gains and the globalexpansion of new and existing customers. Other retail channels, which currentlyrepresent less than 15% of our general battery sales, represent an additional $1.9billion of annual general battery category sales, or 57% of the U.S. general batterymarket. While we have successfully increased the number of our customerrelationships in these other retail channels, they continue to represent important andunder-penetrated opportunities for us. [Emphasis added.]
* * * * *
Similar to general retailing trends, increased battery sales through massmerchandisers and warehouse clubs have driven the overall growth of retail batterysales. Mass merchandisers accounted for 52% of the total increase in general batteryretail dollar sales from 1993 through 2000 and together with warehouse clubs,accounted for 44% of total retail battery sales in 2000. [Emphasis added.]
* * * * *
New Distribution Arrangements. In fiscal 2001, we established several significantnew distribution arrangements. These include:
Home Depot. In May 2001, we were selected by The Home Depot, Inc., the world'slargest home improvement retailer, to supply our alkaline batteries to approximately458 Home Depot stores in 24 states and our rechargeable alkaline and nickel metalhydride batteries and battery rechargers to all of Home Depot's approximately 1,077U.S. stores.
Kingfisher. In April 2001, we announced that we had been selected by Kingfisherplc, one of the top five retail consortiums in the world, to be the exclusive supplierof branded, value-priced alkaline batteries and heavy duty batteries in approximately2,000 locations in Europe, Asia, North America and South America. Kingfisheraffiliated stores include Woolworths, B&Q, Darty and Comet.
Toys R Us. In January 2001, we signed an agreement with Toys R Us Inc. to supplyalkaline batteries in all approximately 800 Toys R Us stores.
36
Latin American Distribution. In Latin America, we recently obtained distributionarrangements in Argentina with Ahold, a food retailer; in Mexico with Woolworths,a discount retailer; in Argentina, Venezuela and Columbia with Makro, a superstoreretailer; in Venezuela and Argentina with Casino, a superstore retailer; and in CentralAmerica with PriceSmart, a warehouse club. [Emphasis added.]
65. The statements in the Prospectus referenced above were each materially false and
misleading because they failed to disclose the adverse facts described above in ¶¶ 47-50.
Rayovac’s Misleading Third Quarter Fiscal 2001 Results
66. On July 26, 2001, Rayovac issued a press release announcing its financial results for
the third fiscal quarter of 2001 (for the period ending June 30, 2001). The Company reported that
revenue for the third fiscal quarter of 2001 rose 6% to $159.1 million, compared to $150.4 million
for the third fiscal quarter of 2000. Defendant Jones commented positively on the results, stating
in pertinent part, as follows:
The Rayovac brand continues to build momentum in the marketplace as our salesoutpaced both our competition as well as the industry as a whole. . . . Despite aweakened economy and slower than anticipated overall battery category growth,Rayovac continues to gain unit share as more and more consumers recognize thevalue of our brand. [Emphasis added.]
67. On or around August 9, 2001, Rayovac filed a Form 10-Q with the SEC for the period
ending June 30, 2001, which confirmed the previously-announced financial results and was signed
by Defendant Steward.
68. Following the Company’s fiscal third quarter earnings announcement, H.H. Murren,
an analyst at Merrill Lynch, issued a positive report on Rayovac common stock, reiterating his
“Accumulate” rating on the stock and stating, in pertinent part, as follows:
37
We expect ROV to continue to deliver solid results as we move into the FQ01 andoutpace the category and believe that the combination of new distribution agreementsand ROV’s important value proposition will continue to drive sales and market sharegains.
* * * * *We note that we are lowering our revenue assumptions slightly over the nextseveral Qs to the 4-6% range due to current economic slowdown in the U.S. Wewould expect continued restructuring savings to benefit margins and act as anoffset. No changes to our EPS estimates.
* * * * *ROV indicated that the protracted weakness in the US economy is havingnoticeable spillover effects in international markets. We continue to believe thatROV can outpace the general battery category by 1-2% as it transitions back toour long-term growth rate of mid/high single digits. We expect ROV to continueto announce meaningful distribution wins over the next several quarters whichshould bolster sales and market share growth.
69. On July 27, 2001, A.V. McQuilling, an analyst at UBS Warburg, issued a positive
report in response to the Company’s third quarter financial results, stating, in pertinent part, as
follows:
Rayovac continues to gain share at mass and overall, but lowered near-term salesgrowth forecasts from 7%-8% to 4%-6% due to extended category/economicweakness. Maintain Buy rating and $25 price target.
* * * * *Sales of lighting products decreased 20%, but the Company expects an upturn in 4Q from new accounts.
* * * * *Management lowered near term sales growth estimates to 4-6% * previously 7%-8% * as they reduced category growth estimates to 3%-4% * from 6% - 7%*. September quarter sales are now projected to be up 6%-7% *previous guidancewas +8%*. We had previously forecast sales growth of 15% growth in theDecember quarter *F1Q02* but are lowering this to 12% on revised expectations,with no change to our EPS estimate.
38
Operating margins *13.5%* keep expanding on efficiency gains, andmanagement estimates continued improvement by 50-100 bps p.a. Managementreaffirmed EPS guidance at $1.28-$1.30 for F2001 and $1.48-$1.53 for F2002, inkeeping with previously stated LT EPS growth target of 15%. [Emphasis added.]
70. The analyst statements above are directly attributable to Defendants.
71. The Defendants’ statements -- both directly to the market and through the analysts --
were materially false and misleading because they failed to disclose (i) the declining demand for
Rayovac’s products; (ii) the fact that in order to stimulate demand and create an impression that
Rayovac was performing according to analyst expectations, Rayovac extended generous credit terms
to customers to induce them to purchase additional products, thereby stuffing the distributor and
retail channels which Rayovac knew would negatively impact demand for Rayovac's products in the
future; (iii) that Rayovac, in violation of GAAP, was accelerating the normal sales cycle by dating
and deep promotions to make quarterly targets; (iv) that Rayovac, in violation of GAAP, was
shipping product to intermediary warehouses and booking such shipments as sales even though the
product would not be delivered to the customer until the following quarter or later; (v) that
Rayovac's expansion in Latin America was the result of aggressive sales practices whereby the
Company extended generous payment terms and induced customers to take additional unneeded
inventory; and (vi) that Rayovac, in violation of GAAP, was carrying tens of millions of dollars of
receivables from customers who were in financial distress when it was probable that those
receivables were uncollectible, without providing for an appropriate allowance for bad debts
recognizing the likelihood of those losses due to such uncollectible receivables, and that Rayovac
did not begin taking appropriate charges for uncollectible receivables until the first quarter of Fiscal
Year 2002.
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Rayovac’s 2001 Annual Meeting of Shareholders
72. Following the successful completion of the Secondary Offering, the Company held
its 2001 annual meeting of shareholders on July 31, 2001. The next day, August 1, 2001, an article
appeared in The Wisconsin State Journal which quoted Defendant Hussey’s comments on the price
of Rayovac common stock. The article stated in pertinent part as follows:
As for the Company's stock, Hussey said a June stock offering used to pay down debtalso resulted in a 50 percent increase in outstanding shares, making shares easier tobuy and sell, reducing the stock's volatility, and adding European investors.
* * * * *
We still think the stock is undervalued, Hussey said. We think it should be backin the high $20s . . . and it will be within six months. [Emphasis added.]
73. These statements were materially false and misleading because Hussey, who is
identified by an former employee as a key person at Rayovac who was given direction by THL,
knew what artifices Rayovac was using to make it appear that the Company was experiencing
increased sales growth and demand, that the Company’s stock price was over-valued, not
undervalued, and that the Company was carrying tens of millions of dollars of receivables from
customers who were in financial distress without recognizing a charge against income related to
those uncollectible receivables in violation of GAAP. Hussey, as CFO, was directly responsible for
the ultimate decision to create adequate allowance for doubtful accounts by reducing income by a
provision for bad debts in accordance with GAAP, Financial Accounting Standard Board Statement
No. 5. Moreover, as CFO, Hussey received the monthly and quarterly sales reports showing the
pattern of improper pulling forward of sales. Accordingly, Hussey had direct and personal
knowledge that his statements were false when he made them.
40
Rayovac’s Violations of Generally Accepted Accounting Principles
74. Defendants represented that, during the Class Period, Rayovac financial statements
when issued, were prepared in conformity with GAAP. These representations were materially false
and misleading when made because Defendants, in violation of GAAP, knowingly or recklessly
employed improper accounting practices, which falsely inflated the Company’s balance sheet, and
falsely overstated income and understated expenses in the interim quarters and fiscal year during the
Class Period.
75. Rayovac’s materially false and misleading financial statements resulted from a series
of deliberate senior management decisions designed to conceal the truth regarding Rayovac’s actual
operating results. Specifically, Defendants caused the Company to violate GAAP by:
a. improperly accelerating revenues, in part, achieved at the expense of future
results. Rayovac shipped to its own warehouses creating totally fictitious and illegally recognized
sales. In addition, Rayovac offered discounts and other inducements to customers in order for
Rayovac to sell merchandise immediately that otherwise would have been sold in later periods, a
practice also known as"channel-stuffing;" and
b. improperly failing to timely record expenses for uncollectible accounts
receivable.
76. GAAP are those principles recognized by the accounting profession as the
conventions, rules, and procedures necessary to define accepted accounting practices at a particular
time. As set forth in Financial Accounting Standards Board ("FASB") Statements of Concepts
("Concepts Statement") No. 1, one of the fundamental objectives of financial reporting is that it
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provide accurate and reliable information concerning an entity's financial performance during the
period being presented. Concepts Statement No. 1, paragraph 42, states:
Financial reporting should provide information about an enterprise's financialperformance during a period. Investors and creditors often use information about thepast to help in assessing the prospects of an enterprise. Thus, although investmentand credit decisions reflect investors' and creditors' expectations about futureenterprise performance, those expectations are commonly based at least partly onevaluations of past enterprise performance.
77. As set forth in SEC Rule 4-01(a) of the SEC Regulation S-X, “[f]inancial statements
filed with the [SEC] which are not prepared in accordance with [GAAP] will be presumed to be
misleading or inaccurate.” 17 C.F.R. § 210.4-01(a)(1). Management is responsible for preparing
financial statements that conform with GAAP. As noted by the American Institute of Certified
Public Accountants (“AICPA”) Professional Standards in U.S. Auditing Standards (“AU”) Section
110.03:
The financial statements are management’s responsibility. The auditor’sresponsibility is to express an opinion on the financial statements. Management isresponsible for adopting sound accounting policies and for establishing andmaintaining internal control that will, among other things, initiate, record, process,and report transactions (as well as events and conditions) consistent withmanagement’s assertions embodied in the financial statements. The entity’stransactions and the related assets, liabilities and equity are within the directknowledge and control of management. The auditor’s knowledge of these mattersand internal control is limited to that acquired through the audit. Thus, the fairpresentation of financial statements in conformity with generally acceptedaccounting principles is an implicit and integral part of management's responsibility.The independent auditor may make suggestions about the form or content of thefinancial statements of draft, in whole or in part, based on information frommanagement during the performance of the audit. However, the auditor’sresponsibility for the financial statements he or she has audited is confined to theexpression of his or her opinion on them.
Rayovac’s Improper Recognition of Revenue
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78. Rayovac financial statements filed with the SEC on Form 10-K for September 30,
2001, represented that “The Company recognizes revenue from product sales upon shipment to the
customer which is the point at which all risks and rewards of ownership of the product is passed.
The Company is not obligated to allow for returns.”
79. These representations were false and misleading as Defendants failed to disclose that
the Company had persuaded various Rayovac customers to accept products by offering them special
discounts, perks, and/or other incentives, to place phony orders for and/or to accept large shipments
of Rayovac products. Defendants engaged in this scheme for the purpose of improperly overstating
Rayovac quarterly and annual reported operating results.
80. Indeed, Defendants improperly required customers to purchase significant quantities
of additional product that customers neither needed nor wanted, with the intention of "cosmetically"
improving the reported results during the Class Period. Thus, the revenue reported was not indicative
of the true demand for Rayovac’s products during the Class Period.
81. GAAP, as described by FASB Concepts Statement No. 5, provides that the
recognition of revenue should occur only where two fundamental conditions are satisfied: the
revenue has been earned; and the amount is collectible. Concepts Statement No. 5, ¶¶ 83-84.
Moreover, Concepts Statement No. 5 generally provides that revenues should not be recognized until
they are: (i) realized or realizable; and (ii) earned. Concepts Statement No. 5, ¶ 83. These
conditions for revenue recognition ordinarily are met when assets or services are exchanged for cash
or claims to cash, and when the entity has substantially performed the obligations which entitle it
to the benefits represented by the revenue. Concepts Statement No. 5, ¶ 83. GAAP also provides
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that profit is deemed to be realized when the collection of the sales price is reasonably assured.
Accounting Principles Board ("APB") Opinion No. 10, ¶ 12.
82. Similarly, the SEC's Staff Accounting Bulletin ("SAB") No. 101, which sets forth the
SEC Staff's views in applying GAAP to revenue recognition in financial statements, imposes the
same prerequisites to the recognition of revenues as does Concepts Statement No. 5. According to
Rayovac Form 10-K for the fiscal year ended September 31, 2001, "The adoption of SAB 101 did
not have an impact on the consolidated financial statements.”
83. Rayovac intentionally did not fairly present its results from operations due, inter alia,
to its practice of booking sales that did not comply with GAAP requirements, as described in detail
above. In each of its public filings Rayovac also failed to disclose, in the Management’s Discussion
and Analysis section or otherwise, that it had accelerated income from later periods through channel
stuffing and shipping product to its own warehouses, and the significance to the Company's future
results of operations of that practice.
Rayovac’s Failure To Account For Uncollectible Receivables
84. On January 24, 2002, Rayovac reported diluted earnings per share of one cent for its
first quarter of Fiscal 2002, ended December 31, 2001. The results for the quarter included a $16.1
million increase in bad debt reserve, related to its accounts receivable exposure for Kmart.
Defendants knew or recklessly disregarded that at least a significant portion of the Company's
reported receivables that existed were grossly delinquent, delayed and/or at serious risk of
noncollectibility and that the Company's reserves were correspondingly inadequate.
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85. The Company violated GAAP in accounting for its accounts receivable by failing
to take a charge against earnings to account for the fact that many of the receivables had and would
become uncollectible. According to Accounting Research Bulletin 43, Chapter 3, Section A, the
objective of providing for reserves against receivables is to assure that, "[a]ccounts receivable net
of allowances for uncollectible accounts . . . are effectively stated at the amount of cash estimated
as realizable."
86. GAAP provides that an estimated loss from a loss contingency “shall be accrued by
a charge to income” if: (i) information available prior to issuance of the financial statements
indicated that it is probable that an asset had been impaired or a liability had been incurred at the
date of the financial statements; and (ii) the amount of the loss can be reasonably estimated. FASB
Concepts Statement No. 5, at ¶ 8. One of the cited examples of a loss contingency requiring accrual
is collection of receivables (¶ 4).
87. Moreover, FASB Concepts Statement No. 5 states, “[a]n expense or loss is
recognized if it becomes evident that previously recognized future economic benefits of an asset
have been reduced or eliminated . . .”
88. The Company violated the GAAP requirement by failing to take a provision for its
noncollectible receivables in its interim financial statements, as indicated by APB Opinion No. 28,
¶ 17, Interim Financial Reporting:
The amounts of certain costs and expenses are frequently subjected to year-endadjustments even though they can be reasonably approximated at interim dates. Tothe extent possible such adjustments should be estimated and the estimated costs andexpenses assigned to interim periods so that the interim periods bear a reasonableportion of the anticipated annual amount. Examples of such items include . . .allowance for uncollectible accounts . . . .[Emphasis added.]
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Additionally, by failing to take a provision for its noncollectible receivables in its interim
financial statements, the Company violated Rule 10-01 (b)(8) of Regulation S-X. Rule 10 of
Regulation S-X governs the form and content of interim financial statements filed with the SEC:
Any unaudited interim financial statements furnished shall reflect all adjustmentswhich are, in the opinion of management, necessary to a fair statement of the resultsfor the interim periods presented. A statement to that effect shall be included. Suchadjustments shall include, for example, appropriate estimated provisions for bonusand profit sharing arrangements normally determined or settled at year-end. If allsuch adjustments are of a normal recurring nature, a statement to that effect shall bemade; otherwise, there shall be furnished information describing in appropriate detailthe nature and amount of any adjustments other than normal recurring adjustmentsentering into the determination of the results shown.
89. As a result of accounting improprieties, Defendants caused Rayovac’s reported
financial results to violate, among other things, the following provisions of GAAP for which each
Defendant is necessarily responsible:
a. The principle that financial reporting should provide information that is useful
to present and potential investors in making rational investment decisions and that information
should be comprehensible to those who have a reasonable understanding of business and economic
activities (FASB Statement of Concepts No. 1, ¶ 34);
b. The principle of materiality, which provides that the omission or misstatement
of an item in a financial report is material if, in light of the surrounding circumstances, the
magnitude of the item is such that it is probable that the judgment of a reasonable person relying
upon the report would have been changed or influenced by the inclusion or correction of the item
(FASB Concepts Statement No. 2, ¶ 132) (SEC Staff Accounting Bulletin No. 99).
46
c. The principle that financial reporting should provide information about how
management of an enterprise has discharged its stewardship responsibility to owners (stockholders)
for the use of enterprise resources entrusted to it. To the extent that management offers securities
of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to
prospective investors and to the public in general. (FASB Concepts Statement No. 1, ¶ 50);
d. The principle that financial reporting should provide information about an
enterprise's financial performance during a period. Investors and creditors often use information
about the past to help in assessing the prospects of an enterprise. Thus, although investment and
credit decisions reflect investors' expectations about future enterprise performance, those
expectations are commonly based at least partly on evaluations of past enterprise performance.
(FASB Concepts Statement No. 1, ¶ 42);
e. The principle that financial reporting should be reliable in that it represents
what it purports to represent. The notion that information should be reliable as well as relevant is
central to accounting. (FASB Concepts Statement No. 2, ¶¶ 58-59);
f. The principle of completeness, which means that nothing is left out of the
information that may be necessary to ensure that it validly represents underlying events and
conditions. (FASB Concepts Statement No. 2, ¶ 80);
g. The principle that conservatism be used as a prudent reaction to uncertainty
to try to ensure that uncertainties and risks inherent in business situations are adequately considered.
The best way to avoid injury to investors is to try to ensure that what is reported represents what it
purports to represent. (FASB Concepts Statement No. 2, ¶¶ 95, 97); and
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h. The principle that contingencies that might result in gains are not reflected
in accounts since to do so might be to recognize revenue prior to its realization and that care should
be used to avoid misleading investors regarding the likelihood of realization of gain contingencies.
(FASB No.5, Accounting for Contingencies).
90. In addition, Defendants falsely failed to disclose the existence of known trends,
events or uncertainties that they reasonably expected would have a material unfavorable impact on
its operating results or that were reasonably likely to result in the Company's liquidity decreasing
in a material way, in violation of Item 303 of Regulation S-K under the federal securities laws (17
C.F.R. § 229.303). These failures rendered the Company's Class Period financial statements and
Forms 10-K and 10-Q materially false and misleading.
THE TRUTH BEGINS TO EMERGE
91. On September 20, 2001 – just 3 months after the Secondary Offering – before the
market opened for trading, Rayovac issued a press release announcing that the Company’s fiscal
fourth quarter results would be negatively impacted by a purported slowdown in battery sales in its
U.S. and Latin American markets. As a result, contrary to Defendants’ bullish Class Period
statements, Rayovac’s earnings for the quarter would be flat to down slightly from the same period
for the previous year. The Company attributed the disappointing results to slowness in the U.S.
economy and a decline in sales in Latin America.
92. The market’s reaction to this announcement was immediate and punitive, with shares
of Rayovac common stock falling more than 23% to a Class Period low of $12.74 per share on
almost eight times the normal trading volume.
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93. Thereafter, Rayovac continued to announce disappointing financial results and
events. On November 6, 2001, Rayovac announced its financial results for the fourth quarter of
fiscal 2001 and fiscal year 2001. The Company reported that it was taking a charge of $3.5 million
for the quarter and $22.3 million for the full fiscal year, as the result of a company-wide global
restructuring program. In addition, the Company’s operating expenses increased, in part due to $2.7
million in bad debt write-offs due to major retail customer bankruptcies, including Ames Department
Stores, Phar-Mor and Western International. Defendants failed to include the bad debt of Kmart in
these write-offs, even though Kmart was carrying large accounts receivable and hopes for collection
were virtually nonexistent.
94. On November 8, 2001 the Company issued a press release announcing that Defendant
Steward, Rayovac’s Chief Financial Officer and Executive Vice President - Administration, had
resigned to “return to San Diego to be closer to his children.” Steward was to remain with the
Company to assist with the transition through the end of the year.
95. The market reacted on November 8, 2001, with Rayovac’s stock falling 10% to
$14.15 from $16.12, the previous day’s closing price.
96. On January 15, 2002, C. Maneaty, an analyst with Prudential Securities, lowered the
rating for Rayovac from “Buy” to “Hold” due to Kmart exposure, stating in pertinent part:
Lowering Rating To Hold And Fiscal 2002 EPS By $0.03 To $1.16 Due to KmartExposure. We are lowering our rating on Rayovac to Hold from Buy and reducingour EPS estimate in fiscal 2002 by $0.03 to $1.16 (up11% y/y), as a result ofRayovac’s exposer to Kmart (KM-$2.45; rated Sell by Prudential Securities’sBroadline Retail Analyst Wayne Hood). We estimate that Kmart accounts for salesof at least $50 million, or nearly 8% of Rayovac’s worldwide total. And with anestimated 10% of its U.S. sales going to Kmart, Rayovac’s exposure is the highestin our consumer products group. [Emphasis added.]
49
We estimate that $8 Million of Rayovac Sales Are At Risk. Assuming that Kmartcloses 500 under-performing stores and that there is a transition period as retailabsorbs the excess inventory from those stores, we estimate that there could be a16% (or $8 million ) hit to Rayovac’s sales to Kmart. This drop would likelytranslate into a 1.6 point reduction in our fiscal 2002 U.S. sales growth rate estimate,from 3.4% to 1.8%; and a 1.2 point reduction in total sales growth, from 3.1% downto 1.9%.
97. After a year of well-publicized financial problems, Kmart filed for bankruptcy
protection on January 22, 2002, leaving little chance of collection of the large accounts receivable
due Rayovac.
98. On January 24, 2002, Rayovac announced its results for the first quarter of fiscal
2002, the period ending December 31, 2001, including a $16.1 million increase in bad debt reserve,
related to its accounts receivable exposure for Kmart.
99. On March 11, 2002, analysts reported that THL had distributed roughly one-third of
the 7.4 million shares it owned in Rayovac to its limited partners, with approximately 2 million of
those shares recently sold in the open market.
100. Then, on March 27, 2002, Rayovac announced that it would be reclassifying its
financial results for 2001, reportedly as a result of the implementation of a new accounting
pronouncement. The effect of the reclassifications revealed that Rayovac’s revenue growth
performance had not been as robust as the market was previously led to believe because revenue
contained millions of dollars of reimbursed distribution costs:
Rayovac adopted EITF 00-14, which addresses classifications for sales incentivessuch as discounts, coupons, rebates and free products, and EITF 00-25, which coversclassification of payments made to resellers for slotting fees, cooperative advertising,buydowns and similar arragements.
50
For Rayovac, the adjustments led to a reduction in full-year 2001 and first quarter sales.
For 2001, the reclassification cut net sales by $59.3 million, increased the cost ofsales by $14 million and decreased selling, general and administrative expenses by$73.3 million. For the first quarter of 2002, the reclassification cut net sales by $20.5million, increased the cost of sales by $5.2 million and decreased selling, general andadministrative expenses by $25.7 million.
101. On August 21, 2002 the Company issued a press release announcing that Defendant
Steward was rejoining Rayovac as Executive Vice President and Chief Financial Officer, effective
immediately. Defendant Hussey, who had served as the Company’s chief financial officer in
Steward’s absence, relinquished his chief financial officer responsibilities and resumed his role as
President and Chief Operating Officer.
RAYOVAC TRADED IN AN EFFICIENT MARKET
102. The market for Rayovac's securities was open, well-developed and efficient at all
relevant times. As a result of these materially false and misleading statements and failures to
disclose, Rayovac's common stock traded at artificially inflated prices during the Class Period. The
artificial inflation continued until the time Rayovac acknowledged the true state of its operations and
this admission was communicated to, and/or digested by, the securities markets. Lead Plaintiffs and
other members of the Class purchased or otherwise acquired Rayovac securities relying upon the
integrity of the market price of Rayovac's securities and market information relating to Rayovac, and
have been damaged thereby.
103. During the Class Period, Defendants materially misled the investing public, thereby
inflating the price of Rayovac's securities, by publicly issuing false and misleading statements and
omitting to disclose material facts necessary to make Defendants' statements, as set forth herein, not
51
false and misleading. Said statements and omissions were materially false and misleading in that
they failed to disclose material adverse information and misrepresented the truth about the
Company, its business and operations, including, the adverse facts alleged herein.
104. At all relevant times, the material misrepresentations and omissions particularized
in this Complaint directly or proximately caused or were a substantial contributing cause of the
damages sustained by Lead Plaintiffs and other members of the Class. As described herein, during
the Class Period, Defendants made or caused to be made a series of materially false or misleading
statements about Rayovac's business, prospects and operations. These material misstatements and
omissions had the cause and effect of creating in the market an unrealistically positive assessment
of Rayovac and its business, prospects and operations, thus causing the Company's securities to be
overvalued and artificially inflated at all relevant times. Defendants' materially false and misleading
statements during the Class Period resulted in Lead Plaintiffs and other members of the Class
purchasing the Company's securities at artificially inflated prices, thus causing the damages
complained of herein.
ADDITIONAL ALLEGATIONS OF SCIENTER
105. As alleged herein, Defendants acted with scienter in that Defendants knew that the
public documents and statements issued or disseminated in the name of the Company were
materially false and misleading; knew that such statements or documents would be issued or
disseminated to the investing public; and knowingly and substantially participated or acquiesced in
the issuance or dissemination of such statements or documents as primary violations of the federal
securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their receipt of
information reflecting the true facts regarding Rayovac, their control over, and/or receipt and/or
52
modification of Rayovac's allegedly materially misleading misstatements and/or their associations
with the Company which made them privy to confidential proprietary information concerning
Rayovac, participated in the fraudulent scheme alleged herein.
106. The Individual Defendants and THL were the top executives and/or directors of
Rayovac as a result of a significant equity investment. They ran Rayovac as “hands-on” managers,
dealing with important issues facing Rayovac’s business, i.e., the slowing down of battery sales in
the U.S. and Latin American markets and the increasing accounts receivables by customers who
were not paying in a timely manner, and were regularly updated in the Company’s current issues in
management meetings and were provided and/or had access to Rayovac’s financial and revenue
information. Such information was, as a matter of course, routinely made available to Rayovac’s
managers including THL and the Individual Defendants. As numerous courts have noted, facts
critical to a business’s core operations (such as the lagging sales and increasing accounts
receivables) are so apparent that their knowledge may be attributed to the company and its key
officers. Epstein v. Itron, 993 F. Supp. 1314 (E.D. Wash.1998). Moreover, the fact that a particular
operating segment (such as the Latin American segment of the Company) constituted a significant
source of income to a company can establish a strong inference that the company and its relevant
officers knew of easily discoverable additional facts that directly affected that source of income.
Cosmas v. Hassett, 886 F.2d 8 (2d. Cir. 1989).
107. Because of their top executive and/or director positions with Rayovac as a result of
a significant equity investment and/or involvement in the day-to-day management of its business,
THL and each Individual Defendant knew, or recklessly disregarded, from internal corporate
documents and conversations with other corporate officers and employees and their attendance at
53
management and/or Board meetings, the adverse non-public information about the problems with
the channel stuffing, deep discounts and promotions and the mounting accounts receivables. As a
result, THL and the Individual Defendants knew that Rayovac would not be able to reach the growth
forecast for 2002. Thus, THL and each Individual Defendant knew, or recklessly disregarded, that
the public statements issued about Rayovac pled at ¶¶ 38-40, 42, 43, 52, 58-61, 63, 64, 66-69, and
72 were false or misleading when made.
108. Defendants had a duty to promptly disseminate accurate and truthful information with
respect to Rayovac's operations and financial condition or to cause and direct that such information
be disseminated and to promptly correct any previously disseminated information that was
misleading to the market. As a result of their failure to do so, the price of Rayovac common stock
was artificially inflated during the Class Period, damaging Lead Plaintiffs and the Class.
109. THL and the Individual Defendants, because of their positions with Rayovac,
controlled the contents of quarterly and annual reports, press releases and presentations to securities
analysts. THL and each Individual Defendant was provided with copies of the reports and press
releases alleged herein to be false and/or misleading prior to or shortly after their issuance and had
the ability and opportunity to prevent their issuance or cause them to be corrected. Because of their
positions and access to material non-public information available to them but not the public, each
of these Defendants knew or recklessly disregarded that the adverse facts specified herein had not
been disclosed to and were being concealed from the public and that the positive representations
which were being made were then false and misleading. As a result, THL and each of the Individual
Defendants is responsible for the accuracy of Rayovac's corporate releases detailed herein as "group-
54
published" information and is therefore responsible and liable for the representations contained
therein.
110. Each Defendant is liable as a primary violator in making false and misleading
statements, and for participating in a fraudulent scheme and course of business that operated as a
fraud or deceit on purchasers of Rayovac stock during the Class Period.
111. As alleged herein, Defendants acted with scienter in that Defendants knew or
recklessly disregarded that the public documents and statements, issued or disseminated by or in the
name of the Company were materially false and misleading; knew or recklessly disregarded that
such statements or documents would be issued or disseminated to the investing public; and
knowingly and substantially participated or acquiesced in the issuance or dissemination of such
statements or documents as primary violators of the federal securities laws. Defendants, by virtue
of their receipt of information reflecting the true facts regarding Rayovac and its business practices,
their control over and/or receipt of Rayovac's allegedly materially misleading misstatements, and/or
their associations with the Company which made them privy to confidential proprietary information
concerning Rayovac were active and culpable participants in the fraudulent scheme alleged herein.
Defendants knew and/or recklessly disregarded the falsity and misleading nature of the information
which they caused to be disseminated to the investing public. The ongoing fraudulent scheme
described in this Complaint could not have been perpetrated over a substantial period of time, as has
occurred, without the knowledge and complicity of the personnel at the highest level of the
Company, including the Individual Defendants.
112. Defendants had the motive and opportunity to perpetrate the fraudulent scheme and
course of business described herein in order to raise additional capital from investors through the
55
Secondary Offering of shares of the Company’s common stock in which the Company received
proceeds in excess of $65 million and the Individual Defendants received proceeds in excess of $74
million.
113. In addition to inflating share value to raise additional capital for the Company,
Individual Defendants personally profited from the Secondary Offering by selling their personal
holdings in Rayovac at inflated prices before disclosing the truth about the Company’s business,
revenue and sales to the investing public. The $74 million in proceeds that the Individual
Defendants raised from the Secondary Offering was distributed as follows:
a. Defendant Jones sold 437,037 shares of Rayovac common stock in the
Secondary Offering and received proceeds of approximately $8.1 million.
b. Defendant Hussey sold 100,000 shares of Rayovac common stock in the
Secondary Offering and received proceeds of approximately $1.85 million.
c. Defendant Schoen sold 14,894 shares of Rayovac common stock in the
Secondary Offering and received proceeds of approximately $276,000.
d. Defendant Shepherd directly sold 7,498 shares of Rayovac common stock in
the Secondary Offering and received proceeds of approximately $139,000.
e. Defendant Shanesy sold 75,185 shares of Rayovac common stock in the
Secondary Offering and received proceeds of approximately $1.4 million.
f. Defendant Tomlin sold 68,700 shares of Rayovac common stock in the
Secondary Offering and received proceeds of approximately $1.3 million.
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g. Defendant Steward sold 10,000 shares of Rayovac common stock in the
Secondary Offering and received proceeds of approximately $180,000.
h. Defendant Biller sold 85,930 shares of Rayovac common stock in the
Secondary Offering and received proceeds of approximately $1.6 million.
i. Defendant THL, which included Defendants Shepherd, Shoen and Smith, sold
3,317,184 shares of Rayovac common stock in the Secondary Offering which resulted in shared
proceeds of approximately $61.5 million.
114. Furthermore, Defendants knew that a bad debt reserve for Kmart receivables would
put the Company out of compliance with the leverage ratio covenant of its senior bank credit
agreement (“Second Amended and Restated Credit Agreement”).
115. According to a former employee, senior management, including the Individual
Defendants, who participated in the Company’s stock option program “really pushed hard” in the
quarters that options were awarded.
116. In addition, as a leveraged buy out firm, THL is notorious for buying companies,
pumping up their stock (often through questionable means), taking the company public and "making
a killing." For example:
a. In 1994, THL sold Snapple Beverage Corp. to Quaker Oats Co. for $14 per
share. At first this deal looked too good to be true on the Quaker Oats side, since shares were
currently trading for $14.25. But the day the sale was announced, Snapple also revealed that its
current quarter profits were down more than 70 percent from the previous year. As reported in The
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Washington Post on November 15, 1994, "Without the $14 Quaker Oats deal, Snapple stock would
have dropped to about $10 faster than you can say Diet Kiwi Strawberry Cocktail."
b. In 1996, shareholders of General Nutrition Cos. filed suit against THL, among
others, claiming that General Nutrition failed to disclose that sales increases prior to the sale by THL
of its 43% stake in General Nutrition were partly a result of discontinued promotion efforts.
APPLICABILITY OF PRESUMPTION OF RELIANCE:FRAUD-ON-THE MARKET DOCTRINE
117. Lead Plaintiffs will rely, in part, upon the presumption of reliance established by the
fraud-on-the-market doctrine with respect to their 1934 Act claims in that:
a. Defendants made public misrepresentations or failed to disclose material facts
during the Class Period;
b. the omissions and misrepresentations were material;
c. the securities of the Company traded in an open and efficient market;
d. the misrepresentations and omissions alleged would tend to induce a
reasonable investor to misjudge the value and prospects of the Company's securities; and
e. Lead Plaintiffs and other members of the Class traded in Rayovac’s shares
between the time Defendants failed to disclose or misrepresented material facts and the time the true
facts were disclosed, without knowledge of the omitted or misrepresented facts.
118. At all relevant times, the market for Rayovac's securities was an efficient market for
the following reasons, among others:
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i. Rayovac's stock met the requirements for listing, and was listed and activelytraded on the NYSE, a highly efficient and automated market;
ii. As a regulated issuer, Rayovac filed periodic public reports with the SEC andthe NYSE;
iii. Rayovac regularly communicated with public investors via establishedmarket communication mechanisms, including through regulardisseminations of press releases on the national circuits of major newswireservices and through other wide-ranging public disclosures, such ascommunications with the financial press and other similar reporting services;and
iv. Rayovac was followed by several securities analysts employed by majorbrokerage firms who wrote reports which were distributed to the sales forceand certain customers of their respective brokerage firms. Each of thesereports was publicly available and entered the public marketplace.
119. As a result of the foregoing, the market for Rayovac's securities promptly digested
current information regarding Rayovac from all publicly available sources and reflected such
information in Rayovac's stock price. Under these circumstances, all purchasers of Rayovac's
securities during the Class Period suffered similar injury through their purchase of Rayovac's
securities at artificially inflated prices and a presumption of reliance applies.
NO STATUTORY SAFE HARBOR
120. The statutory safe harbor providing for forward-looking statements under certain
circumstances does not apply to any of the allegedly false or misleading statements pleaded in this
Complaint. The statements alleged to be false and misleading herein all relate to then-existing facts
and conditions. In addition, to the extent certain of the statements alleged to be false may be
characterized as forward-looking, there were no meaningful cautionary statements identifying
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important facts that could cause actual results to differ materially from those in the purportedly
forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply
to any forward-looking statements pleaded herein, Defendants are liable for those false forward-
looking statements because at the time each of those forward-looking statements was made, the
particular speaker had actual knowledge that the particular forward-looking statements was false,
and/or the forward-looking statement was authorized and/or approved by an executive officer of the
Company who knew that those statements were false when made.
COUNT IFOR VIOLATIONS OF SECTION 11 OF THE
1933 ACT AGAINST RAYOOVAC, THL, AND INDIVIDUAL DEFENDANTS JONES, HUSSEY, SHEPHERD, SCHOEN, SMITH AND STEWARD
121. Lead Plaintiffs repeat and reallege the allegations set forth above as if set forth fully
herein, except to the extent that any such allegations charge the Defendants with intentional or
reckless misconduct. For the purposes of this Count, Lead Plaintiffs expressly disavow any
allegation that any Defendant acted with scienter or fraudulent intent, which is not an element of
1933 Act claims.
122. The Registration Statement and Prospectus for the Secondary Offering was inaccurate
and misleading, contained untrue statements of material facts, omitted to state other facts necessary
to make the statements made not misleading, and concealed and failed adequately to disclose
material facts as described above.
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123. Rayovac is the registrant for the Secondary Offering. As issuer of the shares,
Rayovac is strictly liable to Lead Plaintiffs and the Class for the material misstatements and
omissions from the Registration Statement and Prospectus.
124. Defendants Jones, Hussey, Steward, Schoen, Shepherd and Smith, through
incorporation by reference, signed the Registration Statement and Prospectus for the Secondary
Offering. All of the Defendants named herein were responsible for the contents and dissemination
of the Registration Statement and the Prospectus. As signatories, Defendants Jones, Hussey,
Steward, Schoen, Shepherd and Smith are strictly liable to Lead Plaintiffs and the other members
of the Class for the material misstatements in and omissions from the Registration Statement and
Prospectus.
125. None of the Defendants named herein made a reasonable investigation or possessed
reasonable grounds for the belief that the statements contained in the Registration Statement and the
Prospectus were true and without omissions of any material facts and were not misleading.
Defendants issued, caused to be issued and participated in the dissemination of materially false and
misleading written statements to the investing public that were contained in the Registration
Statement and Prospectus. By reason of the conduct herein alleged, each Defendant violated and/or
controlled a person who violated Section 11 of the 1933 Act.
126. Lead Plaintiffs acquired Rayovac shares issued pursuant to, or traceable to, and in
reliance on, the Registration Statement and Prospectus. None of these shares was acquired after the
Company made generally available to its investors an earnings statement covering a period of at
least twelve months beginning after the effective date of the Registration Statement and Prospectus.
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127. Lead Plaintiffs and the Class have sustained damages. The value of Rayovac shares
has declined substantially subsequent to and due to Defendants' conduct as alleged herein.
128. At the times they purchased Rayovac shares, Lead Plaintiffs and other members of
the Class were without knowledge of the facts concerning the wrongful conduct alleged herein and
could not have reasonably discovered those facts prior to September 20, 2001. Less than one year
elapsed from the time that Lead Plaintiffs discovered or reasonably could have discovered the facts
upon which this complaint is based to the time that Lead Plaintiffs filed their Complaint. Less than
three years elapsed from the time that the securities upon which this Count is brought were bona fide
offered to the public to the time Lead Plaintiffs filed their Complaint.
COUNT IIFOR VIOLATIONS OF SECTION 12(a)(2) OF THE
1933 ACT AGAINST ALL DEFENDANTS
129. Lead Plaintiffs repeat and reallege the allegations set forth above as if set forth fully
herein, except to the extent that any such allegations charge the defendants with intentional or
reckless misconduct. For the purposes of this Count, Lead Plaintiffs expressly disavow any
allegation that any defendant acted with scienter or fraudulent intent, which is not an element of
1933 Act claims.
130. This Count is brought by Lead Plaintiffs pursuant to Section 12(a)(2) of the 1933
Act on behalf of all purchasers of Rayovac shares in connection with, and traceable to, the
Secondary Offering.
131. Defendants were sellers and offerors of the shares offered pursuant to the Prospectus
and received substantial profit from the sale of the shares. Moreover, prior to the Offering, Rayovac,
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through its agents including Defendants, hyped and stimulated market demand for the securities
issued in the Offering.
132. The actions of solicitation taken by Defendants involved participating in the
preparation and dissemination of the false and misleading Registration Statement and Prospectus.
The Registration Statement and Prospectus contained untrue statements of material facts, omitted
to state other facts necessary to make the statements made not misleading, and concealed and failed
to disclose material facts. Defendants’ actions of solicitation included participating in the
preparation of the false and misleading Prospectus.
133. Each Defendant named in this Count solicited and/or was a substantial factor in the
purchase by each member of the Class of Rayovac common stock. But for the participation by
Defendants, including the solicitation by Defendants as set forth herein, the Secondary Offering
could not and would not have been accomplished. Defendants named herein participated in the
Secondary Offering, as follows:
a. They actively and jointly drafted, revised, and approved the Registration
Statement and Prospectus by which the Secondary Offering was made to the public. These written
materials were “selling documents,” calculated by Defendants to create interest in Rayovac common
stock and were widely distributed by Defendants for that purpose;
b. Defendants finalized the Registration Statement and Prospectus and caused
them to become effective. But for Defendants having drafted, filed and signed the Registration
Statement and Prospectus, the Secondary Offering could not have been made; and
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c. Defendants conceived and planned the Secondary Offering and together jointly
orchestrated all activities necessary to effect the sale of these securities to the investing public, by
issuing the securities, promoting the securities, supervising their distribution and ultimate sale to the
investing public.
134. Defendants owed to the purchasers of Rayovac shares, including Lead Plaintiffs and
other class member purchasers of Rayovac shares, the duty to make a reasonable and diligent
investigation of the statements contained in the Secondary Offering materials, including the
Registration Statement and Prospectus contained therein, to ensure that such statements were true
and that there was no omission to state a material fact required to be stated in order to make the
statements contained therein not misleading. Defendants knew of, or in the exercise of reasonable
care should have known of, the misstatements and omissions contained in the Secondary Offering
materials as set forth above.
135. Lead Plaintiffs and other members of the Class purchased or otherwise acquired
Rayovac shares pursuant to and traceable to the defective Registration Statement and Prospectus.
Lead Plaintiffs did not know, or in the exercise of reasonable diligence could not have known, of
the untruths and omissions contained in the Prospectus.
136. Lead Plaintiffs, individually and representatively, hereby offer to tender to
Defendants those securities which Lead Plaintiffs and other Class members continue to own, on
behalf of all members of the Class who continue to own such securities, in return for the
consideration paid for those securities together with interest thereon. Class members who have sold
their Rayovac shares are entitled to rescissory damages.
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137. By reason of the conduct alleged herein, Defendants violated, and/or controlled a
person who violated, § 12(a)(2) of the 1933 Act. Accordingly, Lead Plaintiffs and members of the
Class who hold Rayovac shares purchased in the Secondary Offering have the right to rescind and
recover the consideration paid for their Rayovac shares and, hereby elect to rescind and tender their
Rayovac shares to Defendants sued herein. Lead Plaintiffs and Class members who have sold their
Rayovac shares are entitled to rescissory damages.
138. Less than three years elapsed from the time that the securities upon which this Count
is brought were sold to the public, to the time of the filing of this action. Less than one year elapsed
from the time when Lead Plaintiffs discovered or reasonably could have discovered the facts upon
which this Count is based, to the time of the filing of this action.
COUNT IIIFOR VIOLATIONS OF SECTION 15 OF THE 1933 ACT
AGAINST INDIVIDUAL DEFENDANTS JONES, HUSSEY, SHEPHERD, SCHOEN, SMITH, SHANESY, TOMLIN, STEWARD AND BILLER
AND DEFENDANT THL
139. Lead Plaintiffs repeat and reallege each and every allegation contained above, except
to the extent that such allegations charge Defendants with intentional or reckless misconduct. For
the purposes of this Count, Lead Plaintiffs expressly disavow any allegation that any Defendant
acted with scienter or fraudulent intent, which is not an element of 1933 Act claims.
140. This Count is brought pursuant to Section 15 of the 1933 Act against the Individual
Defendants and THL.
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141. Each of the Individual Defendants and THL was a control person of Rayovac by
virtue of their position as directors and/or senior officers of Rayovac. The Individual Defendants and
THL each had a series of direct and/or indirect business and/or personal relationships with other
directors and/or major shareholders of Rayovac. Therefore, they were “controlling persons”of
Rayovac within the meaning of Section 15 of the 1933 Act. The Individual Defendants and THL
issued, caused to be issued, and participated in the issuance of materially false and misleading
statements in the Registration Statement and Prospectus. Pursuant to Section 15 of the 1933 Act,
by reason of the foregoing, the Individual Defendants and THL are jointly and severally liable to
Lead Plaintiffs and all members of the Class for the alleged violations of Sections 11 and 12(a)(2)
of the 1933 Act.
COUNT IVFOR VIOLATIONS OF SECTION 10(b) OF THE
1934 ACT AND RULE 10b-5 PROMULGATEDTHEREUNDER AGAINST ALL DEFENDANTS
142. Lead Plaintiffs repeat and reallege the allegations set forth above as though fully set
forth herein.
143. During the Class Period, Rayovac, THL and the Individual Defendants, and each of
them, carried out a plan, scheme and course of conduct which was intended to and, throughout the
Class Period, did: (i) deceive the investing public, including Lead Plaintiffs and other Class
members, as alleged herein; (ii) artificially inflate and maintain the market price of Rayovac's
securities; (iii) allow Defendants to successfully complete the Secondary Offering in which the
Company received proceeds in excess of $65 million, and THL and individual shareholders,
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including the Individual Defendants, received proceeds in excess of $74 million; and (iv) cause Lead
Plaintiffs and other members of the Class to purchase Rayovac's securities at artificially inflated
prices. In furtherance of this unlawful scheme, plan and course of conduct, Defendants, and each
of them, took the actions set forth herein.
144. Defendants: (a) employed devices, schemes, and artifices to defraud; (b) made untrue
statements of material fact and/or omitted to state material facts necessary to make the statements
not misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud
and deceit upon the purchasers of the Company's securities in an effort to maintain artificially high
market prices for Rayovac's securities in violation of Section 10(b) of the 1934 Act and Rule 10b-5.
All Defendants are sued either as primary participants in the wrongful and illegal conduct charged
herein or as controlling persons as alleged below.
145. In addition to the duties of full disclosure imposed on Defendants as a result of their
making of affirmative statements and reports, or participation in the making of affirmative
statements and reports to the investing public, Defendants had a duty to promptly disseminate
truthful information that would be material to investors in compliance with the integrated disclosure
provisions of the SEC as embodied in SEC Regulation S-X (17 C.F.R. Sections 210.01 et seq.) and
Regulation S-K (17 C.F.R. Sections 229.10 et seq.) and other SEC regulations, including accurate
and truthful information with respect to the Company's operations, financial condition and earnings
so that the market price of the Company's securities would be based on truthful, complete and
accurate information.
146. Rayovac, THL and the Individual Defendants, individually and in concert, directly
and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails,
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engaged and participated in a continuous course of conduct to conceal adverse material information
about the business, operations and future prospects of Rayovac as specified herein. Defendants
employed devices, schemes and artifices to defraud, while in possession of material adverse non-
public information and engaged in acts, practices, and a course of conduct as alleged herein in an
effort to assure investors of Rayovac's value and performance and continued substantial growth,
which included the making of, or the participation in the making of, untrue statements of material
facts and omitting to state material facts necessary in order to make the statements made about
Rayovac and its business operations and future prospects in the light of the circumstances under
which they were made, not misleading, as set forth more particularly herein, and engaged in
transactions, practices and a course of business which operated as a fraud and deceit upon the
purchasers of Rayovac's securities during the Class Period.
147. The Individual Defendants' primary liability, and controlling person liability, arises
from the following facts: (i) each of the Individual Defendants was a high-level executive and/or
director at the Company during the Class Period; (ii) each of the Individual Defendants, by virtue
of his responsibilities and activities as a senior executive officer and/or director of the Company,
was privy to and participated in the creation, development and reporting of the Company's internal
budgets, plans, projections and/or reports; (iii) the Individual Defendants enjoyed significant
personal contact and familiarity with each other and were advised of and had access to other
members of the Company's management team, internal reports, and other data and information about
the Company's financial condition and performance at all relevant times; and (iv) the Individual
Defendants were aware of the Company's dissemination of information to the investing public which
they knew or recklessly disregarded was materially false and misleading.
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148. Defendants had actual knowledge of the misrepresentations and omissions of material
facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and
to disclose such facts, even though such facts were available to them. Such Defendants' material
misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and
effect of concealing Rayovac's operating condition and future business prospects from the investing
public and supporting the artificially inflated price of its securities. As demonstrated by Defendants'
overstatements and misstatements of the Company's business, operations and earnings throughout
the Class Period, Defendants, if they did not have actual knowledge of the misrepresentations and
omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from
taking those steps necessary to discover whether those statements were false or misleading.
149. As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market price of Rayovac's securities was
artificially inflated during the Class Period. In ignorance of the fact that market prices of Rayovac's
publicly-traded securities were artificially inflated, and relying directly or indirectly on the false and
misleading statements made by Defendants, or upon the integrity of the market in which the
securities trade, and/or on the absence of material adverse information that was known to or
recklessly disregarded by Defendants but not disclosed in public statements by Defendants during
the Class Period, Lead Plaintiffs and the other members of the Class acquired Rayovac securities
during the Class Period at artificially high prices and were damaged thereby.
150. At the time of said misrepresentations and omissions, Lead Plaintiffs and other
members of the Class were ignorant of their falsity, and believed them to be true. Had Lead
Plaintiffs and the other members of the Class and the marketplace known of the true financial
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condition and business prospects of Rayovac, which were not disclosed by Defendants, Lead
Plaintiffs and other members of the Class would not have purchased or otherwise acquired their
Rayovac securities, or, if they had acquired such securities during the Class Period, they would not
have done so at the artificially inflated prices which they paid.
151. By virtue of the foregoing, Defendants each violated Section 10(b) of the 1934 Act
and Rule 10b-5 promulgated thereunder.
152. As a direct and proximate result of Defendants' wrongful conduct, Lead Plaintiffs and
the other members of the Class suffered damages in connection with their respective purchases and
sales of the Company's shares during the Class Period.
COUNT VFOR VIOLATIONS OF SECTION 20(a) OF THE 1934 ACT
AGAINST INDIVIDUAL DEFENDANTS JONES, HUSSEY, SHEPHERD, SCHOEN, SMITH, SHANESY, TOMLIN, STEWARD, AND BILLER
AND DEFENDANT THL
153. Lead Plaintiffs repeat and reallege each and every allegation contained above as if
fully set forth herein. This claim is asserted against the Individual Defendants and Defendant THL.
154. The Individual Defendants and THL were and acted as controlling persons of
Rayovac within the meaning of Section 20(a) of the 1934 Act as alleged herein. By virtue of their
high-level positions, and their ownership and contractual rights, participation in and/or awareness
of the Company's operations and/or intimate knowledge of the statements filed by the Company with
the SEC and disseminated to the investing public, the Individual Defendants and THL had the power
to influence and control and did influence and control, directly or indirectly, the decision-making
70
of the Company, including the content and dissemination of the various statements which Lead
Plaintiffs contend are false and misleading. The Individual Defendants and THL were provided with
or had unlimited access to copies of the Company's reports, press releases, public filings and other
statements alleged by Lead Plaintiffs to be misleading prior to and/or shortly after these statements
were issued and had the ability to prevent the issuance of the statements or cause the statements to
be corrected.
155. In particular, the Individual Defendants and THL had direct and supervisory
involvement in the day-to-day operations of the Company and, therefore, are presumed to have had
the power to control or influence the particular transactions giving rise to the securities violations
as alleged herein, and exercised the same.
156. As set forth above, Rayovac, THL and the Individual Defendants each violated
Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue
of their position each as controlling persons, THL and the Individual Defendants are liable pursuant
to Section 20(a) of the 1934 Act. As a direct and proximate result of Rayovac's, THL’s and the
Individual Defendants' wrongful conduct, Lead Plaintiffs and other members of the Class suffered
damages in connection with their purchases of the Company's securities during the Class Period.
PRAYER FOR RELIEF
WHEREFORE, Lead Plaintiffs, on behalf of the Class, pray for judgment as follows:
A. Determining that this action is a proper class action under Rules 23(a) and (b)(3) of
the Federal Rules of Civil Procedure;
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B. Declaring and determining that Defendants violated the federal securities laws by
reason of their conduct as alleged herein;
C. Awarding Lead Plaintiffs and all other members of the Class money damages for all
losses and injuries suffered as a result of the acts and transactions complained of herein, together
with pre-judgment interest on all of the aforesaid damages which the Court shall award from the date
of said wrongs to the date of judgment herein at a rate the Court shall fix;
D. Awarding Lead Plaintiffs and the Class rescission on Count II to the extent they still
hold Rayovac shares, or if sold, awarding recissory damages in accordance with Section 12(a)(2)
of the 1933 Act;
E. Awarding Lead Plaintiffs and all other members of the Class their costs and expenses
of this litigation, including reasonable attorneys' fees, accountants' fees and experts' fees and other
costs and disbursements; and
F. Awarding Lead Plaintiffs and other members of the Class such other and further relief
as may be just and proper under the circumstances.
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JURY TRIAL DEMANDED
Lead Plaintiffs demand a jury trial of all issues so triable.
Dated: January 9, 2003 By: ________________________________CAULEY GELLER BOWMAN& COATES LLPS. Gene CauleyJ. Allen CarneyT. Brent WalkerTiffany WyattP.O. Box 25438Little Rock, Arkansas 72221-5438(501) 312-8500Lead Counsel for Plaintiffs
MILBERG WEISS BERSHAD HYNES & LERACH LLPRegina LaPollaKristi StahnkeOne Pennsylvania Plaza - 48th FloorNew York, New York 10119(212) 594-5300
FRUCHTER & TWERSKY LLPJack G. FruchterOne Pennsylvania Plaza- 19th FloorNew York, NY 10119(212) 687-6655
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ADEMI & O’REILLY, LLPRobert O’ReillyGuri Ademi3620 East Layton AvenueCudahy, Wisconsin 53110(414) 482-8000Counsel for Plaintiffs
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CERTIFICATE OF SERVICE
I, the undersigned, hereby certify that a true and correct copy of the foregoing was servedon each of the persons listed below via Federal Express, postage prepaid, on this 9th day of January,2003.
James R. Carroll, Esq.SKADDEN, ARPS, SLATE, MEAGHER & FLOM, LLPOne Beacon StreetBoston, MA 02108
And served via U. S. Mail on the following this same day:
Stuart Berman, Esq.SCHIFFRIN & BARROWAY, LLPThree Bala Plaza EastSuite 500Bala Cynwyd, PA 19004
Michael E. Moskovitz, Esq.MUCH SHELIST FREED DENENBERG & AMENT200 North LaSalle StreetSuite 2100Chicago, IL 60601-1095
Susan LaCava, Esq.LACAVA LAW OFFICES23 N. Pinckney StreetMadison, WI 53703
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Fred Taylor Isquith, Esq.WOLF HALDENSTEIN ADLER FREEMAN & HERZ, LLP270 Madison AvenueNew York, NY 10016
Steven G. Schulman, Esq.Samuel H. Rudman, Esq.David A. Rosenfeld, Esq.MILBERG WEISS BERSHAD HYNES & LERACH, LLPOne Pennsylvania PlazaNew York, NY 10119
Robert O’Reilly, Esq.Guri Ademi, Esq.ADEMI & O’REILLY, LLP3620 East Layton AvenueCudahy, Wisconsin 53110
Evan Brodsky, Esq.BRODSKY & SMITH11 Bala AvenueBala Cynwyd, PA 19004