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EX-31.2 - EX-31.2 - Spectrum Brands Holdings, Inc.y92285exv31w2.htm
EX-31.1 - EX-31.1 - Spectrum Brands Holdings, Inc.y92285exv31w1.htm
EX-10.5 - EX-10.5 - Spectrum Brands Holdings, Inc.y92285exv10w5.htm
EX-32.1 - EX-32.1 - Spectrum Brands Holdings, Inc.y92285exv32w1.htm
EX-10.3 - EX-10.3 - Spectrum Brands Holdings, Inc.y92285exv10w3.htm
EX-32.2 - EX-32.2 - Spectrum Brands Holdings, Inc.y92285exv32w2.htm
EX-10.2 - EX-10.2 - Spectrum Brands Holdings, Inc.y92285exv10w2.htm
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 1-4219
Harbinger Group Inc.
(Exact name of registrant as specified in its charter)
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  74-1339132
(I.R.S. Employer
Identification No.)
     
450 Park Avenue, 27th Floor
New York, NY

(Address of principal executive offices)
  10022
(Zip Code)
(212) 906-8555
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ or No o.
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o or No o.
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large Accelerated Filer o   Accelerated Filer þ   Non-accelerated Filer o (Do not check if a smaller reporting company)   Smaller reporting company o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o or No þ
     There were 139,284,286 shares of the registrant’s common stock outstanding as of August 10, 2011.
 
 

 


 

HARBINGER GROUP INC.
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 EX-3.4
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 EX-10.2
 EX-10.3
 EX-10.5
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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PART I: FINANCIAL INFORMATION
Item 1.   Financial Statements
HARBINGER GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
                 
    July 3,     September 30,  
    2011     2010 (A)  
    (Unaudited)          
ASSETS
Consumer Products and Other:
               
Cash and cash equivalents
  $ 449,190     $ 256,831  
Short-term investments
    140,045       53,965  
Receivables, net
    411,248       406,447  
Inventories, net
    548,376       530,342  
Prepaid expenses and other current assets
    95,757       94,078  
 
           
Total current assets
    1,644,616       1,341,663  
Properties, net
    216,690       201,309  
Goodwill
    621,907       600,055  
Intangibles, net
    1,751,812       1,769,360  
Deferred charges and other assets
    110,747       103,808  
 
           
 
    4,345,772       4,016,195  
 
           
Insurance:
               
Investments:
               
Fixed maturities, available-for-sale, at fair value
    15,714,228        
Equity securities, available-for-sale, at fair value
    310,345        
Derivative investments
    205,185        
Other invested assets
    40,853        
 
           
Total investments
    16,270,611        
Cash and cash equivalents
    740,623        
Accrued investment income
    202,295        
Reinsurance recoverable
    1,626,233        
Intangibles, net
    501,820        
Deferred tax assets
    182,125        
Other assets
    50,346        
 
           
 
    19,574,053        
 
           
Total assets
  $ 23,919,825     $ 4,016,195  
 
           
LIABILITIES AND EQUITY
Consumer Products and Other:
               
Current portion of long-term debt
  $ 26,677     $ 20,710  
Accounts payable
    310,109       333,683  
Accrued and other current liabilities
    272,383       313,617  
 
           
Total current liabilities
    609,169       668,010  
Long-term debt
    2,218,958       1,723,057  
Equity conversion option of preferred stock
    79,740        
Employee benefit obligations
    96,644       97,946  
Deferred tax liabilities
    312,789       277,843  
Other liabilities
    61,794       71,512  
 
           
 
    3,379,094       2,838,368  
 
           
Insurance:
               
Contractholder funds
    14,684,482        
Future policy benefits
    3,626,275        
Liability for policy and contract claims
    77,303        
Note payable
    95,000        
Other liabilities
    466,029        
 
           
 
    18,949,089        
 
           
Total liabilities
    22,328,183       2,838,368  
 
           
 
               
Commitments and contingencies
               
 
               
Temporary equity:
               
Redeemable preferred stock
    186,219        
 
           
 
               
Harbinger Group Inc. stockholders’ equity:
               
Common stock
    1,392       1,392  
Additional paid-in capital
    867,061       855,767  
Accumulated deficit
    (44,661 )     (150,309 )
Accumulated other comprehensive income (loss)
    102,828       (5,195 )
 
           
Total Harbinger Group Inc. stockholders’ equity
    926,620       701,655  
Noncontrolling interest
    478,803       476,172  
 
           
Total permanent equity
    1,405,423       1,177,827  
 
           
Total liabilities and equity
  $ 23,919,825     $ 4,016,195  
 
           
 
(A)   Derived from the audited consolidated financial statements as of September 30, 2010.
See accompanying notes to condensed consolidated financial statements.

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HARBINGER GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
                                 
    Three Month Period Ended     Nine Month Period Ended  
    July 3, 2011     July 4, 2010     July 3, 2011     July 4, 2010  
    (Unaudited)     (Unaudited)  
Revenues:
                               
Consumer Products and Other:
                               
Net sales
  $ 804,635     $ 653,486     $ 2,359,586     $ 1,778,012  
 
                       
Insurance:
                               
Premiums
    25,118             25,118        
Net investment income
    176,885             176,885        
Net investment gains
    1,228             1,228        
Insurance and investment product fees and other
    26,424             26,424        
 
                       
 
    229,655             229,655        
 
                       
Total revenues
    1,034,290       653,486       2,589,241       1,778,012  
 
                       
Operating costs and expenses:
                               
Consumer Products and Other:
                               
Cost of goods sold
    510,941       400,617       1,511,215       1,131,101  
Selling, general and administrative expenses
    222,939       193,781       690,493       523,293  
 
                       
 
    733,880       594,398       2,201,708       1,654,394  
 
                       
Insurance:
                               
Benefits and other changes in policy reserves
    129,959             129,959        
Acquisition and operating expenses, net of deferrals
    28,595             28,595        
Amortization of intangibles
    21,340             21,340        
 
                       
 
    179,894             179,894        
 
                       
Total operating costs and expenses
    913,774       594,398       2,381,602       1,654,394  
 
                       
Operating income
    120,516       59,088       207,639       123,618  
Interest expense
    (51,904 )     (132,238 )     (192,650 )     (230,130 )
Bargain purchase gain from business acquisition
    134,668             134,668        
Other income (expense), net
    7,086       (1,312 )     7,049       (8,296 )
 
                       
Income (loss) from continuing operations before reorganization items and income taxes
    210,366       (74,462 )     156,706       (114,808 )
Reorganization items expense, net
                      3,646  
 
                       
Income (loss) from continuing operations before income taxes
    210,366       (74,462 )     156,706       (118,454 )
Income tax expense
    3,720       12,460       63,906       45,016  
 
                       
Income (loss) from continuing operations
    206,646       (86,922 )     92,800       (163,470 )
Loss from discontinued operations, net of tax
                      (2,735 )
 
                       
Net income (loss)
    206,646       (86,922 )     92,800       (166,205 )
Less: Net income (loss) attributable to noncontrolling interest
    13,015       (35,304 )     (18,811 )     (35,304 )
 
                       
Net income (loss) attributable to controlling interest
    193,631       (51,618 )     111,611       (130,901 )
Less: Preferred stock dividends and accretion
    5,963             5,963        
 
                       
Net income (loss) attributable to common and participating preferred stockholders
  $ 187,668     $ (51,618 )   $ 105,648     $ (130,901 )
 
                       
 
                               
Basic and diluted income (loss) per common share attributable to controlling interest:
                               
Continuing operations
  $ 1.03     $ (0.39 )   $ 0.58     $ (0.98 )
Discontinued operations
                      (0.02 )
 
                       
Net income (loss)
  $ 1.03     $ (0.39 )   $ 0.58     $ (1.00 )
 
                       
See accompanying notes to condensed consolidated financial statements.

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HARBINGER GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
                 
    Nine Month Period Ended  
    July 3, 2011     July 4, 2010  
    (Unaudited)  
Cash flows from operating activities:
               
Net income (loss)
  $ 92,800     $ (166,205 )
Loss from discontinued operations
          (2,735 )
 
           
Income (loss) from continuing operations
    92,800       (163,470 )
Adjustments to reconcile income (loss) from continuing operations to net cash used in continuing operating activities:
               
Bargain purchase gain from business acquisition
    (134,668 )      
Depreciation of properties
    34,785       39,488  
Amortization of intangibles
    64,413       31,744  
Stock-based compensation
    22,902       12,280  
Amortization of debt issuance costs
    9,876       6,657  
Amortization of debt discount
    4,105       17,358  
Write off of debt issuance costs on retired debt
    15,420       6,551  
Write off of unamortized discount on retired debt
    8,950       59,162  
Deferred income taxes
    68,951       12,000  
Interest credited/index credits to contractholder account balances
    80,563        
Amortization of fixed maturity discounts and premiums
    35,221        
Net recognized gains on investments and derivatives
    (8,985 )      
Charges assessed to contractholders for mortality and administration
    (14,259 )      
Deferred policy acquisition costs
    (17,293 )      
Cash transferred to reinsurer
    (25,907 )      
Administrative related reorganization items
          3,646  
Payments for administrative related reorganization items
          (47,173 )
Non-cash increase to cost of goods sold due to fresh-start reporting inventory valuation
          34,865  
Non-cash interest expense on 12% Notes
          20,317  
Non-cash restructuring and related charges
    8,312       10,355  
Changes in operating assets and liabilities:
               
Receivables
    (3,996 )     (2,736 )
Inventories
    (17,340 )     (50,200 )
Prepaid expenses and other current assets
    (11,695 )     (855 )
Accrued investment income
    12,227        
Reinsurance recoverable
    (71,766 )      
Accounts payable and accrued and other current liabilities
    (114,782 )     (53,251 )
Future policy benefits
    (5,736 )      
Liability for policy and contract claims
    16,903        
Other operating
    (92,425 )     18,479  
 
           
Net cash used in continuing operating activities
    (43,424 )     (44,783 )
Net cash used in discontinued operating activities
    (291 )     (9,812 )
 
           
Net cash used in operating activities
    (43,715 )     (54,595 )
 
           
Cash flows from investing activities:
               
Proceeds from investments sold, matured or repaid
    1,114,541        
Cost of investments acquired
    (1,254,487 )      
Acquisitions, net of cash acquired
    684,417       (2,577 )
Capital expenditures
    (27,649 )     (17,392 )
Cash acquired in common control transaction
          65,780  
Proceeds from sales of assets
    7,185       260  
Other investing activities, net
    (2,369 )      
 
           
Net cash provided by investing activities
    521,638       46,071  
 
           
Cash flows from financing activities:
               
Proceeds from senior secured notes
    498,459        
Proceeds from preferred stock issuance, net of issuance costs
    269,000        
Proceeds from new senior credit facilities, excluding new revolving credit facility, net of discount
          1,474,755  
Payment of extinguished senior credit facilities, excluding old revolving credit facility
    (93,400 )     (1,278,760 )
Reduction of other debt
    (905 )     (8,366 )
Proceeds from other debt financing
    15,349       51,849  
Debt issuance costs, net of refund
    (26,976 )     (54,931 )
Revolving credit facility activity
    55,000       (33,225 )
Payment of supplemental loan
          (45,000 )
Prepayment penalty
    (7,500 )      
Contractholder account deposits
    241,075        
Contractholder account withdrawals
    (491,182 )      
Other financing activities, net
    (1,447 )     (2,207 )
 
           
Net cash provided by financing activities
    457,473       104,115  
 
           
Effect of exchange rate changes on cash and cash equivalents
    (2,414 )     (7,086 )
Effect of exchange rate changes on cash and cash equivalents due to Venezuela hyperinflation
          (5,640 )
 
           
Net increase in cash and cash equivalents
    932,982       82,865  
Cash and cash equivalents at beginning of period
    256,831       97,800  
 
           
Cash and cash equivalents at end of period
  $ 1,189,813     $ 180,665  
 
           
 
               
Cash and cash equivalents — Consumer Products and Other
  $ 449,190     $ 180,665  
Cash and cash equivalents — Insurance
    740,623        
 
           
Total cash and cash equivalents at end of period
  $ 1,189,813     $ 180,665  
 
           
See accompanying notes to condensed consolidated financial statements.

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HARBINGER GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(Amounts in thousands, except per share figures)
(1) Description of Business and Basis of Presentation
Harbinger Group Inc. (“HGI” and, prior to June 16, 2010, its accounting predecessor as described below, collectively with their respective subsidiaries, the “Company”) is a diversified holding company that is 93.3% owned by Harbinger Capital Partners Master Fund I, Ltd. (the “Master Fund”), Global Opportunities Breakaway Ltd. and Harbinger Capital Partners Special Situations Fund, L.P. (together, the “Principal Stockholders”), not giving effect to the conversion of the Series A Participating Convertible Preferred Stock (the “Preferred Stock”) or the Series A-2 Participating Convertible Preferred Stock (the “Series A-2 Preferred Stock”) discussed in Note 9 and Note 22. HGI’s shares of common stock trade on the New York Stock Exchange (“NYSE”) under the symbol “HRG.”
HGI is focused on obtaining controlling equity stakes in companies that operate across a diversified set of industries. The Company has identified the following six sectors in which it intends to pursue investment opportunities: consumer products, insurance and financial products, telecommunications, agriculture, power generation and water and natural resources. In addition, the Company owns 98% of Zap.Com Corporation (“Zap.Com”), a public shell company that may seek assets or businesses to acquire.
On January 7, 2011, HGI completed the acquisition (the “Spectrum Brands Acquisition”) of a controlling financial interest in Spectrum Brands Holdings, Inc. (“Spectrum Brands”) under the terms of a contribution and exchange agreement (the “Exchange Agreement”) with the Principal Stockholders. The Principal Stockholders contributed approximately 54.5% of the then outstanding Spectrum Brands common stock to the Company and, in exchange for such contribution, the Company issued to the Principal Stockholders 119,910 shares of its common stock. As of July 3, 2011, the Principal Stockholders directly owned approximately 12.8% of the outstanding Spectrum Brands common stock. On July 20, 2011 and July 29, 2011, the Principal Stockholders sold approximately 5,495 and 824 shares, respectively, of the Spectrum Brands common stock they held and Spectrum Brands sold approximately 1,000 and 150 newly-issued shares, respectively, of its common stock in a public offering. As a result, the Company’s and the Principal Stockholders’ ownership of the outstanding common stock of Spectrum Brands was reduced to 53% and 0.3%, respectively.
Spectrum Brands was formed in connection with the combination (the “SB/RH Merger”) of Spectrum Brands, Inc. (“SBI”), a global branded consumer products company, and Russell Hobbs, Inc. (“Russell Hobbs”), a global branded small appliance company. The SB/RH Merger was consummated on June 16, 2010. As a result of the SB/RH Merger, both SBI and Russell Hobbs are wholly-owned subsidiaries of Spectrum Brands and Russell Hobbs is a wholly-owned subsidiary of SBI. Prior to the SB/RH Merger, the Principal Stockholders owned approximately 40% and 100% of the outstanding common stock of SBI and Russell Hobbs, respectively. Spectrum Brands issued an approximately 65% controlling financial interest to the Principal Stockholders and an approximately 35% noncontrolling financial interest to other stockholders (other than the Principal Stockholders) in the SB/RH Merger. Spectrum Brands trades on the NYSE under the symbol “SPB.”
Immediately prior to the Spectrum Brands Acquisition, the Principal Stockholders held controlling financial interests in both HGI and Spectrum Brands. As a result, the Spectrum Brands Acquisition is considered a transaction between entities under common control under Accounting Standards Codification (“ASC”) Topic 805 — “Business Combinations,” and is accounted for similar to the pooling of interest method. In accordance with the guidance in ASC Topic 805, the assets and liabilities transferred between entities under common control are recorded by the receiving entity based on their carrying amounts (or at the historical cost basis of the parent, if these amounts differ). Although HGI was the issuer of shares in the Spectrum Brands Acquisition, during the historical periods presented Spectrum Brands was an operating business and HGI was not. Therefore, Spectrum Brands has been reflected as the predecessor and receiving entity in the Company’s financial statements to provide a more meaningful presentation of the transaction to the Company’s stockholders. Accordingly, the Company’s financial statements have been retrospectively adjusted to reflect as the Company’s historical financial statements, those of SBI prior to June 16, 2010 and the combination of Spectrum Brands, HGI and HGI’s other subsidiaries thereafter. HGI’s assets and liabilities have been recorded at the Principal Stockholders’ basis as of June 16, 2010, the date that common control was first established. As SBI was the accounting acquirer in the SB/RH Merger, the financial statements of SBI are included as the Company’s predecessor entity for periods preceding the June 16, 2010 date of the SB/RH Merger.
In connection with the Spectrum Brands Acquisition, the Company changed its fiscal year end from December 31 to September 30 to

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conform to the fiscal year end of Spectrum Brands. As a result of this change in fiscal year end, the Company’s quarterly reporting periods for fiscal year 2011, subsequent to the Spectrum Brands Acquisition, ended on April 3, 2011 and July 3, 2011.
As discussed further in Note 17, on April 6, 2011 (the “FGL Acquisition Date”), the Company acquired Fidelity & Guaranty Life Holdings, Inc. (formerly, Old Mutual U.S. Life Holdings, Inc.), a Delaware corporation (“FGL”), from OM Group (UK) Limited (“OMGUK”). Such acquisition (the “FGL Acquisition”) has been accounted for using the acquisition method of accounting. Accordingly, the results of FGL’s operations have been included in the Company’s Condensed Consolidated Financial Statements commencing April 6, 2011.
FGL’s primary business is the sale of individual life insurance products and annuities through independent agents, managing general agents, and specialty brokerage firms and in selected institutional markets. FGL’s principal products are deferred annuities (including fixed indexed annuities), immediate annuities and life insurance products. FGL markets products through its wholly-owned insurance subsidiaries, Fidelity & Guaranty Life Insurance Company (“FGL Insurance”) and Fidelity & Guaranty Life Insurance Company of New York (“FGL Insurance NY”), which together are licensed in all fifty states and the District of Columbia.
As a result of the Spectrum Brands Acquisition and the FGL Acquisition, the Company currently operates in two business segments, consumer products and insurance (see Note 21 for segment data).
The accompanying unaudited Condensed Consolidated Financial Statements of the Company (which present SBI as the accounting predecessor prior to June 16, 2010) included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information. All such adjustments are of a normal recurring nature, except for the FGL purchase accounting adjustments discussed in Note 17. Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), have been condensed or omitted pursuant to such rules and regulations. These interim financial statements should be read in conjunction with the Company’s retrospectively adjusted annual consolidated financial statements and notes thereto which are included in the Company’s Current Report on Form 8-K filed with the SEC on June 10, 2011. The results of operations for the nine months ended July 3, 2011 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending September 30, 2011.
(2) Comprehensive Income (Loss)
Comprehensive income (loss) and the components of other comprehensive income (loss), net of tax, for the three and nine month periods ended July 3, 2011 and July 4, 2010 are as follows:

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    Three Months     Nine Months  
    2011     2010     2011     2010  
Net income (loss)
  $ 206,646     $ (86,922 )   $ 92,800     $ (166,205 )
 
                       
 
Other comprehensive income (loss):
                               
Consumer Products and Other:
                               
Foreign currency translation
    13,139       (2,870 )     33,009       (9,306 )
Valuation allowance adjustments
    (216 )     668       860       (2,453 )
Pension liability adjustments
                      (52 )
Net unrealized (loss) on derivative instruments
    (653 )     1,548       (3,718 )     (1,850 )
 
                       
 
    12,270       (654 )     30,151       (13,661 )
 
                       
Insurance:
                               
Unrealized investment gains (losses):
                               
Changes in unrealized investment gains before reclassification adjustment
    227,381             227,381        
Net reclassification adjustment for gains included in net income
    (15,032 )           (15,032 )      
 
                       
Changes in unrealized investment gains after reclassification adjustment
    212,349             212,349        
Adjustments to intangible assets
    (71,344 )           (71,344 )      
Changes in deferred income tax asset/liability
    (49,352 )           (49,352 )      
 
                       
Net unrealized gain on investments
    91,653             91,653        
 
                       
Non-credit related other-than-temporary impairment:
                               
Changes in non-credit related other-than-temporary impairment
    (144 )           (144 )      
Adjustments to intangible assets
    48             48        
Changes in deferred income tax asset/liability
    34             34        
 
                       
Net non-credit related other-than-temporary impairment
    (62 )           (62 )      
 
                       
Net change to derive comprehensive loss for the period
    103,861       (654 )     121,742       (13,661 )
 
                       
Comprehensive income (loss)
    310,507       (87,576 )     214,542       (179,866 )
 
                       
Less: Comprehensive income (loss) attributable to the noncontrolling interest:
                               
Net income (loss)
    13,015       (35,304 )     (18,811 )     (35,304 )
Other comprehensive income (loss)
    5,583       3,506       13,719       3,506  
 
                       
 
    18,598       (31,798 )     (5,092 )     (31,798 )
 
                       
Comprehensive income (loss) attributable to the controlling interest
  $ 291,909     $ (55,778 )   $ 219,634     $ (148,068 )
 
                       
Net exchange gains or losses resulting from the translation of assets and liabilities of foreign subsidiaries are accumulated, net of taxes and noncontrolling interest, in the “Accumulated other comprehensive income (loss)” (“AOCI”) section of HGI’s stockholders’ equity. Also included are the effects of exchange rate changes on intercompany balances of a long-term nature and transactions designated as hedges of net foreign investments.
The changes in accumulated foreign currency translation for the three and nine month periods ended July 3, 2011 and July 4, 2010 were primarily attributable to the impact of translation of the net assets of the Company’s European and Latin American operations, primarily denominated in Euros, Pounds Sterling and Brazilian Real.
Net unrealized gains and losses on investment securities classified as available-for-sale are reduced by deferred income taxes and adjustments to intangible assets, including value of business acquired (“VOBA”) and deferred policy acquisition costs (“DAC”), that would have resulted had such gains and losses been realized. Changes in net unrealized gains and losses on investment securities classified as available-for-sale are recognized in other comprehensive income and loss. See Note 7 for additional disclosures regarding VOBA and DAC.

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(3) Investments
Consumer Products and Other
HGI’s short-term investments consist of (1) marketable equity and debt securities classified as trading and carried at fair value with unrealized gains and losses recognized in earnings, including certain securities for which the Company has elected the fair value option under ASC 825, Financial Instruments, which would otherwise have been classified as available-for-sale, and (2) U.S. Treasury securities and a certificate of deposit classified as held to maturity and carried at amortized cost, which approximates fair value. The Company’s short-term investments are summarized as follows:
                 
    July 3,     September 30,  
    2011     2010  
Trading:
               
Marketable equity securities
  $ 103,408     $  
Marketable debt securities
    778        
 
           
 
    104,186        
 
           
Held to maturity:
               
U.S. Treasury securities
    35,609       53,965  
Certificate of deposit
    250        
 
           
 
    35,859       53,965  
 
           
Total
  $ 140,045     $ 53,965  
 
           
There was $1,058 of net unrealized gains recognized in “Other income (expense), net” during the three and nine months ended July 3, 2011 that relate to trading securities held at July 3, 2011.
Insurance
FGL’s debt and equity securities have been designated as available-for-sale and are carried at fair value with unrealized gains and losses included in AOCI, net of associated VOBA, DAC and deferred income taxes. The amortized cost, gross unrealized gains (losses), and fair value of available-for-sale securities of FGL at July 3, 2011 were as follows:
                                 
            Gross Unrealized     Gross Unrealized        
    Amortized Cost     Gains     Losses     Fair Value  
Available-for-sale securities
                               
Asset-backed securities
  $ 514,291     $ 5,849     $ (261 )   $ 519,879  
Commercial mortgage-backed securities
    614,912       8,304       (6,341 )     616,875  
Corporates
    11,642,202       188,997       (21,909 )     11,809,290  
Equities
    308,939       3,612       (2,206 )     310,345  
Hybrids
    707,553       10,645       (4,411 )     713,787  
Municipals
    801,505       32,970       (503 )     833,972  
Agency residential mortgage-backed securities
    225,751       2,563       (203 )     228,111  
Non-agency residential mortgage-backed securities
    531,932       6,202       (13,298 )     524,836  
U.S. Government
    465,284       2,512       (318 )     467,478  
 
                       
Total available-for-sale securities
  $ 15,812,369     $ 261,654     $ (49,450 )   $ 16,024,573  
 
                       
At July 3, 2011, Non-agency residential-mortgage-backed securities had an other-than-temporary impairment of $(144).

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The amortized cost and fair value of fixed maturity available-for-sale securities by contractual maturities, as applicable, at July 3, 2011 were as follows:
                 
Corporate, Municipal and U.S. Government securities:   Amortized Cost     Fair Value  
Due in one year or less
  $ 365,252     $ 366,031  
Due after one year through five years
    2,853,640       2,886,449  
Due after five years through ten years
    4,606,324       4,685,515  
Due after ten years
    5,083,775       5,172,745  
 
           
Subtotal
    12,908,991       13,110,740  
 
           
 
               
Other securities which provide for periodic payments:            
Asset-backed securities
    514,291       519,879  
Commercial mortgage-backed securities
    614,912       616,875  
Hybrids
    707,553       713,787  
Agency residential mortgage-backed securities
    225,751       228,111  
Non-agency residential mortgage-backed securities
    531,932       524,836  
 
           
Total fixed maturity available-for-sale securities
  $ 15,503,430     $ 15,714,228  
 
           
Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.
As part of FGL’s ongoing securities monitoring process, FGL evaluates whether securities in an unrealized loss position could potentially be other-than-temporarily impaired. FGL has concluded that the declines in fair values of the securities in the sectors presented in the tables below were not other-than-temporary impairments as of July 3, 2011, except for the non-credit portion of other-than-temporary impairments of non-agency residential mortgage-backed securities of $144. This conclusion is derived from the issuers’ continued satisfaction of the securities’ obligations in accordance with their contractual terms along with the expectation that they will continue to do so, including an assessment of the issuers’ financial condition, and other objective evidence. Also contributing to this conclusion is its determination that it is more likely than not that FGL will not be required to sell these securities prior to recovery. As it specifically relates to asset-backed securities and commercial mortgage-backed securities, the present value of cash flows expected to be collected is at least the amount of the amortized cost basis of the security and FGL management has a lack of intent to sell these securities for a period of time sufficient to allow for any anticipated recovery in fair value.
As the amortized cost of all investments was adjusted to fair value as of the FGL Acquisition Date, no individual securities have been in a continuous unrealized loss position greater than twelve months. The fair value and gross unrealized losses, of available-for-sale securities with gross unrealized losses, aggregated by investment category, were as follows:

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    July 3, 2011  
            Gross Unrealized  
    Fair Value     Losses  
Available-for-sale securities
               
Asset-backed securities
  $ 48,060     $ (261 )
Commercial mortgage-backed securities
    271,584       (6,341 )
Corporates
    1,766,048       (21,909 )
Equities
    72,111       (2,206 )
Hybrids
    277,085       (4,411 )
Municipals
    46,997       (503 )
Agency residential mortgage-backed securities
    14,016       (203 )
Non-agency residential mortgage-backed securities
    350,286       (13,298 )
U.S. Government
    229,270       (318 )
 
           
Total available-for-sale securities
  $ 3,075,457     $ (49,450 )
 
           
 
               
Total number of available-for-sale securities in an unrealized loss position
            298  
 
             
At July 3, 2011, securities in an unrealized loss position were primarily concentrated in investment grade corporate debt instruments, residential mortgage-backed securities and commercial mortgage-backed securities. Total unrealized losses were $49,450 at July 3, 2011. The unrealized loss position is primarily the result of risk premiums in finance and related sectors remaining elevated.
At July 3, 2011, securities with a fair value of $3,947 were depressed greater than 20% of amortized cost, which represented less than 1% of the carrying values of all investments. Based upon FGL’s current evaluation of these securities in accordance with its impairment policy and FGL’s intent to retain these investments for a period of time sufficient to allow for recovery in value, FGL has determined that these securities are temporarily impaired.
For the period from April 6, 2011 to June 30, 2011, FGL recognized credit losses in operations totaling $1,259 related to non-agency residential mortgage-backed securities, which experience other-than-temporary impairments that had not previously been recognized, and had an amortized cost of $12,140 and a fair value of $10,737 at the time of impairment.
Net Investment Income
The major categories of net investment income on the Company’s Condensed Consolidated Statements of Operations were as follows:

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    For the period  
    April 6, 2011 to  
    July 3, 2011  
Fixed maturity available-for-sale securities
  $ 174,181  
Equity available-for-sale securities
    5,641  
Policy loans
    800  
Invested cash and short-term investments
    72  
Other investments
    (291 )
 
     
Gross investment income
    180,403  
Investment expense
    (3,518 )
 
     
Net investment income
  $ 176,885  
 
     
Net Investment Gains (Losses)
Details underlying net investment gains (losses) reported on the Company’s Condensed Consolidated Statements of Operations were as follows:
         
    For the period  
    April 6, 2011 to  
    July 3, 2011  
Net realized gain on fixed maturity available-for-sale securities
  $ 15,137  
Realized (loss) on equity securities
    (105 )
 
     
Net realized gains on securities
    15,032  
 
     
Realized (loss) on certain derivative instruments
    (3,258 )
Unrealized (loss) on certain derivative instruments
    (10,546 )
 
     
Change in fair value of derivatives
    (13,804 )
 
     
Net investment gains
  $ 1,228  
 
     
Additional detail regarding the net realized gain on securities is as follows:
         
    For the period  
    April 6, 2011 to  
    July 3, 2011  
Total other-than-temporarily impaired
  $ (1,403 )
Portion of other-than-temporarily impaired included in other comprehensive income
    144  
 
     
 
    (1,259 )
Other investment gains
    16,291  
 
     
Net realized gains on securities
  $ 15,032  
 
     
For the period from April 6, 2011 to July 3, 2011, proceeds from the sale of available-for-sale securities totaled $461,506, gross gains on the sale of available-for-sale securities totaled $12,866 and gross losses totaled $1,815.
Underlying write-downs taken to residential mortgage-backed securities investments as a result of other-than-temporary impairments that were recognized in net income and included in net realized gains on available-for-sale securities above were $1,259 for the period from April 6, 2011 to July 3, 2011. The portion of other-than-temporary impairments recognized in AOCI is disclosed in Note 2.
Cash flows from investing activities by security classification were as follows:
         
    Nine Months  
    Ended  
    July 3, 2011  
Proceeds from investments sold, matured or repaid:
       
Available-for-sale
  $ 648,243  
Held-to-maturity
    70,792  
Trading
    331,417  
Derivatives and other
    64,089  
 
     
 
  $ 1,114,541  
 
     
Cost of investments acquired:
       
Available-for-sale
  $ (730,468 )
Held-to-maturity
    (52,682 )
Trading
    (433,810 )
Derivatives and other
    (37,527 )
 
     
 
  $ (1,254,487 )
 
     

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Concentrations of Financial Instruments
As of July 3, 2011, FGL’s most significant investment in one industry was FGL’s investment securities in the banking industry with a fair value of $2,049,367, or 12.6% of the invested assets portfolio. FGL utilized the industry classifications to obtain the concentration of financial instruments amount; as such, this amount will not agree to the available-for-sale securities table above. As of July 3, 2011, FGL’s exposure to sub-prime and Alternative-A residential mortgage-backed securities was $314,182 and $36,222 or 1.9% and 0.2% of FGL’s invested assets, respectively.
(4) Derivative Financial Instruments
HGI
As of July 3, 2011, the Company had outstanding Preferred Stock that contained a conversion option (see Note 9). If the Company were to issue certain equity securities at a price lower than the conversion price of the Preferred Stock, the conversion price would be adjusted to the share price of the newly issued equity securities (a “down round” provision). Therefore, in accordance with the guidance in ASC 815, Derivatives and Hedging, this conversion option is considered to be an embedded derivative that must be separately accounted for as a liability at fair value with any changes in fair value reported in current earnings. This embedded derivative has been bifurcated from its host contract, marked to fair value and included in “Equity conversion option of preferred stock” in the “Consumer Products and Other” sections of the accompanying Condensed Consolidated Balance Sheet with the change in fair value included as a component of “Other income (expense), net” in the Condensed Consolidated Statements of Operations. The Company valued the conversion feature using the Monte Carlo simulation approach, which utilizes various inputs including the Company’s stock price, volatility, risk free rate and discount yield.
The estimated fair value of the bifurcated conversion option at July 3, 2011 was $79,740. The Company recorded income of $5,960 in “Other income (expense), net” due to a change in fair value from the May 13, 2011 issue date.
Spectrum Brands
Derivative financial instruments are used by Spectrum Brands principally in the management of its interest rate, foreign currency and raw material price exposures. Spectrum Brands does not hold or issue derivative financial instruments for trading purposes. When hedge accounting is elected at inception, Spectrum Brands formally designates the financial instrument as a hedge of a specific underlying exposure if such criteria are met, and documents both the risk management objectives and strategies for undertaking the hedge. Spectrum Brands formally assesses both at the inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in the forecasted cash flows of the related underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the forecasted cash flows of the underlying exposures being hedged. Any ineffective portion of a financial instrument’s change in fair value is immediately recognized in earnings. For derivatives that are not designated as cash flow hedges, or do not qualify for hedge accounting treatment, the change in the fair value is also immediately recognized in earnings.
The fair value of outstanding derivative contracts recorded in the “Consumer Products and Other” sections of the accompanying Condensed Consolidated Balance Sheet were as follows:

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Asset Derivatives   Classification   July 3, 2011     September 30, 2010  
Derivatives designated as hedging instruments:
                   
Commodity contracts
  Receivables   $ 1,997     $ 2,371  
Commodity contracts
  Deferred charges and other assets     1,424       1,543  
Foreign exchange contracts
  Receivables     588       20  
Foreign exchange contracts
  Deferred charges and other assets     2       55  
 
               
Total asset derivatives designated as hedging instruments
        4,011       3,989  
Derivatives not designated as hedging instruments:
                   
Foreign exchange contracts
  Receivables     38        
 
               
Total asset derivatives
      $ 4,049     $ 3,989  
 
               
                     
Liability Derivatives   Classification   July 3, 2011     September 30, 2010  
Derivatives designated as hedging instruments:
                   
Interest rate contracts
  Accounts payable   $ 2,620     $ 3,734  
Interest rate contracts
  Accrued and other current liabilities     854       861  
Interest rate contracts
  Other liabilities           2,032  
Commodity contracts
  Accounts payable     105        
Foreign exchange contracts
  Accounts payable     13,644       6,544  
Foreign exchange contracts
  Other liabilities     1,517       1,057  
 
               
Total liability derivatives designated as hedging instruments
        18,740       14,228  
Derivatives not designated as hedging instruments:
                   
Foreign exchange contracts
  Accounts payable     15,520       9,698  
Foreign exchange contracts
  Other liabilities     22,669       20,887  
 
               
Total liability derivatives
      $ 56,929     $ 44,813  
 
               
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.
The following table summarizes the pretax impact of derivative instruments designated as cash flow hedges on the accompanying Condensed Consolidated Statements of Operations for the three and nine month periods ended July 3, 2011 and July 4, 2010:
                                                     
                                    Amount of Gain ( Loss)      
                                    Recognized in Income on      
    Amount of Gain (Loss)     Amount of Gain (Loss)     Derivatives (Ineffective      
Derivatives in Cash
Flow Hedging
  Recognized in AOCI on
Derivatives
    Reclassified from AOCI
into Income
    Portion and Amount
Excluded from
    Location of Gain
(Loss) Recognized
Relationships   (Effective Portion)     (Effective Portion)     Effectivess Testing)     in Income on
Three Months   2011     2010     2011     2010     2011     2010   Derivatives
Commodity contracts
  $ (109 )   $ (4,647 )   $ 587     $ 155     $ 16     $ (73 )   Cost of goods sold
Interest rate contracts
    (42 )     (998 )     (839 )     (587 )     (44 )     (5,845) (A)   Interest expense
Foreign exchange contracts
    (11 )     (864 )     105       (216 )               Net sales
Foreign exchange contracts
    (5,011 )     5,820       (4,346 )     1,601                 Cost of goods sold
 
                                       
Total
  $ (5,173 )   $ (689 )   $ (4,493 )   $ 953     $ (28 )   $ (5,918 )    
 
                                       
                                                     
Nine Months   2011     2010     2011     2010     2011     2010      
Commodity contracts
  $ 1,764     $ (2,201 )   $ 1,921     $ 1,106     $ 17     $ 68     Cost of goods sold
Interest rate contracts
    (102 )     (12,644 )     (2,527 )     (3,565 )     (294 )     (5,845) (A)   Interest expense
Foreign exchange contracts
    216       (1,214 )     (102 )     (402 )               Net sales
Foreign exchange contracts
    (15,801 )     7,865       (8,438 )     1,382                 Cost of goods sold
 
                                       
Total
  $ (13,923 )   $ (8,194 )   $ (9,146 )   $ (1,479 )   $ (277 )   $ (5,777 )    
 
                                       
 
(A)   Includes $(4,305) reclassified from AOCI associated with the refinancing of the senior credit facility (see Note 8).

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Fair Value Contracts
For derivative instruments that are used to economically hedge the fair value of Spectrum Brands’ third party and intercompany foreign exchange payments, commodity purchases and interest rate payments, the gain (loss) is recognized in earnings in the period of change associated with the derivative contract. During the three and nine month periods ended July 3, 2011 and July 4, 2010 Spectrum Brands recognized the following gains (losses) on these derivative contracts:
                                     
    Amount of Gain (Loss) Recognized in Income on
Derivatives
    Location of Gain (Loss)
Derivatives Not Designated   Three Months     Nine Months     Recognized in Income on
as Hedging Instruments   2011     2010     2011     2010     Derivatives
Commodity contracts
  $     $ (53 )   $     $ 99     Cost of goods sold
Foreign exchange contracts
    (7,578 )     (9,538 )     (17,468 )     (11,827 )   Other income (expense), net
 
                           
Total
  $ (7,578 )   $ (9,591 )   $ (17,468 )   $ (11,728 )    
 
                           
Additional Disclosures
Cash Flow Hedges
Spectrum Brands uses interest rate swaps to manage its interest rate risk. The swaps are designated as cash flow hedges with the changes in fair value recorded in AOCI and as a derivative hedge asset or liability, as applicable. The swaps settle periodically in arrears with the related amounts for the current settlement period payable to, or receivable from, the counter-parties included in accrued liabilities or receivables, respectively, and recognized in earnings as an adjustment to interest expense from the underlying debt to which the swap is designated. At July 3, 2011, Spectrum Brands had a portfolio of U.S. dollar denominated interest rate swaps outstanding, which effectively fix the interest on floating rate debt (exclusive of lender spreads), as follows: 2.25% for a notional principal amount of $300,000 through December 2011 and 2.29% for a notional principal amount of $300,000 through January 2012. At September 30, 2010, Spectrum Brands had a portfolio of U.S. dollar-denominated interest rate swaps outstanding, which effectively fixed the interest on floating rate debt (exclusive of lender spreads), as follows: 2.25% for a notional principal amount of $300,000 through December 2011 and 2.29% for a notional principal amount of $300,000 through January 2012 (the “U.S. dollar swaps”). The derivative net loss on these contracts recorded in AOCI at July 3, 2011 was $(639), net of tax benefit of $718 and noncontrolling interest of $533. The derivative net loss on the U.S. dollar swaps contracts recorded in AOCI at September 30, 2010 was $(1,458), net of tax benefit of $1,640 and noncontrolling interest of $1,217. At July 3, 2011, the portion of derivative net losses estimated to be reclassified from AOCI into earnings over the next 12 months is $(639), net of tax and noncontrolling interest.
Spectrum Brands periodically enters into forward foreign exchange contracts to hedge the risk from forecasted foreign denominated third party and intercompany sales or payments. These obligations generally require Spectrum Brands to exchange foreign currencies for U.S. Dollars, Euros, Pounds Sterling, Australian Dollars, Brazilian Reals, Canadian Dollars or Japanese Yen. These foreign exchange contracts are cash flow hedges of fluctuating foreign exchange related to sales or product or raw material purchases. Until the sale or purchase is recognized, the fair value of the related hedge is recorded in AOCI and as a derivative hedge asset or liability, as applicable. At the time the sale or purchase is recognized, the fair value of the related hedge is reclassified as an adjustment to “Net sales” or purchase price variance in “Cost of goods sold”. At July 3, 2011, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through September 2012 with a contract value of $270,955. At September 30, 2010, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through June 2012 with a contract value of $299,993. The derivative net loss on these contracts recorded in AOCI at July 3, 2011 was $(5,614), net of tax benefit of $4,270 and noncontrolling interest of $4,687. The derivative net loss on these contracts recorded in AOCI at September 30, 2010 was $(2,900), net of tax benefit of $2,204 and noncontrolling interest of $2,422. At July 3, 2011, the portion of derivative net losses estimated to be reclassified from AOCI into earnings over the next 12 months is $(5,042) net of tax and noncontrolling interest.
Spectrum Brands is exposed to risk from fluctuating prices for raw materials, specifically zinc used in its manufacturing processes. Spectrum Brands hedges a portion of the risk associated with these materials through the use of commodity swaps. The hedge contracts are designated as cash flow hedges with the fair value changes recorded in AOCI and as a hedge asset or liability, as applicable. The unrecognized changes in fair value of the hedge contracts are reclassified from AOCI into earnings when the hedged purchase of raw materials also affects earnings. The swaps effectively fix the floating price on a specified quantity of raw materials through a specified date. At July 3, 2011, Spectrum Brands had

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a series of such swap contracts outstanding through September 2012 for 10 tons of raw materials with a contract value of $20,872. At September 30, 2010, Spectrum Brands had a series of such swap contracts outstanding through September 2012 for 15 tons of raw materials with a contract value of $28,897. The derivative net gain on these contracts recorded in AOCI at July 3, 2011 was $1,173, net of tax expense of $1,147 and noncontrolling interest of $980. The derivative net gain on these contracts recorded in AOCI at September 30, 2010 was $1,230, net of tax expense of $1,201 and noncontrolling interest of $1,026. At July 3, 2011, the portion of derivative net gains estimated to be reclassified from AOCI into earnings over the next 12 months is $679, net of tax and noncontrolling interest.
Fair Value Contracts
Spectrum Brands periodically enters into forward and swap foreign exchange contracts to economically hedge the risk from third party and intercompany payments resulting from existing obligations. These obligations generally require Spectrum Brands to exchange foreign currencies for U.S. Dollars, Euros or Australian Dollars. These foreign exchange contracts are economic fair value hedges of a related liability or asset recorded in the accompanying Condensed Consolidated Balance Sheets. The gain or loss on the derivative hedge contracts is recorded in earnings as an offset to the change in value of the related liability or asset at each period end. At July 3, 2011 and September 30, 2010, Spectrum Brands had $277,510 and $333,562, respectively, of notional value for such foreign exchange derivative contracts outstanding.
Credit Risk
Spectrum Brands is exposed to the default risk of the counterparties with which Spectrum Brands transacts. Spectrum Brands monitors counterparty credit risk on an individual basis by periodically assessing each such counterparty’s credit rating exposure. The maximum loss due to credit risk equals the fair value of the gross asset derivatives that are primarily concentrated with a foreign financial institution counterparty. Spectrum Brands considers these exposures when measuring its credit reserve on its derivative assets, which were $62 and $75 at July 3, 2011 and September 30, 2010, respectively. Additionally, Spectrum Brands does not require collateral or other security to support financial instruments subject to credit risk.
Spectrum Brands’ standard contracts do not contain credit risk related contingent features whereby Spectrum Brands would be required to post additional cash collateral as a result of a credit event. However, Spectrum Brands is typically required to post collateral in the normal course of business to offset its liability positions. At both July 3, 2011 and September 30, 2010, Spectrum Brands had posted cash collateral of $294 and $2,363, respectively, related to such liability positions. In addition, at both July 3, 2011 and September 30, 2010, Spectrum Brands had posted standby letters of credit of $2,000 and $4,000 related to such liability positions. The cash collateral is included in “Receivables, net” within the accompanying Condensed Consolidated Balance Sheets.
FGL
FGL recognizes all derivative instruments as assets or liabilities in the Condensed Consolidated Balance Sheet at fair value and any changes in the fair value of the derivatives are recognized immediately in the Condensed Consolidated Statements of Operations. The fair value of derivative instruments, including derivative instruments embedded in Fixed Index Annuity (“FIA”) contracts, is as follows:

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    July 3, 2011  
Assets:
       
Derivative investments:
       
Call options
  $ 203,671  
Futures contracts
    1,514  
 
     
 
  $ 205,185  
 
     
 
       
Liabilities:
       
 
       
Contractholder funds:
       
FIA embedded derivatives
  $ 1,444,506  
Other liabilities:
       
Available-for-sale embedded derivative
    411  
 
     
 
  $ 1,444,917  
 
     
The change in fair value of derivative instruments included in the Condensed Consolidated Statements of Operations is as follows:
         
    For the period  
    April 6, 2011 to  
    July 3, 2011  
Revenues:
       
Net investment gains (losses):
       
Call options
  $ (15,400 )
Futures contracts
    1,596  
 
     
 
    (13,804 )
Net investment income:
       
Available-for-sale embedded derivatives
    8  
 
     
 
  $ (13,796 )
 
     
 
       
Benefits and other changes in policy reserves:
       
FIA embedded derivatives
  $ (21,802 )
 
     
FGL has FIA contracts that permit the holder to elect an interest rate return or an equity index linked component, where interest credited to the contracts is linked to the performance of various equity indices, primarily the S&P 500 Index. This feature represents an embedded derivative. The FIA embedded derivative is valued at fair value and included in the liability for contractholder funds in the Condensed Consolidated Balance Sheet with changes in fair value included as a component of benefits and other changes in policy reserves in the Condensed Consolidated Statements of Operations.
When FIA deposits are received from policyholders, a portion of the deposit is used to purchase derivatives consisting of a combination of call options and futures contracts on the applicable market indices to fund the index credits due to FIA contractholders. The majority of all such call options are one year options purchased to match the funding requirements of the underlying policies. On the respective anniversary dates of the index policies, the index used to compute the interest credit is reset and FGL purchases new one, two or three year call options to fund the next index credit. FGL manages the cost of these purchases through the terms of its FIA contracts, which permit FGL to change caps or participation rates, subject to guaranteed minimums on each contract’s anniversary date. The change in the fair value of the call options and futures contracts is generally designed to offset the portion of the change in the fair value of the FIA embedded derivative related to index performance. The call options and futures contracts are marked to fair value with the change in fair value included as a component of net investment gains (losses). The change in fair value of the call options and futures contracts includes the gains and losses recognized at the expiration of the instrument term or upon early termination and the changes in fair value of open positions.
Other market exposures are hedged periodically depending on market conditions and FGL’s risk tolerance. FGL’s FIA hedging

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strategy economically hedges the equity returns and exposes FGL to the risk that unhedged market exposures result in divergence between changes in the fair value of the liabilities and the hedging assets. FGL uses a variety of techniques including direct estimation of market sensitivities and value-at-risk to monitor this risk daily. FGL intends to continue to adjust the hedging strategy as market conditions and FGL’s risk tolerance change.
FGL is exposed to credit loss in the event of nonperformance by its counterparties on the call options and reflects assumptions regarding this nonperformance risk in the fair value of the call options. The nonperformance risk is the net counterparty exposure based on the fair value of the open contracts less collateral held. The credit risk associated with such agreements is minimized by purchasing such agreements from several financial institutions with ratings above “A3” from Moody’s Investor Services or “A-” from Standard and Poor’s Corporation. Additionally, FGL maintains a policy of requiring all derivative contracts to be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement.
Information regarding FGL’s exposure to credit loss on the call options it holds is presented in the following table:
                                         
            July 3, 2011        
            Notional             Collateral     Net Credit  
Counterparty   Credit Rating     Amount     Fair Value     Held     Risk  
Barclay’s Bank
  Aa3   $ 410,820     $ 20,158     $     $ 20,158  
Credit Suisse
  Aa1     436,595       22,265       19,360       2,905  
Bank of America
    A2       1,543,319       55,171             55,171  
Deutsche Bank
  Aa3     1,570,408       51,411       18,013       33,398  
Morgan Stanley
    A2       1,655,489       54,666       28,085       26,581  
 
                               
 
          $ 5,616,631     $ 203,671     $ 65,458     $ 138,213  
 
                               
In addition to the collateral presented in the table above, FGL has fixed maturity securities of $20,190 pledged as collateral by Bank of America which are considered off balance sheet and therefore not recorded in the Condensed Consolidated Financial Statements as of July 3, 2011. FGL holds cash and cash equivalents received from counterparties for call option collateral, which is included in “Other liabilities” in the “Insurance” sections of the Condensed Consolidated Balance Sheet. Both the cash and cash equivalents and fixed maturity securities held as collateral limit the maximum amount of loss due to credit risk that FGL would incur if parties to the call options failed completely to perform according to the terms of the contracts to $118,023 at July 3, 2011.
FGL is required to maintain minimum ratings as a matter of routine practice in its ISDA agreements. Under some ISDA agreements, FGL has agreed to maintain certain financial strength ratings. A downgrade below these levels could result in termination of the open derivative contracts between the parties, at which time any amounts payable by FGL or the counterparty would be dependent on the market value of the underlying derivative contracts. Downgrades of FGL have given multiple counterparties the right to terminate ISDA agreements. No ISDA agreements have been terminated, although the counterparties have reserved the right to terminate the ISDA agreements at any time. In certain transactions, FGL and the counterparty have entered into a collateral support agreement requiring either party to post collateral when the net exposures exceed pre-determined thresholds. These thresholds vary by counterparty and credit rating. Downgrades of FGL’s ratings have increased the threshold amount in FGL’s collateral support agreements, reducing the amount of collateral held and increasing the credit risk to which FGL is exposed.
FGL held 2,679 futures contracts at July 3, 2011. The fair value of futures contracts represents the cumulative unsettled variation margin. FGL provides cash collateral to the counterparties for the initial and variation margin on the futures contracts which is included in “Cash and cash equivalents” in the “Insurance” sections of the Condensed Consolidated Balance Sheet. The amount of collateral held by the counterparties for such contracts at July 3, 2011 was $10,698.
(5) Fair Value of Financial Instruments
The Company’s measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset or non-performance risk, which may include the Company’s own credit risk. The Company’s estimate of an exchange price is the price in an orderly transaction between market participants to sell the

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asset or transfer the liability (“exit price”) in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability, as opposed to the price that would be paid to acquire the asset or receive a liability (“entry price”). The Company categorizes financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique. The three-level hierarchy for fair value measurement is defined as follows:
Level 1 — Values are unadjusted quoted prices for identical assets and liabilities in active markets accessible at the measurement date.
Level 2 — Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the instrument. Such inputs include market interest rates and volatilities, spreads and yield curves.
Level 3 — Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date based on the best information available in the circumstances.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lower level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
When a determination is made to classify an asset or liability within Level 3 of the fair value hierarchy, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. Because certain securities trade in less liquid or illiquid markets with limited or no pricing information, the determination of fair value for these securities is inherently more difficult. However, Level 3 fair value investments may include, in addition to the unobservable or Level 3 inputs, observable components, which are components that are actively quoted or can be validated to market-based sources.
The carrying amounts and estimated fair values of the Company’s consolidated financial instruments for which the disclosure of fair values is required were as follows (asset/(liability)):

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    July 3, 2011     September 30, 2010  
    Carrying             Carrying        
    Amount     Fair Value     Amount     Fair Value  
Consumer Products and Other
                               
Cash and cash equivalents
  $ 449,190     $ 449,190     $ 256,831     $ 256,833  
Short-term investments (including related interest receivable of $51 and $68)
    140,096       140,087       54,033       54,005  
Total debt
    (2,245,635 )     (2,387,693 )     (1,743,767 )     (1,868,754 )
Derivatives:
                               
Interest rate swap agreements
    (3,474 )     (3,474 )     (6,627 )     (6,627 )
Commodity swap and option agreements
    3,316       3,316       3,914       3,914  
Foreign exchange forward agreements
    (52,722 )     (52,722 )     (38,111 )     (38,111 )
Equity conversion option of preferred stock
    (79,740 )     (79,740 )            
Redeemable preferred stock, excluding equity conversion option
    (186,219 )     (214,725 )            
 
                               
Insurance
                               
Cash and cash equivalents
    740,623       740,623              
Investments:
                               
Fixed maturities, available-for-sale
    15,714,228       15,714,228              
Equity securities, available-for-sale
    310,345       310,345              
Other invested assets
    40,853       40,853              
Derivatives:
                               
Call options and future contracts
    205,185       205,185              
FIA embedded derivatives, included in contractholder funds
    (1,444,506 )     (1,444,506 )            
Available-for-sale embedded derivatives
    (411 )     (411 )            
Investment contracts, included in contractholder funds
    (12,280,732 )     (12,327,608 )            
Note payable
    (95,000 )     (95,000 )            
The carrying amounts of receivables, accounts payable, accrued investment income and portions of other insurance liabilities approximate fair value due to their short duration and, accordingly, they are not presented in the table above.
The fair values of cash equivalents, short-term investments, and the long-term debt set forth above are generally based on quoted or observed market prices. Contractholder funds include investment contracts which are comprised of deferred annuities, FIAs and immediate annuities. The fair value of these investment contracts is based on their approximate account values. The fair value of FGL’s note payable approximates its carrying value as it is short-term in nature and the interest rate set on it was recently negotiated.
Goodwill, intangible assets and other long-lived assets are also tested annually or if a triggering event occurs that indicates an impairment loss may have been incurred (See Note 6) using fair value measurements with unobservable inputs (Level 3).
See Note 10 with respect to fair value measurements of the Company’s pension plan assets.
Financial assets and liabilities measured and carried at fair value on a recurring basis in our financial statements are summarized, according to the hierarchy previously described, as follows (in thousands):

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As of July 3, 2011   Level 1     Level 2     Level 3     Total  
Assets
                               
Fixed maturity securities, available-for-sale:
                               
Asset-backed securities
  $     $ 131,861     $ 388,018     $ 519,879  
Commercial mortgage-backed securities
          616,875             616,875  
Corporates
          11,612,764       196,526       11,809,290  
Hybrids
          708,558       5,229       713,787  
Municipals
          833,972             833,972  
Agency residential mortgage-backed securities
          224,848       3,263       228,111  
Non-agency residential mortgage-backed securities
          505,085       19,751       524,836  
U.S. Government
    467,478                   467,478  
Fixed maturity securities — Trading
          778             778  
Equity securities — Available-for-sale
          310,345             310,345  
Equity securities — Trading
    103,408                   103,408  
Derivatives:
                               
Call options and future contracts
          205,185             205,185  
Commodity swap and option agreements
          3,316             3,316  
 
                       
Total assets carried at fair value
  $ 570,886     $ 15,153,587     $ 612,787     $ 16,337,260  
 
                       
 
                               
Liabilities
                               
Derivatives:
                               
FIA embedded derivatives, included in contractholder funds
  $     $     $ (1,444,506 )   $ (1,444,506 )
Available-for-sale embedded derivatives
                (411 )     (411 )
Interest rate swap agreements
          (3,474 )           (3,474 )
Foreign exchange forward agreements
          (52,722 )           (52,722 )
Equity conversion option of preferred stock
                (79,740 )     (79,740 )
 
                       
Total liabilities carried at fair value
  $     $ (56,196 )   $ (1,524,657 )   $ (1,580,853 )
 
                       
The following tables summarize changes to financial instruments carried at fair value and classified within Level 3 of the fair value hierarchy, all of which are held by FGL except for the equity conversion option of HGI’s Preferred Stock. This summary excludes any impact of amortization of VOBA and DAC. The gains and losses below may include changes in fair value due in part to observable inputs that are a component of the valuation methodology.

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                  Net     Net        
    Balance at     Total Gains (Losses)     purchases,     transfer in     Balance at  
    FGL Acquisition     Included in     Included in     sales and     (out) of     end of  
For the period April 6, 2011 to July 3, 2011   Date     earnings     AOCI     settlements     Level 3 (A)     period  
Assets
                                               
Fixed maturity securities, available-for-sale:
                                               
Asset-backed securities
  $ 399,967     $     $ 6,385     $ (8,128 )   $ (10,206 )   $ 388,018  
Corporates
    188,439             10,722       (2,635 )           196,526  
Hybrids
    8,305             (38 )           (3,038 )     5,229  
Agency residential mortgage-backed securities
    3,271             (8 )                 3,263  
Non-agency residential mortgage-backed securities
    18,519             2,351       (1,119 )           19,751  
 
                                   
Total assets at fair value
  $ 618,501     $     $ 19,412     $ (11,882 )   $ (13,244 )   $ 612,787  
 
                                   
 
                                               
Liabilities
                                               
FIA embedded derivatives, included in contractholders funds
  $ (1,466,308 )   $ 21,802     $     $     $     $ (1,444,506 )
Available-for-sale embedded derivatives
    (419 )     8                         (411 )
Equity conversion option of preferred stock
          5,960             (85,700 )           (79,740 )
 
                                   
Total liabilities at fair value
  $ (1,466,727 )   $ 27,770     $     $ (85,700 )   $     $ (1,524,657 )
 
                                   
 
(A)   The net transfers in and out of Level 3 during the period from April 6, 2011 to July 3, 2011 were exclusively to or from Level 2.
The following table presents the gross components of purchases, sales, and settlements, net, of Level 3 financial instruments from April 6, 2011 to July 3, 2011. There were no issuances during this period.
                                 
                            Net purchases, sales  
For the period April 6, 2011 to July 3, 2011   Purchases     Sales     Settlements     and settlements  
     
Assets
                               
Fixed maturity securities, available-for-sale:
                               
Asset-backed securities
  $     $     $ (8,128 )   $ (8,128 )
Corporates
                (2,635 )     (2,635 )
Non-agency residential mortgage-backed securities
                (1,119 )     (1,119 )
 
                       
Total assets
  $     $     $ (11,882 )   $ (11,882 )
 
                       
Liabilities
                               
Equity conversion option of preferred stock
  $     $ (85,700 )   $     $ (85,700 )
 
                       
(6) Goodwill and Intangibles of Consumer Products Segment
A summary of the changes in the carrying amounts of goodwill and intangible assets of the Consumer Products Segment is as follows:
                                 
            Intangible Assets  
    Goodwill     Indefinite Lived     Amortizable     Total  
Balance at September 30, 2010
  $ 600,055     $ 857,478     $ 911,882     $ 1,769,360  
Business acquisitions (Note 17)
    10,284       1,250             1,250  
Trade name acquisition
          1,530             1,530  
Amortization during period
                (43,073 )     (43,073 )
Effect of translation
    11,568       11,459       11,286       22,745  
 
                       
Balance at July 3, 2011
  $ 621,907     $ 871,717     $ 880,095     $ 1,751,812  
 
                       

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Intangible assets are recorded at cost or at fair value if acquired in a purchase business combination. Customer relationships, proprietary technology intangibles and certain trade names are amortized, using the straight-line method, over their estimated useful lives of approximately four to 20 years. Excess of cost over fair value of net assets acquired (goodwill) and indefinite lived trade name intangibles are not amortized.
Goodwill and indefinite lived intangible assets are tested for impairment at least annually at Spectrum Brands’ August financial period end, and more frequently if an event or circumstance indicates that an impairment loss may have been incurred between annual impairment tests. As a result of a realignment of reporting units, goodwill and indefinite lived trade name intangibles were tested for impairment as of October 1, 2010. Spectrum Brands concluded that the fair values of its reporting units and indefinite lived trade name intangible assets were in excess of the carrying amounts of those assets and, accordingly, no impairment of goodwill or indefinite lived trade name intangibles was recorded.
Intangible assets subject to amortization include proprietary technology, customer relationships and certain trade names, which are summarized as follows:
                                                         
    July 3, 2011     September 30, 2010        
            Accumulated                     Accumulated             Amortizable  
    Cost     Amortization     Net     Cost     Amortization     Net     Life  
Technology assets
  $ 67,613     $ 11,765     $ 55,848     $ 67,097     $ 6,305     $ 60,792     8-17 years
Customer relationships
    756,804       69,077       687,727       741,016       35,865       705,151     15-20 years
Trade names
    149,700       13,180       136,520       149,689       3,750       145,939     4-12 years
 
                                           
 
  $ 974,117     $ 94,022     $ 880,095     $ 957,802     $ 45,920     $ 911,882          
 
                                           
Amortization expense for the three and nine month periods ended July 3, 2011 and July 4, 2010 is as follows:
                                 
    Three Months     Nine Months  
    2011     2010     2011     2010  
Technology assets
  $ 1,649     $ 1,563     $ 4,946     $ 4,655  
Customer relationships
    9,650       8,767       28,708       26,476  
Trade names
    3,140       549       9,419       613  
 
                       
 
  $ 14,439     $ 10,879     $ 43,073     $ 31,744  
 
                       
The Company estimates annual amortization expense for the next five fiscal years will approximate $57,800 per year.
(7) Intangibles of Insurance Segment
Intangible assets of the Insurance Segment include VOBA and DAC.
VOBA represents the estimated fair value of the right to receive future net cash flows from in-force contracts in a life insurance company acquisition at the acquisition date. DAC represents costs that are related directly to new or renewal insurance contracts, which may be deferred to the extent recoverable. These costs include incremental direct costs of contract acquisition, primarily commissions, as well as certain costs related directly to underwriting, policy issuance and processing. Up front bonus credits to policyholder account values, which are considered to be deferred sales inducements (“DSI”), are accounted for similarly to DAC.
The methodology for determining the amortization of VOBA and DAC varies by product type. For all insurance contracts, amortization is based on assumptions consistent with those used in the development of the underlying contract adjusted for emerging experience and expected trends. US GAAP requires that assumptions for these types of products not be modified unless recoverability testing deems them to be inadequate. VOBA and DAC amortization are reported within “Amortization of intangible assets” in the Condensed Consolidated Statements of Operations.
Acquisition costs for universal life insurance (“UL”) and investment-type products, which include fixed indexed and deferred annuities, are generally amortized over the lives of the policies in relation to the incidence of estimated gross profits (“EGPs”) from investment income, surrender charges and other product fees, policy benefits, maintenance expenses, mortality net of reinsurance ceded and expense margins, and actual realized gains (losses) on investments.

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Changes in assumptions can have a significant impact on VOBA and DAC balances and amortization rates. Due to the relative size and sensitivity to minor changes in underlying assumptions of VOBA and DAC balances, FGL performs quarterly and annual analyses of VOBA and DAC for the annuity and life businesses, respectively. The VOBA and DAC balances are also evaluated for recoverability. At each evaluation date, actual historical gross profits are reflected, and estimated future gross profits and related assumptions are evaluated for continued reasonableness. Any adjustment in estimated future gross profits requires that the amortization rate be revised (“unlocking”) retroactively to the date of the policy or contract issuance. The cumulative unlocking adjustment is recognized as a component of current period amortization. In general, sustained increases in investment, mortality, and expense margins, and thus estimated future profits, lower the rate of amortization. However, sustained decreases in investment, mortality, and expense margins, and thus estimated future gross profits, increase the rate of amortization.
The carrying amounts of VOBA and DAC are adjusted for the effects of realized and unrealized gains and losses on debt securities classified as available-for-sale and certain derivatives and embedded derivatives. Amortization expense of VOBA and DAC reflects an assumption for an expected level of credit-related investment losses. When actual credit-related investment losses are realized, FGL performs a retrospective unlocking of VOBA and DAC amortization as actual margins vary from expected margins. This unlocking is reflected in the Condensed Consolidated Statements of Operations.
For annuity, UL, and investment-type products, the DAC asset is adjusted for the impact of unrealized gains (losses) on investments as if these gains (losses) had been realized, with corresponding credits or charges included in accumulated other comprehensive income.
VOBA and DAC are reviewed periodically to ensure that the unamortized portion does not exceed the expected recoverable amounts.
Information regarding VOBA and DAC (including DSI) is as follows:
                         
    VOBA     DAC     Total  
Balance at September 30, 2010
  $     $     $  
Acquisition of FGL on April 6, 2011
    577,163             577,163  
Deferrals
          17,293       17,293  
Less: Amortization related to:
                       
Unlocking
    (2,150 )           (2,150 )
Interest
    6,832             6,832  
Other amortization
    (21,690 )     (4,332 )     (26,022 )
Add: Adjustment for unrealized investment losses (gains)
    (70,850 )     (446 )     (71,296 )
 
                 
Balance at July 3, 2011
  $ 489,305     $ 12,515     $ 501,820  
 
                 
The above DAC balances include $2,966 of DSI, net of shadow adjustments as of July 3, 2011.
Amortization of VOBA and DAC is attributed to both investment gains and losses and to other expenses for the amount of gross margins or profits originating from transactions other than investment gains and losses. Unrealized investment gains and losses represent the amount of VOBA and DAC that would have been amortized if such gains and losses had been recognized.
The estimated future amortization expense for VOBA is $21,364 for the three months remaining to September 30, 2011. Estimated amortization expense for VOBA in future fiscal years is as follows:
         
    Estimated  
For the year ending   VOBA  
September 30,   Expense  
2012
  $ 85,823  
2013
    77,514  
2014
    68,237  
2015
    59,002  
2016
    49,934  
Thereafter
    198,281  
(8) Debt
The Company’s consolidated debt consists of the following:

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    July 3, 2011     September 30, 2010  
    Amount     Rate     Amount     Rate  
HGI:
                               
10.625% Senior Secured Notes, due November 15, 2015
  $ 500,000       10.625 %   $        
Spectrum Brands:
                               
Term loan, due June 17, 2016
    656,600       5.1 %     750,000       8.1 %
9.5% Senior Secured Notes, due June 15, 2018
    750,000       9.5 %     750,000       9.5 %
12% Notes, due August 28, 2019
    245,031       12.0 %     245,031       12.0 %
ABL Revolving Credit Facility, expiring April 21, 2016
    55,000       2.5 %           4.1 %
Other notes and obligations
    29,061       12.7 %     13,605       10.8 %
Capitalized lease obligations
    26,956       5.0 %     11,755       5.2 %
 
                           
 
    2,262,648               1,770,391          
Original issuance discounts on debt, net
    (17,013 )             (26,624 )        
Less current maturities
    26,677               20,710          
 
                           
Long-term debt — Consumer Products and Other
  $ 2,218,958             $ 1,723,057          
 
                           
FGL:
                               
Note payable — Insurance
  $ 95,000       6.0 %   $        
 
                           
HGI
On November 15, 2010 and June 28, 2011, HGI issued $350,000 and $150,000, respectively, or $500,000 aggregate principal amount of 10.625% Senior Secured Notes due November 15, 2015 (“10.625% Notes”). The 10.625% Notes were sold only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain persons in offshore transactions in reliance on Regulation S. The initial $350,000 of 10.625% Notes were subsequently registered under the Securities Act and the other $150,000 of 10.625% Notes are in the process of being registered. The 10.625% Notes were issued at an aggregate price equal to 99.311% of the principal amount thereof, with a net original issue discount (“OID”) of $3,445. Interest on the 10.625% Notes is payable semi-annually, commencing on May 15, 2011 and ending November 15, 2015. The 10.625% Notes are collateralized with a first priority lien on substantially all of the assets directly held by HGI, including stock in its subsidiaries (with the exception of Zap.Com, but including Spectrum Brands, Harbinger F&G, LLC (“HFG”), the wholly-owned parent of FGL, and HGI Funding LLC) and HGI’s directly held cash and investment securities.
HGI has the option to redeem the 10.625% Notes prior to May 15, 2013 at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the date of redemption. At any time on or after May 15, 2013, HGI may redeem some or all of the 10.625% Notes at certain fixed redemption prices expressed as percentages of the principal amount, plus accrued and unpaid interest. At any time prior to November 15, 2013, HGI may redeem up to 35% of the original aggregate principal amount of the 10.625% Notes with net cash proceeds received by HGI from certain equity offerings at a price equal to 110.625% of the principal amount of the 10.625% Notes redeemed, plus accrued and unpaid interest, if any, to the date of redemption, provided that redemption occurs within 90 days of the closing date of such equity offering, and at least 65% of the aggregate principal amount of the 10.625% Notes remains outstanding immediately thereafter.
The indenture governing the 10.625% Notes contains covenants limiting, among other things, and subject to certain qualifications and exceptions, the ability of HGI, and, in certain cases, HGI’s subsidiaries, to incur additional indebtedness; create liens; engage in sale-leaseback transactions; pay dividends or make distributions in respect of capital stock; make certain restricted payments; sell assets; engage in certain transactions with affiliates; or consolidate or merge with, or sell substantially all of its assets to, another person. HGI is also required to maintain compliance with certain financial tests, including minimum liquidity and collateral coverage ratios that are based on the fair market value of the assets held directly by HGI, including our equity interests in Spectrum Brands and our other subsidiaries such as HFG and HGI Funding LLC. At July 3, 2011, the Company was in compliance with all covenants under the 10.625% Notes.
HGI incurred $16,200 of costs in connection with its issuance of the 10.625% Notes. These costs are classified as “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheet as of July 3, 2011 and, along with the OID, are being amortized to interest expense utilizing the effective interest method over the term of the 10.625% Notes.

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Spectrum Brands
In connection with the SB/RH Merger, on June 16, 2010, Spectrum Brands (i) entered into a senior secured term loan pursuant to a senior credit agreement (the “Senior Credit Agreement”) consisting of a $750,000 U.S. dollar term loan due June 16, 2016, (ii) issued $750,000 in aggregate principal amount of 9.5% Senior Secured Notes due June 15, 2018 (the “9.5% Notes”) and (iii) entered into a $300,000 U.S. dollar asset based revolving loan facility due June 16, 2014 (the “ABL Revolving Credit Facility”). The proceeds from such financing were used to repay Spectrum Brands’ then-existing senior term credit facility and Spectrum Brands’ then-existing asset based revolving loan facility, to pay fees and expenses in connection with the refinancing and for general corporate purposes.
On February 1, 2011, Spectrum Brands completed the refinancing of its term loan facility established in connection with the SB/RH Merger, which, at February 1, 2011, had an aggregate amount outstanding of $680,000, with an amended and restated credit agreement (the “Term Loan”, together with the amended ABL Revolving Credit Facility, the “Senior Credit Facilities”) at a lower interest rate. The Term Loan was issued at par and has a maturity date of June 17, 2016. Subject to certain mandatory prepayment events, the Term Loan is subject to repayment according to a scheduled amortization, with the final payment of all amounts outstanding, plus accrued and unpaid interest, due at maturity. Among other things, the Term Loan provides for interest at a rate per annum equal to, at Spectrum Brands’ option, the LIBO rate (adjusted for statutory reserves) subject to a 1.00% floor plus a margin equal to 4.00%, or an alternate base rate plus a margin equal to 3.00%.
The Term Loan contains financial covenants with respect to debt, including, but not limited to, a maximum leverage ratio and a minimum interest coverage ratio, which covenants, pursuant to their terms, become more restrictive over time. In addition, the Term Loan contains customary restrictive covenants, including, but not limited to, restrictions on Spectrum Brands’ ability to incur additional indebtedness, create liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures, engage in mergers or acquire or sell assets. Pursuant to a guarantee and collateral agreement, Spectrum Brands’ and its domestic subsidiaries have guaranteed their respective obligations under the Term Loan and related loan documents and have pledged substantially all of their respective assets to secure such obligations. The Term Loan also provides for customary events of default, including payment defaults and cross-defaults on other material indebtedness.
In connection with voluntary prepayments of $90,000 under the previous term loan and the refinancing of the remaining $680,000 balance, during the nine month period ended July 3, 2011, Spectrum Brands recorded charges to interest expense aggregating $44,241, consisting of (i) the write off or accelerated amortization of debt issuance costs of $24,370 and $4,121, respectively, (ii) the write off of original issue discount of $8,950 and (iii) prepayment penalties of $6,800. Spectrum Brands incurred $8,698 of fees in connection with the Term Loan, which are classified as “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheet as of July 3, 2011 and are being amortized to interest expense utilizing the effective interest method over the term of the Term Loan. In connection with voluntary prepayments of $90,000 of term debt during the nine month period ended July 3, 2011, the Company recorded cash charges of $700 and accelerated amortization of portions of the unamortized discount and unamortized Debt issuance costs totaling $4,121 as an adjustment to increase interest expense.
On April 21, 2011, Spectrum Brands amended the ABL Revolving Credit Facility. The amended facility carries an interest rate, at Spectrum Brand’s option, which is subject to change based on availability under the facility, of either: (a) the base rate plus currently 1.25% per annum or (b) the reserve-adjusted LIBO rate (the “Eurodollar Rate”) plus currently 2.25% per annum. No amortization is required with respect to the ABL Revolving Credit Facility. The ABL Revolving Credit Facility is scheduled to expire on April 21, 2016.
As a result of borrowings and payments under the ABL Revolving Credit Facilities at July 3, 2011, Spectrum Brands had aggregate borrowing availability of approximately $146,893, net of lender reserves of $48,769 and outstanding letters of credit of $24,105.
At July 3, 2011, Spectrum Brands was in compliance with all its debt covenants. However, Spectrum Brands is subject to certain limitations under the indenture governing the 12% Notes maturing August 28, 2019 (the “12% Notes”) as a result of the Fixed Charge Coverage Ratio, as defined under that indenture, being below 2:1. Until the test is satisfied, Spectrum Brands and certain of its subsidiaries are limited in their ability to pay dividends, make significant acquisitions or incur significant additional senior credit facility debt beyond the Senior Credit Facilities. Spectrum Brands does not expect its inability to satisfy the Fixed Charge Coverage Ratio test to impair its ability to provide adequate liquidity to meet the short-term and long-term liquidity requirements of its existing businesses, although no assurance can be given in this regard.

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FGL
On April 7, 2011, Raven Reinsurance Company (“Raven Re”), a newly-formed wholly-owned subsidiary of FGL, borrowed $95,000 from OMGUK, the seller in the FGL Acquisition, in the form of a surplus note, as discussed further in Note 11. The surplus note was issued at par and carries a 6% fixed interest rate. Interest payments are subject to regulatory approval and are further restricted until all contractual obligations that Raven Re has to certain financial institutions have been satisfied in full. The note has a maturity date which is the later of (i) December 31, 2012 or (ii) the date on which all amounts due and payable to the lender have been paid in full.
(9) Temporary Equity
On May 13, 2011, the Company issued 280 shares of Preferred Stock in a private placement subject to future registration rights, pursuant to a securities purchase agreement entered into on May 12, 2011, for aggregate gross proceeds of $280,000. The Preferred Stock (i) is redeemable for cash (or, if a holder does not elect cash, automatically converted into common stock) on the seventh anniversary of issuance, (ii) is convertible into the Company’s common stock at an initial conversion price of $6.50 per share, subject to anti-dilution adjustments, (iii) has a liquidation preference of the greater of 150% of the purchase price or the value that would be received if it were converted into common stock, (iv) accrues a cumulative quarterly cash dividend at an annualized rate of 8% and (v) has a quarterly non-cash principal accretion at an annualized rate of 4% that will be reduced to 2% or 0% if the Company achieves specified rates of growth measured by increases in its net asset value. The Preferred Stock is entitled to vote and to receive cash dividends and in-kind distributions on an as-converted basis with the common stock. The net proceeds from the issuance of the Preferred Stock of $269,000, net of related fees and expenses of approximately $11,000, are expected to be used for general corporate purposes, which may include future acquisitions and other investments.
If the Company were to issue certain equity securities at a price lower than the conversion price of the Preferred Stock, the conversion price would be adjusted to the share price of the newly issued equity securities (a “down round” provision). Therefore, in accordance with the guidance in ASC 815, Derivatives and Hedging, this conversion option requires bifurcation and must be separately accounted for as a derivative liability at fair value with any changes in fair value reported in current earnings (see Note 4). The Company valued the conversion feature using the Monte Carlo simulation approach, which utilizes various inputs including the Company’s stock price, volatility, risk-free rate and discount yield.
As of May 13, 2011, the Company determined the issue date fair value of the bifurcated conversion option was approximately $85,700. The residual $194,300 value of the host contract, less $11,000 of issuance costs, has been classified as mezzanine equity, as the securities are redeemable at the option of the holder and upon the occurrence of an event that is not solely within the control of the issuer. The resulting $96,700 difference between the issuance price and initial carrying value of $183,300 is being accreted to “Preferred stock dividends and accretion” in the accompanying Condensed Consolidated Statements of Operations using the effective interest method over the Preferred Stock’s contractual/expected life of seven years.
(10) Defined Benefit Plans
HGI
HGI has a noncontributory defined benefit pension plan (the “HGI Pension Plan”) covering certain former U.S. employees. During 2006, the Pension Plan was frozen which caused all existing participants to become fully vested in their benefits.
Additionally, HGI has an unfunded supplemental pension plan (the “Supplemental Plan”) which provides supplemental retirement payments to certain former senior executives of HGI. The amounts of such payments equal the difference between the amounts

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received under the HGI Pension Plan and the amounts that would otherwise be received if HGI Pension Plan payments were not reduced as the result of the limitations upon compensation and benefits imposed by Federal law. Effective December 1994, the Supplemental Plan was frozen.
Spectrum Brands
Spectrum Brands has various defined benefit pension plans (“Spectrum Brands Pension Plans”) covering some of its employees in the United States and certain employees in other countries, primarily the United Kingdom and Germany. The Spectrum Brands Pension Plans generally provide benefits of stated amounts for each year of service. Spectrum Brands funds its U.S. pension plans in accordance with the requirements of the defined benefit plans and, where applicable, in amounts sufficient to satisfy the minimum funding requirements of applicable laws. Additionally, in compliance with Spectrum Brands’ funding policy, annual contributions to non-U.S. defined benefit plans are equal to the actuarial recommendations or statutory requirements in the respective countries.
Spectrum Brands also sponsors or participates in a number of other non-U.S. pension arrangements, including various retirement and termination benefit plans, some of which are covered by local law or coordinated with government-sponsored plans, which are not significant in the aggregate and therefore are not included in the information presented below. Spectrum Brands also has various nonqualified deferred compensation agreements with certain of its employees. Under certain of these agreements, Spectrum Brands has agreed to pay certain amounts annually for the first 15 years subsequent to retirement or to a designated beneficiary upon death. It is management’s intent that life insurance contracts owned by Spectrum Brands will fund these agreements. Under the remaining agreements, Spectrum Brands has agreed to pay such deferred amounts in up to 15 annual installments beginning on a date specified by the employee, subsequent to retirement or disability, or to a designated beneficiary upon death.
Spectrum Brands also provides postretirement life insurance and medical benefits to certain retirees under two separate contributory plans.
Consolidated
The components of consolidated net periodic benefit and deferred compensation benefit costs and contributions made during the periods are as follows:
                                 
    Three Months     Nine Months  
    2011     2010     2011     2010  
Service cost
  $ 818     $ 725     $ 2,453     $ 2,174  
Interest cost
    2,772       1,971       8,315       5,597  
Expected return on assets
    (2,217 )     (1,423 )     (6,650 )     (3,967 )
Amortization of prior service cost
          1             4  
Recognized net actuarial loss
    97       22       291       25  
Employee contributions
    (129 )     (88 )     (386 )     (265 )
 
                       
Net periodic pension cost
  $ 1,341     $ 1,208     $ 4,023     $ 3,568  
 
                       
 
                               
Contributions made during period
  $ 3,216     $ 1,711     $ 6,227     $ 3,714  
 
                       
Contributions. Based on the currently enacted minimum pension plan funding requirements, the Company expects to make contributions during the remaining three months of fiscal 2011 totaling approximately $1,100.

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Fair value measurements of the Company’s defined benefit plan assets are as follows:
                 
    July 3,     September 30,  
    2011(A)     2010(A)  
U.S. Defined Benefit Plan Assets:
               
Common collective trusts—equity
  $ 44,173     $ 36,723  
Common collective trusts—fixed income
    18,000       22,067  
Other
    776        
 
           
U.S. Defined Benefit Plan Assets
  $ 62,949     $ 58,790  
 
           
 
               
International Defined Benefit Plan Assets:
               
Common collective trusts—equity
  $ 33,298     $ 28,090  
Common collective trusts—fixed income
    10,859       9,725  
Insurance contracts—general fund
    43,689       40,347  
Other
    5,844       3,120  
 
           
International Defined Benefit Plan Assets
  $ 93,690     $ 81,282  
 
           
 
               
Total Defined Benefit Plan Assets
  $ 156,639     $ 140,072  
 
           
 
(A)   The fair value measurements of the Company’s defined benefit plan assets are based on observable market price inputs (Level 2). Each collective trust’s valuation is based on its calculation of net asset value per share reflecting the fair value of its underlying investments. Since each of these collective trusts allows redemptions at net asset value per share at the measurement date, its valuation is categorized as a Level 2 fair value measurement. The fair values of insurance contracts and other investments are also based on observable market price inputs (Level 2).
(11) Reinsurance
FGL’s insurance subsidiaries enter into reinsurance agreements with other companies in the normal course of business. The assets, liabilities, premiums and benefits of certain reinsurance contracts are presented on a net basis in the Condensed Consolidated Balance Sheet and Condensed Consolidated Statements of Operations, respectively, when there is a right of offset explicit in the reinsurance agreements. All other reinsurance agreements are reported on a gross basis in the Company’s Condensed Consolidated Balance Sheet as an asset for amounts recoverable from reinsurers or as a component of other liabilities for amounts, such as premiums, owed to the reinsurers, with the exception of amounts for which the right of offset also exists. Premiums, benefits and DAC are reported net of insurance ceded.
The use of reinsurance does not discharge an insurer from liability on the insurance ceded. The insurer is required to pay in full the amount of its insurance liability regardless of whether it is entitled to or able to receive payment from the reinsurer. The portion of risks exceeding FGL’s retention limit is reinsured with other insurers. FGL seeks reinsurance coverage in order to limit its exposure to mortality losses and enhance capital management. FGL follows reinsurance accounting when there is adequate risk transfer. Otherwise, the deposit method of accounting is followed. FGL also assumes policy risks from other insurance companies.
The effect of reinsurance on premiums earned and benefits incurred for the period from April 6, 2011 to July 3, 2011 were as follows:
                 
    Net Premiums     Net Benefits  
    Earned     Incurred  
Direct
  $ 79,242     $ 215,152  
Assumed
    11,365       9,708  
Ceded
    (65,489 )     (94,901 )
 
           
Net
  $ 25,118     $ 129,959  
 
           

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Amounts payable or recoverable for reinsurance on paid and unpaid claims are not subject to periodic or maximum limits. During the period April 6, 2011 to July 3, 2011, FGL did not write off any reinsurance balances nor did it commute any ceded reinsurance other than the recapture discussed below under “Reserve Facility.”
No policies issued by FGL have been reinsured with a foreign company, which is controlled, either directly or indirectly, by a party not primarily engaged in the business of insurance.
FGL has not entered into any reinsurance agreements in which the reinsurer may unilaterally cancel any reinsurance for reasons other than nonpayment of premiums or other similar credit issues.
FGL has the following significant reinsurance agreements as of July 3, 2011:
Reserve Facility
Pursuant to the First Amended and Restated Stock Purchase Agreement (the “F&G Stock Purchase Agreement”), on April 7, 2011, FGL Insurance recaptured all of the life insurance business ceded to Old Mutual Reassurance (Ireland) Ltd. (“OM Re”), an affiliated company of OMGUK, FGL’s former parent. OM Re transferred assets with a fair value of $653,684 to FGL Insurance in settlement of all of OM Re’s obligations under these reinsurance agreements. The fair value of the transferred assets, which was based on the economic reserves was approved by the Maryland Insurance Administration. No gain or loss was recognized in connection with the recapture. The fair value of the assets transferred is reflected in the purchase price allocation (see Note 17).
On April 7, 2011, FGL Insurance ceded to Raven Re, on a coinsurance basis, a significant portion of the business recaptured from OM Re. Raven Re was capitalized by a $250 capital contribution from FGL Insurance and a surplus note (i.e., subordinated debt) issued to OMGUK in the principal amount of $95,000 (see Note 8 for the terms of such note). The proceeds from the surplus note issuance and the surplus note are reflected in the purchase price allocation. Raven Re financed $535,000 of statutory reserves for this business with a letter of credit facility provided by an unaffiliated financial institution and guaranteed by OMGUK and HFG.
On April 7, 2011, FGL Insurance entered into a Reimbursement Agreement with Nomura Bank International plc (“Nomura”) to establish a reserve facility and Nomura charged an upfront structuring fee (the “Structuring Fee”). The Structuring Fee was in the amount of $13,750 and is related to the retrocession of the life business recaptured from OM Re and related credit facility. The Structuring Fee was deferred and will be amortized on a straight line basis over the term of the facility.
Commissioners Annuity Reserve Valuation Method Facility (“CARVM”)
Effective September 30, 2008, FGL entered into a yearly renewable term quota share reinsurance agreement with OM Re, whereby OM Re assumes a portion of the risk that policyholders exercise the “waiver of surrender charge” features on certain deferred annuity policies. This agreement did not meet risk transfer requirements to qualify as reinsurance under US GAAP. Under the terms of the agreement, FGL Insurance expensed net fees of $1,545, for the period from April 6, 2011 to July 3, 2011. Although this agreement does not provide reinsurance for reserves on a US GAAP basis, it does provide for reinsurance of reserves on a statutory basis. The statutory reserves are secured by a $280,000 letter of credit with Old Mutual plc of London, England (“OM”), OMGUK’s parent.
Wilton Agreement
On January 26, 2011, HFG entered into a commitment agreement (the “Commitment Agreement”) with Wilton Re U.S. Holdings, Inc. (“Wilton”) committing Wilton Reassurance Company (“Wilton Re”), a wholly owned subsidiary of Wilton and a Minnesota insurance company, to enter into certain coinsurance agreements with FGL Insurance. On April 8, 2011, FGL Insurance ceded significantly all of the remaining life insurance business that it had retained to Wilton Re under the first of the two amendments with Wilton. FGL Insurance transferred assets with a fair value of $535,826, net of ceding commission to Wilton Re. FGL Insurance considered the effects of the first amendment in the purchase price allocation. Effective April 26, 2011, HFG elected the second amendment (the “Raven Springing Amendment”) that commits FGL Insurance to cede to Wilton Re all of the business currently reinsured with Raven Re by November 30, 2012, subject to regulatory approval. The Raven Springing Amendment is intended to mitigate the risk associated with FGL’s obligation to replace the Raven Re reserve facility by December 31, 2012 under the F&G Stock Purchase Agreement entered into in connection with the FGL Acquisition.

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Pursuant to the terms of the Raven Springing Amendment, the amount payable to Wilton at the closing of such amendment will be adjusted to reflect the economic performance for the Raven Block from January 1, 2011 until the effective time of the closing of the Raven Springing Amendment. However, Wilton Re will have no liability with respect to the Raven Block prior to the effective date of the Raven Springing Amendment, and regardless of the date of closing of Wilton’s obligation to reinsure the Raven Block. Based on the facts and circumstances related to the Raven Springing Amendment, FGL Insurance has assessed the consummation of the Raven Springing Amendment to be probable and will record charges for any experience adjustments payable to Wilton Re. There were no such charges for the period from April 6, 2011 to June 30, 2011.
The Raven Springing Agreement may require regulatory approval, which may include approval from the Maryland Insurance Administration for the recapture of the Raven Block from Raven Re and the reinsurance by FGL Insurance of substantially all of a major class of its insurance in force by an agreement of bulk reinsurance. Filings with the Maryland Insurance Administration requesting these approvals, or confirmation of the inapplicability of regulation requiring such approvals, were made in June 2011.
FGL Insurance has a significant concentration of reinsurance with Wilton Re that could have a material impact on FGL Insurance’s financial position. FGL Insurance monitors both the financial condition of individual reinsurers and risk concentration arising from similar geographic regions, activities and economic characteristics of reinsurers to reduce the risk of default by such reinsurers.
(12) Stock Compensation
The Company recognized stock-based compensation expense associated with stock option awards issued by HGI and restricted stock awards and restricted stock units issued by Spectrum Brands. For the three and nine month periods ended July 3, 2011, the Company recognized consolidated stock-based compensation expense of $8,557 and $22,903, or $3,050 and $8,170 net of taxes and noncontrolling interest, respectively. For the three and nine month periods ended July 4, 2010, the Company recognized $5,881 and $12,273, or $3,147 and $7,303, net of taxes and noncontrolling interest, respectively. The Company includes stock-based compensation in “Selling, general and administrative expenses”.
HGI
Total stock compensation expense associated with stock option awards recognized by HGI during the three and nine month periods ended July 3, 2011 was $29 and $88, respectively.
A summary of HGI’s outstanding stock options as of July 3, 2011, and changes during the period, is as follows:
                 
            Weighted  
            Average  
    Shares     Exercise Price  
HGI stock options outstanding at September 30, 2010
    509     $ 5.62  
Granted
           
Exercised
    (87 )     2.79  
Forfeited or expired
    (16 )     7.07  
 
             
HGI stock options outstanding at July 3, 2011
    406       6.17  
 
             
Exercisable at July 3, 2011
    316       5.94  
 
             
Vested or expected to vest at July 3, 2011
    406     $ 6.17  
 
             
Spectrum Brands
Total stock compensation expense associated with restricted stock awards and restricted stock units recognized by Spectrum Brands during the three and nine month periods ended July 3, 2011 was $8,528, or $3,021 net of taxes and noncontrolling interest, and $22,815, or $8,082 net of taxes and noncontrolling interest, respectively. Total stock compensation expense associated with restricted stock awards recognized by Spectrum Brands during the three and nine month periods ended July 4, 2010 was $5,881, or $3,147 net of taxes and noncontrolling interest, and $12,273, or $7,303 net of taxes and noncontrolling interest, respectively.
Spectrum Brands granted approximately 1,580 restricted stock units during the nine month period ended July 3, 2011. Of these grants, 1,547 restricted stock units are performance and time-based with 665 units vesting over a two year period and 882 units vesting over a

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three year period. 15 restricted stock units are time-based and vest over a one year period and 18 restricted stock units are time-based and vest over a three year period. The total market value of the restricted stock units on the dates of the grants was approximately $46,034.
Spectrum Brands granted approximately 939 shares of restricted stock awards during the nine month period ended July 4, 2010, including 271 restricted stock units in connection with the SB/RH Merger. Of these grants, 289 shares are time-based and vest over a one year period and 650 shares are time-based and vest over a two or three year period. All vesting dates are subject to the recipient’s continued employment with the Company, except as otherwise permitted by the Spectrum Brands’ board of directors or in certain cases if the employee is terminated without cause. The total market value of the restricted stock awards on the date of grant was approximately $23,299.
The fair value of restricted stock awards and restricted stock units is determined based on the market price of Spectrum Brands’ shares of common stock on the grant date.
A summary of the Spectrum Brands’ non-vested restricted stock awards and restricted stock units as of July 3, 2011, and changes during the period, is as follows:
                         
            Weighted        
    Units/     Average Grant        
Restricted Stock Awards   Shares     Date Fair Value     Fair Value  
Restricted Spectrum Brands stock awards at September 30, 2010
    446     $ 23.56     $ 10,508  
Vested
    (323 )     23.32       (7,531 )
 
                   
Restricted Spectrum Brands stock awards at July 3, 2011
    123     $ 24.20     $ 2,977  
 
                   
                         
            Weighted        
    Units/     Average Grant        
Restricted Stock Units   Shares     Date Fair Value     Fair Value  
Restricted Spectrum Brands stock units at September 30, 2010
    249     $ 28.22     $ 7,028  
Granted
    1,580       29.14       46,034  
Forfeited
    (17 )     29.29       (498 )
Vested
    (235 )     28.39       (6,671 )
 
                   
Restricted Spectrum Brands stock units at July 3, 2011
    1,577     $ 29.10     $ 45,893  
 
                   
(13) Income Taxes
For the three months ended July 3, 2011, the Company’s effective tax rate was only 2% principally due to (i) the recognition of a bargain purchase gain from the FGL Acquisition, for which a deferred tax liability has not been recorded as the Company believes it has the ability to not incur tax on this gain; and (ii) the release of valuation allowances on tax benefits from net operating and capital loss carryforwards that the Company determined are more-likely-than-not realizable. In addition to the factors noted above, the Company’s effective tax rate for the nine months ended July 3, 2011 of 41% differs from the U.S. Federal statutory rate of 35% principally due to: (i) deferred income taxes provided on the change in book versus tax basis of indefinite lived intangibles, which are amortized for tax purposes but not for book purposes; and (ii) income in foreign jurisdictions subject to tax at rates different from the U.S. statutory rate.
For the three and nine months ended July 4, 2010, the Company reported a provision for income taxes, despite a pre-tax loss from continuing operations, in each of those periods principally due to: (i) deferred income taxes provided on the change in book versus tax basis of indefinite lived intangibles, which are amortized for tax purposes but not for book purposes; (ii) losses in the United States and some foreign jurisdictions for which no tax benefit can be recognized due to full valuation allowances; and (iii) income subject to tax in certain other foreign jurisdictions.
HGI’s effective tax rate was computed using a discrete period approach as a result of its recent acquisition of FGL. FGL is unable to project its expected income for the year ending September 30, 2011 and, as a result, must use a discrete period approach. FGL is unable to project its expected income for the year ending September 30, 2011 because of its inability to reliably project the realization of built-in gains on investments due to unknown variables related to future market conditions, coupled with the potential

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impact that such would have on its effective tax rate. As FGL does not have significant permanent differences, it is anticipated that were they to compute an annual effective tax rate, it would not appreciably differ from the U.S. Federal statutory rate of 35%.
The Company files income tax returns in the United States Federal jurisdiction and various state and local, and foreign jurisdictions, and is subject to ongoing examination by various taxing authorities. The Company’s major taxing jurisdictions are the United States, United Kingdom and Germany. The Company believes its tax reserves for uncertain tax positions are adequate, consistent with the principles of ASC 740, Income Taxes. The Company regularly assesses the likelihood of additional tax assessments in those jurisdictions and, if necessary, adjusts its tax reserves based on new information or developments.
HGI is effectively settled with respect to United States income tax audits for years prior to 2007. With limited exception, HGI is no longer subject to state and local income tax audits for years prior to 2007. Spectrum Brands and Russell Hobbs are effectively settled with respect to U.S. Federal income tax audits for years prior to 2006 and 2008, respectively. However, Federal net operating loss carryforwards from their fiscal years ended September 30, 2006 and June 30, 2008, respectively, continue to be subject to Internal Revenue Service examination until the statute of limitations expires for the years in which these net operating loss carryforwards are ultimately utilized. FGL is effectively settled with respect to U.S. Federal income tax audits for years prior to 2007. FGL is no longer subject to state and local income tax audits for years prior to 2007. However, Federal net operating loss carryforwards from tax years ended June 30, 2006 and December 31, 2006, respectively, continue to be subject to Internal Revenue Service examination until the statute of limitations expires for the year in which these net operating loss carryforwards are ultimately utilized.
The Company recognizes in its consolidated financial statements the impact of a tax position if it concludes that the position is more likely than not sustainable upon audit, based on the technical merits of the position. At July 3, 2011 and September 30, 2010, the Company had $9,366 and $13,174, respectively, of unrecognized tax benefits related to uncertain tax positions. The Company also had approximately $6,000 of accrued interest and penalties related to the uncertain tax positions at those dates. Interest and penalties related to uncertain tax positions are reported in the financial statements as part of income tax expense.
(14) Earnings Per Share
The Company follows the provisions of ASC 260, Earnings Per Share, which requires companies with complex capital structures, such as having two (or more) classes of securities that participate in declared dividends to calculate earnings (loss) per share (“EPS”) utilizing the two-class method. As the holders of the Preferred Stock are entitled to receive dividends with common shares on an as-converted basis, the Preferred Stock has the right to participate in undistributed earnings and must therefore be considered under the two-class method.
The following table sets forth the computation of basic and diluted EPS for the three and nine month periods ended July 3, 2011 and July 4, 2010:

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    Three Months     Nine Months  
    2011     2010     2011     2010  
Income (loss) attributable to common and participating preferred stockholders
                               
Income (loss) from continuing operations
  $ 187,668     $ (51,618 )   $ 105,648     $ (128,166 )
Loss from discontinued operations
                      (2,735 )
 
                       
Net income (loss)
  $ 187,668     $ (51,618 )   $ 105,648     $ (130,901 )
 
                       
 
                               
Participating shares at end of period:
                               
Common shares outstanding
    139,283       139,196       139,283       139,196  
Preferred shares (as-converted basis)
    43,307             43,307        
 
                       
Total
    182,590       139,196       182,590       139,196  
 
                       
 
                               
Percentage of income (loss) allocated to:
                               
Common shares
    76.3 %     100.0 %     76.3 %     100.0 %
Preferred shares
    23.7 %           23.7 %      
 
                               
Income (loss) attributable to common shares:
                               
Income (loss) from continuing operations
  $ 143,157     $ (51,618 )   $ 80,590     $ (128,166 )
Loss from discontinued operations
                      (2,735 )
 
                       
Net income (loss)
  $ 143,157     $ (51,618 )   $ 80,590     $ (130,901 )
 
                       
 
                               
Weighted-average common shares outstanding — basic
    139,222       131,604       139,207       130,258  
Dilutive effect of stock options
    70             73        
 
                       
Weighted-average dilutive shares outstanding
    139,292       131,604       139,280       130,258  
 
                       
 
                               
Basic income (loss) per common share attributable to controlling interest:
                               
Continuing operations
  $ 1.03     $ (0.39 )   $ 0.58     $ (0.98 )
Discontinued operations
                      (0.02 )
 
                       
Net income (loss)
  $ 1.03     $ (0.39 )   $ 0.58     $ (1.00 )
 
                       
 
                               
Diluted income (loss) per common share attributable to controlling interest:
                               
Continuing operations
  $ 1.03     $ (0.39 )   $ 0.58     $ (0.98 )
Discontinued operations
                      (0.02 )
 
                       
Net income (loss)
  $ 1.03     $ (0.39 )   $ 0.58     $ (1.00 )
 
                       
The number of common shares outstanding used in calculating the weighted average thereof reflects: (i) for periods prior to the June 16, 2010 date of the SB/RH Merger, the number of Spectrum Brands common shares outstanding multiplied by the 1:1 Spectrum Brands share exchange ratio used in the SB/RH Merger and the 4.32 HGI share exchange ratio used in the Spectrum Brands Acquisition, (ii) for the period from June 16, 2010 to the January 7, 2011 date of the Spectrum Brands Acquisition, the number of HGI common shares outstanding plus the 119,910 HGI common shares subsequently issued in connection with the Spectrum Brands Acquisition and (iii) for the period subsequent to and including January 7, 2011, the actual number of HGI common shares outstanding.
At July 3, 2011, there were 43,077 and 351 potential common shares issuable upon the conversion of the Preferred Stock and exercise of stock options, respectively, excluded from the calculation of “Diluted income (loss) per common share attributable to controlling interest” because the as-converted effect of the Preferred Stock would have been anti-dilutive and the exercise prices of the stock options were greater than the average market price of the Company’s common stock during the three and nine month periods ended July 3, 2011. The Preferred Stock had a conversion price of $6.50 and the stock options had a weighted average exercise price of $6.89 per share.

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(15) Commitments and Contingencies
The Company has aggregate reserves for its legal, environmental and regulatory matters of approximately $15,900 at July 3, 2011. These reserves relate primarily to the matters described below. However, based on currently available information, including legal defenses available to the Company, and given the aforementioned reserves and related insurance coverage, the Company does not believe that the outcome of these legal, environmental and regulatory matters will have a material effect on its financial position, results of operations or cash flows.
Legal and Environmental Matters
HGI
HGI is a nominal defendant, and the members of its board of directors are named as defendants in a derivative action filed in December 2010 by Alan R. Kahn in the Delaware Court of Chancery. The plaintiff alleges that the Spectrum Brands Acquisition was financially unfair to HGI and its public stockholders and seeks unspecified damages and the rescission of the transaction. The Company believes the allegations are without merit and intends to vigorously defend this matter.
HGI is also involved in other litigation and claims incidental to its current and prior businesses. These include worker compensation and environmental matters and pending cases in Mississippi and Louisiana state courts and in a federal multi-district litigation alleging injury from exposure to asbestos on offshore drilling rigs and shipping vessels formerly owned or operated by its offshore drilling and bulk-shipping affiliates. Based on currently available information, including legal defenses available to it, and given its reserves and related insurance coverage, the Company does not believe that the outcome of these legal and environmental matters will have a material effect on its financial position, results of operations or cash flows.
Spectrum Brands
Spectrum Brands has provided for approximately $8,600 in the estimated costs associated with the resolution of claims for environmental remediation activities at some of its current and former manufacturing sites. Spectrum Brands believes that any additional liability in excess of the amounts provided for will not have a material adverse effect on the financial condition, results of operations or cash flows of Spectrum Brands.
In December 2009, San Francisco Technology, Inc. filed an action in the Federal District Court for the Northern District of California against Spectrum Brands, as well as a number of unaffiliated defendants, claiming that each of the defendants had falsely marked patents on certain of its products in violation of Article 35, Section 292 of the U.S. Code and seeking to have civil fines imposed on each of the defendants for such claimed violations. In July 2011, the parties reached a full and final settlement of this matter and the case has been dismissed.
Applica Consumer Products, Inc. (“Applica”) is a defendant in three asbestos lawsuits in which the plaintiffs have alleged injury as the result of exposure to asbestos in hair dryers distributed by that subsidiary over 20 years ago. Although Applica never manufactured such products, asbestos was used in certain hair dryers distributed by it prior to 1979. Spectrum Brands believes that these actions are without merit, but may be unable to resolve the disputes successfully without incurring significant expenses which Spectrum Brands is unable to estimate at this time. At this time, Spectrum Brands does not believe it has coverage under its insurance policies for the asbestos lawsuits.
Spectrum Brands is a defendant in various other matters of litigation generally arising out of the ordinary course of business.

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FGL
FGL is involved in various pending or threatened legal proceedings, including purported class actions, arising out of the ordinary course of business. In some instances, these proceedings include claims for unspecified or substantial punitive damages and similar types of relief in addition to amounts for alleged contractual liability or requests for equitable relief. In the opinion of FGL management and in light of existing insurance and other potential indemnification, reinsurance and established reserves, such litigation is not expected to have a material adverse effect on FGL’s financial position, although it is possible that the results of operations could be materially affected by an unfavorable outcome in any one annual period.
Regulatory Matters
FGL
FGL is assessed amounts by the state guaranty funds to cover losses to policyholders of insolvent or rehabilitated insurance companies. Those mandatory assessments may be partially recovered through a reduction in future premium taxes in certain states. At July 3, 2011, FGL has accrued $6,995 for guaranty fund assessments which is expected to be offset by estimated future premium tax deductions of $5,000.
Guarantees
Throughout its history, the Company has entered into indemnifications in the ordinary course of business with customers, suppliers, service providers, business partners and, in certain instances, when it sold businesses. Additionally, the Company has indemnified its directors and officers who are, or were, serving at the request of the Company in such capacities. Although the specific terms or number of such arrangements is not precisely known due to the extensive history of past operations, costs incurred to settle claims related to these indemnifications have not been material to the Company’s financial statements. The Company has no reason to believe that future costs to settle claims related to its former operations will have a material impact on its financial position, results of operations or cash flows.
The F&G Stock Purchase Agreement between HFG and OMGUK includes a Guarantee and Pledge Agreement which creates certain obligations for FGL as a grantor and also grants a security interest to OMGUK of FGL’s equity interest in FGL Insurance in the event that Harbinger F&G fails to perform in accordance with the terms of the F&G Stock Purchase Agreement. FGL is not aware of any events or transactions that would result in non-compliance with the Guarantee and Pledge Agreement.
(16) Insurance Subsidiary Financial Information
The Company’s insurance subsidiaries file financial statements with state insurance regulatory authorities and the National Association of Insurance Commissioners (“NAIC”) that are prepared in accordance with Statutory Accounting Principles (“SAP”) prescribed or permitted by such authorities, which may vary materially from US GAAP. Prescribed SAP includes the Accounting Practices and Procedures Manual of the NAIC as well as state laws, regulations and administrative rules. Permitted SAP encompasses all accounting practices not so prescribed. The principal differences between statutory financial statements and financial statements prepared in accordance with US GAAP are that statutory financial statements do not reflect VOBA and DAC, some bond portfolios may be carried at amortized cost, assets and liabilities are presented net of reinsurance, contractholder liabilities are generally valued using more conservative assumptions and certain assets are non-admitted. Accordingly, statutory operating results and statutory capital and surplus may differ substantially from amounts reported in the US GAAP basis financial statements for comparable items. For example, in accordance with the US GAAP acquisition method of accounting, the amortized cost of FGL’s invested assets was adjusted to fair value as of the FGL Acquisition Date while it was not adjusted for statutory reporting. Thus, the net unrealized gains on a statutory basis were $527,000 as of July 3, 2011 compared to net unrealized gains of $212,000 on a US GAAP basis, as reported in Note 3.
The Company’s insurance subsidiaries’ statutory financial statements are based on a December 31 year end. The total adjusted capital of FGL Insurance Company was $941,472 and $902,118 at July 3, 2011 and December 31, 2010, respectively. Life insurance companies are subject to certain Risk-Based Capital (“RBC”) requirements as specified by the NAIC. The RBC is used to evaluate the adequacy of capital and surplus maintained by an insurance company in relation to risks associated with: (i) asset risk, (ii) insurance risk, (iii) interest rate risk and (iv) business risk. FGL monitors the RBC of the Company’s insurance subsidiaries. As of July 3, 2011 and December 31, 2010, each of FGL’s insurance subsidiaries has exceeded the minimum RBC requirements.
The Company’s insurance subsidiaries are restricted by state laws and regulations as to the amount of dividends they may pay to their parent without regulatory approval in any year, the purpose of which is to protect affected insurance policyholders, depositors or investors. Any dividends in excess of limits are deemed “extraordinary” and require approval. Based on statutory results as of December 31, 2010, in accordance with applicable dividend restrictions FGL’s subsidiaries could pay “ordinary” dividends of $90,212 to FGL in 2011. On December 20, 2010, FGL Insurance paid a dividend to OMGUK in the amount of $59,000 with respect to its 2009 results. Based on its 2010 fiscal year results, FGL Insurance is able to declare an ordinary dividend up to $31,212 through December 20, 2011 (taking into account the December 20, 2010 dividend payment of $59,000). In addition, between December 21, 2011 and December 31, 2011, FGL Insurance may be able to declare an additional ordinary dividend in the amount of 2011 eligible dividends of $90,212 less any dividends paid in the previous twelve months.

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(17) Acquisitions
FGL
On April 6, 2011, the Company acquired all of the outstanding shares of capital stock of FGL and certain intercompany loan agreements between the seller, as lender, and FGL, as borrower, for cash consideration of $350,000, which amount could be reduced by up to $50,000 post closing if certain regulatory approval is not received (as discussed further below). The Company incurred approximately $22,700 of expenses related to the FGL Acquisition, including $5,000 of the $350,000 cash purchase price which has been re-characterized as an expense since the seller made a $5,000 expense reimbursement to the Master Fund upon closing of the FGL Acquisition. Such expenses are included in “Selling, general and administrative expenses” in the Condensed Consolidated Statements of Operations for the three and nine months ended July 3, 2011 in the amounts of $1,900 and $22,700, respectively. The FGL Acquisition represents one of the steps in implementing HGI’s strategy of obtaining controlling equity stakes in subsidiaries that operate across a diversified set of industries.
Net Assets Acquired
The acquisition of FGL has been accounted for under the acquisition method of accounting which requires the total purchase price to be allocated to the assets acquired and liabilities assumed based on their estimated fair values. The fair values assigned to the assets acquired and liabilities assumed are based on valuations using management’s best estimates and assumptions and are preliminary pending the completion of the valuation analysis of selected assets and liabilities. During the measurement period (which is not to exceed one year from the acquisition date), the Company is required to retrospectively adjust the provisional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets or liabilities as of that date. The following table summarizes the preliminary amounts recognized at fair value for each major class of assets acquired and liabilities assumed as of the FGL Acquisition Date:
         
Investments, cash and accrued investment income, including $1,040,470 of cash acquired
  $ 17,705,419  
Reinsurance recoverable
    929,817  
Intangible assets (VOBA)
    577,163  
Deferred tax assets
    226,863  
Other assets
    72,801  
 
     
Total assets acquired
    19,512,063  
 
     
Contractholder funds
    14,769,699  
Future policy benefits
    3,632,011  
Liability for policy and contract claims
    60,400  
Note payable
    95,000  
Other liabilities
    475,285  
 
     
Total liabilities assumed
    19,032,395  
 
     
Net assets acquired
    479,668  
Cash consideration, net of $5,000 re-characterized as expense
    345,000  
 
     
Bargain purchase gain
  $ 134,668  
 
     
The application of purchase accounting resulted in a bargain purchase gain of $134,668, which is reflected in the Condensed Consolidated Statements of Operations for the three and nine months ended July 3, 2011. The amount of the bargain purchase gain is equal to the amount by which the fair value of net assets acquired exceeded the consideration transferred. The Company believes that the resulting bargain purchase gain is reasonable based on the following circumstances: (a) the seller was highly motivated to sell FGL, as it had publicly announced its intention to do so approximately a year ago, (b) the fair value of FGL’s investments and statutory capital increased between the date that the purchase price was initially negotiated and the FGL Acquisition Date, (c) as a further inducement to consummate the sale, the seller waived, among other requirements, any potential upward adjustment of the purchase price for an improvement in FGL’s statutory capital between the date of the initially negotiated purchase price and the FGL Acquisition Date and (d) an independent appraisal of FGL’s business indicated that its fair value was in excess of the purchase price.

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Contingent Purchase Price Reduction
As contemplated by the terms of the F&G Stock Purchase Agreement and more fully described in Note 20, Front Street Re, Ltd. (“Front Street”), a recently formed Bermuda-based reinsurer and wholly-owned subsidiary of the Company, subject to regulatory approval, will enter into a reinsurance agreement (“Front Street Reinsurance Transaction”) with FGL whereby Front Street would reinsure up to $3,000,000 of insurance obligations under annuity contracts of FGL, and Harbinger Capital Partners II LP (“HCP II”), an affiliate of the Principal Stockholders, would be appointed the investment manager of up to $1,000,000 of assets securing Front Street’s reinsurance obligations under the reinsurance agreement. These assets would be deposited in a reinsurance trust account for the benefit of FGL.
The F&G Stock Purchase Agreement provides for up to a $50,000 post-closing reduction in purchase price if the Front Street Reinsurance Transaction is not approved by the Maryland Insurance Administration or is approved subject to certain restrictions or conditions. Based on management’s assessment as of July 3, 2011, it is not probable that the purchase price will be required to be reduced; therefore no value was assigned to the contingent purchase price reduction as of the FGL Acquisition Date.
Reserve Facility
As discussed in Note 11, pursuant to the F&G Stock Purchase Agreement on April 7, 2011, FGL recaptured all of the life business ceded to OM Re. OM Re transferred assets with a fair value of $653,684 to FGL in settlement of all of OM Re’s obligations under these reinsurance agreements. Such amounts are reflected in FGL’s purchase price allocation. Further, on April 7, 2011, FGL ceded on a coinsurance basis a significant portion of this business to Raven Re. Certain transactions related to Raven Re such as the surplus note issued to OMGUK in the principal amount of $95,000, which was used to partially capitalize Raven Re and the Structuring Fee of $13,750 are also reflected in FGL’s purchase price allocation. See Note 11 for additional details.
Intangible Assets
VOBA represents the estimated fair value of the right to receive future net cash flows from in-force contracts in a life insurance company acquisition at the acquisition date. VOBA will be amortized over the expected life of the contracts in proportion to either gross premiums or gross profits, depending on the type of contract. Total gross profits will include both actual experience as it arises and estimates of gross profits for future periods. FGL will regularly evaluate and adjust the VOBA balance with a corresponding charge or credit to earnings for the effects of actual gross profits and changes in assumptions regarding estimated future gross profits. The amortization of VOBA is reported in “Amortization of intangible assets” in the Condensed Consolidated Statements of Operations. The proportion of the VOBA balance attributable to each of the product groups associated with this acquisition is as follows: 80.4% related to FIAs, and 19.6% related to deferred annuities.
Refer to Note 7 for FGL’s estimated future amortization of VOBA, net of interest, for the next five fiscal years.
Deferred taxes
The future tax effects of temporary differences between financial reporting and tax bases of assets and liabilities are measured at the balance sheet date and are recorded as deferred income tax assets and liabilities. The acquisition of FGL is considered a non-taxable acquisition under tax accounting criteria, therefore, tax basis and liabilities reflect an historical (carryover) basis at the FGL Acquisition Date. However, since assets and liabilities reported under US GAAP are adjusted to fair value as of the FGL Acquisition Date, the deferred tax assets and liabilities are also adjusted to reflect the effects of those fair value adjustments. This resulted in shifting FGL into a significant net deferred tax asset position at the FGL Acquisition Date. This shift, coupled with the application of certain tax limitation provisions that apply in the context of a change in ownership transaction; most notably Section 382 of the Internal Revenue Code (the “IRC”), relating to “limitation in Net Operating Loss Carryforwards and Certain Built-in Losses Following Ownership Change,” as well as other applicable provisions under Sections 381-384 of the IRC, require FGL to reconsider the admissibility of the asset/liability components related to FGL’s gross deferred tax asset position and the need to establish a valuation allowance against it. Management determined that a valuation allowance against a portion of the gross admitted deferred tax asset (“DTA”) would be required. The components of the net deferred tax assets as of the FGL Acquisition Date are as follows:

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Deferred tax assets:
       
DAC
  $ 96,764  
Insurance reserves and claim related adjustments
    397,000  
Net operating losses
    128,437  
Capital losses (carryovers and deferred)
    267,468  
Tax credits
    75,253  
Other deferred tax assets
    27,978  
 
     
Total deferred tax assets
    992,900  
Valuation allowance
    430,432  
 
     
Deferred tax assets, net of valuation allowance
    562,468  
 
     
 
       
Deferred tax liabilities:
       
VOBA
    202,007  
Investments
    121,160  
Other deferred tax liabilities
    12,438  
 
     
Total deferred tax liabilities
    335,605  
 
     
 
       
 
     
Net deferred tax assets
  $ 226,863  
 
     
The deferred tax position of FGL as of the FGL Acquisition Date will be evaluated in successive reporting periods in order to reconsider the need for a valuation allowance in future reporting periods. Adjustments to the opening position are expected to flow through as a current period income tax benefit or expense.
Results of FGL since the FGL Acquisition Date
The following table presents selected financial information reflecting results for FGL from April 6, 2011 through June 30, 2011 that are included in the Condensed Consolidated Statements of Operations.
         
    For the period  
    April 6, 2011 to  
    June 30, 2011  
Total revenues
  $ 229,655  
Income, net of taxes
  $ 53,706  
Russell Hobbs
On June 16, 2010, Spectrum Brands consummated the SB/RH Merger, pursuant to which SBI became a wholly-owned subsidiary of Spectrum Brands and Russell Hobbs became a wholly owned subsidiary of SBI. The results of Russell Hobbs’ operations since June 16, 2010 are included in the accompanying Condensed Consolidated Statements of Operations. The measurement period for determination of the purchase price allocation for the SB/RH Merger has closed, during which no adjustments were made to the original preliminary purchase price allocation as of June 16, 2010.
Supplemental Pro Forma Information
The following table reflects the Company’s pro forma results for the three and nine month periods ended July 3, 2011 and July 4, 2010, had the results of Russell Hobbs and FGL been included for all periods beginning after September 30, 2009, as if the respective acquisitions were completed on October 1, 2009.

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    Three Months     Nine Months  
    2011     2010     2011     2010  
Revenues:
                               
Reported revenues
  $ 1,034,290     $ 653,486     $ 2,589,241     $ 1,778,012  
FGL adjustment (A)
          113,482       692,004       653,445  
Russell Hobbs adjustment
          137,540             543,952  
 
                       
Pro forma revenues
  $ 1,034,290     $ 904,508     $ 3,281,245     $ 2,975,409  
 
                       
 
                               
Income (loss) from continuing operations:
                               
Reported income (loss) from continuing operations
  $ 206,646     $ (86,922 )   $ 92,800     $ (163,470 )
FGL adjustment (A)
          (20,582 )     36,531       (203,800 )
Russell Hobbs adjustment
          (20,547 )           (5,504 )
 
                       
Pro forma income (loss) from continuing operations
  $ 206,646     $ (128,051 )   $ 129,331     $ (372,774 )
 
                       
 
                               
Basic and diluted income (loss) per common share from continuing operations:
                               
Reported basic and diluted income (loss) per share from continuing operations
  $ 1.03     $ (0.39 )   $ 0.58     $ (0.98 )
FGL adjustment
          (0.16 )     0.20       (1.57 )
Russell Hobbs adjustment
          (0.15 )           (0.04 )
 
                       
Pro forma basic and diluted income (loss) per common share from continuing operations
  $ 1.03     $ (0.70 )   $ 0.78     $ (2.59 )
 
                       
 
(A)   The FGL adjustments primarily reflect the following pro forma adjustments applied to FGL’s historical results:
    Reduction in net investment income to reflect amortization of the premium on fixed maturity securities — available-for-sale resulting from the fair value adjustment of these assets;
 
    Reversal of amortization associated with the elimination of FGL’s historical DAC;
 
    Amortization of VOBA associated with the establishment of VOBA arising from the acquisition;
 
    Adjustments to reflect the impacts of the recapture of the life business from OM Re and the retrocession of the majority of the recaptured business and the reinsurance of certain life business previously not reinsured to an unaffiliated third party reinsurer;
 
    Adjustments to eliminate interest expense on notes payable to seller and add interest expense on new surplus note payable;
 
    Amortization of reserve facility Structuring Fee;
 
    Adjustments to reflect the full-period effect of interest expense on the initial $350,000 of 10.625% Notes issued on November 15, 2010, the proceeds of which were used to fund the FGL Acquisition.
Other Acquisitions
On December 3, 2010, Spectrum Brands completed the $10,524 cash acquisition of Seed Resources, LLC (“Seed Resources”) and on April 14, 2011, Spectrum Brands completed the $775 cash acquisition of Ultra Stop. Seed Resources is a wild seed cake producer through its Birdola premium brand seed cakes. Ultra Stop is a trade name used to market a variety of home and garden control products at a major customer. These acquisitions were not significant individually or collectively. They were each accounted for under the acquisition method of accounting. The results of Seed Resources’ operations since December 3, 2010 and Ultra Stop’s operations since April 14, 2011 are included in the accompanying Condensed Consolidated Statements of Operations for the three and nine month periods ended July 3, 2011. The preliminary purchase prices aggregating $13,275 (representing cash paid of $11,299 and contingent consideration accrued of $1,976), including $1,250 of trade name intangible assets and $10,284 of goodwill, for these acquisitions were based upon preliminary valuations. Spectrum Brands’ estimates and assumptions for these acquisitions are subject to change as Spectrum Brands obtains additional information for its estimates during the respective measurement periods. The primary areas of the purchase price allocations that are not yet finalized relate to certain legal matters, income and non-income based taxes and residual goodwill.
(18) Restructuring and Related Charges
The Company reports restructuring and related charges associated with manufacturing and related initiatives of Spectrum Brands in “Cost of goods sold.” Restructuring and related charges reflected in “Cost of goods sold” include, but are not limited to, termination, compensation and related costs associated with manufacturing employees, asset impairments relating to manufacturing initiatives, and other costs directly related to the restructuring or integration initiatives implemented. The Company reports restructuring and related charges relating to administrative functions of Spectrum Brands in “Selling, general and administrative expenses”, which include, but

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are not limited to, initiatives impacting sales, marketing, distribution, or other non-manufacturing related functions. Restructuring and related charges reflected in “Selling, general and administrative expenses” include, but are not limited to, termination and related costs, and any asset impairments relating to the functional areas described above, and other costs directly related to the initiatives implemented.
In 2009, Spectrum Brands implemented a series of initiatives to reduce operating costs as well as evaluate Spectrum Brands’ opportunities to improve its capital structure (the “Global Cost Reduction Initiatives”). In 2008, Spectrum Brands implemented an initiative within certain of its operations in China to reduce operating costs and rationalize Spectrum Brands’ manufacturing structure. These initiatives included the plan to exit Spectrum Brands’ Ningbo, China battery manufacturing facility (the “Ningbo Exit Plan”). In 2007, Spectrum Brands began managing its business in three vertically integrated, product-focused lines of business (the “Global Realignment Initiative”). In 2007, Spectrum Brands implemented an initiative in Latin America to reduce operating costs (the “Latin American Initiatives”). In 2006, Spectrum Brands implemented a series of initiatives within certain of its European operations to reduce operating costs and rationalize Spectrum Brands’ manufacturing structure (the “European Initiatives”).
The following table summarizes restructuring and related charges incurred by initiative for the three and nine month periods ended July 3, 2011 and July 4, 2010 and where those charges are classified in the accompanying Condensed Consolidated Statements of Operations:
Restructuring and Related Charges
                                                                 
                                    Charges     Expected     Total        
                                    Since     Future     Projected     Expected Completion  
    Three Months     Nine Months     Inception     Charges     Costs     Date  
Initiative:   2011     2010     2011     2010                                  
Global Cost Reduction
  $ 6,462     $ 2,553     $ 14,569     $ 13,942     $ 53,411     $ 11,481     $ 64,892     March 31, 2014
Ningbo Exit Plan
    119       193       219       1,526       29,597             29,597     Substantially Complete
Global Realignment
    485       2,098       2,990       1,115       91,577       750       92,327     June 30, 2013
European
                            26,965             26,965     Substantially Complete
Latin American
                      79       11,447             11,447     Complete
 
                                               
 
  $ 7,066     $ 4,844     $ 17,778     $ 16,662     $ 212,997     $ 12,231     $ 225,228          
 
                                                 
 
                                                               
Classification:
                                                               
Cost of goods sold
  $ 2,285     $ 1,890     $ 4,932     $ 5,530                                  
Selling, general and administrative
    4,781       2,954       12,846       11,132                                  
 
                                                       
 
  $ 7,066     $ 4,844     $ 17,778     $ 16,662                                  
 
                                                       
The following table summarizes the remaining accrual balance associated with the initiatives and the activity during the nine month period ended July 3, 2011:

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Remaining Accrual Balance
                                                 
    Accrual Balance at             Cash             Accrual Balance     Expensed as  
    September 30, 2010     Provisions     Expenditures     Non-Cash Items     at July 3, 2011     Incurred(A)  
Global Cost Reduction
                                               
Termination benefits
  $ 6,447     $ 5,795     $ (5,021 )   $ 183     $ 7,404     $ 686  
Other costs
    4,005       492       (2,486 )     570       2,581       7,596  
 
                                   
 
    10,452       6,287       (7,507 )     753       9,985       8,282  
 
                                   
Ningbo Exit Plan
                                               
Termination benefits
                                   
Other costs
    491       24       (143 )     (372 )           195  
 
                                   
 
    491       24       (143 )     (372 )           195  
 
                                   
Global Realignment
                                               
Termination benefits
    8,721       1,207       (7,096 )     (676 )     2,156        
Other costs
    2,281       93       (619 )     498       2,253       1,690  
 
                                   
 
    11,002       1,300       (7,715 )     (178 )     4,409       1,690  
 
                                   
European
                                               
Termination benefits
    1,801             (455 )     115       1,461        
Other costs
    47             (39 )     (8 )            
 
                                   
 
    1,848             (494 )     107       1,461        
 
                                   
Latin American
                                               
Termination benefits
                                   
Other costs
                                   
 
                                   
 
                                               
 
  $ 23,793     $ 7,611     $ (15,859 )   $ 310     $ 15,855     $ 10,167  
 
                                   
 
(A)   Consists of amounts not impacting the accrual for restructuring and related charges.
(19) Other Required Disclosures
Recent Accounting Pronouncements Not Yet Adopted
In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends current comprehensive income presentation guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, comprehensive income must be reported in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. This guidance will be effective for the Company beginning in fiscal 2013. The Company does not expect the guidance to impact its Condensed Consolidated Financial Statements, as it only requires a change in the format of presentation.
Receivables and Concentrations of Credit Risk
“Receivables, net” in the accompanying Condensed Consolidated Balance Sheets consist of the following:

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    July 3, 2011     September 30, 2010  
Trade accounts receivable
  $ 363,753     $ 369,353  
Other receivables
    51,581       41,445  
 
           
 
    415,334       410,798  
 
               
Less: Allowance for doubtful trade accounts receivable
    4,086       4,351  
 
           
 
  $ 411,248     $ 406,447  
 
           
Trade receivables subject Spectrum Brands to credit risk. Trade accounts receivable are carried at net realizable value. Spectrum Brands extends credit to its customers based upon an evaluation of the customer’s financial condition and credit history, and generally does not require collateral. Spectrum Brands monitors its customers’ credit and financial condition based on changing economic conditions and makes adjustments to credit policies as required. Provision for losses on uncollectible trade receivables are determined principally on the basis of past collection experience applied to ongoing evaluations of Spectrum Brands’ receivables and evaluations of the risks of nonpayment for a given customer.
Spectrum Brands has a broad range of customers including many large retail outlet chains, one of which accounts for a significant percentage of its sales volume. This customer represented approximately 25% and 23% of Spectrum Brands’ net sales during the three and nine month periods ended July 3, 2011, respectively. This customer represented approximately 24% and 22% of Spectrum Brands’ net sales during the three and nine month periods ended July 4, 2010, respectively. This customer also represented approximately 14% and 15% of the Spectrum Brands’ trade accounts receivable, net at July 3, 2011 and September 30, 2010, respectively.
Approximately 40% and 44% of Spectrum Brands’ net sales during the three and nine month periods ended July 3, 2011, respectively, and 37% and 43% of Spectrum Brands’ net sales during the three and nine month periods ended July 4, 2010, respectively, occurred outside the United States. These sales and related receivables are subject to varying degrees of credit, currency, political and economic risk. Spectrum Brands monitors these risks and makes appropriate provisions for collectability based on an assessment of the risks present.
Inventories
Inventories of Spectrum Brands, which are stated at the lower of cost (using the first-in, first-out method) or market, consist of the following:
                 
    July 3, 2011     September 30, 2010  
Raw materials
  $ 70,183     $ 62,857  
Work in process
    35,077       28,239  
Finished goods
    443,116       439,246  
 
           
 
  $ 548,376     $ 530,342  
 
           
Insurance- Other Liabilities
“Other liabilities” in the “Insurance” section of the Condensed Consolidated Balance Sheet consist of the following:
         
    July 3, 2011  
Retained asset account
  $ 201,654  
Call options collateral held
    65,458  
Funds withheld from reinsurers
    53,939  
Amounts payable to reinsurers
    23,137  
Other
    121,841  
 
     
Total insurance- other liabilities
  $ 466,029  
 
     

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Shipping and Handling Costs
Spectrum Brands incurred shipping and handling costs of $51,172 and $150,140 for the three and nine month periods ended July 3, 2011, respectively, and $40,204 and $111,615 for the three and nine month periods ended July 4, 2010, respectively. These costs are included in “Selling, general and administrative” expenses in the accompanying Condensed Consolidated Statements of Operations. Shipping and handling costs include costs incurred with third-party carriers to transport products to customers as well as salaries and overhead costs related to activities to prepare the Spectrum Brands products for shipment from its distribution facilities.
Reorganization Items
On February 3, 2009, SBI and each of its wholly-owned U.S. subsidiaries (collectively, the “Debtors”) filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”), in the U.S. Bankruptcy Court for the Western District of Texas. On August 28, 2009 the Debtors emerged from Chapter 11 of the Bankruptcy Code. SBI adopted fresh-start reporting as of a convenience date of August 30, 2009.
Reorganization items are presented separately in the accompanying Condensed Consolidated Statements of Operations and represent expenses, income, gains and losses that SBI has identified as directly relating to its voluntary petitions under the Bankruptcy Code. Reorganization items expense, net for the nine month period ended July 4, 2010 consists of the following:
         
    2010  
Legal and professional fees
  $ 3,536  
Provision for rejected leases
    110  
 
     
Reorganization items expense, net
  $ 3,646  
 
     
Discontinued Operations
On November 11, 2008, SBI approved the shutdown of its line of growing products, which included the manufacturing and marketing of fertilizers, enriched soils, mulch and grass seed. The decision to shut down growing products was made only after SBI was unable to successfully sell this business, in whole or in part. The shutdown of its line of growing products was completed during the second quarter of SBI's fiscal year ended September 30, 2009.
The presentation herein of the results of continuing operations excludes its line of growing products for all periods presented. The following amounts have been segregated from continuing operations and are reflected as discontinued operations for the nine month period ended July 4, 2010:
         
    Nine Months 2010  
Net sales
  $  
 
     
Loss from discontinued operations before income taxes
    (2,512 )
Provision for income tax expense
    223  
 
     
Loss from discontinued operations, net of tax
  $ (2,735 )
 
     
(20) Related Party Transactions
The Company has a management agreement with Harbinger Capital Partners LLC (“Harbinger Capital”), an affiliate of the Company and the Principal Stockholders, whereby Harbinger Capital may provide advisory and consulting services to the Company. The Company has agreed to reimburse Harbinger Capital for its out-of-pocket expenses and the cost of certain services performed by legal and accounting personnel of Harbinger Capital under the agreement. For the nine months ended July 3, 2011, the Company did not incur any costs related to this agreement.
On January 7, 2011, the Company completed the Spectrum Brands Acquisition pursuant to the Exchange Agreement entered into on September 10, 2010 with the Principal Stockholders. In connection therewith, the Company issued an aggregate of 119,910 shares of its common stock in exchange for an aggregate of 27,757 shares of common stock of Spectrum Brands (the “Spectrum Brands Contributed Shares”), or approximately 54.5% of the then outstanding Spectrum Brands common stock. The exchange ratio of 4.32 to 1.00 was based on the respective volume weighted average trading prices of the Company’s common stock ($6.33 per share) and Spectrum Brands common stock ($27.36 per share) on the NYSE for the 30 trading days from and including July 2, 2010 to and including August 13, 2010, the day the Company received the Principal Stockholders’ proposal for the Spectrum Brands Acquisition.

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Upon the consummation of the Spectrum Brands Acquisition, the Company became a party to a registration rights agreement, by and among the Principal Stockholders, Spectrum Brands and the other parties listed therein, pursuant to which the Company obtained certain demand and “piggy back” registration rights with respect to the shares of Spectrum Brands’ common stock held by the Company.
Following the consummation of the Spectrum Brands Acquisition, the Company also became a party to a stockholders agreement, by and among the Principal Stockholders and Spectrum Brands (the “SB Stockholder Agreement”). Under the SB Stockholder Agreement, the parties thereto have agreed to certain governance arrangements, transfer restrictions and certain other limitations with respect to Going Private Transactions (as such term is defined in the SB Stockholder Agreement).
The issuance of shares of the Company’s common stock to the Principal Stockholders pursuant to the Exchange Agreement and the acquisition by the Company of the Spectrum Brands Contributed Shares were not registered under the Securities Act. These shares are restricted securities under the Securities Act. The Company may not be able to sell the Spectrum Brands Contributed Shares and the Principal Stockholders may not be able to sell their shares of the Company’s common stock acquired pursuant to the Exchange Agreement except pursuant to: (i) an effective registration statement under the Securities Act covering the resale of those shares, (ii) Rule 144 under the Securities Act, which requires a specified holding period and limits the manner and volume of sales, or (iii) any other applicable exemption under the Securities Act.
On March 7, 2011, the Company entered into an agreement (the “Transfer Agreement”) with the Master Fund whereby on March 9, 2011, (i) the Company acquired from the Master Fund a 100% membership interest in HFG, which was the buyer under the F&G Stock Purchase Agreement, between HFG and OMGUK, pursuant to which HFG agreed to acquire all of the outstanding shares of capital stock of FGL and certain intercompany loan agreements between OM Group, as lender, and FGL, as borrower (the “FGL Acquisition”), in consideration for $350,000, which could be reduced by up to $50,000 post closing if certain regulatory approval is not received, and (ii) the Master Fund transferred to HFG the sole issued and outstanding Ordinary Share of FS Holdco Ltd, a Cayman Islands exempted limited company (“FS Holdco”) (together, the “Insurance Transaction”). In consideration for the interests in HFG and FS Holdco, the Company agreed to reimburse the Master Fund for certain expenses incurred by the Master Fund in connection with the Insurance Transaction (up to a maximum of $13,300) and to submit certain expenses of the Master Fund for reimbursement by OM Group under the Purchase Agreement. The Transfer Agreement and the transactions contemplated thereby, including the Purchase Agreement, was approved by the Company’s Board of Directors upon a determination by a special committee (the “FGL Special Committee”) comprised solely of directors who were independent under the rules of the NYSE, that it was in the best interests of the Company and its stockholders (other than the Master Fund and its affiliates) to enter into the Transfer Agreement and proceed with the Insurance Transaction. On April 6, 2011, the Company completed the FGL Acquisition.
FS Holdco is a recently formed holding company, which is the indirect parent company of Front. Neither HFG nor FS Holdco has engaged in any business other than transactions contemplated in connection with the Insurance Transaction.
On May 19, 2011, FGL Special Committee unanimously determined that it is (i) in the best interests of the Company for Front Street and FGL, to enter into a reinsurance agreement (the “Reinsurance Agreement”), pursuant to which Front Street would reinsure up to $3,000,000 of insurance obligations under annuity contracts of FGL and (ii) in the best interests of the Company for Front Street and HCP II to enter into an investment management agreement (the “Investment Management Agreement”), pursuant to which HCP II would be appointed as the investment manager of up to $1,000,000 of assets securing Front Street’s reinsurance obligations under the Reinsurance Agreement, which assets will be deposited in a reinsurance trust account for the benefit of FGL pursuant to a trust agreement (the “Trust Agreement”). On May 19, 2011, the Company’s board of directors approved the Reinsurance Agreement, the Investment Management Agreement, the Trust Agreement and the transactions contemplated thereby. The FGL Special Committee’s consideration of the Reinsurance Agreement, the Trust Agreement, and the Investment Management Agreement was contemplated by the terms of the Transfer Agreement. In considering the foregoing matters, the FGL Special Committee was advised by independent counsel and received an independent third-party fairness opinion.
HFG’s pre-closing and closing obligations under the Purchase Agreement, including payment of the purchase price, were guaranteed by the Master Fund. Pursuant to the Transfer Agreement, the Company entered into a Guaranty Indemnity Agreement (the “Guaranty Indemnity”) with the Master Fund, pursuant to which the Company agreed to indemnify the Master Fund for any losses incurred by it or its representatives in connection with the Master Fund’s guaranty of HFG’s pre-closing and closing obligations under the Purchase Agreement.
On July 14, 2011, the Master Fund and Spectrum Brands entered into an equity underwriting agreement with Credit Suisse Securities (USA) LLC, as representative of the underwriters listed therein, with respect to the offering of 1,000 shares of Spectrum Brands common stock by Spectrum Brands and 5,495 shares of Spectrum Brands common stock by the Master Fund, at a price per share to the public of $28.00. HGI did not sell any shares of Spectrum Brands common stock in the offering. In connection with the offering, HGI entered into a 180-day lock up agreement. In addition, the Master Fund entered into a standstill agreement with HGI, pursuant to which the Master Fund agreed that it would not, among other things (a) either individually or as part of a group, acquire, offer to acquire, or agree to acquire any securities (or beneficial ownership thereof) of Spectrum Brands; (b) other than with respect to certain existing holdings, form, join or in any way participate in a group with respect to any securities of Spectrum Brands; (c) effect, seek, offer, propose or cause or participate in (i) any merger, consolidation, share exchange or business combination involving Spectrum Brands or any material portion of Spectrum Brands’ business, (ii) any purchase or sale of all or any substantial part of the assets of Spectrum Brands or any material portion of the Spectrum Brands’ business; (iii) any recapitalization, reorganization or other extraordinary transaction with respect to Spectrum Brands or any material portion of the Spectrum Brands’ business, or (iv) any representation on the board of directors of Spectrum Brands.

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(21) Segment Data
The Company follows the accounting guidance which establishes standards for reporting information about operating segments in interim and annual financial statements. The Company’s reportable business segments are organized in a manner that reflects how HGI’s management views those business activities. Accordingly, the Company currently operates its business in two reporting segments: (i) consumer products through Spectrum Brands and (ii) insurance through FGL (see Note 1 for additional information).
Segment information for the periods presented is as follows:
                                 
    Three Months     Nine Months  
    2011     2010     2011     2010  
Segment revenues:
                               
Consumer products
  $ 804,635     $ 653,486     $ 2,359,586     $ 1,778,012  
Insurance
    229,655             229,655        
 
                       
Consolidated revenues
  $ 1,034,290     $ 653,486     $ 2,589,241     $ 1,778,012  
 
                       
 
                               
Segment operating income (loss):
                               
Consumer products
  $ 78,767     $ 59,634     $ 195,125     $ 124,164  
Insurance
    49,761             49,761        
 
                       
Total segments
    128,528       59,634       244,886       124,164  
Corporate expenses (A)
    (8,012 )     (546 )     (37,247 )     (546 )
 
                       
Consolidated operating income (loss)
    120,516       59,088       207,639       123,618  
Interest expense
    (51,904 )     (132,238 )     (192,650 )     (230,130 )
Bargain purchase gain from business acquisition
    134,668             134,668        
Other income (expense), net
    7,086       (1,312 )     7,049       (8,296 )
Reorganization items expense, net
                      (3,646 )
 
                       
Consolidated income (loss) from continuing operations before income taxes
  $ 210,366     $ (74,462 )   $ 156,706     $ (118,454 )
 
                       
                 
    July 3, 2011     September 30, 2010  
Segment total assets:
               
Consumer products
  $ 3,822,779     $ 3,873,604  
Insurance
    19,574,053        
 
           
Total segments
    23,396,832       3,873,604  
Corporate assets
    522,993       142,591  
 
           
Consolidated total assets at period end
  $ 23,919,825     $ 4,016,195  
 
           
 
(A)   Included in corporate expenses are $3,400 and $26,500 related to business acquisitions and $1,900 and $3,600 related to Front Street for the three and nine months ended July 3, 2011, respectively.
(22) Subsequent Events
On July 27, 2011, Spectrum Brands made a voluntary prepayment of $40,000 to reduce the Term Loan to $617,000.
On August 5, 2011, the Company issued 120 shares of Series A-2 Preferred Stock, in a private placement subject to future registration rights, pursuant to a securities purchase agreement entered into on August 5, 2011, for aggregate gross proceeds of $120,000. The Series A-2 Preferred Stock (i) is redeemable in cash (or, if a holder does not elect cash, automatically converted into common stock) on the seventh anniversary of issuance, (ii) is convertible into the Company’s common stock at an initial conversion price of $7.00 per share, subject to anti-dilution adjustments, (iii) has a liquidation preference of the greater of 150% of the purchase price or the value that would be received if it were converted into common stock, (iv) accrues a cumulative quarterly cash dividend at an annualized rate of 8% and (v) has a quarterly non-cash principal accretion at an annualized rate of 4% that will be reduced to 2% or 0% if the Company achieves specified rates of growth measured by increases in its net asset value. The Series A-2 Preferred Stock is entitled to vote and to receive cash dividends and in-kind distributions on an as-converted basis with the common stock. The net proceeds from the issuance of the Series A-2 Preferred Stock of $115,000, net of related fees and expenses of approximately $5,000, are expected to be used for general corporate purposes, which may include future acquisitions and other investments.

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Harbinger Group Inc. (“HGI,” “we,” “us,” “our” and, collectively with its subsidiaries or as its accounting predecessor prior to June 16, 2010, the “Company”) should be read in conjunction with our unaudited condensed consolidated financial statements included elsewhere in this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of HGI which was included with our retrospectively adjusted annual consolidated financial statements filed on Form 8-K with the Securities and Exchange Commission (the “Commission”) on June 10, 2011 (the “Recast Financials”). Certain statements we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part II — Other Information” of this report. You should consider our forward-looking statements in light of our unaudited condensed consolidated financial statements, related notes, and other financial information appearing elsewhere in this report, the Recast Financials and our other filings with the Commission.
HGI Overview
We are a holding company that is 93.3% owned by Harbinger Capital Partners Master Fund I, Ltd. (the “Master Fund”), Global Opportunities Breakaway Ltd. and Harbinger Capital Partners Special Situations Fund, L.P. (together, the “Principal Stockholders”), not taking into account the conversion of the Series A Participating Convertible Preferred Stock or the Series A-2 Participating Convertible Preferred Stock (the “Preferred Stock”) discussed below in “Recent Developments.”
We are focused on obtaining controlling equity stakes in subsidiaries that operate across a diversified set of industries. We view the acquisition of Spectrum Brands Holdings, Inc. (“Spectrum Brands”) and Fidelity & Guaranty Life Holdings, Inc. (“FGL,” formally Old Mutual U.S. Life Holdings, Inc.), both discussed below in “Recent Developments,” as first steps in the implementation of that strategy. We have identified the following six sectors in which we intend to pursue investment opportunities: consumer products, insurance and financial products, telecommunications, agriculture, power generation and water and natural resources. In addition to our intention to acquire controlling interests, we may also from time to time make investments in debt instruments and acquire minority equity interests in companies.
In pursuing our strategy, we utilize the investment expertise and industry knowledge of Harbinger Capital Partners LLC (“Harbinger Capital”), a multi-billion dollar private investment firm based in New York and an affiliate of the Principal Stockholders. We believe that the team at Harbinger Capital has a track record of making successful investments across various industries. We believe that our affiliation with Harbinger Capital enhances our ability to identify and evaluate potential acquisition opportunities appropriate for a permanent capital vehicle. Our corporate structure provides significant advantages compared to the traditional hedge fund structure for long-term holdings as our sources of capital are longer term in nature and thus will more closely match our principal investment strategy. In addition, our corporate structure provides additional options for funding acquisitions, including the ability to use our common stock as a form of consideration.
Recent Developments
On November 15, 2010 and June 28, 2011, we issued $350 million and $150 million, respectively, or $500 million aggregate principal amount of 10.625% senior secured notes due 2015 (the “10.625% Notes”). We used the net proceeds of the $350 million 10.625% Notes to acquire FGL as discussed below. We expect to use the remaining proceeds for general corporate purposes which may include the financing of future acquisitions and other investments.
On January 7, 2011, we acquired a then 54.5% (currently 53.0%) controlling interest in Spectrum Brands, a diversified global branded consumer products company, by issuing approximately 119.9 million shares of our common stock to the Principal Stockholders in exchange for approximately 27.8 million shares of common stock of Spectrum Brands in a transaction we refer to as the “Spectrum Brands Acquisition”. As a result, the Principal Stockholders own approximately 93.3% of our outstanding common stock, not taking into account conversion of the Preferred Stock.
Spectrum Brands reflects the combination on June 16, 2010, of Spectrum Brands, Inc. (“SBI”), a global branded consumer products company, and Russell Hobbs, Inc. (“Russell Hobbs”), a global branded small appliance company, in a transaction we refer to as the SB/RH Merger. Prior to the SB/RH Merger, the Principal Stockholders owned approximately 40% and 100% of the outstanding common stock of SBI and Russell Hobbs, respectively. As a result of the SB/RH Merger, Spectrum Brands issued an approximately

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65% controlling financial interest to the Principal Stockholders and an approximately 35% noncontrolling financial interest to other stockholders. Spectrum Brands’ shares of common stock trade on the New York Stock Exchange under the symbol “SPB.”
Immediately prior to the Spectrum Brands Acquisition, the Principal Stockholders held controlling financial interests in both us and Spectrum Brands. As a result, the Spectrum Brands Acquisition is considered a transaction between entities under common control under Accounting Standards Codification (“ASC”) Topic 805 — “Business Combinations,” and is accounted for similar to the pooling of interest method. In accordance with the guidance in ASC Topic 805, the assets and liabilities transferred between entities under common control are recorded by the receiving entity based on their carrying amounts (or at the historical cost basis of the parent, if these amounts differ). Although we were the issuer of shares in the Spectrum Brands Acquisition, during the historical periods presented Spectrum Brands was an operating business and we were not. Therefore, Spectrum Brands has been reflected as the predecessor and receiving entity in our financial statements to provide a more meaningful presentation of the transaction to our stockholders. Accordingly, our financial statements have been retrospectively adjusted to reflect as our historical financial statements those of Spectrum Brands and SBI, and our assets and liabilities have been recorded at the Principal Stockholders’ basis as of the date that common control was first established (June 16, 2010). As SBI was the accounting acquirer in the SB/RH Merger, the financial statements of SBI are included as our predecessor entity for periods preceding the SB/RH Merger.
In connection with the Spectrum Brands Acquisition, we changed our fiscal year end from December 31 to September 30 to conform to the fiscal year end of Spectrum Brands. As a result of this change in fiscal year end, our quarterly reporting periods for fiscal year 2011, subsequent to the Spectrum Brands Acquisition, ended on April 3, 2011 and July 3, 2011.
On March 9, 2011, we acquired Harbinger F&G, LLC (formerly, Harbinger OM, LLC), a Delaware limited liability company (“HFG”), and FS Holdco Ltd., a Cayman Islands exempted limited company (“FS Holdco”), from the Master Fund under a transfer agreement (the “Transfer Agreement”) entered into on March 7, 2011. As a result, we indirectly assumed the rights and obligations of HFG to acquire all of the outstanding shares of capital stock of FGL and certain intercompany loan agreements between OM Group (UK) Limited (“OM Group”) as lender, and FGL, as borrower, in consideration for $350 million, which could be reduced by up to $50 million post closing if certain regulatory approval is not received. FS Holdco Ltd. is a recently formed holding company, which is the indirect parent company of Front Street Re, Ltd. (“Front Street”), a recently formed Bermuda-based reinsurer. Subject to regulatory approval, Front Street will enter into a reinsurance agreement with FGL to reinsure up to $3 billion of insurance obligations under annuity contracts of FGL. Front Street has not engaged in any significant business to date, but expects to provide reinsurance for fixed annuities with third parties as well as FGL. FS Holdco has not engaged in any business other than transactions contemplated under the Transfer Agreement. See Note 17 to our accompanying unaudited condensed consolidated financial statements for additional information regarding this transaction.
On April 6, 2011, we completed the acquisition of FGL for a cash purchase price of $350 million, which could be reduced by up to $50 million post closing if certain regulatory approval is not received, from OM Group in a transaction we refer to as the “FGL Acquisition”. We incurred approximately $22 million of expenses relating to this transaction, which included expense reimbursements to the Master Fund of $13.3 million and $5 million of the $350 million purchase price was re-characterized as an expense since OM Group made a $5 million expense reimbursement to the Master Fund upon closing of the FGL Acquisition. FGL, through its insurance subsidiaries, is a provider of fixed annuity products in the U.S. The FGL Acquisition has been accounted for under the acquisition method of accounting. Accordingly, the results of FGL’s operations have been included in our consolidated financial statements commencing April 6, 2011. See Note 17 to our accompanying unaudited condensed consolidated financial statements for additional information regarding this acquisition.
On May 13, 2011, we issued 280,000 shares of Preferred Stock in a private placement for total gross proceeds of $280 million. The Preferred Stock (i) is redeemable for cash (or, if a holder does not elect cash, automatically converted into common stock) on the seventh anniversary of issuance, (ii) is convertible into our common stock at an initial conversion price of $6.50 per share, subject to anti-dilution adjustments, (iii) has a liquidation preference of the greater of 150% of the purchase price or the value that would be received if it were converted into common stock, (iv) accrues a cumulative quarterly cash dividend at an annualized rate of 8% and (v) has a quarterly non-cash principal accretion at an annualized rate of 4% that will be reduced to 2% or 0% if we achieve specified rates of growth measured by increases in our net asset value. The Preferred Stock is entitled to vote, subject to certain regulatory limitations, and to receive cash dividends and in-kind distributions on an as-converted basis with our common stock. On August 5, 2011 we issued 120,000 shares of Series A-2 Participating Convertible Preferred Stock for total gross proceeds of $120 million. The terms and conditions of this issuance are substantially similar to the initial issuance except for the initial conversion price, which has been set at $7.00, subject to anti-dilution adjustments. We expect to use the aggregate net proceeds of $384 million, net of related total fees and expenses of approximately $16 million, from the issuance of both the Preferred Stock offerings for general corporate purposes, which may include future acquisitions and other investments.

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We currently operate in two segments: consumer products through Spectrum Brands and insurance through FGL.
Consumer Products Segment
Through Spectrum Brands, we are a diversified global branded consumer products company with positions in seven major product categories: consumer batteries; pet supplies; home and garden control products; electric shaving and grooming; small appliances; electric personal care; and portable lighting.
Spectrum Brands manufactures and markets alkaline, zinc carbon and hearing aid batteries, herbicides, insecticides and repellants and specialty pet supplies. Manufacturing and product development facilities are located in the United States, Europe, Latin America and Asia. Spectrum Brands designs and markets rechargeable batteries and chargers, shaving and grooming products, small household appliances, personal care products and portable lighting products, substantially all of which are manufactured by third-party suppliers, primarily located in Asia.
Spectrum Brands sells products in approximately 130 countries through a variety of trade channels, including retailers, wholesalers and distributors, hearing aid professionals, industrial distributors and original equipment manufacturers (“OEMs”) and enjoys strong name recognition in these markets under the Rayovac, VARTA and Remington brands, each of which has been in existence for more than 80 years, and under the Tetra, 8-in-1, Spectracide, Cutter, Black & Decker, George Foreman, Russell Hobbs, Farberware and various other brands.
The “Spectrum Value Model” is at the heart of Spectrum Brands’ operating approach. This model emphasizes providing value to the consumer with products that work as well as or better than competitive products for a lower cost, while also delivering higher retailer margins. Efforts are concentrated on winning at point of sale and on creating and maintaining a low-cost, efficient operating structure.
Spectrum Brands’ operating performance is influenced by a number of factors including: general economic conditions; foreign exchange fluctuations; trends in consumer markets; consumer confidence and preferences; overall product line mix, including pricing and gross margin, which vary by product line and geographic market; pricing of certain raw materials and commodities; energy and fuel prices; and general competitive positioning, especially as impacted by competitors’ advertising and promotional activities and pricing strategies.
Insurance Segment
Through FGL, we are a provider of annuity and life insurance products to the middle and upper-middle income markets in the United States. Based in Baltimore, Maryland, FGL operates in the United States through its subsidiaries Fidelity & Guaranty Life Insurance Company (“FGL Insurance”) and Fidelity & Guaranty Life Insurance Company of New York (“FGL NY”).
FGL’s principal products are deferred annuities (including fixed indexed annuities), immediate annuities, and life insurance products, which are sold through a network of approximately 300 independent marketing organizations (“IMOs”) representing approximately 25,000 independent agents and managing general agents. As of July 3, 2011, FGL had over 775,000 policyholders nationwide and distributes its products throughout the United States.
FGL’s most important IMOs are referred to as “Power Partners”. FGL’s Power Partners are currently comprised of 19 annuity IMOs and 9 life insurance IMOs. From April 6, 2011 through July 3, 2011, these Power Partners accounted for approximately 84% of FGL’s sales volume. FGL believes that their relationships with these IMOs are strong. The average tenure of the top ten Power Partners is approximately 12.5 years.
Under accounting principles generally accepted in the United States (“US GAAP”), premium collections for deferred annuities and immediate annuities without life contingency are reported as deposit liabilities (i.e., contractholder funds) instead of as revenues. Similarly, cash payments to policyholders are reported as decreases in the liability for contractholder funds and not as expenses. Sources of revenues for products accounted for as deposit liabilities are net investment income, surrender and other charges deducted from contractholder funds, and net realized gains (losses) on investments. Components of expenses for products accounted for as deposit liabilities are interest sensitive and index product benefits (primarily interest credited to account balances), amortization of intangibles including value of business acquired (“VOBA”) and deferred policy acquisition costs (“DAC”), other operating costs and expenses and income taxes.

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Earnings from products accounted for as deposit liabilities are primarily generated from the excess of net investment income earned over the interest credited or the cost of providing index credits to the policyholder, known as the investment spread. With respect to fixed index annuities, the cost of providing index credits includes the expenses incurred to fund the annual index credits and where applicable, minimum guaranteed interest credited. Proceeds received upon expiration or early termination of call options purchased to fund annual index credits are recorded as part of the change in fair value of derivatives, and are largely offset by an expense for index credited to annuity contractholder fund balances.
FGL’s profitability depends in large part upon the amount of assets under management, the ability to manage operating expenses, the costs of acquiring new business (principally commissions to agents and bonuses credited to policyholders) and the investment spreads earned on contractholder fund balances. Managing investment spreads involves the ability to manage investment portfolios to maximize returns and minimize risks such as interest rate changes and defaults or impairment of investments and the ability to manage interest rates credited to policyholders and costs of the options purchased to fund the annual index credits on the fixed index annuities.
Results of Operations
Fiscal Quarter and Fiscal Nine Month Period Ended July 3, 2011 Compared to Fiscal Quarter and Fiscal Nine Month Period Ended July 4, 2010
In this Quarterly Report on Form 10-Q we refer to the three months ended July 3, 2011 as the “Fiscal 2011 Quarter,” the nine month period ended July 3, 2011 as the “Fiscal 2011 Nine Months,” the three month period ended July 4, 2010 as the “Fiscal 2010 Quarter” and the nine month period ended July 4, 2010 as the “Fiscal 2010 Nine Months.”
Presented below is a table that summarizes our results of operations and compares the amount of the change between the fiscal quarters and nine month periods (in millions, expect per share data):

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    Fiscal Quarter     Fiscal Nine Months  
                    Increase                     Increase  
    2011     2010     (Decrease)     2011     2010     (Decrease)  
    (Unaudited)             (Unaudited)          
Revenues:
                                               
Consumer Products and Other — Net Sales
  $ 805     $ 653     $ 152     $ 2,360     $ 1,778     $ 582  
Insurance
    230             230       230             230  
 
                                   
Total revenues
    1,035       653       382       2,590       1,778       812  
 
                                   
Operating costs and expenses:
                                               
Consumer Products and Other:
                                               
Cost of goods sold
    511       400       111       1,511       1,131       380  
Selling, general and administrative expenses
    223       194       29       691       523       168  
 
                                   
 
    734       594       140       2,202       1,654       548  
 
                                   
Insurance:
                                               
Benefits and other changes in policy reserves
    130             130       130             130  
Acquisition and operating expenses, net of deferrals
    29             29       29             29  
Amortization of intangibles
    21             21       21             21  
 
                                   
 
    180             180       180             180  
 
                                   
Total operating costs and expenses
    914       594       320       2,382       1,654       728  
 
                                   
Operating income
    121       59       62       208       124       84  
Interest expense
    (52 )     (132 )     80       (193 )     (230 )     37  
Bargain purchase gain from business acquisition
    135             135       135             135  
Other income (expense), net
    7       (1 )     8       7       (8 )     15  
 
                                   
Income (loss) from continuing operations before reorganization items and income taxes
    211       (74 )     285       157       (114 )     271  
Reorganization items expense, net
                            4       (4 )
 
                                   
Income (loss) from continuing operations before income taxes
    211       (74 )     285       157       (118 )     275  
Income tax expense
    4       12       (8 )     64       45       19  
 
                                   
Income (loss) from continuing operations
    207       (86 )     293       93       (163 )     256  
Loss from discontinued operations, net of tax
                            (3 )     3  
 
                                   
Net income (loss)
    207       (86 )     293       93       (166 )     259  
Less: Net income (loss) attributable to noncontrolling interest
    13       (35 )     48       (19 )     (35 )     16  
 
                                   
Net income (loss) attributable to controlling interest
    194       (51 )     245       112       (131 )     243  
Less: Preferred stock dividends and accretion
    6             6       6             6  
 
                                   
Net income (loss) attributable to common and participating preferred stockholders
  $ 188     $ (51 )   $ 239     $ 106     $ (131 )   $ 237  
 
                                   
 
                                               
Basic and diluted income (loss) per common share attributable to controlling interest:
                                               
Continuing operations
  $ 1.03     $ (0.39 )   $ 1.42     $ 0.58     $ (0.98 )   $ 1.56  
Discontinued operations
                            (0.02 )     0.02  
 
                                   
Net income (loss)
  $ 1.03     $ (0.39 )   $ 1.42     $ 0.58     $ (1.00 )   $ 1.58  
 
                                   
 
                                               

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Revenues
Consumer Products and Other
Net sales for the Fiscal 2011 Quarter increased $152 million to $805 million from $653 million in the Fiscal 2010 Quarter. Net sales for the Fiscal 2011 Nine Months increased $582 million to $2,360 million from $1,778 million in the Fiscal 2010 Nine Months. The following table details consolidated net sales by product line, and the amounts attributable to the acquisition of Russell Hobbs in the SB/RH Merger, for each of those respective periods (in millions):
                                                 
    Fiscal Quarter     Fiscal Nine Months  
Product line net sales   2011     2010     Increase
(Decrease)
    2011     2010     Increase
(Decrease)
 
Russell Hobbs acquisition:
                                               
Small appliances
  $ 170     $ 34     $ 136     $ 567     $ 34     $ 533  
Pet supplies
    3       1       2       11       1       10  
Home and garden control products
    1             1       3             3  
 
                                   
Total Russell Hobbs acquisition
    174       35       139       581       35       546  
Consumer batteries
    198       194       4       627       629       (2 )
Pet supplies
    141       135       6       414       420       (6 )
Home and garden control products
    154       164       (10 )     270       266       4  
Electric shaving and grooming products
    62       61       1       211       196       15  
Electric personal care products
    53       43       10       191       167       24  
Portable lighting products
    23       21       2       66       65       1  
 
                                   
Total net sales to external customers
  $ 805     $ 653     $ 152     $ 2,360     $ 1,778     $ 582  
 
                                   
During the Fiscal 2011 Quarter, global consumer battery sales increased $4 million, or 2%, primarily driven by increases in North America and Europe of $3 million and $12 million, respectively, which were partially offset by decreases in Latin American sales of $11 million. The increases within North America were driven by distribution gains at a major customer, whereas increases in Europe were driven by customer gains and increased placement with retailers coupled with a $9 million favorable foreign exchange impact. The decrease within Latin America was driven by lower zinc carbon battery sales of $9 million and lower alkaline sales of $2 million. The decrease in both zinc carbon and alkaline battery sales was predominantly driven by decreased volume and price in Brazil resulting from competitive pressures. Pet supply sales increased $6 million, or 4%, during the Fiscal 2011 Quarter, which was primarily attributable to improved consumption trends at key retailers as well as favorable foreign exchange. During the Fiscal 2011 Quarter, electric shaving and grooming product sales increased $1 million, or 2%, primarily due to increased sales within North America as a result of distribution gains and increased online sales. Electric personal care sales increased $10 million, or 23%, during the Fiscal 2011 Quarter, primarily due to increased sales in North America and Europe of $4 million and $5 million, respectively, as a result of new product introductions, distribution gains, increased online sales and regional growth into Eastern Europe coupled with favorable foreign exchange impacts of $3 million. Home and garden control product sales decreased $10 million, or 6%, during the Fiscal 2011 Quarter compared to the Fiscal 2010 Quarter. The decrease is primarily attributable to unseasonable weather in the United States which negatively impacted the lawn and garden season. The $2 million, or 10%, increase in portable lighting sales during the Fiscal 2011 Quarter was primarily driven by new distribution channels added during the quarter.
During the Fiscal 2011 Nine Months, global consumer battery sales decreased $2 million, or less than 1%, primarily driven by lower Latin American sales of $21 million which were offset by increased North American sales of $16 million and favorable foreign exchange translation of $3 million. North American sales increased as a result of strong holiday sales during our first fiscal quarter and new distribution channels added during the year. Latin American sales decreased due to the factors discussed in the Fiscal 2011 Quarter. The $6 million, or 1%, decrease in pet supplies sales during the Fiscal 2011 Nine Months resulted from decreases in aquatics sales of $13 million resulting from macroeconomic factors which were offset by an increase in companion animal sales of $3 million primarily attributable to the same factors mentioned above during the Fiscal 2011 Quarter, coupled with favorable foreign exchange of $4 million. During the Fiscal 2011 Nine Months, electric shaving and grooming product sales increased $15 million, or 8%, primarily due to increases within North America, Europe and Latin America of $6 million, $5 million and $2 million, respectively, due to distribution gains. Electric personal care sales increased $24 million, or 14%, during the Fiscal 2011 Nine Months, primarily due to increased sales in North America and Europe of $7 million and $14 million, respectively, resulting from the factors listed above for the Fiscal 2011 Quarter as well as successful in-store promotions. Home and garden control product sales increased $4 million, or 2%, during the Fiscal 2011 Nine Months compared to the Fiscal 2010 Nine Months. The increase was

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attributable to increased distribution and product placements with major customers which were tempered by the factors listed above for the Fiscal 2011 Quarter. Portable lighting products sales increased slightly to $66 million during the Fiscal 2011 Nine Months compared to $65 million during the Fiscal 2010 Nine Months due to the factors listed above for the Fiscal 2011 Quarter.
Insurance
Insurance revenues consist of the following components within the Fiscal 2011 Quarter and Nine Months following the FGL Acquisition on April 6, 2011 (in millions):
         
    For the  
    Period April 6, 2011  
    to July 3,2011  
Premiums
  $ 25  
Net investment income
    177  
Net investment gains
    1  
Insurance and investment product fees and other
    27  
 
     
Total Insurance Revenues
  $ 230  
 
     
Premiums of $25 million reflect insurance premiums for traditional life insurance products which are recognized as revenue when due from the policyholder. FGL Insurance has ceded the majority of its traditional life business to unaffiliated third party reinsurers.
Net investment income of $177 million, less interest credited and option costs on annuity deposits of $114 million, resulted in a net investment spread of $63 million during the period. Changes in investment spread primarily result from the aggregate interest credited and option costs on FGL’s fixed indexed annuities (“FIA”) products which can be impacted by the costs of options purchased to fund the annual index credits on fixed index annuities. Average invested assets (on an amortized cost basis) for the period from April 6, 2011 to July 3, 2011 were $16 billion and the average yield earned on average invested assets was 4.33% for the period compared to interest credited and option costs of 2.71%. Also included in net investment income for the period was $(35) million of net premium amortization on the investments in fixed maturity securities. As of the FGL Acquisition Date, all investment securities were recorded at fair value, which resulted in a significant net investment premium position that is being amortized into investment income over the life of the acquired investments.
The investment spread for the period is summarized as follows:
         
    For the Period  
    April 6, 2011  
    to July 3,  
    2011  
Average yield on invested assets
    4.33 %
Interest credited and option cost
    2.71 %
Investment spread
    1.62 %
Net investment gains, reduced by impairment losses, recognized in operations fluctuate from period to period based upon changes in the interest rate and economic environment and the timing of the sale of investments or the recognition of other than temporary impairments (“OTTI”). For the period from April 6, 2011 to July 3, 2011, net investment gains on fixed maturity available-for-sale securities and equity securities were $15 million related to security trading activity during the period. Net investment gains also included net losses of $14 million on derivative instruments purchased to fund the annual index credits for FIA contracts. The components of the realized and unrealized gains on derivative instruments are as follows (in millions):

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    For the Period  
    April 6, 2011 to  
    July 3, 2011  
Call options:
       
Loss on option expiration
  $ (2 )
Change in unrealized gain/loss
    (13 )
Futures contracts:
       
Loss on futures contracts expiration
    (1 )
Change in unrealized gain/loss
    3  
 
     
 
  $ (13 )
 
     
Realized and unrealized gains on derivative instruments primarily result from the performance of the indices upon which the call options and futures contracts are based and the aggregate cost of options purchased. A substantial portion of the call options and futures contracts are based upon the S&P 500 Index with the remainder based upon other equity and bond market indices. The range of index appreciation for call options during the period is as follows:
         
    For the Period  
    April 6, 2011 to  
    July 3, 2011  
S&P 500 Index:
       
Point-to-point strategy
    0%-12.0 %
Monthly average strategy
    0%-15.0 %
Monthly point-to-point strategy
    0%-19.0 %
Daily averaging
    0%-31.4 %
3 Year high water mark
    0.0 %
Actual amounts credited to contract holder fund balances may be less than the index appreciation due to contractual features in the FIA contracts (caps, participation rates and asset fees) which allow us to manage the cost of the options purchased to fund the annual index credits. The level of realized and unrealized gains on derivative instruments is also influenced by the aggregate costs of options purchased. The aggregate cost of options is primarily influenced by the amount of FIA contracts in force. The aggregate cost of options is also influenced by the amount of contract holder funds allocated to the various indices and market volatility which affects option pricing. The cost of options purchased during the period from April 6, 2011 to July 3, 2011 was $31 million.
Insurance and investment products fees and other for the period were $27 million and consist primarily of cost of insurance and surrender charges assessed against policy withdrawals in excess of the policyholders allowable penalty-free amounts (up to 10% of the prior year’s value, subject to certain limitations).
Operating costs and expenses
Consumer Products and Other
Costs of Goods Sold/Gross Profit. Gross profit, representing net sales minus cost of good sold, for the Fiscal 2011 Quarter was $294 million versus $253 million for the Fiscal 2010 Quarter. Our gross profit margin, representing gross profit as a percentage of net sales, for the Fiscal 2011 Quarter decreased to 36.5% from 38.7% in the Fiscal 2010 Quarter. The increase in gross profit is primarily attributable to the SB/RH Merger, which contributed $26 million to the increase in gross profit in the Fiscal 2011 Quarter compared to the Fiscal 2010 Quarter. The decrease in gross profit margin is attributable to the change in overall product mix as a result of the SB/RH Merger. Gross profit for the Fiscal 2011 Nine Months was $849 million versus $647 million for the Fiscal 2010 Nine Months. Spectrum Brands’ gross profit margin decreased to 36.0% from 36.4% in the Fiscal 2010 Nine Months. The increase in gross profit for the Fiscal 2011 Nine Months is also attributable to the SB/RH Merger, which contributed $134 million to the increase during the Fiscal 2011 Nine Months compared to the Fiscal 2010 Nine Months, coupled with the non-recurrence of a $34 million inventory revaluation charge Spectrum

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Brands recognized associated with the adoption of fresh-start reporting upon emergence from Chapter 11 of the Bankruptcy Code. Inventory balances were revalued at August 30, 2009 resulting in an increase in such inventory balances of $49 million. As a result of the inventory revaluation, Spectrum Brands recognized $34 million in additional cost of goods sold during the Fiscal 2010 Nine Months.
Selling, General & Administrative Expense. Selling, general and administrative expenses (“SG&A”) for the Fiscal 2011 Quarter increased $29 million to $223 million from $194 million for the Fiscal 2010 Quarter. The increase is primarily due to $19 million of SG&A for the addition of Russell Hobbs, a negative foreign exchange impact of $9 million, a $2 million increase in restructuring charges and $8 million of SG&A for the corporate expenses at HGI, which are reflected commencing June 16, 2010 (the date that common control was first established over Spectrum Brands and HGI) in the accompanying Condensed Consolidated Statements of Operations for the Fiscal 2011 Quarter and Nine Months. The corporate expenses of HGI included $3 million of corporate overhead, $2 million of start-up costs for Front Street and $3 million of acquisition and project related expenses. These increases have been offset by a decrease in acquisition and integration related charges of $10 million principally related to the SB/RH Merger.
SG&A for the Fiscal 2011 Nine Months increased $168 million to $691 million from $523 million for the Fiscal 2010 Nine Months. The increase is primarily due to $95 million of SG&A for the addition of Russell Hobbs, an $11 million increase in stock-compensation expense at Spectrum Brands, a $9 million increase in acquisition and integration related charges principally related to the SB/RH Merger, a negative foreign exchange impact of $9 million and $37 million of SG&A for the corporate expenses of HGI. The corporate expenses of HGI included $6 million for corporate overhead expenses, $4 million of start-up costs for Front Street and $27 million of acquisition and project related expenses, which included $1 million related to the Spectrum Brands Acquisition, $23 million related to the FGL Acquisition and $3 million of other project related expenses.
Insurance
Benefits and other changes in policy reserves. Benefits and other changes in policy reserves of $130 million for the period from April 6, 2011 to July 3, 2011 include insurance policy benefits and changes in policy reserves of $48 million, interest sensitive and index product benefits of $104 million, and $(22) million related to changes in the fair value of embedded derivatives. Interest sensitive and index product benefits consist primarily of interest credited and the cost of providing index credits to contractholders of deferred and immediate annuities and universal life products. Changes in index credits are attributable to changes in the underlying indices and the amount of funds allocated by policyholders to the respective index options. Benefits also include claims incurred during the period in excess of contractholder fund balances, traditional life benefits and the change in reserves for life insurance products.
Fair value accounting for derivative instruments and the embedded derivatives in the FIA contracts creates differences in the recognition of revenues and expenses from derivative instruments including the embedded derivative liability in our fixed index annuity contracts. The change in fair value of the embedded derivatives will not correspond to the change in fair value of the derivatives (purchased call options) because the purchased call options are one, two, and three-year options while the options valued in the fair value of embedded derivatives cover the expected life of the FIA contracts. The impact on benefits and expenses adjustment resulting from the change in the fair value of the embedded derivatives in the FIA contracts for the period from April 6, 2011 to July 3, 2011 was a credit to earnings of $22 million, with the decrease in the derivative liability being primarily due to FIA contract terminations during the period.
Acquisition and operating expenses, net of deferrals. Acquisition and operating expenses, net of deferrals for the period were $29 million and include costs and expenses related to the acquisition and ongoing maintenance of insurance and investment contracts, including commissions, policy issuance expenses and other underwriting and general operating costs. These costs and expenses are net of amounts that are capitalized and deferred, which are primary costs and expenses that vary with and are primarily related to the sale and issuance of our insurance policies and investment contracts, such as first-year commissions in excess of ultimate renewal commissions and other policy issuance expenses.
Amortization of intangibles. Amortization of intangibles of $21 million includes VOBA amortization of $17 million, net of accrued interest, and DAC amortization of $4 million for the period. In general, amortization of DAC will increase each period due to the growth in our annuity business and the deferral of policy acquisition costs incurred with respect to sales of annuity products. The anticipated increase in amortization from these factors will be affected by amortization associated with fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business and amortization associated with net realized gains on investments and net OTTI losses recognized in operations.
Consolidated operating costs and expenses are expected to increase as we recognize the full period effect of the FGL Acquisition, continue to actively pursue our acquisition strategy and increase corporate oversight due to acquisitions and continued growth at subsidiaries. These increases in SG&A will be partially offset by cost synergies that Spectrum Brands expects to achieve with the

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SB/RH Merger and savings from its pet supplies product line restructuring over the next two years.
Interest Expense. Interest expense for the Fiscal 2011 Quarter decreased $80 million to $52 million from $132 million for the Fiscal 2010 Quarter. The decrease in quarterly interest expense is the result of $77 million of charges related to the refinancing of Spectrum Brands’ debt in the Fiscal 2010 Quarter consisting of (i) $61 million for the write-offs of the unamortized portion of the discounts, premiums and debt issuance costs related to Spectrum Brands’ debt that was refinanced; (ii) $9 million related to bridge commitment fees while Spectrum Brands was refinancing its debt; (iii) $4 million of prepayment penalties; and (iv) $3 million related to the termination of a Euro-denominated interest rate swap. Also affecting the decrease is a reduction in interest rates and average outstanding balances due to Spectrum Brands’ debt prepayments and refinancing during Fiscal 2011. Partially offsetting these decreases was $10 million of interest expense related to our 10.625% Notes initially issued in November 2010. Interest expense for the Fiscal 2011 Nine Months decreased $37 million to $193 million from $230 million for the Fiscal 2010 Nine Months. The decrease is due to the reasons mentioned above for the 2011 Fiscal Quarter which were partially offset by interest expense related to our 10.625% Notes of $25 million, $24 million related to Spectrum Brands’ term loan refinancing in February 2011 and $5 million related to Spectrum Brands’ voluntary debt prepayments.
Bargain purchase gain from business acquisition. The FGL Acquisition was accounted for under the acquisition method of accounting, which requires the total purchase price to be allocated to the assets acquired and liabilities assumed based on their estimated fair values, which resulted in a bargain purchase gain under US GAAP. We believe that the resulting bargain purchase gain of $135 million is reasonable based on the following circumstances: (a) the seller was highly motivated to sell FGL, as it had publicly announced its intention to do so approximately a year ago, (b) the fair value of FGL’s investments and statutory capital increased between the date that the purchase price was initially negotiated and the date of the FGL Acquisition, (c) as a further inducement to consummate the sale, the seller waived, among other requirements, any potential upward adjustment of the purchase price for an improvement in FGL’s statutory capital between the date of the initially negotiated purchase price and the date of the FGL Acquisition and (d) an independent appraisal of FGL’s business indicated that its fair value was in excess of the purchase price.
Other Income (Expense), net. Other income, net was $7 million for the 2011 Fiscal Quarter and Nine Months, compared to an expense of $1 million and $8 million for the 2010 Fiscal Quarter and Nine Months, respectively. The other income, net in the 2011 Fiscal Quarter and Nine Months relates principally to a $6 million mark to market change in the fair value of the equity conversion option of the Preferred Stock that was issued on May 13, 2011. Refer to Notes 4 and 9 to the Condensed Consolidated Financial Statements for further information regarding the accounting for this embedded derivative liability. The $8 million expense in the 2010 Fiscal Nine Months was due principally to a foreign exchange loss recognized in connection with the designation of Spectrum Brands’ Venezuelan subsidiary as being in a highly inflationary economy and the devaluation of Venezuela’s currency.
Reorganization Items. During the Fiscal 2010 Nine Months, Spectrum Brands, in connection with its reorganization under Chapter 11 of the Bankruptcy Code in 2009, recorded reorganization items expense of $4 million, which are primarily professional and legal fees.
Income Taxes. For the Fiscal 2011 Quarter, our effective tax rate was only 2% principally due to (i) the recognition of a bargain purchase gain from the FGL Acquisition, for which a deferred tax liability has not been recorded as we believe we would have the ability to not incur tax on this gain; and (ii) the release of valuation allowances on tax benefits from net operating and capital loss carryforwards that we determined are more-likely-than-not realizable. In addition to the factors noted above, our effective tax rate for the Fiscal 2011 Nine Months of 41% differs from the U.S. Federal statutory rate of 35% principally due to: (i) deferred income taxes provided on the change in book versus tax basis of indefinite lived intangibles, which are amortized for tax purposes but not for book purposes, and (ii) income in foreign jurisdictions subject to tax at rates different from the U.S. statutory rate.
For the Fiscal 2010 Quarter and Nine Months, we reported a provision for income taxes, despite a pretax loss from continuing operations, in each of those periods principally due to (i) deferred income taxes provided on the change in book versus tax basis of indefinite lived intangibles, which are amortized for tax purposes but not for book purposes, (ii) losses in the United States and some foreign jurisdictions for which no tax benefit can be recognized due to full valuation allowances; and (iii) income subject to tax in certain other foreign jurisdictions.
Discontinued Operations. Loss from discontinued operations of $3 million in the Fiscal 2010 Nine Months relates to the shutdown of the growing products line of business, which included the manufacturing and marketing of fertilizers, enriched soils, mulch and grass seed, following an evaluation of the historical lack of profitability and the projected input costs and significant working capital demands for growing products during Fiscal 2009.

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Noncontrolling Interest. The net income (loss) attributable to noncontrolling interest of $13 million and $(19) million in the 2011 Fiscal Quarter and Nine Months, respectively, reflects the 45.5% share of the net income (loss) of Spectrum Brands attributable to the noncontrolling interest not owned by HGI. The net (loss) attributable to noncontrolling interest for the 2010 Fiscal Quarter and Nine Months was $(35) million relating to the period from June 16, 2010 through July 4, 2010, which was the portion of the prior year period that HGI and Spectrum Brands were under common control. Prior to June 16, 2010 the results of Spectrum Brands were entirely attributable to the shareholders of the accounting predecessor, SBI.
Preferred Stock Dividend and Accretion. The preferred stock dividend and accretion for the Fiscal 2011 Quarter and Nine Months of $6 million consists of a cumulative quarterly cash dividend at an annualized rate of 8%, a quarterly non-cash principal accretion at an annualized rate of 4% that will be reduced to 2% or 0% if we achieve specified rates of growth measured by increases in our net asset value, and accretion of the carrying value of our Preferred Stock, which was discounted by the bifurcated equity conversion option and issuance costs. Refer to Note 9 to our Condensed Consolidated Financial Statements for additional information regarding the Preferred Stock.
Liquidity and Capital Resources
HGI
HGI’s liquidity needs are primarily for interest payments on the 10.625% Notes (approximately $53 million per year), dividend payments on our Preferred Stock (approximately $32 million per year), professional fees (including advisory services, legal and accounting fees), salaries and benefits, office rent, pension expense, insurance costs and to fund certain requirements of its insurance subsidiaries. HGI’s current source of liquidity is its cash, cash equivalents and investments.
HGI is a holding company that is dependent on the proceeds realized from investments and dividends or distributions from its subsidiaries as its primary source of cash. The ability of HGI’s subsidiaries to generate sufficient net income and cash flows to make upstream cash distributions is subject to numerous factors, including restrictions contained its subsidiaries’ financing agreements, availability of sufficient funds in such subsidiaries and applicable state laws and regulatory restrictions. At the same time, HGI’s subsidiaries may require additional capital to maintain or grow their businesses. Such capital could come from HGI, retained earnings at the relevant subsidiary or from third-party sources. For example, Front Street will require additional capital in order to engage in reinsurance transactions, including any possible transaction with FGL, and may require additional capital to meet regulatory capital requirements. As another example, pursuant to a reserve funding transaction that FGL’s insurance subsidiary is a party to, we have been required to post collateral under a collateral model and may be required to post additional collateral in the future. See “Item 5. Other Information — The Fidelity & Guaranty Acquisition — The Reserve Facility and the CARVM Facility.” In that regard, as of August 11, 2011, we posted $19 million as additional collateral. We do not expect to receive any dividends from Spectrum Brands through 2011. We expect to receive dividends from FGL in future periods sufficient to fund a substantial portion of the interest payments on the 10.625% Notes. Any payment of dividends by FGL is subject to the regulatory restrictions and the approval of such payment by the board of directors of FGL, which must consider various factors, including general economic and business conditions, tax considerations, FGL’s strategic plans, financial results and condition, FGL’s expansion plans, any contractual, legal or regulatory restrictions on the payment of dividends, and such other factors the board of directors of FGL considers relevant.
We expect our cash, cash equivalents and investments to continue to be a source of liquidity except to the extent they may be used to fund investments in operating businesses or assets. At July 3, 2011, HGI’s cash, cash equivalents and short-term investments were $501 million.
Based on current levels of operations, HGI does not have any significant capital expenditure commitments and management believes that its consolidated cash, cash equivalents and investments on hand will be adequate to fund its operational and capital requirements for at least the next twelve months. Depending on the size and terms of future acquisitions of operating businesses or assets, HGI and its subsidiaries may raise additional capital through the issuance of equity, debt, or both. There is no assurance, however, that such capital will be available at the time, in the amounts necessary or with terms satisfactory to HGI.
Spectrum Brands
Spectrum Brands expects to fund its cash requirements, including capital expenditures, interest and principal payments due in Fiscal 2011 through a combination of cash on hand ($88 million at July 3, 2011) and cash flows from operations and available borrowings under its revolving credit facility (the “ABL Revolving Credit Facility”). Spectrum Brands expects its capital expenditures for the remaining three months of Fiscal 2011 will be approximately $13 million. Going forward its ability to satisfy financial and other covenants in its senior credit agreements and senior subordinated indenture and to make scheduled payments or prepayments on its debt and other financial obligations will depend on its future financial and operating performance. There can be no assurances that its business will generate sufficient cash flows from operations or that future borrowings under the ABL Revolving Credit Facility will be

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available in an amount sufficient to satisfy its debt maturities or to fund its other liquidity needs. In addition, the current economic crisis could have a further negative impact on its financial position, results of operations or cash flows. Accordingly, Spectrum Brands has and expects it will continue to use a portion of available cash to repay debt prior to expected maturity, for the purpose of improving its capital structure.
FGL
FGL conducts all its operations through operating subsidiaries. Dividends from its subsidiaries are the principal sources of cash to pay dividends to HGI and to meet its obligations, including payments of principal and interest on its outstanding indebtedness. Other principal sources of cash include sales of assets.
The liquidity requirements of FGL’s regulated insurance subsidiaries principally relate to the liabilities associated with their various insurance and investment products, operating costs and expenses, the payment of dividends to FGL, payment of principal and interest on their outstanding debt obligations and income taxes. Liabilities arising from insurance and investment products include the payment of benefits, as well as cash payments in connection with policy surrenders and withdrawals, policy loans and obligations to redeem funding agreements.
FGL’s insurance subsidiaries have used cash flows from operations and investment activities to fund their liquidity requirements. FGL’s insurance subsidiaries’ principal cash inflows from operating activities are derived from premiums, annuity deposits and insurance and investment product fees and other income. The principal cash inflows from investment activities result from repayments of principal, investment income and, as necessary, sales of invested assets.
FGL’s insurance subsidiaries maintain investment strategies intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer durations, such as certain life insurance, are matched with investments having similar estimated lives such as long-term fixed maturity securities. Shorter-term liabilities are matched with fixed maturity securities that have short- and medium-term fixed maturities. In addition, FGL’s insurance subsidiaries hold highly liquid, high-quality short-term investment securities and other liquid investment grade fixed maturity securities to fund anticipated operating expenses, surrenders and withdrawals.
The ability of FGL’s subsidiaries to pay dividends and to make such other payments will be limited by applicable laws and regulations of the states in which its subsidiaries are domiciled, which subject its subsidiaries to significant regulatory restrictions. These laws and regulations require, among other things, FGL’s insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay. Along with solvency regulations, the primary driver in determining the amount of capital used for dividends is the level of capital needed to maintain desired financial strength ratings from the rating agencies. Given recent economic events that have affected the insurance industry, both regulators and rating agencies could become more conservative in their methodology and criteria, including increasing capital requirements for FGL’s insurance subsidiaries which, in turn, could negatively affect the cash available to FGL from its insurance subsidiaries.
Summary of Consolidated Cash Flows
                 
    Fiscal Nine Months  
Cash (used in) provided by:   July 3, 2011     July 4, 2010  
    (In millions)  
Operating activities
  $ (44 )   $ (55 )
Investing activities
    522       46  
Financing activities
    457       104  
Effect of exchange rate changes on cash and cash equivalents
    (2 )     (7 )
Effect of exchange rate changes on cash and cash equivalents due to Venezuela hyperinflation
          (5 )
 
           
Net change in cash and cash equivalents
  $ 933     $ 83  
 
           

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Operating Activities
Cash used in operating activities totaled $44 million for the Fiscal 2011 Nine Months as compared to a use of $55 million for the Fiscal 2010 Nine Months. The $11 million decrease in cash used from continuing operations was the result of higher income from Spectrum Brands’ continuing operations of $78 million, primarily related to the SB/RH Merger; $47 million of cash payments for Spectrum Brands’ administrative related reorganization items during the Fiscal 2010 Nine Months which did not recur; the non-recurrence in the Fiscal 2011 Nine Months of $18 million of acquisition related expenses for Russell Hobbs which were paid in the Fiscal 2010 Nine Months; cash used in discontinued operating activities of $10 million during the Fiscal 2010 Nine Months which relates to the shutdown of Spectrum Brands’ line of growing products and was nominal during the Fiscal 2011 Nine Months; and $7 million of net operating cash provided by FGL as premiums collected from its insurance products and income received from its investments exceeded policy acquisition costs, benefits paid, redemptions and operating expenses since the FGL Acquisition Date.
Partially offsetting these decreased uses was a $40 million increased use in our Consumer Products and Other working capital and other assets and liabilities, primarily driven by higher receivables and lower accounts payable due in part to seasonal timing related to the SB/RH Merger as well as the full period effect of the operating cash used for HGI in the 2011 Fiscal Nine Months and the foreign exchange impact on assets and liabilities; $38 million of higher cash payments to Spectrum Brands for integration and restructuring charges; higher cash interest payments of $24 million, of which $15 million related to interest on Spectrum Brands’ 12% Notes which was paid in kind during the Fiscal 2010 Nine Months but paid in cash during the Fiscal 2011 Nine Months, and the remainder primarily due to timing of interest payments as a result of the change in Spectrum Brands’ capital structure in connection with the SB/RH Merger; higher cash interest payments resulting from the 10.625% Notes that were issued on November 15, 2010 of $19 million; and $27 million of acquisition related payments by HGI, principally related to the Spectrum Brands and FGL Acquisitions.
Investing Activities
Cash provided by investing activities was $522 million for the Fiscal 2011 Nine Months. For the Fiscal 2010 Nine Months, cash provided by investing activities was $46 million. The $476 million increase in cash provided by investing activities is due to net cash acquired in our acquisition of FGL of $695 million and proceeds of $7 million received from the sale of the Ningbo, China battery manufacturing facility in Fiscal 2011, partially offset by the cash use of $84 million, net of maturities, for the purchase of short-term investments by HGI, cash used of $57 million, net of maturities, for the purchase of fixed maturity securities by FGL, $10 million in conjunction with the Seed Resources, LLC acquisition in Fiscal 2011 coupled with increased capital expenditures of $10 million. In addition, for the Fiscal 2010 Nine Months, $66 million of HGI cash was added to the consolidated balance sheet as of June 16, 2010 in connection with the common control accounting for the Spectrum Brands Acquisition.
Financing Activities
Cash provided by financing activities was $457 million for Fiscal 2011 Nine Months compared to $104 million for the Fiscal 2010 Nine Months. The increase of $353 million was primarily related to the issuance of our 10.625% Notes, for which we received $498 million of proceeds, net of original net issue discount of $2 million. In addition, on May 13, 2011 we issued the Preferred Stock, for which we received net proceeds of $269 million. This was partially offset by net cash used by FGL of $250 million relating to net redemptions and benefit payments on investment contracts, including annuity and universal life contracts; and the issuance and repayment of borrowings and net cash used of $46 million by Spectrum Brands in Fiscal 2011 Nine Months in comparison to net cash provided by Spectrum Brands of $104 million in 2010 Fiscal Nine Months. The net cash used by Spectrum Brands of $46 million in the Fiscal 2011 Nine Months is primarily driven by term loan repayments of $93 million partially offset by a $55 million increase in the ABL Revolving Credit Facility. The net cash provided in the 2010 Fiscal Nine Months is attributable to Spectrum Brands entering in to a $750 million Term Loan, issuing a $750 million aggregate principal amount of 9.5% Senior Secured Notes and entering into the $300 million ABL Revolving Credit Facility, the proceeds from such financing were used to repay its then-existing senior term credit facility and its then-existing asset based revolving loan facility See “Debt Financing Activities” below for further information.

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Debt Financing Activities
HGI
On November 15, 2010 and June 28, 2011, we issued $350 million and $150 million, respectively, or $500 million aggregate principal amount of the 10.625% Notes. The 10.625% Notes were sold only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain persons in offshore transactions in reliance on Regulation S. The initial $350 million of 10.625% Notes were subsequently registered under the Securities Act and the other $150 million of 10.625% Notes are in the process of being registered. The 10.625% Notes were issued at an aggregate price equal to 99.311% of the principal amount thereof, with a net original issue discount of $3.4 million. Interest on the 10.625% Notes is payable semi-annually, commencing on May 15, 2011 and ending November 15, 2015. The 10.625% Notes are collateralized with a first priority lien on substantially all of the assets directly held by us, including stock in our subsidiaries (with the exception of Zap.Com, but including Spectrum Brands, HFG and HGI Funding LLC) and our directly held cash and investment securities.
We have the option to redeem the 10.625% Notes prior to May 15, 2013 at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the date of redemption. At any time on or after May 15, 2013, we may redeem some or all of the 10.625% Notes at certain fixed redemption prices expressed as percentages of the principal amount, plus accrued and unpaid interest. At any time prior to November 15, 2013, we may redeem up to 35% of the original aggregate principal amount of the 10.625% Notes with net cash proceeds received by us from certain equity offerings at a price equal to 110.625% of the principal amount of the 10.625% Notes redeemed, plus accrued and unpaid interest, if any, to the date of redemption, provided that redemption occurs within 90 days of the closing date of such equity offering, and at least 65% of the aggregate principal amount of the 10.625% Notes remains outstanding immediately thereafter.
The Indenture governing the 10.625% Notes contains covenants limiting, among other things, and subject to certain qualifications and exceptions, our ability, and, in certain cases, the ability of our subsidiaries, to incur additional indebtedness; create liens; engage in sale-leaseback transactions; pay dividends or make distributions in respect of capital stock; make certain restricted payments; sell assets; engage in transactions with affiliates; or consolidate or merge with, or sell substantially all of our assets to, another person. We are also required to maintain compliance with certain financial tests, including minimum liquidity and collateral coverage ratios that are based on the fair market value of the assets held directly by HGI, including our equity interests in Spectrum Brands and our other subsidiaries such as HFG and HGI Funding LLC. At July 3, 2011, we were in compliance with all covenants under the 10.625% Notes.
Spectrum Brands
In connection with the SB/RH Merger, on June 16, 2010 Spectrum Brands (i) entered into a $750 million term loan pursuant to a senior credit agreement (the “Senior Credit Agreement”), (ii) issued $750 million in aggregate principal amount of 9.5% Senior Secured Notes (the “9.5% Notes”) and (iii) entered into the $300 million ABL Revolving Credit Facility. The proceeds from such financing were used to repay its then-existing senior term credit facility (the “Prior Term Facility”) and its then-existing asset based revolving loan facility, to pay fees and expenses in connection with the refinancing and for general corporate purposes.
Senior Term Credit Facility
On February 1, 2011, Spectrum Brands completed the refinancing of its term loan facility established in connection with the SB/RH Merger, which, at February 1, 2011, had an aggregate amount outstanding of $680 million, with a amended and restated agreement (the “Term Loan”, together with the amended ABL Revolving Credit Facility, the “Senior Credit Facilities”) at a lower interest rate. The Term Loan reduces scheduled principal amortizations to approximately $7 million per year, contains a one-year soft call protection of 1% on refinancing but none on other voluntary prepayments, and has the same financial, negative (other than a more favorable ability to repurchase other indebtedness) and affirmative covenants and events of default as the former term loan facility. The Term Loan was issued at par with a maturity date of June 17, 2016. Subject to certain mandatory prepayment events, the Term Loan is subject to repayment according to a scheduled amortization, with the final payment of all amounts outstanding, plus accrued and unpaid interest, due at maturity. Among other things, the Term Loan provides for interest at a rate per annum equal to, at Spectrum Brands’ option, the LIBO rate (adjusted for statutory reserves) subject to a 1.00% floor plus a margin equal to 4.00%, or an alternate base rate plus a margin equal to 3.00%.
The Term Loan contains financial covenants with respect to debt, including, but not limited to, a maximum leverage ratio and a minimum interest coverage ratio, which covenants, pursuant to their terms, become more restrictive over time. In addition, the Term Loan contains customary restrictive covenants, including, but not limited to, restrictions on Spectrum Brands’ ability to incur

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additional indebtedness, create liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets. Pursuant to a guarantee and collateral agreement, Spectrum Brands and its domestic subsidiaries have guaranteed their respective obligations under the Term Loan and related loan documents and have pledged substantially all of their respective assets to secure such obligations. The Term Loan also provides for customary events of default, including payment defaults and cross-defaults on other material indebtedness.
At July 3, 2011, Spectrum Brands was in compliance with all covenants under the Term Loan. On July 27, 2011, Spectrum Brands made a voluntary prepayment of $40 million on the Term Loan.
9.5% Notes
At both July 3, 2011 and September 30, 2010, Spectrum Brands had outstanding principal of $750 million under the 9.5% Notes maturing June 15, 2018.
Spectrum Brands may redeem all or a part of the 9.5% Notes, upon not less than 30 or more than 60 days notice at specified redemption prices. Further, the indenture governing the 9.5% Notes (the “2018 Indenture”) requires Spectrum Brands to make an offer, in cash, to repurchase all or a portion of the applicable outstanding notes for a specified redemption price, including a redemption premium, upon the occurrence of a change of control of Spectrum Brands, as defined in such indenture.
The 2018 Indenture contains customary covenants that limit, among other things, the incurrence of additional indebtedness, payment of dividends on or redemption or repurchase of equity interests, the making of certain investments, expansion into unrelated businesses, creation of liens on assets, merger or consolidation with another company, transfer or sale of all or substantially all assets, and transactions with affiliates.
In addition, the 2018 Indenture provides for customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to make payments on or acceleration of certain other indebtedness, and certain events of bankruptcy and insolvency. Events of default under the 2018 Indenture arising from certain events of bankruptcy or insolvency will automatically cause the acceleration of the amounts due under the 9.5% Notes. If any other event of default under the 2018 Indenture occurs and is continuing, the trustee for the 2018 Indenture or the registered holders of at least 25% in the then aggregate outstanding principal amount of the 9.5% Notes may declare the acceleration of the amounts due under those notes.
At July 3, 2011, Spectrum Brands was in compliance with all covenants under the 9.5% Notes and the 2018 Indenture.
12% Notes
On August 28, 2009, in connection with emergence from the voluntary reorganization under Chapter 11, Spectrum Brands issued $218 million in aggregate principal amount of 12% Notes maturing August 28, 2019 (the “12% Notes”). Semiannually, at its option, Spectrum Brands may elect to pay interest on the 12% Notes in cash or as payment in kind, (or “PIK”). PIK interest is added to principal upon the relevant semi-annual interest payment date. Under the Prior Term Facility, Spectrum Brands agreed to make interest payments on the 12% Notes through PIK for the first three semi-annual interest payment periods. As a result of the refinancing of the Prior Term Facility, Spectrum Brands is no longer required to make interest payments as payment in kind after the semi-annual interest payment date of August 28, 2010.
Spectrum Brands may redeem all or a part of the 12% Notes, upon not less than 30 or more than 60 days notice, beginning August 28, 2012 at specified redemption prices. Further, the indenture governing the 12% Notes (the “2019 Indenture”) requires Spectrum Brands to make an offer, in cash, to repurchase all or a portion of the applicable outstanding notes for a specified redemption price, including a redemption premium, upon the occurrence of a change of control, as defined in such indenture.
At July 3, 2011 and September 30, 2010, Spectrum Brands had outstanding principal of $245 million under the 12% Notes, including PIK interest of $27 million added during Fiscal 2010.
The 2019 Indenture contains customary covenants that limit, among other things, the incurrence of additional indebtedness, payment of dividends on or redemption or repurchase of equity interests, the making of certain investments, expansion into unrelated businesses, creation of liens on assets, merger or consolidation with another company, transfer or sale of all or substantially all assets, and transactions with affiliates.

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In addition, the 2019 Indenture provides for customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to make payments on or acceleration of certain other indebtedness, and certain events of bankruptcy and insolvency. Events of default under the 2019 Indenture arising from certain events of bankruptcy or insolvency will automatically cause the acceleration of the amounts due under the 12% Notes. If any other event of default under the 2019 Indenture occurs and is continuing, the trustee for the 2019 Indenture or the registered holders of at least 25% in the then aggregate outstanding principal amount of the 12% Notes may declare the acceleration of the amounts due under those notes.
In connection with the SB/RH Merger, Spectrum Brands obtained the consent of the note holders to certain amendments to the 2019 Indenture (the “Supplemental Indenture”). The Supplemental Indenture became effective upon the closing of the SB/RH Merger. Among other things, the Supplemental Indenture amended the definition of change in control to exclude the Principal Stockholders and increased Spectrum Brands’ ability to incur indebtedness up to $1.85 billion.
At July 3, 2011, Spectrum Brands was in compliance with all covenants under the 12% Notes and the 2019 Indenture. However, Spectrum Brands is subject to certain limitations as a result of its Fixed Charge Coverage Ratio under the 2019 Indenture being below 2:1. Until the test is satisfied, Spectrum Brands and certain of its subsidiaries are limited in their ability to pay dividends, make significant acquisitions or incur significant additional senior debt beyond the Senior Credit Facilities. Spectrum Brands does not expect the inability to satisfy the Fixed Charge Coverage Ratio test to impair its ability to provide adequate liquidity to meet the short-term and long-term liquidity requirements of its existing business, although no assurance can be given in this regard.
ABL Revolving Credit Facility
On April 21, 2011 Spectrum Brands amended its ABL Revolving Credit Facility. The amended facility carries an interest rate, at Spectrum Brands’ option, which is subject to change based on availability under the facility, of either: (a) the base rate plus currently 1.25% per annum or (b) the reserve-adjusted LIBO rate (the “Eurodollar Rate”) plus currently 2.25% per annum. No amortization is required with respect to the ABL Revolving Credit Facility. The ABL Revolving Credit Facility is scheduled to mature on April 21, 2016.
The ABL Revolving Credit Facility is governed by a credit agreement (the “ABL Credit Agreement”) with Bank of America as administrative agent (the “Agent”). The ABL Revolving Credit Facility consists of revolving loans (the “Revolving Loans”), with a portion available for letters of credit and a portion available as swing line loans, in each case subject to the terms and limits described therein.
The Revolving Loans may be drawn, repaid and re-borrowed without premium or penalty. The proceeds of borrowings under the ABL Revolving Credit Facility are to be used for costs, expenses and fees in connection with the ABL Revolving Credit Facility, for working capital requirements of Spectrum Brands and its subsidiaries, restructuring costs, and other general corporate purposes.
The ABL Credit Agreement contains various representations and warranties and covenants, including, without limitation, enhanced collateral reporting, and a maximum fixed charge coverage ratio. The ABL Credit Agreement also provides for customary events of default, including payment defaults and cross-defaults on other material indebtedness. Pursuant to the credit and security agreement, the obligations under the ABL Credit Agreement are secured by certain current assets of the guarantors, including, but not limited to, deposit accounts, trade receivables and inventory.
As a result of borrowings and payments under the ABL Revolving Credit Facility at July 3, 2011, Spectrum Brands had aggregate borrowing availability of approximately $147 million, net of lender reserves of $49 million. At July 3, 2011, Spectrum Brands had outstanding letters of credit of $24 million under the ABL Revolving Credit Facility.
At July 3, 2011, Spectrum Brands was in compliance with all covenants under the ABL Credit Agreement.
Interest Payments and Fees
In addition to principal payments on the Senior Credit Facilities, Spectrum Brands has annual interest payment obligations of approximately $71 million in the aggregate under the 9.5% Notes and annual interest payment obligations of approximately $29 million in the aggregate under the 12% Notes. Spectrum Brands also incurs interest on borrowings under the Senior Credit Facilities and such interest would increase borrowings under the ABL Revolving Credit Facility if cash were not otherwise available for such payments. Interest on the 9.5% Notes and interest on the 12% Notes is payable semi-annually in arrears and interest under the Senior Credit Facilities is payable on various interest payment dates as provided in the Senior Credit Agreement and the ABL Credit

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Agreement. Interest is payable in cash, except that interest under the 12% Notes is required to be paid by increasing the aggregate principal amount due under the subject notes unless Spectrum Brands elects to make such payments in cash. Effective with the payment date of February 28, 2011, Spectrum Brands elected to make the semi-annual interest payment scheduled for August 28, 2011 in cash. Thereafter, Spectrum Brands may make the semi-annual interest payments for the 12% Notes either in cash or by further increasing the aggregate principal amount due under the notes subject to certain conditions. Based on amounts currently outstanding under the Senior Credit Facilities, and using market interest rates and foreign exchange rates in effect at July 3, 2011, we estimate annual interest payments of approximately $35 million in the aggregate under the Senior Credit Facilities would be required assuming no further principal payments were to occur and excluding any payments associated with outstanding interest rate swaps. Spectrum Brands is required to pay certain fees in connection with the Senior Credit Facilities. Such fees include a quarterly commitment fee of up to 0.50% on the unused portion of the ABL Revolving Credit Facility and certain additional fees with respect to the letter of credit sub-facility under the ABL Revolving Credit Facility.
FGL
On April 7, 2011, a wholly-owned reinsurance subsidiary of FGL borrowed $95 million from the seller in the FGL Acquisition in the form of a surplus note. The surplus note was issued at par and carries a 6% fixed interest rate. Interest payments are subject to regulatory approval and are further restricted until all contractual obligations that the reinsurance subsidiary has to certain financial institutions have been satisfied in full. The note has a maturity date which is at the later of (i) December 31, 2012 or (ii) the date on which all amounts due and payable to the lender have been paid in full. The surplus note issued by the reinsurance subsidiary is expected to be retired by selling the investments the reinsurance subsidiary acquired with the proceeds from the issuance. The retirement is not expected to have a significant impact on HGI or the regulatory position of FGL.
Series A and Series A-2 Participating Convertible Preferred Stock
On May 13, 2011 and August 5, 2011, we issued 280,000 shares and 120,000 shares, respectively of Preferred Stock in a private placement for total gross proceeds of $400 million. See “Recent Developments” above.
Off-Balance Sheet Arrangements
Throughout our history, we have entered into indemnifications in the ordinary course of business with our customers, suppliers, service providers, business partners and in certain instances, when we sold businesses. Additionally, we have indemnified our directors and officers who are, or were, serving at our request in such capacities. Although the specific terms or number of such arrangements is not precisely known due to the extensive history of our past operations, costs incurred to settle claims related to these indemnifications have not been material to our financial statements. We have no reason to believe that future costs to settle claims related to our former operations will have a material impact on our financial position, results of operations or cash flows.
Contractual Obligations
At July 3, 2011, there have been no material changes to the contractual obligations as set forth in the Recast Financials except for the following updates resulting from the subsequent issuance of the 10.625% Notes and the FGL Acquisition (in millions):

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    Payments Due by Fiscal Periods  
            Remainder of     2012 and     2014 and        
Contractual Obligations   Total     2011     2013     2015     After 2015  
HGI
                                       
10.625% Notes
  $ 500     $     $     $     $ 500  
Interest payments on 10.625% Notes
    239             106       106       27  
 
                             
Total HGI contractual obligations
    739             106       106       527  
 
                             
 
                                       
FGL
                                       
 
                                       
Annuity and universal life products(A)
    22,218       606       4,947       3,553       13,112  
Note payable, including interest payments
    105             105              
Operating leases
    22       1       6       4       11  
 
                             
Total FGL contractual obligations
    22,345       607       5,058       3,557       13,123  
 
                             
Total additions to contractual obligations as of July 3, 2011
  $ 23,084     $ 607     $ 5,164     $ 3,663     $ 13,650  
 
                             
 
(A)   Amounts shown in this table are projected payments through the year 2030 which FGL is contractually obligated to pay to its annuity and universal life policyholders. The payments are derived from actuarial models which assume a level interest rate scenario and incorporate assumptions regarding mortality and persistency, when applicable. These assumptions are based on FGL’s historical experience.
Critical Accounting Policies and Critical Accounting Estimates
The preparation of our financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates. There have been no material changes to the critical accounting policies or critical accounting estimates as discussed in Recast Financials except for the following updates resulting from the subsequent issuance of our Preferred Stock and the FGL Acquisition:
HGI
Valuation of Embedded Derivative
The Series A Participating Convertible Preferred Stock contains a “down round” provision, whereby the conversion price will be adjusted in the event that we issue certain equity securities at a price lower than the contractual conversion price of the Preferred Stock of $6.50. Therefore, in accordance with the guidance in ASC 815, Derivatives and Hedging, this conversion option requires bifurcation and must be separately accounted for as a derivative liability at fair value with any changes in fair value reported in current earnings. We re-measure the fair value of this equity conversion option on a recurring basis using the Monte Carlo simulation approach, which utilizes various inputs including HGI’s stock price, volatility, risk-free rate and discount yield. The fair value of this equity conversion option was $80 million as of July 3, 2011 compared to $86 million as of the May 13, 2011 issuance date of the Preferred Stock. Although we use a consistent approach to valuing this equity conversion option on a recurring basis, the use of a different approach or underlying assumptions could have a material effect on the estimated fair value.

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FGL
Valuation of Investments
FGL’s fixed maturity securities (bonds and redeemable preferred stocks maturing more than one year after issuance) and equity securities (common and perpetual preferred stocks) classified as available-for-sale are reported at fair value, with unrealized gains and losses included within accumulated other comprehensive income (loss), net of associated amortization of intangibles and deferred income taxes. Unrealized gains and losses represent the difference between the amortized cost or cost basis and the fair value of these investments. FGL utilizes independent pricing services in estimating the fair values of investment securities. The independent pricing services incorporate a variety of observable market data in their valuation techniques, including: reported trading prices, benchmark yields, broker-dealer quotes, benchmark securities, bids and offers, credit ratings, relative credit information, and other reference data.
The following table presents the fair value of fixed maturity and equity securities, available-for-sale, by pricing source and hierarchy level as of July 3, 2011:
                                 
    Quoted Prices                    
    in Active     Significant     Significant        
    Markets for     Observable     Unobservable        
    Identical Assets     Inputs     Inputs        
    (Level 1)     (Level 2)     (Level 3)     Total  
            (Dollars in millons)          
Prices via third party pricing services
  $ 467     $ 14,944     $     $ 15,411  
Priced via independent broker quotations
                613       613  
Priced via matrices
                       
Priced via other methods
                       
                         
 
  $ 467     $ 14,944     $ 613     $ 16,024  
                         
% of total
    3%       93%       4%       100%  
                         
Management’s assessment of all available data when determining fair value of the investments is necessary to appropriately apply fair value accounting.
The independent pricing services also take into account perceived market movements and sector news, as well as a security’s terms and conditions, including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary. FGL generally obtains one value from its primary external pricing service. In situations where a price is not available from this service, FGL may obtain further quotes or prices from additional parties as needed.
FGL validates external valuations at least quarterly through a combination of procedures that include the evaluation of methodologies used by the pricing services, comparisons to valuations from other independent pricing services, analytical reviews and performance analysis of the prices against trends, and maintenance of a securities watch list.
Evaluation of Other-Than-Temporary Impairments
FGL has a policy and process in place to identify securities in its investment portfolio that could potentially have an impairment that is other-than-temporary. This process involves monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as: the length of time and the extent to which the fair value has been less than amortized cost or cost; whether the issuer is current on all payments and all contractual payments have been made as agreed; the remaining payment terms and the financial condition and near-term prospects of the issuer; the lack of ability to refinance due to liquidity problems in the credit market; the fair value of any underlying collateral; the existence of any credit protection available; the intent to sell and whether it is more likely than not it would be required to sell prior to recovery for debt securities; the assessment in the case of equity securities

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including perpetual preferred stocks with credit deterioration that the security cannot recover to cost in a reasonable period of time; the intent and ability to retain equity securities for a period of time sufficient to allow for recovery; consideration of rating agency actions; and changes in estimated cash flows of residential mortgage and asset-backed securities.
FGL determines whether other-than-temporary impairment losses should be recognized for debt and equity securities by assessing all facts and circumstances surrounding each security. Where the decline in market value of debt securities is attributable to changes in market interest rates or to factors such as market volatility, liquidity and spread widening, and FGL anticipates recovery of all contractual or expected cash flows, FGL does not consider these investments to be other-than-temporarily impaired because it does not intend to sell these investments and it is not more likely than not it will be required to sell these investments before a recovery of amortized cost, which may be maturity. For equity securities, FGL recognizes an impairment charge in the period in which it does not have the intent and ability to hold the securities until recovery of cost or it determines that the security will not recover to book value within a reasonable period of time. FGL determines what constitutes a reasonable period of time on a security-by-security basis by considering all the evidence available, including the magnitude of any unrealized loss and its duration.
Valuation of Derivatives
FGL’s fixed indexed annuity contracts permit the holder to elect to receive a return based on an interest rate or the performance of a market index. FGL hedges certain portions of its exposure to equity market risk by entering into derivative transactions. In doing so, FGL uses a portion of the deposit made by policyholders pursuant to the fixed index annuity (“FIA”) contracts to purchase derivatives consisting of a combination of call options and futures contracts on the equity indices underlying the applicable policy. These derivatives are used to fund the index credits due to policyholders under the FIA contracts. The majority of all such call options are one-year options purchased to match the funding requirements underlying the FIA contracts. On the respective anniversary dates of the applicable FIA contracts, the market index used to compute the annual index credit under the applicable FIA contract is reset. At such time, FGL purchases new one-, two- or three-year call options to fund the next index credit. FGL attempts to manage the cost of these purchases through the terms of the FIA contracts, which permits changes to caps or participation rates, subject to certain guaranteed minimums that must be maintained. FGL is exposed to credit loss in the event of nonperformance by its counterparties on the call options. FGL attempts to reduce the credit risk associated with such agreements by purchasing such options from large, well-established financial institutions.
All of FGL’s derivative instruments are recognized as either assets or liabilities at fair value in the Condensed Consolidated Balance Sheets. The change in fair value is recognized in the Consolidated Statements of Operations within net investment gains (losses).
Certain products contain embedded derivatives. The feature in the FIA contracts that permits the holder to elect an interest rate return or an equity-index linked component, where interest credited to the contracts is linked to the performance of various equity indices, represents an embedded derivative. The FIA embedded derivate is valued at fair value and included in the liability for contractholder funds in the Condensed Consolidated Balance Sheets with changes in fair value included as a component of benefits and other changes in policy reserves in the Condensed Consolidated Statement of Operations.
The fair value of derivative assets and liabilities is based upon valuation pricing models and represent what FGL would expect to receive or pay at the balance sheet date if it cancelled the options, entered into offsetting positions, or exercised the options. The fair value of futures contracts at the balance sheet date represents the cumulative unsettled variation margin. Fair values for these instruments are determined externally by an independent actuarial firm using market observable inputs, including interest rates, yield curve volatilities, and other factors. Credit risk related to the counterparty is considered when estimating the fair values of these derivatives. However, FGL is largely protected by collateral arrangements with counterparties.
The fair values of the embedded derivatives in FGL’s FIA products are derived using market indices, pricing assumptions and historical data.
Deferred Policy Acquisition Costs (DAC)
Costs relating to the production of new business are not expensed when incurred but instead are capitalized as DAC. Only costs which are expected to be recovered from future policy revenues and gross profits may be deferred.
DAC are subject to loss recognition testing on a quarterly basis or when an event occurs that may warrant loss recognition. DAC consist principally of commissions and certain costs of policy issuance. Deferred Sales Inducements, which are accounted for similar

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to and included with DAC, consist of premium and interest bonuses credited to policyholder account balances.
For annuity products, these costs are being amortized generally in proportion to estimated gross profits from investment spread margins, surrender charges and other product fees, policy benefits, maintenance expenses, mortality net of reinsurance ceded and expense margins, and actual realized gain (loss) on investments. Current and future period gross profits for FIA contracts also include the impact of amounts recorded for the change in fair value of derivatives and the change in fair value of embedded derivatives. Current period amortization is adjusted retrospectively through an unlocking process when estimates of current or future gross profits (including the impact of realized investment gains and losses) to be realized from a group of products are revised. FGL’s estimates of future gross profits are based on actuarial assumptions related to the underlying policies’ terms, lives of the policies, yield on investments supporting the liabilities and level of expenses necessary to maintain the polices over their entire lives. Revisions are made based on historical results and FGL’s best estimates of future experience.
Estimated future gross profits vary based on a number of sources including investment spread margins, surrender charge income, policy persistency, policy administrative expenses and realized gains and losses on investments including credit related other than temporary impairment losses. Estimated future gross profits are most sensitive to changes in investment spread margins which are the most significant component of gross profits.
Income taxes
Deferred tax assets represent the tax benefit of future deductible temporary differences and operating loss and tax credit carryforwards. The application of US GAAP requires the evaluation of the recoverability of deferred tax assets and the establishment of a valuation allowance if necessary, to reduce the deferred tax asset to an amount that is more likely than not to be realizable. Considerable judgment and the use of estimates are required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, FGL considers many factors, including: the nature and character of the deferred tax assets and liabilities; taxable income in prior carryback years; future reversals of temporary differences; the length of time carryovers can be utilized; and any tax planning strategies that would be employed to avoid a tax benefit from expiring unused. FGL is required to establish a valuation allowance for any gross deferred tax assets that are unlikely to reduce taxes payable in future years’ tax returns.
As of July 3, 2011, FGL has a consolidated net deferred tax asset of $182 million. Reflected in that asset, which is net of valuation allowances of $410 million, is the tax effect of net operating loss carryforwards of $86 million, tax credits of $68 million and capital losses of $260 million, which, if not used, will expire beginning in 2023, 2017 and 2012, respectively.
Recent Accounting Pronouncements Not Yet Adopted
In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends current comprehensive income presentation guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, comprehensive income must be reported in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. This guidance will be effective for us beginning in fiscal 2013. We do not expect the guidance to impact our Condensed Consolidated Financial Statements, as it only requires a change in the format of presentation.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market Risk Factors
Market risk is the risk of the loss of fair value resulting from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, commodity price and equity prices. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying financial instruments are traded.
Through Spectrum Brands, we have market risk exposure from changes in interest rates, foreign currency exchange rates, and commodity prices. Spectrum Brands uses derivative financial instruments for purposes other than trading to mitigate the risk from such exposures. Through FGL, we are primarily exposed to interest rate risk and equity price risk and have some exposure to credit risk and counterparty risk, which affect the fair value of financial instruments subject to market risk. Additionally, HGI is exposed to market risk with respect to its short-term investments and an embedded derivative liability related to its Preferred Stock.

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Equity Price Risk
HGI
HGI is exposed to equity price risk since it invests a portion of its excess cash in marketable equity securities, which as of July 3, 2011, are all classified as trading within “Short-term investments” in the Condensed Consolidated Balance Sheet. HGI follows an investment policy approved by its board of directors which sets certain restrictions on the amounts and types of investments it may make. In addition, HGI is exposed to equity price risk related to the embedded equity conversion option of its Preferred Stock which is required to be separately accounted for as a derivative liability under US GAAP.
FGL
FGL is primarily exposed to equity price risk through certain insurance products that are exposed to equity price risk, specifically those products with guaranteed minimum withdrawal benefits. FGL offers a variety of fixed indexed annuity (“FIA”) contracts with crediting strategies linked to the performance of indices such as the S&P 500, Dow Jones Industrials or the NASDAQ 100 Index. The estimated cost of providing guaranteed minimum withdrawal benefits incorporates various assumptions about the overall performance of equity markets over certain time periods. Periods of significant and sustained downturns in equity markets, increased equity volatility, or reduced interest rates could result in an increase in the valuation of the future policy benefit or policyholder account balance liabilities associated with such products, results in a reduction in our net income. The rate of amortization of VOBA related to fixed indexed annuity products and the cost of providing guaranteed minimum withdrawal benefits could also increase if equity market performance is worse than assumed.
To economically hedge the equity returns on these products, FGL uses a portion of the deposit made by policyholders pursuant to the FIA contracts to purchase derivatives consisting of a combination of call options and future contracts on the equity indices underlying the applicable policy. These derivatives are used to fund the interest credited to policyholders under the FIA contracts. The majority of all such call options are one-year options purchased to match the funding requirements underlying the FIA contracts. FGL attempts to manage the costs of these purchases through the terms of its FIA contracts, which permits changes to caps or participation rates, subject to certain guaranteed minimums that must be maintained.
Fair value changes associated with these investments are substantially offset by an increase or decrease in the amounts added to policyholder account balances for index products. For the period April 6, 2011 to July 3, 2011, the annual index credits to policyholders on their anniversaries were $72 million. Proceeds received at expiration or gains (losses) recognized upon early termination of these options related to such credits were $49 million for the period April 6, 2011 to July 3, 2011. The difference between proceeds received at expiration or gains recognized upon early termination of these options and index credits is primarily due to the timing of futures income.
Other market exposures are hedged periodically depending on market conditions and risk tolerance. The FIA hedging strategy economically hedges the equity returns and exposes FGL to the risk that unhedged market exposures result in divergence between changes in the fair value of the liabilities and the hedging assets. FGL uses a variety of techniques including direct estimation of market sensitivities and value-at-risk to monitor this risk daily. FGL intends to continue to adjust the hedging strategy as market conditions and its risk tolerance change.
Interest Rate Risk
FGL
Interest rate risk is FGL’s primary market risk exposure. Substantial and sustained increases or decreases in market interest rates can affect the profitability of the insurance products and fair value of investments, as the majority of its insurance liabilities are backed by fixed maturity securities.
The profitability of most of FGL’s products depends on the spreads between interest yield on investments and rates credited on insurance liabilities. FGL has the ability to adjust the rates credited (primarily caps and participation rates) on substantially all of the annuity liabilities at least annually (subject to minimum guaranteed values). In addition, substantially all of the annuity products have surrender and withdrawal penalty provisions designed to encourage persistency and to help ensure targeted spreads are earned.

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However, competitive factors, including the impact of the level of surrenders and withdrawals, may limit the ability to adjust or maintain crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions.
In order to meet its policy and contractual obligations, FGL must earn a sufficient return on its invested assets. Significant changes in interest rates exposes FGL to the risk of not earning anticipated interest earnings, or of not earning anticipated spreads between the interest rate earned on investments and the credited interest rates paid on outstanding policies and contracts. Both rising and declining interest rates can negatively affect interest earnings, spread income, as well as the attractiveness of certain products.
During periods of increasing interest rates, FGL may offer higher crediting rates on interest-sensitive products, such as universal life insurance and fixed annuities, and it may increase crediting rates on in-force products to keep these products competitive. A rise in interest rates, in the absence of other countervailing changes, will result in a decline in the market value of FGL’s investment portfolio.
As part of FGL’s asset/liability management program, significant effort has been made to identify the assets appropriate to different product lines and ensure investing strategies match the profile of these liabilities. As such, a major component of managing interest rate risk has been to structure the investment portfolio with cash flow characteristics consistent with the cash flow characteristics of the insurance liabilities. FGL uses computer models to simulate cash flows expected from the existing business under various interest rate scenarios. These simulations enable it to measure the potential gain or loss in fair value of interest rate-sensitive financial instruments, to evaluate the adequacy of expected cash flows from assets to meet the expected cash requirements of the liabilities and to determine if it is necessary to lengthen or shorten the average life and duration of its investment portfolio. The “duration” of a security is the time weighted present value of the security’s expected cash flows and is used to measure a security’s sensitivity to changes in interest rates. When the durations of assets and liabilities are similar, exposure to interest rate risk is minimized because a change in value of assets should be largely offset by a change in the value of liabilities.
Spectrum Brands
Spectrum Brands has bank lines of credit at variable interest rates. The general level of U.S. interest rates, LIBOR and Euro LIBOR affect interest expense. Spectrum Brands uses interest rate swaps to manage such risk. The net amounts to be paid or received under interest rate swap agreements are accrued as interest rates change, and are recognized over the life of the swap agreements as an adjustment to interest expense from the underlying debt to which the swap is designated.
Foreign Exchange Risk
Spectrum Brands is subject to risk from sales and loans to and from its subsidiaries as well as sales to and purchases from and bank lines of credit with third-party customers, suppliers and creditors, respectively, denominated in foreign currencies. Foreign currency sales and purchases are made primarily in Euro, Pounds Sterling, Brazilian Reals and Canadian Dollars. Spectrum Brands manages its foreign exchange exposure from anticipated sales, accounts receivable, intercompany loans, firm purchase commitments, accounts payable and credit obligations through the use of naturally occurring offsetting positions (borrowing in local currency), forward foreign exchange contracts, foreign exchange rate swaps and foreign exchange options.
Commodity Price Risk
Spectrum Brands is exposed to fluctuations in market prices for purchases of raw materials used in the manufacturing process, particularly zinc. Spectrum Brands uses commodity swaps, calls and puts to manage such risk. The maturity of, and the quantities covered by, the contracts are closely correlated to its anticipated purchases of the commodities. The cost of calls, and the premiums received from the puts, are amortized over the life of the contracts and are recorded in cost of goods sold, along with the effects of the swap, put and call contracts.
Credit Risk
FGL is exposed to the risk that a counterparty will default on its contractual obligation resulting in financial loss. The major source of credit risk arises predominantly in the insurance operations’ portfolios of debt and similar securities. Credit risk for these portfolios is managed with reference to established credit rating agencies with limits placed on exposures to below investment grade holdings.
In connection with the use of call options, FGL is exposed to counterparty credit risk (the risk that a counterparty fails to perform under the terms of the derivative contract). FGL has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the financial loss from defaults. The exposure and credit rating of the

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counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst five different approved counterparties to limit our concentration in one counterparty. FGL’s policy allows for the purchase of derivative instruments from nationally recognized investment banking institutions with an S&P rating of A3 or higher. As of July 3, 2011, all derivative instruments have been purchased from counterparties with an S&P rating of A3 or higher. Collateral support documents are negotiated to further reduce the exposure when deemed necessary.
Sensitivity Analysis
The analysis below is hypothetical and should not be considered a projection of future risks. Earnings projections are before tax and noncontrolling interest.
Equity Price — Trading
One means of assessing exposure to changes in equity market prices is to estimate the potential changes in market values on the investments resulting from a hypothetical broad-based decline in equity market prices of 10%. On July 3, 2011, assuming all other factors are constant, we estimate that a 10% decline in equity market prices will have a $10 million adverse impact on HGI’s trading portfolio of marketable equity securities.
Equity Price — Other
On July 3, 2011, assuming all other factors are constant, we estimate that a decline in equity market prices of 10% would cause the market value of FGL’s equity investments to decline by approximately $31 million and its derivative investments to decline by approximately $1 million based on equity positions as of July 3, 2011. Because FGL’s equity investments are classified as available-for-sale, the $31 million decline would not affect current earnings except to the extent that it reflects other-than-temporary impairments.
On July 3, 2011, assuming all other factors are constant, we estimate that a 10% increase in equity market prices would cause the fair value liability of our equity conversion option of our Preferred Stock to increase by $18 million.
Interest Rates
If interest rates were to increase 10% from levels at July 3, 2011, the estimate of the fair value of fixed maturity securities of FGL would decrease by approximately $347 million. The impact on stockholders’ equity of such decrease (net of income taxes and certain adjustments for changes in amortization of VOBA and DAC) would be a decrease of $139 million in accumulated other comprehensive income and stockholders’ equity. The computer models used to estimate the impact of a 10% change in market interest rates incorporate numerous assumptions, require significant estimates and assume an immediate and parallel change in interest rates without any management of the investment portfolio in reaction to such change. Consequently, potential changes in value of financial instruments indicated by the simulations will likely be different from the actual changes experienced under given interest rate scenarios, and the differences may be material. Because FGL actively manages its investments and liabilities, the net exposure to interest rates can vary over time. However, any such decreases in the fair value of fixed maturity securities (unless related to credit concerns of the issuer requiring recognition of an other-than-temporary impairment) would generally be realized only if FGL was required to sell such securities at losses prior to their maturity to meet liquidity needs, which it manages using the surrender and withdrawal provisions of the annuity contracts and through other means.
At July 3, 2011, the potential change in fair value of outstanding interest rate derivative instruments of Spectrum Brands, assuming a one percentage point unfavorable shift in the underlying interest rates would be a loss of $0.1 million. The net impact on reported earnings, after also including the reduction in one year’s interest expense on the related debt due to the same shift in interest rates, would be a net gain of $0.1 million.
Foreign Exchange Risk
At July 3, 2011, the potential change in fair value of outstanding foreign exchange derivative instruments of Spectrum Brands, assuming a 10% unfavorable change in the underlying exchange rates would be a loss of $50 million. The net impact on reported earnings, after also including the effect of the change in the underlying foreign currency-denominated exposures, would be a net gain of $20 million.
Commodity
At July 3, 2011, the potential change in fair value of outstanding commodity price derivative instruments of Spectrum Brands,

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assuming a 10% unfavorable change in the underlying commodity prices would be a loss of $2 million. The net impact on reported earnings, after also including the reduction in cost of one year’s purchases of the related commodities due to the same change in commodity prices, would be a net gain of $1 million.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that, as of July 3, 2011, the Company’s disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Notwithstanding the foregoing, there can be no assurance that the Company’s disclosure controls and procedures will detect or uncover all failures of persons within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving their control objectives.
Changes in Internal Controls Over Financial Reporting
As a result of the Company’s acquisition of Fidelity & Guaranty Life Holdings, Inc. (“FGL”) in the quarter ended July 3, 2011, the Company incorporated internal controls over financial reporting to include consolidation of FGL’s results of operations, as well as acquisition related accounting and disclosures, in addition to controls that FGL incorporated in connection with the change in its basis of accounting from International Financial Reporting Standards to accounting principles generally accepted in the United States of America. There were no other significant changes in the Company’s internal controls over financial reporting made during the quarter ended July 3, 2011 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of the management of Harbinger Group Inc. (“HGI,” “we,” “us,” “our” or the “Company”) and the management of our subsidiaries. Generally, forward-looking statements include information concerning possible or assumed future actions, events or results of operations of our company and our subsidiaries. Forward-looking statements specifically include, without limitation, the information regarding: efficiencies/cost avoidance, cost savings, income and margins, growth, economies of scale, combined operations, the economy, future economic performance, conditions to, and the timetable for, completing the integration of financial reporting of Spectrum Brands Holdings, Inc. (“Spectrum Brands Holdings”) and Fidelity & Life Holdings Inc. (“F&G Holdings”) with ours, completing future acquisitions and dispositions, completing the Front Street reinsurance transaction, litigation, potential and contingent liabilities, management’s plans, business portfolios, changes in regulations and taxes.
Forward-looking statements may be preceded by, followed by or include the words “may,” “will,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “could,” “might,” or “continue” or the negative or other variations thereof or comparable terminology.
Forward-looking statements are not guarantees of performance. You should understand that the following important factors could affect the future results of our company (including our subsidiaries), and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements.
HGI
HGI’s actual results or other outcomes may differ from those expressed or implied by forward-looking statements contained or incorporated herein due to a variety of important factors, including, without limitation, the following:
    limitations on our ability to successfully identify additional suitable acquisition and investment opportunities and to compete for these opportunities with others who have greater resources;
 
    the need to provide sufficient capital to our operating businesses;
 
    our dependence on distributions from our subsidiaries to fund our operations and payments on our debt;
 
    the impact of covenants in our Senior Notes Indenture governing our senior secured notes, and future financing agreements, on our ability to operate our business and finance our pursuit of additional acquisition opportunities;
 
    the impact on our business and financial condition of our substantial indebtedness and the significant additional indebtedness and other financing obligations we and our subsidiaries may incur;
 
    the impact on the aggregate value of our company portfolio and our stock price from changes in the market prices of publicly traded equity interests we hold, particularly during times of volatility in security prices;
 
    the impact of additional material charges associated with our oversight of acquired companies and the integration of our financial reporting;
 
    the impact of restrictive stockholder agreements and securities laws on our ability to dispose of equity interests we hold;
 
    the controlling effect of our principal stockholders whose interests may conflict with interests of our other stockholders and holders of our senior secured notes;
 
    the effect interests of our officers, directors, stockholders and their respective affiliates may have in certain transactions in which we are involved;
 
    our dependence on certain key personnel;

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    the impact of potential losses and other risks from changes in our investment portfolio;
 
    our ability to effectively increase the size of our organization and manage our growth;
 
    the impact of a determination that we are an investment company or personal holding company;
 
    the impact of future claims arising from operations, agreements and transactions involving former subsidiaries;
 
    the impact of expending significant resources in researching acquisition or investment targets that are not consummated;
 
    tax consequences associated with our acquisition, holding and disposition of target companies and assets; and
 
    the impact of delays or difficulty in satisfying the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 or negative reports concerning our internal controls.
Spectrum Brands Holdings
Spectrum Brands Holdings’ actual results or other outcomes may differ from those expressed or implied in the forward-looking statements contained or incorporated herein due to a variety of important factors, including, without limitation, the following:
    the impact of Spectrum Brands Inc.’s (“Spectrum Brands”) substantial indebtedness on its business, financial condition and results of operations;
 
    the impact of restrictions in Spectrum Brands’ debt instruments on its ability to operate its business, finance its capital needs or pursue or expand business strategies;
 
    any failure to comply with financial covenants and other provisions and restrictions of Spectrum Brands’ debt instruments;
 
    Spectrum Brands’ ability to successfully integrate the business acquired in connection with the combination with Russell Hobbs and achieve the expected synergies from that integration at the expected costs;
 
    the impact of expenses resulting from the implementation of new business strategies, divestitures or current and proposed restructuring activities;
 
    the impact of fluctuations in commodity prices, costs or availability of raw materials or terms and conditions available from suppliers, including suppliers’ willingness to advance credit;
 
    interest rate and exchange rate fluctuations;
 
    the loss of, or a significant reduction in, sales to a significant retail customer(s);
 
    competitive promotional activity or spending by competitors or price reductions by competitors;
 
    the introduction of new product features or technological developments by competitors and/or the development of new competitors or competitive brands;
 
    the effects of general economic conditions, including inflation, recession or fears of a recession, depression or fears of a depression, labor costs and stock market volatility or changes in trade, monetary or fiscal policies in the countries where Spectrum Brands Holdings’ does business;
 
    changes in consumer spending preferences and demand for Spectrum Brands Holdings’ products;
 
    Spectrum Brands’ ability to develop and successfully introduce new products, protect its intellectual property and avoid infringing the intellectual property of third parties;

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    Spectrum Brands’ ability to successfully implement, achieve and sustain manufacturing and distribution cost efficiencies and improvements, and fully realize anticipated cost savings;
 
    the cost and effect of unanticipated legal, tax or regulatory proceedings or new laws or regulations (including environmental, public health and consumer protection regulations);
 
    public perception regarding the safety of Spectrum Brands’ products, including the potential for environmental liabilities, product liability claims, litigation and other claims;
 
    the impact of pending or threatened litigation;
 
    changes in accounting policies applicable to Spectrum Brands’ business;
 
    government regulations;
 
    the seasonal nature of sales of certain of Spectrum Brands’ products;
 
    the effects of climate change and unusual weather activity; and
 
    the effects of political or economic conditions, terrorist attacks, acts of war or other unrest in international markets.
F&G Holdings
F&G Holdings’ actual results or other outcomes may differ from those expressed or implied by forward-looking statements contained or incorporated herein due to a variety of important factors, including, without limitation, the following:
    Harbinger F&G’s ability to replace the Reserve Facility;
 
    Harbinger F&G’s ability to consummate the Raven Springing Amendment;
 
    Wilton Re’s ability or willingness to meet its financial obligations under the Raven Springing Amendment;
 
    F&G Holdings’ insurance subsidiaries’ ability to maintain and improve their financial strength ratings;
 
    Harbinger F&G’s and its insurance subsidiaries’ need for additional capital in order to maintain the amount of statutory capital that they must hold to maintain their financial strength and credit ratings and meet other requirements and obligations, including under the Reserve Facility;
 
    F&G Holdings’ ability to control its business in a highly regulated industry, which is subject to numerous legal restrictions and regulations;
 
    availability of reinsurance and credit risk associated with reinsurance;
 
    the accuracy of F&G Holdings’ assumptions and estimates regarding future events and ability to respond effectively to such events, including mortality, persistency, expenses and interest rates, tax liability, business mix, frequency of claims, contingent liabilities, investment performance, and other factors related to its business and anticipated results;
 
    F&G Holdings’ ability to mitigate the reserve strain associated with Regulation XXX and Guideline AXXX;
 
    the impact of interest rate fluctuations on F&G Holdings;
 
    the availability of credit or other financings and the impact of equity and credit market volatility and disruptions on F&G Holdings;

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    changes in the federal income tax laws and regulations which may affect the relative income tax advantages of F&G Holdings’ products;
 
    F&G Holdings’ ability to defend itself against litigation (including class action litigation) and respond to enforcement investigations or regulatory scrutiny;
 
    the performance of third parties including distributors and technology service providers, and providers of outsourced services;
 
    the impact of new accounting rules or changes to existing accounting rules on F&G Holdings;
 
    F&G Holdings’ ability to protect its intellectual property;
 
    general economic conditions and other factors, including prevailing interest and unemployment rate levels and stock and credit market performance which may affect (among other things) F&G Holdings’ ability to sell its products, its ability to access capital resources and the costs associated therewith, the fair value of its investments, which could result in impairments and other-than-temporary impairments, and certain liabilities, and the lapse rate and profitability of policies;
 
    regulatory changes or actions, including those relating to regulation of financial services affecting (among other things) underwriting of insurance products and regulation of the sale, underwriting and pricing of products and minimum capitalization and statutory reserve requirements for insurance companies;
 
    the impact of man-made catastrophes, pandemics, computer virus, network security branches and malicious and terrorist acts on F&G Holdings;
 
    F&G Holdings’ ability to compete in a highly competitive industry;
 
    the ability of Front Street Re Ltd. (“Front Street”) to effectively implement its business strategy, including the need for capital and its ability to expand its operations; and
 
    ability to obtain approval of the Maryland Insurance Administration for the Front Street reinsurance transaction.
We caution the reader that undue reliance should not be placed on any forward-looking statements, which speak only as of the date of this document. We do not undertake any duty or responsibility to update any of these forward-looking statements to reflect events or circumstances after the date of this document or to reflect actual outcomes.

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Item 1. Legal Proceedings
See Note 15 to the Company’s financial statements included in Part I — Item 1. Financial Statements. There were no material developments relating to the matters discussed therein during the fiscal quarter ended July 3, 2011.
Item 1A. Risk Factors
When considering an investment in the Company, you should carefully consider the risk factors discussed below. Any of these risk factors could materially and adversely affect our or our subsidiaries’ business, financial condition and results of operations and these risk factors are not the only risks that we or our subsidiaries may face. Additional risks and uncertainties not presently known to us or our subsidiaries or that are not currently believed to be material also may adversely affect us or our subsidiaries.
Risks Related to HGI
We are a holding company and we are dependent upon dividends or distributions from our subsidiaries; our ability to receive funds from our subsidiaries will be dependent upon the profitability of our subsidiaries and restrictions imposed by law and contracts.
As a holding company, our only material assets are our cash on hand, the equity interests in our subsidiaries and other investments. Our principal source of revenue and cash flow is distributions from our subsidiaries. Thus, our ability to service our debt, finance acquisitions and pay dividends to our stockholders in the future is dependent on the ability of our subsidiaries to generate sufficient net income and cash flows to make upstream cash distributions to us. Our subsidiaries are and will be separate legal entities, and although they may be wholly-owned or controlled by us, they have no obligation to make any funds available to us, whether in the form of loans, dividends, distributions or otherwise. The ability of our subsidiaries to distribute cash to us will also be subject to, among other things, restrictions that are contained in our subsidiaries’ financing agreements, availability of sufficient funds in such subsidiaries and applicable state laws and regulatory restrictions. Claims of creditors of our subsidiaries generally will have priority as to the assets of such subsidiaries over our claims and claims of our creditors and stockholders. To the extent the ability of our subsidiaries to distribute dividends or other payments to us could be limited in any way, this could materially limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, or otherwise fund and conduct our business.
As an example, Spectrum Brands Holdings is a holding company with limited business operations of its own and its main assets are the capital stock of its subsidiaries, principally Spectrum Brands. Spectrum Brands’ $300 million senior secured asset-based revolving credit facility due 2016 (the “Spectrum Brands ABL Facility”), its $617 million senior secured term facility due 2016 (the “Spectrum Brands Term Loan”), the indenture governing its 9.50% senior secured notes due 2018 (the “Spectrum Brands Senior Secured Notes”), the indenture governing its 12% Notes due 2019 (the “Spectrum Brands Senior Subordinated Toggle Notes” and, collectively, the “Spectrum loan agreements”) and other agreements substantially limit or prohibit certain payments of dividends or other distributions to Spectrum Brands Holdings.
Specifically, (i) each indenture of Spectrum Brands generally prohibits the payment of dividends to shareholders except out of a cumulative basket based on an amount equal to the excess of (a) 50% of the cumulative consolidated net income of Spectrum Brands plus (b) 100% of the aggregate cash proceeds from the sale of equity by Spectrum Brands (or less 100% of the net losses) plus (c) any repayments to Spectrum Brands of certain investments plus (d) in the case of the indenture governing the Spectrum Brands Senior Subordinated Toggle Notes (the “2019” Indenture), $50 million, subject to certain other tests and certain exceptions and (ii) each credit facility of Spectrum Brands generally prohibits the payment of dividends to shareholders except out of a cumulative basket amount limited to $40 million per year. We expect that future debt of Spectrum Brands and Spectrum Brands Holdings will contain similar restrictions and we do not expect to receive dividends from Spectrum Brands Holdings in fiscal 2011.
F&G Holdings is also a holding company with limited business operations of its own. Its main assets are the capital stock of its subsidiaries, which are principally regulated insurance companies, whose ability to pay dividends is limited by applicable insurance laws.
We may not be successful in identifying any additional suitable acquisition or investment opportunities.
The successful implementation of our business strategy depends on our ability to identify and consummate suitable acquisitions or other investment opportunities. However, to date we have only identified a limited number of such opportunities. There is no

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assurance that we will be successful in identifying or consummating any additional suitable acquisitions and certain acquisition opportunities may be limited or prohibited by applicable regulatory regimes. Even if we do complete other acquisitions or investments, there is no assurance that we will be successful in enhancing our business or our financial condition. Acquisitions and investments may require a substantial amount of our management time and may be difficult for us to integrate, which could adversely affect management’s ability to identify and consummate other acquisition or investment opportunities. The failure to identify or successfully integrate future acquisitions and investment opportunities could have a material adverse affect on our results of operations and financial condition and our ability to service our debt.
Because we face significant competition for acquisition and investment opportunities, including from numerous companies with a business plan similar to ours, it may be difficult for us to fully execute our business strategy.
We expect to encounter intense competition for acquisition and investment opportunities from both strategic investors and other entities having a business objective similar to ours, such as private investors (which may be individuals or investment partnerships), blank check companies, and other entities, domestic and international, competing for the type of businesses that we may intend to acquire. Many of these competitors possess greater technical, human and other resources, or more local industry knowledge, or greater access to capital, than we do and our financial resources will be relatively limited when contrasted with those of many of these competitors. These factors may place us at a competitive disadvantage in successfully completing future acquisitions and investments.
In addition, while we believe that there are numerous target businesses that we could potentially acquire or invest in, our ability to compete with respect to the acquisition of certain target businesses that are sizable will be limited by our available financial resources. We may need to obtain additional financing in order to consummate future acquisitions and investment opportunities. We cannot assure you that any additional financing will be available to us on acceptable terms, if at all. This inherent competitive limitation gives others an advantage in pursuing acquisition and investment opportunities.
Future acquisitions or investments could involve unknown risks that could harm our business and adversely affect our financial condition.
We expect to become a diversified holding company with interests in a variety of industries and market sectors. The Spectrum Brands Acquisition, the Fidelity & Guaranty Acquisition and future acquisitions that we consummate will involve unknown risks, some of which will be particular to the industry in which the acquisition target operates. Although we intend to conduct extensive business, financial and legal due diligence in connection with the evaluation of future acquisition and investment opportunities, there can be no assurance our due diligence investigations will identify every matter that could have a material adverse effect on us. We may be unable to adequately address the financial, legal and operational risks raised by such acquisitions or investments, especially if we are unfamiliar with the industry in which we invest. The realization of any unknown risks could prevent or limit us from realizing the projected benefits of the acquisitions or investments, which could adversely affect our financial condition and liquidity. In addition, our financial condition, results of operations and the ability to service our debt will be subject to the specific risks applicable to any company we acquire or in which we invest.
Any potential acquisition or investment in a foreign business or a company with significant foreign operations may subject us to additional risks.
Acquisitions or investments by us in a foreign business or other companies with significant foreign operations, such as Spectrum Brands Holdings, subjects us to risks inherent in business operations outside of the United States. These risks include, for example, currency fluctuations, complex foreign regulatory regimes, punitive tariffs, unstable local tax policies, trade embargoes, risks related to shipment of raw materials and finished goods across national borders, restrictions on the movement of funds across national borders and cultural and language differences. If realized, some of these risks may have a material adverse effect on our business, results of operations and liquidity, and can have an adverse effect on our ability to service our debt.
Our investments in any future joint investment could be adversely affected by our lack of sole decision-making authority, our reliance on a partner’s financial condition and disputes between us and our partners.
We may in the future co-invest with third parties through partnerships or joint investment in an investment or acquisition target or other entities. In such circumstances, we may not be in a position to exercise significant decision-making authority regarding a target business, partnership or other entity if we do not own a substantial majority of the equity interests of the target. These investments may involve risks not present were a third party not involved, including the possibility that partners might become insolvent or fail to

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fund their share of required capital contributions. In addition, partners may have economic or other business interests or goals that are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such partners may also seek similar acquisition targets as us and we may be in competition with them for such business combination targets. Disputes between us and partners may result in litigation or arbitration that would increase our costs and expenses and divert a substantial amount of our management’s time and effort away from our business. Consequently, actions by, or disputes with, partners might result in subjecting assets owned by the partnership to additional risk. We may also, in certain circumstances, be liable for the actions of our third-party partners. For example, in the future we may agree to guarantee indebtedness incurred by a partnership or other entity. Such a guarantee may be on a joint and several basis with our partner in which case we may be liable in the event such partner defaults on its guarantee obligation.
We could consume resources in researching acquisition or investment targets that are not consummated, which could materially adversely affect subsequent attempts to locate and acquire or invest in another business.
We anticipate that the investigation of each specific acquisition or investment target and the negotiation, drafting, and execution of relevant agreements, disclosure documents, and other instruments, with respect to the investment itself and any related financings, will require substantial management time and attention and substantial costs for financial advisors, accountants, attorneys and other advisors. If a decision is made not to consummate a specific acquisition, investment or financing, the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific acquisition, investment target or financing, we may fail to consummate the investment or acquisition for any number of reasons, including those beyond our control. Any such event could consume significant management time and result in a loss to us of the related costs incurred, which could adversely affect our financial position and our ability to consummate other acquisitions and investments.
Covenants in the indenture governing our senior secured notes and the certificate of designations of our preferred stock limit, and other future financing agreements may limit, our ability to operate our business.
The indenture governing our senior secured notes due 2015 (the “Senior Notes Indenture”) and the certificate of designations of our Preferred Stock contain, and any of our other future financing agreements may contain, covenants imposing operating and financial restrictions on our business. The Senior Notes Indenture requires us to satisfy certain financial tests, including minimum liquidity and collateral coverage ratios. If we fail to meet or satisfy any of these covenants (after applicable cure periods), we would be in default and noteholders (through the trustee or collateral agent, as applicable) could elect to declare all amounts outstanding to be immediately due and payable, enforce their interests in the collateral pledged and restrict our ability to make additional borrowings. These agreements may also contain cross-default provisions, so that if a default occurs under any one agreement, the lenders under the other agreements could also declare a default. The covenants and restrictions in the Senior Notes Indenture, subject to specified exceptions, restrict our, and in certain cases, our subsidiaries’ ability to, among other things:
    incur additional indebtedness;
 
    create liens or engage in sale and leaseback transactions;
 
    pay dividends or make distributions in respect of capital stock;
 
    make certain restricted payments;
 
    sell assets;
 
    engage in transactions with affiliates, except on an arms’-length basis; or
 
    consolidate or merge with, or sell substantially all of our assets to, another person.
The terms of our Preferred Stock provide the holders of the Preferred Stock with consent and voting rights with respect to certain of the matters referred to above and certain corporate governance rights.

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These restrictions may interfere with our ability to obtain financings or to engage in other business activities, which could have a material adverse effect on our business, financial condition, liquidity and results of operations. Moreover, a default under one of our financing agreements may cause a default on the debt and other financing arrangements of our subsidiaries.
Financing covenants could adversely affect our financial health and prevent us from fulfilling our obligations.
We have a significant amount of indebtedness. As of July 3, 2011, on a pro forma basis our total outstanding indebtedness (excluding the indebtedness of our subsidiaries, but including the notes and preferred stock) was $900 million. As of July 3, 2011, the total liabilities of Spectrum Brands Holdings were approximately $2.8 billion, including trade payables. As of June 30, 2011, the total liabilities of F&G Holdings were approximately $19.2 billion, including approximately $14.8 billion in annuity contractholder funds and approximately $3.8 billion in future policy benefits. Our and our directly held subsidiaries’ significant indebtedness and other financing arrangements could have material consequences. For example, they could:
    make it difficult for us to satisfy our obligations with respect to our senior secured notes and any other outstanding future debt obligations;
 
    increase our vulnerability to general adverse economic and industry conditions or a downturn in our business;
 
    impair our ability to obtain additional financing in the future for working capital, investments, acquisitions and other general corporate purposes;
 
    require us to dedicate a substantial portion of our cash flows to the payment to our financing sources, thereby reducing the availability of our cash flows to fund working capital, investments, acquisitions and other general corporate purposes; and
 
    place us at a disadvantage compared to our competitors.
Any of these risks could impact our ability to fund our operations or limit our ability to expand our business, which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Our ability to make payments on our financial obligations will depend upon the future performance of our operating subsidiaries and their ability to generate cash flow in the future, which are subject to general economic, industry, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot assure you that we will generate sufficient cash flow from our operating subsidiaries, or that future borrowings will be available to us, in an amount sufficient to enable us to pay our financial obligations or to fund our other liquidity needs. If the cash flow from our operating subsidiaries is insufficient, we may take actions, such as delaying or reducing investments or acquisitions, attempting to restructure or refinance our financial obligations prior to maturity, selling assets or operations or seeking additional equity capital to supplement cash flow. However, we may be unable to take any of these actions on commercially reasonable terms, or at all.
We may be unable to repurchase the senior secured notes upon a change of control.
Under the Senior Notes Indenture, each holder of senior secured notes may require us to repurchase all of such holder’s senior secured notes at a purchase price equal to 101% of the principal amount of the senior secured notes, plus accrued and unpaid interest, if certain “change of control” events occur. However, it is possible that we will not have sufficient funds when required under the Senior Notes Indenture to make the required repurchase of the senior secured notes, especially because such events will likely be a change of control under our subsidiaries’ debt documents as well. If we fail to repurchase notes in that circumstance, we will be in default under the Senior Notes Indenture. If we are required to repurchase a significant portion of the senior secured notes, we may require third party financing as such funds may otherwise only be available to us through a distribution by our subsidiaries to us. We cannot be sure that we would be able to obtain third party financing on acceptable terms, or at all, or obtain such funds through distributions from our subsidiaries.
Future financing activities may adversely affect our leverage and financial condition.
Subject to the limitations set forth in the Senior Notes Indenture and the certificate of designations for our Preferred Stock, we and our subsidiaries may incur additional indebtedness and issue dividend-bearing redeemable equity interests. We expect to incur substantial additional financial obligations to enable us to consummate future acquisitions and investment opportunities. These obligations could result in:
    default and foreclosure on our assets if our operating revenues after an investment or acquisition are insufficient to repay our financial obligations;
 
    acceleration of our obligations to repay the financial obligations even if we make all required payments when due if we breach certain covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant;
 
    our immediate payment of all amounts owed, if any, if such financial obligations are payable on demand;

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    our inability to obtain necessary additional financing if such financial obligations contain covenants restricting our ability to obtain such financing while the financial obligations remain outstanding;
 
    our inability to pay dividends on our capital stock;
 
    using a substantial portion of our cash flow to pay principal and interest or dividends on our financial obligations, which will reduce the funds available for dividends on our common stock if declared, expenses, capital expenditures, acquisitions and other general corporate purposes;
 
    limitations on our flexibility in planning for and reacting to changes in our business and in the industries in which we operate;
 
    an event of default that triggers a cross default with respect to other financial obligations, including our senior secured notes and our Preferred Stock;
 
    increased vulnerability to adverse changes in general economic, industry, financial, competitive legislative, regulatory and other conditions and adverse changes in government regulation; and
 
    limitations on our ability to borrow additional amounts for expenses, capital expenditures, acquisitions, debt service requirements, execution of our strategy and other purposes and other disadvantages compared to our competitors.
In addition to the Spectrum Brands Acquisition, we may make other significant investments in publicly traded companies. Changes in the market prices of the securities we own, particularly during times of volatility in security prices, can have a material impact on the value of our company portfolio.
In addition to the Spectrum Brands Acquisition, we may make other significant investments in publicly traded companies, both as long-term acquisition targets and as shorter-term investments. We will either consolidate our investments and subsidiaries or report such investments under the equity method of accounting. Changes in the market prices of the publicly traded securities of these entities could have a material impact on an investor’s perception of the aggregate value of our company portfolio and on the value of the assets we can pledge to creditors for debt financing, which in turn could adversely affect our ability to incur additional debt or finance future acquisitions.
We have incurred and expect to continue to incur substantial costs associated with the Spectrum Brands Acquisition and the Fidelity & Guaranty Acquisition, which will reduce the amount of cash otherwise available for other corporate purposes, and such costs and the costs of future investments could adversely affect our financial results and liquidity may be adversely affected.
We have incurred and expect to continue to incur substantial costs in connection with the Spectrum Brands Acquisition and the Fidelity & Guaranty Acquisition. These costs will reduce the amount of cash otherwise available to us for acquisitions and investments and other corporate purposes. There is no assurance that the actual costs will not exceed our estimates. We may continue to incur additional material charges reflecting additional costs associated with our investments and the integration of our acquisitions in fiscal quarters subsequent to the quarter in which the relevant acquisition was consummated.
Our ability to dispose of equity interests we hold may be limited by restrictive stockholder agreements and by the federal securities laws.
When we acquire the equity interests of a company, our investment may be illiquid and, when we acquire less than 100% of the equity interests of a company, we may be subject to restrictive terms of agreements with other equityholders. For instance, our investment in Spectrum Brands Holdings is subject to the Spectrum Brands Holdings Stockholder Agreement, which may adversely affect our flexibility in managing our investment in Spectrum Brands Holdings. In addition, the shares of Spectrum Brands Holdings we received in the Spectrum Brands Acquisition and the shares of F&G Holdings we acquired in the Fidelity & Guaranty Acquisition are not registered under the Securities Act and are, and any other securities we acquire may be, restricted securities under the Securities Act. Our ability to sell such securities could be limited to sales pursuant to: (i) an effective registration statement under the Securities Act covering the resale of those securities, (ii) Rule 144 under the Securities Act, which, among other things, requires a specified holding period and limits the manner and volume of sales, or (iii) another applicable exemption under the Securities Act. The inability

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to efficiently sell restricted securities when desired or necessary may have a material adverse effect on our financial condition and liquidity, which could adversely affect our ability to service our debt.
The Harbinger Parties hold a majority of our outstanding common stock and have interests which may conflict with interests of our other stockholders and the holders of our senior secured notes. As a result of this ownership, we are a “controlled company” within the meaning of the NYSE rules and are exempt from certain corporate governance requirements.
The Harbinger Parties beneficially own shares of our outstanding common stock that collectively constitute a substantial majority of our total voting power. Because of this, the Harbinger Parties, subject to the rights of the holders of Preferred Stock, exercise a controlling influence over our business and affairs and have the power to determine all matters submitted to a vote of our stockholders, including the election of directors, the removal of directors, and approval of significant corporate transactions such as amendments to our amended and restated certificate of incorporation, mergers and the sale of all or substantially all of our assets, subject to the consent and board representation rights of our Preferred Stock. Moreover, a majority of the members of our Board were nominated by and are affiliated with or are or were previously employed by the Harbinger Parties or their affiliates. This influence and actual control may have the effect of discouraging offers to acquire HGI because any such transaction would likely require the consent of the Harbinger Parties. In addition, the Harbinger Parties could cause corporate actions to be taken even if the interests of these entities conflict with or are not aligned with the interests of our other stockholders. Matters not directly related to us can nevertheless affect Harbinger Capital’s decisions regarding its investment in us. We are one investment in Harbinger Capital’s portfolio. Numerous considerations regarding Harbinger Capital, including investor contributions and redemptions, portfolio performance, mix and concentration, and portfolio financing arrangements, could influence Harbinger Capital’s decisions whether to decrease or increase its investment in us.
Because of our ownership structure, we qualify for, and rely upon, the “controlled company” exception to the Board and committee composition requirements under the NYSE rules. Pursuant to this exception, we are exempt from rules that would otherwise require that our Board be comprised of a majority of “independent directors” (as defined under the NYSE rules), and that any compensation committee and corporate governance and nominating committee be comprised solely of “independent directors,” so long as the Harbinger Parties continue to own more than 50% of our combined voting power.
We are dependent on certain key personnel and our affiliation with Harbinger Capital; Harbinger Capital and its affiliates will exercise significant influence over us and our business activities; and business activities and other matters that affect Harbinger Capital could adversely affect our ability to execute our business strategy.
We are dependent upon the skills, experience and efforts of Philip A. Falcone, Omar M. Asali and Francis T. McCarron, our Chairman of the Board and Chief Executive Officer, our Acting President and our Executive Vice President and Chief Financial Officer, respectively. Mr. Falcone is the Chief Executive Officer and Chief Investment Officer of Harbinger Capital and has significant influence over the acquisition opportunities HGI reviews. Mr. Falcone may be deemed to be an indirect beneficial owner of the shares of our common stock owned by the Harbinger Parties. Accordingly, Mr. Falcone may exert significant influence over all matters requiring approval by our stockholders, including the election or removal of directors and stockholder approval of acquisitions or other investment transactions. Mr. Asali is a Managing Director and the Head of Global Strategy for Harbinger Capital. Mr. McCarron is currently our only permanent, full-time executive officer. Mr. McCarron is responsible for integrating our financial reporting with Spectrum Brands Holdings and F&G Holdings and any other businesses we acquire. The loss of Mr. Falcone, Mr. Asali or Mr. McCarron or other key personnel could have a material adverse effect on our business or operating results.
Under the terms of our management agreement with Harbinger Capital, Harbinger Capital assists us in identifying potential acquisitions. Mr. Falcone’s and Harbinger Capital’s reputation and access to acquisition candidates is therefore important to our strategy of identifying acquisition opportunities. While we expect that Mr. Falcone and other Harbinger Capital personnel will devote a portion of their time to our business, they are not required to commit their full time to our affairs and will allocate their time between our operations and their other commitments in their discretion.
Harbinger Capital and its affiliated funds have historically been involved in miscellaneous corporate litigation related to transactions or the protection and advancement of some of their investments, such as litigation over satisfaction of closing conditions or litigation related to proxy contests and tender offers. These actions arise from the investing activities of the funds conducted in the ordinary course of their business and do not arise from any allegations of misconduct asserted by investors in the funds against the firm or its personnel. Currently, Harbinger Capital and certain individuals are defendants in one such action for damages filed in the Delaware Court of Chancery in December 2010 concerning the Spectrum Brands Acquisition. See “— From time to time we may be subject to

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litigation for which we may be unable to accurately assess our level of exposure and which, if adversely determined, may have a material adverse effect on our consolidated financial condition or results of operations.”
In addition, in the normal course of business, Harbinger Capital and its affiliates have contact with governmental authorities, and are subjected to responding to questionnaires or examinations. Harbinger Capital and its affiliates are also subject to regulatory inquiries concerning its positions and trading or other matters. The Department of Justice and the SEC are investigating, among other subjects, a loan made by the Harbinger Capital Partners Special Situations Fund, L.P. to Mr. Falcone in October 2009 and the circumstances and disclosure thereof. Such loan was repaid in full. Harbinger Capital and its affiliates continue to respond to subpoenas and voluntary requests for documents and information in connection with these investigations. The SEC is also conducting an informal investigation into whether Harbinger Capital or its affiliates engaged in market manipulation with respect to the trading of the debt securities of a particular issuer in 2006 to 2008, and an informal investigation that relates to compliance with Rule 105 of Regulation M with respect to three offerings. No criminal or enforcement charges have been brought against Harbinger Capital or its affiliates by any governmental or regulatory authority. Harbinger Capital and its affiliates are cooperating with these investigations.
If Mr. Falcone’s and Harbinger Capital’s other business interests or legal matters require them to devote more substantial amounts of time to those businesses or legal matters, it could limit their ability to devote time to our affairs and could have a negative effect on our ability to execute our business strategy. Moreover, their unrelated business activities or legal matters could present challenges which could not only affect the amount of business time that they are able to dedicate to our affairs, but also affect their ability to help us identify, acquire and integrate acquisition candidates.
Our officers, directors, stockholders and their respective affiliates may have a pecuniary interest in certain transactions in which we are involved, and may also compete with us.
We have not adopted a policy that expressly prohibits our directors, officers, stockholders or affiliates from having a direct or indirect pecuniary interest in any investment to be acquired or disposed of by us or in any transaction to which we are a party or have an interest. Nor do we have a policy that expressly prohibits any such persons from engaging for their own account in business activities of the types conducted by us. We have engaged in transactions in which such persons have an interest and, subject to the terms of the Senior Notes Indenture and other applicable covenants in other financing arrangements or other agreements, may in the future enter into additional transactions in which such persons have an interest. In addition, such parties may have an interest in certain transactions such as strategic partnerships or joint ventures in which we are involved, and may also compete with us.
In the course of their other business activities, our officers and directors may become aware of investment and acquisition opportunities that may be appropriate for presentation to our company as well as the other entities with which they are affiliated. Our officers and directors may have conflicts of interest in determining to which entity a particular business opportunity should be presented.
Our officers and directors may become aware of business opportunities which may be appropriate for presentation to us as well as the other entities with which they are or may be affiliated. Due to our officers’ and directors’ existing affiliations with other entities, they may have fiduciary obligations to present potential business opportunities to those entities in addition to presenting them to us, which could cause additional conflicts of interest. For instance, Messrs. Falcone and Asali may be required to present investment opportunities to the Harbinger Parties. Accordingly, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. To the extent that our officers and directors identify business combination opportunities that may be suitable for entities to which they have pre-existing fiduciary obligations, or are presented with such opportunities in their capacities as fiduciaries to such entities, they may be required to honor their pre-existing fiduciary obligations to such entities. Accordingly, they may not present business combination opportunities to us that otherwise may be attractive to such entities unless the other entities have declined to accept such opportunities. Although the Harbinger Parties have agreed, pursuant to the terms of a letter agreement with certain holders of our Preferred Stock, to, subject to certain exceptions, present to us certain business opportunities in the consumer product, insurance and financial products, agriculture, power generation and water and mineral resources industries, we cannot assure you that the terms of this agreement will be enforced because we are not a party to this agreement and have no ability to enforce its terms.
Changes in our investment portfolio will likely increase our risk of loss.
Because investments in U.S. Government instruments generate only nominal returns, we have established HGI Funding LLC as a vehicle for managing a portion of our excess cash while we search for acquisition opportunities. Investing in securities other than U.S. government investments will likely result in a higher risk of loss to us, particularly in light of uncertain domestic and global political,

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credit and financial market conditions. Neither the Senior Notes Indenture nor the certificate of designations for our Preferred Stock generally limit the investments that we are permitted to make.
We will need to increase the size of our organization, and may experience difficulties in managing growth.
At HGI, the parent company, we do not have significant operating assets and have only nine employees as of July 3, 2011. In connection with the completion of the Spectrum Brands Acquisition and the Fidelity & Guaranty Acquisition, and particularly if we proceed with other acquisitions or investments, we expect to require additional personnel and enhanced information technology systems. Future growth will impose significant added responsibilities on members of our management, including the need to identify, recruit, maintain and integrate additional employees and implement enhanced informational technology systems. Our future financial performance and our ability to compete effectively will depend, in part, on our ability to manage any future growth effectively. Future growth will also increase our costs and expenses and limit our liquidity.
We may suffer adverse consequences if we are deemed an investment company under the Investment Company Act and we may be required to incur significant costs to avoid investment company status and our activities may be restricted.
We believe that we are not an investment company under the Investment Company Act of 1940 (the “Investment Company Act”) and we intend to continue to make acquisitions and other investments in a manner so as not to be an investment company. The Investment Company Act contains substantive legal requirements that regulate the manner in which investment companies are permitted to conduct their business activities. If the SEC or a court were to disagree with us, we could be required to register as an investment company. This would negatively affect our ability to consummate an acquisition of an operating company, subject us to disclosure and accounting guidance geared toward investment, rather than operating, companies; limit our ability to borrow money, issue options, issue multiple classes of stock and debt, and engage in transactions with affiliates; and require us to undertake significant costs and expenses to meet the disclosure and regulatory requirements to which we would be subject as a registered investment company.
In order not to be regulated as an investment company under the Investment Company Act, unless we can qualify for an exemption, we must ensure that we are engaged primarily in a business other than investing, reinvesting, owning, holding or trading in securities (as defined in the Investment Company Act) and that we do not own or acquire “investment securities” having a value exceeding 40% of the value of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. To ensure that majority-owned investments, such as Spectrum Brands Holdings, do not become categorized as “investment securities,” we may need to make additional investments in these subsidiaries to offset any dilution of our interest that would otherwise cause such a subsidiary to cease to be majority-owned. We may also need to forego acquisitions that we would otherwise make or retain or dispose of investments that we might otherwise sell or hold.
We may be subject to an additional tax as a personal holding company on future undistributed personal holding company income if we generate passive income in excess of operating expenses.
Section 541 of the Internal Revenue Code of 1986, as amended (the “Code”), subjects a corporation which is a “personal holding company” (“PHC”), as defined in the Code, to a 15% tax on “undistributed personal holding company income” in addition to the corporation’s normal income tax. Generally, undistributed personal holding company income is based on taxable income, subject to certain adjustments, most notably a deduction for federal income taxes and a modification of the usual net operating loss deduction. Personal holding company income (“PHC Income”) is comprised primarily of passive investment income plus, under certain circumstances, personal service income. A corporation generally is considered to be a PHC if (i) at least 60% of its adjusted ordinary gross income is PHC Income and (ii) more than 50% in value of its outstanding common stock is owned, directly or indirectly, by five or fewer individuals (including, for this purpose, certain organizations and trusts) at any time during the last half of the taxable year.
We did not incur a PHC tax for the 2009 fiscal year, because we had a sufficiently large net operating loss for that fiscal year. We also had a net operating loss for the 2010 fiscal year. However, so long as the Harbinger Parties and their affiliates hold more than 50% in value of our outstanding common stock at any time during any future tax year, it is possible that we will be a PHC if at least 60% of our adjusted ordinary gross income consists of PHC Income as discussed above. Thus, there can be no assurance that we will not be subject to this tax in the future, which, in turn, may materially adversely impact our financial position, results of operations, cash flows and liquidity, and in turn our ability to make debt service payments on our senior secured notes. In addition, if we are subject to this tax during future periods, statutory tax rate increases could significantly increase tax expense and adversely affect operating results and cash flows. Specifically, the current 15% tax rate on undistributed PHC Income is scheduled to expire at the end of 2012, so that, absent a statutory change, the rate will revert back to the highest individual ordinary income rate of 39.6% for taxable years beginning after December 31, 2012.

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Agreements and transactions involving former subsidiaries may give rise to future claims that could materially adversely impact our capital resources.
Throughout our history, we have entered into numerous transactions relating to the sale, disposal or spinoff of partially and wholly owned subsidiaries. We may have continuing obligations pursuant to certain of these transactions, including obligations to indemnify other parties to agreements, and may be subject to risks resulting from these transactions.
From time to time we may be subject to litigation for which we may be unable to accurately assess our level of exposure and which, if adversely determined, may have a material adverse effect on our consolidated financial condition or results of operations.
We and our subsidiaries are or may become parties to legal proceedings that are considered to be either ordinary or routine litigation incidental to our or their current or prior businesses or not material to our consolidated financial position or liquidity. There can be no assurance that we will prevail in any litigation in which we or our subsidiaries may become involved, or that our or their insurance coverage will be adequate to cover any potential losses. To the extent that we or our subsidiaries sustain losses from any pending litigation which are not reserved or otherwise provided for or insured against, our business, results of operations, cash flows and/or financial condition could be materially adversely affected.
HGI is a nominal defendant, and the members of our Board are named as defendants in a derivative action filed in December 2010 by Alan R. Kahn in the Delaware Court of Chancery. The plaintiff alleges that the Spectrum Brands Acquisition was financially unfair to HGI and its public stockholders and seeks unspecified damages and the rescission of the transaction. We believe the allegations are without merit and intend to vigorously defend this matter.
There may be tax consequences associated with our acquisition, investment, holding and disposition of target companies and assets.
We may incur significant taxes in connection with effecting acquisitions or investments, holding, receiving payments from, and operating target companies and assets and disposing of target companies or their assets.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to document and test our internal controls over financial reporting and to report on our assessment as to the effectiveness of these controls. Any delays or difficulty in satisfying these requirements or negative reports concerning our internal controls could adversely affect our future results of operations and financial condition.
We may in the future discover areas of our internal controls that need improvement, particularly with respect to acquired businesses, businesses that we may acquire in the future, and newly formed businesses or entities. We cannot be certain that any remedial measures we take will ensure that we implement and maintain adequate internal controls over our financial reporting processes and reporting in the future.
Our Quarterly Report on Form 10-Q/A for the period ended September 30, 2009 stated that we did not maintain effective controls over the application and monitoring of our accounting for income taxes. Specifically, we did not have controls designed and in place to ensure the accuracy and completeness of financial information provided by third party tax advisors used in accounting for income taxes and the determination of deferred income tax assets and the related income tax provision and the review and evaluation of the application of generally accepted accounting principles relating to accounting for income taxes. This control deficiency resulted in the restatement of our unaudited condensed consolidated financial statements for the quarter ended September 30, 2009. Accordingly, we determined that this control deficiency constituted a material weakness as of September 30, 2009. As of the period ended December 31, 2009, we concluded that our ongoing remediation efforts resulted in control enhancements which had operated for an adequate period of time to demonstrate operating effectiveness. Although we believe that this material weakness has been remediated, there can be no assurance that similar weaknesses will not occur in the future which could adversely affect our future results of operations or financial condition.
In addition, when we acquire a company that was not previously subject to U.S. public company requirements or did not previously prepare financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) such as F&G Holdings, we may incur significant additional costs in order to ensure that after such acquisition we continue to comply with the requirements of the Sarbanes-Oxley Act of 2002 and other public company requirements, which in turn would reduce our earnings and negatively affect our liquidity or cause us to fail to meet our reporting obligations. A target company may not be in compliance with the provisions of the Sarbanes-Oxley Act of 2002 regarding adequacy of their internal controls and may not be otherwise set up for

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public company reporting. The development of an adequate financial reporting system and the internal controls of any such entity to achieve compliance with the Sarbanes-Oxley Act of 2002 may increase the time and costs necessary to complete any such acquisition or cause us to fail to meet our reporting obligations.
Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we are unable to conclude that we have effective internal controls over financial reporting, or if our independent registered public accounting firm is unable to provide us with an unqualified report regarding the effectiveness of our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability of our financial statements. Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 could potentially subject us to sanctions or investigations by the SEC, or other regulatory authorities. In addition, failure to comply with our SEC reporting obligations may cause an event of default to occur under the Senior Notes Indenture, or similar instruments governing any debt we incur in the future.
Limitations on liability and indemnification matters.
As permitted by Delaware law we have included in our amended and restated certificate of incorporation a provision to eliminate the personal liability of our directors for monetary damages for breach or alleged breach of their fiduciary duties as directors, subject to certain exceptions. Our bylaws also provide that we are required to indemnify our directors under certain circumstances, including those circumstances in which indemnification would otherwise be discretionary, and we will be required to advance expenses to our directors as incurred in connection with proceedings against them for which they may be indemnified. In addition, we may, by action of our Board, provide indemnification and advance expenses to our officers, employees and agents (other than directors), to directors, officers, employees or agents of a subsidiary of our company, and to each person serving as a director, officer, partner, member, employee or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, at our request, with the same scope and effect as the indemnification of our directors provided in our bylaws.
Risks Related to Spectrum Brands Holdings
Significant costs have been incurred in connection with the Merger of Spectrum Brands and Russell Hobbs and are expected to be incurred in connection with the integration of Spectrum Brands and Russell Hobbs into a combined company, including legal, accounting, financial advisory and other costs.
Spectrum Brands Holdings expects to incur one-time costs of approximately $14 million in connection with integrating the operations, products and personnel of Spectrum Brands and Russell Hobbs into a combined company, in addition to costs related directly to completing the SB/RH Merger described below. These costs may include costs for:
    employee redeployment, relocation or severance;
 
    integration of information systems;
 
    combination of research and development teams and processes; and
 
    reorganization or closures of facilities.
In addition, Spectrum Brands Holdings expects to incur a number of non-recurring costs associated with combining its operations with those of Russell Hobbs, which cannot be estimated accurately at this time. As of July 3, 2011, Spectrum Brands Holdings has incurred approximately $87 million of transaction fees and other costs related to the SB/RH Merger. Additional unanticipated costs may yet be incurred as Spectrum Brands Holdings integrates its business with that of Russell Hobbs. Although Spectrum Brands Holdings expects that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of its operations with those of Russell Hobbs, may offset incremental transaction and transaction-related costs over time, this net benefit may not be achieved in the near term, or at all. There can be no assurance that Spectrum Brands Holdings will be successful in its integration efforts. In addition, while Spectrum Brands Holdings expects to benefit from leveraging distribution channels and brand names across both companies, we cannot assure you that it will achieve such benefits.

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Spectrum Brands Holdings may not realize the anticipated benefits of the SB/RH Merger.
The SB/RH Merger involved the integration of two companies that previously operated independently. The integration of Spectrum Brands Holdings’ operations with those of Russell Hobbs is expected to result in financial and operational benefits, including increased revenues and cost savings. There can be no assurance, however, regarding when or the extent to which Spectrum Brands Holdings will be able to realize these increased revenues, cost savings or other benefits. Integration may also be difficult, unpredictable, and subject to delay because of possible company culture conflicts and different opinions on technical decisions and product roadmaps. Spectrum Brands Holdings must integrate or, in some cases, replace, numerous systems, including those involving management information, purchasing, accounting and finance, sales, billing, employee benefits, payroll and regulatory compliance, many of which are dissimilar. In some instances, Spectrum Brands Holdings and Russell Hobbs have served the same customers, and some customers may decide that it is desirable to have additional or different suppliers. Difficulties associated with integration could have a material adverse effect on Spectrum Brands Holdings’ business, financial condition and operating results.
Integrating Spectrum Brands Holdings’ business with that of Russell Hobbs may divert its management’s attention away from operations.
Successful integration of Spectrum Brands Holdings’ and Russell Hobbs’ operations, products and personnel may place a significant burden on Spectrum Brands Holdings’ management and other internal resources. The diversion of management’s attention and any difficulties encountered in the transition and integration process could harm Spectrum Brands Holdings’ business, financial conditions and operating results.
Because Spectrum Brands Holdings’ consolidated financial statements are required to reflect fresh-start reporting adjustments to be made upon emergence from bankruptcy, financial information in Spectrum Brands Holdings’ financial statements prepared after August 30, 2009 will not be comparable to its financial information from prior periods.
All conditions required for the adoption of fresh-start reporting were met upon Spectrum Brands’ emergence from Chapter 11 of the Bankruptcy Code on August 28, 2009 (the “Effective Date”). However, in light of the proximity of that date to Spectrum Brands’ accounting period close immediately following the Effective Date, which was August 30, 2009, Spectrum Brands elected to adopt a convenience date of August 30, 2009 for recording fresh-start reporting. Spectrum Brands adopted fresh-start reporting in accordance with the Accounting Standards Codification (“ASC”) Topic 852: “Reorganizations,” pursuant to which Spectrum Brands’ reorganization value, which is intended to reflect the fair value of the entity before considering liabilities and to approximate the amount a willing buyer would pay for the assets of the entity immediately after the reorganization, was allocated to the fair value of assets in conformity with Statement of Financial Accounting Standards No. 141, “Business Combinations,” using the purchase method of accounting for business combinations. Spectrum Brands Holdings stated its liabilities, other than deferred taxes, at a present value of amounts expected to be paid. The amount remaining after allocation of the reorganization value to the fair value of identified tangible and intangible assets was reflected as goodwill, which is subject to periodic evaluation for impairment. In addition, under fresh-start reporting the accumulated deficit was eliminated. Thus, Spectrum Brands’ and Spectrum Brands Holdings’ future statements of financial position and results of operations are not comparable in many respects to statements of financial position and consolidated statements of operations data for periods prior to the adoption of fresh-start reporting. The lack of comparable historical information may discourage investors from purchasing Spectrum Brands Holdings’ securities.
Spectrum Brands Holdings is a parent company and its primary source of cash is and will be distributions from its subsidiaries.
Spectrum Brands Holdings is a parent company with limited business operations of its own. Its main asset is the capital stock of its subsidiaries, including Spectrum Brands. Spectrum Brands conducts most of its business operations through its direct and indirect subsidiaries. Accordingly, Spectrum Brands’ primary sources of cash are dividends and distributions with respect to its ownership interests in its subsidiaries that are derived from their earnings and cash flow. Spectrum Brands Holdings’ and Spectrum Brands’ subsidiaries might not generate sufficient earnings and cash flow to pay dividends or distributions in the future. Spectrum Brands Holdings’ and Spectrum Brands’ subsidiaries’ payments to their respective parent will be contingent upon their earnings and upon other business considerations. In addition, Spectrum Brands’ senior credit facilities, the indenture governing its notes and other agreements limit or prohibit certain payments of dividends or other distributions to Spectrum Brands Holdings. Spectrum Brands Holdings expects that future credit facilities and financing arrangements of Spectrum Brands will contain similar restrictions.
Spectrum Brands’ substantial indebtedness may limit its financial and operating flexibility, and it may incur additional debt, which could increase the risks associated with its substantial indebtedness.
Spectrum Brands has, and expects to continue to have, a significant amount of indebtedness. As of July 3, 2011, Spectrum Brands had total indebtedness under the Spectrum Brands ABL Facility, the Spectrum Brands Term Loan and the Spectrum Brands Senior

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Secured Notes (collectively, the “Spectrum Brands Senior Secured Facilities”), the Spectrum Brands Senior Subordinated Toggle Notes and other debt of approximately $1.7 billion. Spectrum Brands’ substantial indebtedness has had, and could continue to have, material adverse consequences for its business, and may:
    require it to dedicate a large portion of its cash flow to pay principal and interest on its indebtedness, which will reduce the availability of its cash flow to fund working capital, capital expenditures, research and development expenditures and other business activities;
 
    increase its vulnerability to general adverse economic, industry, financial, competitive, legislative, regulatory and other conditions;
 
    limit its flexibility in planning for, or reacting to, changes in its business and the industry in which it operates;
 
    restrict its ability to make strategic acquisitions, dispositions or exploiting business opportunities;
 
    place it at a competitive disadvantage compared to its competitors that have less debt; and
 
    limit its ability to borrow additional funds (even when necessary to maintain adequate liquidity) or dispose of assets.
Under the Spectrum Brands Senior Secured Facilities and the 2019 Indenture, Spectrum Brands may incur additional indebtedness. If new debt is added to its existing debt levels, the related risks that it now faces would increase.
Furthermore, a substantial portion of Spectrum Brands’ debt bears interest at variable rates. If market interest rates increase, the interest rate on its variable rate debt will increase and will create higher debt service requirements, which would adversely affect its cash flow and could adversely impact its results of operations. While Spectrum Brands may enter into agreements limiting its exposure to higher debt service requirements, any such agreements may not offer complete protection from this risk.
Restrictive covenants in the Spectrum Brands Senior Secured Facilities and the 2019 Indenture may restrict Spectrum Brands’ ability to pursue its business strategies.
The Spectrum Brands Senior Secured Facilities and the 2019 Indenture each restrict, among other things, asset dispositions, mergers and acquisitions, dividends, stock repurchases and redemptions, other restricted payments, indebtedness and preferred stock, loans and investments, liens and affiliate transactions. The Spectrum Brands Senior Secured Facilities and the 2019 Indenture also contain customary events of default. These covenants, among other things, limit Spectrum Brands’ ability to fund future working capital and capital expenditures, engage in future acquisitions or development activities, or otherwise re